    [Senate Hearing 108-582]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 108-582

                       NOMINATIONS OF: N. GREGORY MANKIW
                        STEVEN B. NESMITH, JOSE F. TERAN
                          JAMES BROADDUS, PAUL D. PATE
                       LANE CARSON, AND C. MORGAN EDWARDS

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

                                    HEARING

                                   before the

                                  COMMITTEE ON
                       BANKING,HOUSING,AND URBAN AFFAIRS
                              UNITED STATES SENATE

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                       ON

                                NOMINATIONS OF:

             N. GREGORY MANKIW, OF MASSACHUSETTS, TO BE A MEMBER OF
           THE BOARD OF DIRECTORS OF THE COUNCIL OF ECONOMIC ADVISERS

                                   __________

                   STEVEN B. NESMITH, OF PENNSYLVANIA, TO BE
       ASSISTANT SECRETARY FOR CONGRESSIONAL AND INTERNATIONAL RELATIONS
                U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                                   __________

                  JOSE F. TERAN, OF FLORIDA, TO BE A MEMBER OF
        THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES

                                   __________

                  JAMES BROADDUS, OF TEXAS, TO BE A MEMBER OF
        THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES

                                   __________

                    PAUL D. PATE, OF IOWA, TO BE A MEMBER OF
        THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES

                                   __________

                  LANE CARSON, OF LOUISIANA, TO BE A MEMBER OF
        THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES

                                   __________

            C. MORGAN EDWARDS, OF NORTH CAROLINA, TO BE A MEMBER OF
        THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES

                                   __________

                                  MAY 13, 2003

                                   __________

      Printed for the use of the Committee on Banking, Housing, and Urban
                                    Affairs

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                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      RICHARD C. SHELBY, Alabama, Chairman

    ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
    WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
    MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
    CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
    RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
    JIM BUNNING, Kentucky                EVAN BAYH, Indiana
    MIKE CRAPO, Idaho                    ZELL MILLER, Georgia
    JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
    ELIZABETH DOLE, North Carolina       DEBBIE STABENOW, Michigan
    LINCOLN D. CHAFEE, Rhode Island      JON S. CORZINE, New Jersey

                 Kathleen L. Casey, Staff Director and Counsel

         Steven B. Harris, Democratic Staff Director and Chief Counsel

                   Peggy R. Kuhn, Senior Financial Economist

                  Mark A. Calabria, Senior Professional Staff

                 Martin J. Gruenberg, Democratic Senior Counsel

                 Jonathan Miller, Democratic Professional Staff

                   Jennifer Fogel-Bublick, Democratic Counsel

                         Patience R. Singleton, Counsel

       Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                           George E. Whittle, Editor

                                      (ii)

                                C O N T E N T S

                                  ----------

                             TUESDAY, JULY 22, 2003

                                                                       Page

    Opening statement of Chairman Shelby.............................     1

    Opening statements, comments, or prepared statements of:
        Senator Specter..............................................     2
        Senator Dole.................................................     4
        Senator Reed.................................................     5
        Senator Allard...............................................     8
        Senator Corzine..............................................     9
        Senator Carper...............................................    11
        Senator Sarbanes.............................................    13
        Senator Schumer..............................................    26
        Senator Santorum.............................................    34
            Prepared statement.......................................    48
        Senator Grassley.............................................    48

                                    NOMINEES

    N. Gregory Mankiw, of Massachusetts, to be a Member of the
      Council of
      Economic Advisers..............................................     3
        Biographical sketch of nominee...............................    50
        Responses to written questions of Senator Johnson............   112
    Steven B. Nesmith, of Pennsylvania, to be Assistant Secretary for
      Congressional and International Relations, U.S. Department of
        Housing
       and Urban Development.........................................    36
        Biographical sketch of nominee...............................    68
    Jose F. Teran, of Florida, to be a Member of the Board of
      Directors
      of the National Institute of Building Sciences.................    40
        Biograhpical sketch of nominee...............................    74
    James Broaddus, of Texas, to be a Member of the Board of
      Directors
      of the National Institute of Building Sciences.................    41
        Biograhpical sketch of nominee...............................    85
        Response to a written question of Senator Shelby.............   113
    Paul D. Pate, of Iowa, to be a Member of the Board of Directors
      of the National Institute of Building Sciences.................    43
        Prepared statement...........................................    49
        Biograhpical sketch of nominee...............................    92
    Lane Carson, of Louisiana, to be a Member of the Board of
      Directors
      of the National Institute of Building Sciences.................    44
        Biograhpical sketch of nominee...............................    98
    C. Morgan Edwards, of North Carolina, to be a Member of the Board
      of
      Directors of the National Institute of Building Sciences.......    45
        Biograhpical sketch of nominee...............................   106

                                     (iii)

                                NOMINATIONS OF:

                      N. GREGORY MANKIW, OF MASSACHUSETTS

                               TO BE A MEMBER OF

                        THE COUNCIL OF ECONOMIC ADVISERS

                       STEVEN B. NESMITH, OF PENNSYLVANIA

                  TO BE ASSISTANT SECRETARY FOR CONGRESSIONAL

                        AND INTERGOVERNMENTAL RELATIONS

                        U.S. DEPARTMENT OF HOUSING AND
                               URBAN DEVELOPMENT

                           JOSE F. TERAN, OF FLORIDA

                            JAMES BROADDUS, OF TEXAS

                             PAUL D. PATE, OF IOWA

                         LANE CARSON, OF LOUISIANA, AND

                      C. MORGAN EDWARDS, OF NORTH CAROLINA

                    TO BE MEMBERS OF THE BOARD OF DIRECTORS

                    NATIONAL INSTITUTE OF BUILDING SCIENCES

                                  ----------

                             TUESDAY, MAY 13, 2003

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.

        The Committee met at 10:02 a.m., in room SD-538 of the
    Dirksen Senate Office Building, Senator Richard C. Shelby,
    (Chairman of the Committee), presiding.

            OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

        Chairman Shelby. The Committee will come to order.
        We have several nominations this morning. I appreciate the
    willingness of the nominees to appear before the Committee
    today. We will take them in three panels.
        Our first panel will be Mr. Nicholas Gregory Mankiw,
    nominated to be a Member of the President's Council of Economic
    Advisers. The Council of Economic Advisers, established by the
    Employment Act of 1946, provides the President with economic
    analysis and advice on the development and implementation of
    domestic and international policy issues.
        Mr. Mankiw most recently held the Allie S. Freed
    Professorship in Economics at Harvard University, where he
    spent the majority of his professional career. I will note
    Professor Mankiw's previous experience at the Council of
    Economic Advisers. He served two decades ago as a Staff
    Economist on the Council. Dr. Mankiw is also a research
    associate with the National Bureau of Economic Research and
    adviser to the Federal Reserve Bank of Boston and the
    Congressional Budget Office. He is a graduate of Princeton
    University and earned his Ph.D. from MIT.
        Our second panel is Mr. Steven Nesmith, nominated to be
    Assistant Secretary for Congressional and Intergovernmental
    Relations at the U.S. Department of Housing and Urban
    Development. Mr. Nesmith most recently served in the Office of
    Congressional and Intergovernmental Affairs at the U.S.
    Department of Commerce's Economic Development Administration.
    Perhaps more importantly, he was recognized by the Washington,
    DC Basketball Hall of Fame during his senior year at American
    University.
        Our third panel will include Mr. Jose Teran, Mr. James
    Broaddus, Mr. Lane Carson, Mr. Morgan Edwards, and Mr. Paul
    Pate. All are nominees to the Board of Directors of the
    National Institute of Building Sciences. The National Institute
    of Building Sciences has the mission of improving the building
    regulatory environment, facilitating the introduction of new
    and existing products and technology into the building process,
    and disseminating nationally recognized technical and
    regulatory information.
        We have with us today, and I know that he has a busy
    schedule, Senator Arlen Specter. Our colleague is the senior
    Senator from Pennsylvania, and I want to recognize him first
    and let him proceed to introduce one of the nominees.
        Senator Specter.

                       STATEMENT OF ARLEN SPECTER

             A U.S. SENATOR FROM THE STATE OF PENNSYLVANIA

        Senator Specter. Thank you very much, Mr. Chairman.
        It is a pleasure to be here today to introduce Steve
    Nesmith, Esquire, who is nominated to be the Assistant
    Secretary for Congressional and Intergovernmental Relations for
    the Department of Housing and Urban Development. Mr. Nesmith is
    a very impressive man, impressive in stature, and his
    background and resume match that.
        As the Chairman has already noted, Mr. Nesmith has achieved
    celebrity status as a 4-year varsity basketball team member,
    team captain, and scholarship award-winner at American
    University.
        After that distinguished academic and athletic career, he
    returned to his native city, Philadelphia, where he was a clerk
    for the Chief Justice of the Pennsylvania Supreme Court, then
    was an associate with the distinguished law firm, Wolfe, Block,
    and then Saul Ewing. He also served in the mayor's Office for
    Community Services, was Senior Counsel of the Legislative
    Strategies group, and has had quite an extensive service in
    governmental matters.
        He currently serves as Deputy Assistant Secretary for
    Congressional and Intergovernmental Relations for the
    Department of Commerce's Economic Development Administration,
    and he now comes to this position, which is quite a career
    advance, calling for Senate confirmation.
        It is a great pleasure for me to introduce Mr. Nesmith, and
    also his wife.
        Chairman Shelby. Thank you. Senator Specter, I know that
    you have other committees that you have to go to. We appreciate
    your early appearance here and we will take this nomination up
    second.
        Thank you so much.
        Senator Specter. Thank you very much, Mr. Chairman.
        Chairman Shelby. Dr. Mankiw, would you come to the table?
        First of all, would you stand and be sworn? Hold up your
    right hand.
        Do you swear or affirm that the testimony that you are
    about to give is the truth, the whole truth, and nothing but
    the truth, so help you God?
        Dr. Mankiw. I do.
        Chairman Shelby. Do you agree to appear and testify before
    any duly-constituted committee of the Senate?
        Dr. Mankiw. I do.
        Chairman Shelby. Dr. Mankiw, do you want to introduce your
    family?
        Dr. Mankiw. Yes. I am here today with my wife and my
    daughter, Catherine. I have two young sons who are at home at
    school today in Massachusetts.
        Chairman Shelby. We welcome you to the Committee. You have
    been nominated by the President to what I believe is a very,
    very important job.
        I know you have an opening statement. Your written
    statement will be made part of the record in its entirety.
        You may proceed as you wish.

                     STATEMENT OF N. GREGORY MANKIW

                  OF MASSACHUSETTS, TO BE A MEMBER OF

                    THE COUNCIL OF ECONOMIC ADVISERS

        Dr. Mankiw. Thank you, Mr. Chairman, and Members of the
    Committee.
        I am honored to be here today as the President's nominee to
    chair the Council of Economic Advisers. For more than half a
    century, the Council has offered Presidents professional
    analysis concerning the state of the economy and the issues
    facing economic policymakers. I have great respect for the
    tradition and, if confirmed, I will make every effort to
    maintain the Council's high standards.
        The United States has long been a land of great economic
    opportunity, and the story of my own family reflects that fact.
    My four grandparents emigrated from Ukraine to the United
    States almost a century ago, looking for a better life. None of
    them had more than a fourth grade education. But the U.S.
    economy was more than ready to reward their hard work and
    determination. When my grandmother opened her small candy store
    in Trenton, New Jersey, in the 1920's, her goal was to give her
    children and grandchildren more opportunities than she had. She
    had ample success.
        I am one of the lucky beneficiaries of those efforts. As a
    student, I attended Princeton and MIT--two of the best
    universities in the world. For the past 18 years, I have been a
    Professor of Economics at Harvard. My career has been dedicated
    to studying the economy and teaching students about the
    principles of economic policy, both in the classroom and
    through the two textbooks I have written.
        I am also a husband and father of three wonderful children.
    My wife Deborah and daughter Catherine are here with me today.
    If there is one hope I have for economic policy, it is for it
    to create an environment where the children of every family
    have access to the opportunities that my father has enjoyed
    since my grandparents arrived in their new homeland.
        The U.S. economy remains one of the most vibrant in the
    world, but we have also faced some significant challenges in
    recent years. The economy's production of goods and services
    has grown over the past 18 months, but not fast enough to put
    people back to work after the recent recession. There are
    several causes of the economy's troubles. The overhang from the
    high-tech bubble of the 1990's, a series of corporate-
    governance scandals, and the increased uncertainties after the
    September 11 terrorist attacks have all put downward pressure
    on economic activity.
        At the same time, monetary and fiscal policymakers have
    acted vigorously to stimulate the economy. Interest rate cuts
    by the Federal Reserve, and tax cuts enacted by Congress and
    signed by the President, have helped offset these
    contractionary forces and contributed to the recovery. I
    believe that passage of the President's Jobs and Growth package
    would add to this effort. It would help put people back to work
    in the short-run, as well as encouraging capital accumulation
    and economic growth in the long-run.
        Despite these recent challenges, the future of the U.S.
    economy is bright. I often point out to my students that Adam
    Smith, the founding father of economics, published his great
    book, ``The Wealth of Nations,'' in 1776, just as our Nation
    was declaring its independence. This is no coincidence. History
    teaches that economic liberty goes hand in hand with political
    liberty. That lesson goes a long way toward explaining the
    success the United States has enjoyed over the past two
    centuries.
        If confirmed, I will be honored to play some role in
    helping to shape our Nation's economic policies. I know that
    public service is a great opportunity and a great
    responsibility. I look forward to working with you and the
    other Members of Congress in the months and years to come.
        Thank you.
        Chairman Shelby. I am going to yield my time to Senator
    Dole right now. I believe she has to go to another meeting.
        Senator Dole.

                  STATEMENT OF SENATOR ELIZABETH DOLE

        Senator Dole. Thank you so much, Mr. Chairman. I certainly
    want to recognize and welcome all the nominees who are before
    the panel this morning.
        I was especially pleased to recognize Paul Pate and Colvin
    Edwards, who are on the third panel, who are both very special
    friends of mine.
        Both are nominated to the Board of Directors for the
    National Institute of Building Sciences, which serves as an
    authoritative voice for the Nation on building and construction
    issues.
        They each bring an enormous amount of experience and
    knowledge to their positions. Paul currently serves as Mayor of
    Cedar Rapids, Iowa, and President and Owner of Pate Asphalt
    Systems, P.M. Systems Corporation.
        He has been named Iowa Businessman of the Year by the U.S.
    Small Business Administration and a blue chip award-winner for
    the U.S. Chamber of Commerce. He is also a former State
    senator, Secretary of State for Iowa, and a cherished friend.
        Colvin Edwards, known as Morgan to his friends, brings a
    similar amount of expertise. He is a retired Navy reservist. He
    served as a Division Chief within Pennsylvania's Building Code
    Administration and Economic Development Director for the City
    of Philadelphia, Pennsylvania.
        Colvin is a native of North Carolina and served as an
    Assistant Secretary at the North Carolina Department of
    Transportation.
        Mr. Chairman, both of these individuals have been an
    enormous asset to me personally. In the time I have known each
    of them, they have been very supportive and very generous with
    their time.
        Today, it gives me great pleasure to voice my strong
    support for their nominations.
        I know from experience what a great contribution each of
    these men will make to the National Institute of Building
    Sciences. America is lucky indeed to have their service.
        I wish I could remain to hear the statements of all of the
    nominees and to discuss some of the issues with them that are
    before our Committee, but unfortunately, I do have other
    obligations that require me to leave.
        Let me just wish each of the nominees the very best and
    express my support for them.
        Thank you very much, Mr. Chairman.
        Chairman Shelby. Senator Reed.

                     STATEMENT OF SENATOR JACK REED

        Senator Reed. Thank you very much, Mr. Chairman, and
    welcome, Dr. Mankiw.
        We are in a period of economic distress which is measured
    in many ways. One way is the number of unemployed Americans,
    which the Economist reported that the proportion of workers who
    exhaust their unemployment benefits before they find work is
    the highest since the records began in the early 1970's.
        There are some of us who feel that we should be
    aggressively supporting the extension of the unemployment
    benefits. Some of that is the result of some work in economics.
        I'll quote your eminent textbook:``When the economy goes
    into a recession, workers are laid off, more people apply for
    unemployment insurance benefits. This automatic increase in
    Government spending stimulates aggregate demand at exactly the
    time when aggregate demand is insufficient to maintain full
    employment.''
        Would you agree that we should extend the unemployment
    benefits program?
        Dr. Mankiw. As you know, the President has worked with the
    Congress to extent unemployment benefits in the past, and I am
    sure that he will work with Congress again on this issue.
        I think the general question of unemployment insurance
    raises a whole set of economic issues, both long-run and short-
    run.
        There is no question that by putting money in people's
    pockets, unemployment insurance maintains aggregate demand at a
    time when the economy needs more demand for goods and services,
    and that was the quote that you mentioned.
        It also provides insurance, which is the ostensible goal of
    helping people when times are difficult.
        Another thing to keep in mind, though, is that it also has
    incentive effects. There is a large literature in economics
    that establishes that people with unemployment insurance search
    less hard for new jobs and the existence of unemployment
    insurance probably does raise the normal level of unemployment.
    It is what economists call the natural rate.
        You see this probably in most dramatic form in some
    European countries, where unemployment insurance, or its
    equivalent, goes on sometimes indefinitely and it really causes
    long-run structural problems.
        And so, in thinking about unemployment insurance, you have
    to balance all these considerations and decide what the right
    mix is.
        Senator Reed. We are coming to a decision point. The
    extended unemployment benefits expires May 31. To keep this
    program going, we are going to have to have a decision. Would
    you advise the President before May 31 to extend the benefits?
        Dr. Mankiw. I am sure that this is something that the
    President will be working with Congress on. As I said, I would
    state to him what I just said to you, which is balancing all of
    these considerations and there are pros and cons.
        Senator Reed. It seems to me on the other factors, and I
    will make one final point about extended unemployment benefits,
    is that the economy is changing. I do not think that anyone
    quite knows precisely in which direction.
        But my observation is that the people who are finding it
    difficult to find employment are not low-skilled individuals.
    They are people who are in middle age, who work for companies
    that have down-scaled significantly. So they used to be a vice
    president of human resources, but there aren't any more VP
    human resources positions in the local area.
        They used to work for financial institutions, but they have
    been displaced by computers. So they are looking for a job that
    basically will be something comparable to what they had, and it
    is been months and in some cases, years, and they haven't found
    it. And in that context, not to extend benefits is to me wrong
    and disreputable. I would hope that you bring that message back
    to the President to include in the balance.
        Let me ask another question, and that is, Henry Aron, who
    is an eminent economist, suggested in some testimony that he
    gave several weeks ago, that the most difficult challenge that
    we face as a Nation, aside from the momentary issues of
    recession and the business cycle and others, is providing for
    the expected retirement of a huge number of Americans, the Baby
    Boom generation.
        Do you agree that that is the most significant challenge
    that we will face in the next decade?
        Dr. Mankiw. It is certainly a significant challenge. The
    entitlement issue, Medicare, and Social Security, are no
    question issues that the Administration and Congress will be
    thinking about and should think about in the years to come.
        The President has talked about wanting to modernize these
    entitlement programs and to make sure that they are there for
    future generations. He has talked about personal accounts in
    Social Security. He has talked about moving Medicare in the
    direction of more private competition.
        I think there is no question that the retirement programs
    are going to need to be modernized for future generations.
        Senator Reed. What does modernization mean? Does that mean
    that we cut the benefits of people who already assume that they
    will receive these benefits? Or we increase the amount of money
    that current employed individuals have to pay?
        Dr. Mankiw. I do not think that anybody is proposing to cut
    benefits for people who are now receiving them.
        There are different approaches to modernizing these
    programs. The President has talked a lot about personal
    accounts. For example, in Social Security, where people would
    have a stake and ownership of assets.
        Senator Reed. How do you create a personal account and
    still pay the beneficiaries who have earned their benefits
    without either increasing taxes to put in these accounts or to
    decrease the benefits that will be paid? How do you do that
    mathematically?
        Dr. Mankiw. There have been a variety of proposals floating
    around about how to reform Social Security and Medicare and the
    President said that he wants to move in the direction of more
    personal accounts and more competition in Medicare.
        I do not have my own personal plan to propose here for you
    today, Senator.
        Senator Reed. In the November 2000 Fortune article, you
    wrote, ``Admittedly, some of Bush's arguments are off the mark.
    When he compares the 2 percent real return a worker now gets
    from Social Security with the 6 percent real return offered by
    a portfolio of stocks, he neglects to mention that the Social
    Security fund still owes a huge amount to those now or soon-to-
    be retired. This liability, the overhang from giving earlier
    generations more than they put in the system, doesn't disappear
    with privatization. Whatever system Bush comes up with, it
    won't give young workers a 6 percent return.''
        So, if that is his modernization plan, I think you go back
    to the initial question--how do you pay for it?
        Dr. Mankiw. I believe in that same article, actually, I did
    say that it was actually a good idea to move in the direction
    of personal accounts, but I was questioning some of the
    particular arguments used to support that.
        I was not raising skepticism of the policy, but some of the
    ways that the arguments were framed. I think there is no
    question that these are big challenges. I think everybody
    agrees that they are big challenges.
        If you look at the President's budget, he has a chapter
    called, The Real Fiscal Danger, which is precisely about the
    entitlement problem looming on the horizon.
        I do not think there is any disagreement over the basic
    facts and the difficult choices that will have to be made in
    the future.
        Senator Reed. I do not think there is any disagreement
    about the challenge. I think the disagreement comes when we
    would be much better prepared for that challenge if we weren't
    undertaking a huge tax cut at the moment that will, by any
    definition, constrain our ability to make the transition, to
    make the modernization. And that is the point I would like to
    leave you with.
        Thank you very much.
        Chairman Shelby. Senator Allard.

                   STATEMENT OF SENATOR WAYNE ALLARD

        Senator Allard. I have a couple of questions, one dealing
    in relation to the transportation system of the country and the
    other one dealing with the housing policy of this country.
        As you are probably aware, we are moving forward with the
    reauthorization of the highway transportation bill, and there
    is discussion among the various Members of the Senate as to how
    we will pay for that.
        Some have suggested that we have a two-cents-per-gallon
    increase on gas taxes, and others have been calling for an
    increase of as high as 12 cents per gallon.
        The State of Colorado, for example, has the highest, or one
    of the highest gasoline taxes in the country. Would you talk a
    little bit about the economics, as you see it, being impacted
    by an increase in the gas tax?
        Do you see the economic development in roads in highways
    offsetting the negative impacts of a tax increase at various
    levels; and how might the impact of those States that have a
    higher gasoline tax, differ from those States with a lower
    gasoline tax?
        And if you can do that within the next two minutes----
        [Laughter.]
        --we would appreciate it. But if you can give some brief
    thoughts on that, I would appreciate it.
        Dr. Mankiw. That is not an issue that I have studied, so I
    shouldn't say anything very specific. As with any public
    project like that, you have to apply a cost/benefit test. You
    have to figure out what the benefits of the public good you are
    providing are and compare that to the costs of the taxes you
    are raising, including any distortionary effects those taxes
    have. So it is not only the direct effect, but any indirect
    effects on the economy.
        That is how I would approach the subject. But on the
    specifics of the legislation you are talking about, I am just
    not that familiar, but I am happy to get back to you with a
    written answer.
        Senator Allard. Are you generally of the view that building
    new roads is an economic development instrument that could be
    used by the Congress to stimulate the economy?
        Dr. Mankiw. I think you really have to do it from a cost/
    benefit standpoint. Obviously, some roads are a good thing and
    not all roads are a good thing. I do not think there is a
    blanket answer to whether building a new road is a good thing
    or not. It really depends on the specifics and whether it
    passes the cost/benefit test in that particular case.
        Senator Allard. Okay. Many homeowners have been blessed in
    the last few years by a marked increase in the equity in their
    home. I think housing is one of the parts of our economy that
    has been pretty self-sustaining as we move forward.
        Not only have we been getting more families into homes--I
    think we are at record levels as far as that is concerned--but
    we also are seeing those homes increase in value.
        Are you concerned about the increasingly common use of home
    equity or second mortgages? And should our economy suffer a
    more serious setback in the future, would there be consequences
    of these practices for both families and the overall economy?
        I wonder if you would talk about that a little bit.
        Dr. Mankiw. I think there is no question that we have a
    financial system that allows people access to credit in ways
    that is unusual around the world and probably unusual
    historically. But I think most economists think that that is
    probably a good thing in the sense that most people who borrow
    understand what they are doing and are doing things to smooth
    over tough times.
        I have a home equity line that we use sometimes and not use
    other times. The instances of these financial markets benefits
    most families. You are right that sometimes people may use them
    unwisely. But I think, by and large, the economy is better off
    and people are better off by virtue of having access to credit
    markets.
        Senator Allard. Mr. Chairman, I see that my time is
    expiring. Thank you very much.
        Chairman Shelby. Senator Corzine.

                  STATEMENT OF SENATOR JON S. CORZINE

        Senator Corzine. Thank you, Mr. Chairman. I appreciate the
    service that we can expect from Dr. Mankiw.
        One of the things Senator Reed started, it is always good
    to look at these words that are written in books brilliant
    people put together--The Essentials of Economics--because it
    always allows for raising questions about issues that one might
    feel strongly about.
        Let me refer to one quote from a textbook that Dr. Mankiw
    talked about: ``The most basic lesson about budget deficits
    follows directly from their effects on the supply and demand
    for loanable funds. When the Government reduces national
    savings by running a budget deficit, the interest rate rises
    and investment falls.''
        Is that a premise that you continue to believe in economic
    analysis, and how does it relate to what appears to be a
    growing period of budget deficits that are projected by almost
    all economic analysts, whether in the private sector, the
    public sector, CBO, and even the President's own numbers?
        Dr. Mankiw. Yes, I have not changed my mind since that
    edition of the book came out 2 months ago.
        [Laughter.]
        And I think reducing the budget deficit is one priority of
    public policy, and I think the President shares that view.
        If you look at another chapter in that same book that you
    are holding, you will also see that tax cuts can stimulate the
    demand for goods and services, raise production and employment,
    and be a way of stimulating the economy with excess capacity. I
    think that lesson also needs to be kept in mind.
        Whenever you are thinking about fiscal policy, you are
    obviously balancing a variety of concerns--effects on demand
    for goods and services and supply of goods and services,
    effects on the short-run, effects on the long-run.
        And one of the most important priorities right now is to
    put people back to work, is to get demand back up so that the
    economy grows more quickly and more people become employed.
        The recession is over in the sense that GDP is growing, and
    that is the good news. The bad news is that it is not growing
    fast enough to put people back to work.
        The purpose of the President's Jobs and Growth package is
    to increase aggregate demand. Certainly one of the purposes is
    to increase aggregate demand and put people back to work in the
    short-run, as well as encouraging capital accumulation and
    economic growth in the long-run.
        Senator Corzine. Do the deficits in the long-run work
    against the possibility of economic expansion because of the
    kinds of competition for capital that I think is implied in the
    statements that you have made?
        Dr. Mankiw. Other things equal, yes. Other things equal, we
    would rather not have the budget deficits. And the President
    has talked about spending restraint as an important part of his
    program, and under the President's budget, the deficits will be
    shrinking over time.
        But, once again, one has to balance that against other
    factors. An important part of the President's plan is
    eliminating the double taxation of dividends, which is a
    distortion that discourages capital accumulation and economic
    growth.
        Senator Corzine. Would you argue that the exemption for
    dividend is of a rank ordering of elements that would stimulate
    the economy, one of the highest order policy initiatives that
    would actually generate short-term demand in the economy?
        Dr. Mankiw. I think the tax package is put together with an
    eye on both the short-run and the long-run. I think fiscal
    policy always has to keep an eye on different horizons.
        My own judgment is that accelerating the marginal rate cuts
    is going to provide a tremendous amount of short-run stimulus,
    but obviously, it is going to have very little long-run effect
    because those rates cuts will go into effect anyway in the
    long-run. So that is going to be explicitly temporary.
        Reducing the double taxation of dividends is great tax
    policy in the long-run. I have not yet talked to an economist
    who thinks that a good tax code double taxes dividends.
        I think it would also have some short-run stimulus effect
    coming from increased wealth as equity markets respond.
        That in part depends on how much equity markets respond,
    and that is something that is obviously very hard to predict.
    But as a matter of economic theory, if you tax dividends less,
    the stock market should rise as it reflects the higher present
    value of after-tax cashflows and that should make people
    wealthier and that should induce them to spend more, as well as
    lowering the cost of capital for businesses and inducing them
    to invest more.
        Senator Corzine. So you would argue that this is going to
    have significant short-run stimulative impact, the dividend
    exclusion?
        Dr. Mankiw. Yes. If people believe that this dividend
    exclusion is credibly going to be permanent, that it is not
    just come and go, but it is going to be a permanent feature of
    tax policy, as I certainly would think it should be, then that
    should affect the value of the stock market, which in turn
    should affect households' wealth and businesses' cost of
    capital.
        Senator Corzine. Thank you, Mr. Chairman.
        Chairman Shelby. Senator Carper.

                 STATEMENT OF SENATOR THOMAS R. CARPER

        Senator Carper. Thanks, Mr. Chairman.
        Dr. Mankiw--have I correctly pronounced your name?
        Dr. Mankiw. That is correct. It rhymes with ``thank you.''
        [Laughter.]
        Senator Carper. Thanks for joining us today. Thanks for
    your willingness to serve our country in this capacity.
        Are members of your family here?
        Dr. Mankiw. Yes. My wife is right here, as is my daughter,
    Catherine, who is 11 years old.
        Senator Carper. Catherine, welcome aboard. Thank you for
    sharing your dad, and Ms. Mankiw, thank you for sharing your
    husband with us. I missed those introductions. I am sure they
    were made earlier.
        A couple of months ago Chairman Greenspan sat in your seat
    and he talked a bit about double taxation of dividends, which
    he thinks is a bad thing, and he called for eliminating them.
        He also called for doing it in a way that did not
    exacerbate our long-term budget deficit. He talked about maybe
    instead of doing it on the individual income taxpayer's side,
    to think about doing it, making the change on the corporate
    side, much as we allow corporations to expense debt, to
    consider possibly letting them expense their dividend payments.
        I have been floating an idea in the last couple of weeks
    with people who are a lot smarter than me, to ask them to react
    to this notion. Let me just ask you to do the same as well.
        We have seen some who have suggested that what we do is we
    phase out over 3 years the taxation on dividend income, and
    then it comes right back again, much as our phasing out of the
    estate tax is going to proceed along and then come right back
    again at the end of this decade.
        I thought that one of the things that businesses need to be
    successful and to grow and one of the factors for a strong
    economy is some certainty. And with respect to estate tax and
    with respect to a dividend tax proposal like I described
    earlier, not a whole lot of certainty for anyone.
        Let me just run this notion by you and just ask you to
    respond to it. If you think it is a bad idea, I am not
    offended. But I would like to have your thoughts.
        Currently, we let businesses expense, as I understand it,
    about 100 percent of what they pay in debt service. We do not
    let them expense the dividend income of the dividends that they
    declare.
        And someone said, we need some parity there. And there is
    different ways to get at the parity. One of the ways is to,
    over a period of time, maybe reduce somewhat the percentage of
    debt service that can be expensed and to gradually increase the
    amount of dividends that can be expensed, until we reach some
    kind of parity. I do not know if it would be 50 percent or 75
    percent. I do not know how many years it would take, but
    several years at least.
        Would you just respond to that notion and tell me if I have
    lost my mind entirely?
        Dr. Mankiw. Yes, there is different ways of eliminating the
    double taxation of dividends.
        In some sense, the similarity of different ways of
    eliminating them is maybe more important than the differences
    in the sense that all these different ways of doing that would
    reduce the cost of capital and encourage capital accumulation,
    which in turn would encourage productivity growth, and that is
    one of the motivations behind the President's dividend
    exclusion.
        To do it at the corporate level is slightly different from
    doing it at the personal level because it would exclude income
    that is never going to be taxed.
        So, for example, Harvard University doesn't pay taxes on
    its dividends because it is a tax-exempt corporation. Right
    now, that income is in some senses taxed once. It is taxed at
    the corporate level, then not taxed at the level of Harvard
    University.
        If you deducted the dividends at the corporate level, which
    is another way to do corporate integration, the income that is
    earned that flows to Harvard University would not get taxed
    once, whereas, under the President's plan, it is only income
    that is taxed once already that gets excluded.
        The President, I believe, was motivated by the idea that we
    want to eliminate double taxation of dividends, so he wants to
    reduce the tax on things that have already been taxed once. But
    if things haven't been taxed once, then he wasn't going to
    propose reducing that tax.
        As I said, I think the most important thing is reducing the
    cost of capital, and any way of lowering the tax on capital
    income would have that effect and therefore, would tend to be
    stimulated toward investment.
        Senator Carper. We have had some focus here today on the
    budget deficit, and you will hear a lot more on that, I hope,
    as we go forward. I am one of those people who believes that
    budget deficits do matter. And the idea of running a deficit in
    the short-term is okay--wars, recessions and that kind of
    thing.
        The idea of having deficits for as far as the eye can see
    is troubling to me, and I hope it is still troubling to you and
    certainly my colleagues here.
        I want us to focus on a different kind of deficit for just
    a moment. That is the trade deficit. The trade deficit has
    continued to grow. I think the trade deficit for this year is
    put at some $400 billion. My wife came back from a business
    trip to China late last year and she said, I am not sure what
    we are going to be making in this country 10 to 20 years from
    now because they are making just about everything.
        I met recently with people in Delaware who were involved in
    training people for technology jobs, jobs in information
    technology. And they are starting to see a shift of those jobs
    to places like India, the Philippines, and other countries.
        In fact, they are setting up a training center now in the
    Philippines in order to help meet that demand. So we are seeing
    not just an exodus of manufacturing jobs, but software jobs,
    technology jobs, that I find troubling.
        A scenario has been painted for me, and I just want you to
    react to the scenario, if you will. We face a growing trade
    deficit. As I understand it, in order to continue to buy ever
    more from the rest of the world than they buy from us, somebody
    from around the world has to invest. There has to be a movement
    of capital for investments in this country.
        Do we reach a point where people in other countries may be
    becoming less inclined to invest in the United States? If so,
    what are the implications for interest rates and for monetary
    policy in terms of raising interest rates to make investments
    here more attractive?
        How does that affect our ability to stimulate and to move
    the economy forward?
        Dr. Mankiw. You are absolutely right that the flip side of
    the trade deficit is a capital accounts surplus, meaning that
    we are importing more goods than we are exporting precisely
    because people abroad are eager to buy U.S. assets, eager to
    buy stocks, bonds, and foreign direct investment in the United
    States.
        In some sense, you can view that as a vote of confidence in
    the U.S. economy, that foreigners want to be holding U.S.
    assets. They want to buy our stocks and bonds. I think history
    teaches that trade deficits come and go and as long as the
    economy is well-run, they are not a problem in and of
    themselves.
        In the 1980's, we saw big trade deficits and we saw trade
    deficits disappear and we saw them come up again. I am not
    tremendously worried about the trade deficits. It is obviously
    something to keep an eye on. But I do not see any reason why,
    if our policies are right, if our economy is growing, that
    foreigners would lose their appetite for U.S. assets. It is
    certainly the best place in the world to invest.
        Indeed, to a large extent, the reason that we have this
    large trade deficit is precisely because the United States has
    been growing faster than much of the rest of the world, that
    even though we are not growing fast enough, we are doing better
    than either Europe or Japan.
        That is encouraging people to invest here rather than
    abroad, and that is partly what the trade deficit reflects.
        If Europe starts growing faster, I think the trade deficit
    will shrink because people will start buying more of our goods.
        Senator Carper. I wish I were as sanguine as you are on
    this point. Maybe we will have an opportunity to discuss it at
    a different day. And I hope that history will show that you are
    correct.
        I am not so sure.
        Chairman Shelby. Senator Sarbanes.

                 STATEMENT OF SENATOR PAUL S. SARBANES

        Senator Sarbanes. Thank you Mr. Chairman, and thank you for
    scheduling these hearings on these nominees as the Committee
    continues to move ahead in discharging its responsibilities.
        Mr. Mankiw, you have a very distinguished professional
    record--summa graduate in economics from Princeton, Ph.D. in
    economics from MIT. And of course, you have been on the Harvard
    faculty since 1985, first as an assistant professor and then a
    full professor.
        I am very much interested in the Council of Economic
    Advisers. I actually worked there for a year when Walter Heller
    was the Chairman.
        The Council was established by the Employment Act of 1946:
    ``To provide the President with objective economic analysis and
    advice on the development and implementation of a wide range of
    domestic and international economic policy issues.''
        The Chairman has been regarded as the senior policymaking
    position of the economics profession within the Federal
    Government. I think it has ebbed and flowed in meeting its
    professional standards. I think it actually has varied
    considerably.
        The first question I want to ask you is how do you envision
    your role in commenting on economic issues? Do you come at it
    that you have to operate within the parameters that the
    President is setting by his political statements on economic
    questions?
        Or do you think the Chairman has the responsibility to call
    the economic issues as he analyzes them on economic terms?
        Dr. Mankiw. I do not have any doubt that the history of the
    CEA has been a very noble one in providing very objective
    advice to Presidents, both Republican and Democratic.
        I certainly view my role as to analyze things as a
    professional economist would and in a way that my professional
    colleagues would respect and to tell the President my
    unvarnished advice.
        At the same time, I recognize that the President is the
    economic policymaker. I am not. But it is certainly our job to
    provide the back-up support and the analytic apparatus that he
    needs so that he can make fully informed decisions.
        Senator Sarbanes. What am I to make of the fact that much
    of your writing, and I could quote it at some length. I
    probably choose not to do so here this morning for the sake of
    time--doesn't jibe with the current economic proposals of the
    Administration.
        Some of it has already been quoted to you. But what are we
    to make of that?
        In fact, it has provoked Stephen Moore, the President of
    the Club for Growth, to say that you ought not to hold this
    position.
        What are we to make of all of that?
        Dr. Mankiw. The particular passage that Mr. Moore referred
    to is a passage where I had raised skepticism about claims that
    tax cuts would generate so much economic growth as to be
    completely self-financing. I remain skeptical of those claims.
        That is different from saying that I am opposed to tax
    cuts, which I am not. It is different from saying that tax cuts
    will not partly pay for themselves, which they will.
        The most extreme advocates of tax cuts I think sometimes
    paint an excessively rosy picture about what they can get out
    of them.
        I do not think that this Administration has done that. I
    think the President has called for spending restraint as part
    of his package of tax cuts. And I feel completely comfortable
    with a policy of cutting taxes, together with spending
    restraint, in order to get the budget deficit under control.
        Senator Sarbanes. Does that jibe with your National Bureau
    of Economic Research paper which you and Larry Summers co-
    authored, ``Are Tax Cuts Really Expansionary?''
        And then in your introduction, you say: ``Existing
    empirical work, therefore, provides little evidence upon which
    to evaluate the standard conclusion that tax cuts are
    expansionary.''
        Dr. Mankiw. Yes, that was a paper written about I think 15
    or 20 years ago.
        Senator Sarbanes. Yes, 1984.
        Dr. Mankiw. Almost 20 years ago, during a time when the Fed
    was pursuing a monetary policy of targeting monetary
    aggregates. And it was particularly asking the question of
    holding monetary aggregates constant, would a policy of tax
    cuts expand aggregate demand for goods and services, which is
    the standard textbook conclusion. That is a very different
    environment than we face today, where the Fed is not, by
    anyone's description, targeting monetary aggregates.
        Senator Sarbanes. Let me just say to you that I really hate
    to see, and I hope you will keep this in mind, a highly
    competent professional turn himself inside out, twisting like a
    pretzel, in order to put forth economic analysis that conforms
    with what I regard as essentially political proposals.
        And I think if you are going to be an effective Chairman of
    the CEA, you have to be very much on guard about that because
    the political game is one thing, but professional standards is
    another. And if you completely undercut the latter, it may
    serve a short-run political purpose of others, but it is really
    going to compromise your own professional standing as an
    economist.
        And I just forewarn you because it seems to me that given
    your writings, you are going to have a lot of tension or
    conflict.
        Mr. Chairman, are we going to do another round to ask a
    couple more questions?
        Chairman Shelby. Sure. We will.
        Senator Sarbanes. All right. I have some other questions I
    want to ask.
        Chairman Shelby. We will take another round in a few
    minutes. Thank you, Senator Sarbanes.
        Doctor, the risk of deflation has been talked about
    recently. Last week, the Federal Reserve left its target
    interest rate unchanged and expressed its concern that, ``The
    probability of an unwelcome substantial fall in inflation,
    though minor, exceeds that of a pick-up in inflation from its
    already low level.''
        This adds to the concerns that others have raised regarding
    deflation. What advice would you give the President regarding
    this possibility?
        I am sure that that would be private.
        [Laughter.]
        What actions should we be taking basically to minimize the
    probability of moving into a deflationary environment?
        Dr. Mankiw. You are absolutely right that a deflationary
    environment is something that we want to avoid. It has happened
    several times in U.S. history. It happened in the late 19th
    century, leading to William Jennings Bryant's famous Cross of
    Gold speech, was motivated in part by deflation.
        It happened in the 1930's.
        Chairman Shelby. There is a huge down side to that, isn't
    there?
        Dr. Mankiw. Right, a huge down side. And we have seen it in
    Japan recently and obviously a much milder form than in the
    1930's in the United States. But there is a huge down side.
        What we need to do is to increase aggregate demand,
    increase spending, to get rid of the excess capacity and high
    unemployment that we now have.
        That is exactly why I think monetary and fiscal policy has
    been acting as it has, monetary policy by cutting interest
    rates, fiscal policy, by cutting taxes, both aimed at
    increasing aggregate demand and both should reduce the risk of
    deflation.
        Chairman Shelby. As far as the tax cut, we have been
    talking about that some here.
        Wouldn't the President's tax cut proposal also provide some
    improvement in corporate governance, something that this
    Committee is very involved in, and something that is needed in
    today's financial environment.
        Dr. Mankiw. Absolutely. Economists have for many years
    talked about how we tax capital income creates a variety of
    distortions.
        One of the distortions is encouraging debt over equity
    finance, including discouraging firms from paying dividends and
    instead encouraging retained earnings.
        To the extent we can undo that and have a neutral tax
    policy, firms will start paying dividends again, which is going
    to change the whole structure of how the economy valuates
    firms.
        Right now, many firms do not pay dividends because it is so
    tax-disadvantaged. And that means that we have to rely on
    accounting statements.
        Chairman Shelby. That would be a more traditional
    evaluation.
        Dr. Mankiw. That is right. Relying on accounting statements
    is basically relying on opinions of professionals, but
    opinions. Whereas, relying on the dividends to evaluate a firm
    is relying on cashflows and, in that sense, it is less easy to
    manipulate.
        Chairman Shelby. What would be the overall effect from your
    judgment on the tax proposals on investment in job growth?
        Dr. Mankiw. The Jobs and Growth package will have positive
    effects, both in the short-run and the long-run.
        In the short-run, it will increase aggregate demand, both
    by increasing consumption and increasing investment, by
    lowering the cost of capital.
        And the CEA, using a very conventional macroeconomic model,
    has estimated that it will create 1.4 million jobs by the end
    of 2004.
        It will also increase growth in the long-run by encouraging
    capital accumulation and also by allowing the existing capital
    stock to be allocated more efficiently.
        Right now, there is a distortion--corporate capital is
    taxed more heavily than noncorporate capital, and that is an
    inefficiency.
        By eliminating the double taxation of dividends, that is an
    inefficiency that would be undone. And whatever capital stock
    we have would be allocated more efficiently and that would
    raise aggregate productivity, incomes, and wages for everyone.
        Chairman Shelby. Government debt in our future, just
    generally. One of the topics raised in your textbooks is the
    size of the Government debt and Government spending.
        You cite how the aging of the population will have a
    profound impact on fiscal policy and it being one of the great
    challenges facing the next generation of policymakers.
        Senator Reed got into that a little bit earlier.
        As the population ages, government expenditures rise from
    21 percent of GDP in 2000 to 43 percent in 2050. How would you
    advise the President and the Congress to deal with this great
    challenge? When does this issue come to a crisis situation?
        Dr. Mankiw. The numbers you quoted I believe are from my
    textbook, which cited the Congressional Budget Office's
    forecast of that. So the CBO was the ultimate source of those
    numbers.
        As we discussed earlier, there is no question that the real
    fiscal danger, as the President's budget put it, is in the
    entitlement programs--looking forward over the next 75 years,
    which I guess is the horizon that Social Security looks at.
        In the next 75 years, there is a large unfunded liability,
    and that has to be dealt with. There are a variety of proposals
    on the table the President has endorsed--personal accounts and
    Social Security. The President has endorsed a move toward
    greater competition in Medicare. And I think that those are
    both constructive steps.
        But it is clearly a big challenge facing the country and it
    is something that is going to have to be dealt with in a
    bipartisan fashion because it will certainly affect all of our
    children.
        Chairman Shelby. In your role at the CEA, will you be
    making any recommendations to the President on moving to a more
    predictable framework, such as explicit inflation targeting, if
    you saw the need?
        Dr. Mankiw. The issue of inflation targeting is an issue
    for the Federal Reserve. As you know, we have an independent
    Federal Reserve and I probably shouldn't comment.
        Chairman Shelby. But you do have some observations on it, I
    am sure, as an advisor to the President.
        Dr. Mankiw. I will probably be spending most of my time
    thinking about fiscal policy.
        Chairman Shelby. Okay. Thank you.
        Senator Allard.
        Senator Allard. Here in the Senate, we evaluate tax policy
    on predominantly, static economic theory.
        Some States, like my home State of Colorado, use more of a
    dynamic scoring. Would you comment on the shortfalls of static
    economic analysis as opposed to dynamic economic analysis, and
    how that fits into your view that tax cuts, although not fully,
    but at least partially offset on costs may actually lead to a
    greater tax cut with the dollars that we have available in the
    budget?
        Dr. Mankiw. The standard scoring of tax cuts, as you said,
    is called static scoring, and it is based on the assumption
    that the economy, the gross domestic product does not change
    with the tax code. That assumption is made, I think, only for
    simplicity. I do not think any economist fundamentally believes
    it. So the real question is, is it good to have a precise
    answer to the wrong question or an approximate answer to the
    right question?
        And clearly the right question, when you think about tax
    policy, is how much is revenue going to change? That is one of
    the questions you want to know, as well as what economic effect
    it is going to have. Dynamic scoring tries to get at the true
    budgetary cost of any tax policy by looking at the feedback
    effects from the tax code to real GDP and then in turn, to the
    tax base.
        That is a very difficult task and it is a task that
    economists are wrestling with. And because of that, it is going
    to be less precise than the static numbers. There is going to
    be a range of estimates based on different economic models.
        But there is no question that it is an important task for
    economists to undertake if we are going to give policymakers
    useful feedback and analysis of the proposals they are
    endeavoring to do.
        There have been a variety of attempts at doing dynamic
    scoring and I suspect there will be more. And I suspect over
    time, you will see a convergence of economists toward a
    standard set of models and tools for doing that.
        One of the implications I should note of dynamic scoring is
    that not all tax cuts are created equal. Tax cuts that are
    particularly aimed at economic growth, at lower marginal tax
    rates, that encourage savings and investment, are going to
    generate more growth, more GDP, and therefore, be more self-
    financing than tax cuts that do not cut marginal tax rates and
    generate as much growth. So it not only gives you an accurate
    view of tax changes in general, but also of comparing one tax
    change versus another tax change.
        Senator Allard. So you would agree with the President's
    policy that tax cuts, particularly when our taxes are as great
    a share as they are of gross domestic product today, would in
    effect create some revenue to the Federal Government?
        Dr. Mankiw. Absolutely. It does it really through two
    channels.
        It does it in the short-run by putting people back to work,
    especially in a situation where there is so much excess
    capacity as we have now and so many unemployed people who are
    looking for jobs. And it does so in the long-run by changing
    incentives and increasing the aggregate supply of goods and
    services. That is, increasing the incentive to work, increasing
    the incentive to accumulate capital and start businesses and so
    on.
        Senator Allard. If you listen to the stock market on
    ``Today,'' it sounds like they had a pretty good day yesterday,
    and there is a lot of optimism. The bottom line is creating
    jobs.
        Do you agree that the President is on the right track in
    creating more jobs today for the rapid growth of our economy?
        Dr. Mankiw. Absolutely. It is standard textbook economics
    to say that when you cut taxes, you increase aggregate demand
    and increase employment.
        That you can find in virtually every economics textbook in
    the country. That is part of the President's plan, is to do
    precisely that, is to accelerate the marginal rate cuts, the
    child care credit, and the marriage penalty and it is going to
    put money in people's pockets and increase aggregate demand.
        Senator Allard. So you have no problem in putting forward
    your economic theories to the President and feel that he would
    seriously consider what you propose to him?
        Dr. Mankiw. That is correct.
        Senator Allard. Thank you, Mr. Chairman.
        Chairman Shelby. Senator Carper.
        Senator Carper. Mr. Mankiw, I met with Dan Crippen a month
    or so after he stepped down as CBO Director. We talked about
    the impact of tax cuts to stimulate the economy. And we talked
    about how much of a tax cut you need and what particular kind
    of tax cut is most helpful in getting the economy going.
        He looked ahead over the next 10 years and he said, think
    of the U.S. economy as about $140 trillion GDP. And he said,
    think of a tax cut that is $600 billion or $500 billion and
    think of it over the next 10 years as a 50-cent or 60-cent
    investment on $140 economy.
        And he said, we like to think that when we make a tax cut,
    it is really going to have a huge impact and it will get things
    moving in the right direction. But he said, sometimes we fool
    ourselves and give ourselves too much credit for the kind of
    effect that we are going to have.
        Would you take a minute and respond to that observation?
        Dr. Mankiw. I think that it is certainly right that there
    are many forces affecting the economy and fiscal policy is only
    one.
        So it is probably wrong to give credit or blame to fiscal
    policymakers to any economic change you see because lots of
    forces, domestic and from abroad, that can affect the course of
    the economy.
        On the other hand, fiscal policy is one important piece of
    the picture. Historically, there have been some important tax
    changes that have acted to stimulate the economy, the classic
    case being the Kennedy tax cuts in the early 1960's to
    stimulate the economy when there is excess capacity.
        We are in a situation now where inflation is very low,
    interest rates are very low. There is clearly excess capacity.
    Look at past utilization and there is really a lot of excess
    capacity there.
        Unemployment is higher than most estimates of the
    equilibrium level of unemployment. If there is ever a case for
    cutting taxes, the situation of excess capacity and low
    inflation and interest rates, very, very low, at 1\1/4\
    percent, it is probably it.
        Senator Carper. There are a number of proposals that are
    out there on both sides of the aisle to encourage particularly
    smaller businesses to make capital investments. I think they
    are able to expense, I believe up to about $25,000 annually,
    the investments that they make. And we are seeing a variety of
    proposals.
        Can you just describe for us what approach you think makes
    the most sense and why?
        Dr. Mankiw. There is a variety of ways to cut the cost of
    capital. In some sense, you can think of a lot of different
    proposals that are out there as being different mechanisms to
    achieve the same aim of reducing the cost of capital for
    businesses.
        The President's plan of eliminating the double taxation of
    dividends is I think one way to do that, and my preferred. But
    there are other ways of doing it, such as expensing, bonus
    depreciation, or something. There are also other mechanisms. In
    some sense, achieving a similar aim, reducing the cost of
    capital, stimulating investment, increasing demand for goods
    and services, and increasing employment.
        Senator Carper. I have seen proposals, for example, to
    increase from $25,000 per year to $75,000, the amount that
    could be expensed this year, maybe next year. There are some
    proposals to make it permanent.
        My question was which of these approaches would you think
    would make the most sense? Could you describe one?
        Dr. Mankiw. Well, I would have to look at the specifics of
    the proposal and if you want to submit which proposals you are
    referring to, I would be happy to have--if confirmed, I would
    be happy to have the CEA staff look at them and provide you an
    analysis.
        Senator Carper. Thank you. Last, just lay out for us maybe
    two or three good ideas to get the economy moving.
        Set aside the tax package and the discussion on taxes. What
    are some other things that you think we should do, not just the
    Congress, but as a Nation. It could be Executive Branch,
    Legislative Branch. It can be outside of Government as well.
        Just two or three good ideas.
        Dr. Mankiw. I think there are a variety of things that most
    economists would agree on. Most economists are very committed
    to free trade and the President has certainly moved forward on
    a very, very aggressive free-trade agenda. I think that that is
    something that economists of all political persuasions would
    endorse.
        I think you can always look at regulations and see, are
    there regulations that we have in place that are standing in
    the way?
        Certainly monetary policy is playing an important role and
    it has been very active in trying to stimulate the economy.
    Fiscal policy through tax changes as well.
        Senator Carper. Any thoughts on productivity and its role?
        Dr. Mankiw. Productivity can at times seem like a problem
    because it can look like people are getting laid off because
    of, say, computerization or increasing productivity in the work
    place. But there is no question that, in the long-run, it is a
    good thing. The reason that we are richer today than we were a
    generation ago is precisely because of productivity. And the
    reason that we are richer than most countries around the world
    is precisely because the United States is a very productive
    economy.
        So we should do absolutely everything we can to try to
    increase productivity because even thought it might at times
    cause temporary dislocations, there is no question that, in the
    long-run, it is better for everyone.
        Senator Carper. All right. Thanks very much.
        Thank you, Mr. Chairman.
        Chairman Shelby. Senator Sarbanes.
        Senator Sarbanes. Dr. Mankiw, do you think one of the
    reasons that we have used a static analysis for the impact of
    tax cuts or spending increases, for that matter, is really a
    conservative effort to avoid the impact of charlatans and
    cranks in the making of fiscal policy?
        Dr. Mankiw. I think there is no question that static
    scoring has the benefit of being simple and it requires
    absolutely no judgment. You are going to assume a zero impact
    on real GDP and zero is a number that nobody can argue with.
        Zero is zero.
        The problem with zero is that it is probably not correct.
    That is, depending on the tax change you are considering, there
    could be substantial impacts on GDP and therefore, on the tax
    base.
        But, certainly, those people who are worried that dynamic
    scoring might give overestimates, find zero an attractive
    number, and I think probably the best----
        Senator Sarbanes. Well, dynamic scoring would open the door
    for the charlatans and the cranks, would it not?
        Dr. Mankiw. I would hope that we could open the door for
    accurate analysis, the best guess, without opening the door for
    charlatans and cranks as well.
        Senator Sarbanes. I thought you warned us pretty
    effectively about that in your book, Chapter 2, Thinking Like
    an Economist. Let me just quote it:

        Anyone can adopt the title, economist, and claim discovery
    of some easy fix to the economy's troubles. These fads often
    tempt politicians who are eager to find easy and novel
    solutions to hard and persistent problems.
        Some fads come from charlatans who use crazy theories to
    gain the limelight and promote their own interests. Others come
    from cranks who believe that their theories really are true.
        An example of fad economics occurred in 1980, when a small
    group of economists advised Presidential candidate Ronald
    Reagan that an across-the-board cut in income tax rate would
    raise tax revenue.

        This is you now, not me.

        They argue that if people could keep a higher fraction of
    their income, people would work harder to earn more income.
    Even though tax rates would be lower, income would rise by so
    much, they claim, that tax revenues would rise.
        Almost all professional economists, including most of those
    who supported Reagan's proposal to cut taxes, viewed this
    outcome as far too optimistic. Lower tax rates might encourage
    people to work harder and this extra effort would offset the
    direct effects of lower tax rates to some extent.
        But there was no credible evidence that the work effort
    would rise by enough to cause tax revenues to rise in the face
    of lower tax rates.
        George Bush, also a Presidential candidate in 1980, agreed
    with most of the professional economists. He called this idea,
    voodoo economics.
        Nonetheless, the argument was appealing to Reagan. It
    shaped the 1980 Presidential campaign, the economic policies of
    the 1980's.

        Then you go on to note:

        After Reagan's election, Congress passed the cut in tax
    rates that Reagan advocated, but the tax cut did not cause tax
    revenue to rise. Instead, tax revenue fell, as most economists
    predicted it would, and the U.S. Federal Government began a
    long period of deficit spending, leading to the largest
    peacetime increase in the Government debt in U.S. history.

        Now if you open up the door for the cranks and charlatans,
    do not you run a very high risk of an inappropriate fiscal
    policy?
        Dr. Mankiw. Yes, in the passages, as I mentioned earlier, I
    expressed skepticism that tax cuts would generate so much
    growth, as to be fully self-financing.
        I am not sure that means that one has to go to the view
    that, therefore, we are going to assume going forward that tax
    cuts generate no growth at all.
        It is certainly true that we need to guard against
    excessive optimism. On the other hand, I also think that we
    should guard against excessive pessimism.
        What we really need is an accurate assessment of the
    effects of fiscal policies. And what dynamic scoring is trying
    to do is to try to come up with an accurate estimate.
        Senator Sarbanes. In The Washington Post, last fall, the
    following story appeared, and I'll just quote the outset of it:
    ``President Bush took a ride on the Laffer Curve yesterday and
    espoused a tax cut theory that his father once derided as
    voodoo economics.''
        After meeting with his Cabinet, the President was asked
    about the Federal budget deficit.

        Well, we have a deficit because tax revenues are down, he
    said. Make no mistake about it, the tax relief package that we
    passed, that should be permanent, by the way, has helped the
    economy, that the deficit would have been bigger without the
    tax relief package.

        That is orthodox supply side theory, the notion that tax
    cuts, by stimulating the economy, actually increased the
    Government's tax revenue. Such thinking, popularized by Arthur
    Laffer and his Laffer Curve, was the ideological fuel for
    Ronald Reagan's tax cuts.
        I have a couple of right-and-now questions I want to ask
    you.
        Chairman Shelby. Go right ahead.
        Senator Sarbanes. First of all, on unemployment insurance.
    I wasn't here for your exchange with Senator Reed. But the
    extension is about to run out. Many of us think we need to
    further extend the unemployment insurance benefits.
        What is your position on that?
        Dr. Mankiw. The President, as you know, has worked with
    Congress before on the unemployment insurance extension. So my
    expectation is that he will do so again.
        Senator Sarbanes. That doesn't tell me what your view is,
    as the potential President's chief economic adviser.
        Dr. Mankiw. Yes, sir. I was just going there.
        Unemployment insurance has pros and cons as a policy. The
    two advantages are that, obviously, it provides insurance for
    people in a difficult time in their lives. And also, it
    provides some stimulus to aggregate demand, sometimes called an
    automatic stabilizer, by maintaining people's incomes and
    spending.
        Senator Sarbanes. Now that is in fact what you said in your
    textbook, ``Essentials of Economics,'' when you said:

        When the economy goes into a recession and workers are laid
    off, more people apply for unemployment insurance benefits.
    This automatic increase in Government spending stimulates
    aggregate demand at exactly the time when aggregate demand is
    insufficient to maintain full employment.

        Correct?
        Dr. Mankiw. That is correct. All right. And those are the
    two advantages of the policy.
        Senator Sarbanes. Yes.
        Dr. Mankiw. There is also a large literature that concludes
    that the existence of unemployment insurance affects the search
    effort of the unemployed and tends to therefore raise the
    economy's natural rate of unemployment.
        We see this in the most extreme form in many European
    countries where unemployment insurance or similar systems go on
    sometimes indefinitely and they have much higher structural
    unemployment than we have.
        So in terms of thinking about unemployment insurance, you
    have to weigh some positive effects against some negative
    effects.
        Senator Sarbanes. And do you think those negative effects
    are present in the U.S. system?
        Dr. Mankiw. There is a large literature that has
    established that they are, that workers, the rate of job
    finding jumps precipitously when UI expires.
        I think that it is not a literature that I have contributed
    to, but I certainly have read it.
        Senator Sarbanes. How is a worker supposed to find a job in
    a labor market that is contracting?
        The unemployment rate last month was at 6 percent. That is
    the highest it is been in about 10 years. I am a worker who got
    laid off. I am drawing unemployment insurance. I am looking for
    a job. I cannot find a job, and I am running out of
    unemployment insurance benefits to help address the problem of
    supporting my family.
        I guess you are telling us, well, you should get out there
    and really hustle and find a job. Then I say, well, the labor
    market in which I am trying to find a job is getting worse, not
    better. The unemployment rate is going up. Private employment
    is down even further. This thing is tightening up. How am I
    expected to find a job in that labor market context? What is
    your answer to that?
        Dr. Mankiw. Well, there are two sides to the labor market.
    There is the supplier and demand and it is the behaviors of
    both the suppliers of labor and the demanders of labor that is
    going to determine the level of employment and the level of
    unemployment.
        And there is no question in my mind that the existence of
    unemployment insurance does affect the behavior of the people
    on the supply side of the market. That is, the workers looking
    for jobs. There is a tremendous amount of evidence from that,
    on that point.
        There is also no question that it has been a labor market
    that has been a difficult time for workers and that is
    precisely why the President has proposed his Jobs and Growth
    package, precisely to stimulate the economy, precisely to
    increase the demand for labor.
        Senator Sarbanes. Where are you on the extension of the
    unemployment insurance? Where do you conclude?
        We have lost 500,000 private-sector jobs over the last 3
    months. Chairman Greenspan, when he was before this Committee
    and we had a chance to ask him about his thoughts on extending
    unemployment insurance benefits, and he testified, ``Extending
    unemployment insurance provides a timely boost to disposable
    income.''
        Chairman Greenspan acknowledged that we are currently in a
    period where jobs are falling and he stated, ``I have always
    argued that in periods like this, that the economic restraints
    on the unemployment insurance system almost surely should be
    eased.''
        Do you disagree with that?
        Dr. Mankiw. I think that there are pros and cons. I tried
    to lay out for you what I think the advantages and disadvantage
    are.
        Senator Sarbanes. Why are people paying into the
    unemployment insurance trust fund, which has built up quite a
    large balance. Employers make regular payments into the
    unemployment insurance trust fund for the purpose of paying
    benefits in an economic downturn.
        We now have an economic downturn. We have quite a large
    balance in the trust fund. Why shouldn't we be drawing on that
    balance in order to meet both the human needs of the
    individuals who are unemployed and also contribute toward
    addressing aggregate demand in providing an economic stimulus?
        What do you propose to do with that big trust fund balance?
        Dr. Mankiw. I do not have any particular proposal for the
    trust fund balance. People are drawing, people are applying for
    unemployment insurance. The issue I believe we are talking
    about extension of unemployment insurance.
        And I am just saying that the unemployment insurance
    system, while it does have the advantages of providing
    insurance for down times, does have the advantage of propping
    up aggregate demands in times of weak aggregate demand, also
    has adverse incentive effects on job finding efforts and
    probably raises the average level of unemployment in the long-
    run.
        You see this in many European countries where they have
    very generous policies toward of the unemployed and the result
    is much higher structural levels of unemployment.
        Senator Sarbanes. I understand that argument, but it seems
    to me that the economic circumstances in which we find
    ourselves really negates that side of the ledger, as Greenspan
    himself recognized in his testimony before this Committee.
        We have a serious problem of unemployed people. They are
    about to run out of their benefits. We have a large balance in
    the trust fund. If these benefits stop being paid out, we are
    going to have a major jolt to aggregate demand. And you are in
    here telling me the con side of the argument to extend
    unemployment insurance benefits at a time when the economic
    circumstances, it seems to me, scream out for it to be
    extended.
        Dr. Mankiw. Senator, I believe I was telling you both the
    pro and con side. I was trying to be on the one hand, on the
    other.
        Senator Sarbanes. Truman, once confronted with that, said
    he wanted a one-armed economist.
        Dr. Mankiw. Well, I have two.
        [Laughter.]
        Senator Sarbanes. They asked him why? He said, I am tired
    of getting this, on the one hand, and on the other hand.
        What is your recommendation to the President going to be on
    extending unemployment insurance benefits?
        Dr. Mankiw. I would tell the President what I told you,
    that there is advantages and disadvantages and he has to weigh
    those advantages and disadvantages, recognizing they are both
    there and work with Congress on how to weigh those pros and
    cons.
        That is how the process works.
        Senator Sarbanes. What would you say if the President said,
    I have to go get myself a one-armed economist if this is the
    line of advice I am going to get.
        [Laughter.]
        Dr. Mankiw. Well, it certainly will be my expectation that
    whenever any policy comes up, I will give him both the pro and
    con side of every policy.
        Senator Sarbanes. You have all the factors. You have to
    weigh them. You are a professional economist. This is what
    you've spent your career doing. You are supposed to do the
    analysis. You know what the current circumstances are and what
    the situation is.
        Where do you come down on the question of whether we need
    to extend unemployment insurance benefits?
        Dr. Mankiw. I come down thinking that there are pros and
    cons and the both--and the first best policy is to create jobs,
    not to pay people to be unemployed.
        And it is the purpose of the President's Jobs and Growth
    package to stimulate the economy so that those jobs will be
    there, and not so we can pay people to be unemployed.
        Senator Sarbanes. I will come back.
        Thank you, Mr. Chairman.
        Chairman Shelby. Doctor, I think you are pointing out that
    in Europe, where they have continually extended unemployment
    benefits and that this is a basic economy that has created no
    net new jobs that we know of in a long time.
        Is that correct?
        Dr. Mankiw. That is exactly right.
        Chairman Shelby. So there is evidence on both sides,
    although we do want to help people when they are out of work.
    We all do. We do want to temporarily help them.
        But in the long-run, they are best to help themselves.
        Isn't this true?
        Dr. Mankiw. That is right.
        Chairman Shelby. Now, if we want to be more like Europe, we
    would just layer on and layer on and layer on these benefits.
        But the bottom line is Government doesn't create jobs. At
    least I do not know that they do, in the long-run. And if we
    are going to have a free-market economy, the law of supply and
    demand, and have it work, if the Government intervenes more and
    more and layer after layer, that doesn't mean that we are not
    far temporarily helping people that are out of work.
        If we continue to do it, won't it have an impact on the
    economy?
        Dr. Mankiw. That is exactly right.
        Chairman Shelby. That is the argument, right?
        Dr. Mankiw. That is exactly right. It is a balancing act
    between helping people who are down on their luck and at the
    same time propping up aggregate demand, both without creating
    adverse incentive effects, like the European labor market.
        Chairman Shelby. And as Senator Sarbanes said, that fund is
    created, has been created for people for unemployment benefits.
        Is that correct?
        Dr. Mankiw. That is correct.
        Chairman Shelby. Now, you mentioned earlier that your
    grandmother's candy store got your family surviving in this
    country.
        Dr. Mankiw. Right.
        Chairman Shelby. And I assume this was a small- or medium-
    sized business.
        Dr. Mankiw. Very small.
        Chairman Shelby. Do you see a role for the Council of
    Economic Advisers in advising the President on ways to reduce
    regulatory burdens on small businesses, knowing, as you do as
    an economist, that a great percentage of our job creation in
    this country has been and will be, the jobs will be created by
    small and medium-sized businesses?
        Dr. Mankiw. Absolutely. There is no question that the U.S.
    economy is incredibly vibrant. It is vibrant because it is an
    economy where it is very easy for an individual to start their
    own business, hire a few workers, and create wealth for their
    family and for others at the same time.
        And what I view the role of Government is to create an
    environment to facilitate that.
        Chairman Shelby. And an overburdensome regulatory hang on
    small businesses cripples that, doesn't it?
        Dr. Mankiw. That is right. Regulations are like taxes, but
    taxes where no revenue gets collected. But, obviously, each
    regulation has to look at the cost-benefit. You go through a
    cost-benefit calculation and say, does this make sense, taking
    into account both the benefits of the regulation, as well as
    the costs in terms of job creation and productivity.
        Chairman Shelby. Senator Schumer.

                STATEMENT OF SENATOR CHARLES E. SCHUMER

        Senator Schumer. Thank you, Mr. Chairman. I want to welcome
    you, Professor Mankiw. I think you are a very accomplished man.
    My daughter is using your textbook in economics.
        She says it is a very good textbook, although it is hard.
        She says it is hard.
        [Laughter.]
        We are glad you are here. I would like to ask you a few
    questions, a few following up on the lines of Senator Sarbanes.
        I intend to be supportive of your candidacy. I think you
    are a good man. But I am a little concerned. I knew Steve
    Friedman pretty well and he was a Concord Coalition guy and he
    joined the Administration.
        Your statements are pretty strong about Arthur Laffer and
    all of that, and now you are joining. Yet, very few people who
    are serious in this who are not ideologue seem to feel this
    idea of cutting taxes and raising the deficit into oblivion is
    the right thing to do.
        Now I am for a tax cut--I know Alan Greenspan says we do
    not need a tax cut to stimulate the economy. I would do on. So
    I would like to ask you questions along that line.
        The first is, could you just tell me again--I know Senator
    Sarbanes went over this--but do you think that the Laffer
    theory has validity?
        Do you think cutting taxes stimulates growth? And do you
    think that it is the number-one way to stimulate growth? And do
    you think on your cost-benefit analysis at this point in time,
    the down sides really do not outweigh the upsides, as most
    economists seem to feel?
        What do you think of Chairman Greenspan's admonition that
    if we are going to cut the dividend tax, that we should find
    other areas to make up for it?
        He did not say that a year and a half ago. He's saying it
    now.
        You are a respected man. And obviously, having you in a
    position of power is a good idea, probably, and I do not expect
    that we are going to agree on everything. But there is some
    view here that the Administration's policy is not supported by
    most people, not supported by most economists, not supported by
    others.
        And you are going to now join and be one of the respected
    voices as a trumpet for it.
        So give me your views, the general views. I am not talking
    about this tax cut, on the supply side. Just cut taxes and
    growth goes up and everything is fine.
        You know, free lunch.
        Dr. Mankiw. As a matter of economic theory, the idea that
    taxes could be so high as to be on what is called the wrong
    side Laffer Curve is certainly right.
        It is possible theoretically that cutting taxes could raise
    revenue. Very few economists think that in the range the United
    States is in today, that that is the case.
        Senator Schumer. Do you?
        Dr. Mankiw. No, I do not.
        Senator Schumer. Okay.
        Dr. Mankiw. That is different, on the other hand, from what
    I think is believing a substantially weaker statement, which is
    that taxes, tax cuts would raise growth. And because they would
    raise growth, they would, to some extent, pay for themselves.
        And being on the wrong side of the Laffer Curve says that
    they would completely pay for themselves.
        Senator Schumer. Right. But the Administration's theory
    doesn't seem to be the second theory. It seems to be the first
    theory, because first, their tax cut is not aimed immediately.
        A huge percentage of it, particularly let's talk about the
    dividend cut, which is the centerpiece, doesn't take effect
    immediately. It doesn't put money in the hands of average
    people.
        We all know that it is in short demand.
        Let me ask you this. If your goal were simply to get the
    economy going quickly, given that it is soggy, in the words of
    someone who will be one of your confreres, wouldn't it be
    better to a 1- or 2-year payroll tax cut, to a certain extent,
    than do a dividend tax cut?
        If you only had a limited amount of dollars, tell me which
    would be better and why.
        Dr. Mankiw. When you talk about tax cuts, you have to keen
    an eye on both the long-run and the short-run considerations.
        Senator Schumer. No, but I limited my question. I said, if
    your only goal were to get this soggy economy going right away,
    would you prefer, with the same amount of money, a payroll tax
    cut or a dividend tax cut?
        [Pause.]
        Dr. Mankiw. I would have to think about the precise numbers
    and the precise proposals and the timing and so on.
        The one thing to say about the dividend tax cut is, even
    though some of the money is----
        Senator Schumer. Could the reporter show that there was a
    long pause before Professor Mankiw answered the question.
        Sorry.
        Dr. Mankiw. Even though the dividend tax cut is in some
    sense forward-looking, some of the effects will show up today
    in the cost of capital, will show up today in the value of the
    stock market, and therefore, will have effects on demand today.
        Part of an answer of what is the short-run effect of the
    dividend tax proposal is an independent part of how the market
    perceives it, whether the market perceives that the Congress is
    going to credibly commit to it in the long-run, or whether this
    policy will get reversed.
        Senator Schumer. Most of the Wall Street economists in the
    big firms say that it is not going to do much and the market
    has not perceived it as well as the Administration thought it
    would.
        Dr. Mankiw. The CEA has actually done a survey of some of
    these firms. There is a range of estimates that go from 5 to 15
    percent on the value of the stock market.
        If you really do get something like that, if you get a 10
    percent rise in the stock market from this, that will have a
    significant effect on wealth, which in turn would affect
    consumption and also investment through the cost of capital.
        Senator Schumer. Don't you think a carry-forward of losses
    if you buy new stocks would cost less money and give you a
    bigger rise in the stock, immediately in the stock market?
        Dr. Mankiw. I would have to look at that proposal.
        Senator Schumer. Basically, if you have previous losses,
    right, you can buy new stocks. And if you make money on those
    stocks, lay their profits tax-wise against the losses that you
    have already had, everyone that I know says that if your sole
    goal is to stimulate the stock market, and I think it is a real
    guessing game whether it can or not, you would be better off
    doing that kind of proposal, wouldn't you?
        Dr. Mankiw. I would have to look at that proposal. But I
    wanted to take exception to the assumption that the sole goal
    is to stimulate the stock market.
        There is a lot of benefits here beyond stimulating the
    stock market. The current tax code has a bias against equity
    finance in favor of debt finance as a bias against dividends in
    favor of retained earnings.
        Those are two inefficiencies that economists have talked
    about for years having an undesirable feature of the tax code.
        And one of the purposes of the President's plan is to
    undo----
        Senator Schumer. If you had $300 billion and you could do
    tax cuts, $350, and you had your choice of tax cuts, would the
    dividend tax cut be number one on your list, given the present
    state of the economy?
        Dr. Mankiw. It would certainly be very high.
        Senator Schumer. Would it have been 6 months ago?
        [Laughter.]
        Dr. Mankiw. I have long thought that double taxation of
    dividends is an undesirable feature of the tax code.
        Senator Schumer. Let me ask you another. What about, a
    number of us are trying to get local aid into this stimulus
    plan, based on the theory that if the Federal Government gives
    John Q. Citizen a $200 tax break or $300 tax break, but local
    governments or State governments raise taxes by that amount,
    there is no money in there, and a 1-year shot into the arm of
    local governments, like revenue-sharing, would help create a
    greater stimulative effect.
        The Administration proposed something like that initially
    in their budget and took it out at the last minute.
        What is your view of that kind of proposal which is now
    being talked about? It was talked about yesterday in Nebraska.
        Dr. Mankiw. Yes. As you said, if the President did not
    include the State aid as part of his proposal. But my
    understanding is that he's willing to work with Congress on
    that issue.
        Senator Schumer. But what is your normative view as an
    economist who is not yet part of the team? Is it a good idea?
        Dr. Mankiw. I think probably providing the tax relief
    directly to the taxpayers is probably the best idea. And you
    are right, that some of that may be undone by the States. But
    that is something that the States should be deciding.
        Senator Schumer. Pardon? I did not hear the last part.
        Dr. Mankiw. Pardon me?
        Senator Schumer. I did not hear the last part.
        Dr. Mankiw. I am saying, I think the best tax relief is
    directly to the taxpayers. It is possible that some of that
    will be undone by State tax increases. I hope that that
    wouldn't happen.
        But that might occur in some States' cases. And that would
    undo part of the effect of the tax cut.
        Senator Schumer. So wouldn't, at least from a stimulative
    effect, say $40 billion to the States and localities this year,
    do more to stimulate the economy than an additional $40 billion
    for, say, a dividend tax cut that would take effect in 2006?
        Dr. Mankiw. I am not sure I would say that.
        Senator Schumer. Okay. What about Mr. Laffer's theory
    again?
        Again, I know that Senator Sarbanes read this. But you were
    so strong when you said, when politicians rely on the advice of
    charlatans and cranks, they rarely get the desired results they
    anticipate. Maybe we should say, when economists rely on the
    advice on politicians on how to run the economy, they rarely
    get the desirable effects they anticipate.
        But do you think that the Laffer view, of just cutting
    taxes and growth takes off, has been pretty much discredited,
    in your mind?
        Dr. Mankiw. The view of Arthur Laffer is not that tax cuts
    generate growth. I think that that is a view associated with
    many economists.
        The particular view that is associated with Arthur Laffer
    is the idea that it would generate so much growth, as to raise
    revenue.
        Senator Schumer. Revenue, right.
        Dr. Mankiw. And while certainly it is conceivable as a
    matter of economic theory, it is probably not true of the level
    of taxation in the United States.
        Indeed, that is why when they President talks about cutting
    taxes, he talks about restraint on the spending side at the
    same time. Because if one really believed that cutting taxes
    raised revenue, then we wouldn't need spending restraints.
        Every time you had a new spending program, we would cut
    taxes some more. That is obviously not the Administration's
    view.
        Senator Schumer. Thank you, Mr. Chairman. And I thank you,
    Professor Mankiw. I glad you are--even though you are not
    stating your views as fulsomely as I would like, I am glad you
    are joining the Administration.
        I am proud to support your nomination.
        Dr. Mankiw. Thank you, Senator.
        Chairman Shelby. Senator Allard.
        Senator Allard. Mr. Chairman, I would like to discuss the
    Laffer Curve with you.
        It takes things to two extremes and says that there is an
    ultimate area in between where you will maximize revenue,
    depending on your level of taxation.
        It says that if you tax everything 100 percent, your
    revenues are going to be low. If you do not tax anything at
    all, they are going to be low. And there is a bell curve that
    somewhere in between there, a balance to be reached between the
    level of taxation and your economy that will maximize revenues
    to the Federal Government. If you step over that line, then
    revenues begin to decrease. If you are on the other side, you
    can in some cases actually increase taxes and increase
    revenues, depending on where that balance is, and that balance
    is not a set figure.
        Would you agree with that?
        Dr. Mankiw. That is correct.
        Senator Allard. And so, in making your recommendations to
    the President, what you are going to be recommending is good,
    sound economic policy as to what you think would be most apt to
    create jobs and that is the sole goal. And what the President
    is trying to do right now, is not necessarily increase revenue
    or benefits to individuals, but increase jobs.
        Dr. Mankiw. That is exactly right. The President did not
    propose a Jobs and Growth package in order to raise revenue for
    the Government. He did it in order to create jobs and economic
    growth.
        Senator Allard. Thank you, Mr. Chairman.
        Chairman Shelby. Senator Sarbanes.
        Senator Sarbanes. I have one other area that I want to
    explore with Mr. Mankiw.
        I do want to observe, though, I guess your textbook is
    going to have to be extensively revised as I listen to your
    testimony and as I anticipate your performance in this office.
    I am very concerned.
        This is your quote: ``When the Government reduces national
    saving by running a budget deficit, the interest rate rises and
    investment falls. Because investment is important for long-run
    economic growth, government budget deficits reduce the
    economy's growth rate. Of course, you are heading us right down
    the deficit path.''
        Let me ask you about foreign indebtedness. You said earlier
    in response to a trade deficit question, well, trade deficits
    come and trade deficits go, as I recall your answer. I think
    that is essentially what you said. If I am not putting it
    correctly, I invite you to correct that.
        Dr. Mankiw. That is correct. We have had substantial
    fluctuations in the trade deficit over time and the
    macroeconomic impacts have not been huge.
        Senator Sarbanes. In the last several years, the U.S.
    current account deficit, and therefore, net foreign borrowing,
    has reached 5 percent of GDP. Five percent.
        We now have a net international liability position of about
    25 percent of GDP. We had a positive international asset
    position of 10 percent of GDP just 20 years ago.
        So we have gone from having a positive international asset
    position of 10 percent of GDP. In 20 years' time, we now have a
    net liability position of 25 percent of GDP. And our trade and
    current account deficits are sinking us further into debt by
    roughly an additional 4 to 5 percent of GDP each year.
        Do you think this position can be sustained?
        Dr. Mankiw. I do not think there is any imminent crisis on
    the horizon forcing it to change in the short-term. It will
    very likely change over time as it did in the 1980's where we
    had large current account deficits and then they shrunk back to
    zero.
        Partly, this is a reflection that the United States is a
    great place to invest. The United States is growing fast--
    despite our slow growth and growth that is not fast enough--we
    are growing faster than Europe and Japan. And if you are
    looking, where do you want to invest your assets, the United
    States is probably the best place in the world. And that is
    what the current account deficits are reflecting, that people
    want to invest their assets here.
        As we talked about earlier, the current account deficit is
    a reflection of a capital account surplus. I expect it will
    probably disappear once Europe and Japan start growing again,
    and we certainly hope that is soon.
        But it is hard to imagine what kind of action we would take
    to address the current account deficit now that would be
    desirable for the economy.
        Senator Sarbanes. You know the Tennessee Williams play,
    ``Streetcar Named Desire''?
        Dr. Mankiw. I read it many years ago in high school, yes.
        Senator Sarbanes. Blanche Dubois in that play has a line
    about being dependent on the kindness of strangers. Dependent
    on the kindness of strangers. Isn't that where the United
    States is now, given this international position? Aren't we
    dependent on the kindness of strangers?
        Dr. Mankiw. I wouldn't put it that way. A lot of people
    work for firms where some of the capital comes from abroad. If
    BMW wants to open up a plant to make cars in the United States
    and employ American workers, I do not see why we should, as a
    Nation, be adverse to that. That creates jobs in the United
    States just as if General Motors opened up a plant.
        Senator Sarbanes. Where is the inflow coming now?
        Dr. Mankiw. I do not have those numbers off the top of my
    head. I know it fluctuates in composition over time.
        Senator Sarbanes. It is coming from foreign governments
    now, isn't it, overwhelmingly? It's no longer coming from
    private lenders or investors. It is now coming overwhelmingly
    from foreign governments, is it not?
        Dr. Mankiw. As I said, I do not have those numbers in front
    of me, but I believe that share has increased.
        Senator Sarbanes. Now would you perceive that as a
    concerted effort on their part to prop up the dollar, to keep
    the currencies from appreciating and to gain a trade advantage?
    Why are the foreign governments doing that?
        Dr. Mankiw. That is not an issue I have looked at. I think
    the U.S. dollar-denominated assets are considered a very safe
    assets for lots of institutions around the world. The dollar is
    very much a standard of security.
        Senator Sarbanes. Do you think that there are countries
    that are seeking to manipulate the currency to gain trade
    advantage?
        Dr. Mankiw. I have not seen any evidence of that, sir.
        Senator Sarbanes. China.
        Dr. Mankiw. I have not seen any evidence of that.
        Senator Sarbanes. Mr. Chairman, I have gone over.
        Chairman Shelby. Thank you, Senator Sarbanes.
        Senator Sarbanes. Thank you.
        Chairman Shelby. Doctor, thank you very much for your
    appearance here today. We will try to move your nomination
    forward.
        Senator Schumer. Mr. Chairman?
        Chairman Shelby. Do you have another question?
        Senator Schumer. Yes, I do.
        Chairman Shelby. Senator Schumer.
        Senator Schumer. If you do not mind, Mr. Chairman. I know
    you have a lot of people to go through. I just wanted to follow
    up one thing on Senator Sarbanes' question.
        Is there a worry that the Euro could replace the dollar, at
    least in some eyes, as the currency of choice? I mean, this
    relates to the question that Senator Sarbanes--it is not a
    political question. I am just interested in your view. I have
    heard that from some people who are pretty smart about this
    stuff.
        Dr. Mankiw. It is conceivable, but I would not bet on it. I
    think the U.S. economy is still in some sense the best run in
    the world and it is still the most productive.
        I think we have a variety of long-run institutional
    advantages over any other country of the world. And I would
    expect as long as the U.S. economy ran strong, the dollar would
    remain the standard bearer for world financial markets.
        Senator Schumer. We haven't had a competitor I guess since
    Bretton Woods, right?
        Dr. Mankiw. Right.
        Senator Schumer. And finally, the Euro is edging back.
        I do not know. I read a statistic somewhere that now, in
    terms of bond trading or something, 40 percent was done in
    Euros, as opposed to dollars, which is brand new.
        And so, we do have the strongest economy. I worry if the
    President's whole, full-fledged tax bill goes through, that it
    wouldn't be seen as that strong any more.
        Well, let me ask you that.
        Do you think the fact that we are now heading on a path of
    increasing our deficit after some years of fiscal surplus,
    encourages people to drop the dollar and go to the Euro?
        Dr. Mankiw. I think the most important thing is to get
    growth going in this economy again.
        Senator Schumer. No, I understand. But do you think that is
    true, that more deficit financing, and particularly a view
    among Europeans and some others, that we now lost our restraint
    which we gained back throughout the 1990's, might encourage
    people to drop the dollar and go to the Euro.
        Dr. Mankiw. Under the President's budget, the deficits will
    be shrinking over time. And according to the Congressional
    Budget Office, the estimate of the Government's budget, the
    debt-to-GDP ratio will not be very different 10 years from now
    as it is today.
        So, I do not see in those numbers any reason for concern.
        Senator Schumer. They are not worried about the 5-year
    where it goes up?
        Dr. Mankiw. No, because it is standard textbook economics
    that recession and wars are the two canonical times you should
    run a budget deficit. And we are had a recent recession and we
    just had a war.
        Senator Schumer. Yes. But you keep jumping on both sides of
    the lines, in all due respect.
        If we are using war and recession, then we should be
    priming the pump. And much of the President's tax plan again is
    not aimed at priming the pump. Everyone agrees to that. But,
    rather, a change in the overall structure.
        We can debate it--reducing the taxes on unearned income,
    which might make the stock market go up. That is the only
    growth portion of it. There are other parts of the tax cut that
    do not do that, do not get me wrong.
        And so, if that is the case, given all of this and given--
    why wouldn't it be better to put more dollars in the front end,
    in the 2003 and 2004, and get it into the hands of people,
    average people, who would spend it?
        You really haven't answered that question adequately for
    me. It is not a question of whether it is good to have tax cuts
    or good to get rid of the double taxation of dividends.
        But if your goal was to strengthen growth, to increase
    growth to deal with the dual problems of war and recession, or
    creating a deficit of money that we had to spend, but recession
    saying prime the pump, why wouldn't it be better to do
    something that puts more money directly in people's hands than
    a dividend tax cut?
        It is a comparison because we do not have unlimited
    dollars.
        Dr. Mankiw. I think the President is motivated by both
    short-run and long-run considerations. He's thinking not only
    to put people back to work today. He also wants to create a tax
    code that is going to generate capital accumulation and long
    growth a decade from now.
        Senator Schumer. But doesn't that desire, which I am not
    debating with you now, cut against priming the pump and getting
    growth going quickly again?
        In other words, if your sole goal were quick, get the
    economy out of this sogginess, wouldn't you put far more
    dollars into people's hands immediately, rather than the
    dividend tax cut, which everyone admits only has its effect
    over a long-term in terms of the money it gets in people's
    hands?
        Dr. Mankiw. I do not think it only has an effect on the
    long-term. I think it is the part of the plan that is going to
    have an effect on the long-term. But I think it also has
    effects on the short-term through lowering the cost of capital
    and by increasing wealth.
        Senator Schumer. One other question. Do you think $750
    billion of tax cut is too high?
        Dr. Mankiw. Actually, I think the President's package was
    well designed.
        Senator Schumer. Okay. Is a billion too high?
        Trillion. Sorry.
        A billion is not too high, even in my book.
        [Laughter.]
        Is a trillion dollars too high? I mean, when do we get into
    a feeding frenzy? Is a trillion too high?
        Dr. Mankiw. I think it depends on the entire budget.
        Senator Schumer. Now. Right now. We have to vote on the
    bill in the next month. And there is a billion dollars,
    increasing the deficit over the next 10 years by a trillion
    dollars.
        Is that too high?
        Dr. Mankiw. That is in an economy that over that period of
    time will have a GDP of $140 trillion.
        Senator Schumer. Whatever the CBO projects or the President
    projects.
        Dr. Mankiw. Compared to the size of the economy and the
    following 10 years, no, I do not think so.
        Senator Schumer. How about $1.5 trillion? When do we get to
    a point where it is crazy already? Everyone knows it is, except
    the small band of people around the President. And now you are
    becoming one.
        I would hope that you would inject some sense into this,
    even if privately. And when you get up here and you tell me,
    that even double the President's plan is not too high, in terms
    of our deficit, in terms of the worries about the dollar, in
    terms of the worries about interest rates, in terms of the
    worries about all of this--you do not strike me as an
    idealogue.
        I think the President's policy is ideologically driven more
    than anything else. It gets its greatest support not from
    business people I speak to or hear about, but from ideologue
    who just hate the Federal Government, hate taxes, certain
    editorial pages.
        I will conclude with this because I do not want you to say
    anything because I am supporting your appointment. I do not
    want you to say anything to jeopardize it.
        [Laughter.]
        But I hope you will be a moderating voice there. I really
    do. The country demands it right now.
        Thank you, Mr. Chairman.
        Chairman Shelby. Any other questions?
        Senator Santorum. Mr. Chairman.
        Chairman Shelby. Senator Santorum.

                   STATEMENT OF SENATOR RICK SANTORUM

        Senator Santorum. Just one comment.
        With support like that, huh?
        [Laughter.]
        Let me just say that I think you were correct in your
    answers and I appreciate your answers. I think what the Doctor
    was trying to say is, the amount of tax cut is always driven by
    the policy and it is the short-term and long-term policy that
    is the most important thing to get accomplished.
        And if you can do it with 350, you do it with 350. And if
    you can do it with 7, you do it with 7. If you can do it with
    1.5--whatever the best policy is to accomplish your goals is
    what is needed.
        And I think it is very arbitrary to pick a number out, as
    the President did not do, because you heard conversations
    earlier this year talking about $300 billion or $500 billion
    was his package. But he changed the number driven by the policy
    of what he wanted to accomplish for the economy for the short-
    term and the long-term.
        We are fixated far too much in this Congress with numbers.
    We have to look at what the policy is underlying those numbers.
    Numbers are important. I am not saying they are unimportant.
    They are important, but not the only thing that we need to
    consider here.
        And when you consider some of the other numbers that we are
    looking at, which is record low inflation--in fact, one of the
    reasons we are always concerned about deficits is because of
    the inflationary pressure.
        We do not have that inflationary pressure now. What we have
    is slow growth and we need to look at ways to increase growth.
        So, I appreciate your comments. I do not think that they
    are ideologically driven. I think they are driven and were
    appropriately driven by what is best for this country as far as
    the economy is concerned.
        Senator Sarbanes. But the numbers are themselves a very
    important policy----
        Senator Schumer. Exactly.
        Senator Sarbanes. --since they bear on the deficit and the
    debt and the prospects for future growth.
        You cannot simply say, well, let's do a tax policy on all
    the tax policy considerations, and say, that is policy, without
    recognizing that the sum total of those changes that you may
    want to make in terms of the aggregate number itself becomes a
    very important policy in terms of the fiscal direction of the
    country and its prospects for our economy.
        Senator Santorum. I would agree with that. I think I made
    that balance.
        Senator Schumer. If my colleague would yield, you could
    have a policy that says, no taxing unearned income. But it
    might cost $5 trillion and you wouldn't do it.
        I could have a policy--national health care for everybody.
    That would cost $5 trillion and I could not do it.
        The numbers in the policy have to interact.
        Senator Santorum. If I could reclaim my time. I do not
    think I said that we should ignore numbers. In fact, I was very
    clear. But to just focus solely on numbers I thought was
    inappropriate and that is all the comment I would make.
        Mr. Chairman, I will yield back my time.
        Chairman Shelby. Thank you.
        Senator Schumer. Mr. Chairman.
        Chairman Shelby. Doctor, as you would say, numbers do have
    consequences. But I believe you were alluding earlier to the
    size of the tax cut compared to the size of our economy, in a
    sense.
        Is that correct?
        Dr. Mankiw. That is right. $726 billion may seem like a
    large tax cut, but not compared to the economy over a 10-year
    period.
        Chairman Shelby. Sure. Thank you for your appearance.
        Dr. Mankiw. Thank you very much.
        Chairman Shelby. We will have our second panel: Mr. Steven
    Nesmith. Come on up, sir.
        He has been nominated to the be the Assistant Secretary for
    Congressional and Intergovernmental Relations, U.S. Department
    of Housing and Urban Development.
        We have with us the other Senator from Pennsylvania who
    will be recognized to say anything that he wants to about the
    nominee.
        Senator Santorum. Thank you, Mr. Chairman.
        It is an honor for me to be here for Steve. I want to
    welcome him and his wife Christelle, and I think his son Steven
    Jr. is here, at least I thought I saw him.
        There he is. I cannot see him behind the chair there.
        Welcome all of you to the hearing today. It is a real
    personal privilege for me to introduce Steve to the Committee.
    He's been someone that I have worked with in Pennsylvania for a
    number of years since I have been in the U.S. Senate. I have
    worked with him both at the Department of Housing and Urban
    Development and his previous--well, current position, I guess,
    as well as with the Economic Development Administration.
        He has been a very strong, active voice in economic
    development in our State, working with EDA, and has a
    distinguished resume of Government service and service outside
    of Government.
        He has a great resume of education. He was a clerk for our
    Supreme Court Justice in Pennsylvania. The laundry list is
    long. And I would like to put my full statement in the record.
        Chairman Shelby. Without objection, it is so ordered.
        Senator Santorum. And just say that it is a pleasure to be
    here. The Secretary is going to be very-well served as having
    Steve be the Assistant Secretary for Congressional and
    Intergovernmental Affairs.
        It is a pleasure to be here.
        Chairman Shelby. Mr. Nesmith, would you stand and hold up
    your right hand?
        Do you swear or affirm that the testimony that you are
    about to give is the truth, the whole truth, and nothing but
    the truth, so help you God?
        Mr. Nesmith. I do.
        Chairman Shelby. Do you agree to appear and testify before
    any duly-constituted committee of the Senate?
        Mr. Nesmith. I do.
        Chairman Shelby. Thank you. Your written testimony will be
    made part of the record in its entirety. You proceed as you
    wish.

            STATEMENT OF STEVEN B. NESMITH, OF PENNSYLVANIA

              TO BE ASSISTANT SECRETARY FOR CONGRESSIONAL

                    AND INTERGOVERNMENTAL RELATIONS

            U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

        Mr. Nesmith. Chairman Shelby, Ranking Member Sarbanes, and
    other Members of the Committee, I thank you for your
    willingness to consider my nomination during such a busy time
    in Congress.
        My wife, Christelle, and son, Stevie, Jr., were already
    introduced. I want to take the time, and I am happy that they
    are here with me today. I also have a beautiful daughter by the
    name of Alexandra. She is only 3 months old, so we thought it
    was best that she not come today and disturb the proceedings.
    Finally, even though my mother, Ruby Nesmith, has passed on and
    she is not physically with me today, I know she is here with me
    in spirit.
        I would like to thank Senators Santorum and Specter for the
    very generous introductions today. It has been an honor for me,
    and a privilege, to work with both Senators in this
    Administration on economic development issues for Pennsylvania
    and, therefore, the country during my tenure at the U.S.
    Commerce Department. I also want to thank the many people who
    have supported me leading up to this process and helped me
    prepare for this hearing. And, of course, I want to thank the
    senior staff here at the Senate Banking Committee. I am most
    grateful for their help.
        Most importantly, I am deeply grateful to President Bush
    and Secretary Martinez for according me the honor of this
    nomination. If confirmed, it is with great humility that I will
    discharge the duties of the position.
        As someone who grew up in public housing and as a so-called
    ``at-risk child'' in the ghetto of Philadelphia, Pennsylvania,
    I am sure that many people could never imagine that I might sit
    here today before such a prestigious group of U.S. Senators as
    the President's nominee for the Assistant Secretary position at
    the U.S. Department of Housing and Urban Development.
        I hope that my experiences, growing up in public housing
    and working on economic development issues in Philadelphia's
    Empowerment Zone, in addition to those as a Government
    Relations Lawyer, and as Deputy Assistant Secretary of the U.S.
    Department of Commerce Economic Development Administration,
    will assist me in thinking through the housing issues from the
    perspective of both community and economic development and the
    U.S. economy.
        In closing, I recognize that there will be challenges ahead
    for us, whether they are a specific program at HUD or issues
    facing the broader housing community. Nevertheless, I believe
    that we must address these issues in a bipartisan manner in
    order to find long-term solutions.
        And I thank you.
        Chairman Shelby. Mr. Nesmith, as Assistant Secretary for
    Congressional and Intergovernmental Affairs, you would serve as
    the information conduit between HUD and Capitol Hill.
        What are your thoughts on improving the flow of information
    between the Department and the Congress?
        Mr. Nesmith. Well, I think that one of the first things
    that is important and that I talked with Secretary Martinez
    about is that the various program areas sometimes operate in
    business silos, if you will, like individual businesses at HUD.
    Instead, the program areas must come together more regularly
    and the Office of Congressional and Intergovernmental Affairs
    must be the leader in bringing those program areas together on
    issues relating to legislation, on specific program issues.
        I have talked to Secretary Martinez about this approach
    and, if I am confirmed, I will take the lead in implementing
    this concept.
        For example, when someone says, you know, I haven't heard
    that much from this other assistant secretary. I haven't heard
    much from this program area. I think that the Office of
    Congressional Affairs must take the leadership in making sure
    that we pull everyone together and take the responsibility in
    getting not only timely responses to members of your senior
    staff and to the Members of this Committee directly, but also
    substantive responses.
        Chairman Shelby. You will also be the point of contact
    between HUD and interested external parties, external to the
    Department. That is a very important communication medium, too.
        How are you going to handle that?
        Mr. Nesmith. As a former athlete, I would like to use
    athletic analogies. One of the things I have in my playbook, so
    to speak, is that we convene interest groups who have the most
    interest in the housing, community and economic development and
    ask them to come to HUD on a regular basis.
        We do not always have to go to them. Instead, bring them
    into the HUD's departmental conference room, and do a better
    job at briefing them about policy issues and have more of an
    intimate relationship with these groups.
        Chairman Shelby. Or any issues that affect them, right?
        Mr. Nesmith. Yes, sir. And so, I believe that what we need
    to do is bring those interest groups that have issues before
    HUD, bring them in and make them part of HUD's family when we
    are making decisions about the Department.
        So that we can sit down together, rather than HUD staying
    where it is physically located and the interest groups being
    located out where they are.
        Chairman Shelby. Senator Sarbanes.
        Senator Sarbanes. Mr. Chairman, I do not have any questions
    of Mr. Nesmith. I look forward to supporting his nomination and
    I want to commend you for scheduling his hearing in such an
    expeditious manner.
        We had the opportunity to meet in advance of this hearing
    and explore a number of issues. There is just one I want to put
    on the public record.
        A number of us on the Committee, and in fact, other Members
    of Congress, both Democrats and Republicans, have had some
    problems with the responsiveness of HUD to inquiries from the
    Hill, requests for information, efforts to consult on the
    evolution of policy and so forth.
        This is not intended to be a criticism of the Congressional
    Relations staff at HUD. Our perception is that they work quite
    hard at staying in touch with Committee Members and Committee
    staff.
        But they apparently were encountering difficulties in
    getting their counterparts in the program areas of the
    Department to respond to concerns raised by the Committee.
        I won't enumerate them, but there are a number of examples
    where it took really months to get responsive answers out of
    the Department. And my understanding is that the Congressional
    Liaison Office was doing its very best to get their
    counterparts in the policy substantive areas of the Department
    to respond.
        Now, obviously, there will be times when we agree or
    disagree about specific policy prescriptions or legislative
    proposals. But, in any event, it is our responsibility as the
    Committee of jurisdiction to review policy and oversee
    operations of the Department.
        I, previously as Chairman, and now Chairman Shelby, have
    stressed the oversight responsibilities of this Committee. To
    meet that responsibility, we need more cooperation from HUD.
        You seemed to understand that concern when we met and
    discussed the problem. I do not know whether you want to add
    anything to that at this point. But I think it is an extremely
    important issue, and as you are about to undertake or embark on
    these important responsibilities, I, frankly, perceive it at
    the moment as a major challenge which you will confront.
        Mr. Nesmith. I appreciate that comment. As you both, both
    Ranking and Chairman, know, as you both were athletes, and I
    know that Senator Shelby, but for some events in life, maybe he
    would have been a Hall of Famer football player from Alabama,
    but for an accident that occurred, physical, that is----
        Senator Sarbanes. You are going to great lengths to compare
    it to----
        Chairman Shelby. We are going to confirm this man fast.
        Senator Sarbanes. Yes.
        [Laughter.]
        Mr. Nesmith. And I know that Senator Sarbanes, it is my
    understanding, was a good athlete in basketball, in fact, at
    Oxford University. You both were athletes, you understand the
    concept of leadership.
        Senator Sarbanes. A shooter there at Princeton.
        Mr. Nesmith. But I really see this as an issue of
    leadership, Senator Sarbanes. And I think that is my
    responsibility.
        I think that the issue you laid out is a very important
    one. So, therefore, I pledge to you to take the leadership role
    in making sure that what you described never happens with the
    team that I have around me.
        And therefore, if you do not see a substantive improvement
    on this issue, I think leadership should be called to task and
    therefore, I will be willing to join you in your office.
        Chairman Shelby. Thank you. And as I just told you, we are
    going to move your nomination fast, Senator Sarbanes and I.
        Mr. Nesmith. Thank you.
        [Laughter.]
        Chairman Shelby. Thank you for your appearance. Thank you
    for your statement.
        We looking forward to supporting you.
        Mr. Nesmith. Thank you very much.
        Chairman Shelby. Our third panel are nominees for Members
    of the Board of Directors for the National Institute of
    Building Sciences: Mr. Jose Teran, Mr. James Broaddus, Mr. Lane
    Carson, Mr. Morgan Edwards, and Mr. Paul Pate.
        I have also been asked on behalf of Senator Grassley that
    he has a statement in support of Mr. Paul Pate of Cedar Rapids,
    Iowa, and I want to make his statement as part of the record,
    without objection.
        I would ask that all of you stand and let me administer the
    oath to you, if you would raise your right hand.
        Do you swear or affirm that the testimony that you are
    about to give is the truth, the whole truth, and nothing but
    the truth, so help you God?
        Mr. Pate. I do.
        Mr. Broaddus. I do.
        Mr. Edwards. I do.
        Mr. Carson. I do.
        Mr. Teran. I do.
        Chairman Shelby. Do you agree to appear and testify before
    any duly-constituted committee of the Senate?
        Mr. Teran. I do.
        Mr. Carson. I do.
        Mr. Pate. I do.
        Mr. Edwards. I do.
        Mr. Broaddus. I do.
        Chairman Shelby. Thank you, gentlemen. Your written
    testimony will be made part of the record in its entirety.
        You know that we have had a long meeting here today. You
    had to endure it.
        If you will sum up as quickly as you can, in a very
    abbreviated manner, we would be deeply appreciative.
        We will start with Mr. Teran.

                 STATEMENT OF JOSE F. TERAN, OF FLORIDA

                TO BE A MEMBER OF THE BOARD OF DIRECTORS

                NATIONAL INSTITUTE OF BUILDING SCIENCES

        Mr. Teran. Mr. Chairman and Members of the Committee, I am
    Jose Francisco Teran, born in Nicaragua and a citizen of the
    United States of America since 1989.
        I want to acknowledge the presence of my wife of 41 years,
    Maria Lourdes, and two of my youngest daughters, Maria Lourdes
    and Gabriela. And I am especially proud to have here also Mr.
    Carlos Ulvert, who is the Ambassador of Nicaragua to the United
    States, and his wife, Carmen Lucia.
        Chairman Shelby. We welcome them here.
        Mr. Teran. Who happens to be my wife's niece.
        Chairman Shelby. Thank you. And we congratulate you, with
    your family and what you have done.
        Mr. Teran. Thank you. It is a great honor to have been
    nominated by President George W. Bush to be a Director of the
    National Institute of Building Sciences.
        Today, I come before you to make a brief statement of what
    I believe to be my qualifications for this position, and to
    thank the Members of the Committee for your review of my
    nomination and allowing me to appear before you this morning.
        My story, as it relates to this nomination, starts with a
    quality primary and secondary education at the Christian
    Brothers and Jesuits schools in Nicaragua. It was at this time
    that I laid the four pillars for my intellectual life:
    Mathematics, Science, Philosophy, and Art. For this reason, I
    decided to become an architect.
        I had my university training as a freshman at Wilson
    Teachers College, Catholic University of America, and George
    Washington University. I spent 5 more years to get my Bachelor
    and Master of Architecture Degrees at the University of
    Michigan in Ann Arbor. I have taken the Harvard-sponsored
    course in advanced management at INCAE.
        Upon graduation, I was invited to join the design team of
    Minoru Yamasaki in Birmingham, Michigan. I worked intensely
    under the guidance of Gunnar Birkerts. At that time I was in
    the teams that designed the Oberlin College Conservatory of
    Music, the Wayne State University College of Education, the
    first international airport in Dahran, Saudi Arabia, and the
    Michigan Consolidated Gas Company Building in Detroit.
        I then went back to Nicaragua and between 1960 and 1979,
    formed the largest architectural, engineering, construction,
    industrial, and financial group of companies. Buildings such as
    the Ruben Dario National Theatre, the INCAE-Harvard campus, the
    Central Bank Building, the National Light and Power Company
    building, and many other office, hotel, and hospital projects
    were successfully planned and constructed in the country. Over
    14,000 single-family, low-cost houses were produced in model
    communities with the assistance of the Agency for International
    Development.
        I came with my family to Houston in 1980 to work for a
    small developer. Several office and commercial projects were
    developed. In 1984, I founded my own company, Natex
    Corporation, that has operated continuously to this day. Two
    separate activities were the key targets of Natex: Real Estate
    Development and Management and Architecture. One of the most
    important projects was the coordination and technical direction
    of the Managua Metropolitan Cathedral donated by Thomas S.
    Monghan, the owner of Domino's Pizza, in 1993. The project
    designed by Ricardo Legorreta of Mexico won the 1994 Award from
    the American Institute of Architects.
        I have been a team member all my life. I highly value the
    benefits of working together with others. I have been in the
    private
    sector all my life, but I have had interesting interactions
    with all sectors of Government, both in the United States and
    abroad.
        I value highly the purpose of the institution I have been
    nominated to serve. The National Institute of Building
    Sciences' mission to join the private and governmental sectors
    to improve the regulatory environment and allow the faster and
    more efficient incorporation of technology into our building
    process is of utmost importance to the welfare of our people.
    It is of particular importance today as the problems of
    homeland security soar with the terrorist threats.
        I am perserverant and like to see results. I strive for the
    highest level of quality, to the best of my ability in what I
    do.
        Again, many thanks for your consideration. I look forward
    to answering any questions that you may have.
        Chairman Shelby. Thank you, Mr. Teran.
        Mr. Broaddus.

                 STATEMENT OF JAMES BROADDUS, OF TEXAS

                TO BE A MEMBER OF THE BOARD OF DIRECTORS

                NATIONAL INSTITUTE OF BUILDING SCIENCES

        Mr. Broaddus. Chairman Shelby, Ranking Member Sarbanes, and
    distinguished Members of the Committee, I am honored to appear
    here today as a nominee to become a Member of the Board of
    Directors of the National Institute of Building Sciences. In
    attendance with me today is my wife of 33 years, Kay, whose
    love and support has enabled my presence here today. I would
    also like to recognize the attendance of two very special
    people, both of whom work diligently in Washington on a daily
    basis: Sharon Gressle, with the Congressional Research Service
    of the Library of Congress, and Jim Kuhn, my close friend and
    business colleague here in Washington, who as an Assistant to
    the President served as the Personal Executive Assistant to
    Ronald Reagan during his second term. Three very special family
    members could not attend are my son Scott Broaddus and
    daughter-in-law Courtney, who remain in Texas because of their
    jobs. Our youngest son also could not make it due to job-
    related duties. First Lieutenant Jeffrey Broaddus is an
    infantry platoon leader with the 1st Battalion 5th Marines.
    After a 1,200-mile tour of southern Iraq and downtown Baghdad,
    he remains in-country there, awaiting transportation back home.
        I was honored and most grateful to President Bush for his
    trust and confidence in me to nominate me to serve on the Board
    of NIBS. I also appreciate the Senate Committee on Banking,
    Housing, and Urban Affairs for considering confirmation of my
    appointment for which I am awed and humbled to be considered.
    For many years, I have been aware of the good work of NIBS and
    its contribution to the building sciences on a national scale.
    However, I never contemplated that I would be entrusted to help
    set its strategy and oversee its direction. Hopefully, the
    Committee will consider my background well-suited for this
    appointment.
        After completing my civil engineering degree at the
    University of Texas, I began my working career as Navy Civil
    Engineering Corps Officer and Navy Seabee where I served 20
    years. From 1970 to 1990, I served in 11 different assignments
    all over the world, which included project management
    responsibilities from the field construction site to the
    Washington level. Following my construction-oriented Navy
    career, I finished my Ph.D. degree at UT Austin, and remained
    there working for the Construction Industry Institute, a
    national research center for the design and building industry.
    My imbedded Seabee penchant for project work brought me back to
    the real world of projects and in 1994, I became Director of
    Facilities Planning and Construction for the 15-campus
    University of Texas system. During my 4\1/2\ years there, we
    completed $1.5 billion statewide in a wide variety of projects
    using new and improved project management methods and
    contracting strategies. In 1998, I returned to Washington, DC
    to lead the Design-Build Institute of America in developing
    integrated and streamlined approaches to design and
    construction. In late 2000, fulfilling a dream I held on to
    since my early college years of having my own professional
    practice. I started Broaddus & Associates as a project
    management firm to help mostly public owners manage major
    complex projects from the earliest planning through design,
    construction, and initial operation. Today, at Broaddus &
    Associates, we are managing $300 million in projects in the
    State of Texas and provide management consulting to facility
    owners and throughout the United States.
        As a professional, my career has focused on improving the
    project process. While our industry is always in need of better
    technology and materials, I know from research and practical
    experience that significant inefficiencies exist in the
    management of projects that ultimately cost taxpayers and
    consumers alike. I look forward to working with NIBS to carry
    on their highly effective efforts and to promote new high
    payback programs that can materially improve one of the largest
    industry sectors in our economy. NIBS was chartered to be the
    public/private interface for the building industry. The private
    sector has much to offer in making our public projects more
    cost-effective, both in initial capital outlay and life-cycle
    costs. I see the opportunity to bring private sector ideas to
    the Government projects every day in the projects we manage at
    Broaddus & Associates. I look forward to bringing that
    perspective to the Board of NIBS.
        Your approval of this nomination will be one of my highest
    honors and I can also assure that I will be an active and
    contributing Board Member, keeping NIBS mindful of its intended
    public purpose. There is much to be done in our industry, and I
    feel NIBS can play an ever-expanding role in improving
    construction.
        I would be pleased to answer any questions you may have.
        Chairman Shelby. Thank you.
        Mr. Pate.

                   STATEMENT OF PAUL D. PATE, OF IOWA

                TO BE A MEMBER OF THE BOARD OF DIRECTORS

                NATIONAL INSTITUTE OF BUILDING SCIENCES

        Mr. Pate. Thank you, Mr. Chairman. Greetings, honorable
    Senators and staff.
        It is an honor to introduce myself to the U.S. Senate
    Banking, Housing and Urban Affairs Committee. My name is Paul
    D. Pate and I am the Mayor of Cedar Rapids, Iowa. I am a
    nominee for the Board of Directors of the National Institute of
    Building Sciences.
        This personal milestone is made possible by a family
    effort.
    Although they could not join me today in person, I am who I am
    because of the absolute support and love of my wife Jane, my
    children Jennifer, Amber, and Paul III, my grandson Brandon, my
    parents Paul, Sr. and Velma, and my entire family, which God
    has blessed me with.
        My parents provided me the strong values of working hard to
    achieve dreams and giving back for the good of the community.
    Serving the public through elected office and pursuing other
    opportunities to reach out through business ownership are two
    ways I have acted on the foundation they gave me. These two
    kinds of professional experiences are the leading
    qualifications I bring as a nominee to the National Institute
    of Building Sciences.
        I have the honor of being Mayor of Iowa's greatest and
    strongest city--Cedar Rapids. Prior to serving as Mayor, I
    served as Iowa's Secretary of State and a State senator,
    totaling more than 11 years of executive and legislative
    experience at the State and local government levels.
        I am a third-generation builder with 27 years' experience
    in the professional development trade. I currently own Pate
    Asphalt. Thanks to the foundation of the values instilled in me
    by my father and grandfather, I worked my way from the ground
    up, and still work to complete the highest quality work. This
    family tradition means I offer a firsthand understanding of the
    perspective of builders to the National Institute of Building
    Sciences.
        I'm qualified to serve in this position not only because of
    my private business and Government service experience, but also
    because I view the position as an opportunity to do my best,
    keep moving forward and help create common benefit through
    effective partnerships. I listen attentively to all
    perspectives offered, which allows me to be a proactive team
    member on this Board of Directors.
        If confirmed, I will actively engage myself in all aspects
    of the Institute's public mission to improve the building
    regulatory environment, facilitate technology introduction, and
    disseminate information. I have already started this process in
    my community.
        For example, I founded the Mayor's Development and Building
    Task Force in Cedar Rapids last year. The group is a successful
    case study that may be replicated in other areas of the
    country. The group meets to streamline the processes local
    businesses must face when they are expanding their physical
    footprint. This has a great impact on keeping economic
    development moving forward.
        In closing, I would like to thank President George W. Bush
    for this nomination and appreciate the Senate's consideration
    of my confirmation for this position. I look forward to
    applying my passion for service if confirmed for this position.
        As a leader and former President I admire, Teddy Roosevelt
    once said, ``The first requisite of a good citizen in this
    republic of ours is that he shall be able and willing to pull
    his weight.''
        If confirmed, I will carry the honor and personal
    responsibility this statement implies forward, applying the
    best of myself as a Member of the Board of Directors of the
    National Institute of Building Sciences.
        I would appreciate your support of my nomination and stand
    ready to answer any questions and listen to any guidance.
        Thank you.
        Chairman Shelby. Thank you.
        Mr. Carson.

                 STATEMENT OF LANE CARSON, OF LOUISIANA

                TO BE A MEMBER OF THE BOARD OF DIRECTORS

                NATIONAL INSTITUTE OF BUILDING SCIENCES

        Mr. Carson. Chairman Shelby, Senator Sarbanes, first, my
    wife Laura could not be with us today because she's getting
    report cards out back in Mandeville Junior High in Louisiana,
    final report cards, of course. And my son Chris is about to be
    a senior at the United States Naval Academy and is in the
    process of getting ready for commissioning week.
        But it is an honor to be here and it is an honor to be
    appointed by the President, and it certainly would be an honor
    to be confirmed by you.
        As a youngster, I grew up in a working community in
    Louisiana. My dad is a member of Local 60, Steamfitters and
    Plumbers, and my brother is also. So I had a chance to work
    personally with these men and really get to know what working
    people are all about.
        After going to school at LSU and serving my country in
    Vietnam, I went on to Tulane Law School in the vocational
    rehabilitation program. And after that, I had an opportunity to
    serve the handicapped community by working on the Architectural
    Transportation Barriers Compliance Board in the Reagan
    Administration.
        Briefly working at the health department in the State, I
    had an opportunity to work with the construction decisions
    regarding hospitals. And after all that, finally got a
    contractor's license and a broker's license and have maintained
    and operated apartments and office complexes.
        I guess my biggest attribute to the Board would be as an
    attorney, for 18 years being in the trenches of local county
    government, trying to make it work, all the issues of zoning,
    land use, building codes, all the things that are important to
    the people back home.
        And that would be my key offering, Mr. Chairman. So with
    that, I offer my candidacy and would appreciate your
    confirmation.
        Chairman Shelby. Thank you.
        Mr. Edwards.

           STATEMENT OF C. MORGAN EDWARDS, OF NORTH CAROLINA

                TO BE A MEMBER OF THE BOARD OF DIRECTORS

                NATIONAL INSTITUTE OF BUILDING SCIENCES

        Mr. Edwards. Good afternoon, Mr. Chairman, Ranking Member
    Sarbanes, ladies, and gentlemen. I first would like to thank
    you for this opportunity to be here today and I especially
    would like to thank Senator Dole for that kind introduction.
        I would like to express my gratitude to President George W.
    Bush for his confidence in nominating me as a Member of the
    Board of Directors of the National Institute of Building
    Sciences. If confirmed, I look forward to serving in this
    important position.
        A few years ago, I had a unique opportunity when I was
    asked to oversee two major building laws that were enacted by
    the Commonwealth of Pennsylvania. It was my job to design,
    develop, and manage the regulatory programs for statewide
    inspection program of mobile home and modular housing.
        For 3 years, I worked to develop these programs and then
    carried out the actual management for an additional 4 years.
    During this time, I served on many National standard-writing
    committees, including the National Fire Protection Association,
    the American Society for Testing Materials, and the National
    Conference of States and Building Code Standards. I was also a
    Member of the original HUD Mobile Home Standards Advisory
    Group.
        Prior to my State code experience, I was in the U.S. Naval
    Reserve, on active duty for 4 years. Following this, I served
    several years in corporate America middle management, including
    Campbell's Soup and Philco Ford, which is now called Ford
    Aerospace.
        I spent time as a Management Consultant. After returning to
    North Carolina, I was appointed Assistant Secretary in the
    North Carolina Department of Transportation by then-Governor
    James Martin, who was also a Member of Congress.
        I recently retired and I spend most of my time, or much of
    my time, practicing real estate on a part-time basis.
        I would like to thank you, Mr. Chairman, and Ranking Member
    of the Committee for this opportunity and I am grateful for
    your time and look forward to addressing any questions you may
    have.
        Chairman Shelby. I want to thank all of you.
        An important concern of mine is seeing that the opportunity
    to own a home is available to all Americans, and I am sure that
    you bring a lot of collective experience there.
        What role do you see for the National Institute of Building
    Sciences in helping to reduce some of the regulatory burden
    placed on home construction.
        We will start with you, Mr. Teran, and anybody who wants to
    comment. How do we reduce the regulatory burden placed on home
    construction?
        Mr. Teran. I think the basic problem is one of approach
    mentality. Housing is a social and economic problem more than
    an architectural and construction problem. We sometimes put the
    architectural and construction importance that really hampers
    the affordability of the home.
        I believe that there is a lot that has to be done to really
    go into the nitty-gritty of the regulations on housing,
    particularly local housing, in our inner-cities and our decayed
    neighborhoods. But also, beyond that, in our rural areas, and
    make sure that those regulations are such that they will allow
    a great deal of latitude to the homeowners to build their own
    houses, to their communities to help in building houses, and to
    make community programs where people can help each other build
    their own houses.
        Chairman Shelby. Mr. Broaddus, do you have any comments?
        Mr. Broaddus. The only thing I can say on that, and that
    would carry that message back to our board, if confirmed. But
    one of the issues in any effectively delivering construction,
    whether it be homes or in the commercial sector, is the length
    of the process, and the length of the process ultimately costs
    all of us money.
        And so, there is a lot of conflicting regulation. There is
    a lot of overlap. And I know one of the purposes of NIBS is to
    try to standardize that and unify some of those codes. I think
    that could also be a major contribution to the affordability of
    housing and also the availability of it.
        Chairman Shelby. Mr. Pate.
        Mr. Pate. I would just encourage continuing to expand on
    the role of the public-private dialogue to understand what the
    impact is, to do the cost analysis of some of the actions we
    are taking, both on the Federal level, as well as the local
    level, because when it gets down to the local level, obviously
    they are trying to interpret the Federal guidelines that are
    being set.
        I think that is where NIBS plays a good role in bringing
    these industrial groups together to have that early dialogue.
    But I also, Senator, hope that the rest of the local levels
    keep their part going.
        Chairman Shelby. That is very important.
        Mr. Carson.
        Mr. Carson. At least in Louisiana, Mr. Chairman, the
    permitting process sometimes adds a lot to the cost of
    construction, whether it is zoning, land use----
        Chairman Shelby. Regulatory burden, isn't it?
        Mr. Carson. Regulatory burden sometimes, and lots of times
    wetlands issues. Areas that are dry as you could think, by
    looking, walking, and observing, are ready to be built upon.
    But because of a technical definition within the wetlands law,
    prevents that from being used, or it is a lengthy process to
    have to swab it out to put it into a nonwet area. That takes up
    our time and money.
        Chairman Shelby. Mr. Edwards.
        Mr. Edwards. While on the Mobile Home Advisory Commission,
    I guess it is called manufactured housing, I fought very hard
    to maintain low cost, as I had been able to do in Pennsylvania.
    In spite of that, the standard tripled the price of a mobile
    homes.
        I look forward to an opportunity to reintroduce that
    concept and keep the price of homes down.
        Chairman Shelby. I am going to ask all of you a question
    for the record because time is moving here today.
        What are some of the things--and I wish you would think
    about it--which could be done to provide greater building
    safety in tornado-prone areas? I guess a lot of the country is
    tornado-prone, even in the last few days.
        But that is a real tough issue. But think about this. I
    would like for you to see what we can do to help you or help
    people survive the tornados.
        We will do that for the record.
        I thank all of you for coming here. I look forward to
    helping move your nominations. We appreciate your
    participation.
        Thank you.
        Mr. Edwards. Thank you.
        Mr. Carson. Thank you.
        Mr. Pate. Thank you, Mr. Chairman.
        Mr. Broaddus. Thank you.
        Mr. Teran. Thank you, Mr. Chairman.
        Chairman Shelby. The hearing is adjourned.
        [Whereupon, at 12:28 p.m., the hearing was adjourned.]
        [Prepared statements, biographical sketches of the
    nominees, and responses to written questions supplied for the
    record follow:]

                  PREPARED STATEMENT OF SENATOR RICK SANTORUM

        Mr. Chairman, it is my great honor to introduce Steven Nesmith, the
    President's nominee to be Assistant Secretary for Congressional and
    Intergovernmental Affairs at the U.S. Department of Housing and Urban
    Development (HUD). I also want to welcome Steve's family--his wife
    Christelle, and his son Steve, Jr.
        If Steve is confirmed, he will serve as the principal adviser to
    the Secretary, Deputy Secretary, and senior staff with respect to
    legislative affairs, Congressional relations, and policy matters
    affecting Federal, State and local governments, and public and private
    interest groups. This is an especially significant position to those of
    us on the Committee as we interact with HUD. HUD has a set of
    challenges all of its own to face, and I am confident that Steve is
    prepared for this task. I am appreciative of the work he has already
    done in his consultant role to HUD.
        In my interactions with Steve as I have worked to bring much needed
    economic development funds into Pennsylvania, I have found him to be
    evenhanded, professional, and a true compassionate conservative. Steve
    is from Philadelphia and spent some time in public housing while
    growing up. I think this experience will give him a unique perspective
    on his work at HUD. His position at the Economic Development
    Administration (EDA) at the Department of Commerce as Deputy Assistant
    Secretary with responsibilities over Congressional and
    Intergovernmental Affairs, Public Affairs, National Technical Research
    Auditing Divisions, and Executive Secretariat functions has also
    prepared him well for the position for which he has been nominated.
        That experience has included work on some high profile issues such
    as the Trade Promotion Authority bill. He has also served as a member
    of the Agency's Senior Executive Management Team and was the Agency's
    principle representative with the White House, OMB, Congress, and other
    Federal agencies on NYC's Post September 11 Economic Recovery Task
    Force; the White House Homeland Security Economic Consequence Task
    Force; and as ``lead negotiator'' for the Agency's reorganization with
    the Federal employee's union.
        A graduate of American University with a BA in Criminal Justice,
    Steve also captained the basketball team. He continued his education at
    Georgetown University Law Center. He went on to clerk for Chief Justice
    of the Pennsylvania Supreme Court Robert N.C. Nix, Jr. as an opinion
    writer and subsequently worked for two of Philadelphia's law firms.
    Steve went on to work as Director of Operations in the Mayor's Office
    of Community Services with the Philadelphia Empowerment Zone.
        In 1999, he moved to Washington, DC and served as Senior Counsel at
    The Legislative Strategies Group. In this work, he focused on assisting
    State and local governments acquire Federal economic development
    funding. This experience will also give him a good perspective of the
    needs of States and localities as they look to HUD for assistance.
        I am very pleased that President Bush has nominated Steve Nesmith
    for this position, and I am hopeful that the Committee will act quickly
    to send his nomination on to the full Senate for a vote. Steve has done
    great work, and I am certain that he will continue to do so at HUD.

                                   ----------

                      PREPARED STATEMENT OF CHUCK GRASSLEY
                     A U.S. Senator from the State of Iowa

        Mr. Chairman and distinguished Members of the Senate Banking
    Committee, thank you for allowing me the opportunity to say a few words
    about my friend and colleague, Mayor Paul Pate of Cedar Rapids. I have
    worked closely with Mayor Pate for many years, and know that he a
    gentleman of integrity and dedication.
        Today, Paul is being nominated to the National Institute of
    Building Sciences. In 1974, Congress recognized the need for a
    community development organization that could serve as a link between
    government and the private sector. For 19 years, the Institute has been
    a working group of professionals, industries, consumers, and elected
    officials that are committed to our country's housing and development
    issues. I have no doubt that Mayor Pate will be a fine addition to the
    Board of Directors for the National Institute of Building Sciences. He
    has always worked with the community at large to solve problems, many
    times before they anise.
        In 2001, Paul was elected as the 55th Mayor of Cedar Rapids. Before
    his mayorship, Paul Pate was a small business man, a distinguished
    member of the Iowa Senate, and served as Iowa Secretary of State under
    Governor Branstad.
        Mayor Pate has become known for his openness and seeking the
    counsel of all segments of the community, to transform the landscape of
    Cedar Rapids. I am pleased to work with him to meet the city's goals.
    Part of the city improvements he has been working on is revitalizing
    underutilized sections of the community, including rehabilitating old
    industrial buildings into multi-use structures or preparing them for
    high-tech industry. For these. reasons and many others, the City of
    Cedar Rapids was recently ranked number 10 in smaller metro areas in
    the United States by Forbes magazine in their ``Best Places for
    Business and Careers Survey.''
        I support Mayor Pate and appreciate your allowing me a few minutes
    today on his behalf.

                                   ----------

                       PREPARED STATEMENT OF PAUL D. PATE
                      Member-Designate, Board of Directors
                    National Institute of Building Sciences
                                  May 13, 2003

        It is an honor to introduce myself to the U.S. Senate Banking,
    Housing and Urban Affairs Committee. My name is Paul D. Pate and I am
    the Mayor of Cedar Rapids, Iowa. I am a nominee for the Board of
    Directors of the National Institute of Building Sciences.
        This personal milestone is made possible by a family effort.
    Although they could not join me today in person, I am who I am because
    of the absolute support and love of my wife Jane, my children Jennifer,
    Amber and Paul III, my grandson Brandon, my parents Paul Sr. and Velma
    and my entire family, which God has blessed me with.
        My parents provided me the strong values of working hard to achieve
    dreams and giving back for the good of the community. Serving the
    public through elected office and pursuing other opportunities to reach
    out through business ownership are two ways I have acted on the
    foundation they gave me. These two kinds of professional experiences
    are the leading qualifications I bring as a nominee to the National
    Institute of Building Sciences.
        I have the honor of being Mayor of Iowa's greatest and strongest
    city--Cedar Rapids. Prior to serving as Mayor, I served as Iowa's
    Secretary of State and a State senator, totaling more than 11 years of
    executive and legislative experience at the State and local government
    levels.
        I am a third generation builder with 27 years' experience in the
    professional development trade. I currently own Pate Asphalt/PM Systems
    Corporation. Thanks to the foundation of the values instilled in me by
    my father and grandfather, I worked my way from the ground up and still
    work to complete the highest quality work. This family tradition means
    I offer a firsthand understanding of the perspective of builders to the
    National Institute of Building Sciences.
        I am qualified to serve in this position not only just because of
    my private business and government service experience, but also because
    I view the position as an opportunity to do my best, keep moving
    forward and help create common benefit through effective partnerships.
    I listen attentively to all perspectives offered, which allows me to be
    a proactive team member on this Board of Directors.
        If confirmed, I will actively engage myself in all aspects of the
    Institute's public mission to improve the building regulatory
    environment, facilitate technology introduction, and disseminate
    information. In fact, I have already started this process in my
    community.
        For example, I founded the Mayor's Development and Building Task
    Force in Cedar Rapids last year. The group is a successful case study
    that may be replicated in other areas of the country. The group meets
    to streamline the processes local businesses must face when they are
    expanding their physical footprint. I know this has a great impact on
    keeping economic development moving forward.
        In closing, I would like to thank President George W. Bush for this
    nomination, and appreciate the Senate's consideration of my
    confirmation for this position. I look forward to applying my passion
    for service if confirmed for this position. As a leader and former
    President I admire, Teddy Roosevelt once said, ``The first requisite of
    a good citizen in this republic of ours is that he shall be able and
    willing to pull his weight.''
        If confirmed, I will carry the honor and personal responsibility
    this statement implies forward, applying the best of myself as a Board
    of Director with the National Institute of Building Sciences.
        I would appreciate your support of my nomination and stand ready to
    answer any questions and listen to any guidance.
        Thank you.

           RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHNSON
                         FROM N. GREGORY MANKIW

    Q.1. Is the goal of the President's tax proposals to raise the
    fraction of the economy that goes to national saving, or to
    lower it?

    A.1. The proposal is intended to increase employment in the
    short-run by boosting aggregate demand and to increase GDP
    growth in the long-run by improving economic incentives,
    particularly by lowering the taxation of capital income. In the
    short-run, the proposal may reduce national saving by adding to
    the deficit. In the long-run, the proposal is likely to
    increase national saving, as private saving is encouraged by
    the removal of the double tax on corporate income and the
    expansion of tax-free savings accounts. The President has said
    that he also favors spending restraint, in order to reduce the
    deficit and increase national saving.

    Q.2. Do you believe that a tax cut worsens or improves the
    budget balance?

    A.2. Holding Government spending fixed, a tax cut worsens the
    budget balance to some extent. However, tax cuts that improve
    economic incentives also promote economic growth, which
    generates additional revenue. This revenue feedback partly
    offsets the direct revenue loss, so that a tax cut reduces the
    budget balance by less than one-for-one. The President has said
    that he believes that spending restraint is an important
    counterpart to tax relief.

    Q.3. Do you believe that a budget deficit raises interest rates
    relative to what they would otherwise be?

    A.3. Budget deficits moderately raise interest rates. The 2003
    Economic Report of the President (pp. 55-58) estimated that
    every $200 billion of additional Government debt causes a long-
    run increase of 3 basis points in interest rates. The impact of
    budget deficits on interest rates is one reason why the
    President is concerned about the deficit and favors spending
    restraint.

    Q.4. Do you believe that an increase in the budget deficit
    crowds out private investment?

    A.4. In the short-run, budget deficits may actually increase
    investment by stimulating aggregate demand. In the long-run,
    all else being equal, budget deficits crowd out private
    investment by raising interest rates (as discussed above).
    However, if the budget deficit is associated with tax cuts that
    encourage private investment, such as the President's proposal
    to remove the double tax on corporate income, the tax cut may
    provide an offsetting boost to private investment. The
    President favors spending restraint to reduce the deficit and
    prevent the crowding out of private investment.

    Q.5. Do you believe the official projections from the Office of
    Management and Budget are a realistic best-guess forecast of
    the likely path of budget surpluses or deficits over the next 5
    or 10 years?
    A.5. Although I am not an expert on budget forecasting, I am
    confident the Office of Management and Budget does a capable
    and professional job, in a volatile economic environment, of
    forecasting the Federal budget under different assumptions
    about policy decisions. One set of OMB projections is based on
    the assumption that the President's proposed policies will be
    adopted and another is based on the assumption that current
    policies will be maintained. Even aside from economic
    uncertainties, the actual budget surplus or deficit will differ
    from these projections if different policies are enacted.

           RESPONSE TO A WRITTEN QUESTION OF SENATOR SHELBY
                         FROM JAMES A. BROADDUS

    Q.1. What are some of the things which could be done to provide
    greater building safety in tornado-prone areas?

    A.1. Mr. Chairman, the National Institute of Building Sciences
    (NIBS) is working vigorously on the issue of tornados and their
    disastrous effects. HAZUS is a nationally applicable,
    standardized methodology and software program for estimating
    potential losses from earthquakes, floods, and wind. HAZUS is
    being developed by the Federal Emergency Management Agency
    (FEMA) under a cooperative agreement with the NIBS. It now has
    the capability to estimate earthquake losses, and flood and
    wind models are being developed. The NIBS has established a
    committee of wind engineering experts to provide technical
    oversight and guidance to the project.
        Development of the wind model will continue after 2003, to
    increase the capability of the model to allow estimating
    indirect economic losses and impacts to lifelines, and to add
    the capability to assess the effects of extra-tropical
    cyclones, tornados, thunderstorms, and hail.
        The HAZUS wind model will be an improvement over existing
    loss estimation models by using a wind hazard-load-damage-loss
    framework. The model will address wind pressure, wind borne
    debris, surge and waves, atmospheric pressure change, duration/
    fatigue, and rain.
        The model will have the following features:

     A building classification system that depends on the
        characteristics of the building envelope and building
        frame.
     The capability to compute damages based on building
        classes and the effects of rain, progressive failure.
     The capability to compute damage to contents and
        building interior.
     The capability to estimate tree blowdown and structure
        debris quantities.
     Loss estimates will include direct and indirect
        economic loss, shelter requirements, and casualties.
     Modules will be included to facilitate future
        assessment of mitigation, benefit cost, and building code
        issues.

        When confirmed as a Board Member, I will monitor the
    progress of this program, making suggestions as necessary to
    ensure its value and payback to the Nation's citizens.