[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                         HEARING ON THE ECONOMY

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            JANUARY 23, 2007

                               __________

                            Serial No. 110-1

                               __________

         Printed for the use of the Committee on Ways and Means



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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY C. HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey        JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                  Brett Loper, Minority Staff Director

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
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current publication process and should diminish as the process is 
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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of January 16, announcing the hearing...................     2

                               WITNESSES

Mark Zandi, Ph.D., Chief Economist, Moody's Economy.com, West 
  Chester, Pennsylvania..........................................     5
Martin Regalia, Ph.D., Vice President of Economic and Tax Policy 
  and Chief Economist, U.S. Chamber of Commerce..................     9
Richard L. Trumka, Secretary-Treasurer, American Federation of 
  Labor-Congress of Industrial Organizations.....................    29
William E. Spriggs, Ph.D., Professor and Chair, Department of 
  Economics, Howard University...................................    35
John W. Diamond, Ph.D., Edward A. and Hermena Hancock Kelly 
  Fellow in Tax Policy Research, James A. Baker III Institute for 
  Public Policy, Rice University, Houston, Texas.................    39

                       SUBMISSION FOR THE RECORD

Executive Intelligence Review, statement.........................    83


                         HEARING ON THE ECONOMY

                              ----------                              


                       TUESDAY, JANUARY 23, 2007

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 10:00 a.m., in 
room 1100, Longworth House Office Building, Hon. Charles B. 
Rangel (Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                                                  CONTACT: 202-225-1721
FOR IMMEDIATE RELEASE
January 16, 2007
FC-1

                      Ways and Means Committee to

                      Hold Hearing on the Economy

    House Ways and Means Committee Chairman, Charles B. Rangel (D-NY) 
today announced that the Committee will hold a hearing on the state of 
the U.S. economy. The hearing will take place on Tuesday, January 23rd, 
in the main Committee hearing room, 1100 Longworth House Office 
Building, beginning at 10 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

FOCUS OF THE HEARING:

      
    The American economy has changed significantly in recent years. 
After a period of recession in 2001, the economy began a slow recovery, 
although job creation has lagged behind the pace set in other recent 
economic recoveries. During these years, income inequality has grown 
significantly and many Americans have experienced little or no growth 
in wages.
      
    This hearing is the first in a series on economic conditions in the 
United States. The hearings will examine such topics as the current 
state of the economy, potential dangers to continued economic health, 
the cost of poverty on the American economy, the impact of 
globalization on workers and the economy, economic pressures on the 
middle class, and whether all Americans have shared in the benefits of 
the economic recovery since the last recession.
      
    In announcing the series, Chairman Rangel said, ``These hearings 
will help provide the Committee with a good economic overview as we 
begin our legislative work in the new Congress. Economic issues are 
vital to the security and prosperity of our great nation and Congress 
needs to know, to the fullest extent possible, how the economy is, or 
isn't working for every American.''
      

WITNESSES:

      
    Witnesses will be announced before the hearing.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
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From the Committee homepage, http://waysandmeans.house.gov, select 
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formatting requirements listed below, by close of business Tuesday, 
February 6, 2007. Finally, please note that due to the change in House 
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deliveries to all House Office Buildings. For questions, or if you 
encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
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    1. All submissions and supplementary materials must be provided in 
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hearing record.
      
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be accepted for printing. Instead, exhibit material should be 
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    3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman RANGEL. The Committee hearing will come to order.
    One of the reasons why we will have this as a series of 
hearings is that soon the Committee will have to settle down 
and start getting our legislative calendar together. What is 
going to be important as we hear from the witnesses sharing 
with us the status of the economy and fears that they may have 
in the future most all of these decisions will have to come one 
way or the other back, to our Committee.
    So, as we listen to the witnesses, it would be very helpful 
for the Committee members to think in terms of their Committee 
assignments so that when we go into the full hearings, we will 
go with the benefit of the discussions that we are having with 
expert witnesses.
    Again, maybe a lot of people in the audience are unaware 
that the Ranking Member and I, and the full Committee and our 
staffs, have committed ourselves to try to find a middle ground 
and legislation that is good for our country, the Congress, and 
certainly the prestige of this Committee.
    So for those of you who would want to over-impress us with 
how bad Democrats or Republicans are, we have been through 
that. We are fully aware of the issues there. We are now going 
to try to move forward as the Committee on Ways and Means to 
see what contribution we can make to our great country.
    At this time, I would like to yield to my friend Mr. 
McCrery.
    Mr. MCCRERY. Thank you, Mr. Chairman, for yielding time. I 
have an opening statement in writing that I would submit for 
the record.
    Chairman RANGEL. Without objection.
    Mr. MCCRERY. Urge the Committee to listen to these 
witnesses today, consider the tasks that we have before us, and 
recognize that it is not going to be easy to deal with some of 
the problems this Committee has jurisdiction over, and 
recognize that it is going to take both political parties 
working together to solve some of these problems that will be 
pointed out by these witnesses today.
    With that, Mr. Chairman, I yield back.
    [The prepared statement of Mr. McCrery follows:]

  Opening Statement of The Honorable Jim McCrery, a Representative in 
                  Congress from the State of Louisiana

    Mr. Chairman, thank you for yielding time, and I thank you for 
holding this hearing today on the state of our economy.
    I have to start by saying that I am encouraged by the state of our 
economy in the short-term, while recognizing that we need to squarely 
face the long-term challenges ahead of us.
    Over the past several years, we have focused on reducing taxes and 
creating a tax code that encourages individuals and businesses to 
invest. The results have been excellent for workers, for the U.S. 
Treasury's bottom line, and for the American economy as a whole.
    The Bureau of Labor Statistics reports that we have had 15 straight 
months at or below 5% unemployment. In the past 3 months, 407,000 net 
new jobs have been created, and we have had 40 straight months of job 
growth. Over the past year, average weekly wage earnings grew 4.8 
percent, while the Consumer Price Index increased by only 2.5 percent.
    Tax receipts increased 11.8% in fiscal year 2006 (FY06), to over 
$2.4 trillion. That was on top of fiscal year 2005's 14.6% increase. 
Tax receipts have grown another 8% so far in the first quarter of 
fiscal year 2007, compared to the first quarter of fiscal year 2006.
    Overall, according to the Bureau of Economic Analysis, our economy 
saw 3.4% annualized real GDP growth through the first 3 quarters of 
2006.
    But, as we all know and as the Chairman of the Federal Reserve 
reminded the Senate Finance Committee last week, our economy faces 
long-term challenges in reforming our entitlement programs.
    The first of the Baby Boomers are poised to retire and begin 
receiving benefits from Social Security and Medicare. Between now and 
2035, our population aged 65 and older is expected to double, while the 
population aged 20-64 is expected to grow by only about 11 percent. As 
a result, there will be fewer workers supporting each beneficiary. In 
1950, 16 workers supported each retiree; today, three workers support 
each retiree. In 25 years, two workers will support each retiree. 
According to the Social Security Board of Trustees, starting in 2017, 
Social Security's revenues will fall short of the amount needed to pay 
promised benefits. By 2040, the Treasury bills in the Social Security 
trust funds will be depleted and payroll taxes will be sufficient to 
pay only 74 percent of benefits.
    As last year's Medicare trustees report noted, ``Medicare's 
financial difficulties come sooner--and are much more severe--than 
those confronting Social Security.'' The trustees continued, ``while 
Medicare's annual costs were 2.7 percent of GDP in 2005, or over 60 
percent of Social Security's, they are now projected to surpass Social 
Security expenditures in a little more than 20 years.''
    Last year, spending on the largest entitlement programs--Social 
Security, Medicare and Medicaid--represented about 40 percent of all 
federal outlays and roughly 8.5 percent of American's Gross Domestic 
Product. According to projections by the non-partisan CBO, spending on 
those three programs will rise to 10.5 percent of GDP by 2015 and to 
about 15 percent of GDP by 2030.
    In his testimony last week, the Federal Reserve Chairman was blunt 
about the dangers of inaction. ``[I]f early and meaningful action is 
not taken,'' he told the Senators, ``the U.S. economy could be 
seriously weakened, with future generations bearing much of the cost.''
    The challenges we face are not the creation or invention of only 
one political party, and one political party cannot solve them alone. I 
look forward to working with the Chairman as we try to continue the 
recent solid economic growth, while preparing to deal with the changes 
our entitlement programs will require over the coming decades.

                                 

    Chairman RANGEL. As the witnesses know, since most all of 
you are professionals before this Committee, we would ask that 
you summarize your statement to 5 minutes to give time to 
answer questions.
    The first witness will be Mark Zandi; Dr. Mark Zandi, chief 
economist, Moody's Economy.com, West Chester, Pennsylvania. 
Thank you.

   STATEMENT OF MARK ZANDI, PH.D., CHIEF ECONOMIST, MOODY'S 
            ECONOMY.COM, WEST CHESTER, PENNSYLVANIA

    Mr. ZANDI. Thank you, Mr. Chairman, Members of the 
Committee. I am Mark Zandi. I am the chief economist of Moody's 
Economy.com.
    I will make four points in my remarks. First, the economy 
in the aggregate is performing well and is expected to continue 
doing so during the coming year.
    Second, the benefits of the strong economy are not accruing 
evenly, as the industrial Midwest and Gulf Coast economies 
continue to struggle, and lower income and less-wealthy 
households fall further behind wealthier households.
    Third, the economy's long-term growth prospects are 
worrisome, given the nation's daunting fiscal challenges, 
unless substantial changes are made to both tax and spending 
policies.
    Finally, any policy changes must be considered from many 
perspectives, including examining them from the prism of the 
distribution of income and wealth.
    The economy is currently experiencing growth near its 
potential, is operating close to full employment, and inflation 
and interest rates are low by historical standards. While 
growth will be slower in the coming year due to the ongoing 
housing correction and some spillover effects into other parts 
of the economy, the economy will enjoy its sixth year of 
expansion.
    This optimism is based on record corporate profits. Profits 
have more than doubled since the 2001 recession, and margins 
have never been wider. Businesses have significantly pared 
their debt loads and are flush with cash, which they are using 
to repurchase stock, pay dividends, acquire and merge with 
other companies, and invest overseas, and also to invest and 
hire here in the United States. Businesses are unlikely to 
significantly pull back on their expansion plans, given their 
currently stellar financial situation.
    The housing correction is weighing on growth. Previously 
soaring house prices combined with the Federal Reserve's 
tightening efforts have undermined housing affordability. 
Builders are working off a large amount of unsold inventory, 
and short-term speculators are being wrung out of the 
marketplace. Sales, construction house prices, will remain weak 
throughout the year.
    There will also likely be some spillover of housing's 
problems into the rest of the economy as lower housing wealth 
and surging delinquencies and foreclosures crimp consumer 
spending growth. The housing correction is unlikely to devolve 
into a crash, however, given the sturdy job market, and thus 
while recession risks are elevated, they are low.
    The benefits of the expansion are not accruing evenly, 
however. The auto producing areas of the industrial Midwest are 
in recession as domestic vehicle producers are cutting 
production and jobs. The Gulf Coast recovery from Hurricanes 
Katrina and Rita is disappointingly slow, and New Orleans 
employment is still 20 percent below its pre-storm level.
    Parts of the rural economy, particularly in the South, are 
still suffering the ill effects of job losses in manufacturing, 
and the economies of many of the nation's urban cores are 
moribund.
    Lower and lower middle income households have not kept up 
financially in this expansion. Rural incomes, median household 
incomes, are no higher today than they were in the late 1990s. 
This reflects very strong income gains for households in the 
top half of the distribution of income, but little or no gain 
in real incomes for those in the bottom half.
    The distribution of wealth is even more skewed. Those in 
the top 10 percent of the wealth distribution have median real 
household net worth of about a million dollars. This is double 
what it was a decade ago. The median household net worth of 
those in the bottom half is less than $50,000, and that has 
barely grown at all in the past decade.
    Globalization and the rapid pace of technological change 
have enormous economic benefits. While both are vital to a 
strong economy, they have also been the principal driving 
forces behind this uneven distribution of those benefits. Those 
with education, skills, and talent are now able to sell their 
wares into a large and fast-growing global marketplace, while 
those without are now competing in a much larger global labor 
market.
    The economy's long-term prospects are also worrisome, given 
the prospects for large budget deficits in the decades ahead. 
As articulated in recent congressional testimony by Federal 
Reserve Chairman Bernanke, without substantive changes to tax 
and spending policies in the near future and making some very 
reasonable assumptions, the deficits will amount to nearly 10 
percent of the nation's Gross Domestic Product (GDP) a quarter 
century from now. Driving this worrisome outlook are the 
inexorable aging of the population and the rapid growth in 
health care costs.
    Mounting deficits will ultimately weigh heavily on 
investment, productivity growth, and ultimately the level 
standards of all Americans. Lower and middle income households 
will be particularly hard hit, however, as they rely heavily on 
Social Security, Medicare, and Medicaid, programs that will 
become insolvent during this period. The debt burdens on these 
households will also become overwhelming due to higher interest 
rates engendered by the mounting deficits.
    These long-term fiscal and economic concerns should be 
addressed in the very near term through a combination of what 
will be painful tax and spending policy changes. Many factors 
must be weighed in determining the appropriate mix of these 
changes, including its implications for households, industries, 
regions, and the broader economy.
    How these changes influence the distribution of income and 
wealth should also be considered. It has long been an anthem 
for economists and difficult for policymakers to consider 
policy through this prism. The ongoing skewing of the 
distribution of income and wealth has become so pronounced, and 
will become even more so in the years ahead, that those who are 
being disenfranchised are sure to short-circuit the process of 
globalization and technological change so vital to the long-
term strength of our economy.
    Policymakers must be resolved not to allow protectionist 
sentiment to boil over, or to allow efforts to intervene in the 
job, product, and financial markets. However, they must be 
equally resolved to consider all future economic policy in the 
context of what it means for lower and middle income 
households.
    Thank you.
    [The prepared statement of Dr. Zandi follows:]

 Statement of Mark Zandi, Ph.D., Chief Economist, Moody's Economy.com, 
                       West Chester, Pennsylvania

    Mr. Chairman and members of the Committee, my name is Mark Zandi, I 
am the Chief Economist and Co-founder of Moody's Economy.com. Moody's 
Economy.com is an independent subsidiary of the Moody's Corporation. We 
are a provider of economic, financial, country, and industry research 
designed to meet the diverse planning and information needs of 
businesses, governments, and professional investors worldwide. We have 
over 600 clients in 50 countries, including the largest commercial and 
investment banks; insurance companies; financial services firms; mutual 
funds; manufacturers; utilities; industrial and technology clients; and 
governments at all levels. Moody's Economy.com was founded in 1990, is 
headquartered in West Chester, Pennsylvania, a suburb of Philadelphia, 
and maintains offices in London and Sydney.
    I will make four points in my remarks. First, the economy, in 
aggregate, is performing well and is expected to continue doing so 
during the coming year. Second, the benefits of the strong economy are 
not accruing evenly, as the industrial Midwest and Gulf Coast economies 
continue to struggle and lower income and less wealthy households fall 
further behind higher income, wealthier households. Third, the 
economy's long-term growth prospects are worrisome given the nation's 
daunting fiscal challenges unless substantial changes are made to both 
tax and spending policies. Finally, any policy changes must be 
considered from many perspectives, including examining them through the 
prism of the distribution of income and wealth.

Near-Term Growth
    The economy is currently experiencing growth near its potential, it 
is operating close to full-employment, and inflation and interest rates 
are low by broad historical standards. While growth will be slower in 
the coming year due to the ongoing housing correction and some spill-
over effects into other parts of the economy, the economy will enjoy 
its sixth year of expansion.
    Behind this optimism is record corporate profitability. Profits 
have more than doubled since the 2001 recession, and profit margins 
have never been as wide. Businesses have significantly pared their debt 
loads and are flush with cash, which they are using to repurchase 
stock, pay dividends, acquire and merge with other companies, invest 
overseas, and also to invest and hire here in the United States. 
Businesses are unlikely to significantly pull-back on their expansion 
plans given their currently stellar financial situation.
    The economy is also receiving a lift from robust global economic 
growth. It is not unprecedented for all the globe's major economies to 
be expanding in unison, but it is unusual. Sturdy global growth 
combined with a weaker dollar is resulting in a narrowing in the trade 
deficit for the first time in a decade.
    The housing correction is weighing on growth. Previously soaring 
house prices combined with the Federal Reserve's tightening efforts 
have undermined housing affordability, builders are working off a large 
amount of unsold inventory, and short-term speculators are being wrung 
out of the marketplace. Home sales, construction, and house prices will 
remain weak throughout much of this year. There will also likely be 
some spillover of housing's problems into the rest of the economy, as 
lower housing wealth and surging mortgage delinquencies and 
foreclosures crimp consumer spending growth. The housing correction is 
unlikely to devolve into a crash, however, given the sturdy job market, 
and thus while recession risks are elevated they remain low.

Economic Benefits
    The benefits of the economic expansion are not accruing evenly, 
however. The auto-producing areas of the industrial Midwest are in 
recession as the domestic vehicle producers cut production and jobs. 
The Gulf Coast's recovery from Hurricanes Katrina and Rita is 
disappointingly slow, with New Orleans employment still more than 
twenty percent below its pre-storm level. Parts of the rural economy, 
particularly in the South, are still suffering the ill-effects of 
ongoing job losses in manufacturing, and the economies of many of the 
nation's urban cores are moribund.
    Lower and lower-middle income households have not kept up 
financially in this expansion. Real median household incomes are no 
higher today than they were at the end of the 1990s. This reflects very 
strong income gains for households in the top half of the income 
distribution, but little or no gains in real incomes among those in the 
bottom half. The distribution of wealth is becoming even more skewed. 
Those in the top ten percent of the wealth distribution have median 
real household net worth of approximately $1 million. Their net worth 
has doubled during the past decade. The real median household net worth 
of those in the bottom half of the wealth distribution is less than 
$50,000 and it has barely grown during this period.
    Globalization and the rapid pace of technological change have 
enormous economic benefits, and while both are vital to a strong 
economy, they have also been the principal driving forces behind the 
uneven distribution of those benefits. Those with education, skills, 
and talent are now able to sell their wares into a large and fast-
growing global marketplace, while those without are now competing in a 
much large global labor market.
    Financially-pressed lower income households have been able to 
mitigate the impact of their constrained incomes on their living 
standards by significantly increasing their borrowing. This has been 
facilitated by the steady decline in interest rates over the past 
quarter century and financial innovations which have substantially 
increased the availability of credit. It is becoming increasingly 
difficult for lower income households to supplement their incomes with 
increased debt, however, as debt burdens are already at record highs, 
interest rates are no longer falling, and judging by surging mortgage 
credit problems, borrowers are increasingly unable to juggle their 
existing obligations.

Long-Term Concern
    The economy's longer-term prospects are also worrisome given the 
prospects for very large budget deficits in the decades ahead. As 
articulated in recent Congressional testimony by Federal Reserve 
Chairman Bernanke, without any substantive changes to tax and spending 
policies in the near future, and making some very reasonable 
assumptions, the federal budget deficit will amount to nearly 10% of 
the nation's GDP a quarter century from now. Driving this worrisome 
outlook are the inexorable aging of the population and rapid growth in 
health care costs.
    Mounting deficits will ultimately weigh heavily on investment, 
productivity growth, and the living standards of all Americans. Lower 
and middle income households will be particularly hard hit, however, as 
they heavily rely on the Social Security, Medicare, and Medicaid 
programs; programs that will become insolvent during this period. The 
debt burdens on these households will also become overwhelming, due to 
the higher interest rates engendered by the mounting deficits.

Policy Changes
    These long-term fiscal and economic concerns should be addressed in 
the very near-term through a combination of what will be painful tax 
and spending policy changes. Many factors must be weighed in 
determining the most appropriate mix of changes, including implications 
for households, industries, regions, and the broader economy. How these 
changes influence the distribution of income and wealth should also be 
considered. It has long been anathema for economists and difficult for 
policymakers to consider policy through this prism. But the ongoing 
skewing of the distribution of income and wealth has become so 
pronounced and will become even more so in the years ahead, that those 
who are being disenfranchised are sure work to short-circuit the 
process of globalization and technological change so vital to the long-
term strength of our economy. Policymakers must be resolved not to 
allow protectionist sentiment to boil over or to allow efforts to 
intervene in the job, product, and financial markets, but they must be 
equally resolved to consider all future economic policy in the context 
of what it means for lower and middle income households.

                                 

    Chairman RANGEL. Our next witness is Martin Regalia, Dr. 
Martin Regalia, Vice President of Economic and Tax Policy and 
Chief Economist for the U.S. Chamber of Commerce. Thank you.

STATEMENT OF MARTIN REGALIA, PH.D., VICE PRESIDENT OF ECONOMIC 
 AND TAX POLICY AND CHIEF ECONOMIST, UNITED STATES CHAMBER OF 
                            COMMERCE

    Mr. REGALIA. Thank you, Mr. Chairman, Ranking Member 
McCrery, and Members of the Committee. My name is Martin 
Regalia, and I am the chief economist at the U.S. Chamber of 
Commerce. I thank you for the opportunity to speak on the 
outlook for the U.S. economy today.
    The near-term outlook for the economy remains fundamentally 
sound, with prospects for solid, albeit not spectacular, 
performance over the course of the year. The economy has 
downshifted over the past year from growth well above its 
potential and increasing inflation to growth somewhat below its 
potential with slowing inflation. The slowdown was the result 
of sharply higher energy prices and an engineered increase in 
interest rates.
    Growth appears to have bottomed out in the third quarter at 
about 2 percent, and we expect it to grow at about 3 percent or 
so in the fourth quarter, somewhere between 2\1/2\ and 3 
percent in the first part of the year, and a little over 3 
percent, approaching potential, by the end of the year. The 
composition of growth will remain heavily dependent on 
consumption, with solid contributions from investment and 
modest improvement in net exports.
    With the economy expected to continue to grow somewhat 
below its potential through the first half of the year, 
employment growth is expected to slow a bit and the 
unemployment rate is expected to rise moderately from its 
current 4.6 percent to about 5 percent by the end of the year, 
still relatively low by historical standards. Overall job 
creation for 2007 should exceed 2 million net new jobs, 
slightly above the level of 1.8 million reached in 2006.
    Inflation began last year on a troublesome note, with both 
overall prices and core prices rising noticeably. With economic 
growth slowing and energy prices retreating from historic 
highs, inflation in overall prices as well as in core prices 
ended the year in much better fashion. The overall Consumer 
Price Index (CPI) actually dropped 2.2 percent at an annual 
rate in the fourth quarter, and the core rate rose only 1.8 
percent. For the year as a whole in 2007, we expect the overall 
CPI to be up about 3 percent or so, between 3 and 3\1/2\, and 
core prices to rise about 2.3 percent, getting closer and 
closer to what the Fed deems its comfort range.
    With economic growth remaining slightly below its potential 
in the first half of the year and with inflation moderating, we 
expect the Fed to hold short-term interest rates in their 
current range. Longer-term interest rates are expected to 
remain about where they are or drift up only slightly through 
the course of the year.
    The risk to this forecast are balanced. On the down side, 
the risk of a decline in housing, spreading to a broader 
weakness in consumption and overall economic growth, appear to 
be waning. The housing market is showing incipient signs of 
bottoming out, with both starts and sales improving in the last 
couple of months of 2006. On the up side, a weaker dollar and 
stronger growth abroad appear to be improving our trade deficit 
somewhat more than we expected a few months ago.
    While the short run looks pretty good, there are some 
daunting challenges facing our economy in the medium to longer 
term. The lack of national saving makes us highly dependent on 
world capital. An aging population raises concerns over rising 
deficits and escalating health care costs. The long-term drift 
in the income and wealth distributions, which appear to be the 
result of shortfalls in education, will threaten our future 
competitiveness on a global basis.
    I will end my remarks there. Be happy to take questions on 
the particulars at the right time. Thank you.
    [The prepared statement of Dr. Regalia follows:]

Statement of Martin Regalia, Ph.D., Vice President of Economic and Tax 
         Policy and Chief Economist, U. S. Chamber of Commerce

    Chairman Rangel and Ranking Member McCrery, members of the 
Committee, I am Dr. Martin Regalia, Vice President of Economic & Tax 
Policy and Chief Economist of the U.S. Chamber of Commerce. I am 
pleased to be able to submit the following testimony for the record on 
behalf of the U.S. Chamber of Commerce. The U.S. Chamber of Commerce is 
the world's largest business federation, representing more than three 
million businesses and organizations of every size, sector and region. 
Over ninety-six percent of the Chamber members are small businesses 
with fewer than 100 employees. I commend the Committee for its interest 
in having this hearing on the current state of the U.S. economy.
    The economy closed 2006 with solid, if not spectacular, economic 
growth and employment, and slowing inflation. The economy grew 2.0 
percent in the third quarter of last year, down from 2.6 percent in the 
second quarter and well below the 5.6 percent pace of the first quarter 
of 2006 as the lagging effects of higher energy prices and Fed-
engineered interest rate increases continued to impact economic growth. 
With energy prices down sharply from their peaks reached earlier this 
year and the Fed tightening now on hold for the last four FOMC 
meetings, we are projecting an up-tick in GDP growth to about 3.0 
percent for the final quarter of 2006 and continued moderate growth in 
the first half of 2007.
    Looking at the labor market, the economy produced 407,000 net new 
jobs in the fourth quarter of 2006, down from a total of 556,000 in the 
third quarter, which was the strongest of the year. Although job 
creation decelerated in the fourth quarter, it nonetheless remains on 
solid footing with December's 167,000 net new jobs bringing the year's 
total to over 1.8 million. The unemployment rate was 4.5% in both 
November and December, up slightly from the 4.4% level seen in October. 
Given the expectation for modest GDP growth, we expect the unemployment 
rate to climb slightly from this point through the middle of the year, 
peaking at about 5%. Thus far in 2007, the labor market is improving 
with the initial claims for unemployment falling to 308,000 on a 4-week 
moving average basis.
    Despite the projected rise in the unemployment rate, job and wage 
growth are expected to be sufficient to ensure continued consumer 
spending. Last year, consumers increased their spending pace to 2.8 
percent in the third quarter, up from 2.6 percent in the second 
quarter. The increase came as gasoline prices retreated from summer 
peaks and freed up some discretionary income. Continued moderation in 
energy prices coupled with modest growth in real disposable income 
should keep consumer spending reasonably robust. Recent increases in 
equity markets have largely offset weakness in home equity wealth. 
Additionally, consumer debt levels, while high by historical standards, 
are trending down, helping to improve consumer balance sheets.
    The government deficit has become a source of anxiety in recent 
years. However, in fiscal year 2006 the deficit was $248 billion, down 
from $318 billion in 2005 and well below the $400+ billion estimate 
made in early 2006. The improvement in the deficit came primarily from 
a surge in tax revenues, which were propelled by a rise in receipts 
from taxes on corporations as well as individuals' investment profits. 
Government outlays jumped 28% between 2000 and 2004, while government 
receipts fell 7% over the same period. However, with strong economic 
growth over the last two years, revenues grew 28% while expenditures 
increased 16%.
    Interestingly, political factors may actually help to ameliorate 
the deficit problem in the short run. With the arrival of the new 
Congress, potential gridlock may actually produce a positive result in 
the Federal budget. The last time we had a similar situation was in the 
latter half of the 1990s, when Democrats controlled the Administration 
and Republicans held the Congress. Back then, the combination of solid 
economic growth and political gridlock increased Federal revenue growth 
while slowing the growth in Federal spending. As a result, the budget 
deficit plummeted, turning into a surplus between 1998 and 2001. While 
there's no guarantee that a divided government will produce similar 
results this time, it is certainly a possibility. Nevertheless, 
sustainable deficit reductions will likely remain a challenge in the 
longer-run.
    Another challenging area for the country's economy is the trade 
sector. However, it appears that the situation has improved a bit of 
late. With the dollar finding a comfort zone at a relatively low level 
and growth abroad turning in a solid performance, U.S. net exports 
improved noticeably over the second half of 2006 as exports 
strengthened and imports slowed, the latter due in part to the recent 
fall in crude oil prices. Despite this short-term improvement, at 
current levels our trade deficit will become unsustainable in the long 
term. Thus, we must continue to push for more access to foreign markets 
and encourage newly emerging players to remove trade barriers and limit 
currency manipulation. We must also encourage more domestic saving, 
which will limit our need to borrow in international capital markets.
    Turning to the country's monetary conditions, interest rates seem 
to have stabilized. At its latest meeting on December 12, the Fed left 
interest rates unchanged for a fourth straight time. Before its meeting 
on August 8, the Fed had increased rates 17 consecutive times, each 
time adding 25 basis points. While the Fed left the possibility open 
for more interest rate increases in the future depending on ``incoming 
information,'' we believe that the Fed is done tightening for this 
cycle as inflation pressures have moderated.
    The rise in overall inflation earlier this year was driven by sharp 
increases in many commodity prices, and more recent commodity price 
declines have likewise been responsible for the recent drop in 
inflation. Nominal crude oil prices set records above $77 a barrel in 
the summer. However, crude has since dropped back to near $50 a barrel 
as oil inventories in the U.S. have become more plentiful amid a mild 
beginning to the winter season on the northern East Coast, the largest 
heating-oil market in the U.S. In addition, gasoline prices have 
dropped more than 70 cents from their peak at over $3 per gallon 
earlier this year, while natural gas prices continue to exhibit a lack 
of price pressures.
    Amid the recent decline in energy prices, the CPI decelerated 
notably in the third quarter, increasing at only a 2.9% pace. Despite 
an up-tick in December, the CPI fell 2.2% at an annual rate in the 
fourth quarter of last year. More importantly, core inflation (net of 
food and energy) also showed signs of slowing. The core CPI rose only 
1.8% at an annual rate in the fourth quarter of 2006, down from 3.0 
percent in the previous quarter. The personal consumption deflator 
(PCE)--a measure watched closely by the Fed--increased 0.5 percent in 
November (the latest data available) and 1.8 percent over the previous 
three months. Concurrently, market inflation expectations have trended 
downward since their cyclical peak in early 2005, with the sharpest 
declines occurring since the summer of this year.
    With the Fed expected to remain on hold and inflationary 
expectations putting downward pressure on longer-term interest rates, 
we anticipate a flat yield curve for the next few quarters. While the 
financial markets appear relatively comfortable with both the Fed's 
monetary policy and the overall growth prospects for the U.S. economy, 
the risk spread has risen slightly in the last few months as economic 
growth has slowed. However, the current risk spread remains near the 
level in the latter part of the 1990s and well below the levels 
witnessed during, and immediately following, the last recession.
    While the overall economy performed reasonably well last year and, 
after a slow first half, is expected to pick up a bit toward the end of 
this year, there were certain sectors that were, and continue to be, 
clear weak spots. For example, the housing market declined sharply in 
2006 after years of stellar performance. Both housing starts and sales 
began slumping in the summer as rising interest rates and home prices 
significantly reduced housing affordability and tempered demand. As a 
result, we experienced a sharp increase in the inventory of unsold 
homes and noticeable weakness in home prices. The drop in housing 
production was a definite drag on the overall economy, but the feared 
decline in household wealth and its negative impact on broader consumer 
spending has failed to materialize in part because of the equity market 
rally in the latter part of last year.
    While the housing sector will likely continue to experience some 
malaise for another few months as the existing inventory is worked off, 
we believe that the market is close to a bottom and, while it may be a 
protracted bottom, a cessation in both interest rate and price 
increases, as well as continued income growth, should help to rebuild 
affordability and stop the negative momentum. We have already seen some 
positive signs with a small pick-up in sales of new and existing homes 
in November and modest improvement in starts in both November and 
December of 2006. Housing affordability has increased four straight 
months since July.
    During times such as these, with overall growth slowing and the 
composition shifting, top line indicators can be inconclusive and we 
can sometimes get a clearer picture by looking at sector data. One of 
these underlying sectors is manufacturing. The Institute for Supply 
Management's computes a Purchasing Managers Index (PMI) that is 
intended to signal whether this sector is expanding or contracting. A 
reading above 50 indicates growth while a reading below 50 signals 
contraction. While a brief stint below 50 can occur even in relatively 
good economic times, a prolonged stay or sharp decline below that level 
usually means trouble. In November 2006 the PMI dipped slightly below 
50 for the first time since April 2003 but quickly rose back above 50 
in December. This brief excursion into negative territory is more 
consistent with below-trend growth rather than an impending recession.
    Another indicator of industrial strength is manufacturing new 
orders, specifically orders of non-defense capital goods excluding 
aircraft--a number which is less volatile and more reflective of the 
overall trend in industrial demand. These orders have trended up since 
2004 and rose 9.6% through November of last year compared with the same 
period in 2005.
    The positive performance of manufacturing orders and shipments is 
reflected by growth in total industrial production. Although it 
decelerated a bit in the third quarter, industrial production growth 
remains decent and continues to drive investment and support robust 
levels of capacity utilization. Moreover, corporate profits continue to 
surge and provide a healthy source for internal financing of 
investment, and with credit readily available on world-wide credit 
markets and interest rates still relatively low, outside financing 
options are prevalent.
    Given the resilience in the industrial sector, growth in equipment 
and software investment bounced back from an annualized rate of -1.4 
percent in the second quarter to 7.7 percent in the third quarter, and 
helped by a strong 15.6 percent rise in the first quarter will likely 
rise by about 7.0 percent in 2006. We expect growth in this component 
at a slightly slower 5.7% pace.
    In addition, investment in structures rose 15.7 percent in 
annualized terms in the third quarter, following a very brisk pace of 
20.3 percent in the second quarter--the highest rate in a decade. While 
we expect some easing in this category over the forecast horizon, the 
generally strong pace will continue to offset some of the weakness in 
residential construction.
    Like manufacturing, transportation has also proven to be a useful 
leading indicator of overall economic activity, especially because it 
includes both domestically produced and imported goods. The American 
Trucking Associations (ATA) produces an index of truck tonnage, which 
measures the volume of goods moved by trucks throughout the country. 
The tonnage index has slumped a bit since early 2006 and through last 
November was 2.8 percent below the same period in 2005. However, the 
level of the index remains well above that seen during the last 
recession.
    Railroad data also suggests some slowing in the economy. The 
Association of American Railroads (AAR) publishes statistics on rail 
activity. In 2006, AAR's total carloadings rose 2.8% over 2005, while 
intermodal carloadings (which are better correlated with manufacturing 
activity) gained 5.0%. However, the rate of year-over-year growth in 
intermodal carloadings has declined noticeably from the nearly 12% pace 
in late 2004.
    Financial indicators are another valuable yardstick to measure 
economic activity. Growth in the money supply strengthened noticeably 
after the 2001 recession, running at an annual rate of nearly 6% 
between 2001 and 2004. Since then growth has slowed to about 1% as the 
Fed's monetary policy has become more restrictive. The availability of 
credit, however, has shown no sign of slowing, as total bank credit has 
risen at an annual rate of 8% in the 2001-2006 period. Moreover, 
commercial and industrial loan volume, which had dropped off sharply 
between 2001 and 2004, has since picked up, growing at an annual rate 
of 11% over the 2004-2006 period.
    While it appears that both liquidity and credit are readily 
available, it is a small consolation if businesses and individuals 
cannot service their debt. However, the data suggest that while 
delinquencies are up slightly since early 2006, they remain well below 
the peaks seen during the last recession. The industrial sector has 
actually outperformed the overall spectrum of borrowers, as commercial 
and industrial loan delinquency rates have declined significantly from 
the most recent peak of 3.9% in the second quarter of 2002 to 1.3% in 
the third quarter of 2006.
    On balance, both sector statistics and top line numbers are telling 
us the same story--despite the current slowing, the economy still has 
plenty of momentum and should continue to grow and create new jobs in 
the near future. If we are correct, GDP will grow at about a 3.0% rate 
in 2006 and slightly less than 3% in 2007. Thus, the economy remains 
fundamentally sound and it appears that the Fed has achieved the 
proverbial soft landing.
                                Appendix

[GRAPHIC] [TIFF OMITTED] T3825A.001

Real GDP Outlook

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Real Personal Consumption Expenditures

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Real Disposable Income Per Capita

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Household Wealth

[GRAPHIC] [TIFF OMITTED] T3825A.005

Consumer Debt

[GRAPHIC] [TIFF OMITTED] T3825A.006

Housing Starts

[GRAPHIC] [TIFF OMITTED] T3825A.007

Home Sales

[GRAPHIC] [TIFF OMITTED] T3825A.008

Median Home Prices

[GRAPHIC] [TIFF OMITTED] T3825A.009

Housing Affordability Index

[GRAPHIC] [TIFF OMITTED] T3825A.010

Real Private Investment in Equipment and Software

[GRAPHIC] [TIFF OMITTED] T3825A.011

Real Private Investment--Structure

[GRAPHIC] [TIFF OMITTED] T3825A.012

Real Change in Private Inventories

[GRAPHIC] [TIFF OMITTED] T3825A.013

Industrial Production

[GRAPHIC] [TIFF OMITTED] T3825A.014

Corporate Profits

[GRAPHIC] [TIFF OMITTED] T3825A.015

Purchasing Managers Index

[GRAPHIC] [TIFF OMITTED] T3825A.016

Inventory-to-Sales Ration: Total Business

[GRAPHIC] [TIFF OMITTED] T3825A.017

U.S. Trade Deficit

[GRAPHIC] [TIFF OMITTED] T3825A.018

U.S. Nominal Trade Weighted Exchange Rate

[GRAPHIC] [TIFF OMITTED] T3825A.019

Real GDP Growth of Top Trading Partners

[GRAPHIC] [TIFF OMITTED] T3825A.020

Total Non-Farm Jobs

[GRAPHIC] [TIFF OMITTED] T3825A.021

Household Employment

[GRAPHIC] [TIFF OMITTED] T3825A.022

Initial Unemployment Claims

[GRAPHIC] [TIFF OMITTED] T3825A.023

Unemployment Rate

[GRAPHIC] [TIFF OMITTED] T3825A.024

Consumer Price Index

[GRAPHIC] [TIFF OMITTED] T3825A.025

Core Consumer Price Index

[GRAPHIC] [TIFF OMITTED] T3825A.026

Market Inflation Expectations

[GRAPHIC] [TIFF OMITTED] T3825A.027

West Texas Intermediate Spot Oil Price

[GRAPHIC] [TIFF OMITTED] T3825A.028

Retail Gasoline Price

[GRAPHIC] [TIFF OMITTED] T3825A.029

Spot Market Price Index: Metals

[GRAPHIC] [TIFF OMITTED] T3825A.030

Natural Gas Price: Henry Hub, LA

[GRAPHIC] [TIFF OMITTED] T3825A.031

Interest Rates

[GRAPHIC] [TIFF OMITTED] T3825A.032

Yield Spread: 10-Year Treasury Minus 3-Month Treasury

[GRAPHIC] [TIFF OMITTED] T3825A.033

Risk Spread: Moody's Seasoned Baa Corporate Yield Minus Moody's 
Seasoned Aaa Corporate Bond Yield

[GRAPHIC] [TIFF OMITTED] T3825A.034


[GRAPHIC] [TIFF OMITTED] T3825A.035

The President Budget

                                 

    Chairman RANGEL. Thank you, Doctor.
    Richard Trumka, Secretary-Treasurer, American Federation of 
Labor.

 STATEMENT OF RICHARD L. TRUMKA, SECRETARY-TREASURER, AMERICAN 
    FEDERATION OF LABOR-CONGRESS OF INDUSTRIAL ORGANIZATIONS

    Mr. TRUMKA. Thank you, Chairman Rangel and other Members of 
the Committee. I welcome the opportunity to testify on behalf 
of the 10 million members of the AFL-CIO.
    Any consideration of the American economy must address one 
central question: Why, in the richest country in the world, is 
it so difficult for so many families to make a living by 
working?
    The U.S. economy is now producing over $13 trillion a year 
and is growing at a respectable pace. American workers are the 
most productive workers in the world, and they are now more 
productive today than ever. Today, American workers work 
harder, longer than any other workers in any other developed 
country. Nevertheless, the vast majority of Americans are 
struggling to maintain their living standard in the face of 
stagnating wages, rising economic insecurity, eroding health 
care and retirement benefits, and mounting debt.
    At the richest moment in our nation's history, the American 
dream is fading for a majority of American workers. Through 
hard work, any worker should be able to participate fully in 
the benefits of a rapidly growing and competitive American 
economy. Achieving requires us to fundamentally rethink our 
country's economic policies.
    Since 1980, labor productivity has increased over 80 
percent, but the real median wage has hardly budged. Real 
median family income has increased at most 13 percent, but only 
because each job requires more hours, each worker is working 
more jobs, and each family is sending more family members to 
work. Moreover, the volatility of family income has increased 
sharply. The chance of a family suffering a 20 percent or 
greater decline in their income over a 2-year period has 
doubled since 1980.
    As health care costs continue to rise, employers are also 
shifting more of the cost of health care onto workers, and the 
ranks of the uninsured continue to rise today. Today over 46 
million Americans have no health care insurance at all, even 
though as a Nation we spend more on health care than any other 
country in history.
    Only half of American families have an employer-provided 
retirement plan of any sort, and only 20 percent have 
guaranteed defined benefit plans, compared with 40 percent in 
1980. In substituting defined contribution for defined benefit 
plans, employers are shifting the risk of retirement onto 
workers ill-prepared to carry this task.
    The stagnation of wages has ruptured the crucial 
relationship between wages and productivity that was the heart 
of the post-World War II social contract that provided the 
foundation for building the American middle class. Over half of 
all gains from increased productivity since 1980 have accrued 
to the top 10 percent of American families, and most of that to 
the top 1 percent.
    As a result of the rupture between wages and productivity, 
America today has the most unequal distribution of income and 
wealth that we have seen since the 1920s. The explosion of 
Chief Executive Officer (CEO) pay is both a cause and a symbol 
of this growth. Prior to 1980, a CEO earned 20 times what the 
average worker earned. Last year, it was 431 times the average 
worker. This means that the average CEO earns more on the first 
day of the working year than the average worker earns all year. 
Indeed, the same CEO earns more before lunch on the first day 
of the year than a minimum wage worker earns all year.
    The central cause of stagnating wages and the rupture of 
productivity/wage relationship is the steadily growing 
imbalance of bargaining power between workers and their 
employers. America's CEOs once viewed themselves as stewards of 
our country's productive assets. Today, they present themselves 
as agents of shareholders in whose name they aggressively ship 
good American jobs offshore, reduce workers' pay, and walk away 
from their health care and retirement obligations.
    Beyond the problem of excess compensation and conflicted 
corporate governance policies, however, American corporations 
are facing two new challenges that are changing the way they do 
business and poisoning their relationships with the employers.
    First is intense competition in product markets produced by 
globalization abroad and deregulation domestically that has 
limited our pricing power. The second is pressure from 
institutional investors in capital markets to increase 
shareholder value by rising profit margins.
    I will try to summarize quickly by asking the following 
questions.
    Do Americans--to rebuild the relationship between wages and 
productivity, we must begin by reflecting on the purpose of the 
economy and the goals of our country's economic policies. Do 
Americans exist to serve the needs of the economy, or does the 
economy exist to serve the needs of Americans, the vast 
majority of whom earn their living by working?
    I think we have to do three things, be guided by three 
principles.
    One, anyone who wants to work in America should have a job. 
Two, people who work every day should not live in poverty, 
should have access to quality health care for their families, 
and should be able to stop working at some point in their lives 
and enjoy secure retirement. Three, all Americans should enjoy 
the fundamental freedom of association with their fellow 
workers.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Trumka follows:]

     Statement of Richard L. Trumka, Secretary-Treasurer, American 
        Federation of Labor-Congress of Industrial Organizations

    Thank you, Chairman Rangel, and other members of the Committee. I 
welcome the opportunity to be here today to testify on behalf of the 10 
million members of the AFL-CIO and share our views on the vitally 
important question of the state of the American economy.
    Any consideration of the American economy today must address one 
simple, but central, question: ``Why, in the richest country in the 
world, is it so difficult for so many families to make a living by 
working?''
    The U.S. economy is now producing over $13 trillion a year and, 
despite a recent slowdown, has been growing at a respectable, if not 
spectacular, three percent a year. American workers are the most 
productive workers in the world, and they are more productive today 
than ever. Americans work hard and log more hours than workers in any 
other developed country.
    Nevertheless, the vast majority of American's are struggling to 
maintain their living standards in the face of stagnating wages, rising 
economic insecurity, eroding health care and retirement benefits and 
mounting debt. At the richest moment in our nation's history, the 
American Dream is fading for a majority of American workers.
    We can, and must, do better. But doing so requires us to 
fundamentally rethink our country's economic policies. We congratulate 
the Committee for holding these hearings and hope that this is the 
beginning of a thorough review of our country's economic policies.
    We must restore the promise of America--that all of our citizens 
can expect that by working hard and playing by the rules, they can 
participate fully in the benefits of a rapidly growing and competitive 
national economy.

The Fading American Dream
    American workers are suffering a now generation-long stagnation of 
family income and rising economic insecurity.
    Since 1980, labor productivity has increased over 80 percent, but 
the real median wage has hardly budged, increasing only 2 percent over 
a quarter century. Real median family income has increased a modest 13 
percent over this period, but only because each job requires more 
hours, each worker is working more jobs and each family is sending more 
family members to work.
    Moreover, the volatility of family income--and with it the economic 
anxiety so many feels--has increased sharply over the same period. 
Jacob Hacker the Yale political scientist estimates that the chances of 
a family suffering a 20 percent or greater decline in their income over 
a two-year period have doubled since 1980.
    Aggravating the economic anxiety of working families are rising 
health care costs and dwindling retirement assets. Only half of 
American families have an employer-provided retirement plan of any 
sort, a proportion largely unchanged for decades. However, whereas 40 
percent of workers participated in employer guaranteed ``defined 
benefit'' pension plans in 1980, today only 20 percent have such plans. 
In substituting ``defined-contribution'' for defined benefit plans, 
employers are shifting the risk of retirement onto workers. And 
American workers are ill prepared to carry this risk.
    And, as health care costs continue to rise, employers shift more 
and more of the cost of health care onto the shoulders of American 
workers. Again, working families with stagnating earnings are in no 
position to shoulder these costs and the ranks of the uninsured 
continue to rise. Today over 46 million Americans have no health 
insurance at all, despite the fact that as a nation we spend more on 
health care than any country in history.
    The increased volatility of income and increasing burden of risk 
for family health care and retirement security are exacerbating the 
acute anxiety that so many working families are feeling.
    However, the stagnation of wages and family incomes has ruptured 
the crucial relation between wages and productivity that was the heart 
of the ``social contract'' that American business and labor struck in 
the early post-WWII period and that provided the foundation for 
building the American middle class. When wages advanced with 
productivity from 1946-73, we grew together as a nation. Since then, 
increasingly, we are growing apart--economically, socially and 
politically.
    Over half of all the gains from increased productivity since 1980 
have accrued to the top 10 percent of American families, most of it to 
the top one percent. Indeed, the incomes of top .01 percent of American 
families--those earning over six million dollars a year--have increased 
by 497 percent over this period.
    As a result of the rupture between wages and productivity, an 
enormous redistribution of income--perhaps the largest in our history--
has occurred from poor and working Americans to the top twenty percent 
of our families. Today, America has the most unequal distribution of 
income and wealth of any developed country in the world. And income and 
wealth are more unequally distributed in America today than at any time 
since the 1920s.
    The explosion of CEO pay is both a cause and a symbol of growing 
economic inequality. Whereas the average CEO of a major American 
corporation earned twenty times that of an average worker in 1980, 
today the average CEO earns 431 times what the average worker earns. 
This means that the average CEO earns more on the first working day of 
the year than the average worker earns by working all year. Indeed the 
same CEO earns more before lunch on the first day of the year than a 
minimum wage worker earns all year.
    Our wealthiest families prosper as never before, but the vast 
majority of working families are left behind. Working families are 
struggling to make ends meet on stagnating earnings and, most of all, 
they are concerned about the future of their children. They are anxious 
about their ability to retire and terrified of what a serious accident 
or sickness might mean for their families' economic security. They are 
also increasingly angry about the sheer injustice of our country's 
growing inequality.

Failed Economic Policies
    There are many contributing causes to the stagnation of wages and 
the rupture of the productivity-wage relationship over the past thirty 
years. Central to them all, I suggest to you, is a steadily growing 
imbalance of bargaining power between workers and their employers. The 
implicit ``social contract'' that allowed Americans to grow together, 
and build the American middle class, in the early post-WWII decades 
rested on a rough balance of power between workers and their unions on 
one side and employers on the other.
    Today, this balance of power has eroded and the social contract 
with American workers is unraveling. America's CEOs, who once viewed 
themselves as stewards of our country's productive assets, today 
present themselves as agents of shareholders in whose name they 
aggressively shift good American jobs off-shore, reduce workers' pay 
and walk away from their health care and retirement obligations. 
Parenthetically, it is a point of some concern among shareholders, that 
such a large proportion of the gains from increasing productivity 
withheld from employees on shareholders' behalf, are finding their way 
into the compensation packages of the CEO's themselves.
    Beyond the problem of executive compensation and conflicted 
corporate governance practices, however, American corporations are 
facing two enormous challenges that have changed the way they do 
business and are poisoning their relationship with their employees. The 
first is intense competition in product markets--produced by 
globalization abroad and deregulation domestically--that have limited 
their pricing power. The second is pressure from institutional 
investors in capital markets to increase shareholder value by raising 
profit margins.
    If corporations must increase margins, but cannot raise prices, 
they must reduce costs. And most of the costs of business are in 
employee compensation in one form or another. Therefore, ``the 
market,'' as business leaders say, is forcing American corporations to 
aggressive reduce compensation costs however they can: by outsourcing 
and off-shoring work, by reducing worker pay and by shifting the costs 
of health care and retirement onto workers. These same forces are 
behind corporation demands to lower their tax and regulatory burdens in 
the name of ``competitiveness.''
    Behind these changes in the business and competitive strategies of 
America's corporations, however, there is a much more fundamental 
change in our country's economic policies that I would like to briefly 
explore with you. The shift in economic policies in the late 1970s from 
a ``Keynesian consensus'' to what George Soros has called ``free market 
fundamentalism'' explains much, in my view, about changing corporate 
behavior, the imbalance of power between workers and their employers, 
stagnating wages and the growing divide between productivity and wages.
    I think of the policies that make up ``free market fundamentalism'' 
as a box that is systematically weakening the bargaining power of 
American workers, constraining their living standards and driving the 
growing inequality of income and wealth in our country.

      On one side of the box is ``globalization,'' unbalanced 
trade agreements that force American workers into direct competition 
with the most impoverished and oppressed workers in the world, destroy 
millions of good manufacturing jobs and shift bargaining power toward 
employers who demand concessions under the threat of off-shoring jobs.
      On the opposite side of the box are ``small government'' 
policies that privatize and de-regulate public services and provide tax 
cuts for corporations and the wealthy, all to ``get government off our 
backs.''
      The bottom of the box is ``price stability.'' Unbalanced 
macroeconomic policies that focus exclusively on inflation and ignore 
the federal government's responsibility to ``maximize employment,'' 
even out the business cycle and assure rapid economic growth.
      The top of the box is ``labor market flexibility,'' 
policies that erode the minimum wage and other labor standards, fail to 
enforce workers' right to organize and bargain collectively and strip 
workers of social protection, particularly in the areas of health care 
and retirement security.

    Each of these economic policy groups--``globalization,'' ``small 
government,'' ``price stability'' and ``labor market flexibility''--may 
sound innocent enough. But they each undermine employment security of 
American workers. And together they powerfully weaken the bargaining 
power of workers and provide corporations with both the incentive and 
the means to enrich themselves at the expense of their employees.

Restoring America's Promise
    To balance bargaining power between employees and their employers, 
rebuild the relationship between wages and productivity and restore 
America's promise, we must begin by reflecting on the purpose of the 
economy and the goal of the economic policies that guide our country's 
economic development.
    Do Americans as workers exist to serve the needs of the economy? Or 
does the economy exist to serve the needs of Americans, the vast 
majority of whom earn their living by working? In our view, the economy 
exists to serve the needs of the American people, not the other way 
around, and the goal of economic policy is to support a strong and 
internationally competitive national economy whose benefits are shared 
broadly by all Americans.
    We must change direction in our country's economic policies to 
assure that the economy meets the urgent needs of the majority of 
American workers. To do so, we must reconnect with three important 
economic values that resonate powerfully with all Americans. Our 
country's economic policies should assure that:
    First, anyone who wants to work in America should have a job. We 
need more balanced macroeconomic policies that serve the dual goal of 
``full employment,'' as well as ``price stability,'' that is, the Fed's 
goal should be to maximize growth and employment consistent with 
reasonable price stability. The Humphrey-Hawkins Act mandates the 
Federal Reserve to serve these dual objectives, but only Congress can 
hold the Fed accountable for serving both.
    We also need more coordination between the fiscal policy of 
Treasury and the monetary policy of the Fed. In recent years, the 
Treasury has been absent from its responsibility to help smooth the 
business cycle and support rapid growth and full employment. One school 
of thought at Treasury is to cut taxes and hope for the best. Another 
school of thought has been to balance the federal budget and hope for 
the best. Neither school well serves the country's need for rapid 
growth and full employment. Moreover, both schools have supported 
``strong dollar'' policies that have contributed to mis-aligned 
exchange rates, particularly with China and other Asian trading 
partners, and left American manufacturers at a distinct competitive 
disadvantage in global markets.
    Second, anyone who works every day (a) should not live in poverty, 
(b) should have access to quality health care for themselves and their 
family and (c) should be able to stop working at some point in their 
lives and enjoy a dignified and secure retirement.
    The increase in the minimum wage to $7.25 an hour recently approved 
in the House is desperately needed and long overdue. But this increase 
will still leave a family of three in poverty and dependent on public 
assistance. To allow low-wage workers to participate equitably in our 
country's productivity growth, we need to restore the minimum wage to 
its traditional level of one half the average wage for non-supervisory 
workers in the private sector. Today that would be over $8.00 per hour.
    We must also reform our failing health care system to provide 
affordable, quality care for every American. As I have already 
mentioned, we spend twice as much on health care as other developed 
nations whose citizens enjoy superior public health outcomes. There are 
a variety of approaches to health care reform that would cover the 
uninsured, without increasing our national health care expenditures. 
Many of these approaches would also provide better means for improving 
quality and restraining health care cost increases. They would also 
help reduce the burden on employers and improve their competitive 
position in global markets.
    Reforming our health care system and restraining cost increases 
would also contribute greatly to our ability to provide a secure 
retirement for American workers. There are an increasing number of 
voices in Washington calling for ``entitlement spending'' reform to 
address long-term costs of Medicare and Medicaid. Reforming our health 
care system should relax some of the pressure to cut retirement 
benefits and allow space for bolstering Social Security and our fragile 
pension system.
    And third American workers should enjoy the fundamental freedom to 
associate with their fellow workers and, if they wish, organize unions 
at their workplace and bargain collectively for dignity at work and a 
fair share in the value they help create.
    Over 20,000 workers are illegally fired every year for exercising 
their most fundamental rights--freedom of opinion, expression and 
association. The Congress should take immediate action to pass the 
Employee Free Choice Act to allow workers the freedom to organize free 
of employer interference and the fear of job loss. This Act would 
represent an enormous step toward restoring balance between workers and 
their employers and helping repair the ruptured productivity-wage 
relationship.
    I will conclude by briefly mentioning one other, particularly 
important, question: The policies we need to assure a competitive 
American economy in a rapidly globalizing world.
    We have lost 3.4 million good manufacturing jobs since 1998 
partially as a result of misguided exchange rate policies, unbalanced 
trade policies and corporate strategies to aggressively off-shore 
manufacturing operations. Moreover, Princeton economist, Alan Blinder 
warns that as many as 42 million service sector jobs are also 
vulnerable to off-shoring, many held by highly educated and highly paid 
American workers.
    In addition to the exchange rate policies I have already mentioned, 
I suggest we need a strategic pause in negotiating new international 
trade agreements until we can formulate the policies we need--
internationally and domestically--to assure a competitive American 
economy able to produce more of what we consume. We simply cannot 
continue to borrow six percent of GDP a year, much of it from the 
central banks of our trading partners. Either we find a way to produce 
more or, one way or another, we will be forced to consume less.
    Internationally, this requires more balanced trade policies that 
protect the rights of workers as well as they protect intellectual 
property. Only with effective worker rights globally will the benefits 
of globalization be equitably shared with workers in the U.S. and 
abroad.
    Domestically, it requires a national economic strategy to rebuild 
our manufacturing capacity. This is important not just because of the 
need for more good manufacturing jobs, but crucial if we are to reduce 
our trade deficit and dependence on foreign borrowing.
    The American economy can work for all Americans, but to do so will 
require a change of course for our country's economic policies. I do 
not pretend to have all the answers to the many economic challenges we 
face. But I believe workable policies to these challenges can emerge 
from a national dialogue that involves business, labor and the public 
at large. I commend the Committee for beginning this dialogue.
    Thank you again for the opportunity to be with you today and share 
the views of the American labor movement.

                                 

    Chairman RANGEL. Thank you, Doctor.
    Dr. William Spriggs, Professor and Chair of Department of 
Economics, Howard University.

 STATEMENT OF WILLIAM E. SPRIGGS, PH.D., PROFESSOR AND CHAIR, 
           DEPARTMENT OF ECONOMICS, HOWARD UNIVERSITY

    Mr. SPRIGGS. Thank you, Mr. Chairman. If I can be allowed 
just one little personal comment here, there is a lot in the 
news about the Super Bowl and celebrating having two African 
American coaches in the Super Bowl. However, for economics, I 
wanted to let you know that appearing here is the Super Bowl. 
If I can make my own little personal note, having you as the 
Chairman is much more important than having an African American 
coach in the Super Bowl.
    Chairman RANGEL. Take as much time as you need.
    [Laughter.]
    Mr. SPRIGGS. If I may, since 2001, the U.S. economy has 
been in recovery, as we have noticed. We have had gross 
domestic product, the broadest measure of our nation's economic 
activity, grow. Aggregate consumption is increased. The 
unemployment rate has fallen. All of that sounds very rosy.
    At the same time, in an unprecedented way, we have the U.S. 
Census Bureau showing us that during this recovery, we have had 
inflation-adjusted median income for families, working-age 
families, fall. We have never had a recovery in which for four 
years straight, the median income of working-age families fall. 
The poverty rate has been rising. We have never had the poverty 
rate rise four years during a recovery.
    The share of private sector workers covered by employer-
provided health insurance has fallen, and the share of private 
sector workers covered by employer-provided pension plans has 
fallen. So, this is a unique recovery and it has trends which, 
if they are not corrected soon, will have important 
implications for fiscal policy.
    We have talked and other witnesses have talked about wage 
and income inequality, which has grown in the United States 
since the 1970s. There are many economists who have liked to 
tell this as a story of skill-biased technological change, that 
we are simply seeing the rewards to those who are better 
educated.
    A closer look by many economists has shown that this 
probably isn't a very good way to try and explain what is going 
on. If you look at the difference between wages of workers of 
different education levels, the big runup in inequality between 
workers of different education levels occurred in the 1980s, 
prior to when most think of skill-biased technological change 
taking place. The difference between inequality, inequality 
between workers of different education levels actually didn't 
increase very much during the 1990s when we would think of 
computer use as being much more ubiquitous.
    Instead, what is really rising at a tremendous rate since 
the 1970s is the growth in inequality among workers who have 
the same level of education, who are otherwise similar. That 
has been the big runup in wage inequality. That is far more 
difficult to understand and explain than what the skill-biased 
hypothesis would have you believe.
    The other sort of anomaly is the huge amount of variation 
in inequality within states. If you look across states, all 
states have to face the same trade because they are part of 
international trade. All of them will face the same technology. 
So, this great difference and inequality across states helps us 
to highlight the differences that aren't caused by skill-biased 
technological change. It does appear that the structure of 
labor markets has a great deal to do with that inequality.
    The most disturbing thing about this growth in inequality 
that has taken place during this recovery has been that it has 
been so unequal. Only those at the very highest end of incomes 
have seen gains. It is not those in the bottom half. It is 
those who are in the bottom 80 percent who in fact have seen 
losses.
    Even when we look at it from the perspective of 
consumption, those who are in the bottom 20 percent have simply 
fallen behind because their wages have not kept up with 
inflation. They actually are living a lower lifestyle during 
this recovery. Those in the middle have barely held on. The 
disturbing is the borrowing of those are in the top 20 percent 
because that is what has kept consumption growing, is actually 
the borrowing of those in the top 20 percent.
    We have seen a tremendous runup in household debt which has 
taken place during this recovery, the fastest growth in 
household debt in a five-year period that we have seen in the 
postwar era. This runup in debt has been at a much faster rate 
than the modest growth in household net worth. So, that means 
that we are seeing households shift to having a very high debt-
to-asset ratio.
    This has severe implications going forward when you think 
about fiscal policy concerns. It means that Americans, the vast 
majority of Americans, the bottom 80 percent, are facing the 
prospect--if we don't see a reversal trend, are facing the 
prospect of lower permanent incomes. They will have to 
reconcile their personal household debt balance sheet, meaning 
in the future they will have to consume less in order to pay 
off their debts.
    So when you think forward about how do we resolve the drop 
in private health care coverage? How do we resolve the drop in 
private pension care coverage? That households themselves will 
be in a more fragile position to try and self-insure 
themselves.
    You also have to think from a public policy perspective 
about the small share of income that now goes to workers, the 
shrinking share of national income that goes in the form of 
earned income. So, if you put more of a tax burden on earned 
income as opposed to capital income, you are going to actually 
increase the overall burden on earned income because it is a 
smaller share of national income than it was before.
    Finally, I would say you need to think about the growth in 
inequality when you think about Social Security reform. We did 
not anticipate this growth in income inequality. Already that 
growth in income inequality, if we would go back to taxing 90 
percent of the wage income in the United States, that would 
account for 40 percent of the gap that we have in Social 
Security funding. So, income inequality has to be taken into 
consideration as you think about tax policy and Social Security 
reform.
    [The prepared statement of Dr. Spriggs follows:]

Statement of William E. Spriggs, Ph.D., Professor and Chair, Department 
                    of Economics, Howard University

    I wish to thank Committee Chairman, Congressman Charles B. Rangel 
for the invitation to offer this testimony. It is an honor and a 
privilege to offer this evidence.
    Since 2001, the U.S. economy has been in a recovery as defined by 
the National Bureau of Economic Research's Business Cycle Dating 
Committee. Gross Domestic Product, the broad measure of the nation's 
economic activity has grown, aggregate consumption has increased and 
the unemployment rate has fallen. Those are broad measures to confirm a 
sense that the economy is in recovery. However, data from the U.S. 
Census Bureau shows this recovery has also seen a fall in the inflation 
adjusted median income for working-age families, poverty rates rise, 
the share of private-sector workers covered by employer-provided health 
insurance fall and the share of private-sector workers covered by 
employer-provided pension plans. These latter trends, if not corrected 
soon, will have important implications for fiscal policy.
    Wage and income inequality have been on the rise in the United 
States since the late 1970s. It appears that the bulk of increase in 
wage inequality between workers of different education levels took 
place in the 1980s. That period was marked with an increase in the 
premium paid to college-educated workers, relative to the wages of high 
school-educated workers, and prompted debate among economists that the 
economy was now experiencing growth that increased rewards to skills; 
or ``skill biased technological change.'' During the 1970's, men with 
college education actually suffered a drop in their premium, from about 
25 percent higher than their high school-educated counterparts to a low 
of about 20 percent by the decades end in 1979. But, in the 1980s, the 
premium for men grew to reach 35 percent by decade's end, a significant 
increase.
    But, economists are not in agreement that the skill biased 
technological change can explain the growth in wage inequality that has 
taken place since the 1970s.\1\ A major concern, is that the build-up 
in wage inequality between workers of different education levels took 
place in the 1980s before the broad introduction of computing, and did 
not expand greatly in the 1990s when computer use became ubiquitous and 
productivity increases returned to their long-run trend after a 
slowdown in the 1970s and 1980s. What has continued to rise, and what 
is the larger component of over-all wage inequality, are differences in 
the earnings of workers who have equal education and experience. Some 
economists attempted to reconcile this apparent anomaly by arguing for 
increases in the returns to unobserved productivity characteristics 
(like school quality) that were linked to schooling differences.\2\ 
But, a closer look suggests that using more accurate data, and 
controlling for shifts in the structure of employment, would show the 
rise in the returns to unobserved characteristics took place in the 
1980s as well. And, the greatest growth in inequality among similarly 
educated workers is among college and graduate-educated workers, not 
among workers with high school or less education.
---------------------------------------------------------------------------
    \1\ See for instance, Thomas Lemieux, ``Increasing Residual Wage 
Inequality: Composition Effects, Noisy Data, or Rising Demand for 
Skill?'' The American Economic Review, 96 (Number 3, 2006): 461-498, 
David Card and John E. DiNardo, ``Skill-Biased Technological Change and 
Rising Wage Inequality: Some Problems and Puzzles,'' Journal of Labor 
Economics, 20 (Number 4, 2002): 733-783 and Daron Acemoglu, ``Technical 
Change, Inequality, and the Labor Market,'' Journal of Economic 
Literature, 40 (Number 1, 2002): 7-72.
    \2\ Chinhui Juhn, Kevin Murphy and Brooks Pierce, ``Wage Inequality 
and the Rise in Returns to Skill,'' Journal of Political Economy, 101 
(Number 3, 1993): 410-442.
---------------------------------------------------------------------------
    There are other problems with the skill-biased hypothesis. One of 
them is that there is great variation between states in the amount of 
wage inequality within states, even though the same technology that 
drives skill demands affects all states. Observing inequality within 
states over time, economists have noted that the decline of large 
manufacturing accounts for increases in overall wage inequality within 
states. This is not consistent with the skill-biased hypothesis.\3\ 
Another is that returns to skills by race diverged during that period, 
which would be inconsistent if firms truly faced skills shortages that 
bid up the wages of skilled workers.\4\ It would also be difficult to 
explain the much higher use of skilled workers by foreign-owned 
companies operating in the U.S. than for domestic producers, and for 
the racial disparity in the skilled work forces between foreign-owned 
and domestic firms suggested by the patterns of employment in those 
sectors with high foreign direct investment in the U.S.\5\ Economists 
have found the decline of unionization in the 1980s, and the effects of 
trade to be important in explaining the growth in overall wage 
inequality. The importance of unions and labor market institutions are 
not consistent with the skill-biased hypothesis.\6\
---------------------------------------------------------------------------
    \3\ J. Bradford Jensen and Andrew Bernard, ``Understanding 
Increasing and Decreasing Wage Inequality,'' NBER Working Paper 6571 
(May 1998).
    \4\ Patrick L. Mason and William Darity, Jr., ``Evidence on 
Discrimination in Employment: Codes of Color, Codes of Gender,'' 
Journal of Economic Perspectives, 12 (Number 2, 1998): 63-90.
    \5\ Abera Gelan, Kaye Husbands Fealing and James Peoples, ``Inward 
Foreign Direct Investment and Racial Employment Patterns in U.S. 
Manufacturing,'' The American Economic Review, (Papers and Proceedings, 
forthcoming) [http://www.aeaweb.org/annual_mtg_papers/2007/
0106_1015_2103.pdf]
    \6\ Richard Freeman, ``How Much Has De-Unionization Contributed to 
the Rise in Male Earnings Inequality?'' in Sheldon Danziger and Peter 
Gottschalk (eds.), Uneven Tides: Rising Income Inequality in America 
(Russell Sage Foundation: New York, 1993) and Lawrence Katz and Kevin 
Murphy, ``Changes in Relative Wages, 1963-1987: Supply and Demand 
Factors,'' Quarterly Journal of Economics, 107 (Number 1, 1992): 35-78.
---------------------------------------------------------------------------
    Perhaps more of an issue is the break between productivity gains 
and wages. During this recovery, productivity has continued to grow at 
its post-1995 rate, suggesting a return to its long-run trend. Yet, 
median wage levels have not kept pace with inflation. Fast productivity 
growth is a way to keep inflation in check, but also a way to improve 
the lifestyles of America's workers. Yet, noted economist Robert Gordon 
has found that only the wages of those in the very top ten percent of 
earnings have kept above productivity growth over the 1966-2001 period. 
The redistribution of gains to the top explains the stagnation of those 
in the middle.\7\
---------------------------------------------------------------------------
    \7\ Ian Dew-Becker and Robert J. Gordon, ``Where did the 
Productivity Growth Go? Inflation Dynamics and the Distribution of 
Income,'' Presented at the 81st Meeting of the Brookings Panel on 
Economic Activity, September 8-9, 2005.
---------------------------------------------------------------------------
    During this recovery, wage inequality has continued to grow. It has 
grown not because of an increase in the returns to education, because 
in the initial phases of the recovery, the wage premium of college 
educated workers fell, as they became the larger share of the long-term 
unemployed.\8\ Instead, it has been the continued expansion of 
inequality of earnings for workers who are similarly educated. 
Apparently, an important source of the growth of that inequality is 
traced to declines in the inflation-adjusted value of the minimum 
wage.\9\
---------------------------------------------------------------------------
    \8\ Andrew Stettner and Sylvia Allegretto, ``The Rising Stakes of 
Job Loss: Stubborn long-term joblessness amid falling unemployment 
rates,'' EPI & NELP Briefing Paper (May 2005).
    \9\ John DiNardo, Nicole M. Fortin and Thomas Lemieux, ``Labor 
Market Institutions and the Distribution of Wages, 1973-1992: A Semi-
parametric Approach,'' Econometrica, 64 (Number 5, 1996): 1001-1044; 
William M. Rodgers III, William E. Spriggs and Bruce W. Klein, ``Do the 
skills of adults employed in minimum wage contour jobs explain why they 
get paid less?'' Journal of Post Keynesian Economics, 27 (Number 1, 
2004): 38-66.
---------------------------------------------------------------------------
    But, the other source is the redistribution of corporate income, 
from wages to capital income. The latest data from the Bureau of 
Economic Analysis shows that the share of corporate-sector income going 
to wages is down to its lowest share in over 25 years, according to an 
analysis done by the Lawrence Mishel and Jared Bernstein at the 
Economic Policy Institute.\10\ They also point to new figures from the 
Congressional Budget Office showing an increased concentration of 
corporate capital income among America's richest one percent. The 
latest CBO figures show that almost 60 percent of capital income goes 
to the top one percent in the U.S. income distribution.
---------------------------------------------------------------------------
    \10\ Lawrence Mishel and Jared Bernstein, ``New data reveal 
unprecedented income inequality,'' EPI Economic Snapshots (January 17, 
2007).
---------------------------------------------------------------------------
    During this recovery, U.S. Census data show that income for those 
in the bottom twenty percent, those in the middle twenty percent and 
those in the top twenty percent have all fallen. Yet, aggregate 
consumption has increased. This anomaly has occurred, because the 
aggregate savings level of Americans has become negative, and household 
debt has risen dramatically. But, a closer look at the data shows that 
those in the bottom twenty percent have in fact suffered from a drop in 
consumption. Real wages for them have fallen, and because they are 
credit constrained, they have not borrowed to maintain consumption. 
Those with middle incomes have apparently maintained consumption, with 
some modest borrowing, and some modest benefit from lower taxes. The 
big gains in consumption have come from those at the top of the income 
distribution, where incomes in the highest ranges have gone up, and by 
borrowing, and from larger benefits from tax cuts. The relative gains 
in consumption by those in the top twenty percent were more rapid than 
during the 1980s or 1990s recovery. By 2005, the top twenty percent of 
the income distribution accounted for almost 40 percent of all 
consumption. The bottom twenty percent consumed only 8.2 percent.\11\
---------------------------------------------------------------------------
    \11\ Jared Bernstein and Jason Furman, ``A Tough Recovery by Any 
Measure: New Data Show Consumer Expenditures Lag for Low- and Middle-
Income Families,'' CBPP and EPI (November 28, 2006). [http://
www.epi.org/issuebriefs/230/ib230.pdf]
---------------------------------------------------------------------------
    Of course, this personal borrowing spree is not sustainable. 
Household debt is growing at annual rate of almost 11 percent during 
this recovery, compared with a more modest growth of 3.7 percent in 
household net worth, leading to a very high household debt to asset 
ratio.\12\ This means that unless incomes rise to sustain consumption 
growth, instead of borrowing, the permanent incomes of Americans are 
falling. That is, at some point, consumption must fall so households 
can balance their incomes.
---------------------------------------------------------------------------
    \12\ Financial Markets Center, Household Financial Conditions: Q3 
2006 (http://www.fmcenter.org/atf/cf/(DFBB2772-F5C5-4DFE-B310-
D82A61944339)/HFC_dec06rev.pdf)
---------------------------------------------------------------------------
    Further, with the federal budget deficit, it means that the nation 
has been borrowing from the rest of the world at an astounding rate to 
fuel our consumption. The current account deficit has mushroomed from 
about 4 percent of GDP in 2001 to 6.8 percent, as of the third quarter 
of 2006. That is a significant claim on future U.S. income by foreign 
interests.
    There are several important fiscal policy implications from these 
current trends. The lower permanent incomes of Americans, particularly 
those in the bottom eighty percent of the income distribution, means 
they will face real constraints that will ill prepare them to take on 
added responsibilities, such as the current shifts away from employer-
provided health care, and the changes in their household balance sheets 
toward increased risks resulting from current shifts away from employer 
defined-benefit retirement plans.
    There are already implications from the shift of shared prosperity 
that ended in the 1970s. The shift to rising incomes only at the 
highest ends of the income distribution has led to a significant drop 
in revenues for the Social Security system, despite continued growth in 
the economy, and an apparent return to long run productivity growth 
that was not anticipated in the early 1980s. If the Social Security 
system were to return to receiving revenue on ninety percent of 
payroll, almost 40 percent of the projected shortfall in benefits could 
be accounted for.\13\
---------------------------------------------------------------------------
    \13\ Virginia P. Reno and Joni Lavery, ``Options to Balance Social 
Security Funds Over the Next 75 Years,'' NASI Social Security Brief No. 
18 (February 2005). [http://www.nasi.org/usr_doc/SS_Brief_18.pdf]
---------------------------------------------------------------------------
    The shift in the nation's income shares, toward a lower share of 
national income in the form of wage and salary means that tax revenues 
from earned income, as opposed to capital income, will need to be re-
calibrated. Continued heavy reliance on earned income as a source of 
revenue will mean that a rising burden will be placed on earned income 
to pay off current federal obligations. Yet, if the current trends do 
not change, it will already be the case that wage earners will face 
lower permanent incomes than the earners anticipated.

                                 

    Chairman RANGEL. The last witness is Dr. John Diamond, 
Edward A. and Hermena Hancock Kelly Fellow in Tax Policy 
Research. Thank you for coming all the way from Houston to be 
with us.

  STATEMENT OF JOHN W. DIAMOND, PH.D., EDWARD A. AND HERMENA 
HANCOCK KELLY FELLOW IN TAX POLICY RESEARCH, JAMES A. BAKER III 
  INSTITUTE FOR PUBLIC POLICY, RICE UNIVERSITY, HOUSTON, TEXAS

    Mr. DIAMOND. Thank you for having me. Chairman Rangel, 
Ranking Member McCrery, and other Members of the Committee, it 
is an honor to testify before the Committee on Ways and Means 
on the economic issues confronting the Nation.
    The U.S. economy continues to grow at a solid pace, and the 
U.S. unemployment rate is low. The Beige Book published by the 
Federal Reserve on January 17th generally reported that labor 
market conditions are improving and that businesses are having 
difficulty filling some job openings. It also reported that 
while monetary wages are growing at a relatively modest pace, 
compensation in the form of benefits is increasing rapidly, 
especially for health care.
    The latest Beige Book reports indicate that economic 
activity in most sectors is strong except for the housing 
sector. An encouraging note is that some of the latest data 
suggests that the residential housing market correction is at 
least nearing its end.
    In spite of this, the Nation must confront several 
challenges to maintain a robust level of economic growth. The 
most important of these challenges is the enormous budget 
pressures that are associated with the increase in entitlement 
spending.
    Additionally, the trend toward globalization presents other 
challenges such as promoting labor productivity, encouraging 
innovation, and increasing the economic security of U.S. 
workers. I believe that in addressing these challenges, it is 
imperative that U.S. fiscal policy support long-term economic 
growth and ensure that U.S. businesses remain competitive at 
home and abroad.
    Reform of Social Security and Medicare should be at the 
forefront of any policy discussion. These are the heart of the 
budget problems that face the Nation. Regarding this, Federal 
Reserve Chairman Bernanke recently testified that to some 
extent, strong economic growth can help to mitigate budgetary 
pressures. All else being equal, fiscal policies that are 
supportive of economic growth would be beneficial.
    Tax rate increases scheduled under current law are almost 
certainly not consistent with fiscal policy that would support 
economic growth because they impose economic costs by 
distorting individual decisions regarding work and savings. 
Distortions are also related to tax complexity. Moreover, the 
corporate income tax is drawing more attention as globalization 
and the declining corporate tax rates around the world have 
drastically changed the competitive environment facing U.S. 
firms.
    Given the ever-increasing importance of globalization, 
especially cross-country flows of both goods and mobile 
capital, reforming the corporate income tax to maintain the 
competitiveness of U.S. business is a critical issue that 
deserves careful attention. Overall, our Federal tax system is 
unnecessarily complex, often counterproductive in terms of 
promoting economic growth. In short, the current Federal tax 
system is in need of a comprehensive overhaul.
    Reforming the Federal system would require tough economic 
choices. It is my belief that dynamic analysis of the 
macroeconomic effects of various policies could prove useful in 
determining tax policy changes that would support economic 
growth.
    Two other concerns are the topic of much recent discussion. 
These include the widening income gap between high and low 
income households over time, and the slow recovery of household 
income from 2001 to 2005. There are many potential explanations 
for the widening income gap between high and low income 
households. I will touch on three.
    Immigration of less-skilled workers into the United States 
is an important factor that reduces the growth of wages of 
less-skilled workers. In addition, anecdotal evidence and 
several economic studies support the view that outsourcing is 
also a potential factor in some of the recent decrease in the 
demand for skilled and unskilled workers.
    Technological change also plays a role as technological 
improvements have decreased the demand for unskilled labor 
relative to skilled labor, and therefore has resulted in larger 
wage growth for skilled workers.
    I do not believe that drastically increasing taxes on the 
rich would be a desirable or effective means of attempting to 
reverse these effects. Most importantly, this would decrease 
the incentives to work and invest, and may be detrimental to 
U.S. economic growth. Currently, the top 50 percent of 
taxpayers pay more than 95 percent of all personal income 
taxes, while over 40 percent of families in the United States 
have no tax liability or receive a refund.
    The shifting economic landscape that leads to a more global 
economy is certain to increase and reduce the well-being of 
some U.S. workers during the transition. Thus, U.S. 
policymakers and businesses will face the chore of ensuring 
that U.S. workers have the opportunity to adapt in this ever-
changing environment by engaging in education and training to 
learn new skills.
    Thank you for this chance to testify before your Committee.
    [The prepared statement of Dr. Diamond follows:]

  Statement of John W. Diamond, Ph.D., Edward A. and Hermena Hancock 
 Kelly Fellow in Tax Policy Research, James A. Baker III Institute for 
             Public Policy, Rice University, Houston, Texas

    Chairman Rangel, Ranking Member McCrery, and other members of the 
Committee, it is an honor to testify before the Ways and Means 
Committee on the economic issues that are confronting the nation. Let 
me start by stating that these are my views and should not be construed 
as representing the views of the James A. Baker III Institute for 
Public Policy, Rice University or any other organization.

I. State of the Economy
    The U.S. economy continues to grow at a solid pace and the U.S. 
unemployment rate is at or near the full employment rate. The Beige 
Book, published by the Federal Reserve on January 17, 2007, generally 
reported that labor market conditions are improving and that some 
businesses are having difficulty filling job openings. It also reported 
that while monetary wages are growing at a modest pace, compensation in 
the form of benefits is increasing rapidly, especially for health care. 
The Beige Book reports were also generally positive for services and 
manufacturing activity, excluding residential construction. Activity in 
commercial real estate, nonresidential construction, energy production 
and exploration, and mining was strong. An encouraging note is that 
some of the latest data on home sales and consumer attitudes on home 
buying suggest that the residential housing market may be nearing the 
end of the correction for the unsustainable surge in housing 
construction in 2004 and 2005. U.S. business profits continue to 
rebound from the corporate scandals in the late 1990's, the 2001 
terrorist attacks in the U.S., the effects of hurricanes Katrina and 
Rita on production, and the recession of 2001. Moreover, larger than 
expected revenue growth from individual and corporate income taxes led 
the Congressional Budget Office to reduce its estimate of the 2006 
deficit.
    In spite of all this, the nation must confront several challenges 
to maintain a robust level of economic growth. The most important of 
these challenges is the enormous budget pressures associated with the 
projected increase in entitlement spending which threaten to undermine 
the strength of the economy. Additionally, the trend toward 
globalization presents other challenges such as promoting labor 
productivity growth, encouraging innovation and entrepreneurialism, and 
increasing the economic security of U.S. workers. I believe that in 
addressing these challenges it is imperative that U.S. fiscal policies 
support long term economic growth, and ensure that U.S. businesses 
remain competitive at home and abroad.

II. Fiscal Policy: Where to Go From Here
    Reform of Social Security and Medicare should be at the forefront 
of any policy discussion since these are the heart of the budget 
problems facing the nation. The cost of these programs is projected to 
rapidly increase for two main reasons: the changing demographics of the 
U.S. population and rapidly rising medical costs. These changes will 
have major implications for tax and spending policies in the U.S. for 
years to come. Regarding this, Federal Reserve Chairman Bernanke 
recently testified that ``to some extent, strong economic growth can 
help to mitigate budgetary pressures, and all else being equal, fiscal 
policies that are supportive of economic growth would be beneficial.''
    The Congressional Budget Office (CBO) projects that tax revenues 
will be 18.3 percent of GDP in 2006, which is up from 17.5 percent of 
GDP in 2005. From 1962 to 2005, revenues were 18.2 percent of GDP. Over 
the next ten years, the CBO projects that revenues will increase 
steadily as a percentage of GDP, and that by 2016 revenues will be $4.2 
trillion, or 19.8 percent of GDP. Under current tax law, including the 
scheduled expiration of the 2001 and 2003 tax cuts, the CBO projects 
that revenues will increase to 23.7 percent of GDP by 2050. This 
increase would result from a one-time tax increase in 2010 related to 
the expiration of the 2001 and 2003 tax cuts, and a steady increase in 
tax rates as real and nominal income growth shifts taxpayers into 
higher tax brackets and onto the Alternative Minimum Tax (AMT).
    As a share of GDP, personal income taxes are 8.1 percent, corporate 
taxes are 2.6 percent, social insurance taxes are 6.4 percent, and 
other revenues are 1.3 percent. Over the next ten years, personal 
income taxes are projected to increase from 8.1 to 10.5 percent of GDP. 
As discussed above, this increase in personal income taxes results from 
the expiration of the temporary tax provisions passed in 2001 and 2003, 
including the higher exemption amount under the AMT. Reforming the AMT 
will be necessary to keep the ratio of federal tax revenue to GDP from 
increasing far above historical levels. Under current law, in which all 
of the 2001 and 2003 tax cuts expire by 2011, the CBO projects that 
over 20 million taxpayers will pay $60 billion more in taxes because of 
the AMT in 2014, and even more than that will be required to calculate 
their taxes under the AMT to see if they are affected. By comparison, 
in 2003, approximately 3 million taxpayers were subject to the AMT. The 
number of taxpayers and the increase in taxes will continue to increase 
over time if no changes are made to the AMT. Corporate income taxes are 
projected to decrease steadily from 2.6 to 1.7 percent of GDP over the 
next ten years as a result of slower growth in corporate profits. 
Social insurance taxes are projected to remain close to 6.3 percent of 
GDP over the next ten years.
    The tax rate increases scheduled under current law are almost 
certainly not consistent with fiscal policy that would support economic 
growth. While taxes are necessary to raise revenue to pay for 
government operations, they impose an economic cost by distorting 
individual decisions regarding how much to work, how much to invest in 
training and education, how much to save, the allocation of saving 
across assets, and tax avoidance opportunities. Distortions are also 
related to tax complexity and the haphazard pattern of marginal tax 
rates created by the interplay of statutory tax rates, eligibility 
requirements, phase-ins, and phase-outs.

A. Disincentives to Work
    The empirical evidence on the responsiveness of hours worked to the 
after-tax wage rate generally ranges from nil to a small but 
significant effect. This ambiguity arises from two offsetting effects: 
(1) that higher marginal tax rates reduce the incentive to work at the 
margin; and (2) that higher taxes reduce disposable income, and 
therefore, individuals must work more to finance a given level of 
consumption. However, individuals make other labor supply decisions 
that may also be affected by taxes such as whether or not they should 
participate in the labor force, how much to invest in training and 
education, and how hard they should work. Currently, there is no 
consensus view on the magnitude of the effect of wage taxes on all of 
these labor supply decisions. Some observers argue that such responses 
are sensitive to wage tax rates and therefore wage taxes have a 
significant impact on long run economic growth. By contrast, others 
argue that the effects of wage taxes for primary workers are small or 
negligible, while recognizing that the labor supply of secondary 
earners is more responsive to wage tax changes. In addition, reported 
taxable income of high income taxpayers is responsive to changes in tax 
rates over time.

B. Disincentives to Save and Invest
    The disincentive to save and invest that is inherent under an 
income tax system is perhaps its most costly distortion. An income-
based tax is levied on capital and labor income, regardless of whether 
the income is saved or consumed. Thus an income tax system penalizes 
future consumption. There is substantial evidence that reducing the 
taxation of capital income could increase saving, investment, 
productivity, and national output in the long run. In addition, the 
allocation of saving across different asset types is influenced by the 
haphazard pattern of tax rates on different types of assets. The 
distortions that are caused by this differing tax treatment are as 
large as distortions that would be associated with a several percentage 
point increase in overall capital income tax rates, indicating the 
importance of eliminating differential capital income taxes.

C. Economic Costs of Tax Complexity
    A compelling argument for tax reform is the need to simplify the 
incredibly complex current tax system. The complexity of the current 
tax system imposes substantial costs on taxpayers in the form of time 
and money spent to understand and comply with the tax law. The 
President's Advisory Panel on Tax Reform estimates that individual 
taxpayers spend 3.5 billion hours doing their taxes (an average of 26 
hours each) and about $100 billion on tax preparation and compliance. 
In addition, businesses spend about 3 billion hours and $40 billion. 
The cost of complying with tax system can be particularly burdensome 
for taxpayers that claim the Earned Income Tax Credit (EITC), that must 
pay the Alternative Minimum Tax (AMT), and for small businesses. The 
panel reported that almost seventy-five percent of taxpayers that 
claimed the EITC or paid the AMT used a tax preparer. The panel 
reported that 45 percent of taxpayers with tax liability will be 
subject to the AMT by 2015, indicating that financial costs of tax 
complexity are likely to rise over time under current law. In addition, 
the complexity of the current tax system creates the opportunity for 
some taxpayers to avoid or evade taxes and thus perpetuates the notion 
that the tax system is unfair. Since the tax reform of 1986, Congress 
has enacted more than 15,000 changes in the Tax Code (p. 16). This 
includes a number of provisions that are temporary, and set to expire 
in 2010 such as the tax rate for ordinary income, the child tax credit, 
the lower tax on dividends and capital gains, and the repeal of the 
Estate and Gift Tax. The high costs of tax compliance are increased by 
the volatile nature of the tax code, which creates more uncertainty and 
complexity for both businesses and families.

D. International Competitiveness and the Corporate Income Tax
    Proposals for reform of the corporate income tax are drawing more 
attention as globalization and declining corporate tax rates around the 
world have drastically changed the competitive environment facing U.S. 
multinational firms. Moreover, the increase in multinational firms and 
globalization has substantially increased complexity associated with 
taxing cross-border corporate income. The U.S. corporate income tax, 
which taxes all repatriated and ``foreign source'' income after 
allowing for a limited credit for foreign taxes paid, is riddled with 
potential tax avoidance and evasion schemes that reduce corporate taxes 
and create costly economic distortions in the production and 
distribution of corporate products. However, evaluating proposals to 
reform the corporate income tax is a daunting task as we must account 
for the effect of corporate income taxes on a number of important 
corporate decisions such as the location of tangible and intangible 
capital, income repatriation, the location of income for tax purposes, 
financial decisions, incentives to export, incentives to lower foreign 
tax burdens, and foreign country tax treatment of U.S. corporations.
    Two general directions are commonly suggested for corporate tax 
reform. The first would include some form of integration of the 
corporate and individual income taxes to ensure that all income is 
taxed once, with much recent attention devoted to plans that would 
accomplish this at the individual level (reducing dividend and capital 
gains tax rates), rather than the business level (reducing the 
corporate tax rate or allowing deductions or exemptions for dividend 
payments to shareholders). A second approach would introduce a new 
consumption-based tax to replace the current federal income tax system 
which is a hybrid tax that has both income tax and consumption tax 
elements, including the corporate income tax. Given the ever-increasing 
importance of globalization, especially cross-country flows of both 
goods and mobile capital, reforming the corporate income tax to 
maintain the competitiveness of U.S. business is a critical issue that 
deserves careful consideration. Note also that lowering individual 
taxation rather than business taxation is problematic in terms of 
attracting foreign capital.

E. Tax Reform
    Our federal tax system is unnecessarily complicated and burdens 
millions of taxpayers and businesses who must comply with its many 
convoluted provisions. It hampers U.S. business from competing in an 
increasingly integrated global marketplace. It is it is riddled with 
loopholes, haphazard provisions, and often undermines our perception of 
fairness. Most importantly, it is often counterproductive in terms of 
promoting economic growth. In short, the current federal tax system is 
in need of a comprehensive overhaul. All of the issues discussed above 
could be addressed by a well-designed tax reform plan that created a 
simple, fair and pro-growth federal tax system. The 2005 report of the 
President's Advisory Panel on Federal Income Tax proposed two 
alternatives: (1) a reformed and integrated income tax (the 
``Simplified Income Tax''), and (2) a consumption-based system 
supplemented with an ``add-on'' layer of capital income taxation at the 
individual level (the ``Growth and Investment Tax'') that is broadly 
similar to the dual income tax. The panel also discussed at length a 
true consumption-based tax--its ``Progressive Consumption Tax'' (PCT) 
option--although the panel ultimately decided against recommending this 
approach. Reforming the federal tax system would require tough economic 
choices that would require presidential leadership and ample bi-
partisanship to achieve a viable reform option.
F. The Importance of Comparing Alternative Tax Policies
    A useful example of comparing the growth effects of alternative tax 
proposals is provided in a report by the Office of Tax Analysis (OTA) 
published in July 2006 that examines the dynamic effects of the 
President's proposal to permanently extend a variety of tax provisions 
enacted in 2001 and 2003. The report provides information on the 
macroeconomic effects of the various tax provisions, similar to an 
analysis by the Joint Committee on Taxation (2005), as well as the 
aggregate macroeconomic effect of all the provisions. This information 
allows for a comparison of the macroeconomic effects of various 
policies and, if used appropriately, could prove useful in determining 
tax policy changes that would support economic growth. For example, the 
OTA report analyzes the following three groups of provisions:

      Extension of lower capital gain and dividend tax rates;
      Extension of lower ordinary income bracket rates for the 
25, 28, 33, and 35 percent brackets and an extension of the repeal of 
personal exemptions and itemized deductions; and,
      Extension of the increase in the child credit from $500 
to $1,000 per child, the increased standard deduction and bracket width 
for joint filers, and the 10 percent rate bracket.

    Table 1 shows that lowering capital gains and dividend taxes 
increased gross national product (GNP) by 0.3 to 0.4 percent in the 
long run, depending on the assumed fiscal offset. This increase in GNP 
occurs because lower effective tax rates on capital income increased 
saving and investment. In fact, permanently extending the dividend and 
capital gains tax cuts increased real GNP in the long run for all of 
the options considered in the OTA analysis. However, as noted by OTA, 
changes in a variety of simplifying assumptions underlying the economic 
model used in this report could strengthen or weaken these results. 
This includes assumptions about the economic effects of dividend taxes 
and a variety of other economic distortions that are not included in 
the model.
    For the base case parameter values, Table 1 shows that permanently 
extending the cuts in the top four ordinary income tax brackets 
increases real GNP by 0.0 to 0.7 percent in the long run, depending on 
the assumed fiscal offset. By comparison, permanently extending the 
increase in the child credit, the increase in the standard deduction 
and bracket width for joint filers, and the 10 percent rate bracket 
reduces real GNP by 0.4 to 1.2 percent, depending on the assumed fiscal 
offset. These provisions are inframarginal changes for most taxpayers 
and thus would not increase the incentive to work or save.
    Purely from an efficiency perspective, a permanent reduction in 
dividend and capital gains tax rates has the most positive effect on 
the economy in most of the cases that were examined by OTA. In 
addition, lowering the four highest ordinary income tax rates increased 
GNP more than the permanent extension of the increase in the child 
credit, the marriage tax relief, and the 10 percent bracket. However, 
efficiency is not the only important factor in determining fiscal 
policy--fairness and simplicity in administration and compliance are 
also factors that should be considered.
    The adoption of efficient, fair, and simple tax and spending 
policies is critical given the fiscal gap facing the nation, which has 
been estimated to be as high as $98 trillion in present value terms.

III. Trends in Household Income
    Promoting labor productivity growth is crucial to increasing living 
standards since real wages increase with productivity in the long run. 
The growth of productivity is determined by technological changes that 
increase the amount of goods and services that can be produced with a 
given level of capital and labor, increases in the capital to labor 
ratio, and increases in human capital. Thus, policies that are likely 
to promote productivity growth include encouraging innovation and 
entrepreneurial ventures, lower taxes on capital income, and increasing 
investment in human capital. Recently, labor productivity growth has 
been roughly 3 percent annually or higher from 2002 to 2005. However, 
an anomaly is that monetary wages have not been increasing at a similar 
pace. Recent increases in non-monetary compensation in the form of 
benefits may explain a part of this trend. Other factors also affect 
real wages by changing labor supply and demand, such as immigration and 
competition from abroad. Wages are the largest source of household 
income for most families in the U.S. Figure 1 shows the growth in 
household income for different income percentiles over time. It 
illustrates two concerns that are the topic of much recent discussion 
in academic, political, and policy circles: the widening gap between 
high- and low-income households over time and the slow recovery of 
household income from 2001 to 2005.
    Figure 1 shows that the widening gap between high- and low-income 
households accelerated in the 1980's and 1990's. There are many 
potential explanations for the widening of the income gap between high 
and low income households including: an inflow of less skilled 
immigrants, international trade, technological change, transfers of 
production activities to foreign countries, a reduction in the quality 
of education, the decline of labor unions, and deregulation. 
Immigration of less skilled workers into the U.S. is an important 
factor that reduces growth in wages of less skilled workers. It is 
important to note that immigration reforms that would reduce the 
negative impacts of immigration on the wages of less skilled workers 
would potentially increase the prices of other goods and services and 
perhaps limit wage increases for higher skilled workers. In addition, 
anecdotal evidence and several economic studies support the view that 
outsourcing is also a potential factor in some of the recent decrease 
in the demand for less skilled (and even some skilled) workers. 
However, it is not likely to explain fully the widening income gap 
between more and less skilled workers. Technological change also plays 
a role as many technological improvements have increased the demand for 
skilled labor relative to unskilled labor and therefore have resulted 
in larger wage growth for more skilled workers. In any case, there does 
not seem to be a simple policy solution to the widening gap between 
more skilled and less skilled workers. Moreover, it is not at all clear 
that the U.S. can reverse the trend toward increased globalization or 
that we would be better off if we did.
    I do not believe that drastically increasing taxes on the rich 
would be a desirable or effective means of attempting to reverse the 
effects of increased competition from foreigner workers on the widening 
gap in household incomes. Most importantly, this would decrease the 
incentives to work and invest, and may be detrimental to U.S. economic 
growth. Moreover, given the progressivity of the current federal income 
tax system, it is not clear that such a policy would be supported 
politically. In 2003, the top one percent of taxpayers ranked by 
adjusted gross income (AGI) paid 34.3 percent of all personal income 
taxes. The top five percent of taxpayers paid 54.4 percent of all 
personal income taxes. Taxpayers that ranked in the top 50 percent of 
taxpayers paid 96.5 percent of all personal income taxes in 2003. In 
fact, the top 50 percent of taxpayers have paid more than 95 percent of 
all personal income taxes in every year since 1993. The President's 
Advisory Panel on Federal Tax Reform estimated in 2006 that the bottom 
50 percent of tax filers would have a negative average tax rate and 
that over 30 percent of tax filers would have no tax liability or 
receive a refund. In addition, 15 million households would not be 
required to file an income tax form. This implies that over 40 percent 
of families would have no liability or received a refund.
    However, this does not imply that nothing should be done. Increased 
competition from abroad threatens the security of many workers in the 
U.S. as businesses struggle to compete with low cost foreign producers 
for customers and capital. This has created a situation of increasing 
financial insecurity for many U.S. citizens. At the same time, this 
process reduces prices for goods and services that U.S. residents 
consume and thus increases the well being of many U.S. residents. While 
competition and production efficiency are necessary for long run growth 
and increased economic well being worldwide, the shifting economic 
landscape that leads to a more global world economy is certain to 
increase insecurity and reduce the well being of some U.S. workers 
during the transition phase. Thus, policymakers and U.S. businesses 
will face the chore of ensuring that U.S. workers have the opportunity 
to adapt in this ever changing environment by engaging in education and 
training to learn new skills. The role of tax policy should be to 
ensure that U.S. businesses remain competitive. For example, reforming 
the corporate tax system to reduce the burden of capital income 
taxation and costs of tax compliance is imperative to maintaining the 
competitiveness of U.S. businesses. In addition, transforming the role 
of unemployment taxes and the benefits and training that U.S. workers 
receive in spells of unemployment may also be an important course of 
action to help U.S. workers cope with increased competition from 
abroad.

[GRAPHIC] [TIFF OMITTED] T3825A.036

[GRAPHIC] [TIFF OMITTED] T3825A.037

    Data Source: U.S. Census Bureau, Current Population Reports, P60-
231, ``Income, Poverty, and Health Insurance Coverage in the United 
States: 2005.''

                                 

    Chairman RANGEL. Thank you so much.
    Dr. Regalia, I am concerned about the fact that trade, U.S. 
trade, is appearing not to be nearly as popular among the 
American people. There are complaints that we are transferring 
jobs from the United States overseas, that we are the losers in 
these trade agreements. Then others would say that we are 
losers because of changes in technology and the needs of our 
businesses.
    Knowing the Chamber's strong support for free trade, do you 
believe that in addition to the U.S. Trade Representative, that 
our team, in order to sell a particular free trade agreement to 
the Congress, should include people that would be specifically 
dealing with the problems that communities are having, such as 
Buffalo and other parts of the country, so that when a citizen 
or politician sees these losses, it is not all attributed to 
our trade policy?
    Mr. REGALIA. Well, Mr. Chairman, I am not the Chamber's 
resident expert on the Chamber's trade policy. I will try to do 
the best I can to answer your question.
    I think that when we look at trade in a global sense, it is 
an overwhelming benefit to the U.S. economy. Much of that 
benefit occurs to U.S. consumers. It has been estimated that 
the increase in purchasing power over the last 15 to 20 years 
per family can be as much as $1,500 to $2,000, which is a 
considerable benefit to the entire consuming economy.
    The openness of the global economy today does cause 
dislocations in certain areas, and increased trade can lead to 
job dislocations in specific areas. I think when that happens, 
it is imperative that we address those issues to try and 
reincorporate the displaced workers, reeducate them if 
necessary, and bring them back into the productive workforce as 
quickly as possible, and to help them transition from their old 
job to the new job.
    The question of how to do that is long and involved. I 
think that the goal of reincorporating those workers is clearly 
in the best interests of the U.S. economy, and is part of the 
Chamber's policy toward trade.
    Chairman RANGEL. We could better sell why trade is so 
important.
    Mr. REGALIA. Yes, sir.
    Chairman RANGEL. So, it should be on the table.
    Mr. REGALIA. Yes, sir.
    Chairman RANGEL. Let me ask Mr. Trumka, the same way the 
Chamber appears that they have never seen a trade agreement 
that they didn't like, one might say that the unions never saw 
one that they did like.
    If there was a trade agreement and it appears as though the 
consumers would have increased purchasing power, and it was 
generally accepted that technology almost dictated that America 
should be competitive, could you outline some of the things 
that labor leaders would look for, in addition to just a trade 
agreement, to alleviate the negative impact that that agreement 
would have on American workers?
    Mr. TRUMKA. Thank you, Mr. Chairman. The first thing we 
would look for is whether there would be enforcement in general 
of any trade agreement. Over the last several years, we have 
seen trade agreements that have not been enforced--the Chinese 
trade agreement that we have. They manipulate their currency. 
They get a major advantage over American manufacturers.
    There are other things that they could be doing to enforce 
that agreement. So, the first thing would be general 
enforcement of the trade agreement. Second would be whether 
workers' rights would be treated the same as intellectual 
property rights, whether there would be some mechanism in a 
trade agreement that would allow us to enforce those rights so 
that globalization doesn't continue to skew the imbalance that 
currently exists between employers and employees.
    Third, we would look for the Tax Code, what the Tax Code 
would do, whether it would continue to reward people that took 
jobs offshore or not. We would continue to do that. We would 
also look for environmental things in the agreement as well 
because the environmental costs put us--if no other nation has 
to comply with them, put us at a disadvantage as well.
    So, we would look for an agreement that, one, enforces and 
treats workers' rights with the same authority as any other 
right, property right, in the agreement, similar to the 
Jordanian agreement. We did support that agreement, Mr. 
Chairman. Those are the type of things we would be looking at.
    Chairman RANGEL. I hope you would think, though, in 
addition to that, since it is difficult to sell these trade 
agreements politically here based on how we are improving the 
quality of life of foreign workers. It would be even more 
difficult to sell it to members who represent a city that was 
going through just an economic depression. It appear as though, 
as the doctor said, that if we could do something meaningful 
for workers who are out of work, that it might not cause trade 
to have the sting where it does, and that is as job losers 
here.
    So, if you could draft something and get your office to 
think of things that would allow us to believe that we are not 
losers, but that we all can gain through trade, besides the 
things you already testified, it would be very helpful as we 
move forward.
    Mr. TRUMKA. Mr. Chairman, that is precisely why we are 
calling for a strategic pause in trade agreements, so that we 
can figure out how to correct the agreements both 
internationally and domestically, things that we can do to help 
people on both sides of the border as well. So the American 
people become the winners.
    We have lost 3.5 million manufacturing jobs since 2000, the 
vast majority of which are from trade agreements, the trade 
agreements that have been unevenly enforced and unevenly 
applied to the various rights of workers. So, we are calling 
for a strategic pause where we can have this dialog with labor, 
government, and business to figure it out.
    We are not anti-trade. However, the rules that have existed 
to date have inured to the disadvantage of the American worker.
    Chairman RANGEL. Well, Mr. McCrery and I have agreed that 
in addition to these hearings, from time to time we are going 
to have forums where people can sit around the table and talk 
about winners and losers and how we can make it more equitable 
for American workers as we try to protect those abroad.
    Mr. McCrery.
    Mr. MCCRERY. Thank you, Mr. Chairman. I think your question 
is an excellent one, and especially put to Dr. Regalia 
representing the U.S. Chamber because it is a fact, I believe, 
that support generally around the country for trade agreements 
has diminished over the last few years. It is incumbent upon 
the business community, if they are convinced that it is in 
their best interests and the nation's best interests to expand 
trade through trade agreements, they have got to help point out 
the benefits of those.
    They also have to help, I think, cure some of the symptoms, 
or at least what people think are symptoms, of trade 
agreements, which is job loss. You mentioned Buffalo. I don't 
know if that is a good example, but it could be--places like 
that. Business has got to be involved in providing solutions to 
the displacement caused by massive job loss; whether it is 
because of trade or not, trade gets blamed.
    I happen to believe trade is not to blame. Mr. Trumka, your 
example of China is a good one because we don't have a trade 
agreement with China. If you look at the countries we do have 
trade agreements with, I believe the data will indicate that 
our exports to those countries have increased substantially 
since we entered into those trade agreements. Increased exports 
means increased jobs due to those trade agreements.
    That is maybe a subject for another hearing that we should 
get into. It is, I think, part of this phenomenon of the income 
gap and so forth that we do need to look at. It is a part. It 
is a piece of the puzzle.
    Dr. Diamond, is there anything that the other panelists 
said that you would like to address in particular? I noticed 
you scribbling some notes as they were talking. Is there 
anything that you would like to address in particular?
    Mr. DIAMOND. I would probably make one point on----
    Mr. MCCRERY. Is your microphone on?
    Mr. DIAMOND. I would probably address one point on this 
issue of trade, and start by saying that while trade is 
important, I don't think it is by any means the most important 
factor that is affecting the American worker. The three factors 
I mentioned, I think, are all more important. I think 
deregulation is more important.
    I think the economic literature generally finds that U.S. 
trade has had a small effect on U.S. workers' wages. I think 
there are larger effects associated with immigration and 
outsourcing that we are currently seeing.
    So, I think the trade debate is kind of old and we should 
move our focus somewhere else because we are not going to be 
able to--whereas we can control trade agreements, it is a much 
more difficult problem to deal with businesses that are taking 
jobs overseas. If our only mechanism is to punish them by 
raising their taxes, all we are going to do is force more jobs 
overseas.
    So, to the extent that people phrase it as the Tax Code 
benefits firms that takes jobs overseas, I think that is kind 
of a misleading statement and we need to just recognize that 
U.S. businesses are in a very competitive environment. They are 
doing their best to compete with foreigners who are actively 
trying to get a piece of the pie, just like lower income 
workers in the United States want a larger part. Poor countries 
around the world want a bigger piece of the world pie. These 
are not easy problems that we can solve with a simple tax 
increase, and we need to think outside of the box.
    Mr. MCCRERY. Thank you. Implicit in your comment about 
outsourcing and your comment about the lack of importance in 
trade and the job situation is that the outsourcing is due not 
to trade agreements but to other factors. You mentioned a 
couple of them.
    Mr. DIAMOND. That is correct.
    Mr. MCCRERY. Health care. Mr. Trumka, I believe, one of the 
reasons that workers' wages have not increased more than they 
have is because employers are spending more and more on health 
care benefits. Would you agree with that or disagree with that?
    Mr. TRUMKA. I would agree that one of the reasons why wages 
haven't increased is because of health care and the lack of a 
health care policy in the country. Yes, more and more is being 
spent on health care for worse and worse results. If you look 
how much we spend and what we get out of it, where we are with 
infant mortality, mother mortality or maternal mortality, 
things of that sort----
    Mr. MCCRERY. I don't have any quarrel with that. I don't 
have any quarrel with that. You agree with me. So, one 
important thing----
    Mr. TRUMKA. I agree that----
    Mr. MCCRERY. One important thing that we could do, we could 
do together, to help the future of wages in this country is to 
take that burden of health care off of the employer community 
and allow them to pay their workers in wages what they are 
worth, and not worry about the health care benefit, assuming 
that we could find some suitable replacement for the employer 
community to provide that to people in this country.
    Mr. TRUMKA. I would agree that that would be part of the 
solution. Trade would be part of the solution. A manufacturing 
policy to help American manufacturers would be part of the 
solution to it. It is not simple at this time, but there are 
more solutions. Yes, health care is an important ingredient in 
that solution.
    Mr. MCCRERY. Thank you.
    Chairman RANGEL. Mr. Levin.
    Mr. LEVIN. Thank you, Mr. Chairman. We are going to be 
talking about trade, Mr. Chairman, next week. Right? So, we are 
going to be talking about trade next week. I think it is useful 
to have raised it, but I will refrain from discussing it except 
to indicate the importance of addressing the question of 
whether and how we shape trade agreements, and not only how we 
handle the problems of those who don't benefit from them.
    By the way, the numbers on the trade deficit have dropped a 
bit these last few months. I just want to remind everybody of 
the overall trade deficit figure. In 2004, it was 611 billion, 
in 2005, 716 billion, and the projection now for 2006 is 765 
billion.
    So, we face a major trade deficit issue, I think. Mr. 
McCrery, it is true in a few cases our surplus has gone up 
after trade agreements. However, with our largest trade 
partners, we have seen a major increase in our deficit.
    Mr. MCCRERY. If the gentleman will yield just a second.
    Mr. LEVIN. Yes.
    Mr. MCCRERY. I don't doubt that. What I said was exports 
from this country have gone up with our trading partners that 
we have agreements with, and that creates jobs.
    Mr. LEVIN. True. However, while the exports have gone up, 
the imports have risen dramatically. You can't just take one of 
the two. Look, we will have a chance next week to talk about 
trade.
    So, let's, if I might, in addition to the appropriate focus 
on trade, spend a few minutes talking about income distribution 
because I think the Treasury Secretary and the Federal Reserve 
Chairman have spoken about this. It was somewhat new to hear 
them talk about it.
    Dr. Spriggs, I think what you have pointed out needs to be 
discussed among the five of you. It is not only the lower 50 
percent, but I think as you say it is more accurate to talk 
about the 80 percent. There has been a disconnect between 
productivity and income.
    So, why don't you talk about it a bit. I saw a figure. It 
was so striking I am having it checked out. This was an article 
based on Census Bureau income figures in 2004, the latest ones 
that are complete. Here is the quote. ``The very top 
households, which include about 300,000 Americans, reported 
significantly more pretax income combined than the poorest 120 
million Americans earned in 2004, a sharp change from 1979.''
    So, talk--you have just a few minutes of my time--about 
what has been happening and its import. Maybe, Dr. Spriggs, you 
want to lead off, and others join in.
    Mr. SPRIGGS. Thank you, Congressman. Well, it has profound 
implications. We talk about the tax burden on those at the top 
half of the income distribution. They have the income. It is 
almost--that is where the money is. So of course they are going 
to have the highest tax burden. They have overwhelmingly most 
of the money.
    The disturbing trend, and having productivity growth only 
go to those at the top, means that we have lost what our labor 
market institutions used to do, create for us shared 
prosperity, so that all Americans could easily believe that 
policies are really for the benefit of all Americans.
    The issue of the growth in income inequality is a belief on 
the part of many Americans that we don't have policies that 
benefit everyone, in absolute terms, and during this recovery, 
in absolute terms, those in the bottom 80 percent have lost. So 
it appears that you are passing policies that are sort of a 
winner-take-all, and we are going to only benefit those at the 
top.
    It has real, profound implications when you think about tax 
policy. Now, today, we have the smallest share of national 
income is in the form of earned income. So, to constantly harp 
on taxing earned income means that you are increasing the 
burden on the shrinking share of national income, not only the 
growing share of national income. So, there is that 
implication.
    As you know because you are so involved in the Social 
Security debate, the growth in inequality has profound 
implications on the revenues for the Social Security system. We 
based the tax for that system assuming that we would be taxing 
90 percent of the wage income. As a higher and higher share of 
income growth goes only to those at the top, we are taxing a 
shrinking share of the wage base and creating a bigger deficit 
for Social Security than we anticipated in 1981 when we put the 
changes in.
    So, there are profound implications about how we think 
about the tax structure. Because those in the bottom 80 percent 
have been trying in the last five years to maintain their 
living styles by trying to maintain their consumption levels, 
they have been doing that by borrowing. That is not 
sustainable.
    We will have to deal with how they get out of debt. How 
Congress respond to this debt burden that has been taken on is 
really important because if trends don't reverse and people 
will have lower permanent incomes, they are going to have to 
lower their consumption level.
    The problem is going to be they are going to lower their 
consumption level at their retirement age, when they are facing 
less certainty about their private pension. They will have 
lower savings because at the current moment they are dis-
saving. They are taking away from their savings. They are 
taking the equity out of their homes.
    So they are going to be in a much weaker position to self-
insure themselves in terms of health insurance and in terms of 
pension or income insurance that people try and do on their 
own. These are profound effects that really have to be 
addressed.
    Mr. LEVIN. Thank you. Thank you, Mr. Chairman.
    Chairman RANGEL. Thank you.
    Mr. Herger.
    Mr. HERGER. Thank you, Mr. Chairman.
    I want to thank each of our witnesses. I would like maybe a 
comment, if I could, from maybe Dr. Diamond and Dr. Regalia on 
the importance of trade, the fact that our Nation is the number 
one trading Nation in the world, far more than any other 
nation.
    My own district, even though it is one of the richest 
agricultural districts in the world, we cannot eat all the 
rice, the walnuts, the almonds that we grow in northern 
California. We are dependent on export. This is so 
characteristic not just of agriculture but basically our 
manufacturing, our service, our financial, really is a mainstay 
of our economy.
    So often you would think by hearing--and I did not really 
hear that in your testimony, Mr. Trumka, today. I know you 
referred to it briefly in your written testimony--would almost 
conclude that globalization is bad by definition, and that 
workers can be dislocated because of trade. We definitely need 
to be doing more and everything we can to help these workers 
adjust to the realities of our world. However, dislocation is 
really the exception to the rule, and the general rule is that 
globalization has created literally millions of jobs in our 
economy.
    Just using the example with labor, the case of United 
Parcel Service (UPS), every time UPS adds 40 new international 
packages per day into its system, it can add one new job. That 
is going to be good, well-paying jobs with full benefits, 
including health insurance. UPS is the largest employer of 
Teamsters, which comprise two-thirds of their workforce or 
407,000 employees. So, trade does not just create jobs, but it 
creates union jobs as well.
    Dr. Diamond, would you like to comment on this, your 
thoughts?
    Mr. DIAMOND. I agree with you. I think trade is very 
important to sustaining economic growth in the United States. I 
think the tax system has a role to play, and that we need to 
simplify the tax system.
    I think one of the things that globalization has caused is 
it is harder and harder for firms to--or it has become more 
complex to tax the income related to multinational firms. I 
think if the tax system is not restructured, we are going to 
continue to see a growing burden in terms of complexity, 
compliance cost on corporations in how they calculate income 
that comes from as many as five, six, seven, eight countries 
for the multinational firm.
    So, I think we need to think about reforming the corporate 
income tax in terms of, A, global income taxes; corporate 
income taxes around the world are decreasing. B, we need to 
make sure that we reduce tax complexity so the compliance costs 
on corporations are reduced.
    Mr. HERGER. Well, I thank you. I would like your comment as 
well, Dr. Regalia. Let me state a goal that I certainly have. I 
think Chairman Rangel summed it up. I think this is tragic 
because it seems like we have labor unions on one side that 
seem to be against any trade--it would appear that way--against 
any trade agreement; and then we have business on the other 
side that seems to be for everything, as Chairman Rangel said.
    I believe it is in our interests that we be working 
together. I believe that we look at the example of UPS, and I 
believe this is characteristic of so much in business, that we 
have so much more to gain if we can lock hands and work 
together to help those that are dislocated maybe move to areas 
where we can compete better and help everybody.
    Dr. Regalia, would you like to comment?
    Mr. REGALIA. Yes. I think that when you look at trade, as I 
said, the gains from trade accruing to the entire economy are 
overwhelmingly positive. Even many of the researchers that have 
looked at some of the issues of trade on wages and immigration 
on wages and outsourcing on wages, all of which are generally 
treated in a negative vein and are all parts of the same puzzle 
because the outsourcing, the immigration, and trade are all 
parts of the global integration that we are seeing in the world 
economies today.
    So, with 95 or over 90 percent of new markets outside of 
the United States, and with more education and more competitive 
enterprises growing up abroad to compete with our domestic 
industries, it is imperative that we figure out how to stay 
competitive and how to turn trade even more to our advantage.
    However, doing away with trade agreements or suspending 
trade agreements would be counterproductive because while we 
are sitting here not engaging on a global scale, all our 
competitors around the world are. What we have to do is make 
sure that the trade agreements that we enter into are enforced. 
The Chamber is very much in favor of enforcing the trade 
agreements and making sure that our trading partners compete on 
a fair basis so that we are not giving away the farm in any 
case.
    To withdraw from engagement, though, on the global stage is 
suicidal in an economic sense. We cannot decide to sit here and 
try to do away with engaging on the global stage. We have to 
learn how to out-compete them. The Tax Code is certainly part 
of that. Additional trade agreements, opening new markets, is a 
part of it; and then figuring out how to deal with those areas 
within our own economy where trade, outsourcing, immigration, 
whatever has caused dislocations or economic problems, and to 
reengage those people in a productive way.
    So, you really have to focus on all the facets of it. 
Pulling back is simply not an option in this day and age.
    Mr. HERGER. Thank you.
    Chairman RANGEL. Dr. Regalia, no one said we want to pull 
back. You have to understand that when we have a trade bill, we 
don't have consumers coming here knocking at our door saying, 
let's have another FTA because we are the beneficiaries.
    We are trying to help the Chamber to think outside of just 
the merits of that, and to have American people to believe that 
the trade agreements are good.
    Mr. REGALIA. Mr. Chairman, I would----
    Chairman RANGEL. As Mr. McCrery said, if someone thought of 
a job, it doesn't make any difference who they are blaming. 
They blame China on everything, but the truth of the matter is, 
is it good for our economy to have people out of work? The 
answer clearly is no.
    So, wherever the Chamber and private sector can help the 
government to train the people, to have them back to work, to 
come up with programs, not just for the beneficiaries of that 
trade agreement but for America, it would be helpful.
    Dr. McDermott.
    Mr. MCDERMOTT. Thank you, Mr. Chairman.
    I made the mistake of picking up a book by Jacob Hacker 
called the Great Risk Shift, which I have been reading. 
Listening to you gentlemen today, I ask myself, in one specific 
area we have obviously shifted the risk in this society from a 
societal handling of risk to individuals and said to them, you 
are on your own, folks. We are gradually doing it in Social 
Security, and we are doing it in health care. We are doing it 
in retirement. We are doing it everywhere.
    The President tonight is going to talk about health care. 
The big business guys are now coming around here for the first 
time in a long time saying we are spending more on health care 
than we are on steel, or we are spending more on health care 
than we are on this or that. They want the government to help.
    The President is going to suggest tonight we ought to give 
tax breaks to the working people who don't have--the 46 million 
who don't have health insurance. I would like to hear whether 
you really think health care is a big issue. Is it one that we 
ought to deal with in this society, or is it one that we ought 
to just play with the Tax Code and hope for the best for the 
folks floating around out there?
    I would like both Dr. Spriggs and Mr. Trumka to at least 
give your view of that.
    Mr. TRUMKA. Well, first of all, health care absolutely must 
be dealt with for a number of reasons. Number one, when you 
have 46 million Americans who don't have health care, you have 
a problem on your hands. Two, when you have a health care 
system that you spend more than twice what anybody else in the 
world spends on health care, and you have results that are 
nowhere near as good, you have a problem on your hand.
    The problem we have seen, we doubt ourselves. Americans 
doubt ourselves when they know that they are having a problem 
with health care. Their drug costs are continuing to rise, and 
yet this Congress passes a bill that says that the government 
can't negotiate down drug costs. They can get the same drug by 
going to Canada, the same exact drug from the same manufacturer 
in the same packaging, and it will cost them half as much. They 
wonder where they have been left out.
    To fool with the Tax Code, the proposal that we hear 
tonight is, quite frankly, another proposal for the rich. It 
will actually hurt people at the bottom. Let me give you a 
couple of concrete examples.
    Right now, two out of three Americans get their coverage 
from employers. This will erode employer coverage because 
employers may either shift more costs onto workers, as they 
will have to when they lose their deduction here, or they will 
eliminate coverage altogether. They will send workers off to 
buy their own coverage with the new deduction.
    Now, here is what happened. Since workers can take the full 
amount of the deduction for buying coverage on their own 
regardless of the costs of the plan, younger and healthier 
workers will buy the cheapest, most bare bone proposal. Older 
workers, people that come under the industry that I came out 
of, the mining industry, that are spent, their health is spent 
during their working years, will have an adverse selection.
    The younger workers will be going out of those plans. Those 
plans will cost more. Then the people at the bottom don't 
enough money now to pay for health care, and the deduction that 
is going to subsidize them of 10 to 15 percent of their premium 
cost isn't really going to help them.
    According to the census data, two-thirds of the uninsured 
have low incomes. That is below 2000 percent or $2,700 for a 
family of three. They either owe no Federal taxes or they are 
in a very low tax bracket, no more than 15 percent. That means 
the Bush deduction would subsidize between zero and 15 of their 
premium, not enough----
    Mr. MCDERMOTT. Could you let Dr. Spriggs have one minute? 
Thank you.
    Mr. TRUMKA. I apologize.
    Mr. MCDERMOTT. That is all right.
    Mr. SPRIGGS. Thank you, Congressman. I think at least the 
President will highlight something clear, and that is that we 
do have two systems. We think about social insurance, as you 
mentioned, sharing the risk. Then we have self-insurance. 
Through our Tax Code is how we implement self-insurance.
    So, as your Committee is well aware, the tax expenditure of 
the medical deduction is the biggest tax expenditure that we 
have. The next one in size has to deal with how we do self-
insurance for saving for retirement. Those are tax 
expenditures. Because we don't make them explicit, we often 
don't make the comparison between what is it really costing us 
from the fiscal side of self-insurance versus social insurance.
    So at least the President is going to get us finally 
talking about what is the cost of this self-insurance model, of 
the ownership society. That will make it explicit. The real 
problem our Nation faces is the rising cost of health care, and 
that is whether you--no matter how you pay for it, that is the 
big issue, and what share of our National income can we devote 
to health insurance, whether it comes from private sources, 
whether it comes from the government. The issue is, can we have 
a growing share of national output devoted simply to health 
care.
    So the Congress is really going to have to confront what do 
we do with that rising amount of money regardless of who pays 
for it that is going to go to health insurance. Then you need 
to ask what is the most efficient way of delivering that health 
insurance.
    Given the large amount of money that in the United States 
that goes simply to administrative cost, not to health care 
cost, we have to think seriously about whether the current 
system and the large amount of money that goes simply to 
administrative cost and not directly to health care cost should 
be thought about.
    The Medicare system, for instance, has a lower 
administrative cost than our private health insurance companies 
currently have. So, when people say that entitlements are the 
problem, well, entitlements would be the problem if Medicare 
had huge administrative costs.
    So, Congress needs to think about efficiency and the 
delivery of the system, how much is going to go to 
administrative cost. You have to think about how do we rein in 
those increasing costs. We need to put on the table the tax 
expenditures that undergird this idea that people can self-
insure themselves, and the idea that we are going to give more 
tax breaks or have tax-preferred saving accounts, which are tax 
expenditures, and----
    Mr. MCDERMOTT [Presiding.] I will have to cut you off.
    Mr. SPRIGGS. Yes. I may.
    Mr. MCDERMOTT. Thank you.
    Mr. SPRIGGS. That is the comparison we need to be making.
    Mr. MCDERMOTT. All right. Mr. Camp.
    Mr. CAMP. Thank you. I just have a couple questions.
    Dr. Diamond, in your statement you mention the top half of 
taxpayers pay 95 percent of all taxes. What income level is 
that?
    Mr. DIAMOND. I think they earn about 75 percent of all 
income. It is----
    Mr. CAMP. What dollar amount?
    Mr. DIAMOND. --about 50 percent of taxpayers. So, they 
pay--they are the top 50 richest taxpayers. I am not sure of 
the income share.
    Mr. CAMP. What income level would that be to put you in 
that category? Does anybody know?
    Mr. DIAMOND. Probably 40-, $50,000.
    Mr. CAMP. Between 40- and $50,000?
    Mr. DIAMOND. Yes.
    Mr. CAMP. Dr. Diamond, do you know?
    Mr. REGALIA. It is 30,000.
    Mr. CAMP. $30,000? In income?
    Mr. REGALIA. Yes. Adjusted gross income threshold on 
percentile for the top 50th percentile, $30,122.
    Mr. CAMP. $30,122 places you as a taxpayer in the United 
States in the top half?
    Mr. DIAMOND. That is correct.
    Mr. CAMP. All right. Does that statistic take into account 
the age of the workers in that pool or the number of workers 
per household? For example, at top income levels, many 
households have two working families as opposed to at lower 
income levels often have one work-earner per household. Is that 
offset anywhere in that statistic, or can you just help me 
understand that?
    Mr. DIAMOND. It is not really in this. It is just a--so a 
tax filing unit files a tax form. It will have--if it is a 
joint return, all the income will be reported jointly. It is 
not broken out.
    Mr. CAMP. So, nothing is taken into account that at the 
very top levels, you have two earners as opposed to one. So, 
you are really comparing two different aspects of--two 
different kinds of earners, frankly.
    Mr. DIAMOND. That is correct.
    Mr. CAMP. Is there anything that takes into account the age 
of the workforce now as you compare these trends? Now the baby 
boomers are at the peak of their earning capacity, so we have 
more people potentially in a higher earning category. Is that 
taken into account when you compare what is trending now as 
opposed to the previous trends? Is there a comparison of that?
    Mr. DIAMOND. Not in this data, no. However, you can find 
data. There is data that you can look at these trends with.
    Mr. CAMP. Is that a factor?
    Mr. DIAMOND. I couldn't say right off the top of my head.
    Mr. CAMP. Is there anything to suggest that the mobility 
between one income--These are clearly a snapshot of workers at 
one time. Is there anything to suggest in the data that the 
mobility between one income level and another is more difficult 
or that it is harder to get ahead?
    Mr. DIAMOND. I can say that when we talk about wage 
inequality, that family structure--and we have continually 
talked about the diverging wage rate across income groups. 
However, the wage rate is only a small part of explaining 
family income differences. Other factors would include 
divergence in other income sources; changes in employment or 
labor hours; and, most importantly or one of the most 
important, would be changes in family structure.
    What you have occurring is at the high end, you often have 
two workers working lots of hours, each making a lot of money. 
Therefore, they end up being in a very high earner group. On 
the bottom end, you have a lot of--more and more we are 
shifting to more single families. So, family structure is an 
important component of this trend in income inequality that we 
should look at.
    Mr. CAMP. So, there is--yes, Doctor?
    Mr. REGALIA. There is a study that just was released in 
July of 2006 by the Bureau of Labor Statistics on ``Earnings 
Mobility: Low Wage Workers in the United States.'' Their top 
line finding is that the persons initially with low income who 
work full time, remain in good health, and receive more 
education exhibit upward earnings mobility, significant upward 
mobility.
    It says the picture is quite opposite, however, for those 
who are not working who start out at the lowest end of the 
income distribution and do not receive any additional 
education. They almost certainly stay in the lowest income 
quintile.
    Mr. CAMP. So, it would be fair to say that there is no 
evidence to suggest it is harder to get ahead if you work hard 
at school and at your job?
    Mr. REGALIA. Absolutely not. In fact, the conclusion is 
that if you get a job, stay in the job, work hard, and get more 
education, you will move up in the income distribution.
    Mr. CAMP. Thank you. Yes, Doctor?
    Mr. DIAMOND. I have actually done research on lifetime--
looking at lifetime income in different groups, where you 
separate the groups into ten deciles, the highest decile and 
the lowest decile. There are many low income workers that out-
save the highest income people, depending on their----
    Mr. CAMP. All right. Thank you. My time has expired.
    Mr. Chairman, I would just ask to submit to the record an 
article by Alan Reynolds on this topic.
    [The article follows:]

Class Struggle?
by Alan Reynolds

    Alan Reynolds is a senior fellow with the Cato Institute and a 
nationally syndicated columnist.
    Major newspapers are in the throes of Mobility Mania: who ``makes 
it'' in America, and why; who doesn't, and why not. The Wall Street 
Journal began a series last week titled ``Challenges to the American 
Dream.'' The New York Times followed suit with a multiparter on ``Class 
in America,'' which aims to disparage the notion that the United States 
is a land of opportunity by claiming that ``new research on mobility, 
the movement of families up and down the economic ladder, shows there 
is far less of it than economists once thought and less than most 
people believe.''
    Yet the scholarship commonly cited in support of such assertions--
new research by Gary Solon of the University of Michigan, David I. 
Levine of Berkeley, and Bhashkar Mazumder of the Chicago Fed, among 
others--says no such thing. A paper last fall by Mr. Solon observed 
that several of the newest estimates, including two from Messrs. Levine 
and Mazumder, suggest that it has become substantially easier to move 
from one economic class to another (as a 1997 Urban Institute study 
also concluded). Those new results were statistically weak, however, 
and an alternative estimate from Messrs. Levine and Mazumder pointed in 
the opposite direction--implying family background might have grown 
more important between the early 1980s and early 1990s. But they 
described the latter result as merely ``suggestive,'' and Mr. Solon now 
suspects the data were distorted. As for the latter's own research, he 
concluded that ``our estimates are still too imprecise to rule out 
modest trends in either direction.''
    The discovery that something has not changed, or might have moved 
imperceptibly in either direction, would not normally be considered 
front-page news. But income distribution is an agenda-driven 
ideological fixation that frequently impairs journalistic judgment. To 
fully understand this non-news about unchanged class mobility, it helps 
to focus on a few reasons why some people earn more than others--they 
work harder, and have more experience and/or more schooling. Some 
observations:

      Households with two full-time workers earn five times as 
much as households in which nobody works. Median income for households 
with two full-time earners was $85,517 in 2003 compared with $15,661 
for households in which nobody worked. Median income for households 
with one worker who worked full-time all year was $60,852, compared 
with $28,704 for those who worked part-time for 26 weeks or less.
      Alan Blinder of Princeton emphasized this point in a 1980 
study: ``The richest fifth of families supplied over 30% of the total 
weeks worked in the economy,'' he wrote, ``while the poorest fifth 
supplied only 7.5%. Thus, on a per-week-of-work basis, the income ratio 
between rich and poor was only 2-to-1. This certainly does not seem 
like an unreasonable degree of inequality.''
      Experienced supervisors earn twice as much as young 
trainees. Median income for households headed by someone age 45 to 54 
was $60,242 in 2003, compared with $27,053 for those younger than 24. 
When we define people as poor or rich at any moment in time, we are 
often describing the same people at earlier and later stages of life. 
Lifetime income is a moving picture, not a snapshot.
      Those with four or more years of college earn three times 
as much as high school dropouts. Median income for college grads was 
$68,728 in 2003, compared with $22,718 for those without a high school 
diploma.

    To repeat, there is no evidence that it has become harder to get 
ahead through hard work at school and on the job. Efforts to claim 
otherwise appear intended to make any gaps between rich and poor appear 
unfair, determined by chance of birth rather than personal effort. Such 
efforts require both a denial that progress has been widespread and an 
exaggeration of income differences. To deny progress, the Times series 
claims that ``for most workers, the only time in the last three decades 
when the rise in hourly pay beat inflation was during the speculative 
bubble of the 90's.'' Could anyone really believe most workers have 
rarely had a real raise in three decades? Real income per household 
member rose to $22,966 in 2003 from $16,420 in 1983 (in 2003 dollars)--
a 40% gain.
    To exaggerate inequality, the authors claim that ``the aftertax 
income of the top 1 percent of American households jumped 139 percent, 
to more than $700,000, from 1979 to 2001, according to the 
Congressional Budget Office.'' But that is mainly because the CBO 
subtracts corporate income taxes from its idiosyncratic measure of the 
``comprehensive income'' of individual stockholders. Because the top 
1%'s share of corporate taxes rose to 53.5% in 2002 from 35.6% in 1980, 
the CBO records that as an increasingly huge individual tax cut and 
therefore as an invisible increase in stockholders' after-tax incomes. 
Arbitrarily subtracting corporate taxes from after-tax incomes of 
investors has nothing to do with labor income, though occupational 
mobility is the essence of the income mobility debate.
    Since the Census Bureau overhauled the way it counts income in 
1993-94 (making the figures incomparable with prior years), the share 
of income earned by the top fifth rose to 49.8% in 2000-03 from 49% in 
1993-94. Because differences in household income can largely be 
explained by the number of workers and their education, it follows that 
a rising share of income earned by the top fifth of households should 
be largely explainable by work and education.
    There are two workers per household in the top fifth of income 
distribution, but fewer than one in the bottom fifth, which relies 
heavily on transfer payments that generally keep pace with inflation. 
Yet by definition, rising real wages mean incomes of two-earner 
families rise more rapidly than inflation. Real median income among 
families with two full-time workers was $85,517 in 2003 and $75,707 (in 
2003 dollars) in 1987--a 13% increase. But median income among families 
in which neither spouse worked ($27,130 in 2003), was just 1.4% higher 
than in 1987. The gap between two-earner families in the top fifth and 
no-earner families in the bottom must grow wider when salaries rise in 
real terms.
    It is statistically dubious to compare long-term growth of average 
income in any top income group with growth below. Only the top group 
has no income ceiling, and the lower income limit defining membership 
in that top group rises whenever incomes are rising. In 2003, a 
household needed an income above $86,867 to make it into the top 20%, 
but an income above $68,154 (in 2003 dollars) would suffice in 1983. 
When the Census Bureau averaged all the income above $86,867 in 2003, 
they were sure to come up with a larger figure than in 1983, when the 
average was diluted by including incomes nearly $20,000 lower.
    The endless academic fascination with murky income distribution 
figures generally ignores differences in work effort and focuses on 
formal schooling--a wider ``skill premium'' between those with and 
without a college degree. And when it comes to differences in 
schooling, we can't talk sensibly about the struggles of poorly 
educated people without mentioning immigration: 52% of male immigrants 
from Latin America did not finish high school (usually in their home 
countries, though we count many as United States dropouts). Most were 
legal immigrants because they had relatives here. Because the United 
States has humanely imported millions of poorly educated people in 
recent decades, it is unreasonable to compare U.S. income mobility with 
countries--e.g., Germany--that are far more restrictive about admitting 
unskilled immigrants.
    A kernel of truth within the income mobility confusion is that good 
parenting matters to a child's lifetime success. Economics Nobel 
laureate James Heckman notes that ``good families promote cognitive, 
social and behavioral skills,'' but ``single-parent families are known 
to produce impaired children who perform poorly in school, the 
workplace and society at large.'' Yes, there are many attentive parents 
with low incomes who spend hours reading to toddlers, and there are 
negligent parents with high incomes. But many dysfunctional families do 
have low incomes, and collecting more taxes from functional families in 
order to send more transfer payments to dysfunctional families can have 
perverse results. Mr. Heckman points out that ``generous social welfare 
programs . . . discourage work and hence investment in workplace based 
skills. . . . Subsidizing work through the EITC . . . can reduce the 
incentives to acquire skills and so perpetuate poverty across 
generations.''
    Recent ``news'' reports implying it has become more difficult for 
young Americans to live better than their parents fail to identify any 
genuine problem. And they suffer from one added handicap: They are 
demonstrably untrue.
    This article appeared in the Wall Street Journal on May 18, 2005.

                                 

    Chairman RANGEL. Mr. Lewis.
    Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman.
    Mr. Chairman, I want to thank the members of the panel for 
being here today. As a Nation and as a people, we are spending 
millions and billions of dollars on bombs and missiles and guns 
and wars while hundreds and thousands and millions of our 
fellow citizens are not sharing in the American dream. I think 
Dr. Zandi, Mr. Trumka, Dr. Spriggs, you all indicated that 
hundreds of our citizens are being left out and left behind.
    How can we use the Tax Code for the common good, for the 
greatest good of all Americans? I think one of you indicated we 
have people who are living in the same city, in the same State, 
our large urban centers, in rural America. What do we do to 
include people that are left out and left behind?
    It is an unbelievable gap. The working poor, people who are 
striving and struggling to stay in the middle class. They do 
not feel like they are going anyplace. They are standing still, 
or running in place, maybe. Dr. Zandi?
    Mr. ZANDI. Well, my view is that the Tax Code should not be 
used exclusively to address this problem, that spending policy 
is more adept at addressing this issue than tax policy, but 
both tax and spending policy should be considered together as a 
whole.
    Simply looking at tax policy creates significant 
disincentives, incentives that we don't understand, unintended 
consequences. Sort of to try to write this skewing of the 
distribution of income and wealth by using the Tax Code by 
itself I think would be a mistake.
    I think spending policy is more efficacious because I do 
think that at the most fundamental level, the problem is that 
we need to reeducate and retrain workers more quickly as they 
become dislocated as a result of globalization and 
technological change. That can be done through better spending 
policies, more resources, and better-directed resources.
    Having said that, I think though we need to consider both 
tax and spending policies together, that trying to address 
issues with just the Tax Code or just with spending policy in 
isolation is going to create increased budgetary problems in 
the long run, and that we need to consider both together when 
trying to address issues like income and wealth distribution, 
and our budgetary health in the longer run.
    So, if I were addressing this, I wouldn't--my first 
inclination would be not to look at the Tax Code. It would be 
to look at the programs that we have to address this issue. 
What are the resources we are devoting to them and how well are 
they working?
    Mr. LEWIS OF GEORGIA. Mr. Trumka?
    Mr. TRUMKA. I think my first question to my colleague would 
be reeducate and retrain workers for what? Reeducate and 
retrain them to do what, and in what period of time? I have 
heard people say that it will be two to three generations 
before we work our way out of this thing. We don't have two or 
three generations to work our way out of it.
    Now, the Tax Code is a powerful incentive. It rewards 
people that are currently taking R&D, not only manufacturing 
facilities but high tech R&D facilities, offshore. They should 
not be rewarded for doing that. We should figure out a way to 
reward people for building those facilities here.
    One of my other colleagues says we have to learn how to 
compete. It is like competing with your other brother Darrell. 
When they take the same technology that you have and they take 
the same capital that you have and they locate something else, 
it is difficult to compete if the only variable is the wage 
base and trade agreements that don't favor the working people 
of either country.
    So, I think we need to look at very carefully the Tax Code, 
and eliminate those incentives that reward people for going 
offshore, and actually reward people for manufacturing here at 
home. I think you will find strong support for that in the 
business community.
    Mr. LEWIS OF GEORGIA. Dr. Spriggs?
    Mr. SPRIGGS. Well, I think----
    Mr. LEWIS OF GEORGIA. Could you also comment on this 
unbelievable unemployment gap in many of our rural communities 
and inner cities between the African American population and 
the overall population?
    Mr. SPRIGGS. A large part of the wage gap between blacks 
and whites, the bulk of it, is explained by gaps in the 
unemployment rate. We have walked away from trying to solve the 
disparity in unemployment rates for the same level of 
education. For the same level of education, African Americans 
are twice as likely to be unemployed as whites. So, there is a 
huge area of enforcement that we have just ignored when it 
comes to the employment question.
    In response to your original question, I think an important 
rule that the Committee on Ways and Means could adopt would be 
to finally balance the issue of tax expenditures versus 
expenditures so that you get a clear picture.
    For instance, I brought up the health insurance issue. 
There is a tendency to look at Medicaid and Medicare, and you 
do that in one debate. Those are expenditures. Then you have 
the tax expenditure in terms of the tax-favored way we 
currently treat the health insurance premium.
    There is a huge disparity when you look at savings, for 
instance, or health insurance and who benefits from the tax 
expenditure side. There is a difference in the income 
distribution of who benefits from the expenditure side. Only 
when you put the two pictures together can you get a picture of 
what is the total expenditure that we are doing.
    We treat these tax expenditures as if they don't affect 
balancing the budget. We treat Medicare and Medicaid as if they 
do affect balancing the budget, but they both do. It would be 
great for the Committee on Ways and Means to say, every time we 
are going to look at health policy or every time we are going 
to look at saving for retirement, that we are going to put the 
tax expenditure and the income impact, the distribution of that 
tax expenditure, against the income distribution of the actual 
expenditure. We are going to compare what is the total impact 
that we are looking at in terms of our total policy.
    Then you will have a clear picture, and you will be able to 
balance out between those who prefer the ownership society and 
self-insurance versus those who prefer expenditures as a way to 
resolve these inequalities.
    Mr. LEWIS OF GEORGIA. Thank you. Thank you, Mr. Chairman.
    Mr. MCDERMOTT. Mr. English.
    Mr. ENGLISH. Thank you, Mr. Chairman.
    Dr. Spriggs, that was a fascinating exposition on tax 
expenditures. It is always interesting the ideological content 
of some of the analysis that comes before this Committee.
    Dr. Diamond, would you comment on your analysis of the 
notion of tax expenditures and whether that is an adequate lens 
through which we can judge tax policy and all of its dynamics?
    Mr. DIAMOND. That is a hard question to answer. I think we 
can definitely look at a tax expenditure and then look at the 
effects it would have on the U.S. economy in terms of the taxes 
we would have to raise to pay for it or government consumption 
that would be cut.
    It would depend on the expenditure. Different expenditures 
are going to have different effects. One that was brought up 
here today is this----
    Mr. ENGLISH. Reclaiming my time, Dr. Diamond, I realize it 
is a difficult question. I thought maybe you would give us an 
insight on how maybe it is not quite as clean and neat, but in 
your testimony, you cite the need for policymakers to respond 
to globalization's challenges, including labor productivity 
growth and encouraging innovation. Would you say that 
repealing, for example, the corporate Alternative Minimum Tax 
would be a significant step in the right direction with respect 
to increasing labor productivity and encouraging innovation, 
and certainly taking the burden off of certain sectors of our 
economy that are prone to cyclical downturns?
    Mr. DIAMOND. I think corporate tax reform in general would 
be, yes, and I would add to that overall reform of the tax 
system. Because it is not only corporations that compete 
overseas. There are many self-employed individuals, S corps, 
partnerships.
    Mr. ENGLISH. Okay. Since you are not prepared to answer my 
direct question, Dr. Diamond, you discuss in your testimony the 
parallel consideration of international competitiveness and the 
corporate income tax. As you know, the United States runs a 
large current account deficit, which has been mentioned by 
other members of the panel and discussed a little bit here 
earlier.
    One possible reason, unfortunately among several, for our 
disadvantage in the trade area may actually be a matter of the 
design of our tax policy. Currently, every single one of our 
major trading partners enjoys, for example, a border-adjustable 
tax system for their imports and exports, whereas we do not.
    Taking into consideration that some of our largest trading 
partners also fail to apply free market principles to their 
economic and monetary policies, what would be the impact on 
economic growth here in the United States in general if we were 
to utilize border-adjusted taxes as well? In particular, please 
discuss the short- and medium-term impacts, if you can.
    Mr. DIAMOND. I don't think border-adjusted taxes would have 
much of an effect. I think most of that is taken care of 
through the exchange rate. It changes in exchange rates for 
most countries.
    Mr. ENGLISH. So, you think that, say, our exchange rate 
with China adjusts?
    Mr. DIAMOND. Well, now, I was--there is this issue of 
countries that are not letting markets perform. Then yes, you 
have an issue. I think it is important that we address 
countries that don't operate as free markets.
    Dr. Regalia, what is the position of the Chamber on border 
adjustability and taxes, if any?
    Mr. REGALIA. Well, we think that whatever could be done to 
put the United States on the same competitive footing as its 
foreign competitors would be advantage to the U.S. economy. 
That could be done through possibly border-adjustable taxes, or 
it could also be done through addressing the territorial nature 
of our competitors' tax system versus our global nature.
    We double-tax our corporations: The income they earn abroad 
is taxed there. It's taxed when they bring it back. This 
increases the tax burden, and it encourages--it discourages the 
growth within the economy. It's also a part of the border 
adjustability. I don't think border adjustability is the only 
way to do it, but it certainly is one way that would address 
that.
    Mr. ENGLISH. Mr. Trumka, does the AFL-CIO take a position 
on border adjustability? Does it matter that we tax our exports 
in a way that other countries don't, and don't place an equal 
impost on imports coming in representing the cost of our tax 
system?
    Mr. REGALIA. Yes. I think we don't take enough account of 
that. I think we should take into account a number of different 
things. They are worth discussing, particularly if we can make 
them progressive in nature--not regressive but progressive in 
nature. Other countries actually subsidize their products 
through their Tax Code, and I think that should be eliminated 
as well.
    Mr. ENGLISH. Thank you, Mr. Chairman.
    Mr. MCDERMOTT. Mr. Neal.
    Mr. NEAL. Thank you.
    Mr. Trumka, you spoke of extraordinary gains in 
productivity, but at the same time, you mentioned wage 
stagnation. I think the one thing that we might agree on is 
that globalization has put pressure on the whole wage issue.
    Tell me a little bit about why trade adjustment and the 
Assistance Act as it relates to retraining workers has failed.
    Mr. TRUMKA. First of all, the system was so cumbersome, 
there are so few people that qualify under the Adjustment Act 
to get to retraining. It takes a long time to do it. So, that's 
one reason why they fail.
    Second of all, again, what do you retrain people for? If 
you have lost 3\1/2\ million manufacturing jobs and there is 
nothing to retrain them for, you have a difficult problem. 
Everybody keeps saying, retraining is the issue. Retraining is 
the issue.
    If you just look at the markets, if there was such a 
shortage of trained people in this country, wages should be 
accelerating. They are not. They are stagnated. They are 
stagnated for a number of different reasons. We have talked 
about a bunch of them here. Trade is one of them. Health care 
is one of them.
    However, the primary reason for that shift is all the 
policies combined have created an imbalance of power between 
employers and employees. Employers not only send jobs overseas, 
they threaten to send jobs overseas. The threat lowers wages, 
causes workers to take cuts in pay, give up health care, do 
away with their pension plans. All of those things impact us.
    The reason why they haven't worked is I think they are ill-
designed right now and they don't--you can't define them quick 
enough. Not very many people--I don't know the statistics off 
the top of my head, but not many people qualify even though 
they lose their jobs to trade.
    Mr. NEAL. Dr. Spriggs?
    Mr. SPRIGGS. Well, I think they don't work because it 
actually is far more complicated to locate who the losers are. 
The labor market is very dynamic. So, if we shut down a steel 
plant or an auto plant, all of those workers don't end up 
unemployed. They find other employment.
    So, the worker who ends up losing their jobs may well be a 
worker who is out-competed by a skilled, experienced worker. 
So, it may be a young worker who can't find the job because 
suddenly there is someone with 15 years' experience in front of 
them in line.
    So, it is much more diffuse than the workers at that old 
plant who need the retraining and a new opportunity. It is the 
young worker who thought they were going to get the job who may 
need the retraining because they may have tried to prepare 
themselves for that job.
    So, it is not so straightforward to locate the actual 
workers impacted because of this diffuse nature of the response 
because of the dynamic nature of the labor market. We have not 
really put together an unemployment insurance system aimed at 
this kind of labor market. We design an unemployment system 
based on the 1930s model based on a previous century, where 
business cycles were dominated by buildup in inventory in 
manufacturing, and workers would go back to their old jobs.
    As Mr. Trumka has made clear, we are changing industries. 
We aren't just changing a business cycle. Even this business 
cycle, which is unique for us and as economists we can't fully 
put our hands around, the information industry, the broader 
group of folks who are engaged in information from 
communications to the Internet, actually has lost jobs and 
continues to lose jobs during this recovery.
    So, we have not in the past seen what does a business cycle 
look like for that industry because for most of the history 
that we have looked at it, those jobs have continued to 
increase regardless of the manufacturing business cycle or the 
construction business cycle.
    Now this downturn is hard to read. Is that what a cycle 
looks like for this industry, and will it be a long-term cycle 
or is the loss of jobs and information short-lived? We are 
talking about folks who are doing Internet jobs, and we all 
know about the dotcom bust, but it continues. We continue to 
shed jobs when it comes to looking at Internet publishers, 
people who do Internet provider jobs, people in 
telecommunications.
    Those jobs are also declining during this recovery. Those 
are the jobs--as Mr. Trumka said, train them for what? Those 
are the jobs we told everybody we would train you for because 
those are the jobs that we would be adding. In fact, that 
industry has been shedding jobs during this recovery as well.
    So, that is why it is hard, when a plant closes because of 
a trade agreement, to locate exactly which workers we are 
impacting and how do we retrain the workforce.
    Mr. NEAL. Thank you.
    Mr. MCDERMOTT. Mr. Weller.
    Mr. WELLER. Thank you, Mr. Chairman, and welcome to our 
panelists. Thank you for joining us today. This is an 
interesting hearing.
    Mr. Chairman, I represent--you and I have discussed this--a 
manufacturing district. Of course, Caterpillar is our biggest 
manufacturer. Over 50 percent of their product that they 
produce in my district, and they are growing by leaps and 
bounds right now, is exported. Thanks to the removal of trade 
barriers, they are enjoying good years. Hired more workers and 
selling more product. We produce a lot of plastics, a lot of 
steel fabrication.
    This campaign and previous campaigns in the election cycle, 
we always hear the rhetoric about tax incentives that reward 
shipping jobs overseas. I would like to really get a greater 
understanding of what that rhetoric means when it comes to 
specifics.
    I was going to say, Mr. Regalia can you just very quickly 
tell us how when manufacturers, for example, are making a 
decision to site or expand a manufacturing facility and they 
are serving the global market, they have a choice of different 
countries to locate, how the Tax Code factors in on their 
decision of where to build, expand, or relocate?
    Mr. REGALIA. Well, when you are siting a plant globally, 
there are a whole host of factors that you kind of go through 
to determine where you want to cite that plant. First and 
foremost, it is where are your factors of production--land, 
labor, capital, that go into the production of the product. 
Second, where are your markets, so that you cut down your 
logistics costs of having to ship your product.
    Then you look at other factors--stability in the region, an 
economic rule of law in the host country, so that investment is 
in some sense protected from risk. Then after that, one of the 
factors that comes into play, of course, is the Tax Code 
because when you decide to produce abroad, you absorb more in 
the way of double taxation because you have to pay taxes in the 
host country. You get a credit against those taxes when you 
repatriate that but in many cases it is not a complete credit.
    One of the discussions about tax expenditures here seems to 
focus on tax expenditures as an end point when in fact many tax 
expenditures arise in the Code out of an attempt to correct for 
other imbalances, not social policy.
    Mr. WELLER. Mr. Regalia, specifically can you identify the 
provisions in the Tax Code that reward shipping jobs overseas? 
Is there one?
    Mr. REGALIA. Well, that wasn't my argument so I don't look 
at specific pieces of the Tax Code----
    Mr. WELLER. If you are making a decision?
    Mr. REGALIA. There is no credit that I know of that says if 
you locate a plant overseas, we will cut your U.S. taxes.
    Mr. WELLER. Are there provisions that actually punish you 
for investing in the United States?
    Mr. REGALIA. There are no provisions that I know of that 
punish you for investing in the United States, no. There are 
differential tax rates, but no provisions that I know of.
    Mr. WELLER. Our tax burden on manufacturing, for example, 
where do we rate compared to other countries around the world?
    Mr. REGALIA. We are not at the highest, but we are in the 
upper echelons.
    Mr. WELLER. Okay. Mr. Trumka, in your statement earlier, 
you talked about the Tax Code rewarding shipping jobs overseas. 
Can you give me a specific provision in the Tax Code, an 
example, not just a statement but a specific provision that you 
believe rewards shipping jobs overseas?
    Mr. TRUMKA. I will do better than that. I will give you a 
whole list of them. Rather than focus on one, what I would like 
to do is give you a whole list of those codes so that you can 
take away from this and some time to reflect on them the 
provisions that we think and that, quite frankly, that 
manufacturers in the United States think also affect them. So, 
we will give you a whole list of them. I will provide that as a 
supplement to my testimony. I would like to be able to do that.
    I would also like to say that it is not just the Tax Code. 
It is the enforcement of the existing laws that we have.
    Mr. WELLER. Yes. Mr. Trumka, my time is limited here and I 
just want to focus on the tax consequences. I look forward to 
your list. Thank you. I look forward to receiving it.
    Mr. Diamond, if we were to make a change in the Tax Code 
that would encourage greater investment, rewarding investment 
in manufacturing in the United States, what would one 
initiative be that you would suggest?
    Mr. DIAMOND. You could lower corporate tax rates. That 
would be a good one.
    Mr. WELLER. What would you suggest we would have to lower 
them to to make investment in the United States competitive, 
factoring in the other costs that a manufacturer has to 
consider?
    Mr. DIAMOND. To be competitive with other countries, I 
would say somewhere around 20 percent.
    Mr. WELLER. So, a 20 percent tax rate is what you would 
suggest?
    Mr. DIAMOND. A 20 to 25. You need to be careful. There is 
some amount of coordination between individual and corporate 
tax rates because you don't want to give individuals and 
corporations incentives just to shift income across.
    Mr. WELLER. Okay. Mr. Regalia, representing the Chamber, 
would you agree with that rate?
    Mr. REGALIA. I think cutting corporate tax rates would be 
one avenue. Another avenue to stimulate investment would be 
increasing the cost recovery, that is, shortening depreciation 
lives to encourage----
    Mr. WELLER. Shorten depreciation?
    Mr. REGALIA. --investment in the U.S., would be a big help 
and go a long way toward stimulating domestic investment.
    Mr. WELLER. So, full expensing of capital assets would be a 
big help?
    Mr. REGALIA. Full expensing of capital assets would be a 
great idea in terms of stimulating investment in this country.
    Mr. WELLER. Okay. Thank you, Mr. Chairman. You have been 
generous.
    Mr. MCCRERY. Thank you.
    Mr. Pomeroy.
    Mr. POMEROY. Yes. Thank you, Mr. Chairman, and thank you, 
panel. This is an extremely interesting discussion.
    I want to talk about wage insecurity as opposed to wage 
inequities, not to in any way diminish the critical importance 
of the growth in wage inequity, income inequity in our country. 
Let's talk about the insecurity part.
    Mr. Diamond, you indicate that there has been--as kind of a 
compounding trend, you note both components present in our 
present economy, a growth in the disparity in income 
distribution, but also a growth in the insecurity felt by the 
average American household. Is that correct?
    Mr. DIAMOND. That's correct.
    Mr. POMEROY. You also note that this can lead to adverse 
economic ramifications across the economy as an insecure 
household is likely to shrink consumptive behavior and act in 
other ways reflecting the insecurity that might diminish their 
optimistic participation in the economy, consumer confidence 
being a critical economic indicator.
    So, is it bad for the economy when we have a great number 
of workers that are feeling insecure?
    Mr. DIAMOND. I am not sure I would classify it as a great 
number. I think I said in my testimony that there are some U.S. 
workers and the number--I don't think it would be great.
    Mr. POMEROY. Well, let's pursue that, then. Let's pursue 
that, then, Dr. Diamond. I will actually invite the panel 
participation in this factor. What do you think is the status 
of wage security in the workforce?
    Mr. DIAMOND. Well, I think it has changed quite a bit. I 
think that the real problem we are facing is the way that 
insecurity used to rise up in the economy and the way that it 
is going to do now under globalization. So, it used to be that 
one industry was affected, and it was relatively easy to think 
of ways in which we could help workers in that industry or that 
industry itself. Now it affects a wide range of people, from 
computer programmers to Certified Public Accountants (CPAs), 
who get their jobs shipped to India.
    Mr. POMEROY. If I hear you----
    Mr. DIAMOND. There is no industry----
    Mr. POMEROY. --that is kind of what I understood your 
testimony to provide. Therefore, that seems to me, to the 
extent that it is now more broadly affiliated across the 
economy in this transitional period that we are in, this is a 
pretty big deal, worker insecurity.
    Mr. DIAMOND. It is a big deal. It is not--I was just saying 
it is not most workers. It can affect one CPA instead of all 
CPAs.
    Mr. POMEROY. Let's run down the panel on it, and then I 
have got a follow-up.
    Mr. SPRIGGS. If I may, I think a way of judging people's 
insecurity and pessimism has to do with the debt level they are 
willing to take on to maintain their income. That can be a bad 
thing if they do that. It can be a good thing if they do that. 
As you indicate, if people become too insecure and they draw 
back on consumption, we know that causes really bad things.
    So, what we have seen recently is that people are willing 
to take on less debt. They are beginning to signal us that they 
no longer are optimistic that this current 4-year wave of not 
seeing their inflation-adjusted incomes rise, they don't think 
that that's going to turn around. They aren't willing to take 
on betting that in the future, their income is going to rise 
and they are going to pay out of that.
    Mr. POMEROY. I am just going to so quickly run out of time, 
Dr. Spriggs.
    Mr. SPRIGGS. Yes. So, the bottom line is, it is beginning 
to show itself, and not willing to take on more debt. As they 
do not take on more debt, if their incomes aren't rising, that 
means consumption is going to fall. So that, I think, is the 
best barometer of how to think about the insecurity and how to 
think about the implications unless we can reverse the trend 
about incomes and having incomes rise and making people change 
their views.
    Mr. POMEROY. I am not going to have time to continue the 
question down the panel. I have got some other questions for 
the panel. I know you would love to tackle that one. I think it 
is a very big deal.
    I take some issue with, Dr. Diamond, your testimony where 
you say the first thing we need to do is go in and reform 
entitlements. Well, to the extent that you have got private 
insurance programs being health insurance, being pensions, 
under attack and being diminished in the private sector, the 
role of public programs providing support in these areas, 
through Social Security, through Medicare, through workers 
comp, workers unemployment compensation, rather, are even more 
critically important in this period of greater wage instability 
and therefore insecurity. I think that that has to be really a 
foundation of our economic policies going forward.
    I have got one final note to kind of put a point on this. 
We spent some time--we didn't spend much time--last Congress 
talking about pensions. The Labor Department told us pensions 
were absolutely going insolvent in huge numbers. The funding 
crisis was critical. The Administration advanced a pension 
bill. Regrettably, this Committee, Republicans or Democrats, 
were not allowed much participation, although the Chairman had 
substantial input in the ultimate pension bill.
    Today's Wall Street Journal, and I want to add this in the 
record, talks about pension plans taking a healthy turn after 
years of steep under-funding thanks to several years of double-
digit investment gains and rising interest rates--having 
nothing to do with the bill we passed, just the long-term ebb 
and flow of a snapshot picture of solvency in light of their 
investment holdings.
    So, we have pensions healing up, but we have now passed a 
bill. I want to point your attention to a paragraph in this. 
``The transition from prior accounting rules to the new ones, 
however, mean that the Fortune 100 companies''--that now, by 
the way, are 100 percent funded, as reflected in the article--
``the Fortune 100 companies are likely to see a combined 
decrease in shareholders' equity of about $160 billion.'' That 
is much better because it was 245 billion before the re-
estimate.
    [The Wall Street Journal article follows:]

Pension Plans Take Healthy Turn
Rising Markets Aid Big Firms' Funds; Failure Risk Lessens

By THEO FRANCIS

January 23, 2007; Page A4

    After years of steep underfunding, pension plans are now healthy, 
thanks to several years of double-digit investment gains and rising 
interest rates, separate studies from benefits consultants suggest.
    The pension plans of Fortune 100 companies ended 2006 with 102.4% 
of the assets needed to pay pensions indefinitely, according to an 
estimate expected to be released today by Towers Perrin, a Stamford, 
Conn., benefits consultant. That is up sharply from a low point of 
81.9% in 2002, though still below the 125.8% recorded at the height of 
the stock-market boom in 1999.

PENSION HEALTH

      The News: Pension plans have enough funds to cover their 
obligations, a study found.
      The Background: Concern over underfunded pensions helped 
legislation through Congress last year. Stock gains were the biggest 
factor in the plans' recovery.
      Outlook: Estimates for 2006 show further improvement.

    Consultants and pension experts said the change suggests fewer 
pension plans are at risk of failing. That bodes well for workers 
dependent on the plans for retirement income and for the Pension 
Benefit Guaranty Corp., a federally run pension insurer that pays basic 
benefits if the plans aren't able to.
`The Right Direction'
    ``There's no reason why their funding shouldn't have improved--
everything's going in the right direction,'' said Jack Ciesielski, a 
pension-accounting expert who writes the Analyst's Accounting Observer 
newsletter. While some companies faced serious funding shortfalls, for 
many employers ``it was cyclical in nature,'' he added.
    Similar findings are echoed by a separate study of pension funding 
based on 2005 data, released yesterday by benefits consultant Watson 
Wyatt Worldwide. That study found that pensions for a group of 1,000 
companies were about 91% funded in 2005, up from a little more than 80% 
funded in 2002.
    Widespread concern over underfunded pensions and corporate 
decisions to freeze or cut pension benefits has helped pension 
legislation through Congress last year. The legislation was billed as 
shoring up pension plans weakened by a ``perfect storm'' of low 
interest rates and poor stock-market performance early this decade. Few 
provisions of the new law took effect before this year, so any 
improvements they may bring about aren't reflected in the estimates by 
the benefits consultants.
    Towers Perrin's study examined the 79 companies in Fortune 
magazine's list of the 100 largest U.S. firms that sponsored defined-
benefit pension plans. Pension plans are backed by trust funds that 
typically pay retirees a set amount each month for life, or a one-time 
payout based on that stream of payments. A plan's funded status is a 
measure of any gap between the fund's assets and the company's 
obligations under the plan.
Company Contributions
    Stock-market gains were the biggest factor in the plans' recovery, 
averaging about 12% in 2006. In addition, rising interest rates likely 
reduced plan liabilities by about 3%, Towers Perrin estimated. Interest 
rates determine how the company converts future pension payouts into a 
liability on its books today.
    Company contributions also improved pension funding, with average 
contributions rising more than fivefold since 1999. But these 
contributions boosted plan funding by only about 1%, Towers Perrin 
said.
    One factor unexamined in the study: How big a role pension freezes 
and cuts have played in improving pension funding. Freezing or cutting 
benefits reduces a company's pension liabilities, which means the 
existing assets cover more of the company's obligations.
    Towers Perrin used publicly disclosed data for each company, 
including asset, liability and asset-allocation figures, and took into 
account subsequent market returns and interest-rate changes.
    Improving plan fortunes could encourage some companies to stop 
contributing to their plans, as many did in the late 1990s; however, 
pension-industry officials say last year's legislation makes that less 
likely.
    Separately, new pension-accounting rules taking effect this year 
mean companies must start reflecting net pension liabilities on the 
balance sheet, instead of recording them in a footnote as they have for 
years. Under Towers Perrin's projections, ``on average, the Fortune 100 
will be booking an asset'' rather than a liability for their plans, 
said Bill Gulliver, Towers Perrin's chief actuary for human-resource 
services.
Big Exposure to Stocks
    The transition from prior accounting rules to the new ones, 
however, mean that the Fortune 100 companies are likely to see a 
combined decrease in shareholders' equity of about $160 billion, 
improved from prior estimates of $245 billion, Towers Perrin said.
    Watson Wyatt's study showed that plan funding improved by about $10 
billion in aggregate between 2004 and 2005. Investment returns improved 
funding by about $114 billion, and company contributions added about 
$51 billion, offset by the growth of benefits for employees in the 
plans, Watson Wyatt said.
    ``The bottom line is, things are getting better,'' said Mark 
Warshawsky, Watson Wyatt's director of retirement research and a former 
Bush Administration Treasury official. He said preliminary estimates 
for 2006 show further improvement.
    Still, Watson Wyatt's analysis shows that pension assets were 
invested about 64% in stocks, on average--meaning another sharp 
downturn could wreak havoc with pension funding once again.

                                 

    Mr. POMEROY. Now, I want to ask Mr. Trumka whether he 
believes corporations----
    Mr. MCDERMOTT. Your time has expired.
    Mr. POMEROY. Okay. I will just--you may submit in writing 
your answers to this question. I will conclude with a point, 
Mr. Chairman.
    It is my belief that we have done horrible damage with 
pension funding requirements. We responded to those that said 
the system was in crisis when it isn't in crisis, and it is 
already reflecting better results right now. The funding rules 
we have imposed will create a crisis. They are not going to put 
in $162 billion, and we are going to see tremendous assaults on 
pensions going forward without further review and action by 
this Committee. Any statements you would like to add to that 
effect, I would appreciate.
    Thank you, Mr. Chairman. I yield back.
    Mr. POMEROY [Presiding.] Mr. Lewis is recognized.
    Mr. LEWIS OF KENTUCKY. Thank you, Mr. Chairman. I certainly 
appreciate the panel and your being here today.
    Dr. Diamond, Mr. Bernanke just recently talked about some 
of the challenges that are out in front of us, and not really 
too far away. The U.S. Comptroller General, David Walker, has 
been before this Committee on several occasions, and he has 
talked about those challenges.
    In fact, in the past 19 years, Medicare and Medicaid 
spending has risen from 1 percent of the Federal budget to 19 
percent. In 2040, entitlements will consume the entire Federal 
budget. A 50 percent tax increase on workers or drastic benefit 
cuts for seniors will be required to pay for defense and other 
government services.
    The unfunded obligations for Social Security and Medicare 
will have grown in the past 6 years from $20 trillion to $50 
trillion, amounting to a $440,000 debt for every household in 
the United States. In the next 25 years, the number of 
Americans age 65 or older is expected to double. Those are 
overwhelming challenges.
    My son and daughter--my daughter is 24 and my son is 35--
and they are not expecting anything in Social Security. They 
are putting a lot in, as much as they can, into 401(k)s. What 
can we do to solve these challenges by creating incentives for 
the American people, for our children and the children to come, 
to be able to be part of an ownership society and be able to 
invest in their future through things like 401(k)s and savings 
and so forth? What can we do in the Tax Code, or what can we do 
to try to meet these challenges now before it is too late to 
solve them?
    Mr. DIAMOND. I think there are several things we can do, 
all of which would focus on increasing national savings. Reduce 
taxes on capital income so individuals save more. Cut 
government spending so the government deficit is lower. We 
could reform the tax system just to have a tax system that is 
more conducive to economic growth, shifting to some type of 
consumption tax system, or corporate tax reform in which we 
incorporate the corporate and personal income tax to reduce the 
double taxation of capital income, would be an example.
    Furthermore, on the point of Social Security is I think it 
is a necessity, not just something we should think about, but I 
think it is a necessity that we move to at least a mixed system 
of Social Security, meaning part pay as you go and part 
investment-based. Other countries are moving to mixed systems--
China, Britain, Sweden, Chile, Australia. President Clinton 
almost proposed moving to a mixed system when he was President.
    The way Social Security works is that to keep paying 
benefits to each successive generation, we have to keep raising 
taxes on future generations. Right now we are at the point 
where we have to raise the payroll tax from 10.6 to somewhere 
above 15 percent, 15.6, 15.7 percent, assuming no negative 
economic growth effects, just to pay the current level of 
benefits over the next 50 years or so.
    Come a generation or two later, we are going to have to 
raise it even more if we don't switch to some kind of system 
that allows people to have private accounts where their money 
can grow with the stock market and with corporate profits, as 
we see going on in public pensions.
    I think the whole point that Representative Pomeroy made 
about public pensions being in good health now is directly 
related to growth of the economy, what happens when you own an 
asset and it increases in value. We need to switch Social 
Security to that system.
    Mr. LEWIS OF KENTUCKY. How many Americans now have some 
type of investment in stocks? Do you know? Anyone know?
    Mr. DIAMOND. It is a growing number. I can't--I think the 
number is somewhere over 50 percent----
    Mr. LEWIS OF KENTUCKY. I think that is right.
    Mr. DIAMOND. --but I can't say right off the top of my 
head. Dr. Zandi may know.
    Mr. ZANDI. Yes. According to the survey of consumer 
finance, it is just about 50 percent.
    Mr. LEWIS OF KENTUCKY. Yes. So, a lot of the--well, the 
goose that is laying the golden egg needs to be encouraged to 
keep laying that golden egg if we are going to have a 
prosperous future for our kids and grandkids. I see my time is 
up. Thank you.
    Chairman RANGEL [Presiding.] Mr. Thompson of California.
    Mr. THOMPSON. Thank you, Mr. Chairman.
    I have a question for Mr. Zandi. Sir, before this 
Committee--or, actually, before the Senate Banking Committee, 
the Chair of the Federal Reserve spoke recently about a vicious 
cycle in which large deficits lead to rapid growth in debt and 
interest payments, which in turn add to subsequent deficits.
    Then before this Committee, we heard from David Walker, who 
told us that at some point in the year 2040, the amount of 
revenue coming into the Federal Government will match the 
amount that the Federal Government has to pay to service our 
debt, this growing and I think troubling national debt.
    I am very concerned about the amount of money that we owe. 
I am interested in your thoughts on the role that the deficit 
and the debt play in determining our economic health and how 
they might impact future economic growth.
    Mr. ZANDI. Well, I think this will be our most significant 
economic problem. Not this year, not next----
    Mr. THOMPSON. Our most significant?
    Mr. ZANDI. Far and away our most significant economic 
problem. Not this year, not next, not the year after, but 
certainly, as we make our way into the next decade, it will 
quickly become clear that if we do not address the what will 
then be very large and growing budget deficits, it will 
undermine our economy's ability to grow and thrive.
    If you do the math and make some very reasonable 
assumptions, something is going to break. We are just not to 
get out to 2030 with these projections. Something has got to 
change because it just won't work.
    Mr. THOMPSON. Thank you. Mr. Walker, the Comptroller 
General, David Walker, also on his--he has gone across the 
country on this fiscal wakeup tour. He has stated on numerous 
occasions that our current fiscal policy is unsustainable and 
that faster economic growth can't solve our deficit problem.
    I would like to hear from--maybe just a yes or no down the 
line if you agree with David Walker's comments.
    Mr. DIAMOND. I agree.
    Mr. SPRIGGS. Yes, I agree.
    Mr. TRUMKA. Yes.
    Mr. REGALIA. Yes.
    Mr. ZANDI. Yes, sir.
    Mr. THOMPSON. So, it is not going to be--we are not going 
to grow our way out of this. Thank you very much.
    Dr. Spriggs, if you would, in your testimony you discussed 
borrowing to maintain consumption levels. You note that 
household debt has been growing at a rate of almost 11 percent 
over the past few years vis-a-vis the 3.7 growth in our 
household net worth. As a result, our savings rate has reached 
record lows.
    I am just wondering if you have any suggestions as to what 
we should or what we could do or should we be putting policies 
in place to promote savings, especially among our lower and 
middle class families.
    Mr. SPRIGGS. We have to help people lower their debt level, 
which is a form of savings. From an economist's perspective, 
that is savings.
    Mr. THOMPSON. That is a kind of vicious circle, though.
    Mr. SPRIGGS. It is the vicious circle that people find 
themselves in. So, the first thing that households will tend to 
want to do is to make their debt level lower. We need to think 
about policies for that.
    We favor people and terms of the interest deduction they 
have on home equity-based debt. We don't do anything to help 
people get out of debt if it is not home equity debt in terms 
of how we think about the interest payments that they are 
making.
    I think the Committee on Ways and Means really needs to 
have a set of hearings to think through how you can give 
incentives for people to lower their debt level. Too much of 
the discussion on long-term savings and on their retirement, I 
think, divert us from this immediate need.
    Because if this trend doesn't turn itself around, the bad 
way that people would do it, of course, is to just stop 
consuming. That is called a recession. The preferred way is of 
course we have people's incomes rise, and we encourage them to 
use the rise in income to get rid of the debt.
    There has to be a lot more explicit discussion of how do we 
get people's debt levels down without having consumption fall 
at a dramatic rate. Homeowners and American families cannot 
sustain the current debt-to-asset ratios, and they will correct 
them.
    Mr. THOMPSON. Thank you very much.
    Chairman RANGEL. Mr. Blumenauer.
    Mr. LINDER. Mr. Chairman, am I not next?
    Chairman RANGEL. I am so sorry. I meant to share with you 
that we have such an overwhelming number of Democrats that are 
present that I shared with the Ranking Member that we were 
going to do two for one to try to bring it down based on when 
they came here.
    Mr. Blumenauer.
    Mr. BLUMENAUER. Thank you, Mr. Chairman.
    I noted, Mr. Zandi, in your testimony on page 3, there was 
one paragraph that you chose not to read where you are talking 
about ``financially pressed lower income households who 
heretofore have been able to mitigate the impact of constrained 
incomes on their living standards by significantly increasing 
their borrowing.''
    You are talking here about it being increasingly difficult 
for them to be able to maintain this. We are looking at 
pressures with the housing bubble. We have got impacts in terms 
of new bankruptcy laws.
    Do you want to just--can you elaborate on that for a 
moment?
    Mr. ZANDI. Sure. I only skipped it because I know you are a 
stickler for 5 minutes, and I was at 5:30 anyway. So, that was 
the only reason.
    My view is that lower income households have been under 
significant financial pressure for a quarter century. It hasn't 
materially affected their standard of living in large part 
because they have been able to take on a significant amount of 
leverage. That has been only--that has been facilitated by a 
steady decline in interest rates more or less for the past 
quarter century; and, moreover, financial innovation, which has 
allowed lenders and creditors to extend out more credit.
    However, that process is now over. Going forward, it is 
hard to argue that interest rates are going to go lower for any 
extended period of time. Debt service burdens are at record 
highs. We are starting to see financial stress develop. 
Initially, we will see that very clearly in a surge in mortgage 
delinquency and default.
    Foreclosure rates are going to rise very rapidly in many 
parts of the country. That is indicative of the fact that it is 
now going to be very difficult for lower income households to 
supplement their income by taking on even more leverage. So, 
the constraint on their standard of living is just going to 
become more obvious going forward. It has been masked by their 
ability to borrow.
    Mr. BLUMENAUER. I appreciate that. Mr. Chairman, I know you 
have been of great concern about the impact on society of 
having an increasing number of poor and lower income people, 
that that bears a direct cost to us. I appreciate, Mr. Trumka, 
you are talking everybody in your testimony who works every day 
shouldn't have to live in poverty. They should have access to 
health care and be able at some point to have income security 
in retirement.
    Mr. Chairman, I hope that there will be an opportunity in 
the course of our discussions to zero in on this impact of how 
borrowing has sustained the standard of living and put more and 
more people at risk.
    I happen to agree with Dr. Zandi that we are going to see--
a number of these innovation mortgage products are going to 
result in a lot of people being under exorbitant stress in this 
year as the higher interest rates kick in, when the negative 
amortization runs out, as we start to see the impact of the 
change in mortgage laws--excuse me, in bankruptcy laws--that 
are starting to sort through.
    Last but not least, as has been noted in terms of health 
care, where low and moderate income people get checked in, and 
they only get access to health care in a hospital if they 
produce a credit card, which they are going to be paying 20 or 
30 percent interest.
    I think this is an area that deserves our continued 
interest. I know, Mr. Chairman, you have deep concern. I have 
read some of your speeches that I think are helpful. I am 
hopeful that we can work with distinguished representatives 
like people on the panel here because it is not just government 
debt, but it is low and moderate income people who are stressed 
and have less margin that could have all sorts of ripple 
effects throughout the economy.
    Thank you, Mr. Chairman, and I yield back.
    Chairman RANGEL. It is my hope that--and the Ranking Member 
agrees with me--that it is one thing to listen for 5 minutes to 
what the problem is. We wish we could get your time to come and 
sit with us to work toward the solution of these problems 
because this information verifies what a lot of people think. 
However, because of your expertise, you help us with it.
    Mr. Linder, according to the sheet that I have here--we 
follow the Gibbons rule as to who came here. Mr. Brady, Mr. 
Reynolds, Mr. Tiberi, and Mr. Porter would precede you. So, I 
didn't mean to pass over you if this is accurate that Mr. 
Brady--let's see. Brady is not here. Is Mr. Reynolds here? Mr. 
Tiberi? Mr. Porter.
    Mr. PORTER. Thank you, Mr. Chairman.
    I guess I really appreciate you being here this morning and 
I look forward to, as the Chairman has mentioned, that possibly 
we could have some time to have some discussion at a later date 
to find some solutions.
    I would like to address maybe a regional aspect of 
discussions this morning. Now, we talk about some of the 
challenges in different quarters of the country. There are some 
areas that are in desperate need of help, from education to 
manufacturing to creating new jobs.
    Take the Nevada experience for a moment. We have created 
close to 50,000 new jobs in the last year in a very resilient 
business community that has retrained, retooled constantly to 
remain on the cutting edge of visitors to our country and to 
our community.
    It has been built upon labor and management working 
together. I think we are a true flagship for cooperation 
between business and labor. We have about 40 million and some 
visitors a year. We are constructing another 40,000 hotel 
rooms. All this says we are really a bellwether for the economy 
and the country. We are about 98 percent occupancy with 41 
million visitors. That means people's attitudes are improving 
substantially. If there wasn't a positive attitude in this 
country, we would be out of business.
    The New York Times--I will like to enter this into the 
record, without objection--the New York Times in May of '05 did 
a report on how class works. Wanted to ask Americans how they 
felt regarding their social class.
    If I can just quote from the article, ``More than ever, 
Americans cherish the belief that it is possible to become 
rich. Three-quarters think the chances of moving up to a higher 
class are the same or greater than 30 years ago.'' Compared 
with 30 years ago, the likelihood of moving up from one social 
class, 75 percent said that they felt they would be moving up. 
Eighty percent said that compared to their social class rowing 
up, things would get better.
    In the last year, weekly earnings are up 4.8 percent. 
Pension and health benefits are up 6.1 percent. So, it is 
almost 11 percent improvement to the quality of life of 
Americans.
    What I would look forward to, Mr. Chairman, with your 
encouragement earlier today is that we can sit down and work 
together, management and labor, and what we can do to get more 
money in the pockets of hard-working American people. Certainly 
health insurance and health benefits and health challenges, as 
Mr. McCrery mentioned, are a big part of that.
    [The New York Times article follows:]
    [GRAPHIC] [TIFF OMITTED] T3825A.038
    
                                 

    Mr. PORTER. So, if I could just ask one question as we move 
on: What can we do on the short term and long term with limited 
time to work on this health care challenge, with costs up? What 
are some specifics that you would suggest that we do 
immediately?
    Mr. DIAMOND. I would support--I don't really know the 
specifics of what the President is going to address tonight. I 
know the President's advisory panel put forth a document in 
which they proposed a cap on health care, employer-provided 
health care deductions.
    I have heard it stated several places that this is a 
giveaway to the rich, but I think it is exactly the opposite. 
You are actually capping the deduction they get. I think it 
would--I think it is an important policy because what happens 
now is the deduction is unlimited. So, even very high cost 
health insurance plans are completely deductible.
    So, we are just encouraging an over-consumption of health 
care spending by very high income people. So, I think a 
deduction or a limit, a limit on the deduction that could be 
taken, would reduce consumption by high income people, and 
therefore it would help slow down the cost of medical spending.
    Another very equitable thing that we need to do is extend 
this benefit to self-employed people. So, currently, if you're 
employed by someone and they buy your insurance, then you get a 
deduction. However, if you own your own company or you work for 
yourself and you buy health insurance, you get no deduction. 
That is inherently unfair. I think the proposal that was put 
forth by the President's advisory panel--I am not sure of the 
specifics tonight. I think something like that would be a good 
start.
    I would also think that we should look at growing physician 
networks. Physicians get in large networks to do negotiations 
with insurance companies. The larger the networks, the more 
market power they have and the higher the prices they can 
negotiate with insurance companies.
    So, I think there is a problem with market power there. In 
fact, the Justice Department found in 1998 that there was 
economic manipulation, and they had a ruling--or they imposed 
that networks could not negotiate from 2001 to 2006, although 
that is expiring.
    On the flip side, there is a benefit to large networks in 
that it reduces contracting cost. I think that is an issue that 
the Committee should look at.
    Mr. SPRIGGS. I think we have to at least do the easy 
pickings. First is the issue of administrative cost. Congress 
really has to get a chance to think again about the efficiency 
of our health care dollars.
    Any dollar that is not going to health care is, in the 
current framework, just not going to work because we have too 
much of the share of our GDP from any source going to health 
care. There needs to be some sort of report card that can let 
everybody know what share of their deduction is going to that.
    I think the President is inviting a very healthy discussion 
by letting us look at this tax expenditure. I don't think this 
is one that is regressive. In the case of our savings efforts, 
currently those are regressive. They help those at the high 
income much more than those at the low income.
    Given that low income people can't afford health insurance 
given their incomes anyway, I don't think that this current tax 
expenditure is necessarily regressive. At least we get to have 
a discussion. So, I think it is very important that the 
President is having that. That is the other thing that Congress 
has to have, is this discussion about the tax expenditures. So, 
I am glad the President is doing this.
    Third is we have to find ways to contain the increase in 
cost. There has to be a lot more examination about the dramatic 
rise in drug costs. Why do drug costs so differ across 
countries? We have to do those first steps because those are 
the easy ones. We have to solve those ones first, I think.
    Then I think we can get to the more difficult ones because 
the more difficult ones really do get to issues of efficiency, 
differences in vested interests because some people have 
private health insurance. Those are more difficult, but I think 
we at least have to solve the easy ones.
    Chairman RANGEL. Mr. Pascrell.
    Mr. PASCRELL. Thank you, Mr. Chairman.
    We spent--all of you touched upon the subject of 
redistribution. I am fascinated by the subject of 
redistribution because 20 years ago you would have had a 
discussion about communism and socialism.
    Before I ask the questions about redistribution, I want to 
ask a question of you, Dr. Diamond. You suggest--we did have a 
solution, Mr. Chairman. One of the solutions that Dr. Diamond 
recommended is that we cut corporate taxes by 20 percent. That 
was one of your solutions to a question that was asked to you.
    I would like to know in very--you only have a few seconds, 
now, to respond--I want to know how you would make up the 
revenue that is lost in that 20, the billions of dollars that 
would not be coming into the Treasury. How do you make up for 
that?
    Mr. DIAMOND. You could actually make up for it. So, I guess 
what I was suggesting----
    Mr. PASCRELL. How?
    Mr. DIAMOND. --is we cut the corporate tax rate, but at the 
same time you could get rid of infra-marginal corporate tax 
breaks so that at the margin corporations are more competitive. 
You could have it completely. You could just reform the 
corporate tax to be revenue-neutral and create a more efficient 
corporate tax.
    Mr. PASCRELL. So, you are suggesting a revenue-neutral plan 
that would cut corporate taxes 20 percent, but we would make up 
for it by increasing those other fringe corporate taxes? Is 
that what you are suggesting?
    Mr. DIAMOND. I am not suggesting anything. I was just 
answering your question as how it could be done.
    Mr. PASCRELL. Well, this is a question of accountability on 
that side of the table and obviously on this side of the table. 
So, I want to talk about accountability.
    I want to ask the question to Dr. Regalia about the 
redistribution question. Did the redistribution of income in 
the United States of America just happen? Was it a consequence 
of economic policies? Was is intended? How did we get to this 
point that we are taxing income so much more than we are taxing 
assets, which is the reverse of what happened, what the 
situation was 20 to 30 years ago. You tell us in as short a 
time as possible, how did that happen?
    Mr. REGALIA. Well, I think that we tax assets significantly 
in this country. So, I disagree to a certain extent with the 
assertion that we are taxing income and not assets. We tax----
    Mr. PASCRELL. Dr. Regalia, that is not the case. In fact, 
we had the reverse of what happened 30 years ago.
    Mr. REGALIA. We tax savings when it is earned. We tax the 
income on savings when that is earned. We tax the capital gain 
on savings. We tax the asset at death. I would assert that we 
tax saving a whole lot more than we tax income in this country.
    Mr. PASCRELL. The record will show, Dr. Regalia, that the 
difference between now and 30 or 40 years ago is that we depend 
more on taxing income than we do in terms of assets, in taxing 
of assets. There is a particular reason for that, and that is, 
we have placed the middle class and the poor in a precarious 
situation. You know exactly what I am talking about.
    I want to ask you this question. You talk about trade, the 
question of trade. We talked about the loss of jobs. Just in 
the Economist today, in an article that was written by--I will 
find out the author in a second--in the Economist today from 
Virginia, Galax, Virginia, one study suggests that during the 
1980s and 1990s, 65 percent of manufacturing workers in America 
who lost their jobs to freer trade were employed two years 
later, but most took a pay cut.
    No one wants to talk about the kinds of jobs that those 
folks who have lost their jobs through trade deals, which the 
Congress in bailing out of Article 1, Section 8 of their own 
responsibilities, gave to the Executive Branch--whether it was 
Clinton or Bush is immaterial to me--and the loss of those 
jobs, and the new jobs that they receive don't pay anywhere 
near the manufacturing jobs.
    I don't want to go over with you the battle between 
Hamilton and Jefferson. It would be good to revisit it, to see 
that we decided at that time that we are going to move in the 
direction of a multi-based economy. We weren't going to be an 
agrarian society forever.
    We haven't even talked about the loss of the infrastructure 
of manufacturing. We talked about the jobs. The loss of the 
infrastructure has had a downward pressure on property taxes in 
those Rust Belt communities, be they in the Midwest or the East 
or anyplace, for that matter.
    What are you going to do about that manufacturing 
infrastructure, Mr. Regalia?
    Mr. REGALIA. Well, I think what we ought to do about it is 
to encourage it every way we can. What is interesting is that 
despite all of what you mentioned, we still produce more today 
than we ever have before. So, it really hasn't hurt our 
productive ability to have undergone these changes in the 
manufacturing sector. We produce more today than we did before 
in real terms.
    Mr. PASCRELL. There is a larger scale. You have more people 
here. We understand that.
    Mr. REGALIA. We have more capital, and----
    Mr. PASCRELL. Let's talk about the very essence, though.
    Mr. REGALIA. However, if we were losing all these jobs and 
we were not investing in the assets, then it would be hard to 
see how we could produce more today. I think what we are 
undergoing is changes in the manufacturing sector that in many 
cases are productivity driven and in many cases are the result 
of competition from abroad.
    Mr. PASCRELL. So, you believe, Dr. Regalia, if I can get 
you straight here, that the same infrastructure that exists 
today, that infrastructure in manufacturing that exists today 
can produce the exact same--or more, in fact--than existed 20, 
30, 40 years ago, even though we have had the loss of these 
jobs and places where these jobs take place?
    Mr. REGALIA. Not that it could. It is.
    Mr. PASCRELL. We still have the same manufacturing impetus 
today?
    Mr. REGALIA. We produce more goods today than we did 
before.
    Mr. PASCRELL. On scale, we do.
    Mr. REGALIA. Pardon me?
    Mr. PASCRELL. On scale. In proportion, we don't.
    Mr. REGALIA. In proportion, the manufacturing sector is a 
smaller component of the U.S. economy today than it has been in 
the past.
    Mr. PASCRELL. Do you think that we should have a 
manufacturing policy?
    Mr. REGALIA. Yes. I think we should have a manufacturing 
policy.
    Mr. PASCRELL. Why don't we?
    Mr. REGALIA. Sir, you would be better to answer that 
question than I am. I don't make the laws. I try to influence 
what gets made.
    Chairman RANGEL. Mr. Larson.
    Mr. LARSON. Thank you, Mr. Chairman, and thank the 
panelists for your patience and endurance.
    With the permission of the Chair and if I might prevail 
upon him, one of the--all of you touched upon the issue of 
globalization. This seems to be a term of art that everyone 
uses. I am not so sure myself, in listening to people talk 
about it and describe it what it means exactly. Or at least it 
seems to be viewed--beauty is in the eye of the beholder, so to 
speak, shall I say.
    So I was hoping, Mr. Chairman, that perhaps I could prevail 
upon the panelists, if they could, just write for us what your 
definition of globalization would be. That would be an enormous 
help as we continue to discuss various tax and trade issues on 
this Committee as it relates to ``globalization.''
    I have two questions within that context, one for Mr. 
Diamond and the other for Mr. Trumka. The first is, Mr. 
Diamond, in your testimony you talked about a progressive 
consumption as a means of taxation.
    When you were talking about that, has there been any 
consideration given to, we will say, in this ``era of 
globalization,'' where everything is shrinking; the world is 
flat; taxes, for example, as it relates to the Internet or 
over-the-counter trades?
    Mr. DIAMOND. There have been papers written on--should we 
tax Internet trading and so forth. I am not real familiar with 
that literature.
    Mr. LARSON. As part of a progressive consumption, would 
that be considered inasmuch as people are--the world is 
shrinking electronically. People are in touch with one another. 
We talk about a manufacturing policy, and yet we see that there 
is lack of manufacturing, and yet there is the means by which 
to share in a global economy, so to speak, via 
telecommunications and television, et cetera.
    Mr. DIAMOND. The progressive consumption tax that I wrote 
about is a specific variant of the X tax, where it is basically 
a wage tax. It exempts capital income. However, you have a 
progressive wage tax instead of a flat wage tax. So, when I 
mentioned the progressive consumption tax, I was speaking about 
a shift from an income to a consumption-style tax, but taxing 
consumption progressively.
    Mr. LARSON. Okay. You also mentioned, I believe, in the 
testimony something like a hybrid of that, where you also would 
have some kind of value-added tax to that. Is that correct? Am 
I----
    Mr. DIAMOND. Well the debate on taxation really is should 
we tax income or consumption. I think a lot of countries are 
kind of meeting in the middle in what is called a dual income 
tax, which is a wage tax, a tax on wage income; and then some 
level of capital taxation, which is usually about 30 percent of 
the level of the wage tax. So countries----
    Mr. LARSON. Has a tax on transactions in general ever been 
considered?
    Mr. DIAMOND. The United States--I think it is safe to say 
the United States is the only country that does not have some 
time of Value Added Tax or national sales tax. There may be a 
handful, but----
    Mr. LARSON. Thank you, sir.
    Mr. Trumka, you talked about in terms of some of the 
problems that we face. You outlined, in the box, four areas, 
including globalization, and the small government, and price 
security.
    I am also interested in what you meant by labor 
flexibility, market labor flexibility.
    Mr. TRUMKA. Labor market flexibility is a generic term that 
we use to enunciate all the policies that, one, erode the 
minimum wage. That erode labor standards. That do away with 
overtime for working past 40 hours, all of those things. The 
failure to enforce workers' rights to organize and bargain 
collectively, that strip workers of social protections, 
particularly in the area of health care and retirement.
    The bankruptcy laws would be part of that, where they can 
do away with the pension plan. They can shirk their legacy 
costs and do away with all those. So, labor flexibility, labor 
market flexibility, is just sort of a generic term that we use 
that says, you focus on workers and you further reduce the 
bargaining power they have.
    We think that the wage stagnation in the country is 
primarily due to an imbalance of power between employers and 
workers that has been further exacerbated by all four sides of 
the box that I talked about in my testimony, and specifically 
about the labor market flexibility.
    Mr. LARSON. Well, I thank you and I thank all the panelists 
for your contribution this morning.
    Chairman RANGEL. Mr. McCrery.
    Mr. MCCRERY. I also want to add my thanks to the panel 
today for your excellent testimony in response to our 
questions.
    I have one last question because my good friend from wine 
country in California, Mr. Thompson, polled the panel as to 
whether we could grow our way out of this looming fiscal 
problem because of the entitlement growth, and each of you said 
no. We can't grow our way out of it. Economic growth alone 
won't solve the problems. I happen to agree with that.
    My question to you is: If we maintain strong economic 
growth, will that make it easier or harder for us to deal with 
those long-term fiscal problems of the country? Dr. Zandi?
    Mr. ZANDI. Certainly stronger economic growth is good, and 
it would make our budgetary problems easier. They won't solve 
them.
    Mr. MCCRERY. Dr. Regalia?
    Mr. REGALIA. Strong economic growth is imperative if we are 
going to solve the budget programs.
    Mr. MCCRERY. Mr. Trumka?
    Mr. TRUMKA. I am sorry. Strong economic growth that is 
equally shared among all facets of the population and the 
citizens would help the problem significantly.
    Mr. MCCRERY. Dr. Spriggs?
    Mr. SPRIGGS. I think I would have to add what Mr. Trumka 
said. Growth that all Americans benefit from, returning us to 
shared prosperity, will make your job a lot easier because all 
Americans will believe that whatever happens, this is in their 
interest.
    Mr. MCCRERY. No. I get your point. However, weaker economic 
growth certainly won't make it easier for us to deal with those 
fiscal problems, will it, under any circumstances, however it 
is shared?
    Mr. SPRIGGS. Well, strong economic growth with the 
continued growth in inequality will make it very hard for us to 
solve these problems because growth inequality----
    Mr. MCCRERY. You didn't answer my question. Weaker economic 
growth under any circumstances won't make it easier for us for 
deal with those problems.
    Mr. SPRIGGS. Weaker economic growth under any circumstance 
will make your job harder.
    Mr. MCCRERY. Thank you.
    Mr. SPRIGGS. Growing inequality will make your job harder.
    Mr. MCCRERY. I understand, and I appreciate your making 
that point again.
    Dr. Diamond.
    Mr. DIAMOND. Stronger economic growth is imperative, and 
weaker economic growth would be catastrophic, in my mind.
    Mr. MCCRERY. Thank you, Mr. Chairman.
    Chairman RANGEL. Dr. Diamond, what impact would poverty 
have on a strong economic growth?
    Mr. DIAMOND. Poverty has a substantial impact on economic 
growth. In fact, I just finished paper for a group in Texas on 
school vouchers, talking about an income-limited school voucher 
program for students who are in low income schools because I 
think that is the population most at risk for not receiving a 
good education, which they can then be successful in the labor 
market.
    One article I read, I just cannot recall the number, but 
reducing poverty reduced government expenditures by a 
substantial amount. So, by reducing poverty, we can reduce 
government expenditures for crime and police protection and 
other things. Therefore, there are benefits to reducing 
poverty, and it is something we should take very, very 
seriously.
    Chairman RANGEL. Would I be stretching it if I say that 
poverty and unemployability is a threat to our National 
security? I am thinking Katrina.
    Mr. DIAMOND. I am not really ready to answer that question.
    Chairman RANGEL. Well, I will take you one step at a time. 
Let me get those papers that you got so we can work together.
    Mr. DIAMOND. Okay.
    Chairman RANGEL. What I was telling the Ranking Member is 
that I don't want to revolutionize the Committee on Ways and 
Means. I love it, he loves it, and we really want to get 
something done.
    So this process has to be good, as far as I am concerned, 
as an appetizer on a menu to get different views. At the end of 
the day, all of you, 90 percent of the time you are agreeing. 
If we are going to legislate up here, we have got to find 
something that all of you can say: it wasn't all--they didn't 
do all that they could have done but they sure made an 
improvement on what we have to work with.
    So I really want to thank you for spending so much time 
with us. We understand it if you can't come back, but don't be 
surprised if we don't change the configuration here and just 
sit down and talk and maybe some time argue so that we are not 
yelling at each other, but trying to figure out how we can deal 
with the problems, most of which all of you agree that we have.
    Thank you so much for your time and effort and look forward 
to working with you.
    The Committee will now stand adjourned.
    [Whereupon, at 12:35 p.m., the hearing was adjourned.]
    [Submission for the Record follows:]

               Statement of Executive Intelligence Review

    The political evidence of the November election's results, and the 
nature of the campaigns in which the new Members were elected, is that 
the American people want not only an end to a war policy; they also 
want an end to globalization and de-industrialization of their economy 
by ``free trade,'' low-wage outsourcing, deregulation. This is a strong 
message of the ``New Politics'' of the 110th Congress. It is also an 
urgent necessity, to forestall a severe plunge of the dollar and 
financial collapse of the U.S. economy.
    The 110th Congress must act to reverse the ravages of globalization 
and deindustrialization upon the U.S. economy, before a threatening 
severe collapse of the dollar brings chaos to the banking and monetary 
system, and makes such Congressional intervention extraordinarily 
difficult or even impossible.
    The Congress needs to intervene to protect and revive U.S. 
industry, and the dollar, restoring principles of fair trade and above 
all, launching major investments to rebuild and restore the neglected 
economic infrastructure of the nation: modern high-speed transport, 
energy and power supply, water management and clean water, flood 
control and navigation, public health and hospitals, and more.
    Facing already very large budget deficits, the 110th Congress 
should establish a (Federal Capital Budget) for these urgent 
investments and public works. Congress can create large volumes of 
long-term, low-interest Federal credit through capital budgeting, based 
on the economic record of such modern infrastructure creating $5-7,000 
of economic value in the economy for each $1,000 of such investment. It 
can, and must also act to stop the high-yield (``junk'') leveraged debt 
markets from taking and looting remaining U.S. economic infrastructure 
through ``Public-Private Partnerships (PPPs),'' abetted by the 
extremely loose money-supply growth policy of the Federal Reserve.
    These are the purposes of the Economic Recovery Act of 2006 (ERA), 
proposed by the Lyndon LaRouche Political Action Committee (LPAC). The 
idea of this legislation has been circulated by LPAC for two years, 
endorsed and lobbied for by scores of union locals and leaders, and by 
many state and city elected officials and several state legislatures 
(see below, supporters of ads calling for adoption of an ERA in The 
Hill and Roll Call on June 8, 2005). It focuses on the urgency of 
Congressional intervention to stop the collapse of the American auto 
industrial sector--by ``retooling'' considerable capacity in that 
sector for the purposes of building a new national economic 
infrastructure.
    When the 109th Congress did not act, manufacturing job loss resumed 
through 2005 and 2006; 90,000 jobs were lost in auto and auto supply 
industries alone, which have lost 285,000 since 2000. Scores of plants 
closed in the auto sector, and literally hundreds of plants are now 
slated for closure or sell-off by the three major automakers and six 
largest auto-supply firms.
Combating Globalization, Investing in Productivity
    One view of the clear and present danger of globalization, current 
among economic thinkers in Washington, holds that the only significant 
danger of globalization is the huge American trade, current account, 
and budget deficits and imbalances it has brought. Another view, is 
that the sole major problem of globalization is the persistent creation 
of one financial bubble after another--commercial real estate, 
communications stocks, commodities, residential real estate, junk 
credit, etc. This is attributed to the huge inflows of capital to U.S. 
and European markets, and the ultra-loose credit and money-supply 
policies of Alan Greenspan's Federal Reserve (continuing today), and of 
the Bank of Japan, over the period of globalization, and still 
continued by the Fed today.
    While pointing to real dangers, both ignore the central, 35-year 
poisoning and destruction of our economy by globalization and 
deregulated international trade and financial markets: the lowering of 
productivity. The absolute loss of 5.5 million U.S. manufacturing jobs 
since 1979--including the elimination of nearly half the employment in 
the aerospace and auto industries, the two major machine-tool 
reservoirs of the economy--lowers the productivity of the entire world 
economy.
    The outsourcing of skilled, technological work to lower-
infrastructure areas and countries has lowered the productivity of the 
industries. The re-employment of American workers at less-skilled, 
lower-wage jobs has lowered the productivity of the American workforce. 
(Inclusively, the portion of the American workforce with a college 
education is actually declining in this ``knowledge and information 
economy.'') Then, the infrastructure of power, transport, energy, water 
management, navigation, sanitation, public health, etc. which was 
necessary for that lost industrial employment, is itself let go to 
neglect and decay, and new investments in modern infrastructure 
stopped. This dramatically lowers the productivity of the entire 
economy.
    With the sinking of the housing price/mortgage bubble and 
threatened plunge of the dollar, we have now reached the trigger-point 
at which the characteristics of this trend could be expressed as a 
general breakdown-crisis of the economy, in the United States and 
internationally.
    Worst, the destruction of the machine-tool capacity of industries 
such as aerospace and auto which are our machine-tool reservoirs--
entire plants of machine-tools either destroyed or auctioned over the 
Internet to primarily overseas buyers--threatens to eliminate the 
nation's industrial capabilities for the future.
Save Machine-Tool Capacity
    Without a deep and versatile machine-tool capacity, U.S. industry 
will no longer be capable of building the new economic infrastructure 
the economy requires to recover--as, for example, U.S. industry already 
has no capacity to build nuclear power plants, and already lacks the 
aerospace-industrial capabilities for Apollo Moon-landings we could 
make 40 years ago.
    The machine-tool sector is the core of an industrial economy where 
scientific and technological ideas are turned into new economy reality. 
If the U.S. auto-manufacturing industry is destroyed, the U.S.A. 
becomes a virtual Third World nation overnight. The nation's machine-
tool design capability, most of which is tied up in the auto-
manufacturing and supply firms, is lost. The loss of the tool-making 
and closely related capabilities of that sector of industry would cause 
incalculable, chain-reaction consequences, within our nation, and also 
the world at large.
    The loss of employment of that machine-tool design segment of that 
part of the labor-force, means many times that number of skilled 
employees out of jobs. Sixty million square feet of aerospace-defense 
capacity are closed and machinery auctioned off since 1990. Eighty-one 
hundred million square feet of auto capacity are being closed and 
machinery auctioned off over 2006-08, more capacity lost than in the 
last 30 Years combined. The United States' economy's consumption of 
machine tools is only 60% of the 1980 level, and 60-70% of that 
consumption is imported machine tools.
    Nothing less than the nationwide ``retooling'' and recreation of 
advanced industrial capability, carried out to prepare for the war 
production of World War II, is the model for what the Congress must do 
now to build a new national infrastructure.
Infrastructure Deficits
    The deficits of modern infrastructure in the United States economy 
have grown huge, requiring hundreds of billions of dollars of public 
investments (annually) for an economic recovery based on raising the 
real productivity of our workforce and our population. The American 
Society of Civil Engineers' (ASCE) estimate of $1.7 trillion in 
immediate infrastructure fixes needed, is well known, but does not even 
begin to address the need for a new national infrastructure.
    Clean water infrastructure is the largest need, at $450 billion. 
The entire nation has only 1,300 miles of electrified railroad left; 
its power grid is falling below minimum reliable requirements, and 
requires $100 billion investments in distribution systems alone, which 
are not planned by the power industry. America's community hospitals 
can't meet public health needs.
    Constructing a national network of high-speed, electrified railroad 
corridors will require $300 billion in investments, according to 
transportation consultants. For the land-side regions around America's 
ports on the East and West Coast, such new rail corridors are not a 
pleasant option: They are an urgent necessity to prevent collapse or 
chaos of completely overloaded transport modes.
    ASCE's estimated need for waterway and port navigation 
infrastructure--especially, lock-and-dam systems on the nation's 
rivers--is $125 billion, and does involve new infrastructure projects, 
because these systems are so old, undersized, and obsolete that 
hundreds of them need urgent replacement with modern technology. But 
overall, ASCE's estimate is the barest minimum, measuring maintenance 
rather than new infrastructure technologies. If our mission is to build 
a new national infrastructure to raise the technological level and 
productivity of our workforce, and the standards of our people, to 
21st-Century potentials, the infrastructure deficit is several times 
the ASCE's $1.7 trillion figure.
A Federal Capital Budget
    Facing large deficits of budget and current account, very large 
capital-project investment needs, and a threatened dollar collapse, the 
110th Congress can think anew--of the proven methods of Federal credit 
issuance used for the Transcontinental Railroad and the industrial boom 
which followed the Civil War; for the great infrastructure projects of 
the FDR Presidency; and during the earlier era of Hamiltonian national 
banking, which first secured our new nation's debt and built up its 
economic infrastructure.
    Congress should institute a Federal capital budget for important 
public projects. A current White Paper written by Lyndon LaRouche and 
published by LPAC, ``The Lost Art of the Capital Budget,'' explains 
this in detail.
    The essential step is the issuance by the Treasury, of bonded 
credit into major new infrastructure investments which will raise 
economic productivity over one-two generations--issuance of government 
credit which is at a very low (such as 1-2%), regulated rate of 
interest, and for a long term, but nonetheless not as long as the term 
of that new infrastructure's productive, technologically advanced 
economic life.
    As in the proposed Economic Recovery Act (ERA), Congress can 
authorize the Treasury to issue long-term bonds at low interest 
directly to an Infrastructure Corporation. By discounting these bonds 
for capital at Federal Reserve banks, that Corporation causes the 
Federal Reserve to act in the manner of a National Bank, and the 
credits issued to remain regulated at low-interest, and their value 
essentially at 100%.
    Contrast the disastrous alternative of national, state, and local 
infrastructure being dependent on investments and privatizations from 
the so-called high-yield (``junk'') capital markets, through private 
equity funds and hedge funds in ``PPP''s--expecting not 1-2%, but 10% 
and higher annual returns on investment. These loot existing 
infrastructure, rather than building new. The Federal Reserve's ``wall 
of money'' policy repeatedly since the 1980s has created huge high-
interest bubbles, particularly mortgage-debt-based. The U.S. banking 
system's assets are now 50% mortgage-based, and another 20% on loans 
into ``leveraged'' private-equity takeover markets: That banking system 
is bankrupt, and should be treated as bankrupt.
    Federal capital budgeting by Congress directs the Federal Reserve 
away from feeding such speculative financial markets with ``walls of 
money,'' into the function of monetizing directed Federal credit 
issuance.
    The ``bill of materials'' for such major new infrastructure public 
works is produced in factories and shipyards with advanced machine-tool 
capacities; as demonstrated in the World War II buildup, the Manhattan 
Project, the Apollo Project and space programs, if the nation industry 
has lost or shut down such capacities, they must be recreated or 
``retooled.'' The capacity being discarded and underutilized by the 
automobile and related industries, as well as in aerospace industries, 
is the vehicle to be save and used for this infrastructure mission. An 
Infrastructure Corporation can assume control of and/or lease this 
capacity, exactly as did the Defense Plants Corporation created under 
the RFC in 1940.
    Secondly: Regional, state, and local infrastructure rebuilding 
projects combine factory-built machinery and other elements of the new 
infrastructure, with large construction sites requiring semi-skilled 
and labor-intensive employment. For example, the replacement of the 19 
obsolete locks and dams on the Ohio River Mainstem system alone, would 
generate approximately 20,000 construction-site jobs for a several-year 
period. This is the ``CCC-like'' impact of such investments on urban 
and rural unemployment and underemployment.
    Compare the costs and real economic impact of such low-interest, 
long-term infrastructure credits; and compare them to the real cost 
ravages of ``PPP'' privatization of infrastructure. For example: If 
Congress were to authorize $2 trillion of new infrastructure credit 
issuance through Federal capital budgeting at $300 billion investments 
annually, Treasury's interest cost (net of tax recovery from the Fed) 
would rise toward $30 billion annually. Based on the past economic 
record of major new infrastructure, six million or more new jobs would 
be created (or saved in industry) over that time, and the new economic 
value added to the economy would conservatively raise Federal tax 
revenues alone, over a number of years, by $300 billion or more 
annually.
    Congress can, in addition, designate revenue sources to these 
bonds, infrastructure user-fee trust funds, contractor lease payments 
for plant capacity. (The new Federal long-term debt issued can be 
retired over a term less than the long-term technological and 
productivity impact of the infrastructure built and renewed.) Thus, the 
$50 billion in credits issued through the Reconstruction Finance 
Corporation were repaid in full.
    The fundamental support of this bond-credit issuance is the 
increased productivity, and technological and scientific level given to 
the American workforce and the entire productive economy by this 
modern-infrastructure ``driver.'' Studies ever since the 1960s Apollo 
Project have shown that such high-technology infrastructure investments 
generate about $6 billion in direct and indirect income in the economy, 
for each $1 billion spent on them by government. The steadily 
increasing future tax revenues generated by this infrastructural 
investment, give the Treasury the capacity to retire these bonds as a 
matter of policy--(if) they are issued as long-term, low-interest 
special-purpose bonds not subject to short-term market speculations. 
This is served by the financing method of the Economic Recovery Act.

[GRAPHIC] [TIFF OMITTED] T3825A.039


This draft legislation is circulated to Congress by the LaRouche 
        Political Action Committee (LPAC)

1. TITLE: THE ECONOMIC RECOVERY ACT OF 2006

2. FINDINGS

Congress Finds the Following:

    A. Under the impact of ``globalization,'' there is a massive and 
ongoing loss in the machine-tool capabilities of the U.S. economy. This 
danger is centered in the accelerating ``outsourcing'' and shut-downs 
of plants in America's most important and versatile machine-tool 
industry, the auto industry. Eighty million square feet of auto 
capacity being are closed and machinery auctioned off over 2006-08, 
more capacity lost than in the last 30 years combined. Sixty million 
square feet of aerospace/defense capacity are closed and machinery 
auctioned off since 1990. U.S. consumption of machine tools is only 60% 
of the 1980 level; of that consumption, 60-70% are imported machine 
tools; much of this stock, in turn, is being destroyed or sold off 
overseas as plants are closed; machining vital to national security, 
including defense and aerospace production, has been and is being 
outsourced.
    B. The machine-tool sector is the core of an industrial economy 
where scientific and technological ideas are turned into new economic 
reality. If the U.S. auto-manufacturing industry is destroyed, the 
U.S.A. becomes a virtual ``Third World'' nation overnight. The nation's 
machine-tool design capability, most of which is tied up in the U.S. 
auto-manufacturing and supply firms, is lost. The loss of the tool-
making and closely related capabilities of that sector of industry 
would cause incalculable, chain-reaction consequences, within our 
nation, and also the world at large.
    The loss of auto and auto-parts plants means an economic disaster, 
approaching ghost-town proportions, for entire towns, counties, and 
cities, even states of the union, which are already highly vulnerable.
    The loss of employment of that machine-tool design segment of that 
part of the labor-force, means many times that number of skilled and 
unskilled employees out of jobs.
    C. There were 250,000 net jobs lost in the automobile 
manufacturing/supply sector from 2000-05, leaving a total employment at 
end of 2005 of 1,090,000. During 2006, the shutdown/sell-off of 67 auto 
plants has been announced by major U.S. automakers and the biggest 
parts-supply companies alone, occurring and to occur in 2006-08, with 
the direct and indirect loss of another 250,000 net jobs occurring and 
to be expected in the auto sector.
    D. Accepting the reduction in the number of automobiles produced by 
U.S. automakers, we must replace that work immediately with a switch to 
other categories of technologically very high-grade products which the 
auto industry's machine-tool capacity is uniquely qualified to design 
and produce. The alternative mission for this purpose is chiefly in the 
category of needed, new economic infrastructure.
    E. The United States suffers a worsening crisis in its public 
infrastructure. This breakdown is clear: in the failure of water 
control, transportation infrastructure, and power infrastructure in the 
Gulf States during Hurricanes Katrina and Rita; in the long heat-
blackouts of hundreds of thousands in major cities in Summer 2006 due 
to failure of obsolescent power distribution networks and inadequate 
power capacity; in the lack of refinery capacity and dependence on oil 
imports; in the spread of freshwater crises throughout the Western half 
of the country in the past decade.
    The United States lacks railroad and mass transportation 
infrastructure, with shrinking air travel grids; its electric power 
infrastructure is falling behind under deregulation; it has lost fossil 
water and freshwater supplies for irrigation, and has inadequate 
drinking water supply in rural regions; its water control--especially 
upstream dams--and river navigation infrastructure are obsolescent; it 
has insufficient port and landside port-rail infrastructure; and 
insufficient hospital infrastructure for any serious public health 
crisis. This is given only a minimal estimate in the American Society 
of Civil Engineers' ``infrastructure report card'' which estimates the 
need for $1.7 trillion in investments merely to repair and replace 
obsolescent and broken-down infrastructure.
    1. Each $1 billion of Federal funding invested in new, modern 
infrastructure creates approximately 50,000 jobs and $6 billion in 
economic activity.
    2. States, cities, transit authorities, airport authorities, and 
other entities have thousands of ready-to-go infrastructure projects, 
which will create long-term capital assets for the United States and 
which can help stimulate the nation's economy.
    F. Action, by the U.S. Federal government and others, is urgently 
needed, to prevent an across-the-board collapse of not only the U.S. 
auto industry, but the counties, towns, cities, and states, and their 
people.

3. PURPOSES

Congress Adopts the Following Purposes:

    A. To prevent the wholesale loss of the U.S. auto industrial 
sector, with its vital, large-scale, and versatile machine-tool 
capabilities and skilled workforce; since it is rapidly being lost, 
Congress must act with speed and force.
    B. To reverse by Federal investments the neglect, decay, and 
deregulation of critical economic infrastructure of the United States; 
and to foster the building of projects of a new national infrastructure 
using 21st-Century technologies of transport, power, navigation, water 
purification, and others.
    C. To preserve a national strategic machine-tool design and 
production capability and associated skilled workforce, from among auto 
industry plants otherwise being idled and discarded and their 
production outsourced by the automakers.
    D. To save skilled and industrial jobs, and to create new such 
jobs, by retooling these idle plants and capacity, to machine and 
produce the bill of materials for infrastructure projects in power, 
rail, transport, water management, and energy; to create many tens of 
thousands of semi-skilled and unskilled construction jobs indirectly, 
through the construction projects involved in the building of new 
infrastructure.
    E. Congress adopts for these purposes, the model of functioning of 
the Reconstruction Finance Corporation (RFC) and its amendment, the 
Defense Plant Corporation (DPC) Act of 1940, by which thousands of auto 
and other industrial plants were retooled for--at that time--defense 
production. Half of all auto industrial capacity was idle at the time 
of the creation of the Defense Plants Corporation in June 1940.

4. TITLES:

    Title 1: Federal Infrastructure Plants Corporation. A Federal 
public corporation is created, the Federal Infrastructure Plants 
Corporation, to assume control of, and operate--directly or by 
contract--the discarded and unused plant-and-equipment capacity of the 
automobile/auto supply sector; and other unused industrial facilities, 
military base, or shipyard facilities.

    Title 2: Infrastructure. The Corporation shall fund and carry out, 
and may aid other public agencies or corporations and state or local 
government agencies in carrying out, projects of new, modern economic 
infrastructure including a) passenger and freight rail transportation, 
including regional and national high-speed rail corridors, magnetic-
levitation trains on priority routes, and light-rail and mass transit 
systems; b) electric power production, including third- and fourth-
generation nuclear power plants, and electric power distribution 
systems; c) freshwater purification and desalination infrastructure, d) 
modern water-control and water-management systems; e) ocean ports and 
inland navigation freight-transport systems; f) hospitals and public 
health infrastructure.

    Title 3: Powers.

    A. The Corporation is authorized 1) to produce, acquire, and carry 
strategic machine tools and other industrial machinery needed to 
produce bill of materials for infrastructure projects; 2) to purchase 
and lease land, to purchase, lease, build, and expand plants, and to 
purchase, and produce equipment, supplies, and machinery for the 
manufacture of bills of materials for new economic infrastructure; 3) 
to lease such plants to private corporations to engage in such 
manufacture; and 4) to engage in such manufacture itself.
    B. The Corporation may make loans to, or purchase the capital stock 
of any corporation for the purposes of Title 3A.
    C. The Corporation is further authorized to contract with state or 
local agencies wishing to use idled auto plants and machinery for 
infrastructure projects, subject to Title 3D; or to contract with firms 
wishing to lease auto plants and machinery for such contracts, subject 
to Title 3D; or to purchase auto product lines and auto-supply product 
lines where necessary to prevent loss of industrial employment to 
foreign producers.
    D. Contracting and Employment: The state, local agencies, or 
contractors are required 1) to maintain all plant facilities open and 
in repair, and at least maintain work levels, 2) to provide for 
preferential hiring of members of the pre-existing workforce who want 
to continue to work at the plant facilities, 3) to be subject to Davis-
Bacon rules for Federal contracting, 4) to spend 90-95% of issued funds 
within two years of commencement of the project.

    Title 4. Engineering Survey of Plants and Facilities. An 
engineering survey of these plants and other facilities shall be 
carried out by the U.S. Army Corps of Engineers (USACE) within six 
months of enactment of this Act, to determine and plan for their 
potential employment in producing the bills of materials for modern 
infrastructure projects.

    Title 5: Board. The Corporation's Board of Directors shall include 
the President; the Secretary of the Treasury; the Deputy Secretary of 
the Army for Civil Affairs; and the Secretaries of Transportation, 
Agriculture, Energy, Education, Labor, Housing and Urban Development, 
and Health and Human Services.

    Title 6: Funding of the Corporation. The Corporation shall be 
provided a capital-budget stock by issuance of 2%-interest, long-term 
special-purpose bonds by the Treasury to the Corporation, for 
discounting at Federal Reserve banks. The corporation shall be under 
the authority of the Secretary of the Treasury.

    A.  The authorization of issuance of credit from the Treasury, 
through issue of special-purpose bonds to this Corporation, is up to a 
limit of $200 billion in each of Fiscal Years 2007 through Fiscal 2011; 
and $300 billion in each of Fiscal Years 2012 through 2016.
                               __________
LPAC placed this statement in Roll Call, June 8, 2006; and in The Hill, 
June 9, 2006.

CONGRESS MUST LAUNCH EMERGENCY ECONOMIC ACTION NOW!

    In March of 2005, Lyndon LaRouche warned that General Motors was 
facing imminent collapse. He called for Congress to intervene with an 
emergency reconstruction policy designed to save the industry as a 
whole, as a crucial component of a drive for overall economic recovery. 
He proposed that the Federal government intervene by placing the 
productive capacity of the industry into government-supervised 
receivership, and then fund the retooling and expansion of that 
capacity to supply the components of desperately needed national 
infrastructure projects. He stressed that any liquidation of the 
present structure of the physical productive capacities of the auto 
industry, especially its machine-tool sector, would do irreparable 
damage to our physical economy and mean not only the end of the U.S. as 
a leading physical economic power, but would also result in related 
kinds of chain-reaction damage to the world economy as a whole.
    The world financial system is already in a state of mixed 
hyperinflationary and deflationary collapse, which necessitates 
instituting an FDR-style recovery program to save civilization. The 
Congress's failure to act then has brought us to the point that today, 
65 major auto sector plants, with over 75 million square feet of 
machine-tool capacity are being shut down this year and next. These 
shutdowns will cost 75,000 skilled industrial jobs directly, and 
300,000 more through immediate radiating effects on smaller supply 
plants and machine tool shops. What is about to be shut represents the 
capacity to build over 2.5 million cars and light trucks a year. But, 
more importantly, in terms of urgent national economic investment, it 
represents a unique industrial capability to build an urgently needed 
new national infrastructure of transportation, power, and more.
    LaRouche has authored a statement of principle called (The U.S. 
Economic Recovery Act of 2006.) It calls on Congress to intervene to 
save our auto capacity (now); to retool the 50% or more unutilized 
capacity of the auto industry for production of new national 
infrastructure, particularly high-speed rail corridors and new 
electricity grids centered on nuclear power. It gives us the 
opportunity to save ourselves; to turn our nation, and the world, onto 
a course of prosperity, and away from the current descent into a New 
Dark Age. Already, state legislatures in Alabama, Vermont, and Rhode 
Island have weighed in with memorials to Congress demanding that 
Congress enact this retooling legislation. They have been joined by 
city and county councils across the nation's industrial heartland.
    We urge members of Congress, regardless of party affiliation or 
geographic origin, to enact the urgently needed emergency Federal 
legislation specified in the (U.S. Economic Recovery Act of 2006) to 
prevent the threatened immediate collapse and shutdown of the physical 
productive capacity of the U.S. auto sector and to put our nation on 
the road to becoming, once again, the greatest productive economy in 
the world.
    The names published then represented only a small number of the 
hundreds of endorsers representing elected officials, and trade union 
officials from across the United States. Affliliations were for 
identification purposes only:

                           ELECTED OFFICIALS

    Rep. Ronald Grantland, Hartselle, Al.
    Rep. Thomas Jackson, Thomasville, Al.
    Rep. John Letson, Hillsboro, Al.
    Rep. Bryant Melton, Tuscaloosa, Al.
    Joycelyn Elders, former U.S. Surgeon General, Little Rock, Ar.
    Rep. Otis Davis, Earle, Ark.
    Rep. Steven Jones (former), Chairman-elect Ark. Asn. of County Dem. 
Officers, West Memphis, Ar.
    Assemblyman Mervyn Dymally, Los Angeles, Ca., former Congressman, 
former Chair, Congressional Black Caucus
    Rep. Felipe Reinoso, Bridgeport, Ct.
    Rep. Bob Henriquez, Tampa, Fl.
    Rep. Priscilla Taylor, West Palm Beach, Fl.
    Rep. Art Turner, Chicago, Il.
    Theodore Thomas, Alderman, Chicago, Il.
    Cong. Andy Jacobs, Jr. (former), Indianapolis, In.
    Sen. Billie Breaux, Indianapolis, In.
    Sen. Sam Smith, E. Chicago, In.
    Rep. Terri Austin, Anderson, In.
    Sen. Perry Clark, Louisville, Ky.
    Sen. Joey Pendleton, Hopkinsville, Ky.
    Rep. Arthur Morrell, New Orleans, La.
    Sen. Dianne Wilkerson, Boston, Ma.
    Rep. LaMar Lemmons, Detroit, Mi.
    Rep. Alexander Lipsey, Kalamazoo, Mi.
    Rep. Lee Gonzales, Flint, Mi.
    Rep. Earle Banks, Jackson, Ms.
    Rep. Credell Calhoun, Jackson, Ms.
    Rep. Jim Evans, Jackson, Ms.
    Rep. John Bowman, St. Louis, Mo.; Chair, Leg. Black Caucus
    Rep. Esther Haywood, St. Louis, Mo.
    Rep. Terry Riley (frmr), City Council, Kansas City, Mo.
    Rep. Juanita Walton, St. Louis, Mo.
    Sen. Joe Neal (former), Las Vegas, Nv.
    Assemblyman Gordon Johnson, Englewood, N.J.
    Sen. Carlos Cisneros, Questa, N.M.
    Sen. John Sampson, Brooklyn, N.Y.
    Adam McFadden, City Council, Rochester, N.Y.
    Rep. Dan Stewart, Columbus, Oh.
    Rep. Sylvester Patton, Youngstown, Oh.
    Rep. Jenine Perry, Toledo, Oh.
    Rep. Catherine Barrett, Cincinnati, Oh.
    Rep. Annie Key, Cleveland, Oh.
    Kevin Conwell, City Council, Cleveland, Oh.
    Sen. Bill Morrisette, Springfield, Or.
    Rep. Harold James, Philadelphia, Pa.
    Rep. Peter Ginaitt, Warwick, R.I.
    Sen. Theresa Two Bulls, Pine Ridge, S.D.
    Rep. Joe Towns, Memphis, Tn.
    Sen. Tracy Dempsey, Harts, W.V.
    Rep. Christine Sinicki, Milwaukee, Wi.

                         TRADE UNION OFFICIALS

    Frank Barkley, Bus. Agent; former Pres., AFGE Local 1061, Los 
Angeles, Ca.
    William Danny Givens, Bus. Rep., IAM Dist. 75, Pensacola, Fla.
    Samuel Stevens, Pres., UAW Local 882, Atlanta, Ga.
    Rich Downs, Vice Pres., Local 18, Heat and Frost Pipe, Insulators, 
Indianapolis, In.
    John Jeffries, Pres., and entire Exec. Bd; IAM Local 830, 
Louisville, Ky.
    Bill Londrigan, Pres., Kentucky State AFL-CIO, Frankfort
    Ken Koch, Pres., State Council of Machinists; Vice Pres., Kentucky 
AFL-CIO, Louisville, Ky.
    John Clark, Pres., UAW Local 2031, Adrian, Mi.
    Joe Joseph, Pres., UAW Local 1970, Dearborn, Mi.
    Val Nevels, Exec. Bd., Region 1-C, UAW CAP Ctte.; Flint, Mi.
    Bert Atkins, Leg. Chair, IAM District Lodge 837, Florissant, Mo.
    John Smirk, Bus. Mgr., Painters Dist. Council 15, Las Vegas, Nv.
    Gerald J. Hay, Jr., Sec.-Treas., Teamsters Local 375, Buffalo, N.Y.
    Mark Sweazy, Pres., UAW Local 969, Columbus, Oh.
    Chuck Morton, Exec. Dir., Building Trades, Dayton, Oh.
    Gary Barnette, UAW CAP Chair, Franklin County, Columbus, Oh.
    Larry Oberding, Pres., Ironworkers Local 44, Cincinnati, Oh.
    Tom Knox, Chair, GM UAW Local 969, Columbus, Oh.
    Lynn Lehrbach, State Political Dir., Oregon Conference of 
Teamsters, Portland, Or.
    Ken Washington, Dir., Governmental Affairs, Laborers Dist. Council, 
Philadelphia, Pa.
    Claretta Allen, Sec., Smith Co. Central Labor Council, Tyler, Tx.
    Bruce Price, Sr., Fin'l Sec., UAW Local 919, Norfolk, Va.
    Bob Francis, Exec. Bd., Pierce Co. Central Labor Council, former 
Pres., Teamsters Local 599, Takoma, Wa.
    Dan Aude, Chair, UAW CAP Fox Valley; Green Bay, Wi.
    Denal Crawford, Pres., AFSCME Local 1654, Milwaukee, Wi.

                                 
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