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



 
                     THE ROLE OF PUBLIC INVESTMENT


                      IN PROMOTING ECONOMIC GROWTH

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 23, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-17




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West 
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 23, 2007...............................................     1
Appendix:
    March 23, 2007...............................................    31

                               WITNESSES
                         Friday, March 23, 2007

Drake, Michael, M.D., Chancellor, University of California, 
  Irvine.........................................................    14
Haughwout, Andrew F., Research and Statistics Group, Federal 
  Reserve Bank of New York.......................................    21
Rapoport, Miles S., President, Demos.............................    16
Rohatyn, Ambassador Felix G., Rohatyn Associates LLC.............     2
Winston, Clifford, Senior Fellow, The Brookings Institution, 
  Washington, DC.................................................    18

                                APPENDIX

Prepared statements:
    Drake, Michael...............................................    32
    Haughwout, Andrew F..........................................    45
    Rapoport, Miles S............................................    55
    Rohatyn, Ambassador Felix G..................................    65
    Winston, Clifford............................................    73


                     THE ROLE OF PUBLIC INVESTMENT



                      IN PROMOTING ECONOMIC GROWTH

                              ----------                              


                         Friday, March 23, 2007

             U.S. House of Representatives,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 2:05 p.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Present: Representatives Frank, Maloney, Moore of Kansas, 
Green, Cleaver; Neugebauer, and Campbell.
    The Chairman. The gentleman from Texas is from Houston. He 
has been Mr. Hospitality this year because his City is the lead 
place where people have been welcomed from New Orleans, so he's 
been in a very welcoming mood for longer than he should have 
had to be.
    This hearing of the Committee on Financial Services will 
come to order. I begin with an apology and expression of 
gratitude to the witnesses. It has been a busy week, and I had 
anticipated unnecessarily that we might have a spillover this 
morning. I very much appreciate your accommodating us on a busy 
Friday afternoon. I understand that Mr. Rohatyn is going to 
have to leave, and it's our fault, not the fault of any members 
of the panel. We are appreciative.
    We're going to get right into this. This committee has, of 
course, legislative jurisdiction in specific areas involving 
housing and financial services. We also have jurisdiction over 
the Humphrey-Hawkins Act and the question of economic policy in 
America in general.
    One aspect of this that we are focused on is the problem we 
are confronting in the United States, as well as in other parts 
of the world, about how you go forward with economic growth in 
a way that does not exacerbate social problems and in a way 
that does not provide more inequality. Obviously, our 
capitalist system requires inequality. It is a good thing in 
the appropriate amounts, but too much inequality can become 
socially dysfunctional. It might even become politically 
dysfunctional, and this committee is going to be talking to 
thoughtful people all year about how we go forward.
    One aspect that I believe in very strongly is being 
overlooked in the current situation and that is the 
contribution that should be made by the public sector. I do not 
regard support for a vigorous public sector as in any way a 
denigration of the private sector. Our system requires both. 
And when you talk about diminishing inequality, not getting rid 
of it, but preventing it from growing as growth comes, I 
believe we need more reliance on the public sector as a part of 
that effort than we've had. How you do it, we can talk about.
    So this is a piece of that discussion. It's the role of 
public investment in promoting economic growth, and in 
promoting economic growth in a way that makes it sustainable by 
giving the great majority of the public a view that they have a 
stake in it.
    Do either of the other members wish to make an opening 
statement? If not, we will begin with our witnesses, again with 
my thanks for accommodating us. We'll begin with Mr. Rohatyn. 
Ambassador, please go forward.

 STATEMENT OF AMBASSADOR FELIX G. ROHATYN, ROHATYN ASSOCIATES 
                              LLC

    Mr. Rohatyn. Mr. Chairman and members of the committee, 
it's a great privilege to be here today to discuss a critical 
issue--the need for large-scale public investment in projects 
that will modernize our Nation and enrich our people.
    Throughout our history, and until the 1960's, the Federal 
Government played a dominant role in our level of public 
investment, while the States played a secondary role. This has 
changed since then. Public investment has, by tradition, meant 
infrastructure: roads, trains, bridges, public transportation, 
public schools, etc., have provided the private sector with the 
complementary investments which improve business productivity, 
our standard of living, and our quality of life. Largely the 
product of a Federal, State and local partnership, it was badly 
neglected over the years, principally by the failure of the 
Federal Government to maintain its level of participation.
    The American Society of Civil Engineers has estimated that 
it would take $1.6 trillion dollars over a 5-year period to 
bring America's infrastructure to a reasonable standard of 
adequacy and that this requirement increases by about $300 
billion every 2 years.
    Mr. Chairman, I have for many years recognized our 
government's historic role as the indispensable investor in the 
economy of our country. I hope that your support will encourage 
the Congress to undertake the major effort needed in rebuilding 
America before it is too late. In order to do so, we must 
counteract the present theology that all public investment is 
wasteful and that neither taxes nor borrowing can be justified 
for that purpose.
    It is also worth noting that the financing of public 
infrastructure creates hundreds of thousands of private sector 
jobs, which is particularly important when globalization is 
putting pressure on American industrial employment.
    Fortunately, past American political leaders did not always 
think this way. As we look to our Nation's future, we should 
also look back at the history of great public investments, at 
the precedents set by leaders who made many of the critical 
commitments that became the backbone of our Nation; we should 
reflect on the actions of those leaders who used government 
power and public finance to make the investments that formed 
this country; and we should celebrate their historic 
achievements by continuing to invest boldly and wisely in 
America's future.
    As the political, geographic, and economic structure of 
America took shape in the 19th and early 20th centuries, public 
investments such as the Louisiana Purchase, the Erie Canal, the 
Transcontinental Railroad, the RFC, and the interstate highway 
system shaped our economy and our security structure. Although 
the private sector has been the mainstay of our economy, it 
could not exist without this platform and the political leaders 
who made those decisions--Jefferson, DeWitt, Clinton, Lincoln, 
FDR, and Eisenhower.
    Since the beginning of the Republic, transportation, 
infrastructure, and education have played a central role in 
advancing the American economy: whether it was the canals in 
upstate New York or the railroads that linked our heartland to 
our industrial centers; the opening of education to average 
Americans by land grant colleges and the GI Bill, making 
education basic to American life; or the interstate highway 
system that ultimately connected all regions of the Nation.
    This did not happen by chance, but was the result of major 
investments financed by the Federal and State Governments over 
the last century-and-a-half. Mr. Chairman, we need to make 
similar investments now.
    Of course, not all government investments have been 
successful. The endless earmarks, political pork in too many 
projects, corruption in military contracts, and the recurring 
problems in NASA and many others are proof that there is no 
such thing as perfection in the public sector any more than in 
the private sector. But the private sector has also had its 
Enrons and its Worldcoms, as well as its earlier scandals, 
which caused Teddy Roosevelt to break up the trusts and FDR to 
regulate the securities markets.
    But the consistent ideological attack on public investment 
is bringing this country to its knees. Witness the outrage of 
New Orleans, the state of our public schools, our pollution, 
and our wasteful use of energy. Without adequate levels of 
public investment, our private sector will lose much of its 
competitiveness and outsource more and more of our requirements 
in goods as well as services, constantly increasing our foreign 
debt and losing domestic jobs.
    The recent decades have been the best of times for private 
investment. For public investments, they have been disastrous.
    My views on economic and social issues have been shaped not 
only by my years in business and in government, but also by my 
experiences as a child and as a refugee fleeing from the Nazis 
and seeking asylum in America during World War II. During the 
war years, I had from to time heard FDR's voice on the radio, 
sometimes on clandestine sets, which shaped almost by osmosis 
my views of America. To me, America was the platform for 
freedom, fairness, and opportunity, and I have never wavered 
from these views.
    My involvement in public life began in the spring of 1975 
when New York City was caught in a financial death spiral. In 
the 1960's, the City had lost 300,000 private sector jobs, and 
in the early 1970's, the City's economy had slowed sharply 
during a national recession, aggravated by the Arab oil 
embargo. Our capital investment program had been wiped out. The 
City was shut out of the financial markets and headed for 
bankruptcy.
    To regain market access, we needed a plan which would 
revive the City's economy, eliminate its deficit, and revive 
its moribund capital investment program. We needed a plan with 
Federal backing.
    In the summer of 1975, when Governor Carey appointed me 
chairman of New York's Municipal Assistance Corporation, I 
believed that bringing the City back to the market would take a 
few months. It actually took several years and required the 
courageous political leadership of Governor Carey and Mayor 
Koch, the strong support of the City's labor unions and of its 
banks, and ultimately, it required credit from the Federal 
Government in the form of seasonal loans.
    The Federal credit support enabled the union pension funds 
and the private financial institutions to bring their own 
support to the City, and as a result, the City balanced its 
budget, reentered the financial markets, and for the next 20 
years, the City's economy was strong, its budgets were 
balanced, and it was able to make the vital investments in its 
infrastructure. It could not have happened without the credit 
support of the Federal Government and the sacrifices of its 
citizens.
    It is also worth noting that the City repaid 100 percent of 
its debt to the Federal Government ahead of schedule, and that 
the Federal Government did not have to face the staggering 
national cost of a New York City bankruptcy.
    Today, support for any government intervention in the 
economy has become anathema, and this has frightened too many 
Americans into ignoring the long and positive history of 
government investment in our land. Furthermore, the illogical 
rules of government accounting and the fear of further deficits 
make this a very difficult political issue.
    As opposed to businesses, States, and local governments, 
the Federal Government accounts do not differentiate between 
long-term investment and everyday operating expenses. They 
treat construction of a dam as if it were a welfare check and 
record the debt incurred as a deficit without the offsetting 
assets represented by the dams. If our private sector companies 
were to keep their books in this fashion, they would report 
losses instead of profits, they would cut back on investment 
and employment in order to show earnings, and they would 
ultimately go out of business.
    The idea that government intervention is always bad has had 
consequences. The recent catastrophe of New Orleans was an 
event waiting to happen. If not in New Orleans, it would have 
happened somewhere else. It is the result of a national failure 
to make public investments adequately and intelligently--in the 
case of New Orleans, inadequate investment necessary to prevent 
the flooding of New Orleans, and the failure to have in place 
an effective emergency response system.
    Modern market capitalism and the links of the financial 
markets to advanced information technology have created a 
formidable engine for the creation of wealth, and we have, in 
my judgment, the best economic system in the world. This 
wealth, however, is heavily weighted toward the private sector, 
and has resulted in the neglect and decay of public facilities, 
including that of our public schools. The sensitivity of the 
financial markets to government spending became a powerful 
brake on public investment, because the arbiter of financial 
policy is a government accounting system that treats investment 
as an expense and a bond market fearful of deficits, regardless 
of their origins.
    The combination of these notions, namely, that government 
cannot do trading agreement right, and that long-term public 
investments are the equivalent of welfare payments, has caused 
a steady erosion in Federal funding for infrastructure and 
other initiatives that would spur progress and economic growth, 
leaving more and more to State and local governments, which 
cannot provide adequate support. That is the road that led to 
New Orleans.
    As we fail to make large public investments--
    The Chairman. Mr. Rohatyn, could you sum up in another 
minute, and then--
    Mr. Rohatyn. Certainly, sir.
    The Chairman. Thank you.
    Mr. Rohatyn. I certainly can. A Federal capital budget 
would help correct our problems. You all know the political 
hurdles of such a budget, but their existence should not 
automatically doom the idea. However, if we are unable to 
institute a capital budget, there is a recent development that 
suggests another remedy--the return of the 30-year Treasury 
bond, because long-term bonds should finance capital assets, 
and their issuance should be dedicated to that purpose. Even 
longer maturities, such as 50-year bonds, should be envisaged. 
That is what the European Union does to fund its systems.
    To help deal with our shortage of capital investment, the 
Congress could authorize a trust fund to be financed over a 5-
year period by special purpose 50-year Treasuries. The fund 
could be used to co-finance high priority national, regional, 
and local infrastructure programs, as well as special projects 
which generate advanced intellectual property. Private capital 
should be an integral part of the program. Tight control should 
be applied to the operations, and it should be subject to the 
Federal limit.
    Jefferson, Lincoln, FDR, and Eisenhower proved that public 
investment can generate vast returns. The Federal budget should 
be a tool to encourage such national investment instead of 
writing it off.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Ambassador Rohatyn can be found 
on page 65 of the appendix.]
    The Chairman. Thank you very much, Mr. Rohatyn. Next, Dr. 
Michael Drake, who is the chancellor of the University of 
California at Irvine.
    Oh, I apologize. We agreed to do an immediate round of 
questions for Mr. Rohatyn because he has to leave early, so let 
me begin.
    It's important, because you've had a very distinguished 
career in the private sector as an investment banker, as well 
as your public sector work. One of the arguments we've heard is 
that the expansion of the public sector is somehow inimical to 
the private sector.
    I do think it's important for you to comment from the 
perspective you've had as an extremely successful private 
financial markets individual as to the compatibility of the two 
and whether or not the benefits you urge from an expanded 
public sector could in fact be done through the private sector 
instead.
    Mr. Rohatyn. Well, Mr. Chairman, the experience that I've 
had in the public sector essentially was my work as chairman of 
the Municipal Assistance in New York. And that for me was an 
eye opener in terms of how bad the need is for the public and 
the private sector to work together. New York City would have 
gone bankrupt if we hadn't had access to public money, to 
government assistance. And we were able to do that by at the 
same time bringing the private sector, the banks, as well as 
the public sector unions, into the process.
    And it turned out--probably turned out even better than we 
thought it might. But without it, the City would have gone 
bankrupt, the Nation would have suffered a terrible, terrible 
economic loss, and socially, it would have been a catastrophe.
    So I am absolutely convinced that the public and the 
private sector have to work together, that they're 
complementary, and they're not at all in opposition to each 
other; that business and labor have to work together, and that 
political parties have to work together. If we don't do that, 
we are going to always be in trouble.
    The Chairman. Thank you. A related question, because one of 
the arguments often made on the Floor of the House and 
elsewhere when we talk about government spending is there is a 
general view that less government spending is better, unless 
it's war or maybe going to Mars, or subsidizing agriculture. 
Those are the three exceptions that we often hear.
    But there is a general view that if you cut government 
spending, that's better, and particularly we hear, when we're 
not talking about defense contracts, and this is a verbatim 
quote I have heard many, many times. Let me show off most of my 
Latin. I now quote you verbatim what I have heard ad nauseam.
    [Laughter]
    The Chairman. And it is that government cannot create jobs, 
that government spending cannot create jobs, that only the 
private sector creates jobs, and that government funding that 
is theoretically motivated by somehow increasing employment is 
almost a contradiction in terms. Would you comment on that?
    Mr. Rohatyn. Well, my simplest comment is that public 
investment leads to private employment. Most of the people put 
to work by public investment are private sector employees, and 
most of the entities that benefit from public investment are 
private sector corporations. The notion that these are 
contradictory to each other doesn't make any sense to me.
    The Chairman. In the book that you're working on, and the 
comments you've made, you talk about some major decisions 
involving significant public expenditure. Is it your view that 
private employment, private sector employment in the economy 
around those, subsequent to those events, was greater than it 
would have been if they hadn't been made?
    Mr. Rohatyn. Oh, absolutely, Mr. Chairman. I mean, the 
decision by Lincoln, for instance, to finance the 
Transcontinental Railroad, if we hadn't had a Transcontinental 
Railroad, the economic development of this country would have 
been infinitely slower. To me, this is self-evident. The things 
that--
    The Chairman. You hold that truth to be self-evident?
    Mr. Rohatyn. I do indeed. I mean, the build-up to World War 
II, which was an extraordinary accomplishment both politically 
and economically, resulted in an enormous increase in private 
employment and private investment as Roosevelt was building the 
country up for World War II.
    The Chairman. And I take it--I will turn it over to my 
colleague--but what it seems to me you were saying, what I read 
in here you're saying is that the job creation that results is 
not simply from the expenditure itself, which might sort of be 
self-evident in that sense, but enhances the creation for 
further private sector investment. That done well, public 
investment increases the level of private sector activity 
subsequently?
    Mr. Rohatyn. Absolutely, Mr. Chairman. I would argue, if we 
did a better job in our public schools, we would have a much 
better functioning economy as a result. It may be 10 years 
later, but it starts right there.
    The Chairman. The gentleman from Texas.
    Mr. Neugebauer. I thank the chairman. Mr. Chairman, I want 
to be clear. Are we just going to direct these particular 
questions to--
    The Chairman. Just to Mr. Rohatyn, and then we'll do the 
rest.
    Mr. Neugebauer. I just wanted to be clear about that. Thank 
you, Ambassador, for--you know, I, number one, I concur with 
you that infrastructure is a vital part of our economy.
    In fact, you know, one of the things I tell folks--and I'm 
a land developer, so I understand infrastructure probably as 
well as anybody, because I've put a lot of infrastructure in, 
and I look for infrastructure when I'm doing a land development 
project--I would say that you're right when you look at putting 
in the transportation infrastructure, for example, that we put 
in this country, opened up opportunities, bringing electricity 
to other parts of the country. And probably in those days, you 
know, there was no other financing source for some of those 
projects than the Federal Government.
    But due to the sophistication of financial markets today, 
and the fact that we have the ability to put capital together, 
really for just about anything. I mean, we now have in Texas, 
under proposal, a private company to build a road and to build 
a toll road in our--do you see our role in the government is 
not necessarily--I noticed you're a proponent of going back to 
a 30-year bond or even a 50-year bond. One of the problems I 
had with that is, we have trouble up here getting a budget 
passed for a 1-year project, much less a 30- or 50-year 
project. But do you see the government being an augmenter of 
some of these marketplace activities now and letting the 
private sector fill in the gaps on this infrastructure?
    Mr. Rohatyn. Sir, I believe, as I said, that there is a 
partnership always--usually a partnership role for the public 
sector and the private sector. I would give priority in terms 
of looking for capital to looking for capital in the private 
sector, even as we deal with public investment.
    But I've also had experience, especially with the 
refinancing of the City of New York, with the fact that a 
relatively small amount of government involvement and public 
capital plays an enormous role in encouraging the other 
players, the insurance companies, the unions, everybody else, 
to put in the majority of the capital.
    Also, there are projects where the public purpose is more 
important than necessarily the profit margins of the business, 
which have to be put in equilibrium.
    So my position would be that there has been a huge 
improvement in the technology of finance, if you will, and that 
can be put to use now in any number of private and public 
activities. And to make use of that as much as possible, but to 
have an instrument where if you have three governors who need 
to do a regional project that's complicated, and where the 
profitability isn't self-evident, to have a government financed 
entity that is professionally competent and then can put up 
enough of the money to encourage private sector people to come 
in.
    Mr. Neugebauer. Well, you're kind of leading to my next 
question, and want you just to expand on that. Where do you see 
the areas today where we don't see private capital coming to--
showing much interest in infrastructure? Can you identify some 
of those areas for me?
    Mr. Rohatyn. Well, I think that by and large, you can 
encourage private capital to look at investment practically 
anyplace. On the other hand, that is not always consistent with 
the profitability of the projects that would come about, 
because it just doesn't lend itself to that kind of thing. So I 
am for having all of the instruments that you need, both 
financial and nonfinancial.
    For instance, you cannot--you're not going to put a private 
sector--at least I don't think, on a large scale, in the public 
school system of most cities in America today. You may do it in 
some places, but you're not going to do it on a massive scale.
    So I think you have to do what works, and what works is 
some combination of private and public involvement, both in the 
financial and the operating area.
    Mr. Neugebauer. You know, in the education mode, I think 
the jury is still out on that, because, you know, it's a 
relatively new concept of--there are some very successful 
private institutions.
    Mr. Rohatyn. Oh, I agree with you, sir. I just--
    Mr. Neugebauer. Yes. And so I think we have to be careful 
of characterizing that. I would say this. We have made a 
tremendous investment in education. People say we need to 
invest more in education and maybe that's true. But when you 
look at the money over the history of this country, of the 
amount of money that we have put into education, it's a 
pretty--if you graph it, it's a pretty steep graph.
    And I think the question that people are--should be asking 
more is, instead of putting more money into education, I think 
what we are saying now is that we want more education for our 
money. I think that's particularly the road I'm going down, 
that before we continue to pour extremely large amounts of 
money into education, I think we have to go back and kind of 
look at the overall model and say, is this working? Because the 
money has been coming into education.
    Mr. Rohatyn. I agree. I was actually mostly arguing about 
the need to build buildings where the water doesn't come 
through the roof onto these kids who are trying to learn the 
alphabet.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    The Chairman. I now recognize the gentlewoman from New 
York.
    Mrs. Maloney. Thank you, Mr. Chairman, for calling this 
important hearing, and it is a tremendous honor, Ambassador, to 
have you here today in Congress to share your knowledge with 
us, and I want to really personally thank you for your many 
contributions to our economy and really to helping our country, 
not only New York during the 1970's, and during our time of 
crisis, but you've continued to be a voice that everyone 
listens to.
    And I have wanted to ask you this question for a long time, 
and even though it's a little bit off point, could you comment 
on the weak dollar and what that means to our economy now and 
your thoughts about the impact on our country long term with 
this? It appears to be a policy of the Administration to weaken 
the American dollar. And I would just welcome any of your 
analysis or thoughts on this subject.
    Mr. Rohatyn. This is kind of a suicidal subject that you're 
asking me to comment on.
    [Laughter]
    Mr. Rohatyn. To some extent, the weak dollar is a result of 
our foreign deficits, and our foreign deficit is partly a 
result of the competitiveness of countries like China, India 
coming along, and our domestic deficits. So I think in today's 
world where the financial markets are so huge that it's very 
difficult to simply control them, that the weak dollar is a 
result of the economic position of our country in the world and 
our internal financial policies.
    I'm not a fan of a weak currency in terms of its social 
repercussions and in terms of its standing in the world. So I 
would prefer, personally, a strong currency, economic growth, 
low inflation, and a relatively balanced budget, but I wouldn't 
make a fetish out of balancing the budget every year, mostly 
because I have no confidence in the accounting system of the 
government, which I don't think reflects at all the financial 
condition of the country.
    So I'm not sure that's a very good answer that I'm giving 
you. I'm not sure there are very good answers to that question, 
frankly. But the weak currency is a result of a huge imbalance 
in our economic position, in our trade deficit as well as our 
Federal deficit, and the fact that countries like India and 
China are coming along like gangbusters and are going to make 
things very, very difficult.
    Mrs. Maloney. I heard a comment from Shirley Tillman, the 
president of Princeton, recently. She was asked what she thinks 
is the greatest crisis confronting our government. We feel that 
we're facing a crisis every day; there's something happening 
all the time. And I just would like to ask you the same 
question. Her response was the fact that our country is not 
investing in science and mathematics and really research and 
sort of cutting edge technologies, which has kept our country 
really on the curve, on the leadership curve in the world. And 
she saw the fact that we seem to be cutting back in--or we are 
cutting back in investments in science and technologies. And 
since we are--and mathematics. And since we are talking about 
public investments today and how it helps our economy, where do 
you think we as a Nation should be investing? Obviously, we 
need to invest in many areas, but if we had to be strategic, 
where do we need to put our dollars to help the most people and 
to really keep our country competitive in this very, very 
competitive world?
    Mr. Rohatyn. Well, I would say education and 
infrastructure.
    Mrs. Maloney. You would say education and?
    Mr. Rohatyn. Infrastructure.
    Mrs. Maloney. And infrastructure?
    Mr. Rohatyn. Yes.
    Mrs. Maloney. Thank you.
    The Chairman. The gentleman from Kansas.
    Mr. Moore of Kansas. Mr. Chairman, I want to welcome the 
witnesses who are here to testify today and thank them for 
their testimony.
    I think Mrs. Maloney has asked some of the questions I 
would ask, and I would ask another question. Mr. Ambassador, if 
you don't feel comfortable answering, if you don't feel like 
this is in your area, please say so. I'm not trying to push at 
all. I'm just asking.
    We have in this Nation an--
    The Chairman. We may be one of the few committees in the 
Congress who is not subpoenaing people.
    [Laughter]
    The Chairman. So you're here voluntarily. You can answer or 
not.
    Mr. Moore of Kansas. Right. Right you are, Mr. Chairman. We 
have in this country an $8.8 trillion national debt. About 40 
percent of that debt right now I understand is financed by 
foreign nations. And a question was asked, I believe by Mrs. 
Maloney, about our currency and our situation. Do you have 
concerns about foreign nations holding such a substantial 
portion of our debt? And what might be the result if those 
foreign nations decided they didn't want to hold our debt any 
more?
    Mr. Rohatyn. I think, first of all, there is somebody from 
the Federal Reserve, thank God, on this committee, who can 
hopefully--
    Mr. Moore of Kansas. And I'm happy to have anybody if you 
care to answer it try to take stab at that. I'm trying to ask a 
legitimate question here. I'm not trying to put anybody--
    Mr. Rohatyn. Totally. And it is obviously a risk to have 
this kind of imbalance in our accounts.
    Mr. Moore of Kansas. Yes, sir.
    Mr. Rohatyn. And to have as much of our capital in hands 
that today are cooperative and tomorrow might not be. On the 
other hand, it does create a situation where we're all kind of 
in the same boat, and--
    Mr. Moore of Kansas. And what do you mean by that, sir? 
We're all in the same boat?
    Mr. Rohatyn. Well, it will not help China to destroy the 
dollar.
    Mr. Moore of Kansas. Would their selling off our debt 
destroy the dollar?
    Mr. Rohatyn. Well--
    Mr. Moore of Kansas. Or would it affect interest rates at 
all?
    Mr. Rohatyn. It depends to whom and in what amounts and in 
what way. So I'm sorry not to be able to be very precise.
    Mr. Moore of Kansas. I understand.
    Mr. Rohatyn. But this is a--first of all, it's a very 
delicate question.
    Mr. Moore of Kansas. Yes, sir.
    Mr. Rohatyn. And secondly, it's something that I don't 
think anybody has the answer to. I think the only answer is to 
be as orderly in the way we run our economy and as prudent as 
we can be as to invest as much as we can in things aimed at 
economic growth and social support, and try to run our--both 
our import-exports and our internal budgets with as much 
equilibrium as possible. But that requires political decisions. 
This is not an issue that has no solution, if we want to do it.
    Mr. Moore of Kansas. Yes, sir. Well, I appreciate, and 
frankly agree with you, that as much as we can invest in 
infrastructure and education, that's going to be to the 
advantage of the people in our country. I think ultimately my 
concern is that our debt is getting so high and we sometimes 
end up borrowing money to make those investments, and I just--
that's my concern of where do you find the appropriate balance? 
And if the gentleman from the Federal Reserve cares to comment, 
I'd be happy to hear anything you have to say. I know that 
since Chairman Greenspan has gone, everybody thought that the 
markets didn't listen to him any more. And when he talks about 
the possibility of a recession, I guess we were wrong that 
people, in fact, do still listen to Chairman Greenspan. Any 
comment at all, sir?
    Mr. Haughwout. Well, Congressman, this is really not an 
area in which I specialize.
    Mr. Moore of Kansas. Okay.
    Mr. Haughwout. I'm afraid I don't--
    The Chairman. Yes. In fairness, he wasn't asked for this 
purpose.
    Mr. Moore of Kansas. Okay.
    The Chairman. Will the gentleman yield to me briefly?
    Mr. Moore of Kansas. Absolutely, Mr. Chairman.
    The Chairman. I appreciated the colloquy with the gentleman 
from Texas and Ambassador Rohatyn about the importance of 
education, and we talked about how much money has gone in 
there. In fact, I think if you look at education and measure by 
money, as we often do, as a value, we don't treat it very 
seriously.
    We've just been through a markup with some amiable 
contention about CEO salaries, and we were told that those of 
us who thought that CEO salaries might have gotten a mite high 
were being mean-spirited, and we had to pay for performance. 
Look at what we pay teachers. If you look in this society at 
the salary of teachers--let me put it this way. If you didn't 
know what the occupation was, and you just ranked compensation, 
and then you said based on the amount of compensation, how 
strongly do you think the society values that profession, you'd 
figure teaching wasn't very highly regarded around here. We 
don't pay teachers very much at all.
    So when you look at overall expenditures, there are a lot 
of things that go into it, but I believe it is in fact a sign 
that we have not as a society valued education when we pay the 
people who are trying to teach 5-, 6-, or 7-year-olds, 
particularly those who have had difficult lives previously. So, 
yes, I do think that that's a good measure.
    Now, money can be well spent or badly spent. But if you 
start out by substantially undercompensating people compared to 
so many other professions in this society, we shouldn't be 
surprised. And I'm just off on this tangent, but we used to be 
able to get away with that because we had a good thing to help 
us get teachers even though we underpaid them. It was called 
sex discrimination.
    If you were a woman interested in chemistry or physics or 
biology 40 years ago, you could go be a teacher or a nurse. And 
as the society has made some progress in diminishing 
discrimination, women have other options. So, you know, we had 
an artificial supply of good teachers because of sex 
discrimination, and that artificial supply is no longer there. 
Supply and demand, I think, have not yet rebalanced.
    I appreciate the indulgence. The gentleman from Texas.
    Mr. Green. Thank you, Mr. Chairman. And I thank all of the 
persons who are appearing today, as well as the ranking member. 
Just a comment before I ask a question, and it has to do with 
education as well. We from time to time hear of problems in 
police departments, corruption, if you will. And rarely do we 
talk about eliminating police departments or police services. 
We usually will conclude that we should fix the problem. We 
should hire more police officers, pay them more, and buy better 
equipment. We should do those things necessary to maintain what 
we know to be a good system.
    And unfortunately, I agree with what the chairman has said, 
we have not taken a similar attitude, I think, as it relates to 
education. We want to leave no child behind, but in the 
process, we seem to overlook the fact that we have to leave no 
teacher behind if we're going to leave no child behind. And I 
want to associate myself with the comments of the chairman on 
education.
    Mr. Ambassador, I hate to be the one to ask you to go into 
specifics. You mentioned education in the main, but what aspect 
of education would you conclude that we should focus on? Should 
it be Head Start, higher ed? Where should we go in your 
opinion, with our public influence by way of emolument?
    Mr. Rohatyn. Sir, I am not an expert on education, and, 
therefore, I will give just an off-the-cuff answer, if I may. 
My wife is involved--and I should have brought her here. It 
would have been much more productive.
    There are two areas of education that to me seem vital. One 
is to start very early, not to wait for a child to be 5-, or 6-
, or 7 years old to begin concentrating on what to do. And 
secondly, as I mentioned earlier, to give working facilities to 
children in schools a clean and safe environment. And in 
working at MAC in the city, I got involved in this subject, 
because we created a building fund for the schools as we were 
starting to run surpluses. So I spent a lot of time walking 
around the schools. And it is the most distressing and 
depressing situation in most of the schools that you can think 
of. And I think that unless you start children very young in a 
decent environment to study in, it's hopeless before you start.
    But, you know, the rest is how you--what the curriculum 
should be, and how this should be organized. I'm not an expert 
on that.
    Mr. Green. Thank you. Mr. Chairman, I will yield back the 
balance of my time in the interest of time.
    The Chairman. I thank the gentleman. The gentleman from 
California.
    Mr. Campbell. No questions.
    The Chairman. I thank the gentleman. The gentleman from 
Missouri.
    Mr. Cleaver. Thank you, Mr. Chairman. I really appreciate 
your comments, Mr. Ambassador, with regard to public financing. 
Here's a conundrum. I think we should invest in public 
financing for the same reason that you stated, and I've seen it 
in my City. I'm a former mayor of Kansas City, Missouri, and 
I've seen public investment generate all kinds of private 
economic development around the public investment.
    The problem is--and it's been touched on by my colleague 
from Kansas, I think everybody here to some degree--we are 
borrowing so much money that, frankly, we're financing 
everything with borrowed money. We are a debtor nation. And $7 
billion for Katrina in the supplemental that we approved 
earlier today. And so there's a public investment going into 
New Orleans. And when you think about the infrastructure 
declining on the Federal highways and in the cities. Most 
cities on the Eastern seaboard are functioning with stormwater 
and sanitary sewers that are over a century old, and they're 
crumbling. But if we try to do public investment, you know, 
some kind of a contemporary TVA, we're going to have to borrow 
money to do it.
    Now the only other option is to figure out how to reverse 
the trend toward a minus zero savings rate in this country. We 
have to borrow from foreigners because we don't have--we don't 
save money in this country, whereas in Asian countries, the 
savings rate in some rise above 20 percent, and we are like 0.6 
or something. I'm not sure exactly what it is right now. What 
can we do, or is there anything that we can do, that you would 
suggest, to generate a savings rate? Or is it that the economy 
is not as good as we are being told it is, and people cannot 
save, and, therefore, they are spending all they earn and then 
borrowing to make it?
    Mr. Rohatyn. Well, sir, I hate to bring up something that 
is probably considered impolite in this City, but I would 
just--
    Mr. Green. Nothing is impolite in this City.
    Mr. Rohatyn.--refer to the fact that no other country in 
history has ever gone to war and cut taxes at the same time. 
And when you start with contradictions of interest that are so 
profound, I don't know what to say to you with respect to 
ultimately running a balanced economy that deals with these 
things, because you're eliminating revenues to an extent that 
it's finally impossible.
    So, most of the problems that this country has, I think, 
because we are still the strongest economy in the world. We 
have great science. Every other year we invent something new 
like Google or Yahoo or things that 5 years ago just didn't 
exist. But we can't seem to agree among ourselves on a balance 
between spending and saving. So, these are not rocket science, 
but they do require some unity of interest and some unity of 
philosophy in terms of what kind of an economy and what kind of 
a society you want to run.
    Mr. Green. I have a question. Have you seen this TV 
commercial where this guy starts out walking from his home and 
he says I have this beautiful home and great family, then he's 
driving around and cutting his grass on a tractor, and the next 
thing he's cleaning his swimming pool. They have a gorgeous 
swimming pool. And he says, ``How do I do it? I'm up to my 
eyeballs in debt.'' And every time I see that, I just--I think 
about our country, our Federal Government.
    Thank you.
    The Chairman. Thank you. Thank you, Mr. Rohatyn. You're 
excused now, and I appreciate your coming to see us.
    Mr. Rohatyn. Me, too, and I apologize.
    The Chairman. No, no, we changed this around. I'm very 
grateful to the others for staying here, and I'm sorry that we 
don't have control over the schedule, and we are indebted to 
you for your indulgence.
    We'll now resume the statements. Dr. Michael Drake is the 
chancellor of the University of California, Irvine. And I guess 
the closer people were, maybe then they can go early, and then 
get home. You're stuck for the night. So, thank you for 
staying. Go ahead, Dr. Drake.

  MICHAEL DRAKE, M.D., CHANCELLOR, UNIVERSITY OF CALIFORNIA, 
                             IRVINE

    Dr. Drake. So I'll talk low and talk slow and I won't say 
too much.
    The Chairman. Two out of three won't be bad, Doctor.
    Dr. Drake. Okay. Good afternoon, Chairman Frank, Ranking 
Member Bachus, and committee members. Thank you for the 
opportunity to appear before you today to discuss the important 
issue of Federal investment in basic science research.
    I am Michael Drake, chancellor of the University of 
California Irvine, one of the 10 campuses of the University of 
California system. At UC Irvine, we educate nearly 26,000 
students and conduct research in a wide range of the sciences, 
supported by the National Institutes of Health, the National 
Science Foundation, the Departments of Defense and Energy, 
NASA, NOAA, and several other Federal research agencies.
    Our Nation's system of higher education, and particularly 
its public universities, are a unique example of a public 
investment that has paid enormous dividends. Starting with the 
GI Bill, Federal student aid has helped shape postsecondary 
education since World War II. Thanks to the Federal 
Government's commitment, including your recent action to 
increase the Pell Grants, students with need have increased 
access to higher education.
    America's colleges and universities produce human and 
intellectual capital, the twin engines of economic growth. 
Public investment is the critical factor that has made our 
research universities the envy of the world. There is no doubt 
that university research is critical to our Nation's R&D 
enterprise. Universities perform over 60 percent of the 
Nation's basic research.
    Economists attribute as much as 50 percent of our national 
economic growth over the last half century to innovation. To 
quote Alan Greenspan in 2001, ``Had the innovations of the 
recent decade, especially in information technologies, not come 
to fruition, productivity growth during the past 5 to 7 years, 
arguably, would have continued to languish at the rate of the 
preceding 20 years.''
    Public investment in basic research has an added benefit--
the integration of research and education. At both the 
undergraduate and graduate levels, students learn by doing, 
both in the lab and in the classroom. Research takes place in 
the institutions that develop our young future scientists. 
Other countries, particularly China and India, are struggling 
to emulate this. As you well know, Mr. Chairman, from your 
personal experience, it is that formula that spawned the root 
128 phenomena in Massachusetts, as well as the Silicon Valley 
phenomenon in my own home State of California.
    Our country's higher education system is so successful that 
we often forget how big a role federally supported university 
research has played in changing Americans' lives. For example, 
in my field of medicine, for the second consecutive year, 
annual cancer deaths in the United States have actually fallen. 
This drop, a first in history, is occurring despite the aging 
of our population.
    On the physical sciences side, basic research in physics 
led to the development of the Global Positioning System, which 
has been an invaluable aid to our military, and also to wayward 
travelers, I should add. Imagine as you leave here what you 
will do and be impacted with; dozens of things that were 
unthinkable a generation ago, whether it be listening to an MP3 
player, using the Internet, or using your ATM card. I mention a 
number of other examples in my written testimony.
    The Federal familiar in basic research has had an excellent 
return for American taxpayers. It has been estimated at between 
28 to 40 percent per year. But why does the Federal Government 
have to do this? Why shouldn't the private sector do more? 
Well, the fact is that business spends an enormous amount of 
money on development, but the characteristics of basic research 
are not attractive to short-term investors. Basic research is 
just that; basic. It is long-term and uncertain. It is a 
fundamental building block for the future. Basic research 
doesn't conform to the investor cycle of quarterly reports. 
Norm Augustine, the former CEO of Lockheed Martin, frequently 
tells how his company proudly announced a program of long-term 
investment in basic research, only to watch its stock price 
fall.
    With few exceptions, my State of California being one, 
States simply lack the means to invest heavily in research. 
State support is a very small portion of the total basic 
research done at our universities. But the Federal commitment 
to basic research has had a mixed record in recent years. It is 
true that Congress recently doubled funding for the NIH, and 
thank you. But since 2003, NIH funding has declined in real 
terms by 12 percent. Physical sciences and engineering research 
have been nearly flat funded over some 3 decades. Given the 
growing importance of interdisciplinary research, adequate 
funding for both the life sciences and the physical sciences is 
essential.
    I am here today as the chancellor of a research university, 
but I am also a physician and an NIH-funded researcher for over 
a quarter century. I marvel at how diagnostic tools, therapies 
and preventive knowledge have transformed the practice of 
medicine and enhanced the quality of life for all Americans.
    Mr. Chairman, I want to thank you and your colleagues for 
the recent actions taken by this Congress in its funding 
decisions this year. I respectfully request that the Congress 
continue its support for research. Only the Federal Government 
has the resources and ability to support this vital research. 
We can afford these investments. Indeed, we must make them if 
we want to continue to lead the world.
    I thank this committee for bringing the Nation's attention 
to this incredibly successful partnership and hope it will 
continue to spread the message through the Congress and the 
Administration. I'd be pleased to answer your questions.
    [The prepared statement of Dr. Drake can be found on page 
32 of the appendix.]
    The Chairman. Thank you. Our next witness is Mr. Miles 
Rapoport, who is the president of Demos. And I should have said 
before, any written material that any of the witnesses wish to 
insert in the record, without objection, will be inserted. Go 
ahead.

        STATEMENT OF MILES S. RAPOPORT, PRESIDENT, DEMOS

    Mr. Rapoport. Thank you. I deeply appreciate the 
opportunity to be here, and I thank the committee for turning 
its attention to this important issue. To introduce myself 
briefly, I am the president of Demos, a network of ideas and 
action. Demos is a nonpartisan public policy and research 
institute founded in 2000. We focus on problems of democratic 
participation, economic opportunity, and the important question 
you are considering today, the proper role of government in our 
society and the economy.
    In the 1980's and 1990's, I was in State government in 
Connecticut, both as secretary of the State, and also for 10 
years in the legislature where I was a member of the Finance 
Committee. The role of public investment was central to all 
that experience. I was a freshman legislator in Connecticut 
when the Mianus River Bridge in Greenwich collapsed after years 
of deferred maintenance. I was there for an ambitious 
initiative called U Conn 2000, which spent 10 years investing 
in the University of Connecticut with fabulous results. And 10 
years ago, the City of Hartford received a significant state of 
investment, which has had an enormous important and salutary 
effect on that City and its economic vitality.
    These cases were my education, both in what happens when we 
underinvest in our infrastructure and the public structures 
that undergird our economy and quality of life, and they were 
my education in the leading and positive role that public 
investment can play in economic development.
    I believe it is important to restore a broad understanding 
of the role played by public investment and the public sector 
in our economy and in the quality of our lives. America's 
signal achievement after World War II, the creation of a broad 
and vibrant middle class, was accomplished with policies that 
included major public investments. The Veterans Administration 
and the FHA helped millions of young families buy homes. The GI 
Bill, and later the Pell Grants and Stafford loans, helped 
millions of young people get an education. These public 
investments created opportunities for young people--young 
families, rather--to get a leg up and build a future for 
themselves and their children.
    Unfortunately, this commitment to investing in shared 
prosperity has waned. Over the past 30 years, public investment 
has been systematically devalued. There has been a sustained 
and relentless critique not only of government's excesses but 
of government itself. The ideals of the marketplace have been 
elevated and extended into arenas previously occupied by an 
understanding of a shared common good.
    In the 1970's and 1980's, we embraced privatization, 
deregulation, and the liberation of the global marketplace. It 
all boiled down to one simple message: the market is better. 
This has left Americans with a very negative view of 
government. Careful research undertaken for Demos over the last 
2 years shows that people have two dominant images of 
government, both negative. The first is of politicians fighting 
and attacking one another, and the second is of an ill-defined, 
bureaucratic monolith that has little to do with people's daily 
lives. Most people give little conscious thought to the number 
of ways in which every day, government, properly run, assists 
us all. And it is a very long list.
    The consequences of devaluating public investment have been 
severe. Let me mention a few. The first is inequality, which 
has increased dramatically in America over the last 30 years. 
The rewards of private investment have gone to a small or 
smaller number of people who have pulled far ahead of the rest 
of us. It is by now a familiar tale. The top 10 percent of 
Americans have increased their share of personal income from 
about 30 percent in the postwar era to 46 percent in 2004. The 
share of income going to the bottom 60 percent has plunged from 
32 percent in 1967 to 26 percent in 2005. Is this connected to 
the lack of public investment? I believe that it is.
    The second consequence is the highly disturbing fact that 
for the first time in recent American history, the next 
generation will not, as a whole, be better off than the 
previous one. Tamara Draut of Demos, in her book, Strapped, 
makes it very clear that in comparing young Americans today to 
my generation, it has become far more difficult to achieve the 
hallmarks of middle-class adulthood: getting a college degree 
and paying off your debts; buying a home; having children; and 
getting a job with health insurance. In each of these areas, 
our investments have declined significantly.
    Third, there are areas of our economic life where 
government can not only achieve economic goals more equitably 
than private markets, but more efficiently as well. Health care 
is probably the clearest case. Public Medicare is far more 
efficient than its private counterparts. The VA hospital system 
does a better and more cost-effective job than its fragmented 
private sector counterparts. But thus far, our market-oriented 
blinders have kept us from seeing this clearly.
    Let me mention just three specific realms in which I think 
public investment could make a major difference. The first is 
investment in early childhood education, particularly programs 
for children born into disadvantaged circumstances. The work of 
Nobel Prize winning economist James Heckman shows that 
investment in early childhood programs gives children a much 
larger chance to succeed. From a strictly income-generating 
viewpoint alone, according to Heckman, such programs can 
increase earnings by 15 to 17 percent over a lifetime.
    Another arena for investment is to make college more 
affordable. Education is a requirement for people to succeed in 
the workforce, and for our economy to compete in the global 
arena. But many students are either avoiding post-high school 
education altogether, or graduating with enormously burdensome 
levels of college-related debt. According to recent studies, 
168,000 academically qualified high school students every year 
don't attend college because they can't afford it, and a large 
number attend 2-year colleges rather than 4-year colleges for 
the same reason.
    The Pell Grant, which used to cover three-quarters of the 
cost of attending public universities, now covers only a little 
more than a third. Grants have largely been converted to loans, 
and tuition in our public 4-year universities has more than 
doubled.
    A last arena--and this is a very personal experience for 
me--is making a needed public investment in our democracy 
itself. Elections in this country have literally been run on a 
shoestring, and we have paid a heavy price and lost confidence 
in our election system. The patchwork of laws, rulings, and 
equipment purchasing decisions, has all of us on edge about 
procedural chaos every time a major election comes up. We need 
a strong national agency with serious and sustained investment 
in research, testing, standard-setting, training, and 
enforcement, and we need sustained support for States in 
improving their system.
    Let me conclude by saying that our Nation's future and that 
of its people depends on a set of public structures that give 
everyone, businesses and individuals alike, the chance for 
success. These structures, whether they are scientific research 
programs, as the chancellor said, levies, bridges, roads, 
colleges, or children's programs, promote the common good and 
shape our common future. We need to reverse the undervaluing of 
public investment and our government's overall role. This 
committee's hearing today is an important contribution to that 
conversation. I thank you for allowing me to be part of it.
    [The prepared statement of Mr. Rapoport can be found on 
page 55 of the appendix.]
    The Chairman. Next is Mr. Clifford Winston, who is a senior 
fellow of economic studies at the Brookings Institution.

  STATEMENT OF CLIFFORD WINSTON, SENIOR FELLOW, THE BROOKINGS 
                 INSTITUTION, WASHINGTON, D.C.

    Mr. Winston. Thank you, Mr. Chairman, and members of the 
committee. I'm happy to be here to talk about public 
investment. Public investment encompasses both investment in 
physical infrastructure and investment in human capital. I'll 
confine my remarks to investment in physical infrastructure or 
physical capital, but a lot of what I have to say, I think, 
also applies to investments in human capital.
    Any economic intervention in a market calls into question 
how the markets are doing. This is not necessarily an attack, a 
general attack on markets, but one has to ask the question, why 
is government involved in public investment? So the first thing 
I want to talk about briefly is just some justification for 
what I call public production. That's what we're dealing here 
with, physical capital. Then I'll assess how government policy 
has performed in this task, and then I'll briefly conclude with 
some policy suggestions.
    All right. Justification. The main justification for 
economic involvement in public production is market failure. 
That is, there is the view that the market would not provide a 
good or service that is socially desirable even though it's 
privately unprofitable. For example, roads. The roads system is 
extremely expensive to construct. It would be extremely 
expensive and difficult for the private sector to raise all the 
capital to build the interstate. Even if they could raise the 
capital, they'd be encumbered by such great debt that they'd 
probably never make a profit.
    Or, for example, an urban rail system. It may not be that 
they're going to be able to attract sufficient demand, or with 
competition from autos get higher fares to support a private 
sector rail system that's profitable. But these things could be 
socially desirable in terms of the benefits to the public 
exceed the subsidies that are required to keep them going.
    So, if the public is involved then in doing this, and we 
see this in a number of areas, certainly in the transportation 
infrastructure--highways, airports, inland waterway systems, 
public investment involved there--public land management--and 
then services--urban bus, urban rail, and inner city rail 
service, that is Amtrak, Postal Service the like--all areas of 
public investment. The question is, how well has the government 
done? Has it performed efficiently? This is not a question of 
whether these things are desirable. Presumably they are. The 
question is, are they being provided in an efficient way?
    My assessment will be drawn from my book. The book is 
entitled Government Failure Versus Market Failure. It's 
actually available for free on my Web site. Don't tell 
Brookings I've said that if you want to see it, but it is on my 
Web site. What the book is about broadly is retrospective 
assessments by the economics profession about what we really 
know about how government has performed in this area. Some of 
the work I've done, obviously, or I probably wouldn't have 
written the book, but mainly the work is done by a lot of other 
economists.
    The general lesson you get out of the work is that research 
accumulates. We don't start from square one. We now have really 
a core of knowledge that we can build on to get to, ``truth''; 
that is, at least the state of knowledge we have at the time, 
and this could be quite powerful, I think, in our 
understanding.
    Let me begin before getting to that evidence with just some 
descriptive statistics to get some intuition. You observe 
growth in highway congestion and delays, something probably all 
of you live with, you see that. Growth in air travel delays. 
You certainly hear about that. Growth in urban transit 
deficits. You probably hear about that, or certainly the issue 
of the Dulles extension costing $4 billion raises questions and 
obviously, you're all aware of the big dig, that costing a 
little bit more than we planned on it costing.
    So that suggests that public investment might be 
characterized by serious inefficiencies. It need not be. These 
things may be just the price of getting socially desirable 
goods and services. However, the academic evidence that I 
mentioned actually does reinforce intuition that in fact there 
have been tremendous inefficiencies in all these areas that 
have cost of hundreds of billions of dollars and are a drag on 
economic growth.
    There are a number of sources for where the problems lie, 
but I'll just touch on two--inefficient pricing and inefficient 
investment. Quick examples. The problem with pricing like in 
the area of highways. Highways are underpriced in the sense 
that the users who contribute to congestion don't have to pay 
for that congestion, so there is demand for capacity but people 
do not have to pay for that. And that's a wrong signal for 
investment. We think we need more roads, but if we price them 
efficiently, perhaps we wouldn't.
    Trucks. Trucks tear up the roads because they're big and 
heavy and all that, but the damage is related to the weight per 
axle. That is, if you have more axles, that is good, that helps 
your weight and you do less damage. It displaces your weight. 
You do less damage to the road. However, the way we price roads 
is with a gas tax, which is perverse. It penalizes trucks who 
do the least damage, because they're the ones with more axles, 
but they get less fuel economy, okay. But this is exactly the 
kinds of ways that we are allocating resources in roads.
    Road investment. Pavements. They should be trading off up-
front capital costs for ongoing maintenance costs. A thick road 
doesn't have to be maintained as much. What's happening is, we 
underbuild roads, they're maintained a lot. They don't last as 
long, and we wind up increasing expenditures, okay. These are 
some of many examples that I could talk about just in terms of 
specific policies that have led to serious inefficiencies in 
public production and public provision of infrastructure. As 
noted, the implication is, a lot of waste and resources, as I 
said, hundreds of billions of dollars a year; a drag on 
economic growth, so you actually see the return on investment 
in these areas is low. I've estimated that one dollar of 
spending on highways reduces congestion costs only 11 cents. So 
I guess I'm suspicious of claims that we should increase 
spending. Why do we want to increase spending when we're 
getting such low rates of return? Usually, that's not where you 
want to be putting your resources.
    Where then do I see policy? First, you look at what the 
source of the problem is. A lot of this, obviously, deals with 
political economy, and you could actually give better testimony 
than I could about the pressures to lead to waste in spending, 
also rigidity of agencies. The real concern, regardless of what 
you think, the story is these inefficiencies has persisted for 
decades, and there are real concerns about seeing reform, but 
growing interest in when the private sector could do better.
    So here is where I think we now have to have a broader 
vision, not just public-private partnerships, but serious 
consideration of the, ``counter factual,'' that is, 
privatization.
    We could, in all these areas of the private sector, do 
better. I think it would be premature to recommend this, but 
the success of deregulation, not only as a policy, but getting 
bipartisan support, was through experiments, that is without 
knowledge of what intrastate airline competition was doing, 
lower fares compared with interstate, without knowledge of 
deregulated commodities, how they compared to the price of 
regulated commodities, I do not think Congress will be 
enthusiastic about deregulation.
    What I am calling for is growing interest in experiments of 
privatization, in a variety of areas. Obviously, I do not have 
enough time to go into how this could be done. I think there is 
a lot more thought that goes into it.
    I would suggest that such experiments might reveal ways 
that the private sector can help in far greater ways than we 
could possibly imagine, and transform a lot of our 
infrastructure in urban services in ways that we could not 
imagine just as how deregulation has transformed our inner city 
system and generated such high benefits.
    Thank you.
    [The prepared statement of Mr. Winston can be found on page 
73 of the appendix.]
    The Chairman. Thank you.
    Our final witness, and then we will have questions, is Mr. 
Andrew Haughwout, who is a member of the Research and 
Statistics Group of the Federal Reserve Bank of New York.
    Mr. Haughwout?

   STATEMENT OF ANDREW F. HAUGHWOUT, RESEARCH AND STATISTICS 
            GROUP, FEDERAL RESERVE BANK OF NEW YORK

    Mr. Haughwout. Chairman Frank, and members of the 
committee, thank you very much for the opportunity to speak to 
you on the subject of public investment.
    Today, I will be discussing research on public investment 
and its relationship to economic growth and wellbeing.
    All of the views I will express are my own and are not 
those of the Federal Reserve Bank of New York or the Federal 
Reserve System.
    Physical public capital, what I will refer to as, 
``infrastructure,'' is the dominant component of the Nation's 
publicly owned wealth, and it is that kind of investment that 
my own research is focused on.
    Infrastructure consists largely of highways and streets, 
buildings like schools and city halls, and sewer and water 
systems.
    Public capital is a very important part of the Nation's 
wealth. Public investment in physical capital was over $430 
billion in 2006, adding to a stock of publicly owned physical 
capital that would have cost nearly $8 trillion to replace in 
2005.
    About 90 percent of the non-defense public assets in the 
United States are owned by State and local governments. 
Nonetheless, the Federal Government plays a large role by 
helping to finance the construction of capital goods that State 
and local governments own.
    The ultimate goal of the large amount of resources devoted 
to public investment is improvement of the welfare of the 
American people.
    Today, I will discuss three crucial issues surrounding 
public infrastructure: its effects on economic growth; its 
effects on household quality of life; and how these benefits 
are influenced by the way we finance and locate new 
investments.
    The first issue is the relationship between infrastructure 
and economic growth. Well-functioning infrastructure systems 
are critical to a well-functioning economy, but it is clear 
that the United States already has extensive public 
infrastructure.
    The evidence we currently have points to a conclusion that 
additional infrastructure investments do increase productivity 
but those effects are probably smaller than the benefits of 
private capital.
    Early estimates from the 1980's had indicated that 
infrastructure's contribution to private output was 
approximately twice as large as that of private capital, which 
led to concerns of a severe infrastructure shortfall.
    More recent research has resulted in significantly lower 
estimates of the productivity of infrastructure, and most 
economists now agree that the earlier estimates were too high.
    The second central issue, which has received far less 
attention from economists, is the direct benefits that 
infrastructure provides to households. An example may clarify 
what I mean.
    Imagine that a State builds a new road from your home to 
your place of work that cuts your one way commuting time by 15 
minutes. Will you arrive earlier at work each day or sleep 
later?
    The way economists have thought about infrastructure 
implies that all employees will get to work earlier, increasing 
the output they produce. At least some workers will probably 
sleep later or read the paper longer each morning. This 
increased leisure will not be accurately measured in standard 
studies of income or productivity, but it is still a real 
benefit since it improves quality of life.
    These quality-of-life benefits of public investments have 
been less well studied, but some evidence is available. In my 
own work, I have estimated that the value to households of 
increases in infrastructure is considerably higher than the 
comparable benefit to firms.
    The issue of infrastructure's effect on wellbeing is 
broader than its effect on income.
    The third issue I would like to emphasize is that the way 
we finance and select infrastructure projects affects location 
patterns. This dimension is important since where activities 
occur has significant effects on levels of productivity and 
income growth.
    Thus, an important way in which infrastructure policy can 
potentially affect economic growth is through its effect on 
location patterns.
    Research indicates that private firms in dense urban 
environments are more productive than in less developed areas. 
Because they are often placed in relatively undeveloped areas, 
public investments provide individual firms and households with 
incentives to move from more to less dense environments, but if 
this re-distribution of activity reduces productivity growth, 
then the placement of new infrastructure in relatively 
undeveloped areas may not be the most effective use of public 
monies.
    The complex way we finance public investments allows 
localities to receive the benefits of public works, while much 
of the cost is paid by taxpayers elsewhere.
    Regional decisionmaking bodies are authorized to allocate 
transportation investment budgets, but do not typically control 
the size of these budgets.
    Maximizing the effectiveness of our public investment 
budget requires careful attention to both the level of funding 
and the design of institutions for allocating infrastructure 
investments.
    Thank you.
    [The prepared statement of Mr. Haughwout can be found on 
page 45 of the appendix.]
    The Chairman. Thank you all, very much.
    It is 3:00 on a Friday afternoon. We are through with 
votes. There are five members here and a couple of others in 
and out. There is some interest in this, and we intend to 
continue to discuss it.
    Mr. Winston, to get a sense of this, you talk on pages two 
and three about transit pricing--three and four. You talk about 
how it is below what is needed.
    Would you recommend raising the fares for public transit? 
You say it would be privatized. Would a private company doing 
the transit then raise the fares?
    Mr. Winston. Let me step back.
    The Chairman. No, please do not step back. We do not have 
time. That is the question.
    Mr. Winston. Ultimately, yes. My expectation would be that 
the subsidies are something that would not be sustained in a 
private system.
    The Chairman. You would advocate turning it over to a 
private company which would raise the fares?
    Mr. Winston. I would advocate a private company to do two 
things. First, try to minimize the cost of service. That is a 
critical part. My expectation, even with a lower cost of 
service, is that fares would probably be higher; yes.
    The Chairman. Thank you.
    Dr. Drake, one of the things that concerns me is that we 
are told by some--Alan Greenspan, Ben Bernanke--that yes, we 
have more inequality than it is healthy for society to have, 
and they have argued, and others have argued, that the major 
way to diminish it, never to try to even come close to 
abolishing it, is through education.
    I believe they are putting too much of a burden on 
education going forward, and certainly education does not take 
care of all the people who are already in their 30's and 40's, 
but even if we are talking about education going forward, my 
view is that part of the problem is if you simultaneously are 
an advocate for steady reduction in government spending kind of 
across the board, you are going to have problems. A critical 
element in the education is going to have to come from public 
funding. What is the state of the current level of Federal and 
State funding for education?
    Can the private sector make up for it? Do you think we need 
more public support for education, particularly higher 
education?
    Dr. Drake. A complicated question, and I think a 
challenging one. I believe that Federal support for public 
education is a critical factor that has made this country what 
it is.
    I speak from the higher education point of view first, and 
say that if we look at the United States in the last half of 
the 20th century, compared to the United States in its history 
before that time, things that made us a leader among nations 
were things that came from our higher education compact, and 
things that we brought to society from the education system, 
and a lot of the growth over this last several decades has been 
the result of Federal investment of research and other things 
that have come from higher education.
    I would say at the same time, from the time I grew up going 
to public schools, that the level of investment and the level 
of quality in public schools across the country is just very 
different than it seemed like it was when I was attending.
    The Chairman. When I talk about, ``public,'' I am talking 
about public support for higher education. That is what 
concerns me.
    What is the current projection--I agree with you that 
higher education has been important. From the standpoint of 
diminishing, reducing inequality, it seems to me that there is 
going to need to be a public funding element of higher 
education.
    What is the state of that today? In terms of the 
accessibility of people from poor families, lower income 
families, what kind of access do they have to your institution?
    Dr. Drake. We at the University of California actually have 
a very proud record of access to lower income families, about a 
third of our students, 30 percent of our students, are PELL 
grant eligible, which is the highest of any comparable 
institution in the country. We are very proud of that.
    I will say that every year there is increasing stress on 
families to be able to support their students in our education 
system. As fees go up, the stretch and strain on families, 
particularly middle income families, becomes an increasingly 
large burden.
    We work quite hard to try to do everything we can to keep 
costs as low as possible while maintaining the excellence that 
is required to be leaders nationally.
    I will say that State support is the way that we would see 
it most actively. From the time I was a medical student at the 
University of California, San Francisco, now 30 years ago, the 
percentage of State support has dropped to about half of what 
it was before. I think that is troublesome.
    The Chairman. That is very troubling. State universities in 
general say that well, the trend has been much lower. I just 
wish when people talk across the board for lower public 
expenditures, they will understand that among the expenditures 
that have been lowered is support for higher education.
    My time has expired. The gentleman from Texas.
    Mr. Neugebauer. Thank you, Mr. Chairman. I will say this 
has been a great panel.
    Dr. Drake, I want to go back to something that you said 
that I agree with. The country has been an enormous benefactor 
of the research that has gone on in many of our universities in 
the technology. You pointed out the GPS, and that is not only 
something we enjoy in the military.
    As a policymaker, one of the things we face is something 
that you were kind of alluding to, we have this huge appetite 
from our research universities that if you will give us more 
money, we can do more research, and in fact, provide a better 
educational opportunity for our students who are coming there.
    Then the other piece of it is that we hear more and more of 
our students are having trouble at the other end of the 
spectrum, of becoming a student.
    What are some things that you think we can do at our level 
to do that? Either we are going to be giving you folks more 
money for research or we are going to be helping more students 
get into the system. Somewhere in the middle, I guess, is the 
appropriate balance. I do not know that we have found that yet.
    Dr. Drake. Yes. I was going to say both, but I guess it was 
not one of my options.
    Mr. Neugebauer. Everybody who comes up here, that is their 
answer. We are looking for some solutions here.
    Dr. Drake. I understand. I would say a couple of things. 
One, I am here to support research. I think supporting students 
is also critically important, and there really is a balance. We 
do what we can actually, and in a lot of our research, we do 
educational research also, to look at how we can help to 
improve the educational system.
    In fact, in California, we have recently started a new 
initiative at the University of California to go and do 
something called the Science and Math Initiative, where people 
from our campuses work in K-12 to try to help the production of 
K-12 individuals be stronger in the science and math areas 
particularly, those things that are important for technology as 
it goes forward.
    It is a critically important balance. I think you often 
have the challenge--I do not mean to make the analogy, but as a 
chancellor, all day I have people coming to me with good things 
that they would like for me to do, and then more good things 
than we can do, and there is a balance between those two.
    As a country, we have done very, very well over these last 
several decades in that balance. I think it is important to 
stay the course.
    Mr. Neugebauer. Thank you.
    Mr. Winston, I was listening to your discussions about 
infrastructure and to the extent of letting the market forces 
be much a part of that as you can, and I agree with that.
    One of the interesting concepts that I have been toying 
with as a former city council member and then later working on 
a transportation project, is a concept of buying down.
    Do you know what to buy down a mortgage is? To pay fees up 
front to make the interest rate less on a mortgage, so you pay 
some up front.
    One of the things I have been a proponent of is letting the 
public sector buy some of that down to an economic level and 
where it makes sense for then the private sector to be able to 
take that. That leverages those dollars.
    Let's just say we could build a road for $1 million, using 
all public money. Dr. Drake here needs money for education and 
those kinds of things.
    If we could put, say, $100,000 of public money into that 
transportation system and let the private sector put the other 
$900,000 in, and let the private sector maintain that road and 
keep it up from that point forward, that frees up my $900,000 
for education and schools and research and other kinds of 
things.
    That creates an interesting debate. There are a lot of laws 
against mixing private and public money and taxpayers' money 
together.
    What are your thoughts on that concept?
    Mr. Winston. My concern about that is that although you can 
sort of name, in your example, hard fees, $100,000 versus 
$900,000, in practice, once we go down a road like that, there 
is the risk that the $100,000 is not enough, that the private 
sector is involved.
    We sort of got a sense of this in private investment 
possibly in a high speed rail, inner city rail, there were 
supposed to be projects that were going to go in that way, but 
the private sector initially was interested, and then after 
making further inquiry into what it was going to cost, they 
came back and said, ``No, we are going to need more money.''
    If we could really agree there were going to be limits and 
that these limits we could identify were sort of the tipping 
point that would be just what the private sector needed to 
attract them, that would be great.
    I think as a practical matter, the system could be gamed, 
and once they get in, there can be problems.
    I am weary about that. I am also weary about the incentives 
for the most important thing that I am really looking for in 
this area, which is innovation.
    When the private sector fully has a stake in these systems, 
then they start to think out of the box and start making the 
kinds of technological changes and innovations that are 
unencumbered by the public sector, and that often can give you 
the sort of biggest return, the things you just cannot 
anticipate and you cannot see.
    Unfortunately, I cannot say that I am enthusiastic about 
those kinds of arrangements.
    Mr. Neugebauer. Thank you.
    Mr. Green. [presiding] The gentleman's time has expired. I 
will now yield myself 5 minutes.
    If I may, I would like to visit with you, Mr. Rapoport. I 
would like to go to page six of your codified instrument.
    On page six, near the very bottom of the page, the language 
reads, ``Public Medicare is enormously more efficient than its 
private counterparts, with far fewer administrative costs.
    ``The VA hospital system, with its efficiencies of scale, 
long-standing patient relationships, and comprehensive care, 
does a better and more cost effective job than its fragmented 
private sector counterparts.
    ``But in the health care debate thus far, our market 
oriented blinders have kept us from learning these lessons.''
    What I would like to know is, and this may not be the best 
time to talk about the VA system, given some of the things we 
have heard in the news lately, please, if you would, tell us 
what we can learn from this in terms of health care for people 
in the main.
    Mr. Rapoport. The most recent information that I drew from 
in talking about the VA was a very interesting piece from the 
Boston Globe by Drake Bennett on March 11th, which sort of 
looked very closely at what the actual cost and quality 
implications were of the VA, which obviously as you know, does 
not impact running the Walter Reed Hospital, it is a separate 
system.
    And what they found is because there was such a long term 
clientele, if you will, that is people who use the VA system as 
their main source of health care, that there was an up front 
investment in the proper testing and the proper long term care 
that they got, which actually lowered the costs of medical 
care, gave them very, very good care, had a very high 
satisfaction rate, and a relatively low administrative cost, as 
opposed to in the privatized system where patients are going 
from one place to another to another to another, and often not 
as properly coordinated.
    The administrative costs were low and the quality of care 
was actually quite good. It sort of came as a surprise to the 
writer of the article as he investigated it, but that is what 
he came back with.
    Mr. Green. How would you respond to the notion of some sort 
of nationwide health plan that covers everyone that has 
government involvement?
    Mr. Rapoport. This is somewhat out of my area of full 
expertise. I would generally say that as an area of needed 
public investment, creating a health care system where we have 
universal coverage for everyone with administrative costs that 
are kept under control would be an extraordinarily important 
investment for the health, wellbeing, and ultimate productivity 
of society.
    Almost every other industrialized country that our 
businesses compete with pay for the health care of their 
citizens in one holistic system as opposed to putting the 
burden onto the corporations or putting it onto the individual.
    I think that would be a very productive way to do it. By 
the way, one very easy way to think about this would be to 
expand Medicare to a different age population. It has fairly 
low administrative costs, and I think that would be a good step 
forward.
    Yes, I think as a matter of an area for public investment 
that would pay very high returns, I happen to believe that 
would be a good one.
    Mr. Green. Would anyone else care to comment?
    Dr. Drake. I should. This has been my field. I am also 
chair of a group now called the Association of Academic Health 
Centers for the United States, where we look at this very 
carefully.
    It would be incredibly helpful for the efficiency of the 
health care system in this country and for the health of our 
citizens.
    Mr. Green. Thank you. At this time, I will yield 5 minutes 
to the gentleman from California, Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman. Welcome all, and a 
special welcome to you, Chancellor Drake.
    The University of California, as I recall, a few years ago, 
about 18 percent of its total budget was State funds, total 
revenue, income, if you will. I do not remember how much was 
Federal or how much was tuition or how much was privately 
raised.
    Can you tell me what that is either for the University of 
California, of which I am an undergraduate product, by the way, 
or UCI?
    Dr. Drake. At Irvine, the State funds for Irvine are just 
under $300 million a year in a budget of $1.4 billion. You can 
do the math. We come out at around 20 percent. It is higher at 
campuses that have no medical facility, because that is a big 
part of our budget at Irvine.
    At Santa Cruz or Riverside, the percentage of State funding 
would be higher. It would be lower at a place like UC, San 
Francisco, where it is closer to 10 percent.
    Mr. Campbell. How much is private?
    Dr. Drake. There is $300 million, State. Our Federal 
research grants and contracts are around 200 to $250 million a 
year, so we are looking toward about $600 million for us.
    A lot of the rest of that, about $600 million of that, 
would be in the health care part of our budget. A large part of 
the health care budget then is Medicare and other things, 
probably about half of that.
    The private investment in our research enterprise is 
actually relatively small. Students also pay fees at our 
institution--25,000 students at a fee of about $7,000 to $8,000 
per student also is a big part of our budget.
    Mr. Campbell. And you have private contributions as well?
    Dr. Drake. And we have private contributions. Last year, 
about $100 million, for a campus of our size. It is a public/
private partnership in that way.
    Mr. Campbell. I am sure you would like to see more of 
everything. That is your job. Is that balanced? How does that 
balance feel to you or is there an objective within the 
University of California to change that balance?
    Dr. Drake. Yes. There is an objective in two ways. I will 
tell you the places that we have looked at, and the place that 
is in the private sector and the place that is in the public 
sector.
    In the private sector, we look actually for more fund 
raising. As the State, in this case, not the Federal 
Government, has decreased its support for higher education on a 
percentage basis, that puts stress on our ability to be able to 
compete for faculty and others with private institutions who 
charge much, much more for what they provide, 5 times as much, 
almost, for tuition.
    We have a hard time competing if the State fraction goes 
down, unless we have private support to help us.
    The place where it is most important for us to have Federal 
support is what I mentioned today, which is one of the most 
important places, which is in the research enterprise.
    As we grow forward, that funding of basic research is not 
as attractive to the private sector. There is some. We have a 
lot of public/private partnerships. We care a lot about those. 
True basic research, when you are not even necessarily thinking 
about the product, is something that the private sector tends 
not to invest in very heavily.
    Mr. Campbell. You mentioned the doubling of NIH funds. I 
have heard some criticism, not specific to NIH, but that lots 
of money goes into research and where there is not a lot of 
product, output.
    You talked about basic research, which can have a very long 
gestation period.
    Is there something we could or should be doing with NIH to 
make it more effective or efficient?
    Dr. Drake. I think that NIH is the envy of the world. As we 
travel around the world, when other countries are trying to 
emulate the great success of the United States, they try to put 
together something like the NIH, where you have a fund of money 
that is peer reviewed by scientists looking at the best ideas 
and the best new science that has a long enough period of 
support that a young scientist can become involved in an area 
and create a career by making real discoveries.
    This has been an incredible model for us. As I mentioned, 
as we look at the United States in the last 60 to 70 years, and 
the real advances, particularly in the area that I work in, 
which is in medicine, we see them coming from discovery upon 
discovery that builds this great foundation.
    I am a supporter. I worked in the lab and did basic 
research. I am a supporter of basic research based on peer 
reviewed merit, so we look at the best ideas and lead those 
forward, and then actually as that becomes a part of our 
knowledge, we then can look at ways to apply it later on.
    We have done it awfully well in this past period.
    Mr. Campbell. No suggestions?
    Dr. Drake. I would say that continuing to fund it at an 
adequate level is the most important thing. I am being as 
honest as I can. It really has worked. It is really the envy of 
the world. It has worked quite well. It needs your continued 
support.
    Mr. Campbell. Let me ask anybody who wants to answer. I am 
a CPA, so this is a bean counter oriented question.
    One of the things that is unique to government accounting 
is that when public money is spent on something that has a 
useful life that is long, such as a road or a building at the 
University of California, Irvine, or wherever, we expense it 
all when the cash is put out, when the building is bought, 
which outside of government, that is not done at all in 
accounting.
    Obviously, that affects decisionmaking. Has anybody ever 
thought about that or does anybody think that government should 
act more like private entities and set up an asset and 
depreciate those?
    Yes. I will butcher your name if I say it. I will let you 
say it.
    Mr. Haughwout. I am Andy Haughwout from the Federal Reserve 
Bank of New York.
    I think it is important to note that State and local 
governments budget more in the way you are describing the 
private sector budgeting, that is to say they have capital 
budgets, which allow the use of debt to finance along with 
capital projects, and then pay for operating expenses, 
including maintenance, out of current revenues.
    I think for those governments, that kind of institutional 
arrangement allows for the kind of long term planning you were 
alluding to.
    Mr. Campbell. Mr. Rapoport, a question for you, and I guess 
probably my last question.
    Right now, Federal Government spending is about 20 percent 
of gross domestic product, and Federal taxes are slightly below 
that, hence, the deficit, I think 18.6, something like that.
    That is about the historic average since 1960. A lot of the 
things that you suggest in your testimony would obviously 
increase that dramatically. That is just the Federal 
Government. I cannot recall the number with State and local, 
but I think it is somewhere north of 30-something percent of 
GDP that is government related activity.
    I would assume with the things that you are suggesting that 
you would take taxes considerably higher than the 18.6 they are 
at now and government spending higher than that.
    Is there some place you think that can go without hurting 
the economy?
    Mr. Rapoport. Yes, I would take it higher, actually. I 
think one of the places to look for comparison--the costs for 
health care, for instance, are borne somewhere. They are either 
borne by the government or they are borne by major corporations 
who pay for health care, or they borne by the individual. The 
costs are done.
    In a number of the European countries, which in fact have 
done reasonably well in the global economy and on a trading 
basis as we have and have not had the kinds of inequality 
increases that the United States has had over the time, the 
taxation levels are up closer to 30 percent and yet if you 
actually take the costs to a consumer or taxpayer, and if you 
take out the health care costs that they no longer need to pay 
or the other costs, it may not be a much greater cost.
    I might go up to the upper 20's and lower the costs for 
people in society in other ways.
    Mr. Campbell. Be more like Sweden.
    Mr. Rapoport. Not a bad idea.
    The Chairman. The other countries, how many are spending 
$100 billion a year on a war in Iraq?
    Mr. Rapoport. Is that a question?
    The Chairman. Yes.
    Mr. Rapoport. None that I know of.
    The Chairman. Thank you.
    With that, the hearing is adjourned.
    [Whereupon, at 3:42 p.m., the hearing was adjourned.]
                            A P P E N D I X



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