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



 
                      AMERICAN DECLINE OR RENEWAL?
=======================================================================


                                HEARINGS

                               BEFORE THE

                   SUBCOMMITTEE ON INVESTIGATIONS AND
                               OVERSIGHT

                  COMMITTEE ON SCIENCE AND TECHNOLOGY

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               ----------                              

                              MAY 22, 2008
                                  and
                             JUNE 24, 2008

                               ----------                              

                           Serial No. 110-105
                                  and
                           Serial No. 110-111

                               ----------                              

     Printed for the use of the Committee on Science and Technology

   
     Available via the World Wide Web: http://www.science.house.go



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                                 ______


                  COMMITTEE ON SCIENCE AND TECHNOLOGY

                 HON. BART GORDON, Tennessee, Chairman
JERRY F. COSTELLO, Illinois          RALPH M. HALL, Texas
EDDIE BERNICE JOHNSON, Texas         F. JAMES SENSENBRENNER JR., 
LYNN C. WOOLSEY, California              Wisconsin
MARK UDALL, Colorado                 LAMAR S. SMITH, Texas
DAVID WU, Oregon                     DANA ROHRABACHER, California
BRIAN BAIRD, Washington              ROSCOE G. BARTLETT, Maryland
BRAD MILLER, North Carolina          VERNON J. EHLERS, Michigan
DANIEL LIPINSKI, Illinois            FRANK D. LUCAS, Oklahoma
NICK LAMPSON, Texas                  JUDY BIGGERT, Illinois
GABRIELLE GIFFORDS, Arizona          W. TODD AKIN, Missouri
JERRY MCNERNEY, California           JO BONNER, Alabama
LAURA RICHARDSON, California         TOM FEENEY, Florida
PAUL KANJORSKI, Pennsylvania         RANDY NEUGEBAUER, Texas
DARLENE HOOLEY, Oregon               BOB INGLIS, South Carolina
STEVEN R. ROTHMAN, New Jersey        DAVID G. REICHERT, Washington
JIM MATHESON, Utah                   MICHAEL T. MCCAUL, Texas
MIKE ROSS, Arkansas                  MARIO DIAZ-BALART, Florida
BEN CHANDLER, Kentucky               PHIL GINGREY, Georgia
RUSS CARNAHAN, Missouri              BRIAN P. BILBRAY, California
CHARLIE MELANCON, Louisiana          ADRIAN SMITH, Nebraska
BARON P. HILL, Indiana               PAUL C. BROUN, Georgia
HARRY E. MITCHELL, Arizona
CHARLES A. WILSON, Ohio
                                 ------                                

              Subcommittee on Investigations and Oversight

               HON. BRAD MILLER, North Carolina, Chairman
JERRY F. COSTELLO, Illinois          F. JAMES SENSENBRENNER JR., 
EDDIE BERNICE JOHNSON, Texas             Wisconsin
DARLENE HOOLEY, Oregon               DANA ROHRABACHER, California
STEVEN R. ROTHMAN, New Jersey        DAVID G. REICHERT, Washington
BRIAN BAIRD, Washington              PAUL C. BROUN, Georgia
BART GORDON, Tennessee               RALPH M. HALL, Texas
                DAN PEARSON Subcommittee Staff Director
                  EDITH HOLLEMAN Subcommittee Counsel
            JAMES PAUL Democratic Professional Staff Member
       DOUGLAS S. PASTERNAK Democratic Professional Staff Member
           KEN JACOBSON Democratic Professional Staff Member
                    BART FORSYTH Republican Counsel
            TOM HAMMOND Republican Professional Staff Member
                    STACEY STEEP Research Assistant


                            C O N T E N T S

     American Decline or Renewal?--Globalizing Jobs and Technology

                              May 22, 2008

                                                                   Page
Witness List.....................................................     2

Hearing Charter..................................................     3

                           Opening Statements

Statement by Representative Brad Miller, Chairman, Subcommittee 
  on Investigations and Oversight, Committee on Science and 
  Technology, U.S. House of Representatives......................     5
    Written Statement............................................     7

Statement by Representative Ralph M. Hall, Ranking Minority 
  Member, Committee on Science and Technology, U.S. House of 
  Representatives................................................     8
    Written Statement............................................     8

Prepared Statement by Representative Jerry F. Costello, Member, 
  Subcommittee on Investigations and Oversight, Committee on 
  Science and Technology, U.S. House of Representatives..........     9

Prepared Statement by Representative Eddie Bernice Johnson, 
  Member, Subcommittee on Investigations and Oversight, Committee 
  on Science and Technology, U.S. House of Representatives.......     9

                                Panel I:

Dr. Ralph E. Gomory, Research Professor, New York University 
  Stern School of Business; President Emeritus, The Alfred P. 
  Sloan Foundation
    Oral Statement...............................................    10
    Written Statement............................................    13
    Biography....................................................    25

Dr. Margaret M. Blair, Professor of Law, Vanderbilt University 
  School of Law
    Oral Statement...............................................    25
    Written Statement............................................    27
    Biography....................................................    61

Dr. Bruce R. Scott, Paul Whiton Cherington Professor of Business 
  Administration, Harvard Business School
    Oral Statement...............................................    61
    Written Statement............................................    65

Discussion
  A New Metric for Corporate Accountability......................   100
  Corporate Incentives That Encourage Long-term Profit...........   101
  Executive Compensation.........................................   102
  Corporate Governance...........................................   104
  Proposed Rule for New York Stock Exchange......................   105
  Free Trade and Equality........................................   106
  Pension Funds..................................................   107
  Hedge Funds....................................................   108

                               Panel II:

Mr. James R. Copland III, Chairman, Copland Industries/Copland 
  Fabrics, Burlington, NC
    Oral Statement...............................................   109
    Written Statement............................................   111
    Biography....................................................   160

Mr. M. Brian O'Shaughnessy, Chairman, Revere Copper Products, 
  Inc.; Member, Board of Directors, Coalition for a Prosperous 
  America
    Oral Statement...............................................   160
    Written Statement............................................   162
    Biography....................................................   169

Mr. Wes Jurey, President and CEO, The Arlington, Texas Chamber of 
  Commerce
    Oral Statement...............................................   170
    Written Statement............................................   173
    Biography....................................................   178

Discussion
  Predatory Pricing..............................................   181
  More on Free Trade.............................................   184
  A Comprehensive Solution.......................................   185
  Job Training and Competitiveness...............................   186

             Appendix 1: Answers to Post-Hearing Questions

Dr. Ralph E. Gomory, Research Professor, New York University 
  Stern School of Business; President Emeritus, The Alfred P. 
  Sloan Foundation...............................................   192

Dr. Margaret M. Blair, Professor of Law, Vanderbilt University 
  School of Law..................................................   194

Dr. Bruce R. Scott, Paul Whiton Cherington Professor of Business 
  Administration, Harvard Business School........................   201

             Appendix 2: Additional Material for the Record

The Global Competitive Environment, Drivers of Change, and 
  Potential Implications for Federal Policy, Congressional 
  Research Service, May 21, 2008.................................   204

                            C O N T E N T S

  American Decline or Renewal? Part 2--The Past and Future of Skilled 
                                  Work

                             June 24, 2008

                                                                   Page
Witness List.....................................................   218

Hearing Charter..................................................   219

                           Opening Statements

Prepared Statement by Representative Bart Gordon, Chairman, 
  Committee on Science and Technology, U.S. House of 
  Representatives................................................   225

Statement by Representative Brad Miller, Chairman, Subcommittee 
  on Investigations and Oversight, Committee on Science and 
  Technology, U.S. House of Representatives......................   221
    Written Statement............................................   222

Statement by Representative F. James Sensenbrenner Jr., Ranking 
  Minority Member, Subcommittee on Investigations and Oversight, 
  Committee on Science and Technology, U.S. House of 
  Representatives................................................   223
    Written Statement............................................   224

Prepared Statement by Representative Jerry F. Costello, Member, 
  Subcommittee on Investigations and Oversight, Committee on 
  Science and Technology, U.S. House of Representatives..........   225

Prepared Statement by Representative Eddie Bernice Johnson, 
  Member, Subcommittee on Investigations and Oversight, Committee 
  on Science and Technology, U.S. House of Representatives.......   225

                               Witnesses:

Dr. John B. Russo, Coordinator, Labor Studies Program; Co-
  Director, Center for Working-Class Studies, Williamson College 
  of Business Administration, Youngstown State University, Ohio
    Oral Statement...............................................   226
    Written Statement............................................   228
    Biography....................................................   230

Mr. Frank H. Morgan, Attorney, White & Case LLP, Washington, D.C.
    Oral Statement...............................................   230
    Written Statement............................................   232
    Biography....................................................   304

Mr. Howard F. Rosen, Visiting Fellow, The Peterson Institute for 
  International Economics; Executive Director, The Trade 
  Adjustment Assistance Coalition
    Oral Statement...............................................   304
    Written Statement............................................   306
    Biography....................................................   366

Ms. Jeanie Moore, Vice President, Continuing Education Programs, 
  Rowan-Cabarrus Community College, Salisbury, North Carolina
    Oral Statement...............................................   366
    Written Statement............................................   369
    Biography....................................................   385

Dr. Thomas I. Palley, Founder, Economics for Democratic and Open 
  Societies Project, Washington, D.C.
    Oral Statement...............................................   385
    Written Statement............................................   388
    Biography....................................................   401

Ms. Diana Furchtgott-Roth, Director, Center for Employment Policy 
  and Senior Fellow, The Hudson Institute, Washington, D.C.
    Oral Statement...............................................   401
    Written Statement............................................   403
    Biography....................................................   405

Discussion
  Job Protection.................................................   407
  Wages and Inflation............................................   410
  A New Metric for Corporate Accountability......................   410
  The DOD Model of Community Assistance..........................   413
  Trade Adjustment Assistance....................................   414
  The Service Industry and Trade Adjustment Assistance...........   417
  Challenges and Lessons for Community Colleges..................   419
  The Emotional Cost of De-industrialization.....................   421
  Part-time Training and TAA.....................................   423
  Supporting and Developing a Healthy Workforce..................   424
  Health Care Costs..............................................   426

              Appendix: Additional Material for the Record

The Globalization of R&D and Innovation: Scale, Drivers, 
  Consequences, and Policy Options, Committee Print, Serial No. 
  110-A, May 2008................................................   430


     AMERICAN DECLINE OR RENEWAL?--GLOBALIZING JOBS AND TECHNOLOGY

                              ----------                              


                         THURSDAY, MAY 22, 2008

                  House of Representatives,
      Subcommittee on Investigations and Oversight,
                       Committee on Science and Technology,
                                                    Washington, DC.

    The Subcommittee met, pursuant to call, at 10:05 a.m., in 
Room 2318 of the Rayburn House Office Building, Hon. Brad 
Miller [Chairman of the Subcommittee] presiding.


                            hearing charter

              SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT

                  COMMITTEE ON SCIENCE AND TECHNOLOGY

                     U.S. HOUSE OF REPRESENTATIVES

     American Decline or Renewal?--Globalizing Jobs and Technology

                         thursday, may 22, 2008
                          10:00 a.m.-1:00 p.m.
                   2318 rayburn house office building

Purpose:

    The purpose of this hearing is to assess the effects of the 
globalization of jobs and technology on the American economy, and to 
develop an understanding of the incentives and disincentives that 
influence United States firms' decisions on whether to locate at home 
or abroad the production and research facilities that are critical 
sources of value creation and high-paying jobs. Firms' thinking both on 
whether to retain or to offshore existing U.S.-based capacity and on 
where to locate new investment will be explored.
    The Committee on Science and Technology annually authorizes the 
expenditure of billions of dollars to support scientific research. It 
therefore has a direct interest in the extent to which the benefits of 
the innovations spawned by this federal funding are captured by the 
U.S. national economy and for the taxpayers with whom the funding 
originates. The Committee has a specific interest, through its 
connection to the National Institute of Standards and Technology, whose 
budget it authorizes, in the health of the Nation's manufacturing 
industries. Finally, the vigor of the Nation's scientific research 
enterprise, like the health of the economy that supports it, is closely 
linked to its ability to sustain value creation--in the form of both 
technological innovation and high-value added production--within its 
borders.
    This hearing has been designed to help the Committee in identifying 
measures that might increase the likelihood of high-value-added 
activity's remaining, increasing, and succeeding within U.S. borders, 
and thereby contributing to the future health of the America's economy 
and the future prosperity of its citizens.

Witnesses:

Panel One

Dr. Ralph E. Gomory currently serves both as Research Professor at the 
NYU Stern School of Business and as President Emeritus of the Alfred P. 
Sloan Foundation. A mathematician who was a longtime Director of 
Research at IBM, he is author with the economist William J. Baumol of 
the book Global Trade and Conflicting National Interests.

Dr. Margaret M. Blair is a Ph.D. economist who serves as Professor of 
Law at Vanderbilt University Law School. She is the author of numerous 
scholarly articles on corporate governance and of the book Ownership 
and Control: Rethinking Corporate Governance for the Twenty-First 
Century.

Dr. Bruce R. Scott is the Paul Whiton Cherington Professor of Business 
Administration at Harvard Business School. One of the founders of the 
competitiveness debate in the 1980s, he has a new book, Capitalism, 
Democracy, and Development, due to be published in October.

Panel Two

Mr. James R. Copland III is the Chairman of Copland Industries, Inc., 
and Copland Fabrics, Inc., located in Burlington, NC; he served as the 
companies' President, Treasurer, and CEO from 1986 until 2004. He is 
also the founder of two banks and currently serves as Director of four 
banks.

Mr. Brian O'Shaughnessy has been Chairman since 1988 of Revere Copper 
Products, Inc., in Rome, NY, and until recently served as President and 
CEO as well. He also serves on the Board of Directors of the Coalition 
for a Prosperous America, three copper industry trade associations, and 
three manufacturing associations in New York State.

Mr. Wes Jurey is the President and CEO of the Arlington Chamber of 
Commerce in Arlington, TX. He founded the Center for Workforce Training 
& Preparation in El Paso, TX, and currently serves as Chair of the U.S. 
Chamber's Institute for a Competitive Workforce and as a member of the 
Texas Workforce Investment Council.
    Chairman Miller. Thank you to all of you, and welcome to 
this interesting hearing today, American Decline or Renewal?--
Globalizing Jobs and Technology. The jurisdiction for Oversight 
is more indulgent than the jurisdiction the Committee has for 
legislation. If this committee tried to claim jurisdiction for 
legislation coming out of any of the discussions today, we 
probably would be in a death struggle with other committees 
that would probably win that struggle, but part of our 
jurisdiction is to consider American competitiveness generally. 
There are several items in our jurisdiction that give us that 
broader authority at least to think about how American business 
needs to be more competitive, and much of the Committee's work 
in the last two years has been on that subject. And certainly 
this hearing today gets at that subject as well.
    The former Vice Chairman of the Federal Reserve Board, Alan 
Blinder, observed, ``What I've learned is anyone who says 
anything that obliquely sounds hostile to free trade is treated 
as an apostate.'' Actually, that apostasy is very welcome in 
parts of my district that has suffered a great deal of job loss 
in the last decade, in the last generation.
    The faith that Blinder has recently begun to question 
himself has guided both our policy and international economic 
policy for more than two decades. Its credo is that lowering 
trade barriers while curbing regulation produces the greatest 
growth. According to its doctrine, this new order would provide 
undiluted benefits to an advanced nation like ours. It would 
free Americans trapped in traditional jobs for more 
sophisticated, remunerative work, while flooding the world with 
goods and services made in the United States. I represent a lot 
of folks who do not feel that they were trapped in traditional 
jobs but really wish they still had those jobs.
    But 15 years after the ratification of NAFTA and 13 years 
after the birth of the WTO, the ranks of the doubters seem to 
be growing.
    Could this reflect America's net loss of 3.5 million 
manufacturing jobs since 2001? Many workers have been freed 
from being trapped in traditional jobs, but have not found 
other jobs that are as well-paid, or as easy to support 
themselves and a family on as the jobs that they lost.
    Could it reflect the fact that the United States' 
merchandise trade deficit has risen every year but one over the 
last decade and has hovered around three-quarters of a trillion 
dollars for three years running? Our trade surplus in services 
is tiny by comparison. In 2007, it was only around one-eighth 
the goods deficit's size.
    Could this reflect the Nation's assumption since 2001 of 
$10 trillion in new debt, $6.5 trillion by households, $3.5 
trillion by the Federal Government? Is that an indication that 
we have not produced anywhere near the level at which we would 
like to consume?
    Could it reflect anxiety over the rise of colossal 
sovereign wealth funds that are using what they take in from us 
to buy up our industrial and financial assets?
    In this context, the hardships of working Americans are 
proving longer lasting and are deeper. Lawrence Summers, the 
Treasury Secretary under President Clinton and before that, 
Chief Economist of the World Bank, a strong supporter of 
globalization in the past, last month wrote of ``a world where 
Americans can legitimately doubt whether the success of the 
global economy is good for them.'' He also acknowledged that 
``growth in the global economy encourages the development of 
stateless elites whose allegiance is to global economic success 
and their own prosperity rather than the interests of the 
Nation where they are headquartered.''
    When even folks like Summers, one of the architects of the 
current international trading system, are now feeling and 
saying out loud concerns like that, it heralds a significant 
change in the public debate on the global economy and the 
values of the global economy to American workers. No longer can 
we in good conscience avoid the question, what are we to do 
about it? If we are to find effective answers, we must be open 
to new ideas, even ideas that might have seemed apostasy in the 
past. We must be prepared to discover that we know less than we 
thought about the consequences of globalization or even that 
some of our basic views on the subject may rest on mistaken 
assumptions.
    The panelists in the first panel today point out that much 
of our economic theory is built on a society in which the baker 
sells his bread to the candlestick maker who sells his candles 
to the miller who sells his flour to the baker. And with the 
kind of size, the kind of capital, the kind of labor force 
required for the economy today, that may not be the best model. 
It may not be one that truly describes the economy of the world 
that exists now.
    We have two panels, each of which will, in its own way--in 
different ways--help us consider these apostate ideas.
    The first panel will offer their perspectives on the 
beliefs that have, for several generations, shaped the design 
and governance of our world trading system, as well as our 
expectations of proper behavior by corporations. One of the 
members of the panel, Dr. Ralph Gomory, last year testified 
before the Science and Technology Committee that the interests 
of U.S.-based multinational corporations are no longer 
necessarily in step with those of a healthy American economy, 
certainly an apostate idea. Today the members of this panel 
will question things we think we know, about the role and 
responsibilities of corporations, about the relationship of the 
state and the market, about the ability of technological 
innovation to ensure our country's economic prosperity in the 
absence of changes in the trading system. And they will suggest 
some measures that might strengthen America for the future.
    The second panel is testimony from the trenches. Two heads 
of domestic companies will talk about their commitment to 
producing at home, what they do out of concern for the well-
being of their employees, the viability of the communities in 
which their businesses are located, and the sustainability of 
the Nation's economy. They will tell us about the cost of 
upholding that commitment under the current trading system and 
suggest how the Federal Government might help lighten their 
burdens now. Joining them is a regional development expert who 
will explain what it takes to attract investment as the lure of 
off-shoring becomes more prevalent, and will add some ideas of 
his own about how to improve American competitiveness.
    I will yield back the balance of my time which expired a 
long time ago and recognize now the distinguished Ranking 
Member, not Mr. Sensenbrenner, but Mr. Hall for his opening 
statement.
    [The prepared statement of Chairman Miller follows:]
               Prepared Statement of Chairman Brad Miller
    ``What I've learned,'' former Fed Vice Chairman Alan Blinder has 
observed, ``is anyone who says anything even obliquely that sounds 
hostile to free trade is treated as an apostate.''
    The faith that Blinder has recently begun to question has guided 
both U.S. and international economic policy for more than two decades. 
Its credo is that lowering trade barriers while curbing regulation 
produces optimal growth. According to its doctrine, this new order 
would provide undiluted benefit to an advanced nation like ours. It 
would free Americans trapped in traditional jobs for more 
sophisticated, remunerative work, while flooding the world with goods 
and services made in the U.S.A.
    But 15 years after the ratification of NAFTA, and 13 years after 
the birth of the WTO, the ranks of the doubters seem to be growing.

          Could this reflect America's net loss of 3.5 million 
        manufacturing jobs since 2001?

          Could it reflect the fact that the U.S. merchandise 
        trade deficit has risen every year but one over the past 
        decade, and has hovered around three-quarters of a trillion 
        dollars for three years running? By the way, our trade surplus 
        in services is tiny in comparison. In 2007, it was only around 
        one-eight the goods deficit's size.

          Could this reflect the Nation's assumption since 2001 
        of $10 trillion in new debt, $6.5 trillion by households, $3.5 
        trillion by the Federal Government--an indication that we have 
        not produced anywhere near the level at which we wish to 
        consume?

          Could it reflect anxiety over the rise of colossal 
        Sovereign Wealth Funds that are using what they take in from us 
        to buy up our industrial and financial assets?

    In this context, the hardships of working Americans are proving 
enduring and profound. Lawrence Summers--Treasury Secretary under 
President Clinton and, before that, Chief Economist of the World Bank--
last month wrote of ``a world where Americans can legitimately doubt 
whether the success of the global economy is good for them.'' He also 
acknowledged that ``growth in the global economy encourages the 
development of stateless elites whose allegiance is to global economic 
success and their own prosperity rather than the interests of the 
Nation where they are headquartered.''
    That even such a figure as Summers, one of the architects of the 
current international trading system, is now expressing such concerns 
heralds a significant change in public discourse on the global economy. 
No longer can we in good conscience escape the question: What do we do 
about it? If we are to find effective answers, we must be open to 
hearing new ideas. We must be prepared to discover that we know less 
than we thought about the consequences of globalization, or even that 
some of our basic views on the subject may rest on mistaken 
assumptions.
    Today we have two panels, each of which will, in its own way, help 
us along this path.
    The first panel will offer new perspectives on the beliefs that 
have, for several decades, underlain the design and governance of the 
world trading system, as well as our expectations of proper behavior by 
corporations. One of its members, Dr. Ralph Gomory, last year testified 
before the Science and Technology Committee that the interests of U.S.-
based multinational corporations are no longer necessarily in step with 
those of a healthy American economy. Today the members of this panel 
will question things we think we know--about the role and 
responsibilities of corporations, about the relationship of the state 
and the market, about the ability of technological innovation to ensure 
our country's economic prosperity in the absence of changes in the 
trading system. And they will suggest some measures that might 
strengthen America for the future.
    The second panel will bring us into the trenches. Two heads of 
domestic firms will talk about their commitment to producing at home, 
which they do out of concern for the well-being of their employees, the 
viability of their communities, and the sustainability of the Nation's 
economy. They will also tell us about the cost of upholding that 
commitment under the current trading system, and suggest how the 
Federal Government might help lighten their burdens now. Joining them 
is a regional development expert who will explain what it takes to 
attract investment as the lure of offshoring becomes more prevalent, 
and will add some ideas of his own on how to improve American 
competitiveness.
    With that I yield back my time--which has, in fact, already 
expired--and recognize the distinguished Ranking Member for his opening 
statement.

    Mr. Hall. Thank you, Chairman Miller, and you very 
adequately gave an opening statement that covers I think 
everything that ought to be covered, and I am not here to take 
Mr. Sensenbrenner's place. I'm just here to carry out the 
bylaws that there has to be a Minority here before he can hit 
that gavel down and we get started hearing your testimony. But 
don't be alarmed that for the lack of Members that are here. 
And Mr. Sensenbrenner is not here because he fell yesterday, 
and the good news is that he was not badly injured. He is all 
right, and he will be back with us shortly.
    But all the empty seats, most all of us have about three or 
four things to do every hour of the day here; and your 
testimony under the Chairman's guidance is taken down. It is 
even being televised, and everybody in the Congress will read 
it and see it. So you are not talking to the empty chairs. You 
have the most important people, staffers back here, that tell 
us what you said, you know, when we get back to our offices. 
But I won't even be here very long, but I have great admiration 
for the Chairman, and I know he is going to handle it well. I 
yield back my time. I ask unanimous consent to put my opening 
statement in the record.
    Chairman Miller. Certainly, without objection.
    [The prepared statement of Mr. Hall follows:]
           Prepared Statement of Representative Ralph M. Hall
    Today's hearing will address a topic that this committee has looked 
at several times in the past year--globalization. This new global 
marketplace has created many opportunities and challenges that 
corporations, governments, and workers must now adapt to. Today's 
hearing will touch on a number of broad issues both in and out of this 
committee's jurisdiction.
    While our thinking should not be limited by such artificial 
boundaries, we should, however, be cognizant of what we can actually 
affect. STEM education and Federal Research and Development are clearly 
topics that this committee should address. From the National Academies 
Rising Above the Gathering Storm report, to the President's American 
Competitiveness Initiative, to this committee's COMPETES Act, this 
committee is actively engaged in maintaining America's preeminence in 
Science and Technology. It is in these areas that we can continue to 
influence how our nation responds to a globalized economy.
    I look forward to the witness' comments on other topics such as 
currency manipulation, subsidization, corporate governance, price 
fixing, regulatory policy, patent reform, and tort reform. These issues 
are certainly an important aspect of globalization, but ultimately may 
not be the most appropriate topics for the Science Committee to 
address. Nevertheless, much like the intertwined global economy, many 
of these issues are also interrelated so I look forward to hearing our 
guests' perspectives.
    Thank you. I yield back the balance of my time.

    Chairman Miller. I hope the Members did not really believe 
that every Member of Congress is going to read the transcripts 
of today's hearings, but I do still think, even if a relatively 
small number of people even learn in the most general terms 
what was discussed, it will advance the debate and allow us to 
consider these questions in ways we haven't before but need to.
    And I ask unanimous consent that all additional opening 
statements submitted by any Member be included in the record. 
And without objection, it is so ordered.
    [The prepared statement of Mr. Costello follows:]
         Prepared Statement of Representative Jerry F. Costello
    Chairman Miller, thank you for your continued attention to one of 
the most important issues facing our nation. The changing nature of the 
international economy has had profound effects on the American 
workforce. How we confront the long-term effects of this phenomenon is 
critically important for our future economic health.
    It is a familiar refrain over the last 15 years: more jobs, 
particularly manufacturing jobs, have left the U.S. and gone overseas, 
where workers are paid substantially less. And this activity has not 
been limited to blue collar jobs. As China and India produce more and 
more engineers and other high-tech workers--that also work for less 
than their American counterparts--white collar jobs are lost abroad.
    While our economy slows and rising food and gas prices are 
squeezing families, the average American worker's wages have stagnated, 
and most manufacturing workers that lose their jobs make less in their 
next job.
    Our country's success has been underpinned to a great degree by the 
fact that a person without a college education could find a good-paying 
job, enough to raise a family, afford an occasional vacation, and 
generally live a higher standard of living than his parents.
    For many Americans, that ideal is in jeopardy. Service sector jobs 
do not pay as well as manufacturing jobs, and often come without 
benefits. While our economy remains the most innovative in the world, 
not everyone will be able to acquire the skills to survive the demands 
of the 21st Century workforce. My overarching question to our panelists 
is, how do we rebuild the U.S. job base?
    Mr. Chairman, thank you for holding this hearing. I look forward to 
the insights of our witnesses and appreciate their taking the time to 
discuss these issues with us today.

    [The prepared statement of Ms. Johnson follows:]
       Prepared Statement of Representative Eddie Bernice Johnson
    Thank you, Mr. Chairman. I want to commend this subcommittee's work 
on today's hearing.
    The topic is of great interest: an in-depth analysis of the 
incentives and disincentives when it comes to global outsourcing of 
high technology jobs.
    A simple Internet search for global outsourcing in Texas yields 
several large corporate business names.
    These businesses advertise themselves as being proficient and 
helping other businesses outsource their work, globally.
    Mr. Chairman, I believe that as information technology continues to 
improve, that global outsourcing will be the way business is done. This 
trend will become ever more routine.
    My concern is regarding which jobs stay in the United States, and 
which jobs go to other nations.
    Science, technology, and engineering jobs are among the higher 
paying, more rewarding ones. The fruits of this work pay untold 
dividends to a society.
    There will always be a place, here and abroad, for attorneys, 
manufacturers, teachers, bankers, and business people. These can be 
high-paying and valuable professions.
    I believe that STEM jobs--those involving science, technology, 
engineering and mathematics--present critical sources of value creation 
and prosperity to individuals and to society.
    Let us use Silicon Valley, for an example. Had the Internet boom 
occurred initially in India, would that nation now surpass us in 
computer science innovation?
    Some would argue that, in some sectors, it is already doing so.
    I am pleased that our witnesses bring expertise from the academic 
standpoint as well as the business perspective.
    Hopefully, the information will enable the Subcommittee to get a 
sense of decision-making that goes into firms' thinking both on whether 
to retain or to offshore existing U.S.-based capacity and on where to 
locate new investment.
    Thank you, and I yield back.

    Chairman Miller. It is now my pleasure to introduce our 
witnesses today. The first is Dr. Ralph Gomory who currently 
serves as a Research Professor at the NYU Stern School of 
Business and is President Emeritus of the Alfred P. Sloan 
Foundation. Dr. Margaret Blair is a Ph.D. economist who serves 
as Professor of Law at Vanderbilt University School of Law. Dr. 
Bruce Scott is Paul Whiton Cherington Professor of Business 
Administration at the Harvard Business School. You will each 
have five minutes for your oral testimony. Your written 
testimony will be included in the record for the hearing. When 
you complete your testimony, we will begin with questions. Each 
Member will have five minutes to question the panel. As this is 
an Investigations and Oversight Subcommittee, it is our 
practice to take testimony under oath. The likelihood of a 
perjury prosecution coming out of this hearing seems remote, 
but we do still take testimony under oath.
    Do any of you object to being sworn? All right. And you 
also are allowed counsel if you prefer. We ask you these 
questions to put you at ease.
    Ms. Johnson. Mr. Chairman?
    Chairman Miller. Yes, Ms. Johnson?
    Ms. Johnson. Pardon me for breaking in but I have a markup 
starting at 10:30----
    Chairman Miller. Yes, ma'am.
    Ms. Johnson.--and I notice on the witness list here there 
is someone from my area, the President and CEO of Arlington 
Chamber of Commerce, and I simply want to welcome him and then 
reiterate Mr. Hall's comment about us getting the information 
even if we are not here. But I do have a markup.
    Chairman Miller. Ms. Johnson, would you like to introduce--
he is on the second panel, but if you would like to introduce 
him now that would be fine.
    Ms. Johnson. I don't even know him.
    Chairman Miller. Well, thank you. I will be pleased to 
welcome him for you and for the rest of the panel, and I wish 
you well at your markup.
    And none of you have counsel? All right. If you would now 
all rise and raise your right hand, do you swear to tell the 
truth and nothing but the truth? Thank you. The record will 
reflect that all answered that they did so swear.
    Dr. Gomory, you may begin. You do need to turn on your 
microphone.
    Mr. Gomory. I am sorry.

                                Panel I:

STATEMENT OF DR. RALPH E. GOMORY, RESEARCH PROFESSOR, NEW YORK 
 UNIVERSITY STERN SCHOOL OF BUSINESS; PRESIDENT EMERITUS, THE 
                   ALFRED P. SLOAN FOUNDATION

    Dr. Gomory. I am here just representing myself, not the 
Sloan Foundation, not New York University. For myself, let me 
say how pleased I am to have this opportunity to discuss these 
crucial issues, and I thank you, Mr. Chairman, and Members of 
the Committee for having organized this hearing.
    I will make only one basic point in my testimony, and that 
is that in this era of globalization, the interest of global 
corporations and their countries have diverged; and if most 
Americans are to benefit from globalization, we must change 
this situation and there are ways to do that.
    After all, what is it that countries want of their 
corporations? I say two things. One, countries have looked to 
their corporations to be productive at making what they make, 
and second, to enable the people of the country to earn a 
living by being a part of these productive organizations.
    Now, if we look at the behavior of corporations, it is 
clear that profit is something that really matters to 
corporations. Globalization has now made it possible for global 
corporations to pursue their profits by building capabilities 
abroad and instead of investing along side U.S. workers and 
using that investment in R&D and all the rest to increase their 
productivity, corporations today can produce goods and services 
abroad using low-cost labor and import those goods and services 
into the United States.
    But increasing their profits this way, they are not 
fulfilling the social purpose of allowing Americans to 
participate in the production of goods. Economists correctly 
point out that this often results in the availability of 
cheaper goods and that itself is a social good, and that is 
certainly true; but it is also true that as we lose our 
capabilities in many areas, we have less to trade for those 
goods so that eventually, the cheaper goods become expensive in 
real terms and you come out behind, not ahead.
    The idea that the industrial development of your trading 
partner can actually become harmful to your total GDP has 
appeared in the economic literature from time to time. With a 
detailed understanding that Professor Baumol and I have added 
to that viewpoint in our book, there is a good reason to think 
that the rapid industrialization of some Asian countries is 
harmful to the United States overall, not just in some areas.
    Now, let me say that U.S. corporations were not always 
purely profit oriented. When Reginald Jones became the CEO of 
General Electric in 1972, he announced that his 
responsibilities would be equally split among the company and 
its shareholders, its employees, the American industry, and the 
Nation; and that sense of broad responsibility was at that 
time--and I remember it myself--pervasive in American industry.
    But in the years since then, that view of corporate 
leadership has been largely replaced by the idea that the 
business of business is solely to make profit for shareholders 
and that in the pursuit of profits or shareholder value, all 
other values should be sacrificed. And what has been the result 
of that?
    During the three decades after 1973, GDP increased steadily 
as new technologies were introduced that increased 
productivity; but during this period, the gains from this 
increase were distributed in a very skewed fashion. Over those 
30 years, most Americans have seen little or no growth in real 
wages. The gains from this impressive productivity growth have 
been going to the wealthy and, even among them, to the very 
wealthy primarily.
    While many explanations have been brought forward for this 
remarkable divergence of the richer and poorer in our country, 
one very simple one has received little attention. But let us 
note that the shares of corporations are held overwhelmingly by 
those who are already wealthy. Ninety percent of shares are 
held by the top 20 percent or by those like top executives who 
will become wealthy if share values go up. And if corporations 
focus on share value to the exclusion of anything else, this is 
an automatic mechanism for increasing inequality and the skewed 
distribution.
    But with the onset of globalization, the capital, know-how, 
and technology that once made American workers the most 
productive in the world are being transferred overseas to other 
workers who will do the same job for a fraction of the wage. 
This makes for excellent corporate profits, but it leaves 
American workers out and it will leave most Americans as 
losers, not winners from globalization.
    Can anything be done about this? The answer is yes, but we 
will have to do some new things. While the United States has no 
national stated strategy aimed at the goal of greater GDP, 
there is no lack of individual suggestions about ways to 
improve the U.S. economic situation. This often translates into 
asking for improved K through 12 education, et cetera, et 
cetera, et cetera; and I discuss all these in my written 
testimony. However, the main thrust of this testimony today is 
on the issue of better aligning corporate and national goals. 
We need to consider a U.S. economic strategy that provides 
incentives to companies to have high value-added jobs in the 
United States. If we want high value-added jobs, let us reward 
companies for having such jobs. Let us consider a corporate 
income tax that does that, and we don't care how they do it, 
whether it is through R&D, advanced technology, or by just 
plain American ingenuity exercised at every level. Such a tax 
could be revenue neutral, low on producers and high on the non-
producers. Such a tax would encourage corporations to return to 
what a country wants of them, high output and jobs in this 
country.
    Many people would oppose this or any similar move, saying 
that our national economic strategy is and should be to leave 
markets alone and take whatever free markets produce. But when 
you think for one second, you realize there is no one free 
market. All markets are affected by all our regulations and our 
tax structures. And so the question simply remains, which free 
market are you describing and which free market do you want?
    However, we cannot do these things that I have described or 
anything effective if we do not balance trade. If we do not 
balance trade, we cannot be in control of our own destiny. We 
will continue to be the victims of merchantless practices and 
there is nothing to prevent U.S. corporations from leaving the 
country and working from abroad if they prefer that to what it 
means to be a U.S. corporation.
    But trade can be balanced. There are many approaches to 
this, but in this limited time, I would only mention one, a 
remarkable approach described by Warren Buffet and based on 
what he calls import certificates.
    If most Americans are to benefit rather than lose--let me 
summarize--if most Americans are to benefit rather than lose 
from globalization, we need to re-align the goals of 
corporations with those of the Nation, and we must balance 
trade to control our own destiny and there are ways to do both 
these things. Let us start now.
    [The prepared statement of Dr. Gomory follows:]
                 Prepared Statement of Ralph E. Gomory

Mr. Chairman and Members of the Committee:

    Thank you for the opportunity to take part in this hearing. The 
subjects that we are to discuss today are the ones to which I have 
devoted much of my working life. For almost 20 years I was the head of 
the research effort of a major international corporation, (IBM). For 
the last 18 years I was the head of a major foundation (Alfred P. 
Sloan) deeply interested in science and technology. Today I am a 
Research Professor at New York University's Stern School of Business.
    In addition, for almost my entire adult life, I have been active as 
an individual researcher--first in mathematics and more recently in 
economics. I am pleased and honored to be here today and to have this 
opportunity to testify.
    Some of you may remember that I testified to the full Science and 
Technology Committee on June 12 of last year on the subject of the 
globalization of R&D. At that time I stated:

         The effect on the United States of the internationalization of 
        the scientific and technical enterprise can only be understood 
        as one part of the revolutionary process of globalization, 
        which is fundamentally revising the relation of companies to 
        the countries from which they have originated. In this new era 
        of globalization the interests of companies and countries have 
        diverged. What is good for America's global corporations is no 
        longer necessarily good for the American economy.

    My testimony today will bear on this same question, viewed in the 
broader context of the evolving relation of countries and companies. I 
will address the impact of these events on the overall ability of this 
country to produce a large GDP (value of the total national product), 
as well as on the rapidly growing problem of extreme inequality in the 
distribution of that national product. Nonetheless, my conclusion will 
be exactly the same:

What is good for America's global corporations is no longer necessarily 
good for the American economy.

    To see why this is so, let us review the fundamental social role 
that the corporation fulfills in this country and in other developed 
countries.

The Basic Social Function of the Corporation

    For a very long time most of the work of the world was done on 
farms or in small shops. An individual could learn the printing trade 
or shoe making and graduate to his own shop; a family could run a farm. 
In both cases an individual or very small groups of people could grow 
crops or make shoes that could be sold to others and thus have the 
money to supply what was not made at home.
    But today the goods we consume cannot be made at home; they are 
complex and require large organizations to create them. You cannot 
manufacture a car in your garage; it takes a large-scale organization 
to do it. The food you eat is not produced by a family on a nearby 
farm, but is made by large organizations on highly mechanized farms 
with machinery produced by other large organizations. The food itself 
then travels on highly organized transportation networks to get to huge 
outlets, where nearby you can pick up a refrigerator made by another 
large organization or a television set that no individual or small 
group could ever build.
    The same is true of services: there is no way to build your own 
telephone service. And even medicine, one of the last strongholds of 
the individual practitioner, is rapidly agglomerating into large-scale 
enterprises.
    A person must now be part of an organization that makes or 
distributes the complex goods and services that people buy today. Being 
part of an organization is what people must do to earn a living and 
support themselves and their families. The fundamental social role of 
corporations and other businesses is to enable people to participate in 
the production of the goods and services that are consumed in the 
modern world; the corporation enables them to earn a share of the value 
produced for themselves and their families.
    My testimony bears on the question of how well America's global 
corporations are fulfilling that fundamental purpose today. The whole 
thrust of my testimony is that in the last few decades the shift in 
corporate motivation toward emphasizing profits above everything else 
has had a deleterious effect on the way they are fulfilling that role. 
That deleterious effect is now being enormously accelerated through 
globalization.

The Role of Profits and Competition

    Business organizations today do not proclaim the social mission 
that I have just described; rather, they make clear that they are there 
to make profits for their shareholders.
    I understand very well that profit is a creative force. Companies 
come into existence to create profits, and to do that they create GDP, 
the goods and services that constitute a nation's economic output. And 
in constantly striving for more profits, companies tend to become ever 
more efficient and create ever more GDP. As Adam Smith pointed out, 
``It is not from the benevolence of the butcher, the brewer or the 
baker that we expect our dinner, but from their regard to their own 
interest.''
    Today's butcher and baker are corporations, and their interest is 
profits.
    But while it is true that profit can be a creative force it is also 
true that emphasizing profit above everything else can be bad for the 
Nation. Profit under the right circumstances can be an energizing force 
that creates GDP. But we should remember that from a national point of 
view, profit is a means to the end of creating GDP, not an end in 
itself.

The Divergence of the Profit Motive and the Fundamental Role

    Globalization has now made it possible for global corporations to 
pursue their profits by building capabilities abroad. Instead of 
investing alongside U.S. workers and using their investment and R&D to 
increase their productivity, corporations today can produce goods and 
services abroad using low-cost labor and import those goods and 
services into the United States. But in creating their profits this 
way, they are building up the GDP of other countries while breaking 
their once tight links with America's own GDP.
    Economists will sometimes argue that this development of 
capabilities abroad is good for the U.S. economy as a whole. For one 
thing, we get cheaper goods. That is certainly true, but it is also 
true that if we lose our superior capabilities in many areas and are 
less competitive, we have less to trade for those goods, so that 
eventually the cheaper goods become expensive in real terms. I do not 
intend to repeat today the arguments that I have already outlined to 
the Full Committee in my earlier testimony and that are spelled out in 
the book on global trade and its consequences that I co-authored with 
Professor Will Baumol.
    I would like to point out, however, that the view that the 
industrial development in your trading partner can be harmful to your 
total GDP is not new. There is a long history of well known economists 
making that observation, most recently Paul Samuelson.\1\ What 
Professor Baumol and I have added to that long history in our book 
``Global Trade and Conflicting National Interests'' is the realization 
that the benefits of your trading partner's economic development occur 
in the early stages of its development, and as your partner becomes 
more fully industrialized and is no longer confined to low value-added 
industries, further development is harmful to your GDP.
---------------------------------------------------------------------------
    \1\ See References 1-6.
---------------------------------------------------------------------------
    This result, which we derive rigorously from the most standard 
economic models, corresponds to the intuitive notion that we do well 
when we lose low-wage jobs and not well when we start losing high-wage 
or high-tech jobs .And that is what we are seeing today. And as I said 
in my previous testimony, in agreeing with my co-panelist Professor 
Alan Blinder, there are many reasons to believe that the impact on the 
United States will be severe.

In addition to the impact on GDP, the Effect of Globalization on 
                    Inequality

    Globalization was not the beginning of the divorce between 
corporate profits and the economic welfare of the American people. It 
is rather a very large next step down a long road already traveled. To 
see how far we have come, let us look back 35 years.
    Reginald Jones became CEO of General Electric in 1972, and shortly 
thereafter made two remarkable speeches to the Business Roundtable and 
the National Press Club.\2\
---------------------------------------------------------------------------
    \2\ This is summarized from Reference 7.
---------------------------------------------------------------------------
    Mr. Jones said that with his appointment as CEO, he would 
henceforth view his responsibilities as being equally split among the 
company and its shareholders, employees, American industry, and the 
Nation. This sense of broad responsibility became pervasive in American 
industry. In fact, urged on by Jones, the Business Roundtable--the 
organization of major company CEOs intended to look after the interests 
of business in the public policy arena--formally endorsed in 1981 the 
policy that shareholder returns had to be balanced against other 
considerations.
    In the intervening years that view of corporate leadership has 
waned, largely replaced by the idea that the business of business is 
solely to make profits for shareholders, and that in the pursuit of 
profits, or shareholder value, all other values can be sacrificed.
    In the decades from 1973 to now, GDP increased steadily as new 
technologies were introduced that increased productivity. If the gains 
in productivity had been reflected evenly in incomes, a typical worker 
would get 35 percent more today than in 1973. In fact, the typical 
worker saw a far smaller gain. Median household income grew about 16 
percent since 1973, much of that gain being due to the fact that many 
households became two-earner households. So, instead of looking at 
households, if we look instead at individual workers--for example, men 
in the 35-40 age bracket--their inflation-adjusted wages have in fact 
decreased in real terms since 1973.
    In fact the gains from productivity growth have been going to the 
rich--and even among the rich, primarily to the very rich--while most 
Americans have seen little or no growth in real wages.\3\ While details 
can be disputed, as is the case with much economic data, the general 
trend toward a sharply increasing degree of inequality in incomes and 
wealth cannot be disputed; and we are seeing today a concentration of 
wealth at the very top, unmatched since the days of the so-called 
``robber barons'' at the close of the 19th century.
---------------------------------------------------------------------------
    \3\ This is discussed in much greater detail in Reference 8 Chapter 
1, especially pages 22 and 23 and in Reference 9 Chapter 7. See also 
Reference 7.
---------------------------------------------------------------------------
    And just to remove any ambiguity about what is going on, in 2004 
the Business Roundtable revised its earlier position on CEO 
responsibility and publicly asserted that the obligation of business is 
only to maximize shareholder wealth.\4\
---------------------------------------------------------------------------
    \4\ From Reference 7.
---------------------------------------------------------------------------
    While many explanations have been brought forward for this 
divergence of the richer and the poorer in our country, one very simple 
one has received remarkably little discussion. Companies today are 
aimed primarily at maximizing shareholder gains, and their shares are 
held overwhelmingly by those who are already wealthy\5\ or by those, 
like top executives, who will become wealthy if share values go up. 
Corporations today are motivated to cut wages and benefits whenever 
they can to increase profits and shareholder value. The money saved 
from wages and benefits comes out of the middle and lower income 
groups; the gain in profits goes to the wealthy.
---------------------------------------------------------------------------
    \5\ Reference 8, page 23.states that almost that 90 percent of 
shares are held by the top 20 percent of stock owners and has further 
data.
---------------------------------------------------------------------------
    As we remarked above, important American corporations have found 
that the easiest way to maximize shareholder wealth today is to take 
their technology, know-how and capital overseas to wherever labor is 
cheapest and subsidies are the greatest. The capital, know how and 
technology that once made American workers the most productive in the 
world are being transferred overseas to other workers who will do the 
same job for a fraction of the wage. This makes for good corporate 
profits, but it leaves American workers far behind. Corporate goals, as 
they are now being stated, have been diverging for a long time from 
what is good for the country. Now, however, that decades-long history 
of workers and more generally the middle class losing share in the 
productivity gains is being accelerated by globalization. In 
globalization, jobs leave the country altogether and only the corporate 
profits remain.
    We need to realize that the interests of the American global 
corporation, whose interest is profit, and the interests of most 
Americans, who want a higher standard of living, have been diverging. 
Globalization is causing that divergence to occur faster and further 
than ever before.

Can Anything Be Done?

    This testimony does not pretend to take on in any systematic way 
the task of answering the question, ``What is to be done?'' I will be 
content if I can contribute to the clarification of some of the issues.
    While the United States has no stated national strategy aimed at 
the goal of greater GDP, there is no lack of individual suggestions 
about ways to improve the U.S. economic situation vis-a-vis the more 
rapidly developing nations. This often translates into asking for 
improved K-12 education, especially in science and technology. While 
improved education can only do good, education improvement is hard to 
come by and it is hard to imagine an improvement in education so 
profound that it turns out Americans who are so productive that they 
are worth hiring in place of the four or five Asians who can be hired 
for the same wage.
    Another emphasis is the quest for innovation, usually innovation 
that is closely linked to R&D. More R&D can only help. But the role of 
science and technology in globalization needs to be understood. R&D 
does not contribute to a nation's wealth directly by employing large 
numbers of people in high value-added or high-wage jobs. It contributes 
by supporting a small number of people whose work is intended to give a 
competitive edge to the end product, whether that is goods or services. 
It is these end products, whether they are cars or computers or medical 
services that make up the bulk of a corporation's revenues and support 
the wages of its employees.
    If in the process of globalization the production (or delivery in 
the case of services) of the good moves overseas, so do the wages. Even 
if R&D remains behind, the vast bulk of value creation has moved to 
another country, and it is there that it supports the wages of 
employees.
    It is also hard to envision a significant industrial advantage vis-
a-vis other countries derived from more university research, when a 
large fraction of graduate students in science are from Asian countries 
and who return home after obtaining their advanced degrees. Understand, 
too, that the great global companies Intel and Microsoft have research 
centers in leading universities and are well positioned to spread the 
latest research to their labs and development sites in other countries 
around the world.
    Proposals of this sort about education and R&D can be helpful. But 
they can also be harmful if they create the mistaken belief that these 
measures alone can deal with the problem.
    Another class of suggestions points to the U.S. infrastructure, 
correctly observing the crumbling bridges, crowded airports, and the 
inadequate broadband, which restricts the bit traffic of the future. 
Again, addressing these domestic needs is worth doing as it does add to 
U.S. productivity across the board.
    The main thrust of this testimony, however, points to the 
divergence of company goals, focused almost exclusively on profit, and 
the broader goals of greater GDP and less inequality in the United 
States. Therefore, we need to turn our attention not only to the 
familiar suggestions I have just listed, but also to the issue of 
better aligning corporate and national goals.

Aligning Country and Company

    Some Asian countries, for example Singapore and China, have 
national strategies aimed at the rapid increase of their GDP. As past 
of that strategy they align corporate goals with their national goals. 
They have made it profitable for foreign (often U.S.) corporations to 
create high value-added jobs in their countries. They do this by 
offering tax and other incentives that make it profitable for 
corporations to locate high value-added jobs in their countries.
    We need to consider a U.S. national economic strategy that includes 
incentives for companies to have high value-added jobs in the United 
States. If we want high value-added jobs, let us reward our companies 
for producing such jobs--whether they do that through R&D and advanced 
technology, or by just plain American ingenuity applied in any setting 
whatsoever.
    The Asian countries have done this usually by individual deals with 
individual companies. We have neither the tradition nor the knowledge 
nor the inclination in the U.S. Government to do that. An approach that 
is better suited to what the United States can do, would be to use the 
corporate income tax. We have already used the corporate income tax to 
spur R&D, so why not apply it to directly reward what we are aiming 
at--high value-added jobs.
    For example, the corporate tax rate could be scaled by the value 
added per full-time employee, by the workers of corporations operating 
in the United States. A company with high value-add per U.S. employee 
would get a low rate, a company with low value-add per U.S. employee 
would get a high rate. This tax could be made revenue neutral by having 
a high tax rate for unproductive companies and a low (or even negative) 
tax rate for productive companies. Depending on the rates, it could be 
as strong or as weak an incentive as desired. This is quite doable, as 
value-add is measurable. It is measured today in Europe as the basis 
for the value-added tax.
    Critics may say that our national economic strategy is, in fact, to 
leave markets alone and take whatever free markets produce. They may 
also suggest that this is the best possible economic strategy. But 
``free market'' is not a single, simple concept. Do we mean free 
markets with or without anti-trust laws, with or without child-labor 
laws or with or without the ability for labor to organize? Do we mean 
free markets that do or don't have access to government sponsored 
research, etc., etc.? The presence or absence or degree of these 
restrictions or abilities will produce very different results, all 
coming from ``free markets''; as will different tax policies or special 
loans for special industries, and so on and so on.
    On the subject of government incentives, a present day General 
Electric CEO Jeffrey Immelt recently stated:\6\
---------------------------------------------------------------------------
    \6\ See Interview in Reference 10.

         If the U.S. Government ``wants to fix the trade deficit, it's 
        got to be pushed,'' he said. ``GE wants to be an exporter. We 
        want to be a good citizen. Do we want to make a lot of money? 
        Sure we do. But I think at the end of the day we've got to have 
        a tax system or a set of incentives that promote what the 
---------------------------------------------------------------------------
        government wants to do.''

On Inequality

    In this part of my testimony I have discussed mainly total GDP. But 
we have seen that who benefits from GDP is important too and that 
globalization affects the distribution GDP of wealth as well as the 
total GDP.
    So far I have discussed mainly increasing GDP. But there is also 
the question of extreme inequality, the concentration of wealth and 
power, and the influence over government that goes with it.
    To reduce the natural forces working toward extreme inequality we 
should obviously consider what can be done through taxes, individual or 
corporate, but also consider charters for corporations that require 
consideration of other factors than profit maximization. Today in the 
United States, a Delaware-chartered corporation gives nothing in return 
for its charter. It is interesting that Theodore Roosevelt saw the role 
of corporations quite differently from the current Delaware 
perspective. Roosevelt's agenda was to control and regulate 
corporations in the public interest. ``Great corporations exist only 
because they are created and safeguarded by our institutions,'' he 
stated in his 1901 State of the Union Message. ``And it is therefore 
our right and our duty to see that they work in harmony with these 
institutions.''
    We have an interesting mild precedent for broadening the goals of 
corporations in the British Corporations Law of 2006. This law is 
explicit in allowing directors to consider employees, the community and 
many other factors in their decisions. Many U.S. states have in recent 
years passed similar statutes, but they have had little impact so far 
on the actions of corporations.

Controlling Our Own Destiny

    To obtain the benefits of trade in the narrow sense we need free 
trade. This means, in particular, that we need to address the major 
distortions in the market caused by the systematic mispricing of Asian 
currencies and other mercantilist practices. If we do not have a free 
market in currencies we cannot claim that the benefits of free trade 
are being achieved.
    If the imbalance of trade continues there is nothing to stop the 
current trend of selling off pieces of the United States to Sovereign 
Wealth Funds to balance the import of underpriced foreign goods. There 
would also be nothing to prevent U.S. companies from leaving the 
country, and, working from abroad, continuing to send in goods and 
services thus exacerbating the imbalance and weakening the productive 
capabilities of the country. On the other hand, if trade is balanced, 
the value of goods imported is matched to the value of goods exported 
from the country; and those goods and services are provided by 
corporations that comply with the U.S. standard of what a corporation 
should be. Balanced trade therefore is necessary if we are to control 
our own economic destiny.
    Again, there is a litany of approaches to balancing trade ranging 
from jawboning to tariffs. One simple approach advanced and advocated 
by Warren Buffet, however, could really make a difference. It is well 
described in his 2003 article in Fortune.\7\ This approach, in contrast 
to import quotas or tariffs aimed at imports from particular countries, 
creates a free market in import certificates. It would balance trade 
and would give us control over own economic destiny. Since the import 
certificate approach is a major departure from the past it should be 
introduced gradually. But we should take this approach seriously. In 
fact, a bill based on the Buffet approach has been introduced into the 
Senate by Senator Dorgan and Senator Feinstein.
---------------------------------------------------------------------------
    \7\ Reference 11.

Conclusion

    We live in a world of rapid technological change. That change has 
made possible a degree of globalism in economic development that was 
previously not possible. In so doing it has strongly accelerated the 
emerging gap between the goals of global corporations and the 
aspirations of the people of individual countries. This is true not 
only in the United States but also in less developed countries. Even 
when globalization increases a country's wealth, which it does not 
always do, most of the gains are going to a thin upper crust, and the 
bulk of the people do not participate.
    We need to change this and better align the goals of corporations 
and the aspirations of the people of our country. This is not an idle 
dream, the growth we had in America in the decades after WWII and 
before 1970 was both rapid and well distributed. Americans of almost 
every stripe benefited.
    To do this today we must realign the interests of global 
corporations with those of the country. We have given a few examples of 
changes that could push in that direction. However, much more thought 
is needed in that direction. If we look we will find more and better 
ways to do this.
    In addition, in a globalizing world where nations pursue their own 
interests with mercantilist policies, we must balance trade if we are 
to control our own destiny. Fortunately, there is at least one way to 
do that, the Buffet proposal.
    There are many things we can work on to make the United States a 
stronger nation. Let us clear our vision and start now.

References

 1.  Hicks, J.R. 1953. An Inaugural Lecture. Oxford Economic Papers 5: 
117-35.

 2.  Dornbush, Rudiger W., Stanley Fisher, and Paul A. Samuelson 1977 
Comparative advantage, trade and payments in a Ricardo model with a 
continuum of goods, American Economic Review 67, pp. 823-829.

 3.  Krugman, Paul R. 1985. A ``Technology Gap'' Model of International 
Trade in K. Jungenfelt and D. Hague eds. ``Structural Adjustment in 
Developed Open Economies,'' New York, St. Martin's Press, pp. 39-45.

 4.  George E. Johnson, Frank P. Stafford ``International Competition 
and Real Wages, American Economic Review, Vol. 83, No. 2, Papers and 
Proceedings of the Hundred and Fifth Annual Meeting of the American 
Economic Association (May, 1993), pp. 127-130.

 5.  Samuelson, Paul A, 2004, Where Ricardo and Mill Rebut and Confirm 
Arguments of Mainstream Economists Supporting Globalization, Journal of 
Economic Perspectives Volume 18, Number 3, pp. 135-146.

 6.  Ralph E. Gomory and William J. Baumol, 2001, Global Trade and 
Conflicting National Interests, MIT Press.

 7.  Barron's On Line Monday, August 13, 2007 ``A Plea for Corporate 
Conscience'' by Leo Hindery Jr.

 8.  Robert Kuttner, 2007, ``The Squandering of America,'' Alfred A. 
Knopf Publisher.

 9.  Paul Krugman, 2007, ``The Conscience of a Liberal,'' W.W. Norton & 
Co. Publisher.

10.  Jeffrey Immelt, Interview in Manufacturing and Technology News, 
November 30, 2007, Volume 14, No. 21.

11.  Warren Buffet, Fortune Magazine, October 2003, ``America's Growing 
Trade Deficit Is Selling the Nation Out From Under Us. Here's a Way to 
Fix the Problem-And We Need to Do It Now.''












                     Biography for Ralph E. Gomory
    Ralph E. Gomory is a Research Professor at the Stern School of 
Business of New York University (NYU) and is President Emeritus of the 
Alfred P. Sloan Foundation.
    Dr. Gomory received his B.A. from Williams College in 1950, studied 
at Cambridge University and received his Ph.D. in mathematics from 
Princeton University in 1954. He served in the U.S. Navy from 1954 to 
1957.
    Dr. Gomory was Higgins Lecturer and Assistant Professor at 
Princeton University, 1957-59. During this period he invented the first 
integer programming algorithm. He joined the Research Division of IBM 
in 1959, was named IBM Fellow in 1964, and became Director of the 
Mathematical Sciences Department in 1965. In 1970 he became IBM 
Director of Research with line responsibility for IBM's Research 
Division. Under his leadership the Research division made major 
contributions to the computer industry, such as the invention of the 
Relational data base, and also won two Nobel Prizes. Dr. Gomory became 
an IBM Vice President in 1973 and Senior Vice President in 1985. In 
1986 he became IBM Senior Vice President for Science and Technology. In 
1989 he retired from IBM and became President of the Alfred P. Sloan 
Foundation. Under his leadership the foundation pioneered in on-line 
education and supported major scientific efforts such as the Sloan Sky 
Survey and the Census of Marine life. In December 2007 he became 
President Emeritus.
    Dr. Gomory has served in many capacities in academic, industrial 
and governmental organizations. He is a member of the National Academy 
of Science, the National Academy of Engineering, and the American 
Philosophical Society. He was elected to the Councils of all three 
societies. He was a Trustee of Hampshire College from 1977-1986 and of 
Princeton University from 1985-1989. He served on the President's 
Council of Advisors on Science and Technology (PCAST) from 1984 to 
1992, and again from 2001 to the present. He served for a number of 
terms on the National Academies' Committee on Science, Engineering and 
Public Policy (COSEPUP) and is presently a member of the National 
Academies Board on Science Technology and Economic Policy (STEP).
    He has been awarded eight honorary degrees and many prizes 
including the Lanchester Prize in 1963, the John von Neumann Theory 
Prize in 1984, the IEEE Engineering Leadership Recognition Award in 
1988, the National Medal of Science awarded by the President in 1988, 
the Arthur M. Bueche Award of the National Academy of Engineering in 
1993, the Heinz Award for Technology, the Economy and Employment in 
1998, the Madison Medal Award of Princeton University in 1999, the 
Sheffield Fellowship Award of the Yale University Faculty of 
Engineering in 2000, the International Federation of Operational 
Research Societies' Hall of Fame in 2005, and the Harold Larnder Prize 
of the Canadian Operational Research Society in 2006.
    Dr. Gomory has been a director of a number of companies including 
the Washington Post Company and the Bank of New York (now Bank of New 
York-Mellon). He is currently a director of Lexmark International, 
Inc., and of two small start-up companies. He was named one of 
America's ten best directors by Director's Alert magazine in 2000.
    In recent years, while continuing his mathematical research, he has 
written on the nature of technology and product development, industrial 
competitiveness, technological change, and on economic models of 
international trade. He is the author of a 2001 MIT Press book (with 
Professor William J. Baumol) on conflicts in international trade.

    Chairman Miller. Dr. Blair.

STATMENT OF DR. MARGARET M. BLAIR, PROFESSOR OF LAW, VANDERBILT 
                    UNIVERSITY SCHOOL OF LAW

    Dr. Blair. Thank you. I knew to turn his on, I just didn't 
know to turn mine on. Thank you, Mr. Chairman, for the 
opportunity to speak to your Committee today. I am Dr. Margaret 
Mendenhall Blair. I am an economist, and I am also a Professor 
of Law at Vanderbilt University Law School; and I specialize in 
corporate law, corporate finance, and corporate governance.
    What I want to speak to you today about is a question that 
has to do with the fiduciary obligations that corporate 
directors have, by law, in this country. In particular, I want 
to address a claim that is often made in the press, and by 
members of what a Delaware Court judge has recently called the 
``corporate governance industry.'' This is the claim that 
corporate directors have a legal duty to maximize share value 
or maximize profits, if you want to think of it in those terms.
    What I hope you will take from my testimony today is that 
this claim is, at best, a misleading overstatement; and at 
worst, this claim is false, but is often asserted as a weapon 
to try to persuade corporate managers and directors that they 
should take actions that benefit a particular group of 
shareholders of a given corporation, regardless of whether 
those actions may impose high costs on creditors, employees, 
the communities where the corporations operate, or other 
stakeholders, or sometimes even on the long-run ability of the 
corporation itself to compete effectively for market share, or 
to develop the next technology.
    Let me begin with an indisputable legal fact: There is no 
statutory requirement in the U.S. that corporations must 
maximize profits or that directors are responsible for 
maximizing share value. The Model Business Corporation Act, 
Section 3.01 says simply, ``Every corporation has the purpose 
of engaging in any lawful business unless a more limited 
purpose is set forth in the articles of incorporation.'' That 
is it. That is all it says about what the goal of corporations 
is.
    Delaware Corporate Law just says that a corporation ``may 
be . . . organized under this chapter to conduct or promote any 
lawful business or purposes.'' State statutes assign all powers 
to act for a corporation to its board of directors, but do not 
in any way prescribe how directors are to carry out this task.
    Courts recognize that directors and managers must have very 
broad discretion to balance competing interests in a business 
enterprise because business decisions are often very complex. 
Courts further recognize that they should not be making 
business decisions for directors, or interfering in the actions 
that directors take in good faith. This legal doctrine is 
called the ``business judgment rule.'' What this means is that 
directors are very rarely found in breach of their duties 
unless they engage in blatantly self-dealing behavior.
    Now, I by no means intend to suggest today that in today's 
world corporate directors and managers are not under 
significant pressure to find ways to increase share value, 
sometimes even at the expense of the long-run performance of 
the company. But let me be clear that this pressure comes from 
the media, from shareholder advocates, from financial 
institutions in whose direct interest it is for the company to 
get its share price to go up, and from self-imposed pressure 
created by compensation packages that provide enormous 
potential rewards for directors and managers if stock price 
goes up. And by the way, those compensation packages also 
impose very little downside cost on the managers or directors 
if, in their attempt to goose the company to get share price to 
go up, it should not work out and the stock price declines. 
This means that managers and directors often have huge 
incentives to cause their companies to take very big risks in 
their effort to achieve higher share prices.
    These pressures might be alleviated with certain policy 
actions that this body and/or other regulatory bodies could, in 
theory, take. In Britain, for example, the British Companies 
Act of 2006 explicitly codified what most lawmakers believed 
had already been the rule under case law in Britain, and it 
provides that directors have duties to multiple stakeholders. A 
change in the tax rules, for another example, might reduce the 
current tax preference given to compensation packages that are 
based on stock options and that makes those stock options so 
much more attractive than other forms of compensation.
    In sum, decisions by managers and directors of U.S. 
corporations to choose investment strategies that may be 
profitable in the short run, but that sell our country short by 
moving value-creating activities offshore, are decisions that 
those managers and directors must take personal responsibility 
for. These decisions are not in any way mandated by law.
    [The prepared statement of Dr. Blair follows:]
                Prepared Statement of Margaret M. Blair
    Thank you for the chance to speak to your Committee today.
    I am Dr. Margaret Mendenhall Blair. I am an economist, and a 
Professor of Law at Vanderbilt University Law School where I specialize 
in corporate law, corporate finance, and corporate governance.
    I want to speak to you today on a question about the fiduciary 
obligations that corporate directors have, by law, in this country. In 
particular, I want to address a claim often made in the financial 
press, and by members of what a Delaware Court judge has recently 
called the ``corporate governance industry.'' \1\ This is the claim 
that corporate directors have a legal duty to ``maximize share value.'' 
\2\
---------------------------------------------------------------------------
    \1\ Leo E. Strine, Jr., Toward Common Sense and Common Ground? 
Reflections on the Shared Interests of Managers and Labor in a More 
Rational System of Corporate Governance, 33 JOURNAL OF CORPORATION LAW 
1, 1 (2007) at 5, (describing the ``Corporate Governance Industry'' as 
``the strange admixture of public pension fund administrators, proxy 
advisory and corporate governance ratings organizations, corporate law 
scholars, and business journalists, who profit in monetary and psychic 
ways from corporate governance tumult.'' Strine is Vice-Chancellor of 
the Delaware Chancery Court. He further adds that ``to say these folks 
profit from tumult is not a normative argument; it is a positive 
claim.'' Id.
    \2\ In a recent article in FOREIGN AFFAIRS, for example, Robert 
Reich asserted that we cannot rely on corporations themselves to change 
the rules of the game that are driving them to lay off employees, cut 
wages, and move production overseas. ``Corporate executives are not 
authorized by anyone--least of all by their investors--to balance 
profits against the public good,'' he claimed. Robert B. Reich, How 
Capitalism is Killing Democracy, FOREIGN POLICY, September/October, 
2007. Typical of the share-value maximization rhetoric in the financial 
press is this quote from a financial analyst discussing Yahoo's recent 
decision to turn down an acquisition offer from Microsoft: `` `While 
Yahoo!'s board has a fiduciary duty to maximize shareholder returns, 
running the risk of derailing a deal is dangerous to Yahoo! 
shareholders,' said Jefferies analyst Youssef Squali.'' Zachery Kouwe 
and Peter Lauria, Board Bucks Yang, NEW YORK POST, Feb. 15, 2008, 
available at http://www.nypost.com/seven/02152008/business/
board-bucks-yang-97797.htm. Similar 
claims are repeatedly made in conversations about Yahoo's recent 
rejection of Microsoft's bid on blogs that follow those companies. See, 
e.g., Isn't Yahoo! Management Supposed To Work For Its Shareholders? 
posting by Timothy Lee to TechDirt Blog http://www.techdirt.com/
articles/20080304/192104440.shtml (Mar. 5, 2008 10:24 a.m.). (``If I 
were a Yahoo! shareholder, I'd be pretty unhappy that things are being 
framed that way. Yahoo! management has a fiduciary responsibility to 
me, the shareholder, to maximize the value of my investment.'')
---------------------------------------------------------------------------
    What I hope you will take from my testimony today is that this 
claim is, at best, a misleading overstatement. At worst, this claim is 
simply false, but is often asserted as a weapon to try to persuade 
corporate managers and directors that they should take actions that 
benefit particular shareholders of a given corporation, regardless of 
whether those actions may impose high costs on creditors, employees, 
the communities where corporations have their operations, or other 
stakeholders, or sometimes even on the long run ability of the 
corporation itself to compete effectively for market share, or to 
develop the next technology.
    Let me begin with an indisputable legal fact: There is no statutory 
requirement in the U.S. that corporations must maximize profits, or 
that directors are responsible for maximizing share value. The Model 
Business Corporation Act, 3.01 says simply, ``Every corporation . . . 
has the purpose of engaging in any lawful business unless a more 
limited purpose is set forth in the articles of incorporation.'' 
Delaware Corporate Law just says that a corporation ``may be . . . 
organized under this chapter to conduct or promote any lawful business 
or purposes.''\3\ State statutes assign all powers to act for a 
corporation to its board of directors, but do not in any way prescribe 
how directors are to carry out this task.\4\
---------------------------------------------------------------------------
    \3\ DGCL 101(b).
    \4\ ``All corporate powers shall be exercised by or under the 
authority of the board of directors of the corporation, and the 
business and affairs of the corporation shall be managed by or under 
the direction . . . of its board of directors.'' MBCA 8.01(b). ``The 
business and affairs of every corporation organized under this chapter 
shall be managed by or under the direction of a board of directors. . . 
.'' DGCL 141(a).
---------------------------------------------------------------------------
    Case law, which, in the U.S. is mostly made in the courts of the 
State of Delaware, also does not require share value maximization, 
except in one very narrow circumstance: When, in the course of buy-out 
negotiations, it becomes inevitable that a corporation will be sold, 
the Delaware Supreme Court has said that directors' duties then change 
``from defenders of the corporate bastion to auctioneers charged with 
getting the best price for stockholders at a sale of the company.'' \5\ 
Note that, implicitly at least, this formulation of the law accepts the 
proposition that directors may in all other circumstances act to 
preserve the long-run viability of the corporation itself, even if 
other actions might be more immediately rewarding to shareholders.
---------------------------------------------------------------------------
    \5\ Revlon v. MacAndrews & Forbes Holdings, Inc., Del 506 A.2d 173 
(1986).
---------------------------------------------------------------------------
    To be sure, courts often note that directors have a duty to act in 
the best interest of ``the corporation and its shareholders.'' \6\ In 
theory, and sometimes in practice, these interests coincide with one 
another.\7\ But not always.\8\ For this reason, courts have always 
interpreted the mandate to act in the ``best interest of the 
corporation and its shareholders'' very broadly, to give directors wide 
discretion.\9\ Moreover, in applying this mandate, courts implicitly or 
explicitly recognize that the corporation is a separate entity from its 
shareholders, and that directors' duties normally run to the 
corporation first. (My colleague Prof. Bruce Scott will say more about 
the importance of the corporation being a separate legal entity, and I 
have written about the historical importance of this feature of 
corporate law.\10\ I would be happy to elaborate on this point if this 
committee wants to hear about this.)
---------------------------------------------------------------------------
    \6\ ``In carrying out their managerial roles, directors are charged 
with an unyielding fiduciary duty to the corporation and its 
shareholders.'' Smith v. Van Gorkom, 488 A2d 858 (Del. 1085). Directors 
``are charged with an unyielding fiduciary duty to the corporation and 
its shareholders.'' Guth v. Loft, Inc., 2 A.2d 225 (Del. Ch. 1938), 
aff'd, 5 A.2d 503 (Del. 1939).
    \7\ Law and economics scholars have claimed that, since 
shareholders are understood to be the ``residual claimants'' in 
corporations, maximizing value for shareholders should be equivalent to 
maximizing total wealth created by the corporation. See Margaret M. 
Blair, OWNERSHIP AND CONTROL: RETHINKING CORPORATE GOVERNANCE FOR THE 
TWENTY-FIRST CENTURY, Brookings, 1995, at 227, for a discussion of this 
line of economic argument.
    \8\ Finance theory makes it clear that shareholders can be made 
better off at the expense of other corporate participants by shifting 
risk onto them. Because shareholders may not be held liable for 
corporate debts (a protection granted to shareholders under the 
corporate law doctrine known as ``limited liaiblity''), share value can 
be increased if the corporation engages in highly risky ventures, where 
shareholders have a chance for substantial gain if the venture works 
out, but most of the cost of failure falls on creditors.
    \9\ In a classic case establishing the relevant legal doctrine, 
shareholders of the Chicago National League Ball Club Inc., which owned 
the Chicago Cubs, sued directors on grounds of negligence and 
mismanagement because they would not install stadium lights in Wrigley 
Field so that the Cubs could play night games. See Shlensky v. Wrigley, 
Illinois Appellate Court, 1968, 237 N.E.2d 776. The court dismissed the 
complaint for failure to state a claim. See Margaret M. Blair and Lynn 
A Stout, A Team Production Theory of Corporate Law, 85 Virginia Law 
Review 247 (1999), noting that a series of court decisions in the mid- 
to late-20th century have ``allowed directors to sacrifice 
shareholders' profits to stakeholders' interests when necessary for the 
best interest of the `corporation.' `` Courts, for example, have 
sanctioned directors' decisions to expend corporate resources for 
charitable purposes, to avoid risky undertakings that would increase 
profits at the expense of creditors, and to fend off corporate takeover 
bids that threatened to harm employees or the community. Id., at notes 
140-148 and surrounding text.
    \10\ Separate entity status for the corporation serves a crucially 
important economic function: it allows the corporation to hold assets 
in the name of the corporation over an indefinite time period, so that, 
unlike what would happen under default rules of partnership, the assets 
of a corporation will not be broken up and distributed when a 
shareholder dies or becomes insolvent or wants to re-deploy her wealth. 
The shareholder is instead free to sell her shares, but she cannot 
force dissolution of the corporation itself. The ability to keep assets 
invested in an enterprise for an indefinite time was critical to the 
development of the railroads, and other businesses that required long-
lived specialized capital investment. For an extensive discussion of 
how these rules developed under corporate law in the 19th Century U.S., 
see Margaret M. Blair, Locking In Capital: What Corporate Law Achieved 
for Business Organizers in the Nineteenth Century, 51 UCLA LAW REVIEW, 
2 (2003), 387.
---------------------------------------------------------------------------
    Courts recognize that directors and managers must have very broad 
discretion to balance competing interests in a business enterprise 
because business decisions are often very complex. Courts further 
recognize that they should not be making business judgments for 
directors, or interfering with actions directors take ``in good 
faith.'' \11\ This legal doctrine is called the ``business judgment 
rule.'' \12\
---------------------------------------------------------------------------
    \11\ A classic statement of this position is the court's opinion in 
Shlensky, supra note 7 (``We are not satisfied that the motives 
assigned to Philip K. Wrigley, and through him to the other directors, 
are contrary to the best interests of the corporation and the 
stockholders. For example, it appears to us that the effect on the 
surrounding neighborhood might well be considered by a director who was 
considering the patrons who would or would not attend the games if the 
park were in a poor neighborhood. . . . By these thoughts we do not 
mean to say that we have decided that the decision of the directors was 
a correct one. That is beyond our jurisdiction and ability. We are 
merely saying that the decision is one properly before directors and 
the motives alleged in the amended complaint showed no fraud, 
illegality of conflict of interest . . . we feel that unless the 
conduct of the defendants at least borders on one of the elements, the 
courts should not interfere.'' See also In re Caremark International, 
Inc. Derivative Litigation 698 A.2d 959 (Del. 1996) (``Whether a judge 
or jury considering the matter after the fact, believes a decision 
substantively wrong, or degrees of wrong extending through `stupid' to 
`egregious' or `irrational,' provides no ground for director liability, 
so long as the court determines that the process employed was either 
rational or employed in a good faith effort to advance corporate 
interests.'' (emphasis in original) )
    \12\ See e.g., Aronson v. Lewis, 473 A.2d 805 (Del. 1984), at 812 
(``The business judgment rule is an acknowledgement of the managerial 
prerogatives of Delaware directors under Section 141(a). It is a 
presumption that in making a business decision the directors of a 
corporation acted in an informed basis, in good faith and in the honest 
belief that the action taken was in the best interests of the company. 
Absent an abuse of discretion, that judgment will be respected by the 
courts.'')
---------------------------------------------------------------------------
    What this means is that directors are very rarely found in breach 
of their duties unless they engage in blatantly self-dealing behavior.
    I by no means intend to suggest here that, in today's world, 
corporate directors and managers are not under significant pressure to 
find ways to increase share value, sometimes even at the expense of the 
long run performance of the company.\13\ But let me be clear that this 
pressure comes from the media, from shareholder advocates and financial 
institutions in whose direct interest it is for the company to get its 
share price to go up, and from the self-imposed pressure created by 
compensation packages that provide enormous potential rewards for 
directors and managers if stock prices go up. And by the way, those 
compensation packages also impose very little downside cost on managers 
or directors if stock prices decline, which means that managers also 
often have huge incentives to cause their companies to take very big 
risks in their efforts to achieve higher share prices.
---------------------------------------------------------------------------
    \13\ Numerous shareholder proposals filed with the SEC, seeking to 
urge or compel directors to take certain actions, including selling off 
divisions, paying special dividends, or accepting a takeover offer from 
another company, justify their proposal on the grounds that the action 
would ``maximize share value.'' See, e.g., Schedule 14A filed with the 
Securities and Exchange Commission by Wisconsin Central Shareholders 
Committee to Maximize Value, SEC File 0-19150, Oct. 23, 2000, 
announcing a proxy fight against directors of Wisconsin Central 
Transportation Corp. (``Edward A. Burkhardt, former Chairman, President 
and Chief Executive Officer of Wisconsin Central Transportation 
Corporation (NASDAQ:WCLS), today announced the formation of a committee 
to improve company performance and to maximize share value.''). 
Available at http://www.secinfo.com/dsvRs.55Wm.htm
---------------------------------------------------------------------------
    These pressures might be alleviated with certain policy actions 
that this body and/or other regulatory bodies could, in theory, take. 
In Britain, for example, the British Companies Act 2006 explicitly 
codified what lawmakers believed to be the rule under their case law, 
which provides that directors have duties to multiple stakeholders.\14\ 
A change in the tax rules, for another example, might reduce the 
current tax preference that makes compensation packages based on 
``stock options'' so attractive relative to other approaches to 
executive compensation.\15\
---------------------------------------------------------------------------
    \14\ (1) A director of a company must act in the way he considers, 
in good faith, would be most likely to promote the success of the 
company for the benefit of its members as a whole, and in doing so have 
regard (amongst other matters) to-

---------------------------------------------------------------------------
(a) the likely consequences of any decision in the long-term,

(b) the interests of the company's employees,

(c) the need to foster the company's business relationships with 
suppliers, customers and others,

(d) the impact of the company's operations on the community and the 
environment,

(e) the desirability of the company maintaining a reputation for high 
standards of business conduct, and

(f) the need to act fairly as between members of the company.

  Companies Act 2006, c. 46,  172, available at http://
www.opsi.gov.uk/acts/acts2006/
ukpga-20060046-en-13#pt10-ch2
---------------------------------------------------------------------------
    \15\ For a general discussion of how stock options receive 
favorable tax treatment, see Shevlin, Terry J. and Hanlon, Michelle, 
Accounting for the Tax Benefits of Employee Stock Options and 
Implications for Research (April 2001). University of Washington 
Working Paper. Available at SSRN: http://ssrn.com/abstract=271310 or 
DOI: 10.2139/ssrn.271310
---------------------------------------------------------------------------
    In sum, decisions by managers and directors of U.S. corporations to 
choose investment strategies that may be profitable in the short-run, 
but that sell our country short by moving value-creating activities 
offshore, are decisions that those managers and directors must take 
personal responsibility for. These decisions are absolutely not 
mandated by law.
    (I have some thoughts about how and why the notion that corporate 
managers must maximize share value came to be so widely accepted in the 
last three decades. But that is a longer story that I will not 
undertake to tell here unless the Committee wants to hear it. Instead I 
attach to this testimony a copy of Margaret M. Blair, Shareholder 
Value, Corporate Governance and Corporate Performance: A Post-Enron 
Reassessment of the Conventional Wisdom.'' CORPORATE GOVERNANCE AND 
CAPITAL FLOWS IN A GLOBAL ECONOMY, Peter K. Cornelius and Bruce Kogut, 
eds., Oxford University Press, January 2003 Available at SSRN: http://
ssrn.com/abstract=334240)




























































                    Biography for Margaret M. Blair

Research interests: The legal structure of business organizations, 
corporate governance, role of corporations in globalization

About Professor Blair

    Margaret Mendenhall Blair is an economist who focuses on business 
and management law. She joined the Vanderbilt faculty in 2004 as part 
of the team supporting the Law and Business program, which the law 
school offers in conjunction with the Owen Graduate School of Business 
at Vanderbilt. She moved to Vanderbilt from Georgetown University Law 
Center, where she became a visiting professor in 1996 and from January 
2000 to June 2004 served as a Sloan Visiting Professor, teaching 
Corporations and Corporate Finance, and as Research Director for the 
Sloan-GULC Project on Business Institutions. She has also been a Senior 
Fellow in the Economic Studies Program at the Brookings Institution, 
where she wrote about corporate governance and the role of human 
capital in corporations. Her current research focuses on three areas: 
the legal structure of business organizations, team production issues 
and the theory of the firm, and the role of corporations in 
globalization. She served on the Board of Directors of Sonic 
Corporation from January 2001 through January, 2006, and current serves 
on the Board of WRAP (Worldwide Responsible Apparel Production).

Representative Publications

``The New Role for Assurance Services in Global Commerce,'' with 
        Cynthia A. Williams and Li-Wen Lin, 33 JOURNAL OF CORPORATION 
        LAW, 2, 325-360 (Winter 2008).

``Locking in Capital: What Corporate Law Achieved for Business 
        Organizers in the Nineteenth Century,'' 51 UCLA L. Rev. 2 
        (December 2003). Republished in Top 10 Corporate Practice 
        Commentator (2004).

Unseen Wealth: Report of the Brookings Task Force on Intangibles 
        (author and editor, with Steven M.H. Wallman), Brookings, 2001. 
        Chinese translation distributed by the Chinese Social Science 
        Publishing House. Japanese translation distributed by 
        Chuokeisai-Sha Publishing Company.

Trust, Trustworthiness, and the Behavioral Foundations of Corporate 
        Law, (with Lynn Stout), 149 UNIVERSITY OF PENNSYLVANIA LAW 
        REVIEW 1735-1810 (November 2000).

A Team Production Theory of Corporation Law, (with Lynn Stout), 85 
        VIRGINIA LAW REVIEW (March 1999).

Ownership and Control: Rethinking Corporate Governance for the Twenty-
        first Century, Brookings 1995. Chinese translation republished 
        by the Chinese Social Science Publishing House, Beijing. This 
        book won an academic book publishers award.

    Chairman Miller. Dr. Scott.

    STATEMENT OF DR. BRUCE R. SCOTT, PAUL WHITON CHERINGTON 
 PROFESSOR OF BUSINESS ADMINISTRATION, HARVARD BUSINESS SCHOOL

    Dr. Scott. Thank you, Mr. Chairman. I teach at a business 
school and started my studies looking at how firms are managed 
and doing case writing here and in Europe and switched from 
that to looking at those same ideas at the level of countries 
and saying countries have strategies as well.
    This has been a very lonely thing to be doing for the last 
20 years. It really has. It has been completely out of touch 
with what is going on in most of organized economics. It is 
very strange to see this beginning to be used as a set of terms 
and saying, we have to think about it differently.
    Having said that, what I would like to say to you is that 
if you think about this problem in terms of globalization, you 
are never going to get there. Globalization means you are 
integrating the markets, that is all. There is another way to 
look at it which is how the countries are managed, which has 
something to do with what you people on this Committee do all 
the time; and the operational way to think about this is in 
terms of the government's systems that operate within all the 
countries. Capitalism is a system of governance for economic 
affairs; democracy is the one that almost everybody uses for 
the political affairs. But you have got two governance systems 
that are working together that influence each other all through 
this, and you need to begin to pick that up I think as a way to 
see what you can do. It is very hard to do this, and certainly, 
teaching at a business school, most people simply turn off and 
say, ``It is too hard to do this. I can't figure out how the 
pieces fit together.''
    So let me suggest there is a way to think about this that 
is simple enough that anybody can catch it very quickly. The 
analogy is that organized competition in all the major sports 
is organized the same way a capitalist system is in a country. 
It is a three-level system that starts with a political 
authority. It depends upon which one of those sports you like, 
but if it is football, it is the NFL. If it is baseball, it is 
Major League Baseball. They operate as a political authority. 
They operate--so that they can operate as a state. Now, every 
one of these has the power to create the rules. They decide who 
gets hired as the regulators and referees. You have a set of 
institutions, the rules, the regulations, everything, which is 
exactly the same as a capitalist system. I had somebody I was 
talking with a couple of weeks ago about this who is a Canadian 
banker, and he said, ``Well, I am really uncomfortable about 
this notion of regulation.'' I asked, ``Well, do you watch 
hockey?'' ``Yeah, of course I watch hockey.'' ``How would it 
work if you had no referees?'' ``Unimaginable.'' Well, it is 
the same thing. You can't--and if you are on Financial 
Services, Mr. Chairman, you must have had at least the chance 
to think about what happens when we have the number one 
regulator in the financial services sector say, ``I really 
think the private sector can do it without government.'' That 
is how we got to where we are. Football would work that way, 
hockey would work that way, all of them would work that way if 
you don't have rules, the referees, and--most of what we focus 
on is the games. The games and the sports correspond to the 
markets that you see in capitalism.
    Well, if I turn from the sports to capitalism, you just 
say, look, it is the same three levels. You have a government, 
that is you in this, the rules and then the market framework. 
And thinking about it this way gives you something that is easy 
to work with. If you have ever watched football, you have got 
to recognize that--and especially for the men--you end up 
saying, I have got to watch until the last two minutes, you 
can't tell who is going to win.
    Yeah, but that is basically because the National Football 
League organized and said, ``We are going to split the 
television revenues equally. Green Bay is going to have the 
same television revenues as Los Angeles or Boston or anybody 
else. We are going to equalize the revenues. Our function is 
close games. Close games get people watching until the last of 
the game, and that is what sells the advertising revenue.''
    If I go to baseball, they have not done that yet. They have 
teams that have five, six times the revenue of other teams. 
Football decided that entertainment was best when the games 
were close. The purpose of the capitalist system is very 
different, but the governance process is just exactly--I mean, 
this three-level governance system works as a way to understand 
it.
    Most of our attention, I think, in the description of how 
capitalism works, is built around the product markets. That is 
the part we see, and that is the fruit stand, the automobile 
dealership, whatever else. The really decisive things that 
distinguish one country from another are not in the product 
markets, they are in the factor markets, meaning: How do you 
deal with land, how do you deal with labor, how do you deal 
with financial capital, how do you deal with intellectual 
property? And unlike the simple-minded models that are used so 
much of the time where we assume that we have got voluntary 
transactions among people that are consenting adults that have 
equal information, there is virtually no way to get equal 
relations in the factor markets. You are dealing with unequal 
power as well as unequal information.
    All you have to do is think about somebody going to apply 
for a job. The organization that you are applying to may be 100 
people, it may be 1,000 people, it may be 100,000 people. There 
just aren't equal relationships in there. You have to have 
rules and regulations in how these things work to make it at 
all a plausible thing in a democratic society. It can be done, 
but that is not the problem. The problem is recognizing the 
fact that we are not dealing with equal relationships, 
especially not in the factor markets.
    Let me take this--I was just thinking just what you were 
talking about with the competition and the model of it. This is 
a homely little chart, a model of unregulated competition has 
existed for a long time. The Brits had it in the Middle Ages. 
It is the common pasture, and just imagine that we have got a 
bunch of poor people that live in those little brown houses to 
the side of it, and we have got one big house. And so the 
castle there has got his grounds, the other folks don't have 
much, but the other folks share the common. They can take their 
goats or their cattle or whatever they are onto the common, and 
if it is an unrestricted system, what happens is you keep on 
adding cattle until you destroy the common. And people 
understood that the way to do this was--and in the British 
case, what they did was sell--privatize. And then we are going 
to have somebody in control, and we won't have the excessive 
usage and in addition we will have people that will invest 
money to improve it, to drain it, to change what we do from one 
crop to another.
    Well, this is a useful thing to think about because there 
really are several ways to deal with this, but the easiest one 
to think about is, that it is not an insoluble problem at all. 
All you've got to do is have a fence around the common, have a 
gate, and have somebody at the gate.
    If the somebody at the gate is a legitimate gate keeper, he 
can just say, ``Look, you are on Mondays and Wednesdays and 
your staff is on Tuesdays and Thursdays and this is all you can 
have.'' But, you got to have either legitimacy or you got to 
have coercive power to manage the gate. Much the same thing is 
true when you are thinking about your global economy. That is 
exactly what the circumstances are. The biggest of the common 
resources is not the land for the grass. It is the savings of a 
society, it is the technologies of a society, and in my sense, 
above all, it is the legal frameworks that are effectively the 
collective capital of the capitalist system. Just take as an 
example a country that joins Western Europe at this stage, the 
EU. If you ask, what are the terms of joining, the terms of 
joining are you must accept the whole framework, and the whole 
framework used to mean a few hundred pages, then a few thousand 
pages. Now a new member that joins Europe has to sign on for 
100,000 pages of regulation, and there is no discussion. You 
either sign up for it or you can't belong. But, that is the 
accumulated wisdom of somebody building this thing up over a 
period of time. That is one of the most precious things that 
they have.
    If I take this and say what is it applied to the United 
States, the United States was set up in an utterly unusual set 
of circumstances because the Constitution gave the right to 
charter firms to the states. So, they start of with in effect 
13 people, 13 organizations that can charter firms to compete 
in the market. And then the right to regulate the competition 
was held by the Federal Government. Well, it very quickly got 
us into a set of circumstances as soon as we got the 
continental market, we began to have abuse of the market just 
exactly like the folks grazing on the common. And the most 
obvious abuse turned out to be companies trying to have holding 
companies and quasi-monopolies. And they were prohibited from 
doing that by every state until New Jersey changed its law. And 
in 1888, New Jersey authorized holding companies, and we have a 
rush to incorporate in New Jersey, then New York, and then in 
Delaware; and you change the whole structure, both of the firms 
and of competition in the United States, not by act of 
Congress, but by the vote of a State legislature.
    Congress tries to come back and find a way to deal with 
this, and Theodore Roosevelt is the first one that I think 
really understood what he was doing, saying, ``We are going to 
have to create something that has a regulatory framework that 
corresponds to the global market.'' So they brought back the 
idea of the federal charter. Federal charter was initially 
posed by Madison at the Constitutional Convention, and people 
decided that if it had been put in the Constitution, the 
chances were the Constitution would never have been ratified. 
It would have symbolized too much power in the hands of the 
Federal Government. So there was no federal charter. You had 
initially 13--it is ineffective commons with 13 gates to start 
with. As you go along it goes to 30, then 40, then 50. So you 
have no regulation of who uses it. You have to have a 
regulatory regime that has oversight over the whole thing, and 
Roosevelt recognized we didn't have that. And so he and William 
Howard Taft both proposed for over a period of about 11 years 
that they either create a federal license or a federal charter 
which is the same thing. And they can't get it through. The 
hitch is when we got the big companies, we ended up with big 
companies having enough power to dominate State legislatures. 
State legislatures were appointing people who were not going to 
allow the regulation of the firms.
    How about if I stop there?
    [The prepared statement of Dr. Scott follows:]
                  Prepared Statement of Bruce R. Scott

         U.S. Capitalism: a system of governance is challenged

Mr. Chairman and Members of the Committee:

    I am a faculty member of the Harvard Business School, and have been 
for many years. My initial field of study was in General Management, 
meaning the strategies and governance of firms. I migrated from that 
field to its analog at the country level in the 1960s while studying 
French attempts to formally plan their economic development.
    In recent years I have been working on a book entitled Capitalism, 
Democracy and Development.\1\ The title of the book is indicative of a 
shift in my own thinking from a focus on substantive economic 
strategies of countries to a focus on the processes of governance. From 
my comparative case studies on countries it has gradually become clear 
to me that much of a nation's economic strategy is embedded in the 
institutions through which that particular nation is governed, and that 
the existence of institutions imply a certain strategy. For instance, 
deregulation in the U.S. as practiced since 1980 was a strategy 
designed to promote efficiency but it was also designed to favor 
capital at the expense of labor. Likewise, tolerance for the omission 
of the cost of stock options from profit and loss statements was 
nominally a way to promote performance, but also implicitly a strategy 
for redistributing wealth in favor of those with the power to secure 
grants of such options.
---------------------------------------------------------------------------
    \1\ Scheduled for publication later this year by Springer Verlag, 
Heidelberg.
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    In this paper I will introduce several ideas from my book and then 
append some pages of explanation from two chapters of the text.

Capitalism is a system of governance

    If there is one idea that I would urge this committee to consider 
in its studies of the offshoring process, it is to go beyond a focus on 
markets to consider how capitalism works as a system of governance for 
economic affairs. Markets are part of that system of governance, with 
the invisible hand acting as an automatic form of governance within the 
prescribed frameworks of the markets. But markets are only part of the 
system, and a dependent part at that. All formal or organized markets 
require laws, regulations and physical and social institutions for 
their underpinnings. These laws and institutions are created through 
human agency and as a result they are likely to differ in significant 
aspects from one nation to another. These institutional variances imply 
that there are different variants of capitalism, and this in turn 
implies that the so-called Anglo-American style of capitalism is but 
one style. We should not assume that other countries are trying to be 
more like us unless we have sound empirical research to so indicate. In 
the meantime, we should pay close attention to the idea that capitalism 
is a system of governance where other countries could have economic 
strategies quite different from our own.
    Gabriel Almond, a professor of political science at Stanford and 
former president of the American Political Science Association, called 
attention to this notion of capitalism as a system of governance when 
he wrote that the economy and the polity are the two chief problem-
solving systems of a society, interacting with and transforming each 
other, as suggested in Slide number one. Almond's idea was expressed in 
an article in Political Science and Politics titled ``Capitalism and 
Democracy'' and thus I understand ``economy'' and ``polity'' to more 
specifically reference ``capitalism'' to ``democracy,'' respectively. 
Thus, in his view and mine as well, capitalism refers to something very 
different from globalization--and if today you frame your inquiry in 
terms of the former, meaning comparative capitalist systems, your 
inquiry may take you in quite a different direction.
    To explain: Globalization refers to the integration of markets, and 
market integration is being driven by very powerful forces such as 
declining transport costs and trade barriers, as we all know. Firms 
operate within markets and are greatly influenced by the forces of 
supply and demand that are manifested within them. Firms must learn to 
adjust to those market forces if they are to survive, let alone 
prosper. However, the market frameworks themselves are created, 
legitimated, monitored and periodically modernized by government and 
not by economic actors. To frame your inquiry in terms of how 
globalization works will risk ignoring how the markets have been 
structured and how these structures determine the actual operations 
that take place within the markets.
    The market frameworks that facilitate and constrain economic 
activity are created through legislatures; as a result, they reflect 
the relative power of different interest groups in the political 
markets of legislatures at any point in time, as you all know better 
than I. It is legislative markets that create the frameworks within 
which firms operate, and the frameworks that underpin economic markets 
can be tilted to favor capital versus labor or the reverse, producers 
versus consumers, lenders versus creditors, and so on. The notion that 
the economic markets of capitalism somehow reflect a benign set of 
circumstances where parties voluntarily come together to achieve 
mutually beneficial transactions may be an adequate description of 
commerce at a roadside fruit and vegetable stand or a flea market, but 
not for much of the transactional activity of a modern economy. This 
notion of a benign, self regulating capitalism where almost all 
transactions are voluntary and therefore mutually beneficial is based 
upon an unexamined assumption that the legislative markets have done 
their job in a flawless way to begin with, which would be quite 
remarkable if true. Thus, as a more realistic alternative I suggest 
that we see capitalism as a three level system of governance which is 
designed to mediate commerce among actors with different purposes, 
different access to information, and radically different access to 
economic power as well.

Capitalism as a three level system of governance

    Capitalism is a concept which has been used to describe processes 
of governance that are partly political, partly legal and partly 
economic, and which interact in a system or systems that continue to 
evolve through time. It is not surprising that such a complex system 
has defied any standard definition for more than a century and that 
many books that analyze capitalist development do not even attempt to 
define it.\2\ Given this situation, I have found it very helpful to 
define capitalism relative to some much smaller, simpler and more 
tractable governance systems, notably those for organized sports Thus, 
as shown in Slide number two, I define capitalism as an indirect, three 
level system for the governance of economic activities analogous to 
those used to govern team sports such as baseball, basketball, football 
and hockey. As in the governance of these sports, the essential 
principle is that the economic agents, like their analogs in sports, 
are free to use their powers as they wish, whether as individuals or as 
members of a firm, so long as they stay within the physical bounds of 
the competitive arena, and so long as they obey the rules and 
regulations of their particular capitalist system. I spell these ideas 
out more fully in three excerpts from Chapter 2 of my book, which are 
attached.
---------------------------------------------------------------------------
    \2\ Cf. Fernand Braudel, Civilization and Capitalism, 1400-1800, 
Volume 2, page 237 for some of the history of definitions.
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    Crudely put, the three levels consist of the economic markets, the 
legal and other institutions that underpin those markets, and the 
political level through which new institutions are created and older 
ones maintained and modified. These three levels permit the harnessing 
of human energy that is called forth through competition, whether among 
sports teams, firms or individuals. The actions of the competitors are 
coordinated in part by their own social organizations (teams or firms) 
and in part by the rules, regulations and institutions that govern the 
competition, but in any event not by an immediate hierarchical 
authority with or without a central plan. Hence capitalism is an 
indirect system of governance, in contrast to one that is governed 
directly through a hierarchy.
    Slide number three shows the three level model in more detail, 
distinguishing the factor markets (e.g., those for land, labor, capital 
and intellectual property) from those for goods and services. The 
distinction is very important for two reasons. First, historically 
speaking, it was the establishment of factor markets and not the trade 
in product markets that was the hallmark of capitalism. While some 
scholars have claimed that the Aztecs had ``capitalism'' before the 
Spanish arrived, I disagree. In 1500 the Aztecs, like most of the known 
world, did not have free mobility for land or labor; they had feudalism 
and even forced labor instead. Trade was compatible with feudalism but 
free mobility of land and labor were not. And, as we remember from 
Shakespeare's Shylock, returns on financial capital were not seen to be 
legitimate in Venice pre-1600.
    The second reason for calling attention to the factor markets is 
that they are the frameworks for the development and trade of 
resources, and thus a prime area where a government can influence its 
developmental prospects. Governments can favor saving versus 
consumption, for instance, and a number of East Asian nations have had 
saving rates at more than twice the American level since World War II. 
This has allowed them to finance growth rates superior to ours without 
the need to be open to foreign capital, for example in China in recent 
decades. Higher saving rates can be achieved through restrictions on 
consumer credit, high down payments on consumer durables such as 
housing, or mandatory payroll saving plans such as those in Australia, 
Chile or Singapore, where money is automatically deducted from 
paychecks and deposited in defined saving plans. In addition, countries 
can have quite different distributions of incomes between wages and 
profits and can use wage reductions as a preferred way to achieve a 
result similar to devaluation of the currency.
    Capitalist countries that believe in an active role for government 
can have active, government led or supported strategies, a concept that 
is quite alien to those who think that completely decentralized 
decision-making is the sure route to optimal efficiency. For instance, 
government supported strategies can embark on attempts to accelerate 
the acquisition, adaptation, and production of new, typically higher 
technology products instead of remaining specialized in existing 
products, (e.g., the Taiwanese government successfully invested in 
semiconductor manufactures starting virtually from scratch).

Common property is key resource in most if not all capitalist systems

    While capitalism is usually defined as a system based upon private 
property and free enterprise, this is a remarkable oversimplification. 
As already noted, it is based in part upon regulated enterprise and in 
part upon common access to certain resources, such as air, water, 
light, and use of land for purposes of transportation. Historically, 
capitalism was also associated with the abolition of common land for 
grazing purposes in order to improve efficiencies. The choices in how 
to deal with common resources can be seen in terms of a hypothetical 
common, symbolized in the green area of Slide number 4.
    When common land is left unfenced or unregulated, the situation is 
ripe for what is known as ``The Tragedy of the Common,'' i.e., the 
tragedy that arises when economic actors have unrestricted rights to 
the use of a common resource such as a pasture.\3\ If unregulated, the 
actors (e.g., the farmers or shepherds) will have a tendency to keep 
adding more animals to their herds until they cause the overgrazing of 
the field and damage or even destroy it. Still more obviously, it will 
be difficult for such a group of actors, if they act as individual 
competitors, to maintain the fertility of the field let alone improve 
it, and thus it will be very difficult for them to improve its 
productivity over time. Thus, the availability of a common resource is 
a classic case where unregulated competition produces undesirable 
results.
---------------------------------------------------------------------------
    \3\ The name comes from a paper by Garrett Hardin, an eminent 
biologist.
---------------------------------------------------------------------------
    However, it is also a problem which can be readily solved by 
putting a fence around the field, adding a gate, and having someone 
lock and/or guard the gate. Given an enclosed field, the agent in 
control of the gate can regulate the number of users and/or their 
frequency of usage, thereby avoiding the over usage that would destroy 
the usefulness of the field as a source of food. What this means is 
that the so-called ``tragedy of the common'' is only a concern for an 
unregulated common. But simple as it might sound to have a fence, a 
gate, a guard and some rules and regulations that limit usage by the 
various actors, no regulatory framework can be expected to work unless 
it has been established by a legitimate political authority that can 
back enforce its actions by coercive force if need be, unless it is one 
that starts out with coercive force and without legitimacy.
    This simple example illustrates some of the critical forces at the 
heart of what is needed for effective regulation of any common 
resource, such as air, water, sunlight or access to a right of way for 
travel. And solutions might seem simple, but in reality they are not. 
In Britain, where the idea of enclosing the common has been much 
studied, the common areas were privatized over several centuries, 
typically by acts of Parliament, and typically by awarding the land in 
question to the nearby manor or large landowner. Thus, the Enclosure 
Acts that were credited with improving productivity through improved 
methods of farming were redistributing land in favor of the rich while 
impoverishing most of their neighbors. In addition, these same acts 
have been credited with creating the pauper class that helped energize 
the workshops that preceded the Industrial Revolution and then the much 
larger factories of the latter era.\4\ Enclosing the common in a 
legitimate, effective, and socially ``just'' or ``democratic'' way is 
therefore quite a difficult task for any political authority to 
undertake.
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    \4\ See Karl Polanyi, The Great Transformation, Beacon Press.
---------------------------------------------------------------------------
    These developments in Britain illustrate the close connection 
between the system of economic governance and its political 
counterpart. The small landowners symbolized by the small houses in 
Slide number 4 had no representation in Parliament until late in the 
19th century, by which time the Enclosure Movement was long since over. 
Parliament was dominated by the great landowners even after the Great 
Reform Bill of 1832, so the landowners could simply vote to grant 
themselves the right to take the land legally.\5\ This illustrates one 
of the great risks of capitalism; powerful people can use the system to 
appropriate common resources from their neighbors, all in the name of 
greater efficiency through privatization. Power passes back and forth 
between the economic system and the political, and concentrations of 
power in either can subvert normal processes in the other. However, 
redistributing the land among the peasantry in the small brown houses 
is no sure answer either. When tried in a number of countries, for 
example in Mexico when it broke up its ejidos, it was a recipe for 
creating farming plots that were too small to be viable, and thus it 
led to declining productivity and poverty.
---------------------------------------------------------------------------
    \5\ For a fascinating and famous account of these events see Karl 
Polanyi, The Great Transformation.

Market frameworks as a key common asset of capitalism

    In my view one of the great common assets of capitalism is hidden 
right in plain sight. It is the market frameworks that underpin the 
various markets for factors of production as well as trade in goods and 
services. These market frameworks are expressed in laws, regulations, 
and, in many countries, the law books that explain precedents from 
previous cases. Since these frameworks originate in legislatures they 
are by definition common property. This is also the case for later 
supporting regulations and court decisions. And, if a legislature has 
truly met Abraham Lincoln's notion of governing the people for the 
people and not just by the people, then it has created a form of 
commonwealth as surely as if it had voted to authorize new schools or 
highways to benefit all, as expressed in Slide number 5.

The state and the firm

    Firms have a somewhat different relationship to the state in the 
U.S. than in many other industrial countries, and this difference is 
very germane to your inquiry into the off-shoring of activities by U.S. 
firms. As noted in Slide number 6, in most countries firms are 
chartered by a single authority speaking for the Nation. In contrast, 
in the U.S. the Constitution did not give the Federal Government this 
power to charter firms, for fear that this power might make the central 
government appear so powerful that the Constitution itself would be 
rejected during the ratification procedure. This meant that there were 
initially 13 gates (i.e., the 13 states at the time) to the common of 
the U.S. market during the colonial and early federal era. This 
governance structure suited the market of the time; transport costs 
were so high that, once one was away from navigable water, the U.S. 
market amounted to something much closer to 13 distinct State markets 
and, indeed, many smaller markets than to a single, national market. In 
these circumstances, a state was granting authority to firms to operate 
in markets that might in reality be a good deal smaller than a state 
and thus able to be managed by the regulatory power of the state in 
question. U.S. states typically granted these early charters for public 
purposes, such as for universities and canals, and, given their local 
monopoly power in chartering, could accordingly ask for something in 
return. Since capital was scarce and corporations were rare until the 
early 19th century, few, if any, issues over firm power arose. The 
corporation existed as a legal entity because of a grant of power from 
the state and was at the same time accountable to the state and its 
chartering standards.
    As time passed and transport improved, trading radiuses grew 
larger, and there were more and more requests for charters to establish 
a legal vehicle more permanent than a partnership. At much the same 
time, the concept of limited liability was developed, increasing the 
value of and demand for charters for incorporation even more. In order 
to speed up the processing of such requests and reduce the corruption 
in the legislatures over who would be favored, the states gradually 
shifted to ``general charters'' that notably lacked specific, public 
purposes. This movement to the general charter without specific firm 
objectives and standards reduced the apparent dependence of the firm on 
the state. Accordingly, legal doctrine gradually evolved toward seeing 
the firm as the beneficiary of a free contract with the state and, 
eventually, as a ``free entity'' altogether, as though firms and indeed 
capitalism were born from and existed independent of the state.
    What this meant was that by the 1870s, as the railroads linked 
regional markets into a nationwide system, the Nation had 30-40 gates 
or states admitting firms to the market. States competed for the funds 
generated by corporate taxes and thus raced to the bottom in issuing 
charters that granted generous terms to firms. It was a case where 
unregulated competition was clearly not in the public interest. And the 
clearest example came in 1888 when New Jersey decided to break ranks 
with the other states and authorized its firms to create holding 
companies to buy or merge with other (often rival) firms, no matter 
where these firms had been incorporated and no matter whether such 
growth would reduce industry competition. As New York and eventually 
other states followed New Jersey's lead, the gates to the national 
market or common were opened wide to quasi-monopoly capitalism. The 
following years were marked by a stampede of mergers and the creation 
of much larger firms. Indeed, this change in New Jersey law would 
undermine almost all regulation of firm behavior, facilitating a great 
change in the structure of U.S. firms and industries, all of it aimed 
at larger size with the implication of much greater economic power. And 
though this changed the nature of interstate commerce dramatically, the 
U.S. Congress had little or no say in the matter as it lacked the 
constitutional right to intervene in the chartering process.
    President Theodore Roosevelt understood this imbalance of power and 
attempted to correct it by supporting proposals to create a federal 
right to charter or license firms, as is discussed in the attached 
excerpt from Chapter 13. However, neither he nor his successor, William 
Howard Taft, was successful. What this meant was that the U.S. 
Government had little right to regulate its own market prior to the 
passage of the 17th Amendment in 1914, an amendment which switched the 
selection of U.S. Senators away from State legislatures in favor of 
direct election. This amendment was viewed as essential to establishing 
more adequate power in Washington to regulate the national market. 
Thanks to their extraordinary influence in State legislatures, the big 
firms had been able to ensure the appointment of enough Senators 
friendly to their interests to dramatically limit the regulatory powers 
of the Federal Government. Thus, the U.S. market had become much like 
the unregulated common discussed earlier, except that the agents taking 
advantage of the situation were firms advised by lawyers and not poor 
shepherds or goat herds, as suggested in Slide number 7.

Today's global economy is much like the U.S. in the later 19th century

    In today's economy, nations and states charter firms to compete in 
a global common, but no chartering authority exists that wields the 
political power to impose rules on these global markets. While there 
are rules for trade, the chartering of financial firms in particular 
invites a race to the bottom to escape taxes as well as regulations. At 
the same time, some countries are imposing conditions on foreign firms 
as a condition for doing business in their countries. This issue is 
particularly important in the case of a few very large countries, 
notably China. These countries, with priorities that favor rapid 
growth, are using national power to partner with U.S. firms on the 
condition that the latter move some of their activities to China. These 
countries are behaving much the way New Jersey did in an earlier era, 
taking advantage of an inadequately regulated common.
    In light of the inadequate regulation of the global markets for 
capital and technology movements, I suggest that you consider reopening 
the question of a federal charter or license for U.S. firms as a way to 
specify certain requirements for behavior. For instance, a federal 
charter might state that any U.S. firms may choose to work for 
stakeholder interests if they so choose, a choice that they already 
have, in fact, but often seem to not be aware of. This would be a weak 
form of guidance. I think it would be better to consider the 
establishment of a mandatory standard of stakeholder welfare. In 
addition to the fact that it would put U.S. firms more nearly in step 
with some of the major European countries in this respect, I believe it 
would be a healthy step in its own right, in that it would help limit 
the steadily increasing inequalities of income in this country. And, as 
another possible standard, there could be a mandate that any incentive 
compensation, other than that taking the form of restricted stock that 
is held for at least five years, would be subject to a very high rate 
of taxation, so as to more nearly align managerial incentives with 
those of shareholders.
    Incentive compensation systems should have a downside risk as well 
as upside potential, and the only way to achieve this will be by 
uniform regulation; otherwise, any firms that did so voluntarily would 
risk a loss of key employees. The incentives in our market framework 
have become very problematic in encouraging CEOs to take risks in 
circumstances where they are not subject to comparable down side 
consequences if they fail. The costs of failure are borne by 
shareholders, lower level employees and, on occasion, by taxpayers. Our 
market frameworks, like the pastoral common of old, need regulatory 
standards to reduce the likelihood of opportunistic behavior that 
inflicts losses on other users of the same common.
    Thank you.

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chairman Miller. That would be fine.
    Dr. Scott. That is your problem.

                               Discussion

               A New Metric for Corporate Accountability

    Chairman Miller. I think all the witnesses spoke for more 
than five minutes but less than 50, so I appreciate the 
restraint.
    Mr. Baird just left. I was going to call upon him. All 
right. I now recognize myself for five minutes of questioning. 
I won't pause to say I now recognize myself for a second round. 
I think you will understand I get to keep asking questions 
nonetheless.
    Dr. Blair, I was interested in your discussion of the 
various constituencies and considerations that boards of 
directors should take into account, not just the financial 
interest of shareholders. My question is, who shall guard the 
guardians? How do we hold directors accountable and on what 
basis and how are they chosen? If they are elected by 
shareholders, why would shareholders not elect the members of 
the board who would do the most to act in their interest, their 
financial interest?
    Dr. Blair. That is an excellent question. It goes right to 
the heart of one of the things that has driven what I regard as 
a cultural change in the last 20 to 25 years to bring directors 
around to thinking that they have to maximize share value. That 
is the argument that if they don't focus on a single metric, we 
don't have any way of holding them accountable. And my response 
to that is on several levels. First of all, the notion that, if 
you maximize shareholder value, it is really clear what you 
have to do, is crazy. Nobody knows what you are going to have 
to do to maximize share value, and so maximizing share value 
doesn't translate into a specific set of actions that directors 
are supposed to take, and at any point in time there is 
disagreement and contention potentially about whether or not 
the actions that the board is trying to take serve to maximize 
share value. My own view of this is that the corporation was 
formed with the idea in mind that what corporations should do 
is maximize the total wealth-creating capacity, and that that 
would mean that, you know, in an economic sense, if the 
shareholders are made better off, it should not be at the 
expense of some of the other stakeholders.
    That is a vague mandate, which doesn't translate into 
specific instructions as to what they should do on a day-to-day 
basis. And I think up until about 25 years ago, the larger 
corporations, because they were very visible and because they 
had a brand and an image that they had to protect and because 
they tended to have loyalties to the communities where they 
were incorporated, the executives--maybe not perfectly, 
absolutely not perfectly--but at least they tended to think in 
terms of, ``what are we doing for the long run health of the 
company, what are we doing and how is it going to affect the 
communities where we operate and how is it going to affect our 
customers?'' I think that the emphasis on share value has 
caused many company directors and managers to lose sight of 
that bigger picture. Can you make them do it? Can you force 
them to do it? Probably not, but my first point is that we 
can't force them to maximize share value, either. That is my 
point.
    But at a second level, when you think about what we can 
make corporations do, what I am a strong believer in is 
disclosure, and I think increasingly, we have had a tug and 
pull in the 1930's after the financial collapse--the Congress 
moved to put into place a system that would require publicly 
traded companies to disclose a lot, disclose a lot more than 
they used to. There is still an enormous amount they don't 
disclose, and I think if they are required to disclose what it 
is they are doing on a number of different fronts, they are 
going to be more responsible about what they do.
    Chairman Miller. I would love to pursue that further, but I 
will now yield back the balance of my time in the first round 
of questioning so that Mr. Baird, who I understand also has a 
markup like Ms. Johnson, may ask questions. Mr. Baird for five 
minutes.

          Corporate Incentives That Encourage Long-term Profit

    Mr. Baird. I really am fascinated by the topic of this 
hearing and thank the Chairman for holding it. Dr. Blair, I 
thought your testimony was quite enlightening because there is 
a sense that the fiduciary responsibility obligates the company 
to just look at sort of short-term profits. And you are saying 
that is not the case at all. You are saying that that is maybe 
an urban legend or something.
    Dr. Blair. Yes.
    Mr. Baird. It is not valid. What other incentives and what 
can or should the government do or not do--and this is not just 
for Dr. Blair, for all of our panelists--to try to get that 
longer-term commitment to the well-being not only of just the 
shareholder in the short-term but the communities in which the 
businesses operate, the workforce that may have been loyal to a 
company for 30 or 40 years or more, what kind of reforms can or 
should we do or not do? And that is to any of the panelists.
    Dr. Blair. I will start if that is okay. I think the first 
and most important thing is that we need to make sure that 
there are not incentives in place that cause company executives 
and directors to have this preference for risk and preference 
for strategies that produce instant profit rather than long-
term profit.
    Now, there was an attempt in a sense--it is kind of ironic 
because there was a big push in the 1980's when corporate 
directors and managers were under a lot of pressure from the 
hostile takeover market. Then they began to say, well, if we 
have executives who are compensated in stock or in stock 
options, they will focus on share value and then they will be 
less vulnerable to takeovers. And prior to that, corporate 
managers were saying, you know, we have these other 
responsibilities and so we don't necessarily think that just 
because these outsiders think they can come in and buy the 
company for more that we should be required to sell it. And so 
we fixed that problem by radically changing the way corporate 
executives were compensated, to tie their compensation much 
more tightly to not just share value but to the value of the 
options which are a one-sided gamble. And stock options have a 
huge tax advantage relative to compensation in shares. I think 
if directors were paid and managers were paid in restricted 
stock that they had to hold for 10 years before they could sell 
it, that would cause them to have a very different set of 
incentives than what they have with the compensation and stock 
options. That is where I would start. It is a big problem, but 
I think I would start there.
    Mr. Baird. Dr. Gomory.
    Dr. Gomory. I agree with what Margaret has just said, but I 
have had I don't know whether it is 60 or 70 man years on 
corporate boards, and I have concluded that the people on those 
boards are humans and they are subject to the normal human 
emotions and attachments, all right? And when this whole 
business first became visible to me, it was in a world in which 
the directors wanted their companies to be successful and they 
cared quite a bit about the employees. I was an officer of IBM 
during its golden period.
    Now, I think that they are still humans, but I think there 
are two problems. One is they believe the thing that Margaret 
says isn't there and she is right, which is it isn't their 
legal duty they believe it is to maximize shareholder value. 
The second thing, the compensation being tied to the share 
price and the sheer volume of shares given to leading 
executives is such that for most people, that amount of wealth 
is overwhelming.
    I agree with Margaret that restricted stock--which goes up 
and down, not just one way--is a much better vehicle, but I 
would think that there should be less compensation, honestly, 
because these people do care about their companies and their 
people as anyone does who associates for a long time with them. 
But, they are overwhelmed in my opinion by what they see as the 
legal imperatives, some pressure from some of the totally 
financially oriented shareholders, and that overwhelms what was 
in the past and remains their natural instinct to care about 
their people, their community, and the other things because 
they are human, too. And I think we have in some sense overcome 
that normal tendency which had existed for decades and decades 
before the 1980's by a concerted effort to line them up with 
very active financial shareholders with these tempting, huge 
packages. I think they should not be there.
    Mr. Baird. Did you want the time back, Mr. Chairman? I have 
got more questions, but I would be happy to give it up.
    Chairman Miller. Given that you have a markup and there is 
nobody else, why don't you go on?

                         Executive Compensation

    Mr. Baird. Terrific. What are your thoughts about dealing 
with golden parachutes and retirement packages for executives? 
You know, we see increasingly these takeovers and mergers, et 
cetera, or business decisions that basically drive a company 
into the dirt, and the employees lose much of their retirement 
benefits but the guys at the top walk away with enormous 
compensation levels. Any merit to tying the fate of employees' 
benefit packages to the fate of the executive or board 
packages?
    Dr. Blair. I like it in principle. The devil is going to be 
in the details, but yeah, I like it in principle.
    Dr. Gomory. And I feel exactly the same as Margaret. I 
think that is a very good direction. I mean, we don't have to 
have and we didn't have in the past corporate executives who 
were paid hundreds of times more than everyone else and who had 
these enormous retirement packages at a time when the pensions 
of everyone else were being cut. But that is what we have now, 
and it is a distortion and I think it is one that we do not 
need.
    Mr. Baird. Do you think that could be remedied statutorily, 
possibly?
    Dr. Gomory. Yes. I do agree with Margaret. It is not as 
simple as it sounds, but as a direction, it is the right way to 
go.
    Mr. Baird. Are there any other incentives driving--one of 
the issues here is the globalization of jobs and the economy. 
What are other perverse incentives that you are aware of that 
may incline businesses to export jobs, particularly 
manufacturing jobs, that they might not want to do but that 
inherent structures in our legal code or our tax incentives 
don't force them to do but certainly reward them for doing? 
Have you identified some of these?
    Dr. Blair. I have not focused on that in my work. I don't 
actually have a good answer for you.
    Mr. Baird. Dr. Scott.
    Dr. Scott. Yeah. We are into a transaction-driven system. 
Let me back up just one second. Executive compensation in this 
country has no parallel anywhere else, okay? It is much higher. 
And if you take a look at this over a period of time, just to 
go back to the '70s, the CEOs of our big companies are being 
paid on the order of 30 times their mean employee, and in 
Europe it was about 20. And that is what it was when I went to 
start doing research in Europe in the '60s. As we get to the 
end of the '70s, we begin to break away; and when we go through 
the '80s, we are out of bounds on this. But the reason for 
this, I think, is that we created the stock option, and the 
stock option cost was not a cost on the P&L statement. And in 
1992, 1993, 1994, the Financial Accounting Standards Board said 
it ought to be, and there was enough pressure brought by people 
down here to say, ``If you really try to put that on the P&L 
statement, we are going to so curtail your budget that you are 
not going to be able to do anything.'' And Arthur Levitt has 
written a very interesting account of what happened, and he 
just simply tells the Financial Accounting Standards Board, if 
you try to put this on the P&L statement, I will not back you. 
And the Accounting Standards Board only recommends, it was the 
SEC decision to say, ``We are going to allow this to continue 
to go.'' So you have created a transaction-oriented system 
where you don't have to pay for it. The cost of the stock 
options drops directly to the bottom and doesn't have to go 
through the P&L statement until we get to 2004. So you have 
given the directors the right to give people free money, and 
that is what they did. And you can raise your earnings and 
raise your stock price by doing a deal with the Chinese, you 
can do it any way you want. It is the transactions that drive 
the stock and that drive your compensation. It is really a 
pernicious system.
    Mr. Baird. What do you think we should do about that?
    Dr. Scott. If I were doing it, I would find a way to outlaw 
the stock option entirely, and that may sound really weird----
    Mr. Baird. You mean as a mechanism of compensation or----
    Dr. Scott. Yes.
    Mr. Baird. Okay.
    Dr. Scott. Margaret mentioned the other alternative. The 
other alternative is treat the CEO more like a shareholder and 
say, ``We are going to give you stock''; and when you do that, 
you have to record a cost. You can't give away stock without--
you can give the option. Now you have to put something on it. 
But you have to give the stock, and if you are getting 
restricted stock you can't sell it for a good deal of time. 
Therefore, if the company has a down on this thing, you take it 
down along with the shareholders. It is a tremendous change. We 
have created a set of--this is a big part of your problem over 
in Financial Services, and if you go back to Martin Wolf 
writing about this in the Financial Times back in January, he 
said unless this is changed and unless it is changed by 
legislation, you are never going to correct this problem. The 
runaway is creating financial incentives--Margaret mentioned 
this just briefly--that have an upside that encourages people 
to take risk and no downside. The downside is paid by the 
shareholder and the taxpayer but not by the person taking the 
risk.
    Dr. Gomory. Let me add something to that. So far we have 
talked mostly about, you know, let us not have stock options, 
let us not do this, let us not do that. But I think we ought to 
decide what we want a corporation to do, we as a nation; and 
that might have something to do with where the jobs are and 
whether they are productive and things like that. And then we 
ought to make sure that our tax structure rewards that, not 
just pure profit because they won't get to keep it if they 
don't meet certain other criteria. If they are not productive, 
if they don't treat people right, if their skew of compensation 
is crazy. Why don't we try and incent the corporations to 
behave in the way we want them to? I think that is worth 
thinking about.
    Mr. Baird. Thank you. Thank you for your indulgence, Mr. 
Chairman.

                          Corporate Governance

    Chairman Miller. Thank you, Mr. Baird. I want to pursue the 
corporate governance issues that I had begun with Dr. Blair. 
This has also been debated as Dr. Scott suggested in the 
Financial Services Committee and corporate governance issues, 
specifically in executive compensation. And there are other 
critics of corporate governance who say that if actually 
corporations were acting to benefit 20 percent of the 
population, the 20 percent that Dr. Gomory says owns most of 
the stock, that would be more revolutionary than anything the 
Bolsheviks did or what happened in 1789 in France. That would 
be a remarkable change. The corporations are not actually even 
being governed to benefit the shareholders, that corporate 
boards are made up of CEOs of other corporations; and they all 
think that they are underpaid and they know that the salary or 
the total compensation for the CEO of a company on whose board 
they sit will be looked at by their own board as what their 
compensation should be. And the single best predictor of what 
exactly compensation will be is how many CEOs sit on the board, 
and particularly on the compensation committee.
    There are critics. Dr. Blair spoke less than admiringly of 
shareholder advocates, but there are shareholder advocates who 
argue that if boards were required to act on behalf of the 
shareholders, it would be a vast improvement in corporate 
governance, that actually executive compensations now have 
become a fairly significant part of overall profitability. And 
in fact, even these massive pension funds can't get to 50 
percent because 70 or 80 percent of stock is now legally held 
by someone who is not the beneficial owner. In other words, 
brokerage houses that hold the stock of shareholders who never 
see the piece of paper, never actually claim the legal title to 
the stock, but are the beneficial owner. And they vote for the 
incumbent or for the slate of corporate boards proposed by the 
incumbent directors and California, North Carolina, UAW, any 
combination of pension funds can't outvote them.
    Dr. Blair, do you disagree with that critique and why?
    Dr. Blair. I think----
    Chairman Miller. I think you turned it off.
    Dr. Blair. I think the critique has been taken way too far. 
I think it started out as a well-intentioned effort to try to 
make sure that corporate officers and corporate directors and 
managers were more accountable, but it has become an obsession 
and it has become an industry. The Delaware judge I quoted was 
Vice Chancellor Leo Strine, that over time we now have 
shareholder advisory firms, we have a substantial number of 
academics who are keenly interested in pushing a position in 
which we can create more and more control rights for 
shareholders. I think it is a very dangerous direction. I 
personally don't think that Carl Icahn knows better about what 
Yahoo should do than Yahoo's executives do.
    Chairman Miller. Dr. Gomory.
    Dr. Gomory. I think that you may have already made the 
point that I want to make, but I would like to--my actual 
experience with boards and worrying about takeovers and things 
like that is that a board of any significant corporation today 
knows there is a short list of people who control the shares. 
In this company that I have dealt with, it is about fourteen. 
Almost all are as you suggested I think earlier--they are 
financial houses of one sort or another. So when we are talking 
about having shareholder control, people's minds go to people, 
individuals. Not so, folks. It is really the financial houses.
    Now, putting more control in their hands is not at all 
necessarily a good idea because you have to look----
    Chairman Miller. Are you talking about the brokerage houses 
that are buying shares for which they are not the beneficiary--
--
    Dr. Gomory. Yes, that is----
    Chairman Miller. Are you talking about----
    Dr. Gomory. Yes, exactly. Exactly that. Because you have to 
look at how those individuals are compensated in their 
financial firms. And if they are very sensitive--in hedge funds 
it is terrible, of course--through the share price, all you are 
doing is making the company more directly a financial object to 
be manipulated. You are not going to the people, you are going 
to the financial people and a small group of them.

               Proposed Rule for New York Stock Exchange

    Chairman Miller. There is a proposed rule for the New York 
Stock Exchange--I think I am getting this right--that has been 
at the SEC for one and one-half years, not acted upon. Are you 
familiar with that proposed rule? It would limit what the legal 
owner of stock could vote on, even if it deprived the board or 
the shareholder meeting of a quorum for some issues, unless 
they had specific directions from the beneficial owners, which 
would essentially mean the brokerage houses couldn't vote for 
board members, et cetera.
    Dr. Gomory. To answer your question, I am not aware of 
that, but I think it is an excellent direction.
    Chairman Miller. Dr. Scott.
    Dr. Scott. I would have to disagree. If you go back to 
roughly 1960, the average share was held for somewhere between 
six and eight years, and so it was reasonable to speak of 
somebody as having a long-term interest. It doesn't mean they 
know anything about the company, but at least with a six- or 
eight-year holding, you are talking about somebody that has a 
long-term connection with the company. The average shareholding 
now is about one year. So when you are talking about a 
shareholder and saying does the shareholder have some kind of a 
long-term interest in the company, you have no way to have any 
bet on that at all. The change is we have, quote, 
``democratized ownership,'' but we have also reduced the cost 
of trading. People are trading much more. I mean, just go and 
pick up the statement of any mutual fund and look and see what 
is the average turnover on their funds. The average turnover on 
a lot of them is two times a year. Their real interest--and by 
the way, I think you are missing a term when you say it is 
brokerage houses. It is not brokerage houses, it is mutual 
funds and pension funds and insurance companies. And if you ask 
what is their big business, their big business is trying to 
attract additional assets that they manage. They don't want to 
antagonize any firm at the risk of losing its pension funds 
business. So they don't even want to have to vote their shares, 
they don't want to have to vote anything that would be 
considered hostile to management. They are trying to grow 
assets under management at the mutual fund, the pension fund, 
or whatever else, not really worrying about how the company is 
managed.
    Chairman Miller. I want to pursue that at another time, I 
think. Stocks held in street name, which are 70 to 80 percent 
of stocks are actually not stocks held by pension funds.
    Dr. Scott. No, but your big holders are mutual funds.

                        Free Trade and Equality

    Chairman Miller. Dr. Gomory, obviously international trade 
affects not only American workers but workers all over the 
world, and when I was considering the CAFTA vote, I was lobbied 
vigorously by advocates for human rights in the CAFTA countries 
who said it would actually be bad for the workers in those 
countries, too, which is perhaps contrary to the common 
impressions of what the effect of trade is.
    What is the effect of free trade, international trade, 
unrestricted international trade on workers in other countries, 
and what is the effect then on the distribution of wealth in 
those countries?
    Dr. Gomory. Well, first of all, I would like to say this is 
not a subject on which I have deep knowledge. I have had an 
awful lot of experience in the United States, but very limited 
in other countries, and I will simply report the impression 
that I have from those who know more, and the impression that I 
have received is that the globalization has reinforced whatever 
the economic structure was in these countries. If you had a 
ruling elite as you did in many--I am not talking about China 
of course, but take South American countries or others--that 
this has simply--they have been the principal gainers from 
globalization. So as I see that, in the United States, the 
wealthy have been also. That pattern I am told is repeated in 
other countries, but I am really relaying to you the opinions 
of others, not my own direct experience.
    Chairman Miller. Dr. Gomory, is there an economic benefit 
besides simply having a more fair society, of having a more 
even distribution of wealth, income, and what is that benefit?
    Dr. Gomory. Well, let us just stick to the United States. 
In the United States, we have had a productivity increase for 
30 years, but people are, from the middle class on down, 
struggling to pay their bills. And it is not that the 
productivity increase wasn't there, it is just that they didn't 
get it. That is the downside.
    Chairman Miller. Dr. Scott.
    Dr. Scott. Yeah, I would answer that very differently, not 
in any way contradictory. It has a huge impact in the United 
States. We are almost alone in operating our educational system 
at the first 12 grades on a market, and the market is local 
real estate taxes. You want to get a good school system, you 
now look and you say, ``Who has the good school systems?'' It 
is the people that have the big tax base. The big tax base is 
then wealthy people, and they are attracting more and more; and 
now we are getting segregated schooling all over the country 
out of this. Other countries pay their school teachers 
typically either by a province or by a Federal Government. We 
are paying them by local real estate taxes. So as you are 
building this, you are building a self-reinforcing thing. We no 
longer have mobility of the labor force that is greater than 
Europe. It is the other way around. So you are creating 
something where a whole lot of people are being deprived of the 
chance for a good education because they are in a school 
district that doesn't have the money to do it, and that is 
particularly what is going on around our big, urban areas. So 
yes, it does. We are going to deprive all sorts of people of a 
good education as the wealth concentrates and people learn to 
buy their way into a place where they can get a good school.
    Chairman Miller. Mr. Baird, do you wish to ask another 
round of questions?
    Mr. Baird. I would, if I might.
    Chairman Miller. All right. Mr. Baird.

                             Pension Funds

    Mr. Baird. Given that incredible amounts of money are 
available in State and federal pension funds, can you talk a 
little bit about constructive or counter-productive roles 
pension funds can play and some of the kind of reforms you 
talked about?
    Dr. Blair. Let me take that on. It is true that State and 
local pension funds have been among the most activist in the 
shareholder rights movement if you want to call it that. And it 
does seem to me that some of them have played very constructive 
roles in the almost behind-the-scenes conversations that they 
have had with companies than the rhetoric that you see in the 
newspaper would tend to suggest--when General Motors was really 
in serious trouble in the 1980's, CalPERS, the California State 
Public Employees Retirement System, did some behind-the-scenes 
maneuvering along with a number of other institutional 
shareholders to pressure the board to change management and to 
make changes that needed to be made. And I certainly think that 
they have the potential to play a role in insisting on the 
overall performance of the company because they have a 
constituency that is in the state where they are operating in 
the community. So they ought to be paying attention to other 
beneficiaries as well--and what is good for the beneficiaries--
both in the financial terms and in the larger picture. 
Ironically, corporate pension funds are actually precluded from 
doing that because of a Department of Labor ruling that said 
that pension funds that are regulated under ERISA are required 
to pay attention to the financial interest only and not to pay 
attention to other interests that might affect the 
beneficiaries of those pensions. It was kind of a perverse 
rule, but it was put in place in the 1980s, and it is not--as I 
understand it, it is a Department of Labor regulation, rather 
than a statute.
    The thing about pension funds is that they tend to have the 
most long-run interests because there is money flowing into 
pension funds that is to be held there for 10, 20, 30 years for 
the beneficiaries. So they intend to have a more long-run 
focus. I don't think the problem is coming from pension funds, 
and I think they have a potential role that could actually be 
productive.

                              Hedge Funds

    Mr. Baird. Let us look at a different--and you may have 
mentioned this already so forgive me--the role of hedge funds 
in this issue in either making the problem worse or possible 
ways they could improve it.
    Dr. Blair. I am not an expert on hedge funds. One of the 
things that really troubles me about hedge funds is that they 
don't disclose anything. They are not required to disclose 
anything. So we don't know how their executives are being 
compensated. There are stories that the hedge funds management 
gathers two percent of the gross amount of money under 
management plus 20 percent of the profits annually. That 
produces some outrageous results in which they can, by taking 
very high risk strategies, they get their two percent every 
year and then they can take off 20 percent when their strategy 
wins but they don't have to give any back when their strategy 
loses. And so they are in a heads-I-win, tails-you-lose 
situation. Now, what is puzzling to me is that the market 
hasn't regulated it, and I think the reason why the market 
hasn't regulated that so far is partly because they had a 
string of good years, and so it caused a lot of money managers, 
and even like private endowments, to say, ``Well, let us put 
some of our money with these hedge funds.'' I would hope that 
in the wake of the financial crisis that has resulted from the 
mortgage lending and the securities that were based on mortgage 
lending, you will see some of these institutions saying, 
``Oops, maybe that wasn't such a good idea. Maybe we should not 
invest so much of our money with hedge funds.'' But I am a 
strong believer in disclosure. I think if hedge funds had to 
disclose more of what they were doing that they would then be 
subject to embarrassment, and I believe in embarrassment as a 
regulatory device.
    Mr. Baird. May I ask one other question, Mr. Chairman?
    Chairman Miller. I am sorry. I thank all the witnesses in 
the first panel for their testimony. If we could now have the 
testimony of the second panel, I think we will be called to 
votes before too much longer. I would like to see if we can get 
in the second panel's testimony. But, I thank all of you.

                               Panel II:

    Thank you. I would now like to introduce our second panel. 
The first witness is Mr. James R. Copland, III. Mr. Copland is 
the Chairman of Copland Industries and Copland Fabrics located 
in Burlington, North Carolina. It is not in my long-term 
interest for all Americans to realize that some Southerners 
when they act unsophisticated and guileless actually have a 
pretty good idea of exactly what they are doing. They may just 
be playing you, and I pointed out to Mr. Copland that I did 
know in the past that he was a Morehead scholar at the 
University of North Carolina at Chapel Hill and son, Jason, who 
now works in the family business, has a Master's degree from 
the Amos Tuck School of Business at Dartmouth. So welcome, Mr. 
Copland, and I hope you don't give our secret away. Second is 
Mr. Brian O'Shaughnessy, who is the Chairman of Revere Copper 
Products located in Rome, New York, and third, Mr. Wes Jurey, 
the President and CEO of the Arlington Chamber of Commerce in 
Arlington, Texas. Mr. Jurey, I am sorry you did not get to meet 
your charming and capable Member of Congress, Eddie Bernice 
Johnson, but you are lucky to have her.
    And now, all of you know that your oral testimony is 
limited to five minutes, and after that the Members of the 
Committee will have the opportunity to ask rounds of questions. 
Again, to put you at ease, we would like to put you under oath 
under penalties of perjury. Do any of you have an objection to 
being sworn in? And do any of you--are any of you represented 
by counsel? No? All right. If you would all now stand and raise 
your right hand? I understand Jason may also be testifying, so 
if you would stand as well? Do you swear to tell the truth and 
nothing but the truth? All right.
    Mr. Copland, you may begin.

   STATEMENT OF MR. JAMES R. COPLAND III, CHAIRMAN, COPLAND 
           INDUSTRIES/COPLAND FABRICS, BURLINGTON, NC

    Mr. James Copland. First, thanks for the opportunity to 
speak before this esteemed committee.
    America needs a new manufacturing policy. I don't believe 
that anyone in America is opposed to free trade as long as it 
is fair trade, but when foreign governments subsidize, 
manipulate their currency, flout legal requirements and 
tactically condone worker and environmental abuses, it is 
impossible for Copland or any domestic manufacturer to compete. 
Under such circumstances, Copland isn't competing against 
foreign companies but they are competing against foreign 
governments. This is bad manufacturer policy.
    Let us look at the People's Republic of China. They are the 
800-pound gorilla in international trade. As a communist 
country, most of China's industry is government owned or quasi-
government owned. The Chinese government buys their capital 
equipment, or in the case of quasi-government-owned companies, 
it guarantees the purchase. Chinese companies often end up 
paying zero capital costs, a tremendous advantage that no U.S. 
competitor can overcome.
    In many cases, the Chinese government subsidizes utility 
and transportation costs but that is not all. China also 
provides a 17 percent export subsidy on goods shipped to the 
United States when it fully rebates value-added taxes. China's 
currency is pegged to the dollar and it is undervalued by 
approximately 40 percent. If our dollar goes down, the Chinese 
currency goes down. The yuan is not allowed to float on the 
world market like other currencies. This subsidy makes China's 
goods 40 percent cheaper in the market.
    Finally, China has no EPA, no OSHA, no workmen's 
compensation, no unemployment insurance. Their whole system is 
different from ours, a communist system, yet U.S. manufacturers 
must compete against them, an impossible task.
    People often talk about wage rights. Sure, China's wages 
are a mere fraction of ours with no child labor laws, no 
overtime, few benefits, but let me be perfectly clear. Wages 
are not the only issue. U.S. workers are much more efficient. 
In many cases, if a Chinese company's labor costs were free, 
they still could not compete without subsidies from their 
government. U.S. manufacturers would win hands down, 
absolutely. No company can compete when your competition is a 
foreign government determined to spend whatever it takes to 
force you out of the market and the U.S. Government does 
nothing about it. The U.S. Government recognized problems with 
the communist Soviet Union but for some reason it fails to see 
it with China. This is one of the things I mean when I say in 
my written testimony that the United States has an 
uncompetitive manufacturing policy.
    I also want to talk about one aspect of trade agreements 
that has not been given proper emphasis, the human factor. 
Millions of Americans are losing their jobs. Their jobs are 
being moved overseas and they can't get other jobs. Don't think 
there are high-tech jobs available for those folks, because 
there aren't. They are being shipped to China and India too. 
Moreover, many of the factory workers being laid off in the 
United States aren't trained for those jobs, even if they did 
exist. If those that were laid off are lucky, they have landed 
jobs flipping hamburgers or as a greeter at some retail store. 
Every American deserves the right to provide for his family, to 
own a home and to educate his kids, but our flawed 
manufacturing and trade policies are taking this away. Our 
Constitutional preamble says a government of the people, by the 
people and for the people. We have forgotten about the words 
``for the people.''
    Go to the small towns in North and South Carolina. Mills 
are closed. Stores are closed with weeds growing up around 
them. But you know it is really bad when you see the churches 
closing. Someone needs to think about the hardworking people 
and what is happening to them. They are left out of the thought 
process when flawed manufacturing and trade policy is made. Let 
me say that the big multinational companies, the importers and 
big retailers have exactly what they want. They couldn't have 
written a book and had it more perfect for their world. Buy at 
the China price, sell at the U.S. price and don't worry about 
whether the average American has a job or he can make ends, 
meet but their world is not what is good for America.
    You hear a lot of political candidates talking about the 
economy, our financial crisis and health care. They talk about 
the result but they don't talk about the cause. Subprime 
mortgages have been around for decades, car loans as long as 
there have been cars, credit cards for decades. The primary 
reason people can't make their payments now is because they 
don't have any money. In most cases, the reason they don't have 
any money is because they have lost their jobs or they now have 
jobs making a fraction of what their pay was before their jobs 
were exported. If these people had their manufacturing jobs, 
they wouldn't have the economic problems and financial problems 
we now have. People often got their health insurance from their 
jobs. Now many of those jobs have moved offshore because of our 
flawed trade agreements. No wonder we have a health care 
crisis. Americans just want their manufacturing jobs back. The 
U.S. Government's policy is creating millions of jobs, all 
right, but they are creating them in the People's Republic of 
China and Vietnam at the expense of hardworking Americans here 
at home.
    Our country should be ashamed, totally ashamed of what our 
government has done to working people in America. People are 
angry now, and when they connect the dots, and they are going 
to connect them, they are going to know where to focus their 
anger.
    [The prepared statement of Mr. Copland follows:]
               Prepared Statement of James R. Copland III

Introduction

    My name is Jim Copland and I am the Chairman of Copland Industries/
Copland Fabrics, a company located in Burlington, North Carolina. 
Copland Industries/Copland Fabrics is a textile company whose main 
business historically serviced the home furnishings industry in the 
United States. We manufactured fabrics for curtains, draperies and 
blinds among other home furnishing products. Due to the U.S. home 
furnishing market being overrun by imports, especially by those of the 
subsidized variety from China, employment at Copland Industries/Copland 
Fabrics has fallen from more than 1,000 in recent years to less than 
300 and we have been forced to exit many of our traditional business 
markets.
    To give you an example of the one of the competitive challenges 
faced by Copland Industries/Copland Fabrics, in the man-made fiber 
curtain and blinds tariff lines not included in the U.S.-China textile 
bilateral agreement due to expire at the end of this year, U.S. imports 
from China exploded by 6,912 percent, jumping from 845,000 kilograms in 
2001 to 59.265 million kilograms in 2007.\1\ China accounted for almost 
107 percent of the total U.S. growth in imports for those products 
during the time period, meaning the rest of the world actually lost 
U.S. import market share. In 2007, China held a 90.2 percent U.S. 
import market share for man-made curtains and blinds not under quota 
compared to a 7.7 percent market share in 2001. A flood of imports from 
China in products like the ones for which we used to make fabric is one 
of the main reasons why my home town of Burlington has lost nearly 40 
percent of its manufacturing jobs since 2001, making it the hardest hit 
metro area for manufacturing job loss in North Carolina.\2\
---------------------------------------------------------------------------
    \1\ Source: U.S. Office of Textiles and Apparel.
    \2\ Source: U.S. Bureau of Labor Statistics.
---------------------------------------------------------------------------
    Copland Industries/Copland Fabrics also is a member of the American 
Manufacturing Trade Action Coalition (AMTAC), a lobbying organization 
dedicated to preserving and promoting domestic manufacturing. On May 1, 
2008, my son Jason Copland, CEO of Copland Industries/Copland Fabrics, 
participated in a conference call press event where AMTAC released a 
comprehensive report on North Carolina jobs and manufacturing that 
provides the basis for much of the following testimony.
    The two main points I want to drive home are these: (1) the U.S. 
Government's uncompetitive manufacturing policy is responsible for much 
of the steep decline in manufacturing employment and investment that 
significantly is hindering economic growth in the United States and in 
my home State of North Carolina and hurting working people; and (2) 
U.S. manufacturing will continue to suffer unless Congress and the Bush 
Administration intervene with policies that encourage rather than 
discourage manufacturing investment in the United States--and the first 
policy step in this direction is countering the predatory trade 
practices of China and other countries.
    If the United States comprehensively were to address its 
manufacturing competitiveness policy problems, domestic manufacturers 
likely would rebound strongly. This is because only the most efficient, 
productive, nimble, and innovative companies have been able to survive 
the severe manufacturing economic downturn since 2001.
    But let me be clear. As long as the current status quo on the U.S. 
Government's manufacturing policy continues, the United States will 
have much more difficulty ameliorating the pain an economic recession 
will inflict on its citizenry in a timely manner. To wit, the 2006 U.S. 
Department of Labor study of the 1.085 million U.S. manufacturing 
workers who were displaced between 2003 and 2005 from jobs that they 
had held for three or more years showed that only 64.5 percent of those 
workers gained reemployment and that just 20 percent of them found a 
job that paid better than the one they lost.\3\
---------------------------------------------------------------------------
    \3\ Source: U.S. Department of Labor. See: http://www.bls.gov/
news.release/disp.t07.htm

Record Debt Stimulus Should Have Created Booming Domestic Manufacturing 
                    Sector

    U.S. manufacturing is mired in the midst of a crisis unprecedented 
since the Great Depression. Deeply flawed U.S. trade policy toward 
domestic manufacturing is the single most important root cause of the 
illness, undermining U.S. manufacturing competitiveness on a global 
basis.
    Absent a rational U.S. trade policy, U.S. manufacturing should be 
experiencing the best of times. Consider the following. Since 1950, 
U.S. Gross Domestic Production (GDP) has grown 550 percent in 
inflation-adjusted terms\4\ while the U.S. population has doubled from 
150 million to 303 million. Since 1990, U.S. GDP has grown by a little 
more than 50 percent in inflation-adjusted terms while the U.S. 
population has increased by 54 million.\5\
---------------------------------------------------------------------------
    \4\ Source: U.S. Bureau of Economic Analysis.
    \5\ Sources: U.S. Bureau of Economic Analysis and U.S. Census 
Bureau.
---------------------------------------------------------------------------
    Moreover, the percentage of U.S. GDP used for consumer consumption 
has been above 70 percent in each of the previous six years.\6\ Noting 
this figure, it should not be surprising that U.S. household and 
Federal Government debt has skyrocketed to unprecedented levels. 
Together, household and federal debt almost have doubled over the past 
seven years, soaring by $10.4 trillion to reach $23.1 trillion, an 
amount 64 percent larger than the entire Gross Domestic Product 
(GDP).\7\ In comparison, total U.S. household and federal debt was 27 
percent larger than GDP at the end of 2000. While the current record 
debt level is the basis for the debt crisis that now has plunged the 
United States into a new and possibly severe recession, in recent years 
it should have served as the greatest stimulus to U.S. manufacturing 
since the need for production to fight and win World War II.
---------------------------------------------------------------------------
    \6\ Sources: U.S. Department of Commerce, U.S. Bureau of Economic 
Analysis, and MBG Information Services.
    \7\ Sources: U.S. Department of the Treasury, U.S. Department of 
Commerce and MBG Information Services.
---------------------------------------------------------------------------
    Instead, the United States by far suffered its slowest seven-year 
job growth since the demobilization following World War II. Although 
the U.S. Census Bureau estimates that the U.S. population grew by 6.9 
percent, expanding by 19,622,932 people from 283,946,833 on January 1, 
2001 to 303,569,765 on January 1, 2008, the United States added only 
5,587,000 jobs for a seven-year employment increase of 4.2 percent, 
growth far short of the 9,140,000 job creation figure necessary to 
maintain employment participation rates at January 2001 levels. The 
U.S. manufacturing sector suffered even worse, losing 3,361,000 jobs.
    Additionally, annual inflation-adjusted U.S. GDP growth has been 
weak, averaging just 2.55 percent per year for the seven-year period 
ending in 2007.

Indicators of the National Manufacturing Crisis

    Rather than showing strong gains in employment, capacity, output, 
and investment that normally would be expected in an economy 
experiencing the level of consumer stimulus that the United States has 
seen in recent years, the evidence instead demonstrates that U.S. 
manufacturing has slumped severely.
    Last year, the United States ran a trade deficit of $708.5 billion, 
including a $498.9 billion deficit in manufacturing goods. The 
cumulative numbers even are more troubling. Since 1980, the cumulative 
U.S. trade deficit is $6.365 trillion, with manufacturing goods 
accounting for $5.249 trillion of that figure. Of even greater concern, 
almost 59 percent of that trade deficit in manufactured goods, $3.08 
trillion, has been accumulated since 2001. Even the U.S. dollar's 24.2 
percent fall against the U.S. Federal Reserve Board's price-adjusted 
``Broad'' Index of world currency values since January 2002\8\ has 
failed to increase U.S. exports enough materially to stanch the trade 
red ink.
---------------------------------------------------------------------------
    \8\ Source: Federal Reserve Board's price-adjusted ``Broad'' Index 
of currency values.
---------------------------------------------------------------------------
    The United States cannot continue to withstand the problems 
associated with a runaway trade deficit indefinitely. But don't just 
take my word for it; others agree:

          ``The present level of the current account deficit is 
        enormous, it is unprecedented and I believe it is 
        unsustainable.''

                --  Martin Feldstein, Professor of Economics at Harvard 
                University, former Chairman, Reagan Council of Economic 
                Advisors

          ``[T]he United States must now attract almost $7 
        billion of capital from the rest of the world every working day 
        to finance its current account deficit and its own foreign 
        investment outflows.''

                --  C. Fred Bergsten, Director, Institute for 
                International Economics

          ``[O]ur trade deficit has greatly worsened, to the 
        point that our country's ``net worth,'' so to speak, is now 
        being transferred abroad at an alarming rate. A perpetuation of 
        this transfer will lead to major trouble.''

                --  Warren Buffet, Chairman, Berkshire Hathaway

    So, how can it be that the United States, a country that possesses 
the most sophisticated industrial complex in the world, spends billions 
on research and development and product innovation, and has one the 
world's most advanced transportation, communication, and higher 
educational infrastructures, cannot run a trade surplus in virtually 
any manufacturing sector?



    The reason why the United States runs massive trade deficits in 
products where free-trade theory posits America should have a 
comparative advantage is because foreign government intervention 
negates comparative advantage with value-added tax schemes, manipulated 
currencies, State sponsored subsidies, lack of protections for 
intellectual property rights, below market interest rates, and non 
performing loans that create an absolute advantage for their 
manufacturers.
    These foreign predatory practices often are compounded by other 
factors such as pennies-per-hour labor, blatant disregard for 
environmental protection, lack of reasonable labor rights and workplace 
safety standards, and lack of basic benefits such as health care.
    Consequently, it should surprise no one that other key economic 
health indicators for U.S. manufacturing show either an industry in 
distress or the weakest growth on record in the last six decades.
    The U.S. manufacturing sector's inflation-adjusted capital 
expenditures for plant and equipment have plunged dramatically. The 
2006 expenditure amount of $116.6 billion was smaller than each of the 
amounts for 1978 ($120.7 billion), 1979 ($124.2 billion), and 1980 
($129.7 billion), the last three years of President Jimmy Carter's 
Administration. Furthermore, it was considerably lower than the $158.8 
billion expenditure peak in 1997.



    U.S. manufacturing capacity also has grown at a slower rate in the 
2000s than in any of the past six decades. Growth was 50 percent for 
the 1950s, 63 percent for the 1960s, 38 percent for the 1970s, 25 
percent for the 1980s, and 57 for the 1990s. Projected growth for the 
2000s has fallen to a mere 16 percent or 1.6 percent per year.\9\
---------------------------------------------------------------------------
    \9\ Source: Federal Reserve Board, Industrial Capacity, 
Manufacturing (SIC), Not Seasonally Adjusted.
---------------------------------------------------------------------------
    U.S. manufacturing output numbers tell a similar tale as output in 
the 2000s has grown at a slower rate than in any decade since the 
1950s. Output growth was 69 percent for the 1950s, 54 percent for the 
1960s, 40 percent for the 1970s, 23 percent for the 1980s, and 56 
percent for the 1990s. Projected output growth for the 2000s is an 
anemic 13 percent or 1.3 percent per year.\10\ For the category that 
covers much of the Copland Industries production, U.S. Textile Mills, 
output is down 50.4 percent from its peak in December 1997.
---------------------------------------------------------------------------
    \10\ Source: Federal Reserve Board, Industrial Output, 
Manufacturing (SIC), Not Seasonally Adjusted.
---------------------------------------------------------------------------
    Finally, U.S. manufacturing employment collapsed between 2000 and 
2003 and has yet to recover from the downturn. It now has plummeted to 
13.6 million, its lowest level since May 1950 one month prior to the 
eruption of the Korean War. Employment in the U.S. textile and apparel 
sectors has been even harder hit, falling from 1,048,300 in January 
2001 to 506,200 in April 2008--a loss of 542,100 jobs and a decline of 
51.7 percent.



    Pollyannas arguing that little is wrong with U.S. manufacturing 
cite U.S. manufacturing productivity increases as the main reason for 
employment decline. Although U.S. manufacturing productivity indeed has 
doubled in recent years, U.S. demand for manufactured goods has 
tripled. Because U.S. growth in demand for manufactured goods exceeds 
growth in productivity, the United States should be adding 
manufacturing jobs instead of losing them if it were maintaining its 
market.
    The real culprit in the loss of U.S. manufacturing jobs is the loss 
of markets and the loss of domestic markets to offshore producers in 
particular. Since 1980, U.S. demand for durable manufactured goods has 
soared nearly 400 percent. U.S. production of durable manufactured 
goods, however, only has grown by 40 percent of that total.\11\ To 
further illustrate this point, U.S. Business and Industry Council 
Research Fellow Alan Tonelson conducted a study on import penetration 
rates for 114 high tech and other capital-intensive industries in the 
U.S. manufacturing sector. His research showed that import penetration 
rates for those industries jumped by 58.6 percent from a penetration 
rate of 21.4 percent in 1997 to 33.9 percent in 2006.\12\
---------------------------------------------------------------------------
    \11\ Source: U.S. Commerce Department, U.S. Federal Reserve and MBG 
Information Services.
    \12\ See USBIC Research Alert, New Data Show Import Growth 
Depressing U.S. Industrial Output; Advanced U.S. Manufacturers Keep 
Losing Ground in Home Market, by Alan Tonelson and Sarah Linden, 
January 8, 2008.

New Competitive Trade Policy Needed to Restore Health of U.S. 
                    Manufacturing

    Considering the undeniable plight of U.S. manufacturing, a 
comprehensive new U.S. trade policy to boost competitiveness 
desperately is needed.

Require Reciprocity--U.S. trade policy must be redirected to its 
original roots in reciprocity, a concept clearly not present in the 
global economy's chief trade regime, the World Trade Organization 
(WTO). In the Uruguay Round, the United States agreed to lower or 
eliminate most barriers to its market for manufactured products without 
receiving commensurate market access from the rest of the world in 
return. Today, the average U.S. bound tariff for industrial products is 
three percent, while the average worldwide bound tariff is 30 
percent.\13\ Moreover, the average trade weighted U.S. industrial 
tariff stands at less than 1.7 percent.
---------------------------------------------------------------------------
    \13\ Statement of Senator Charles Grassley at Senate Finance 
Hearing on WTO negotiations 10/27/2005.
---------------------------------------------------------------------------
    In this regard, one significant problem is the ability of WTO 
members to self-designate themselves as ``developing countries,'' a 
status granting them more favorable trading privileges than self-
designated ``developed'' countries such as the United States. The 
ability of WTO members to self-designate their country status must be 
eliminated and replaced with objective criteria that accurately measure 
a country's ability to compete in the global trading arena.
    Take China for example. While it may be a developing country in 
many respects, it is an international superpower in terms of global 
trade. In both 2006 and 2007 China exported more manufacturing goods to 
the world than did the United States.\14\ Yet under the current WTO 
regime, China is allowed to maintain high tariff walls and other 
substantial non-tariff barriers to market access as a self-designated 
``developing country.''
---------------------------------------------------------------------------
    \14\ Sources: U.S. Department of Commerce, China Customs, and MBG 
Information Services.
---------------------------------------------------------------------------
    The ongoing Doha Round negotiations only further would exacerbate 
the lack of reciprocity afforded to U.S. producers. The Doha Round's 
Non-Agricultural Market Access (NAMA) text grants numerous exemptions 
to developing countries such as that contained in the Hong Kong 
Declaration's paragraph 14, ``Take fully into account the special needs 
and interests of developing countries including through less than full 
reciprocity in reduction commitments.'' The NAMA Chairman's July 2007 
text states, ``There is almost unanimous support that a simple Swiss 
formula with two coefficients should be adopted.'' Finally, for 
developed countries such as the United States, the maximum industrial 
tariff allowed proposed in the current NAMA negotiations is to be 
between eight and nine percent. In contrast, developing countries such 
as China will be allowed a tariff ceiling that would fall between 19 
and 23 percent.

Offset the VAT Border Tax Disadvantage--Currently, 149 countries, 
accounting for approximately 95 percent of all U.S. trade, utilize a 
border-adjusted, value-added (VAT) tax system implemented at average 
rate of 15.4 percent. This tax often is among a country's most 
significant revenue sources to pay for such expenditures as 
nationalized health care and other vital government services.
    Countries utilizing value-added tax systems impose those taxes on 
the cost of an import plus all shipping, handling, insurance and tariff 
expenses. They also rebate any VAT paid on a domestically produced good 
that is exported. Meanwhile, the United States neither rebates the 
taxes paid by a producer upon the export of a good nor imposes a 
significant tax burden on imports.
    Consequently, goods produced in VAT countries have a built-in price 
advantage over their U.S. counterparts. Producers in VAT countries 
often are able to export goods at a price that deducts the U.S. 
equivalent of payroll and other taxes that are used to pay for social 
security, unemployment insurance, and health care costs. U.S. producers 
not only pay those U.S. taxes in the process of manufacturing 
domestically produced goods, they also are forced to pay them in other 
countries the moment a U.S. export is slapped with a VAT. AMTAC 
estimates that border-adjusted VAT schemes disadvantaged U.S. producers 
and service providers by a staggering $428 billion in 2006.
    Ordinarily, a VAT would be viewed as an impermissible export 
subsidy under current trade rules. Unfortunately, in the years 
following World War II, the United States agreed to a loophole under 
the old General Agreement on Tariffs and Trade (GATT) the exempted VAT 
subsidies. Since allowing that loophole, use of the VAT grew from just 
France to almost the rest of the world, 149 countries. And as one would 
expect, VAT rates often have risen as tariff rates have fallen, 
creating a constant, but less visible barrier to U.S. exports. For the 
European Union (EU), the average barrier to U.S. exports has remained 
nearly constant at 23.8 percent since 1968.\15\ Although the average EU 
tariff has dropped from 10.4 percent in 1968 to 4.4 percent in 2006, 
the average EU VAT has risen from 13.4 percent to 19.4 percent.
---------------------------------------------------------------------------
    \15\ Sources: Simple averages of MFN tariff rates on industrial 
products applied by EU countries are from the OECD and UNCTAD. For 
2006, the latest available tariff rate from UNCTAD, for 2003, is 
assumed to remain constant. Simple averages of standard VAT rates of EU 
members with a VAT in effect are from the European Commission. 
Aggregate trade barrier is the sum of the average tariff rate and the 
average VAT rate for each year examined.
---------------------------------------------------------------------------
    Last year, Congressmen Bill Pascrell (D-NJ), Duncan Hunter (R-CA), 
Mike Michaud (D-ME), and Walter Jones (R-NC) introduced H.R. 2600, the 
Border Tax Equity Act, to offset the VAT disadvantage to U.S. producers 
and service providers. Congressman Steven Rothman (D-NJ) of the Science 
and Technology Committee's Subcommittee on Oversight and Investigations 
also is among the 15 total (seven Democrats and eight Republicans) 
House Members currently sponsoring the bill. H.R. 2600's swift 
enactment is a key to restoring U.S. manufacturing health.

Make Currency Manipulation an Actionable Subsidy--U.S. congressional 
and executive inaction against blatant currency manipulation by China 
is inexcusable. For years that country has pegged the value of its 
currency, the yuan, to the U.S. dollar at an artificially low rate. 
Factoring inflation, the value of the yuan has risen in value by less 
than five percent against the U.S. dollar since its peg was 
``loosened'' to a basket of currencies in 2005. This policy has enabled 
China to simultaneously lower the cost of its exports and raise 
substantial barriers to imports.
    Since 2001, the year China joined the WTO, the U.S. merchandise 
trade deficit with that country has exploded from around $80 billion to 
a staggering $256 billion in 2007.\16\ The cumulative U.S. trade 
deficit with China during that same time period for manufactured goods 
was a staggering $1.2 trillion!
---------------------------------------------------------------------------
    \16\ Sources: U.S. Department of Commerce, U.S. Bureau of Economic 
Analysis, and MBG Information Services.
---------------------------------------------------------------------------
    The United States imported $313.6 billion in manufactured goods 
from China in 2007. If, for example, China were undervaluing its 
currency by 35 percent, a figure not unreasonable to many experts, it 
would amount to a subsidy of nearly $110 billion to Chinese 
manufacturing exporters. With subsidies like this, its should surprise 
no one that less productive and efficient Chinese manufacturers can 
ship their products halfway around the world to the United States and 
still undercut the prices of their U.S. competitors.
    Congressmen Tim Ryan (D-OH) and Duncan Hunter (R-CA) have 
introduced H.R. 2942, the Currency Reform for Fair Trade Act of 2007, 
to discourage currency manipulation by China, Japan, and other 
countries. A total of 44 Democrats and 31 Republicans (75 House Members 
total) are sponsoring the bill, including U.S. Representatives Eddie 
Bernice Johnson (D-TX), Dana Rohrabacher (R-CA), and James 
Sensenbrenner (R-WI) of the Science and Technology Committee's 
Subcommittee on Oversight and Investigations.
    H.R. 2942's strongest deterrent is a provision that would make 
currency manipulation an actionable subsidy under U.S. countervailing 
duty (CVD) law. Enactment of this legislation is imperative if the 
United States is to reduce its manufacturing and trade policy 
competitiveness gap with China, Japan and others.

Separate Trade Enforcement from the Office of the U.S. Trade 
Representative--It is unreasonable to expect that an office who on one 
hand is charged with negotiating trade agreements with other countries 
to then be able to turn around and impartially punish them when they 
run afoul of U.S. trade law. The conflicts of interest inherently are 
too great. As such, all enforcement of U.S. trade law should be 
separated from the Office of the U.S. Trade Representative (USTR).
    A separate U.S. governmental entity should be set up as an 
independent agency or in another cabinet-level department, such as the 
U.S. Department of Commerce, to enforce U.S. trade law. This body would 
be charged with aggressively pursuing dumping, subsidy and intellectual 
property rights violation cases within the U.S. judicial and regulatory 
system and at the WTO. The anti-competitive dumping and illegal subsidy 
practices revealed in recent cases against China (the case on coated 
free sheet paper is a good example) should provide enough work to keep 
any enforcement agency busy for years.
    Also as part of this reform, the U.S. Government should reduce the 
cost and barriers to U.S. manufacturers attempting to bring trade 
enforcement cases. Presently, anti-dumping and CVD cases often cost 
millions for U.S. manufacturers to prosecute effectively. Even after 
making such a financial commitment, a favorable outcome is not 
guaranteed. In addition, U.S. manufacturers in a product's supply chain 
often have almost no access to trade law remedies due to a lack of 
standing. Only the assemblers of the final product and/or its workers, 
i.e. a union, usually effectively have standing to file a case. These 
costs and barriers deter the filing of many legitimate trade cases. The 
United States should consider adopting reforms to mimic the European 
Union where manufacturers would submit data indicating a likelihood of 
dumping or CVD infraction and the government then would investigate 
them and render a decision.

Stop Negotiating FTAs With Countries That Cannot Buy Finished U.S. 
Goods--Finally, the United States should stop negotiating free trade 
agreements with countries or economic regions that either are unwilling 
or unable to buy finished U.S. goods at the same rate they export to 
the United States.
    Flawed U.S. free trade agreements demonstrably have fueled the U.S. 
trade deficit. Measuring U.S. Government data for domestic exports\17\ 
minus imports for consumption,\18\ the U.S. trade deficit with our free 
trade partners has skyrocketed since 1989 from $13.55 billion to a 
whopping $187.84 billion in 2007.\19\ With just Canada and Mexico 
between 1994 and 2007, the United States ran a cumulative trade deficit 
in manufacturing goods of $397.6 billion, a merchandise trade deficit 
of $1.071 trillion, and a current account deficit in goods and services 
of $942.2 billion.
---------------------------------------------------------------------------
    \17\ Domestic Exports are defined as exports of domestic 
merchandise include commodities which are grown, produced or 
manufactured in the United States, and commodities of foreign origin 
which have been changed in the United States, including U.S. Foreign 
Trade Zones, or which have been enhanced in value by further 
manufacture in the United States.
    \18\ Imports for Consumption measure the merchandise that has 
physically cleared Customs either entering consumption channels 
immediately or entering after withdrawal from bonded warehouses under 
Customs custody or from Foreign Trade Zones.
    \19\ Source: U.S. Department of Commerce.
    
    

    Instead of seeking out negotiating partners in small or developing 
countries, the United States should be targeting agreements or economic 
alliances with countries that have lucrative consumption markets and a 
settled rule of law. Japan or the European Union would be examples of 
two good candidates. These trade partners both have sufficient large 
populations and high standards of living to buy sizable quantities of 
U.S. exports if a good free trade agreement were negotiated and 
---------------------------------------------------------------------------
properly enforced.

Conclusion

    Despite the hardships it has faced, the health of U.S. 
manufacturing quickly can be restored if the United States addresses 
its manufacturing policy competitiveness issues by fixing its broken 
trade policy. Weak and inefficient U.S. manufacturers closed their 
doors years ago. Only the strongest and most efficient U.S. 
manufacturers have been able to survive in such a hostile competitive 
atmosphere. These companies will be well placed to ramp up new 
investment, reclaim lost market share, and add employment if the U.S. 
Government boosts competitiveness by removing trade policy obstacles 
impeding their success.


















































































                  Biography for James R. Copland, III

Education

Elementary and High School--public schools Burlington, NC

College--1962 graduate UNC-Chapel Hill

Morehead Scholar, Phi Beta Kappa

Degree--B.S. Business Administration

Work Experience

1962-Present--Copland Industries, Inc./Copland Fabrics, Inc.

1986-2004--President, Treasurer & CEO, Copland Industries, Inc. & 
        Copland Fabrics, Inc.

2004-Present--Chairman of the Board, Copland Industries, Inc. & Copland 
        Fabrics, Inc.

1970-Present--Director, Copland Industries, Inc. & Copland Fabrics, 
        Inc.

1963-1986--Director, Northwestern Bank, Burlington, NC

1977-1986--Director, Northwestern Bank, North Wilkesboro (Corporate 
        Board)

1986-1987--Director, First Union National Bank, NC Board

1988-1996--Director, Executive Committee, FirstSouth Bank, Burlington, 
        NC

1997-Present--Director, Chairman, MidCarolina Bank

1982-Present--Director, Vice President, Executive Committee, Lutheran 
        Retirement Ministries, Burlington, NC

1986-Present--Capital Treasurer, Macedonia Lutheran Church, Burlington, 
        NC

1994--Alamance County Man of the Year

2006--Business Leadership Award, Elon University

1992-1996--UNC Board of Visitors

Worked with various charities and foundations including--United Way, 
        Boy Scouts of America, Alamance Citizens for Education, 
        Alamance Community College, Salvation Army, UNC Honors Program

Married--Harriett E. Copland (40 years)

3 Sons--James R. Copland, IV; Dr. Spencer T. Copland, Jason C. Copland

    Chairman Miller. Mr. O'Shaughnessy.

STATEMENTOF MR. M. BRIAN O'SHAUGHNESSY, CHAIRMAN, REVERE COPPER 
  PRODUCTS, INC.; MEMBER, BOARD OF DIRECTORS, COALITION FOR A 
                       PROSPEROUS AMERICA

    Mr. O'Shaughnessy. Thank you, Mr. Chairman.
    My company is Revere Copper Products and was founded by 
Paul Revere in 1801. We believe we are the oldest manufacturing 
company in the U.S.A. Our factory is in Rome, New York, and 
produces copper and brass sheet, strip, coil, bar and extruded 
products for shipment to other manufacturing companies. Revere 
is a domestic manufacturing company and outsources nothing. My 
unwillingness to outsource or sell out is based on loyalty and 
patriotism.
    Please note that I also represent and serve on the Board of 
Directors of the Coalition for a Prosperous America, or CPA. 
This coalition includes domestic manufacturing, organized 
labor, farming and ranching. You should visit CPA at 
www.ProsperousAmerica.org. My testimony includes positions on 
issues that have not yet been considered by CPA but are ever 
present in Revere's besieged financial results.
    Mr. Chairman, the United States is alone among major 
trading nations in the world without a national trade policy. 
China and the rest of the world are waging a mercantilist war 
on the United States and the United States is sleeping as its 
factories, farms and ranches are being systematically 
destroyed. We desperately need a national trade policy instead 
of a patchwork of trade agreements that deepen the current 
problems and enable foreign protectionism. Our nation's focus 
on general trade agreements and FTAs is misguided, inadequate 
and lacks strategic thinking.
    While I am a proponent of free trade, the agreements to 
date compound the problem while deceiving many who think free 
trade is being promoted. This is one problem that has real 
solutions.
    First, the United States cannot continue to negotiate 
global or bilateral trade agreements as long as the other 
country is free to manipulate its currency and use VATs to 
offset any tariff reduction. Also, labor, environment, 
antitrust, quality and intellectual and other property 
standards and trade agreements must be equivalent to the burden 
placed on manufacturing, farming and ranching in the United 
States or we just cannot compete and provide jobs in the United 
States. Can you imagine competing in a global market that gives 
your competition an eight-year head start? Yet that is exactly 
what is being proposed to kill jobs with House legislation for 
only domestic manufacturing companies to cap and trade and die. 
If the environmental burden is unfair for our foreign 
competition, it is unfair for us. In the global trade war, who 
do you represent?
    Second, the manipulation of its currency by China or any 
nation is unacceptable. The first step should be to pass the 
Ryan-Hunter bill, H.R. 2942, that would define currency 
manipulation as an illegal subsidy and allow the application of 
countervailing duties, CVDs, to offset the injurious impact of 
currency manipulation. The Ryan-Hunter bill is designed to 
sanction the use of CVDs to offset currency manipulation. We 
must assume that the system that governs world trade is broken 
and must be fixed immediately. If the use of CVDs to offset 
currency manipulation does not lead China to stop manipulating 
its currency, then the United States must take stronger 
measures, even if it means stepping outside WTO rules.
    Third, the United States must reform its tax and health 
care systems and institute VATs on a scale that gives 
production of goods and services in the United States a 
competitive advantage. Currently, the United States is the only 
country without such a policy. The United States must 
significantly reduce or eliminate all national taxes, both 
corporate and personal, including income, dividend, capital 
gain, estate, FICA and unemployment taxes and replace them with 
a consumption tax like a VAT. Under current international trade 
rules, consumption taxes can be rebated on exports and imposed 
on imports. The United States refuses to reciprocate, 
disadvantaging all American-made goods that compete with 
imports or are offered for export. No wonder we have such a 
massive trade deficit. In my opinion, those taxes must also 
include the tax of health care costs. My concern is simply that 
health care cannot be paid for by job providers in the United 
States competing with job providers abroad who pay little, if 
any, health costs. Either the U.S. Government solves this 
problem or outsourcing will resolve it.
    Fourth, the United States needs to ensure that its citizens 
and businesses have access to substantial additional low-cost 
clean energy so that they are able to compete on the world 
stage and keep the environment clean. Our government needs to 
focus on the big picture of global trade and the competitive 
position of the U.S. economy, which is deteriorating. Please 
address these problems with a national trade policy 
immediately.
    When Paul Revere tried to rouse the countryside with his 
wakeup call, what did the people do? They certainly didn't go 
back to sleep. We all need to wake up and listen but we must be 
careful who we listen to. Visit RevereCopper.com and learn 
more. Wake up, America.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. O'Shaughnessy follows:]
              Prepared Statement of M. Brian O'Shaughnessy

                         Who Do You Represent?

    Three and a half million manufacturing jobs have been lost in the 
USA since the year 2000. Some attribute it to increased productivity--
but previous recoveries typically resulted in a loss of about one 
million jobs in spite of productivity increases. Some think it is our 
country's responsibility to support fledgling economies because we are 
the strongest, most powerful Nation in the world. Some say we need to 
set a good example and others will follow. Make no mistake about it, 
protectionism should not be the end game but it seems to be an 
acceptable practice when used by everyone but the USA.
    No matter how we try to rationalize it, millions of manufacturing 
jobs are going overseas.
    I'm sure this committee is well aware of the significant connect 
between manufacturing and research and development. Manufacturing and 
Technology News just ran an article on May 16, 2008 that puts the 
foreign flight of technology in perspective. The article is titled, 
``China Displaces United States In Georgia Tech's Technology Index.''
    The article states, ``China has surpassed the United States in a 
key measure of high tech competitiveness. The Georgia Institute of 
Technology's biannual High-Tech Indicators finds that China improved 
its technological standing by nine points over the period of 2005 to 
2007, with the United States and Japan suffering declines of 6.8 and 
7.1 respectively. In Georgia Tech's scale of one to 100, China's 
technological standing now rests at 82.8, compared to the U.S. at 76.1. 
The United States peaked at 95.4 in 1999. China has increased from 22.5 
in 1996 to 82.8 in 2007.''
    ``The message speaks out pretty loudly,'' says Alan Porter, Co-
Director of Georgia Tech's Technology Policy and Assessment Center, 
which produces the benchmark.
    ``I think the prospects are pretty scary.''
    My company is Revere Copper Products. We were founded in 1801 by 
Paul Revere and believe we are the oldest manufacturing company in the 
USA. Our factory is in Rome, New York and produces copper and brass 
sheet, strip, coil and extruded products for shipment to other 
manufacturing companies. Revere is a domestic manufacturing company and 
outsources nothing.
    My unwillingness to outsource or sell out is based solely on 
loyalty and patriotism.
    Please note that I also represent and serve on the Board of 
Directors of the Coalition for a Prosperous America (CPA). This 
coalition includes domestic manufacturing, organized labor, farming and 
ranching. You should visit CPA at www.prosperousamerica.org. My 
testimony includes positions on issues that have not yet been 
considered by CPA but are ever present in Revere's besieged financial 
results.
    So Revere is part of the copper and brass industry of the USA. In 
December, 2006, China's State Assets Supervisory and Administration 
Commission (SASAC) which is second only to its politburo directed that 
this industry in China be designated a ``heavyweight'' and a ``vital 
artery of the national economy and essential to national security.''
    Revere's founding was considered vital to U.S. national security in 
1800.
    The U.S. Government loaned Paul Revere $10,000 to construct the 
first copper rolling mill in North America. The War Department was 
concerned about another war with the British and worried about the 
domestic content of its naval vessels to wage such a war. The USS 
Constitution needed copper sheathing to prevent barnacles from growing 
on its sides underwater. Barnacles would slow the ship and cause extra 
time in dock to remove them. Such copper was previously rolled in 
Britain.
    That's how Revere started and how the USS Constitution came to be 
sheathed with Revere Copper.
    Today, many of Revere's customers are manufacturing companies 
located throughout the USA. Since 2000, about 30 percent of these 
customers have shut down, moved offshore or outsourced their 
production. Revere's customer mix is quite broad ranging from building 
and construction, transportation, electrical and electronics including 
weapon systems. Revere's engineers work on research and development 
projects regarding national defense applications including the Nation's 
new aircraft carrier under construction, the Gerald Ford. But in the 
context of Revere's history, let's just describe what happened recently 
to the production of a simple silver bowl.
    Of course, this silver bowl was designed by Paul Revere.
    In the year 2000, Revere shipped copper coils about 20 miles to 
Oneida Ltd. Oneida cut and formed that copper into a bowl and plated it 
with silver to produce a Paul Revere silver bowl. Now, that product is 
as American as apple pie, right? Wrong. Today, that bowl is 
manufactured in China and shipped to Oneida and sold as a Paul Revere 
replica. You probably believe that the people of Revere just can't 
compete anymore with the people of China.
    Let me explain why our people can compete but our government does 
not.
    Let's assume the production cost of that silver bowl made in China 
is 100 yuan. China manipulates its currency so that the exchange is now 
about seven yuan to $1. So the production cost in China is $14.28. But 
if the free market were to determine the rate of exchange, it would be 
about four yuan to $1 and the production cost in China would be $25.00.
    In other words, China manipulates its currency so that it 
subsidizes the cost of manufacturing in China.
    The current and the former U.S. administration have refused to take 
any concrete action against such manipulation by China and have chosen 
instead to jawbone. The problem with this strategy is that currency 
manipulation by China is serving its best interests.
    The manipulation of its currency reduces the competitiveness of 
every other product, good and service in the world when compared to its 
production in China.
    This form of protectionism by China is reaping huge rewards as its 
export-based economy is growing three or four times faster than the 
rest of the world with factories being built at a pace beyond the 
imagination of anyone just a few years ago. Meanwhile, factory jobs are 
disappearing in the USA and the world. Even manufacturing plants in 
Mexico are moving to China.
    But this is more than an economic battle.
    Did you catch the statement by Congressman Tim Ryan of Ohio 
concerning the paper (``Unrestricted Warfare'') written by two Chinese 
military strategists? They suggested that military supremacy be 
achieved by undermining the manufacturing base of the United States by 
maintaining China's currency at artificially low levels to gain an 
economic advantage for Chinese manufacturing and destroying the 
manufacturing base of the United States. Seems to be working, doesn't 
it?
    Personally, I admire the Chinese culture and believe that China 
does not need such a disruptive currency policy to compete in the world 
given its many other advantages. The Chinese economic policy is export 
driven by taxing its citizens through currency manipulation which 
drives inflation and takes away their disposable income. A market 
driven currency exchange rate policy would drive China's economy toward 
domestic consumption and a better life for its citizens.
    But make no mistake about it, China is waging a mercantile war on 
the world and the world is sleeping.
    Why is the world sleeping? First, we must look at the role of the 
multinationals. Remember in the 1980s when Japan was such a fierce 
competitor in so many U.S. markets. The reaction by our largest 
corporations was loud and largely one voice calling for tariffs and 
restraints. Contrast that with today as most of the largest U.S. 
corporations are so much more international and especially with their 
investments in China. Many that do not have direct investments in China 
buy substantial numbers of components from China's factories. Many have 
set their strategic plans to produce components or products in China.
    It may surprise you to learn that I don't have a problem with any 
company that sets up a plant offshore or imports components or 
products. But if manufacturing in America must compete with the 
protectionist policies of any foreign government, that is not fair. And 
if meaningful corrective action by the U.S. Government is thwarted by 
U.S. manufacturing and financial service companies who gain from such 
protectionism, that is wrong. CEOs of multinational companies are put 
in a very difficult position by national trade policies.
    They have to choose between their company and their country.
    Let me explain. Earlier I mentioned that China practices a policy 
of managing its currency at artificially low levels to gain a 
competitive advantage for any export products or services produced in 
China . . . by as much as 40 percent! Now, you must realize a simple 
truth, a multinational that manufactures in China and benefits 
significantly from this advantage doesn't want this to change.
    It is not my intention to vilify multinationals or the capable CEOs 
who run them. These executives are charged with representing the best 
interests of their shareholders. Also, many of these CEOs of 
``American'' companies are not U.S. citizens nor are many of their 
shareholders. For example, the Chairman of Coca-Cola is Irish and its 
President is Turkish!
    It is important to appreciate that it is in our nation's best 
interest to have the corporate headquarters of a multinational located 
in the USA even if it has no remaining production facilities here. That 
is not so that they can be taxed and regulated and driven away but so 
that the high skilled, corporate level jobs are here not there . . ..
    So when issues such as patriotism are raised in this paper, it is 
really an appeal to U.S. political leadership not that of multinational 
corporations.
    Companies that manufacture in the USA and must compete with either 
multinationals or companies that outsource components from abroad 
believe currency manipulation is unfair and must be stopped. They see 
other U.S.-based manufacturing plants shutting down and are concerned 
that will be their fate. These domestic manufacturing companies want 
the U.S. Government to take effective action to right this wrong and 
the sooner, the better.
    At a 2006 meeting I attended of an international economic policy 
committee of an association of manufacturing companies, one 
manufacturing company said that it buys components from China and does 
not want the current situation to change. Now there's a breath of 
honesty. Maybe not patriotic but at least he's honest.
    Patriotic . . . why bring that word into the mix?
    Well, you see the strength of manufacturing is an inherent strength 
of our country. Some economists believe our country is in a transition 
from a manufacturing economy to a service economy just as it 
transitioned from an agricultural economy to a manufacturing economy 
years ago. But maybe the manufacturing economy was simply layered on 
top of our agricultural economy just as the service economy is layered 
on the manufacturing economy. And it is certainly hard to argue against 
the proposition that a weak manufacturing sector threatens our national 
security.
    Even so, some economists cite data that the manufacturing sector is 
doing just fine as it is producing more than ever before. Such data is 
misleading and you should consider the source. For example, statistics 
on U.S. produced products include Dell computers which are merely 
assembled in the USA from components produced abroad. We could argue 
endlessly about this but the facts are the facts and the fact is we 
have become a nation with a colossal trade deficit. In 2005, for the 
first time in over a hundred years, our nation imported more food 
products than it exported and our trade deficit in manufactured goods 
continues to soar. Indeed, our nation's trade deficit is growing by $2 
billion a day! (More about this later . . .)
    Sounds like our nation needs some help.
    Or at least some good advice . . . and that leads me to integrity. 
You see when a CEO attempts to push an agenda that supports Chinese 
protectionism rather than an agenda that goes against that 
protectionism, maybe that CEO should declare that he or she is 
conflicted on this issue and should be recused from any forum that 
determines U.S. trade policy. Many of these CEOs have plants in the USA 
which would benefit from freer trade but they support their growing 
investments in plants in China and outsource components from China by 
choosing their company's best short-term interests over that of their 
own domestic plants and their country.
    That's because they have to but you don't!
    Supposedly, one issue before us today is how to stop China from 
managing its currency so as to give its production of goods and 
services an unfair competitive advantage. Or, is it? If you recall, 
earlier I mentioned the multinational delegate, the honest one . . . he 
said he was against a proposal that would raise his prices on the 
components he buys from China. I believe the real issue is, ``Should 
the USA support measures that will not work so multinationals can 
support them or should the USA support measures that will work to cause 
China to change its policy of managing its currency?''
    The multinationals have endless arguments for stretching out the 
process like . . .. ``We don't want to start a trade war now, do we?'' 
But we are already in a trade war, aren't we? Of course we are and we 
are losing. We are pacifists in this war. How about this one by the 
multinationals . . .. ``Your policies are protectionist!'' Yes, they 
actually say that, can you imagine? Often the accuser benefits from 
China's export subsidies which are clearly prohibited by the WTO as 
protectionist.
    The irony is that domestic producers are the victims of 
protectionism not the beneficiaries.
    Another argument we hear is, ``What about their fragile banking 
system?'' This one has been around for years and of course, it is 
impossible to amend an economic strategy let alone a banking system 
that depends on subsidization to such an extent without removing the 
subsidy, isn't it? Besides, their banks are owned by the same 
government that is holding more than 1.7 trillion U.S. dollars worth of 
official reserves. Maybe their banks are not quite as insolvent as you 
have been lead to believe . . ..
    China set up a system to manage the movement of its currency toward 
market levels and then used it to move its currency at rates about four 
percent per year compared to estimates of an underlying rate of 
appreciation of five percent of its currency, thereby exacerbating the 
problem.
    Even if China were immediately to stop manipulating its currency, 
there is nothing to deter China from returning to the policy at a time 
of its choosing. Equally, other countries would be free to continue or 
adopt similar mercantilist policies with impunity. In fact, the author 
of a paper published by the UN Conference on Trade and Development in 
``China in a Globalizing World'' (2005) has advised developing 
countries that ``China's experience in the past decade can be seen as a 
model of a successful development strategy.''
    The author continued, ``As in other Asian countries in the past, 
fixing the real exchange rate at a favorable level and promoting 
exports offers the possibility of penetrating world markets rapidly and 
experiencing strong growth and capital accumulation. The penetration of 
foreign markets brings about the rise in income needed to finance 
increased investment without recourse to net foreign capital inflows.''
    The experience so far is that China is going to delay as long as it 
can and make corrections in as small increments as it can get away with 
given its support.
    Part of that support comes from U.S. trade objectives which please 
the multinationals that are aligned with the trade policies of China. 
Never give in on trade issues, but, if ever, give slowly . . ..
    There is no easy solution to this Chinese puzzle. Even I have 
supported the verbal approach . . . for years. Our nation could simply 
slap a tariff on all imports from Chinese and other nations that manage 
their currency but I think we must take measured concrete steps that 
increase in severity before such a step.
    China is not the only country that manipulates its currency to gain 
a competitive advantage. Other Asian nations also manipulate their 
currency partly as a defensive mechanism so their producers of goods 
and services can compete with goods and services originating from 
China.
    It is important to understand that the end of currency manipulation 
will not end the depreciation of the U.S. dollar against other 
currencies including China's yuan.
    For this reason, it is difficult and perhaps impossible to develop 
a coherent trade policy to deal with China without considering the tax 
policies of our own country. China uses a Value Added Tax (VAT) to 
protect its domestic production of goods and services and uses its 
revenues to fund government programs such as national health care. VATs 
are a tax but they are also a form of tariffs which are largely exempt 
from World Trade Organization (WTO) rules. The WTO was established to 
advance world trade. It has developed ground rules for international 
commerce and mediates trade disputes. Of course, China also employs a 
VAT tax but unlike everyone else, the VAT is applied in a 
discriminatory manner which is in direct violation of WTO rules.
    Market determined exchange rates simply put all nations back at the 
starting gate for the race to determine who will win the battle to 
produce competitive goods and services assuming all other things are 
equal. Of course, all other things are not equal and because of this 
our nation's inability to compete with China and the rest of the world 
means that our currency will continue to depreciate and the standard of 
living of all Americans will decline and our nation will grow weaker.
    This is because other trading nations use revenues generated by 
Value Added Taxes (VATs) to reduce the tax and health care burden on 
their production of goods and services and the most ambitious nations 
are developing energy policies which give them a competitive edge.
    Here is a real world example of how VATs are used by other 
governments to protect their industry. Revere had an industrial plate 
mill in New Bedford, Massachusetts for 145 years. The plate was used in 
heat exchangers and in unique applications for U.S. national defense. 
It was considered the best quality plate in the world. Its major 
competitors were located in Germany but could be located in China and 
the principles and the result would be the same. These competitors were 
able to undercut Revere's prices thanks to a VAT that the German 
government applies to all goods and services sold in Germany, domestic 
or imported.
    When New Bedford shipped its plate to Germany for its consumption, 
that plate paid the 19 percent German VAT tax. If the German mills ship 
plate to the USA, the 19 percent VAT tax is rebated. VAT revenues allow 
the German Government to help fund national health care costs and 
reduce corporate taxes. So German competitors pay far less in taxes and 
medical costs. Medical costs alone amount to about $10,000 per employee 
for Revere. Ironically and tragically, the New Bedford workers had to 
bear the burden of helping to pay for the health care of the German 
workers they competed with through the payment of German VATs on any 
Revere products shipped to Germany.
    Naturally, Revere hardly shipped any product to Germany while its 
German competitors just loved the U.S. market.
    Meanwhile, the American worker is expected to respond to these 
pressures by increasing productivity and reducing waste. The people at 
Revere's New Bedford plant did that at an astonishing pace, averaging 
productivity improvement at the rate of 10 percent a year for the last 
six years. During this period the workers and management of this mill 
did everything that was asked.
    Yet, even that wasn't enough--on March 5, 2007, Revere announced 
the closure of its New Bedford mill and the loss of 87 good paying 
jobs.
    In recent years, the USA has been negotiating Free Trade Agreements 
(FTAs) in an effort to get other countries to lower tariffs. This has 
led to the North American Free Agreement (NAFTA) in which the U.S., 
Canada and Mexico reduced outright tariffs. Around the time of the 
negotiations, however, Canada instituted VAT taxes while Mexico 
increased its VAT rates. VATs are excluded.
    How can the USA continue to negotiate trade agreements allowing 
other nations to offset tariff reductions with VATs and other forms of 
border adjustable taxes and manipulate their currency?



    These VATs are applied on our products by over 140 foreign 
countries. The chart above shows how the European Union countries have 
managed to increase VATs while lowering other types of tariffs--keeping 
the effective tariff the same despite trade agreements. Mexico and 
Canada have made similar adjustments despite FTAs. Countries that sign 
FTAs are free to replace the tariffs they give up with VATs charged on 
our goods sold to them.
    The revenues collected by the foreign countries help pay for the 
health care cost of their manufacturing workers that U.S. workers must 
compete against. Foreign countries also have to collect VATs on their 
domestic production to comply with World Trade Organization (WTO) rules 
on trade but then use them to lower corporate and payroll taxes on 
domestic production of goods and services. Foreign producers gain even 
further as their nations refund their VATs on exports.
    VATs protect the domestic production of goods and services in any 
country that has them. The lack of a VAT in the USA allows European 
nations to gain market share from the USA partially offsetting the 
impact of China's manipulation of its currency on the production of 
goods and services in Europe. That's one reason why Europe is less 
vocal about China's mercantile war. The lack of VATs in the USA also 
largely explains why the USA has a trading deficit with virtually every 
other trading nation in every class of goods.
    VATs have been adopted by all of the world's major trading nations, 
excluding the USA and some oil producing Middle Eastern nations.
    Another nail in the coffin of U.S. manufacturing would be if the 
USA were to sign the Kyoto Treaty. The Kyoto Treaty exempts China, 
India, Brazil and other developing nations from its standards. But the 
carbon emissions per $1,000 of GNP in China are seven times that of the 
USA while India emits three times as much. The Kyoto Treaty and other 
measures such as Regional & National Greenhouse Gas Initiatives and 
carbon cap and trade schemes drive manufacturing from developed 
countries with more strict standards to countries with much worse 
practices.
    These treaties and regulations have the unintended consequence of 
increasing carbon emissions and global warming as factories are 
shutdown in the USA and Europe and production increases in China.
    During the days of substantial aid programs by the USA to 
developing nations, the primary consideration was to build an 
infrastructure. That included large scale projects to supply low cost, 
economic energy. Of course, what is true for developing nations is also 
true for developed nations that must compete in a global economy . . . 
the provision of low cost, competitive power is essential to success.
    The gigantic footprint of windmills, solar energy, bio-fuels, and 
hydropower is so vast and the costs so uneconomic that no nation that 
is serious about engaging in the global competition for skilled jobs is 
embarking on these power programs to the extent of the USA. Any energy 
source that must be mandated, subsidized and surcharged to such an 
extent cannot be economic, can it?
    In my opinion, the best large scale, low cost source of clean 
energy is nuclear. China is planning 40 new nuclear power plants; Japan 
is building 10 more while France relies on nuclear for 80 percent of 
its electricity. Why? Nuclear power is clean and low cost if sitting 
and environmental concerns are managed. Nuclear waste is dangerous but 
can be contained in areas much smaller than most people realize. Thirty 
years of nuclear waste from a 1,000 MW plant would fit in an area the 
size of a high school gym. If other countries can do it, why can't the 
USA?
    The loss of manufacturing jobs to date in the USA is only the tip 
of the iceberg. The impact of currency manipulation, VATs and 
environmental/energy costs are not limited to manufactured goods. Any 
goods and services that compete in global markets, either directly or 
as part of a supply chain, are exposed to these protectionist forces. 
Future losses will go far beyond the continued loss of manufacturing 
jobs and extend to the agriculture, food processing and service 
industries. Indeed, Alan Blinder, former Federal Reserve Vice Chairman, 
was quoted in the Wall Street Journal on March 28th saying that, ``. . 
. as many as 40 million American jobs (are) at risk of being shipped 
out of the country in the next decade or two.''
    Policy-makers and citizens must realize the urgency of the matter. 
The USA must see itself as a competing nation . . . competing in a 
global market for good paying jobs. But it's not only about jobs. It is 
also about national security and our entire economy. Factories 
producing goods and services necessary for U.S. national defense are 
moving offshore. The U.S. trade deficit is growing $2 billion a day. 
China and Japan have each accumulated more than U.S. $1 trillion. The 
accumulation of U.S. currency by China and other Asian nations is a 
growing bubble.
    So, the looming question is, ``What should be done to counter this 
offensive and protective behavior by other nations?''
    First, the USA cannot continue to negotiate global or bilateral 
trade agreements as long as the other country is free to manipulate its 
currency and use VATs to offset any tariff reduction. Also labor, 
environmental, antitrust, quality and intellectual and other property 
standards in free trade agreements must be equivalent to the burden 
placed on manufacturing, farming and ranching in the USA or we just 
cannot compete and provide jobs in the USA.
    Can you imagine competing in a global market that gives your 
competition an eight year head start? Yet, that is exactly what is 
being proposed to kill jobs in current House legislation for domestic 
manufacturing to cap and trade and die. If the environmental burden is 
unfair for foreign competitors, it's unfair for us.
    In the global trade war, who do you represent?
    Second, the manipulation of its currency by China or any nation is 
unacceptable. The first step should be to pass the Ryan Hunter bill 
(H.R. 2942) that would define currency manipulation as an illegal 
subsidy and allow the application of Countervailing Duties (CVDs) to 
offset the injurious impact of the currency manipulation. The Ryan 
Hunter bill is designed to be compliant with the rules of the WTO. That 
being said, if the WTO refuses for any reason to sanction the use of 
CVDs to offset currency manipulation, we must assume that the system 
that governs world trade is broken and must be fixed. Immediately!
    If the use of CVDs to offset currency manipulation does not lead 
China to stop manipulating its currency, then the USA must take 
stronger measures, even if it means stepping outside WTO rules.
    Third, the USA must reform its tax and health care systems and 
institute VATs on a scale that gives production of goods and services 
in the USA a competitive advantage.
    A smart competitor never looks at where a competitor is and tries 
to match that position. A smart competitor might try to match where a 
competitor is going to be at a certain time. But the most intelligent 
competitor attempts to gain a competitive advantage by providing a 
product beyond where the competition is going to line up in the race.
    In order to achieve this objective, the USA must significantly 
reduce or eliminate all national taxes, both corporate and personal, 
including income, dividend, capital gain, estate, FICA and unemployment 
taxes and replace them with a consumption tax like a VAT. Under current 
international trade rules, consumption taxes can be rebated on exports 
and imposed on imports. The U.S. refuses to reciprocate, disadvantaging 
all American-made goods that compete with imports or are offered for 
export. No wonder, we have such a massive trade deficit!
    The regressive nature of a VAT or consumption tax should also be 
offset by the provision of a national health care system to offset the 
unique American health care ``tax on jobs.''
    A national health care system could utilize private insurance to 
provide the best choice to U.S. consumers or we could adopt a system 
similar to that employed by Great Britain. It provides universal health 
care for all but allows any citizen to opt out to private care as long 
as they are willing to pay the cost. I am not aware of any nation that 
is considering dropping its health care system to adopt the system used 
in the USA which eats up twice as much GNP per capita and burdens the 
domestic production of goods and services. My concern is simply that 
health care cannot be paid for by job providers in the USA competing 
with job providers abroad who pay little if any health costs.
    Either the U.S. Government solves this problem or outsourcing will 
resolve it.
    Also, adverse impacts on charitable and lending institutions need 
to be offset by matching charitable grants and providing housing 
subsidies which could further offset the regressive VAT system and make 
it fair. The new system should be designed to be revenue neutral for 
all classes.
    Fourth, the USA needs to ensure that its citizens and businesses 
have access to substantial, additional low cost, clean energy so that 
they are able to compete on the world stage and keep the environment 
clean. The USA should use a system similar to the one used by the Base 
Realignment and Closure (BRAC) Commission to determine the location of 
surviving military bases to site nuclear power stations throughout the 
USA. Competing nations all over the world are building terminals and 
pipelines to receive natural gas to supply their manufacturing and 
economic base. So must the USA. We simply must not allow the events of 
9/11 to destroy our nation's ability to compete by stifling the 
expansion of natural gas terminals and pipelines.
    The U.S. is alone among major trading nations in the world without 
a national trade policy.
    The result is that the U.S. is being defeated in international 
trade. American manufacturers are extremely efficient. Indeed, I would 
argue those still remaining are the most efficient in the world because 
they are surviving despite unfair foreign protectionist practices that 
general trade agreements like GATT and Free Trade Agreements (FTAs) 
allow to continue.
    The demand in the U.S. for durable manufactured goods has soared 
about 400 percent since 1980 as our economy has grown. But U.S. 
production of these goods grew only 40 percent. Without foreign 
government trade cheating, U.S. production would have been far greater. 
Revere Copper's exports and domestic sales would have grown very large 
indeed.
    Our nation's focus on general trade agreements and FTAs is 
misguided, inadequate and lacks strategic thinking. Although I am a 
proponent of free trade, the agreements to date compound the problem, 
while deceiving many who think free trade is being promoted.
    China and the rest of the world are waging a mercantilist war on 
the U.S. and the U.S. is sleeping as its factories, farms and ranches 
are being systematically destroyed. We desperately need a national 
trade policy instead of a patchwork of trade agreements that deepen the 
current problems and enable foreign protectionism. That is what we 
should be hearing about from our Congress and the remaining 
Presidential candidates. We are running out of time. What a mess we are 
leaving our children. This is one problem that has real solutions.
    Our government needs to focus on the big picture of global trade 
and address these problems with a national trade policy immediately.
    When Paul Revere tried to rouse the countryside with his wake up 
call, what did the people do? They certainly didn't go back to sleep. 
We all need to wake up and listen. But we must be careful who we listen 
to . . ..
    Wake up, America!

                  Biography for M. Brian O'Shaughnessy
    Brian O'Shaughnessy is the Chairman of Revere Copper Products and 
served as President & CEO for almost twenty years until the end of 
2007. His company was founded in 1801 by Paul Revere and may be the 
oldest manufacturing company in America. Revere does not make pots and 
pans anymore but makes copper and brass sheet, strip and coil as well 
as extruded products for shipment to other manufacturing companies. 
Brian did a leveraged buy out of Revere in 1989.
    Brian is recognized as an expert on international trade & taxes as 
well as energy and environmental issues. He championed and chaired the 
world class, worldwide copper industry's environmental program. In 
February of 2006, the Copper Club named Brian as its Copper Man of the 
Year--an international award considered the most prestigious in the 
copper industry.
    Brian has chaired two industrial energy advocacy committees and 
serves on the board of directors of a third group. He also serves on 
the board of directors of a public utility with transmission and 
distribution operations for gas and electricity in New Hampshire, Maine 
and Massachusetts.
    In 2005, Brian testified before the U.S. Senate Committee on Energy 
and Resources and testified in 2006 before the U.S. House of 
Representatives Committee on Government Reform regarding energy, trade 
and tax policy. In May, 2007, he testified before a tripartite hearing 
on China Currency Issues before subcommittees of the House Ways and 
Means, Energy and Financial Services Committees. In July, 2007, he 
testified before a U.S. Senate subcommittee hearing on the impact of 
China Trade on U.S. manufacturing. Brian has appeared on BBC World News 
and been interviewed on Bloomberg on the Economy as well as PBS. Brian 
has written op-ed pieces for various newspapers including the Boston 
Globe.
    Brian also serves on the boards of directors of the Manufacturers 
Alliance of New York and the Manufacturers Association of Central New 
York (MACNY) and served on the BOD of the National Association of 
Manufacturers (NAM). At NAM, Brian is on its International Economic 
Policy Committee and its China Policy Subcommittee. Brian is a past 
Chairman of the U.S. Copper & Brass Fabricators Council and currently a 
member of its BOD. He testified on its behalf before the International 
Trade Commission. Brian is currently Chairman of the Copper Development 
Association (CDA) and serves on the BOD of the Coalition for a 
Prosperous America (CPA).
    Brian is a national leader of domestic manufacturing companies 
attempting to change U.S. international trade and tax policy to help 
level the playing field for domestic manufacturing.
    Prior to joining Revere, Brian spent twenty-one years in the 
international copper mining industry with seven years each in 
operations, marketing and corporate administration.
    Brian graduated with a BS in Industrial Management from the 
University of Nevada and studied International Business in Graduate 
School at the University of Southern California. USC course work 
included ``Advanced Problems of International Finance'' and ``Case 
Studies in International Business.''
    Brian is celebrating 40 years of marriage with three sons and four 
grandchildren. In 2002, Mr. O'Shaughnessy rode his Harley Davidson on 
two-lane scenic roads from Moody Beach, Maine to Seattle, Washington 
stopping off in Sturgis, South Dakota. Mr. O'Shaughnessy is an avid 
snow-boarder and golfer but spends most of his time working!

    Chairman Miller. Thank you.
    Mr. Jurey.

 STATEMENT OF MR. WES JUREY, PRESIDENT AND CEO, THE ARLINGTON, 
                   TEXAS CHAMBER OF COMMERCE

    Mr. Jurey. Mr. Chairman, thank you for the opportunity to 
appear before the panel. I may bring a slightly different 
perspective than those who have testified before.
    As President of the El Paso Texas Chamber of Commerce 
during the 1990s, I was leading that chamber during a period 
when we lost 23,000 jobs in the garment industry so I am 
acutely aware of those issues and yet many of the experiences 
there have led me to the things I will share with you today, 
and at the end of that decade we actually had more net 
employment in the county despite the fact that we lost that 
many jobs. I then went to Arlington, Texas, in 2001 and have 
led that chamber in the past nearly seven years, took that 
community from a time of economic stalemate to a time of robust 
growth in its tax base and jobs as well, and so I will offer 
some thoughts from those perspectives.
    I would say at the outset that there are two factors that 
happened in the 1980s that we sometimes overlook, and that was 
that the Cold War ended. We asked Premier Gorbachev to tear 
down the wall, and the unintended consequences, we put three 
billion people into competition with us in the world's 
marketplace and we are not going to turn that clock back. Then 
we invented the Internet in the federal labs and we gave people 
the ability with the click of a mouse to move CAD drawings and 
X-rays worldwide and we are not going to close that door again 
either.
    And so the reality is, we are in a truly globally driven, 
innovation-driven economy and the critical issue, how do we 
maintain U.S. competitiveness, and from my experience, these 
companies have two critical factors they have to think about: 
do they have access to a highly trained, skilled, competitive 
workforce, and what is the true cost of doing business in the 
area they are at, often derived from various factors including 
things like whether we tax consumption, production or wealth, 
as well as what kind of regulatory climate and processes are 
they competing with in that climate, and so I will offer five 
brief suggestions.
    Number 1: If you look at the publicly funded workforce 
system, it is not that you need more dollars, it is that we 
need to think very carefully about how we both allocate and 
deploy the dollars that you do spend. And I would say that at 
the outset, if you look at the Workforce Investment Act (WIA), 
it is written from a job seeker perspective, not an employer or 
job creator perspective, and therein lies your challenge. We 
are currently managing a grant for the Texas Workforce 
Commission. It is a modest grant of $1 million, and the goal is 
to create replicable, sustainable, scalable models of how we 
engage the systems to work together to provide workers for 
advanced manufacturers. I will give you simple examples. 
National Semiconductor spent $50 million retooling a plant to 
go from a six- to an eight-inch wafer to remain competitive in 
the United States, finding no curriculum to retrain their staff 
with. We are putting modest sums of money into National 
Semiconductor. Our community college and our university, they 
are cataloging training National Semi is having to develop. The 
outcome will be curriculum that can be employed in the future 
at a fraction of the cost to National Semi. A second quick 
example is Progressive, a company building a part for Lockheed 
Martin for the Joint Strike Fighter, can't find the seven 
machinists it needs today, let alone the 400 it will need in 
the future. There are hundreds of unemployed machinists in 
Michigan but the Texas Workforce Commission can't spend $1 
letting them know these jobs exist, and there is little 
training capacity in Texas, and so we are putting dollars into 
the Dallas and Tarrant County college systems to create that 
capacity.
    The commonality of many examples I could cite for you is 
that under current DOL [Department of Labor]/WIA regulations, 
the ways we are deploying and allocating these dollars would be 
exceedingly difficult to do under those regulations, and my 
bottom-line recommendation, and there are many in my written 
testimony, is a really thoughtful look at both the process and 
the measures would help those dollars be spent far more 
effectively to address many of the workforce needs and the 
challenges that these employers face.
    Secondly, to recognize that if we need highly skilled 
workers to drive a highly innovative economy, that if you look 
at the graduate and postgraduate programs in the United States, 
50 percent of those students are either immigrants or they are 
foreign students. Forty percent of all Ph.D.s granted in 2006 
went to those foreign students or immigrants and 75 percent of 
those Ph.D.s will go to foreign students or immigrants in 2010. 
We have an incubator in Arlington. We started it with the 
University in 2002. In the past six years, more than 75 percent 
of all the intellectual discoveries and innovative ideas coming 
to us came from foreign students and immigrants, and the bottom 
line is, they can either go home and take that innovation with 
them or we can find ways to both protect our borders and 
welcome legal immigrants and keep the innovation in the United 
States.
    Third, federal R&D funding. In talks with Dr. Zerhouni at 
the National Institutes of Health, I commend him because under 
translational awards, called road maps sometimes, he has 
recognized that if you take some of the $27 billion NIH uses to 
fund health research and put it into the hands of universities 
that partner with the private sector in a genuine collaborative 
environment, that the commercialization activity resulting then 
takes place in the United States, not foreign countries. And if 
you look at what they are doing in Homeland in the Science and 
Technology Directorate, they have funded six major research 
projects to date, all through major universities all required 
collaboration with 20 to 30 other partners, both private sector 
and nonprofit and other universities. And I would commend you 
to those models because they take Federal R&D dollars, they 
leverage private sector and university dollars and they ensure 
the commercialization takes place in the United States, and if 
you look carefully at Northern California from the 1940s and 
1950s on, it is frankly how they became Silicon Valley.
    Fourth, promote global cooperation in the international tax 
arena. As was cited, foreign countries do many things with 
their currency and their taxation, but the reality is, we have 
got to go back to looking at the factors that drive U.S. 
competitiveness, and a part of it is taxation. Are we taxing 
production, wealth or consumption? What does that do in the 
regulatory environment and how does that impact cost structure?
    I remember Reynolds aluminum plant in Arkansas in the 
1980s. They paid high wages, $25 to $45 an hour in 1984, but 
their cost was the cost of electricity. They paid $100 million 
a year to Arkansas Power and Light for electricity, and the 
rumor started that they were going to move and go to another 
city in another state and everybody scoffed at the idea because 
they just built the $42 million plant. The plant manager put it 
in perspective. He said, ``Wes, if you pass second grade math, 
you will understand that if a city offers me that utility 
kilowatt hourage at $60 million a year, in three years I will 
net $80 million to the bottom line in a highly competitive 
industry while abandoning that plant to your industrial 
development corporation and building a new plant in the other 
city.'' And so although we can say we kept those jobs in 
America, that was little consolation for the people in Hot 
Springs and Malvern, Arkansas, who lost their jobs, the city 
and county who lost the tax base, and $100 million hole left in 
the rate base of Arkansas Power and Light. And so it really is 
critical to think about the cost factors of those companies and 
how we think globally and talk about the international tax 
arena. That could be an area where the United States leadership 
could be impactful.
    And fifth, focus on the prevention of harmful regulatory 
competition internationally. Use our economic international 
diplomacy in those arenas. Imagine if the General Motors plant 
in Arlington, Texas, that brings in components from over 600 
suppliers throughout the United States imposed tariffs on all 
of those supplies. Well, the truth is, the United States 
economy is strong because interstate commerce is regulated in a 
way that allows that trade to flow among and between the 50 
states. In the global competition, we are going to have to find 
ways for that trade to flow fairly throughout the countries of 
the world because again, we are not going to be able to turn 
the clock back.
    I would say in summation that the number one most vital 
recommendation I have is that our economic policy promote 
globalization. For 60 years we told foreign companies to open 
their markets and for the last 20 years they finally did, and 
that coincides with the time of economic prosperity in the 
United States. We have got to recognize too that 96 percent of 
the world's consumers live in another country. We have grown 
because we were a land of immigrants and we fed on their hunger 
and their energy and their innovation and we have become one of 
the most open competitive societies in the world, and I close 
by leaving you with this thought. Dr. George Kozmetsky, 
considered one of the pioneers and founders of Silicon Valley, 
published an extensive demographic analysis in 2000 going back 
to 1950 and forward to 2050. He said on giving me a copy, ``We 
are living in a time when 88 percent of the wealth is 
controlled by 12 percent of the people in countries all 
demographically projected to decline through 2050, meaning 12 
percent of the world's wealth is what 88 percent of the world's 
people try to survive on, all in countries demographically 
projected to grow for the next 50 years. What do you think that 
means?'' he said. And my comment was, I would much rather 
understand what he thought, and he said, ``I think it is 
simple; Global competitiveness will cause us to finally go to 
war over resources or learn to integrate the global economy so 
that every nation has a stake in a strong global economy in 
which the United States can remain competitive.
    I appreciate the time given to me to speak to the panel.
    [The prepared statement of Mr. Jurey follows:]
                    Prepared Statement of Wes Jurey
    The United States today finds itself in unprecedented and 
unchartered waters. For the past several decades, our super power 
status has largely gone unchallenged, something seldom seen in history 
other than perhaps the Pax Romana nearly 2000 years ago. It has been an 
unprecedented time of global economic growth and expansion, fueled, I 
would argue, by two seemingly unrelated events in the 1980s.
    The first was the end of the Cold War, symbolized by President 
Reagan's pronouncement to Premier Gorbachev to ``Tear down this wall.'' 
What should be noted is that the end of the Cold War allowed under 
developed nations to shift their focus from defense to develop 
educational systems and economic and transportation infrastructure 
necessary to compete.
    The second was the discovery of the Internet in a U.S. federal lab, 
enabling everything from x-rays to engineering design to be transferred 
world-wide with the simple click of a mouse. Viewed from an historical 
perspective, those two seemingly unrelated events in the 1980s have 
enabled global economic development during the past 20 years.
    In his book, The Post-American World,\1\ Fareed Zakaria argues that 
we are living through the third great power shift in modern history. 
The first, the rise of the western world, around the 15th century, 
produced the world as we know it now--science and technology, commerce 
and capitalism, and the industrial and agricultural revolutions. It 
also led to the prolonged political dominance of the nations of the 
western world.
---------------------------------------------------------------------------
    \1\ The Post-American World, Fareed Zakaria, W.W. Norton & Company, 
Inc., 2008.
---------------------------------------------------------------------------
    The second, in the closing years of the 19th century, was the rise 
of the United States. Once industrialized, becoming the most powerful 
nation in the world, stronger than any likely combination of other 
nations.
    The third, the one we are experiencing now, is the rise of the rest 
of the world, largely driven by a global economy that has dramatically 
accelerated. Zakaria further argues that this post-American world, 
although an unsettling prospect for Americans, is not a decline of 
America, but rather the rise of everyone else, fueled by the Innovation 
Economy.
    From my perspective, the Innovation Economy really isn't new; it 
simply is a relatively new way of describing what has always the driver 
of wealth creation. Historically, research resulting in technology 
innovation has been the primary driver of economic growth and 
development.
    For the most part, technology led economic development has 
clustered around and been driven by universities who understood that 
commercializable research is the basic cornerstone in the creation of 
technology start-ups. The most successful innovation economies have 
been the result of effective partnerships between universities and the 
private sector, focused on technology transfer from the lab to the 
marketplace. Clear examples include the role Stanford University and 
the University of California played in the evolution of Silicon Valley; 
MIT and Harvard in the development of the Boston Biotech Corridor; and 
Duke and the University of North Carolina in the growth of the Research 
Triangle.
    In these regions, applied research is the basic cornerstone for the 
creation of technology start-ups, new applications for existing 
technology, as well as new technologies. The resultant products form 
the basis for thousands of companies.
    What is new, however, is the unprecedented challenge we face in our 
communities, regions, states and as a nation in terms of global 
competition. As examples, the emergence and evolution of India, China 
and Brazil during the last two decades from an economic perspective is 
truly staggering. If we clearly look back to the early 1900s, 
technology discoveries resulted in the creation of the assembly lines 
that sparked the industrial revolution. In a similar manner, the 
discoveries that led to the Internet essentially sparked the Innovation 
Economy we find ourselves competing in today.
    George Kozmetsky, one of the founders of Silicon Valley, stated 
``All human affairs--political, social, economic, cultural, and 
business--are conducted by human beings; people's motivations, 
ingenuity, and creativity ultimately determine success or failure in 
all these human affairs.'' \2\
---------------------------------------------------------------------------
    \2\ Embracing the Global Demographics Transformation 1950-2050 
Sharing Peace and Prosperity in the Global Marketplace, George 
Kozmetsky and Piyu Yue, IC2 Institute, University of Texas at Austin.
---------------------------------------------------------------------------
    His statement supports the U.S. Chamber's premise that ``the 
toughest, most important competition in the 21st century worldwide 
economy will be the global race for talent and workers.\3\ From my 
perspective, the outcomes will largely determine U.S. competitiveness 
in the future.
---------------------------------------------------------------------------
    \3\ The State of American Business, 2008, Thomas J. Donahue, U.S. 
Chamber of Commerce.
---------------------------------------------------------------------------
    We are competing in an era in which the U.S. represents only four 
percent of the world's population, while consuming approximately 26 
percent of our planet's available resources with the U.S. population 
projected to decline for the next 50 years. At the same time, most of 
the planet's natural resources, people, capital, and markets reside 
some place else, generally in countries where the populations are 
projected to grow for the next 50 years.
    In recent columns, dated April 26 and May 4, 2008 in the Financial 
Times, Laurence Summers, Harvard University professor, argues that 
America's economic policy has supported an integrated global economy, 
stimulating the development in poor countries, particularly in Asia, at 
unprecedented rates. Yet American commitment to internationalist 
economic policy is ever more in doubt. He further argues that this has 
been the right economic policy, and that withdrawing from the global 
economy is untenable, ultimately reducing U.S. competitiveness.\4\
---------------------------------------------------------------------------
    \4\ The Financial Times Ltd., Lawrence Summers, 2008.
---------------------------------------------------------------------------
    And from the Federal Reserve Bank's March newsletter comes this 
opening line; ``Innovation is key to global growth in rising living 
standards.'' \5\ My response is that our ability to remain highly 
innovative depends largely upon our ability to continue to train, 
educate, and retain a highly skilled workforce.
---------------------------------------------------------------------------
    \5\ Economic Letter, Federal Reserve Bank of Dallas, March 2008.
---------------------------------------------------------------------------
    In responding to the Committee's request to explore the issues of 
U.S. competitiveness, and in particular those factors that drive and 
influence U.S. firms' decisions to retain existing production and 
research capacity at home or take it abroad, I offer the following 
observations and suggestions.
    I'll begin with an observation. Since 1990, corporate location 
decisions have increasingly been driven by two key factors; the 
availability and competitiveness of the workforce in areas in which the 
company locates, and the competitiveness of the regulatory environment. 
Both determine the ability of the company to remain competitive. Much 
has been said and written about incentives. In practice, I have found 
that they are not the primary determinant, since the ability of a 
company to remain profitable month after month, quarter after quarter, 
and year after year is highly dependent upon the competency of the 
workforce and the cost of doing business in a particular location. In a 
free market economy, it generally comes down to that. From that 
perspective, I offer five suggestions to the Committee.
    First, the manner in which we allocate and deploy funding for 
workforce development should enable and empower our publicly funded 
workforce development system to become talent developers rather than 
funders of training. Allow me to explain. Since 1990, I have been 
highly involved with the U.S. Department of Labor, the Texas Workforce 
Commission, and two local workforce development boards. I have done so 
because in the communities I have served, I have found that the most 
critical need is to ensure that the companies we are attempting to both 
attract and retain have access to a highly skilled, highly competitive, 
highly innovative workforce.
    Through my participation in a variety of national pilot projects, 
and service on various Texas Workforce System and U.S. Department of 
Labor advisory boards, committees, and commissions, I have found that 
it is not necessarily the amount of funding we allocate but rather the 
means by which we deploy it, and the restrictions we place upon it. As 
a recent example, the Arlington Chamber of Commerce is currently 
administering a grant from the Texas Workforce Commission; the primary 
purpose being to develop replicable, sustainable, scalable model 
pipelines that develop the talent and supply chain for advanced 
manufacturers, rather than simply funding job training assistance.
    The focus of our work is fairly simplistic. The Chamber works to 
identify specific workforce challenges employers face. In doing so, we 
engage the local workforce development board, our local community 
college system, and our local university. Collectively, as partners, we 
identify the challenge, design the solution, and do what is necessary 
to resolve the employer defined challenge.
    National Semiconductor, for example, recently spent $50 million 
retooling 26 machines to convert production from a six- to eight-inch 
wafer. Their challenge: to retrain their workforce, with no curriculum 
available to do so. In response, the Chamber engaged the university and 
community college to collectively catalogue training conducted by 
National Semiconductor, in order to develop curriculum. Grant funding 
provided approximately 20 percent of National Semiconductor's training 
cost. The outcome--retrained workers and curriculum for future training 
needs, meeting the critical need for the employer.
    As another example, we began working with Progressive last fall, a 
local company that is one of Lockheed Martin's many subcontractors for 
the Joint Strike Fighter. Progressive indicated they will need to hire 
400 CNC machinists over the 20-year life of the contract, and cannot 
find the seven they currently need. This, despite the fact that their 
starting salary is $86,000 annually. As we continued this work, we 
discovered that Progressive is not alone; that there are a significant 
number of companies in need of machinists; and that the critical factor 
in North Texas is the lack of capacity to train machinists. As a 
result, we are allocating some of the funds directly to the Dallas 
County and Tarrant County Community College Systems to enable their 
collaboration to develop the training capacity necessary to train 
skilled machinists in North Texas.
    It should be noted that in our discussions with employers, they 
indicated that they can pay machinists $86,000 to $106,000 because of 
the increased productivity of the United States' worker; however, they 
also indicated that as wages continue to escalate due to the lack of 
skilled machinists, there would come a point where cost versus 
productivity would meet, and they would be forced to move these jobs 
offshore.
    As a third example, the General Motors Assembly Plant in Arlington 
is working with us to develop internships for high school students, 
apprenticeships for promising interns, entry level certification, and 
incumbent worker training. All defined as critical to their 
competitiveness. This example prompts me to point out that although 
participants in DOL apprenticeship programs are paid during their 
apprenticeship, there are essentially no DOL funds allocated to 
directly support this effort, other than direct staff technical 
assistance. This despite the fact that every federal dollar spent for 
apprenticeship leverages significant private sector dollars.
    What is important to understand about all three models is that they 
would be difficult to fund under current DOL/WIA guidelines. First, the 
law itself is crafted, and the services and centers funded under WIA 
are based upon the job seekers perspective--the supply side--rather 
than the demand side. That translates into the need for State and local 
workforce systems to be highly creative in structuring grants or 
contracts in order to fund the types of activities I have cited.
    Second, if it is truly our intent to create an employer driven 
system, then we must take into account that employers are faced with 
two primary factors critical to their competitiveness; speed to market, 
and rapid response to market conditions. That same criterion, however, 
seldom applies to public funding. Therefore, we must minimize both the 
time it takes an employer to secure funding, and the process employers' 
view as unnecessarily cumbersome.
    Third, we should assess the performance measures that State and 
local workforce investment boards have to meet, because they don't 
reflect the factors determining industry competitiveness. Again, the 
focus of performance measures is on the supply side, relative to job 
seekers, rather than the demand side, relative to jobs being created. 
These measures also place more focus on entry level, rather than 
incumbent workers who need enhanced skills to advance. By focusing on 
incumbent workers who gain the skills to move up the ladder, we also 
create the entry level positions job seekers require.
    Fourth, the system should allow greater flexibility. I understand 
that a call for flexibility is often perceived as a request to not be 
held accountable for achieving results. In response, I firmly believe 
that recipients of these funds should be held accountable for 
measurable outcomes. I also believe you must allow recipients the 
flexibility to be innovative in the manner in which they work to 
achieve the measurable outcomes.
    The simple truth is that employers don't use the publicly funded 
workforce development system. Whether real or perceived, they view it 
as difficult to work with and unnecessarily cumbersome.
    My overall recommendation is that a detailed analysis of the 
processes employers are subject to in order to utilize these funds 
should lead to opportunities to effectively streamline the process 
required, and re-think the measurements. I might add that a recent 
study by the U.S. Small Business Administration indicated that the 
average small business spends $7,647 annually as the cost of regulatory 
compliance per employee.\6\ When you add to that the slow, cumbersome, 
regulatory process to access the publicly funded system, it may lead to 
a greater awareness as to why these funds are not more effective in 
achieving the outcomes we expect from their use.
---------------------------------------------------------------------------
    \6\ The Impact of Regulatory Costs on Small Firms, W. Mark Crain, 
U.S. Small Business Administration, September 2005.
---------------------------------------------------------------------------
    I would also suggest that it would be helpful if the U.S. 
Departments of Labor and Education work together with major U.S. 
business organizations, such as the U.S. Chamber of Commerce, the 
National Association of Manufacturers, and other such national employer 
organizations, to clearly define workforce readiness precluding the 
fifty states from each separately trying to do so. Given our extremely 
mobile workforce, we frequently find that workers are trained and 
certified for jobs they can't find in the regions they are in, 
requiring them to move to other regions in order to secure meaningful 
employment. When they do so, their certification frequently doesn't 
reflect the work readiness credentials and certifications established 
in other regions. An industry led and developed work readiness 
definition, universally accepted throughout the United States, would 
enable certification to be universally understood, increasing the 
likelihood of matching the supply of job seekers with the demand of 
jobs we've created, regardless of the geography.
    Second, if we recognize that highly skilled innovative people are 
necessary to drive our economy, then we need to recognize that nearly 
50 percent of the students in our graduate and post-graduate programs 
at our nation's universities are foreign students and immigrants. In 
2006, they received 40 percent of all Ph.D.s and by 2010, 75 percent of 
all science Ph.D.s in this country will be awarded to foreign students. 
If our immigration policies allow these students to stay upon 
graduation, then innovation will happen here. If our policies force 
them to leave, they take their innovative talents with them.
    In other words, the potential for American productivity may depend 
far more on a rational immigration policy that both secures our borders 
and welcomes legal immigrants to our shore, rather than on the quality 
of our actual education systems or amount we spend for research and 
development. Let me share a local example.
    In 2002, the Arlington Chamber established the Arlington Technology 
Incubator in partnership with the University of Texas at Arlington. Our 
focus was very basic--we intended to support the commercialization of 
intellectual discoveries emanating from the labs of our university. At 
the time, UT Arlington had one of the first nano-fabrication labs in 
the southwest; and one of the few in the United States. This 
essentially meant that UT-Arlington scientists could fabricate working 
mechanical devices at the molecular level. By contrast, the National 
Institute of Standards and Technology launched its nano-fabrication lab 
in 2007.
    Our focus was on ensuring that research resulting in patentable, 
licensable discoveries would be nurtured through proof of concept, 
proof of product, and proof of market; providing access to venture 
funding to bridge the gap until the technology was ready for 
introduction to the marketplace. During the past six years, the vast 
majority of intellectual discoveries brought to the incubator are from 
scientists who are foreign students or immigrants.
    Third, we should allocate federal R&D funding, to the greatest 
extent possible, to support industry academic research partnerships; 
thereby leveraging federal dollars with both private sector and 
university dollars while ensuring that commercialization activity 
resulting from such research takes place in the United States. Allow me 
to explain. During a meeting with Dr. Elias Zerhouni, Executive 
Director of the National Institutes of Health, he indicated that of the 
approximate $27 billion annually spent by NIH on health care and 
related research, most of the resultant commercialization takes place 
offshore, in countries we compete against economically. Under new 
programs developed by NIH, college and university systems are 
designated ``translational centers'' based on their ability to 
demonstrate significant collaboration among and between universities, 
while partnering with the private sector. Under the terms of the Bayh-
Dole Act, granting the funds to universities who partner with the 
private sector ensures that the patentable discoveries are 
commercialized in the United States. This simple act--that of linking 
industry and academia while funding academia ensures that the 
commercialization of research financed by federal R&D dollars would 
inure to the benefit of our local, regional, State and national 
economies, and support the development of top tier research 
universities as regional economic drivers.
    Fourth, we should take the lead to promote global cooperation in 
the international tax arena. Just as U.S. corporations frequently 
locate in states where the corporate tax structure favors their 
business model, firms that do business internationally increasingly 
headquarter in countries whose tax structure favors their business 
model. As we assess the issue of taxation, it should be noted that we 
fundamentally tax one of three things; productivity, consumption, or 
wealth. In turn, it is important to understand the factors that drive a 
particular business, in terms of assessing the impact of a country's 
tax structure on that particular business. If, for example, a 
particular business is capital intensive, meaning their business model 
requires significant outlays for taxable property and equipment, then 
taxing wealth would be seen as a disincentive to that business. On the 
other hand, a company with little capital expense, but significant 
production cost would find a tax system built on taxing production as a 
disincentive. What we often fail to take into account is the impact of 
the allocation of tax in terms of production, wealth and consumption on 
the key industry clusters that drive our economy.
    Allow me to provide a simple analogy. During my tenure in Hot 
Springs, Arkansas in the 1980s, a rumor surfaced that the Reynolds 
Aluminum plant might relocate. At the time, the regional director of 
Arkansas Power & Light assured me it wasn't so, citing the expenditure 
by Reynolds of $42 million to build the plant. However, my conversation 
with the plant manager put it in proper perspective. My cost isn't 
people, he explained, although he paid his production workers $25 to 
$45 dollars an hour in the mid 1980s. My cost, he stated, is a $100 
million dollar a year electric bill to Arkansas Power & Light. In 
recent months we have been offered the same kilowatt hours for $60 
million annually by other cities. The cost of this factory including 
equipment, was only $42 million. I could actually abandon the factory 
and move to one of the new communities offering reduced electrical 
rates, build a new production plant, and still net $80 million over 
three years in a highly competitive global business. When the plant 
closed, it left hundreds of people unemployed and Arkansas Power & 
Light with a $100 million hole in its annual rate base. Simplistic, 
perhaps, but it is one more way to point out that the factors that 
drive U.S. companies to make decisions about where to locate are based 
on their ability to compete; and that a key factor is their cost of 
doing business, whether based on the tax structure or other key 
factors.
    Fifth, we should focus our international economic diplomacy on the 
prevention of harmful regulatory competition. As an example, imagine 
the challenge of the United States maintaining economic prosperity if 
every state in the union had differing regulations that impacted 
interstate trade.
    For example, imagine Texas imposing tariffs on the parts and 
components used by General Motors in Arlington received from more than 
600 suppliers located throughout the U.S. The reality is the United 
States' economy is vibrant largely because interstate commerce is 
supported by an overlay of federal regulatory guidelines rather than 
competitive State guidelines. In a similar manner, the United States 
must acknowledge that the global marketplace increasingly needs to 
think about global regulatory competition. Just as companies in 
countries we compete against are integrating their production lines 
with developing countries, we must integrate our country's regulatory 
structure with the structure of the world's marketplace.
    In closing, I would encourage the Committee to recognize that the 
single most important thing the Federal Government can do is support 
economic policies that promote healthy globalization, strengthening 
efforts to reduce inequality and insecurity throughout the world.
    For the past 60 years, the United States has encouraged foreign 
countries to open up their markets and increasingly in the last 20 
years they have done so. During those two decades, the U.S. has also 
enjoyed unusually robust growth, low unemployment, and increased 
productivity, with most of the job gains coming from small and medium 
size businesses during a time of rapid globalization. I would argue 
that the opening of these international trade markets has been a 
critical driver of our economic growth, and as the world continues to 
globalize, we must continue to globalize with it; particularly in a 
time when 96 percent of the world's consumers live in foreign lands.
    At the same time, we should remember we are a land developed by the 
hunger and energy of immigrants. In the process we have become the most 
open, flexible society in the world. We have absorbed people--their 
cultures, their ideas, their goods and services. That very openness has 
inspired and encouraged innovation. And we are still dominant in the 
technologies that will drive future growth, such as nanotechnology, and 
our universities are still among the best in the world. In recent 
rankings, U.S. universities received eight of the top 10 rankings, 37 
of the top 50. Faced with continued international competition, we have 
adapted and adjusted; primarily through our ability to innovate.
    I leave you with this closing thought. I was privileged to know 
George Kozmetsky, both as a mentor and a friend. Acknowledged as one of 
Silicon Valley's founders, he published a demographic analysis in 2000. 
He gave me one of the first copies with this comment; ``Today 88 
percent of the world's wealth is controlled by 12 percent of the 
world's population, all living in countries demographically projected 
to decline in the next 50 years. That means 88 percent of the world's 
population struggles to live on 12 percent of the world's wealth, all 
in countries demographically projected to grow over the next 50 years. 
What do you think that means?'' I responded by stating I was far more 
interested in what he thought. His reply has stayed with me ever since. 
``It means one of two things, he said. We will ultimately go to war 
over the resources nations need for people to survive, or we will learn 
to become an international marketplace where trade and commerce link 
and integrate the countries of the world, one to the other, providing 
the very motivation needed to stabilize our global economy.''

The Arlington Chamber of Commerce

    The Chamber's mission is to serve as the primary catalyst for 
Arlington's economic development, fostering a positive business 
environment through the enhancement and diversification of our economic 
base, representing the business community on public policy and 
community issues that impact the ability of Arlington citizens and 
businesses to reach their full economic potential.
    The Arlington Chamber of Commerce is one of North Texas' largest 
business federations, representing more than 1,400 businesses and 
organizations of every size, sector, and region.
    More than 96 percent of the Chamber's members are small businesses 
with 100 or fewer employees, 70 percent of which have 10 or fewer 
employees. Yet, virtually all of Arlington's largest companies are also 
active members. We are particularly cognizant of the problems of 
smaller businesses, as well as issues facing the business community at 
large.
    Besides representing a cross-section of the Arlington business 
community in terms of number of employees, the Chamber represents a 
wide management spectrum by type of business and location. Each major 
classification of American business--manufacturing, retailing, 
services, construction, wholesaling, and finance--is represented. Also, 
the Chamber has substantial membership throughout North Texas.
    The Chamber's State and national engagement is substantial as well. 
The Chamber has been and continues to be a participant in a number of 
State and national pilot projects and innovation grants, focused on the 
Innovation Economy and developing and maintaining a competitive 
workforce.
    Our positions on State and national issues are developed by a 
cross-section of Chamber members serving on committees, subcommittees, 
and task forces. More than 300 business people participate in this 
process.

                        Biography for Wes Jurey
    President & CEO of the Arlington Chamber of Commerce since 2001, 
Jurey also serves as Chair of the U.S. Chamber's Institute for a 
Competitive Workforce; was appointed in 2007 to a six-year term on the 
Texas Workforce Investment Council; and appointed in 2008 to a two year 
term on the U.S. Department of Labor's Advisory Committee on 
Apprenticeship. He was one of nine individuals appointed to the U.S. 
Department of Labor committee charged with developing DOL's five year 
research plan for 2002-2007.
    He founded the Center for Workforce Training & Preparation in El 
Paso, Texas; was a partner in the establishment of the Center for 
Continuing Education & Workforce Development in Arlington, Texas, and 
is the founder of the Arlington Technology Incubator.

                               Discussion

    Chairman Miller. I want to thank all the panelists. We were 
just called for a vote.
    We have now had proposals that are out of the usual 
mainstream political debate to the left and out of the 
mainstream political debate to the right, so we wanted an open 
discussion of ideas that aren't part of the usual debate and we 
certainly have had that.
    I will waive my first round and recognize Mr. Baird. Do you 
have questions? Oh, one second, please. For now, Mr. Baird.
    Mr. Baird. I thank the panelists. I thought all of the 
comments were very insightful and I appreciate the struggles, 
particularly Mr. Copland and Mr. O'Shaughnessy as you try to 
meet the challenges of keeping domestic workforce and industry 
viable. One could say that Mr. Jurey's comments were 
contradictory to Mr. Copland and Mr. O'Shaughnessy. I don't 
necessarily see it so as I listened. It sounded to me like Mr. 
Jurey was saying, ``Look, if we blame it all on trade, we are 
missing a whole lot of other things we could be doing to make 
ourselves more competitive.'' As the three of you listened to 
each other, what are the areas of common ground that you heard 
in one another's testimony?
    Mr. Jurey. I will start. One of the things that I will 
acknowledge quickly is, they both face intense competitive 
pressures, and many of the regulatory policies of the United 
States don't necessarily help them, and then there is reality. 
We have a company that I didn't talk about, Progressive, to an 
extent, the one trying to find the machinists. They are paying 
$86,000 a year to a starting machinist. They will quickly get 
them to $106,000, and when they get them trained at that level, 
their competition comes in, gives them a signing bonus, a 
higher salary and takes them away, and their comment was, ``We 
want as good corporate citizens to keep this job and this work 
in the United States, but if you continue to not be capable of 
producing the machinists we need and the wages continue to 
escalate, there will come a time when even that enhanced U.S. 
productivity per worker will meet a certain mark and I am going 
to have to be forced to do something different to remain 
competitive.'' And so again, if you look at the way we spend 
dollars, you have got an apprentice program at the Department 
of Labor that has almost no money to spend, and yet the minute 
you put people in an apprenticeship program, they start getting 
industry wages. There is a great return on the dollar spent to 
assist industry with the cost of getting highly trained, 
competitive people who can create that level of productivity.
    Mr. Baird. Mr. Jurey, what you are saying is music to my 
ears. I founded the Career and Technical Education Caucus in 
the Congress. I just would ask you to not repeat this in front 
of our staff lest we lose a number of fine young people to 
career and technical fields like machinists because they will 
make more money doing what they do there than they do here.
    Mr. Jurey. Well, every time I have announced that salary, 
people come up and give me cards and ask me where to apply, and 
the reality is, that is where the job market is going, and we 
do need to think differently about how the United States 
supports industries like the two on the panel with me. I simply 
think you also have to take into account the fact that we are 
forced to compete in a global economy, and pretending otherwise 
won't make a difference, won't change that.
    Mr. Baird. Thank you.
    Mr. O'Shaughnessy or Mr. Copland, any comments?
    Mr. O'Shaughnessy. I think job training is an important 
factor, but I think it comes after some of the basics, and the 
basics start with your costs and the costs of your competitor, 
and if currency manipulation has an impact of 40 percent on 
your costs and value-added taxes has an impact, an average 
worldwide of about 20 percent, put them all together, that is 
60 percent, those two. If health care costs, they are 10 
percent of Revere's costs, now you are up to 70 percent.
    Mr. Baird. It is a tough margin to beat.
    Mr. O'Shaughnessy. It doesn't really matter whether there 
is anyone trained or not; we are out of business and now we are 
going to increase the energy costs by probably 30 percent in 
this country but not in others.
    Mr. Baird. Is it your feeling, Mr. O'Shaughnessy, that the 
things the other panelists, the issues you have just addressed 
are not adequately dealt with in our trade negotiations?
    Mr. O'Shaughnessy. Sir, they are not dealt with, period, in 
our trade negotiations.
    Mr. Baird. Any dispute of that?
    Mr. Jurey. I would concur with that. I made two points. It 
is a competitive workforce and it is the total cost of doing 
business environment they have to compete in, and that is a 
legitimate part of that total cost of doing business. So if you 
go back to one of his comments about consumption tax, look at 
the taxation factors that really are a part of the cost of 
doing business. If you are taking a company that has high 
capital costs and your tax environment primarily taxes wealth 
or capital investment, then that is a disincentive to that 
company. On the other hand, if a company's costs are primarily 
in production and you have levied a high production cost, you 
have handicapped their competitiveness. And so if you don't 
think about tax policy as it impacts their cost of doing 
business and if you don't think about the tax policy 
internationally that either helps or hinders the global 
competition, then we aren't going to be able to enable the kind 
of true competition we need for the U.S. companies to remain 
competitive.
    Mr. Baird. I actually concur with both points, and one of 
the frustrations I have about our trade policy, and I spoke 
with Susan Schwab about this a few days ago and spoke with 
members from the machinists' union just yesterday, is we tend 
to battle it out over yes or no Colombia, yes or no Peru, yes 
or no Panama, but we neglect all these other structural factors 
of our own society, and the focus so becomes on the trade 
agreement yes or no that we neglect our tax policy, our 
education policy, our currency policies, et cetera, and I think 
ultimately to solve this--and whoever the next President is, 
Democrat or Republican, we are not going to solve this 
country's financial situation unless we take a comprehensive, 
integrated approach. And by the way, the President doesn't 
write the laws, this body does, so we can look to that 
President, but the fact is, it is the next Congress that needs 
to address a comprehensive approach, not just a trade policy 
but an economic policy writ large, and I very much value the 
insights of the gentleman and yield back to him.
    Chairman Miller. Thank you. The buzzers that you heard 
earlier were Mr. Baird and me being called to a vote, and we 
now need to go vote. It will probably take us 20 minutes, 
perhaps a half an hour. And so if you all could be at ease for 
a little bit, we will go vote and come back and reconvene. 
Thank you.
    Mr. Baird. I may not be able to return, but I am very 
grateful to both panels for their insightful testimony. Thank 
you very much.
    [Recess.]

                           Predatory Pricing

    Chairman Miller. I think we are probably close to the end 
of the hearing. I apologize for making all of you wait for so 
long so close to the end of the hearing. I do have a couple 
questions for various members of the two panels. Most antitrust 
laws are designed to keep prices low. An exception to that that 
I remember from law school and from the early years of my 
practice when I actually did a little of that was predatory 
pricing, where a large company set prices that were below their 
cost, certain in the knowledge that they could outlast their 
smaller competitors, and when the smaller competitors went out 
of business, they would be able to set their prices at whatever 
level they wanted to, whatever the monopoly price would be 
rather than the competitive price. A lot of the economists 
point out, those who are strong advocates for free trade, not 
apostates, that a lot of the benefits that Mr. Copland 
described and Mr. O'Shaughnessy described and others of you as 
well that the Chinese have in particular--the currency 
manipulation, the free capital, getting free land, free 
building, free machinery--all that is free capital, is actually 
a cost and they are selling to us below cost, below what it 
costs their society at least. And that if a country wants to 
sell us goods at below cost, we ought to let them. That is a 
bargain for as long as it lasts, but eventually they will have 
to raise their prices.
    Mr. Copland, when the day comes and the Chinese correct or 
let their currency float and stop giving free capital to 
Chinese textile manufacturers, are you going to be in business?
    Mr. James Copland. First off, are you going to guarantee 
that they are going to change their currency policy and they 
are going to change the stuff you are talking about?
    Chairman Miller. Well, if they do.
    Mr. James Copland. Oh, if they do.
    Chairman Miller. Are you sure that you are going to be----
    Mr. James Copland. Are we going to be in business? Well, 
let me tell you, it has been extremely difficult. It has been 
like a nightmare what we have had to face. Our business was the 
curtain business. We were the big player in the United States 
for it and actually we had extremely high market share because 
we were the best. That is why we had that market. And they came 
at this market starting in 2001. China had about seven percent 
of the import market, and the total import market on our goods 
was only about five percent. What has happened in that seven-
year period is that China's imports went up 6,900 percent on 
the type of goods that we make. China has got 90-plus percent 
market share. Let me tell you something, the total market is 
offshore goods. The total market today is 98 percent offshore 
goods. So what do we have to do? I mean, what we are doing, 
that market is gone. They are selling this stuff not below 
cost, they are selling it below our raw material cost to be 
able to do it. This is the subsidies that you are talking 
about. This is the predatory pricing that you are talking 
about. How do we survive? It is a sad way to have to survive. 
We are picking up the pieces when somebody else goes out of 
business. We have competition go out of business, we pick up a 
piece and believe you me, just as soon as you get into it, here 
come the Chinese again. We look constantly for something that 
the Chinese are not doing, that they haven't focused on yet or 
we are looking constantly for something that may have some 
natural barrier to them coming over here, a time thing or so 
on. But remember, everybody in our industry is doing the same 
thing, everybody. There have been 550,000 jobs lost in my 
industry since 2001 alone. Manufacturing in my state, North 
Carolina, has lost 28 percent of the manufacturing jobs. We 
have lost 19 percent nationwide, folks.
    You ask, are we going to be able to do it? With every ounce 
of energy I have got, with every ounce of energy that my son 
has got and our wonderful workforce, loyal workforce we got, we 
intend to do it. We intend to be here. But I am going to tell 
you, that if this thing doesn't stop, there are going to be no 
survivors that have manufacturing in the United States, and I 
will not put my manufacturing in the People's Republic of 
China. I will not put it in any foreign country. I have a loyal 
workforce. They are part of my family. I speak of them as 
though they are part of my family and I will tell you under no 
circumstances will I export their jobs, will I put them out of 
work for my own personal gain. But I intend to, if the Lord 
gives us the strength and we get any decent break at all, we 
will make it.
    Chairman Miller. Anyone else? Dr. Gomory.
    Dr. Gomory. Yes, I want to talk to the notion that when 
they have wiped out the competition and then they raise their 
prices that you can get back in. I mean, that may be some form 
of economics but it is not the real world. In any business, 
either low tech or high tech, there is an immense amount of 
know-how, and when you lose the know-how, you are out of it. 
You are also not an isolated thing. You depend on a chain of 
people who get parts for you and they are not there anymore, 
and the idea that when the other guy is finished killing you, 
you can rise from the dead, just--that is a piece of--that is 
on paper, but in the real world, it is complicated. You are 
very dependent on things that have gone away. You can't do it.
    Chairman Miller. Dr. Scott.
    Dr. Scott. Well, listening to Mr. Copland, it really 
strikes me that there is a certain measure of discretion that 
people have when they are running a company. He could have 
changed his mind and said, ``Guys, I am in the nickel and dime 
business, shut the business.'' There aren't very many people 
like Mr. Copland any longer. One of the reasons is what is 
taught in business education across the entire country has 
changed and that also changes beginning at the end of the 1970s 
or the beginning of the 1980s. Just pick one, the one that I 
happen to know, but our school was founded, the dean said the 
mission of the school is to teach people to earn a decent 
profit in a decent way. That is a question, it is not an 
answer, but business schools don't do that anymore, and the 
change, teaching a decent profit in a decent way, you could 
pass for saying we are going to teach officers that have some 
loyalty to a broad range of things. We start doing the other 
and what we are doing is teaching mercenaries. We are teaching 
mercenaries. No mercenary is going to pay attention to his 
concerns at all and they are going all through the 
establishment with a new calculus that says, ``Hey, in order to 
be effective, you have got to be able to reduce it to one 
dimension or you can tell that three is bigger than two.'' The 
sense of responsibility that ought to be there isn't there, and 
we are generating them. I am sure that this is an exception 
where they don't do that but aside from Vanderbilt, it is all 
over the country.
    Mr. James Copland. Let me make another statement about this 
in regard to what was said just a minute ago. Mr. Chairman, you 
said whenever they get enough and they are going to raise their 
prices, this business is not going to come back to America. Let 
me tell you about the textile business. When these plants are 
closed down, they are closed. The equipment--if you don't run 
the equipment, keep it up, it deteriorates to nothing anyway, 
but the equipment is being sold. Pakistan is buying the 
equipment. People are selling it for five cents on the dollar. 
Nobody wants it. And let me tell you what is happening to the 
buildings themselves. I was just down in Joanna, South 
Carolina, a huge mill down there has been closed five years. 
They are tearing it down. They are doing it all over the South, 
tearing the mills down that are closed. Why? They are going to 
sell the bricks, guys. They are going to sell the beams. They 
will sell the bricks and sell the beams. So don't think that 
you are going to be able to say, ``Oh, boy, as soon as this 
thing is over, here we come back,'' it is going to be 
regeneration. All we are trying to do is to hold onto what we 
have got, and if we don't wake up and start paying attention to 
these trade agreements that we are making and pay attention to 
the fine points of these trade agreements, we are going to give 
it all away.
    Let me give you one example. We just talked about CAFTA, 
and that is not too long ago, CAFTA. It sounded like a good 
idea, all right, going to make it in the United States, going 
to make it in Central America, everybody is going to be okay. 
They left a loophole. The loopholes are what get us and so many 
times our negotiators don't even know that the loopholes are 
there because they are some political appointee that hasn't 
done it but about six months or three months or they have been 
out of college for about a year. They don't even know the 
loopholes are there. They do know when they do it, woe be to 
them. Let me tell you something. They had a deal in there to 
where they could take pocketing, so that doesn't sound like 
much. That is not sounding like much. Let me tell you 
something. Pocketing is a 180-million-yard business in the 
United States, pockets for trousers. It is a United States 
business, and they had it in there and said, ``Well, you know, 
we are going to make an exception on pocketing and we are going 
to let these Central American countries make this stuff out of 
Chinese cloth.'' Dominican Republic wanted that. They gave it 
to them. We pointed it out and said, ``Look, you are going to 
destroy the industry.'' ``Oh, no, oh, don't worry, we are going 
to fix it, we are going to fix it, we are going to fix it, 
trust it, we are going to fix it.'' That was three-plus years 
ago, folks. It hasn't been fixed. There has been nothing done. 
Let me tell you the end result of that thing. Eighty percent of 
that market is gone, and it is gone, folks. Eighty percent of 
it is gone. Haines Finishing Company in Winston-Salem closed 
down 75 percent of their business, closed it down. They have 
been there longer than we have. Allis Manufacturing Company 
closed down four plants down in South Carolina. You have got 
Mount Vernon, they lost 70 million yards worth of business, 
closed plants in Rome, Georgia, closed plants down in Texas.
    We have got to start paying attention to what we are doing 
with these trade agreements. We have to get some people that 
know what they are doing with these trade agreements. We are 
being out-negotiated. We better start paying attention to what 
we are doing because let me tell you something, we are 
exporting the wealth of this country as fast as we can export 
it today. It is going offshore. We are going to pay one 
tremendous price in this country.
    Chairman Miller. Dr. Gomory.
    Mr. Gomory. I really want to comment on that because first 
of all, I am in wholehearted agreement, but I think it is very 
difficult to work out a set of agreements which are that 
detailed. It is also very difficult to counter the next 
mercantilist policy which may be loophole 47, all right? The 
reason why I think we should seriously consider the Buffet 
certificate program is because it measures results, not how you 
got them. The Buffet proposal, if you can't export, they can't 
import, however tricky they are and whatever the deals are. It 
is not trying to match, you know, their currency manipulation 
with our currency manipulation or their loophole with our 
loophole or their subsidy with our subsidy. It says, ``Okay, 
kids, if you want to ship stuff in, we have got to be shipping 
stuff out and it is not nation by nation.'' This I think is an 
approach which needs to be taken very, very seriously.
    Chairman Miller. Mr. O'Shaughnessy.

                           More on Free Trade

    Mr. O'Shaughnessy. I have two problems with the trade 
agreements in general that we have negotiated. The first is, 
trade agreements are designed to lower tariffs. That is what 
they are about. But the problem is, because of our tax system 
where we are the only major country in the world that does not 
have VAT taxes, VAT taxes are like a tariff but they are exempt 
from trade agreements. They are exempt by WTO rules. And so 
what happens is that you can look at a chart in my written 
testimony, about how European countries have lowered tariffs, 
normal tariffs, and they have increased VAT taxes and their 
total tariffs are the same. So they don't even work on that 
side.
    The second problem I have with the free trade agreements is 
that the focus is wrong. And you see, to put together a 
patchwork of trade agreements to solve our trade policy, to 
solve the loss of the manufacturing jobs, and the loss that we 
are going to see in the service sector--we are going to lose 
way more jobs in the service sector than we have lost in the 
manufacturing sector--we have to design a national trade 
strategy or policy from the top so that when we consider things 
like environmental standards, we think about the impact on our 
own ability to produce goods and services. When we consider 
energy policy, we will think about that. When we consider tax 
policy, we will think about that. And when you layer all of 
these things together, that is very critical and that is what 
is wrong. Our focus is wrong by looking at trade agreements 
without having the framework to negotiate them from.
    Mr. James Copland. Let me just say this about the tariffs, 
you brought up about the tariffs. You know, we make these trade 
agreements and today the average tariff in the United States, 
this is the average of United States tariffs: 1.7 percent. That 
is not much, guys. You turn right around and you look at the 
tariffs that the other countries have that we have these 
agreements with and they average 30 percent. Is that fair? Is 
that a good deal when you negotiate something like that? No, 
you can't tell me it is. Let me tell you something. China 
today, they have--under the rules, they have the right to 
designate themselves as an underdeveloped country, China. 
They've got the biggest international trade in the world but 
when you are designated as an underdeveloped country, you can 
charge anything you want as far as tariffs on stuff coming in 
there in addition to these value-added taxes like has been 
brought up. Is that fair? Is that good negotiations? Are those 
good trade deals? Is that good for America? Absolutely not.
    Chairman Miller. Mr. Jurey.

                        A Comprehensive Solution

    Mr. Jurey. I guess a point I would make, a lot of good 
comments have been made, but I would encourage the panel, the 
Committee to think this way: there is going to have to be a 
comprehensive solution. It is not as simplistic as taking any 
one of these suggestions. At one point I remember a key member 
of your staff said, ``Well, could you cite in your testimony 
what specific clause we could change to deal with your point?'' 
And I said I wish it were that simple. I wish I could say that 
if you simply change article 3, section 2, paragraph 9 under 
WIA, all these things would go away, but the reality is, the 
entire law is structured in such a way that you are going to 
have to rethink all of the processes and all of the 
measurements and how they impact the competitiveness of all 
these companies. And in a similar way, you are going to have to 
think about the broader aspects of these free trade agreements 
because there are components that challenge the men at this 
podium but you can't simply take one component and change it 
and think you have solved the problem.
    The broader issue really is, we don't have a comprehensive 
economic policy to deal with global competitiveness. It has got 
to be multifaceted and there are some aspects of global 
competition we are not going to be able to change and there are 
others we can. And if out of this you can begin to think about 
the things that you can impact--and as one of your colleagues 
said--you are the group that writes the laws, if you can pull 
out the parts that you can have an impact on and look at it in 
a more comprehensive way, I believe you could make significant 
progress in enabling these companies to remain and be very 
globally competitive.
    Chairman Miller. Dr. Scott.
    Dr. Scott. The main ideas are the same as the one for the 
domestic, and by the way, the increasing inequality in the 
United States comes after 1980--from 1945 to 1980 the fraction 
of the income being earned by the top 10 percent in the United 
States does not change for 35 years. The change is since 1980, 
1982. By the same token, this is not coming from globalization. 
Europeans are not experiencing the same problem at all that we 
are. It is here, it is since 1980, and we are very close to 
being back to the income distribution that we had at the end of 
the 1920s. The common denominator is, we have deregulated 
domestically at the same time that we are trying to deregulate 
internationally and the universal principal has been to 
deregulate. And it is like my little green box, it is exactly 
the same thing: ``Hey fellows, we really don't need to 
regulate, we can use the common resources without really having 
to figure out what we are going to do, it will solve itself 
automatically.'' Well, it isn't and it won't as you do this, 
but that is a very big job because you'll find that being 
taught, not in the business schools, but at the economics 
departments in this country everywhere. It is very, very 
different when you get to Europe. My big personal luck was 
somebody that is a publisher in Germany happened to call and 
ask, ``Are you publishing a book? Tell me about it and hey, we 
will publish it.'' Because they really teach economics that is 
grounded in history in Europe, in Germany, in France and in 
Scandinavia. We don't.
    Chairman Miller. The other Mr. Copland, Jason Copland.
    Mr. Jason Copland. I wanted to expand upon and agree with 
Mr. Jurey's comments, just about the whole need for a 
comprehensive trade policy. Just something that is going on 
real and right now that I thought would be interesting to hear 
about, Chairman Miller, is the recent Farm Bill, and I want to 
give a very concrete example. We have had kind of a disjointed 
trade policy where sometimes we sign free trade agreements with 
countries for political reasons or sometimes reasons I can't 
even figure out other than the fact that maybe we just want to 
sign as many free trade agreements as possible. But then 
sometimes we also try to create these regional trading blocks, 
and that was really the intent behind NAFTA and CAFTA, that we 
would be able to use our technology and our productivity and 
then utilize other countries' less expensive labor and then you 
would have that rising economic tide that would both help the 
United States and Mexico and our Central American partners.
    Well, in the most recent Farm Bill, Charlie Rangel put out 
a Haiti add-on to that Farm Bill where it kind of destroys that 
entire concept. In North America we are going to have a trade 
bill with Haiti that is part of the Farm Bill that just 
specifically with textiles will have absolutely no rules or 
regulations whatsoever and will allow fabrics to come in not 
just from the regional trading block but from China. And it is 
so sad that the economic condition that Haiti is in, but this 
just shows the lack of any type of a comprehensive trade policy 
and no one has thought that through. Well, if Haiti has that, 
what is that going to do to the Dominican Republic and what is 
that going to do to Guatemala and Nicaragua? No one thinks 
about that at all. And who it really is going to help is the 
Chinese, and it is really--you know, too many people want to 
blame China, and this is just an overall criticism of 
Washington, D.C. People like to point the finger at China, and 
I think that that is wrong. I think we should be pointing the 
finger at ourselves. It is not China's fault, it is our fault 
because we have let it happen.

                    Job Training and Competitiveness

    Chairman Miller. The answers to my only question so far 
have taken 20 minutes, and I am not sure how important my 
questions are in the discussion now. We are close to the end, 
obviously not to solving all the problems of the world or this 
problem but of the hearing at least and we will have further 
hearings on this topic.
    I know that some of the first panel in the discussion of 
corporate governance talked about the model of corporate 
governance in which the corporation was not driven entirely by 
profitability but by other considerations and that a corporate 
board of directors could decide to locate manufacturing 
operations in the United States even if they would be cheaper 
somewhere else because of the effect on the community and out 
of loyalty to their employees and that the law should allow and 
even encourage that, but I wonder how well that generous 
impulse is going to work in guiding corporate behavior for the 
longer term, although perhaps you are right, there have been 
more generous impulses in the past than there have been 
recently.
    I would like to hear a little bit about some of the other 
things we could do besides having more generous impulses guide 
boards of directors, and one that I have worked on a fair 
amount or talked about a fair amount is the need for training 
for workers to learn new skills very quickly, that we should 
have an advantage on the rest of the world in the ability to 
learn new skills quickly as manufacturing operations change 
fairly quickly. I visited Mr. Copland's plant. If you have seen 
the movie Norma Rae, it doesn't look much like that. We are 
developing new technologies quickly. I think one of the first 
panel's discussions of R&D being an advantage is if it is just 
R&D--if that is the only thing happening in the United States--
it is not all that helpful. What we hope happens is R&D is 
applied in the United States at least first. At least for a 
while we will have a head start and then our workforce needs to 
be able to learn the skills quickly to use new technologies.
    I attended a panel discussion earlier this week organized 
by the Business Roundtable. They did't invite me to talk about 
executive compensation but they did invite me to talk about 
community colleges. Mr. Copland knows the role that--both Mr. 
Coplands know the role that community colleges play in North 
Carolina and perhaps how much more of an advantage it is to 
North Carolina business than in other parts of the country. In 
other parts of the country, community colleges began as 
academic institutions, as essentially a junior college, and in 
North Carolina they have always been technical job skills-
driven and there is a close relationship between the business 
community, business leadership, and the community colleges to 
develop curricula for specific job skills. The leading employer 
in Alamance County is no longer Mr. Copland's company or Glen 
Raven Mills or Burlington. It is LabCorp, the Nation's second 
largest medical testing firm, and Alamance Community College 
has a curriculum in medical testing developed in consultation 
with LabCorp and LabCorp hires every one of the graduates of 
that program, at least the ones that don't take another job 
with somebody else and actually get a better deal out of it.
    Mr. Jurey, what is the role of community colleges or job 
training in our ability to compete and keep jobs in this 
country?
    Mr. Jurey. I think it is critical, and I will give you one 
clear anecdote that speaks to what you have said about 
community colleges. In the mid-1990s, I was in El Paso. The 
Texas Workforce Commission committed considerable dollars, 
every hospital committed considerable dollars, to that 
community college to expand the only nursing program within 200 
miles. We had 12 percent unemployment. We had hospital CEOs 
going to India and China to recruit nurses and finally 
persuaded the board to go along with the need to expand the 
program with 200 on its waiting list. Along came a new college 
president who called me and said, ``I decided we are going to 
open a beauty college and put a hold on the nursing 
expansion,'' and when I got up off the floor, I said, ``Could 
you tell me why? There are six for-profit beauty colleges in 
our community, none have a waiting list. They pay below median 
wage. Nursing pays a very high above-median wage. It is a huge 
demand and you are taxpayer supported and we thought you were 
going to meet the demand needs of industry. And he still was 
unwilling to bend and so I said, ``Fine,'' went back and talked 
to my board and they said, ``You are going to organize a tax 
rollback election,'' since he announced something like a 30 
percent tax increase. The next day the College Board of 
Trustees Chair called me and said, ``I thought we were 
partners.'' I said, ``So did I, but all we ever asked you to do 
was listen to the actual needs of the employers and you have 
quit doing that.'' He quickly called the board together in 
closed session, asked me to recite my discussion with the 
college president. At the end of it, he looked at the board and 
they nodded and he said, ``Can we have 24 hours to reason with 
our new president?'' I said ``Well, yes, sir.'' He called me 
the next day after reasoning with him, ``He has resigned, can 
you get that money back on the table?'' And to me, that is a 
very responsive community college system because the board of 
trustees took seriously their need to think about the role they 
played in providing the kind of training necessary to keep key 
sectors competitive.
    Then if you back up into the regulatory process side, as I 
discussed, and you start really digging deeply into how quickly 
can local workforce boards and community colleges deploy WIA 
and DOL dollars to meet those needs, when employers are faced 
with having to get speed to market and rapid response to 
changing market conditions, it is extremely cumbersome. It is 
very difficult to do outside of the box. It is hard to help 
employers retrain incumbent workers to get higher skills to 
quickly meet those changed needs because the slant in the law 
is toward entry-level job seekers, and yet if you don't move 
incumbent workers up the ladder, there are no entry-level jobs 
for the job seekers to seek. And so again, I keep trying to 
stress, you are going to have to think a little more 
comprehensively if you really want to help all these companies 
remain competitive and think about the impact not just of one 
change but to how systemically we can provide the type of 
incentives and assistance and help, particularly in having a 
highly competitive trained workforce that these employers need. 
And one last comment. If they need apprenticeships, there are 
no dollars to pay them in the program.
    Chairman Miller. Mr. O'Shaughnessy.
    Mr. O'Shaughnessy. Yes, thank you, Mr. Chairman. I have to 
catch a flight so I would like to comment. Thank you. I think 
the issue of education and training is a very important one. 
However, I think it is necessary to put it in perspective. I 
often read articles about we need to encourage more of our 
young people to study engineering. The way we are going, it 
really isn't going to matter because there is not going to be 
anywhere for them to work that needs that kind of work. The 
factories are going to be shut down. The service jobs are going 
overseas. Because of factors like 40 percent of our costs are 
due to currency manipulation, 20 percent taxes, 10 percent 
health care. That is 70 percent. If you don't deal with those 
issues, and then we add on energy costs, another 10, 
environmental costs, another 10, we have got a 90 percent cost 
problem. I want to solve those problems so that we have jobs 
for well-trained people, and to train people when they lose 
jobs, to focus on that, well, I don't know where they are going 
to go. I think we are in a much more serious problem than any 
of us realize and we won't realize it until the service jobs 
start flowing overseas. Allen Binder, the former Vice Chairman 
you quoted, also said that he expected to see 30 million 
service jobs go overseas in the next few years.
    Chairman Miller. Dr. Gomory.
    Dr. Gomory. I would like to go back to your point about 
what we were saying about corporate governance. By the way, I 
am very supportive--we have done a great deal of work on 
community colleges. I think they are vital, great training 
grounds. Sometimes they are confused about whether their place 
is to train people for higher education or for jobs. I think in 
corporate governance, we certainly mentioned liberating 
directors to consider more than profit, but I also think we 
should seriously entertain the notion of rewarding companies 
that create and keep high-value jobs in the United States so 
that when they have this generous impulse to locate the jobs 
here, they are doing a service to the country. They are adding 
to our GDP. Let us give them something for doing that. That is 
what all the other countries do. They say, ``Come here, add to 
our GDP, we will give you profit in return.'' Why can't we say 
that too? And that is why I suggested just one example, a 
corporate income tax graded by the value add of the people in 
the company. But there are other ways. I think we have to 
realize that when companies create jobs here and especially 
those that are productive, they are already doing a service for 
the country before they pay their tax, and we need to take that 
into account.
    Chairman Miller. Mr. Jurey.
    Mr. Jurey. I would support that in this way. The market 
responds to incentives, and if you think about how to 
incentivize those kinds of behaviors in ways that also enable 
companies to be highly cost competitive, that can be very 
effective as part of a strategy.
    Mr. James Copland. As far as----
    Chairman Miller. I almost said that I wanted the record to 
reflect that I asked a question and no one named Copland had 
raised their hand to respond. Mr. Copland.
    Mr. James Copland. Thank you, Mr. Chairman. First off, let 
me say that as far as job retraining and education, I am 
totally in favor of it. It is a wonderful thing and we do in 
the State of North Carolina have a tremendously successful 
community college system. But it can only go so far. It can 
only go so far. You talked about my county of Alamance County 
and LabCorp and what the Chairman said is true. We have had 40 
percent of the people in my county--40 percent of the 
manufacturing jobs have been lost. LabCorp can't hire all these 
people. LabCorp hires them but they can't hire all those people 
at all. Only a fraction are they able to hire. And if you look 
right down the road to Cabarrus County, North Carolina, down at 
Cannon Mills, Pillowtex, what was it, four years ago they went 
out. Five thousand people lost their job all at one time. Today 
only 60 percent of those people have found any job at all and 
they have got a wonderful community college system. So there 
has got to be a blend. You have got to have both. You have to 
take into consideration everything, and job retraining and 
education is part of the answer, but it needs to be a 
comprehensive program, as has been brought out here today.
    Chairman Miller. I have been called for another vote and I 
think we are probably then going to end the hearing. I 
encourage all of you to keep talking among yourselves. When you 
get it all worked out, I will introduce the bill that solves 
all the problems.
    Mr. James Copland. Do you promise?
    Dr. Gomory. I really want to thank all of you for 
organizing this. It has been very worthwhile, and we are 
talking about some things you don't get to talk about 
everywhere. I appreciate it.
    Chairman Miller. Well, it obviously--these are topics that 
we need to talk about more.
    I want to thank all of the panelists for appearing 
including Mr. O'Shaughnessy, who had to leave now to go get on 
a plane, but thank all of you and I appreciate all of the 
perspectives that are not typically part of this debate. But 
perhaps given the consequences of this debate, we need to step 
back and think about what are some of the assumptions that have 
gone unchallenged but should be challenged.
    So again, thank you for appearing, and we are now 
adjourned.
    [Whereupon, at 1:12 p.m., the Subcommittee was adjourned.]
                              Appendix 1:

                              ----------                              


                   Answers to Post-Hearing Questions




                   Answers to Post-Hearing Questions
Responses by Ralph E. Gomory, Research Professor, New York University 
        Stern School of Business; President Emeritus, The Alfred P. 
        Sloan Foundation

Questions submitted by Chairman Brad Miller

Q1.  You say in your written testimony: ``If in the process of 
globalization the production (or delivery in the case of services) of 
the good moves overseas, so do the wages. Even if R&D remains behind, 
the vast bulk of value creation has moved to another country, and it is 
there that it supports the wages of employees.'' But if production 
moves offshore, how long can R&D remain behind? Particularly in high-
value-added industries, has there been any evidence that R&D activity 
is drawn toward the geographic location of manufacturing capacity? 
Conversely, are there circumstances in which R&D activity has drawn 
manufacturing capacity to its geographic location?

A1. In the case of established products R&D is very likely to follow 
production. In disc drives and semiconductors or similar advanced and 
difficult products you need the R&D people to be intimately involved in 
the details of production in order to know what is actually possible 
and what is needed.
    If you are talking about a totally new product, and this is the 
picture that is too often in peoples'' minds, there is no production to 
follow and initial production could be set up anywhere depending on a 
great variety of circumstances. However if the new product becomes 
established and large scale, production location will often be dictated 
by costs and thereafter R&D will eventually follow production.
    However, at any given time, most production is in established 
products.

Q2.  In your written testimony, you say that ``the emerging gap between 
the goals of global corporations and the aspirations of people of 
individual countries''--a gap arising from ``rapid technological 
change'' and its consequently increased ``degree of globalism in 
economic development''--has accelerated ``not only in the United States 
but also in less developed countries.'' You add: ``Even when 
globalization increases a country's wealth, which it does not always 
do, most of the gains are going to a thin upper crust, and the bulk of 
the people do not participate.'' What does this augur for the future of 
a world economy that, in recent memory, has depended for its sustenance 
on the production and sale of goods of mass consumption?

A2. This is really a quantitative question whose answer is not obvious. 
In the U.S. the growth of wealth in the upper crust has been extremely 
rapid, the growth for most others zero, i.e., some negative some 
slightly positive, all greatly below the rate of growth of GDP. It is 
difficult therefore to extrapolate into a rather far off future when 
the number of people is growing.

Q3.  During a discussion of whether executives' severance and 
retirement packages drain lower-ranked employees' retirement and other 
benefits, Dr. Blair was asked about the ``merit [of] tying the fate of 
employees' benefit packages to the fate of the executive or board 
packages.'' You agreed with her endorsement of the idea ``in 
principle.'' Can you envision some ways in which this might be put into 
practice, and what hindrances or limits might exist?

A3. I do think this is a good general direction, not only for benefit 
packages but also for the general use of profit. Profit represents the 
available surplus after standard expenses are met. How should this be 
allocated, all to shareholders, all to workers as a bonus, split 
between the two, used to improve pensions? The possibilities are 
endless. We need to decide what we want of our corporations. This may 
be left to the boards of directors after first limiting the shareholder 
share. This is more a direction thing than an explicit rule and 
different companies might act differently and a tax structure is needed 
in the end to incent this sort of behavior. If this level of response 
is not helpful I have nothing further to respond to this question.

Q4.  You said that ``we as a nation . . . ought to decide what we want 
a corporation to do'' and ``make sure that our tax structure awards 
that.'' You also talked about not allowing firms to keep the profits 
they earn ``if they are not productive, if they don't treat people 
right, if their skew of compensation is crazy.'' In addition to the tax 
regime you proposed that would reward firms for keeping high-value-
added jobs in the country and punish firms for moving them offshore, 
can you offer specific measures for incentivizing desirable corporate 
behavior?

A4. Taxes are the most obvious method. In addition corporate charters 
that require corporations to consider the Nation, the employees and the 
community as well as the shareholders. Incentive pay should reflect all 
these factors. At present the use of huge stock option grants has 
skewed the attention of management, which was once focused on other 
factors as well as share price to focus on share price only as the 
reward, is tens and hundreds of millions of dollars. This skewed 
motivation should be changed and the executives should be rewarded for 
performing in many factors. Share price became especially attractive 
when the stock market was rising as every company went up whether well 
managed or not. It was rewarding the executives for being in charge 
during good weather. I suggest that it would be better for even the 
component of compensation that is tied to share price should be tied to 
a peer group comparison. This would motivate executives to build 
companies that could survive bad times as well as rise with the rising 
tide.
                   Answers to Post-Hearing Questions
Responses by Margaret M. Blair, Professor of Law, Vanderbilt University 
        School of Law

Questions submitted by Chairman Brad Miller

Q1.  You offered while testifying to expand upon ``how and why the 
notion that corporate managers must maximize share value came to be so 
widely accepted in the past three decades.'' Please do so here.

A1. Societal norms, conventions, or expectations rarely change 
overnight, and that is certainly true with respect to the question of 
the purpose of corporations, and what corporate managers and directors 
are expected to do. Throughout the history of the use of the corporate 
form as a way to organize business activities, there have been societal 
debates about whether corporations should be regarded as creatures of 
the state, required to serve some public purpose, or whether they are 
purely the product of contracts among private parties, whose only 
purpose is to serve the interest of those parties, presumably by 
earning profits for investors.
    For most of the 20th Century, until at least until the late 1980s, 
the question was thought by most corporate law scholars, as well as 
most business leaders, to be settled in favor of the view that 
corporations are supposed to serve a broad social purpose (while also, 
of course, earning profits for investors).\1\ This ``social entity 
conception,'' as this view has been called, came to be widely-accepted 
in the 1930s, partly as a reaction to widespread concerns about the 
role that corporate abuses had played in the financial excesses of the 
``Roaring 20s,'' and in the collapse of financial markets in 1929 and 
the ensuing Depression of the 1930s. The social entity view was 
accepted by most economists and legal scholars partly as a result of 
the scholarship of Adolph Berle and Gardiner Means, who, in 1932, found 
that most large corporations did not have a ``controlling'' shareholder 
(an individual or other firm who held 50 percent or more of the voting 
shares) who could be held accountable for the actions of the 
corporation.\2\ Instead, shares had come to be very widely-held by 
individual investors, so that in many firms, managers and boards of 
directors were not constrained to act only in shareholders' interest. 
If shareholders could not be held accountable for the actions of 
corporations, Berle and Means argued, it made no sense as a matter of 
public policy to hold directors and managers responsible for serving 
the interests of shareholders.\3\ Instead, they argued, directors and 
managers should be required to manage corporations in the public 
interest.\4\
---------------------------------------------------------------------------
    \1\ For a discussion of the economic function served by the 
corporate form that made it attractive to business organizers in the 
19th Century, as compared with the partnership form, see Margaret M. 
Blair, Locking in Capital: What Corporate Law Achieved for Business 
Organizers in the Nineteenth Century,'' 51 UCLA Law Review, 2, 387 
(2003). For a general discussion of the history of legal thinking about 
the role of corporations, see Margaret M. Blair, Ownership and Control: 
Rethinking Corporate Governance for the Twenty-first Century, Brookings 
(1995), Chapter 6, Whose Interests Should Corporations Serve? pp. 202-
234.
    \2\ See Adolf A. Berle, Jr., and Gardiner C. Means, The Modern 
Corporation and Private Property, 1932.
    \3\ ``The owners of passive property [dispersed shareholders], by 
surrendering control and responsibility over active property, have 
surrendered the right that the corporation should be operated in their 
sole interest,'' Berle and Means asserted. Berle and Means, 1932, pp. 
355.
    \4\ ``Eliminating the sole interest of the passive owner, however 
does not necessarily lay a basis for the alternative claim that the new 
powers should be used in the interest of the controlling groups 
[corporate managers and directors] . . .. The control groups have, 
rather, cleared the way for the claims of a group far wider than either 
the owners or the control. They have placed the community in a position 
to demand that the modern corporation serve not alone the owners or the 
control but all of society.'' Berle and Means, 1932, pp. 355-356. 
William Allen, former Chancellor of the Delaware Court, described the 
``social entity'' view in a law review article as follows: 
``Contributors of capital (stockholders and bond holders) must be 
assured a rate of return sufficient to induce them to contribute their 
capital to the enterprise. But the corporation has other purposes of 
perhaps equal dignity: the satisfaction of consumer wants, the 
provision of meaningful employment opportunities and the making of a 
contribution to the public life of its communities. Resolving the often 
conflicting claims of these various corporate constituencies calls for 
judgment, indeed calls for wisdom, by the board of directors of the 
corporation. But in this view, no single constituency's interest may 
significantly exclude others from fair consideration by the board.'' 
See William T. Allen, Our Schizophrenic Conception of the Business 
Corporation, 14 Cardozo Law Review, 2 (1992).
---------------------------------------------------------------------------
    During the years of World War II, and the post-War expansion, the 
interests of the corporate sector seemed to be very much aligned with 
the interests of the country.\5\ Thus business leaders could credibly 
proclaim that ``what is good for the country is good for General 
Motors,'' \6\ and courts did not worry much about whether corporate 
officers and directors who took into account the public good in their 
corporate decision-making would thereby breach their fiduciary duties 
to shareholders.\7\
---------------------------------------------------------------------------
    \5\ Historian Dow Votaw, writing in 1965, observed that ``the 
corporation performed brilliantly during World War II,'' and ``the 
performance of the corporate system since the war has also been very 
good, as a whole, [producing] rising prosperity and standards of 
living.'' Dow Votaw, Modern Corporations, 1965, p. 102.
    \6\ Attributed to Charles E. Wilson, who was president of General 
Motors Corporation in the early post-War years, and later became 
Secretary of Defense. See The New Dictionary of Cultural Literacy, 
Third Edition. Edited by E.D. Hirsch, Jr., Joseph F. Kett, and James 
Trefil. Copyright  2002 by Houghton Mifflin Company. Published by 
Houghton Mifflin Company, at http://www.bartleby.com/59/18/
whatsgoodfo2.html
    \7\ In 1946, Frank Abrams, then chairman of Standard Oil Company of 
New Jersey, described the role of modern managers as maintaining ``an 
equitable and working balance among the claims of the various directly 
interested groups--stockholders, employees, customers, and the public 
at large.'' See Eugene V. Rostow, To Whom and for What ends is 
Corporate Management Responsible? in The Corporation and Modern 
Society, edited by Edward S. Mason, 47-71, 1960. In the 1970s, General 
Electric C.E.O. Reginald Jones similarly argued that corporate leaders 
must balance shareholder concerns against the interests of employees, 
American industry, and the Nation. The Business Roundtable formally 
adopted a similar position in 1981. And as late as 1990, the Business 
Roundtable position was that ``Corporations are chartered to serve both 
their shareholders and society as a whole.'' See Corporate Governance 
and American Competitiveness, Business Roundtable, March, 1990, p. 4. 
The Business Roundtable reversed its position in 2004, however, 
asserting that the only obligation of business leaders is to maximize 
shareholder wealth.
---------------------------------------------------------------------------
    This view of the duties of officers and directors of corporations 
changed during the late 1980s and 1990s. The change was the product of 
a new set of theories in economics and finance, in combination with 
dramatic changes in how financial markets work.
    On the theory side, three developments were important:

    First, economists began developing alternative theories about 
whether corporations would, in practice, always maximize profits (as 
basic economic theory generally assumes). If managers were not 
themselves substantial shareholders, theorists speculated, and if there 
were no controlling or dominant shareholders, then managers might tend 
to act in their own personal interests rather than in the best interest 
of the corporation or its shareholders, economists argued. This was 
seen as a policy problem as well as a problem with economic theory. To 
address this problem, economists developed ``agency theory.'' Agency 
theory recognizes that a gap often exists between what shareholders 
would want and what managers might want, and it argues that corporate 
participants will develop a variety of contracting strategies that 
could be deployed to give managers incentives to act in shareholders' 
interest. Agency theory analyzes the effectiveness of various contract 
terms at resolving the ``agency problem'' or at least trying to 
minimize its costs.\8\
---------------------------------------------------------------------------
    \8\ See, e.g., Michael C. Jensen and William H. Meckling, Theory of 
the Firm: Managerial Behavior, Agency Costs and Ownership Structure,'' 
3 Journal of Financial Economics (October) 1976.
---------------------------------------------------------------------------
    One of the most important theories to come out of the focus on 
agency problems is the idea that, if managers of a corporation do not 
choose actions that maximize share value, other investors will be able 
to acquire the shares of the company at a price that is discounted 
relative to the corporation's potential value, and in this way, get 
control of the corporation and fire those ineffective managers. Thus 
theorists believed that a market mechanism, the so-called ``market for 
corporate control,'' would limit the ability of managers to diverge 
from share value maximization.\9\
---------------------------------------------------------------------------
    \9\ See, e.g., Henry G. Manne, Mergers and the Market for Corporate 
Control, 73 Journal of Political Economy, 1965, and Michael C. Jensen, 
Agency costs of Free Cash Flow, Corporate Finance, and Takeovers, 76 
American Economic Review, May, 1986.
---------------------------------------------------------------------------
    Second, finance scholars came to believe in the ``Efficient Capital 
Markets Hypothesis,'' which states that security prices in widely-
traded markets, such as stock markets in the U.S., will quickly reflect 
all available information that might be relevant to the future 
performance of the company that issued the security. Prices determined 
in such markets will be an unbiased estimate of the true value of the 
security, according to the theory.\10\ The beauty of this theory, from 
the point of view of academic economists and finance scholars, is that 
it implies that the financial performance of any company with publicly-
traded shares can be measured quite easily and without systematic error 
simply by looking at what happens to the share price of the company's 
stock.
---------------------------------------------------------------------------
    \10\ E.F. Fama, Efficient Capital Markets: A Review of Theory and 
Empirical Work, 25 Journal of Finance, May, 1970.
---------------------------------------------------------------------------
    Furthermore, with a few ``modest'' assumptions (and this was the 
dangerous part), changes in stock prices could be interpreted as 
measuring the entire economic performance of corporations. The 
assumptions required are that all participants in the enterprise of a 
corporation except shareholders (lenders, suppliers, employees, etc.) 
are compensated at their (risk-adjusted) opportunity cost by complete 
contracts, so that all of the surplus economic value created by the 
corporation is captured by shareholders. Under efficient capital 
markets theory, and with these assumptions, stock prices came to be 
viewed as the single most important measure of total corporate 
performance--in fact, some scholars came to treat stock prices as 
essentially the only meaningful measure of corporate value.
    The third theoretical innovation that helped lay the intellectual 
foundation for shareholder primacy is the development of mathematical 
models for estimating the value of stock ``options.'' \11\ The role of 
option pricing models is more subtle and complex, however, so I save 
the discussion of why it was important for later, when I explain why 
stock options became important.
---------------------------------------------------------------------------
    \11\ See F. Black and M. Scholes, The Pricing of Options and 
Corporate Liabilities, 81 Journal of Political Economy, May-June, 1973.
---------------------------------------------------------------------------
    On the financial markets' side, several developments helped change 
the general public perception and belief about the responsibilities of 
corporate officers and directors:

    First, securities markets went through an extended period of time 
in the 1970s and early 1980s when returns on capital were abysmally 
low. As an indicator of this, from a peak of 1051.7 in 1973, the Dow 
Jones Industrial Average collapsed to 577.60 at the end of 1974, and 
did not rise above 1000 (to stay above that level) until early 1983. 
Bond markets also performed poorly during this period as inflation ate 
away at the real return to bond holders, and drove nominal interest 
rates to record highs by the early 1980s. By the 1980s, financial 
investors were willing and eager to try new things in order to improve 
the return on capital.
    Second, several financial market innovations emerged in the 1980s 
that made it easier for outside investors to get control of publicly-
traded corporations, to force changes in the management of these firms 
in order to improve returns on investments. The innovations were junk 
bonds, hostile takeovers, and leveraged buyouts. Investment banking 
firm Drexel Burnham Lambert demonstrated how investors could make 
outsized profits (seemingly without corresponding risks) by investing 
in portfolios of bonds that were rated below investment grade (Such 
bonds are called ``junk bonds.''). This created a substantial market 
for junk bonds, and made it possible for Drexel to underwrite the 
issuance of junk bonds by a new breed of market players who were 
willing make ``tender offers'' for corporations, even if existing 
management and boards of directors at those corporations believed that 
a takeover would not be in the best interests of the corporation and 
its various stakeholders. Tender offers made in the face of opposition 
by target company management are called ``hostile takeovers.'' The 
outside investors who were making these junk-bond financed offers, 
pejoratively called ``corporate raiders,'' were then able to buy up a 
sufficient quantity of shares in a number of companies to get control 
and oust directors and managers who did not want to go along with the 
plans of the takeover investor. These transactions (called ``leveraged 
buyouts'' because they were financed with large amounts of debt and 
relatively small amounts of equity) seemingly confirmed the new 
economic theories that predicted that if corporate managers did not 
maximize share value, other investors would come along and take over 
the firm to force the firm to maximize share value.
    Thus the ``market for corporate control'' theory provided 
legitimacy to the ``raiders'' to the extent that what they were doing 
appeared to be consistent with what theorists had predicted, and the 
theory seemed to provide an explanation for why so many takeovers and 
leveraged buyouts were happening in the 1980s. Although most corporate 
directors and managers strongly resisted takeovers during the 1980s, 
over the course of that decade, the argument was repeatedly made that 
takeovers were the market's way of eliminating poorly performing 
managers and compelling corporations to restructure and redeploy assets 
to improve the return for shareholders. And because of the rarely-
acknowledged or examined assumption behind the market for corporate 
control theory--that other corporate participants were fully protected 
by their contracts with the corporations--defenders of hostile 
takeovers argued that actions such as factory closings, layoffs, and 
asset sales that accompanied LBOs and led to higher share prices must 
be value-creating, and should be encouraged rather than inhibited by 
the law.\12\
---------------------------------------------------------------------------
    \12\ The full reality was more complicated. As mentioned before, 
the return on capital in the aggregate economy was dismal during the 
1970s, so that investors had become restless and prepared to pursue new 
strategies to try to improve returns. Then in the early 1980s, the 
``cost'' of capital (as measured by market rates of interest for bonds 
issued during that period) shot up to unprecedented levels, as Federal 
Reserve Board Chairman Paul Volcker promulgated policies to try to 
squeeze inflation out of the economy. During the period from about 1983 
to about 1987, the aggregate cost of capital in the U.S. economy 
exceeded the aggregate return on capital, creating an environment in 
which it did not make economic sense for most firms in many industries 
to make further investments in new capital. Leveraged buyouts, of 
course, did not represent new investment by the buyout firms, since 
buyers were simply buying out the position of the previous 
shareholders, who could then redeploy their cash to other investments, 
such as government bonds, which were paying extraordinarily high rates 
at the time. Leveraged buyouts, thus, had the effect of preventing net 
new investment in the buyout firms, because after the buyout, all cash 
flows had to be used to pay down the debt, rather than to make new 
investments. The financial markets rewarded firms that restructured in 
this way because it freed up cash from corporate investment that could 
then be available to support the huge and growing federal budget 
deficits accumulated during the 1980s . Thus leveraged buyouts can be 
understood as a mechanism by which the financial markets forced the 
corporate sector in the U.S. to disinvest in the 1980s and 1990s. See 
Margaret M. Blair, ``Financial Restructuring and the Debate about 
Corporate Governance,'' in Margaret M. Blair, ed., The Deal Decade: 
What Takeovers and Leveraged Buyouts Mean for Corporate Governance, 
Brookings, 1993.
---------------------------------------------------------------------------
    Raiders and their fellow investors who were financing hostile 
takeovers in the early 1980s made very high returns on their 
investments. By the late 1980s, however, it became clear that too many 
deals were being done, and that some firms could not handle the high 
levels of debt they were taking on. A number of prominent firms that 
had been taken over in leveraged buyouts had to be reorganized or 
liquidated in bankruptcy proceedings.\13\ Meanwhile, the return on 
capital climbed steadily during the 1980s, and by the late 1980s and 
early 1990s, and the cost of capital began falling again, suggesting 
that the underlying macroeconomic rationale that had fueled the 
takeover frenzy had largely worked itself out. Moreover, a number of 
states passed statutes in the late 1980s that made it easier for 
corporate managers to resist hostile takeovers. So by the early 1990s, 
we saw that the wave of takeover and leveraged buyout activity 
declined.
---------------------------------------------------------------------------
    \13\ See e.g., Blair, The Deal Decade, at 41 for the story of 
Campeau Corp.'s leveraged buyout of Federated Department Stores in 
1988,and subsequent bankruptcy filing by Campeau in early 1990.
---------------------------------------------------------------------------
    This did not seem to undermine the success of the new theory, 
however. Excesses of the old regime, in which corporate executives (who 
were more likely to see it as their role to grow the corporation rather 
than enhance share value) often engaged in wasteful empire building and 
indulged their desire to enjoy fancy offices and corporate jets in the 
absence of restraint by shareholders, had been exposed as epic takeover 
battles were fought.\14\ And the seeds of the idea had been planted 
that corporate executives could provide substantially higher returns to 
shareholders if they were willing to abandon commitments their firms 
had made to employees, communities, and to long-term investments in 
basic research.
---------------------------------------------------------------------------
    \14\ See, e.g., Bryan Burrough and John Helyar, Barbarians at the 
Gate, 1990, for a description of the excesses at R. J. Reynolds prior 
to its leveraged buyout by Kohlberg, Kravis, and Roberts, in 1988.
---------------------------------------------------------------------------
    Thus, by the early 1990s, the culture inside the boardrooms had 
begun to change. Economists and finance scholars who bought in to the 
shareholder primacy perspective were telling directors that they should 
not believe that managers had intrinsic motives to do what was best for 
the companies, let alone to maximize share value. Rather, directors 
should monitor managers closely, and compensate them in ways that would 
give them large financial incentives to focus on share value. The most 
common way to do this was to grant large blocks of stock options to the 
executives.\15\
---------------------------------------------------------------------------
    \15\ One might imagine that, in a well-functioning market for 
executive services, cash compensation would be reduced by a substantial 
amount to offset the value of the grant of stock options to executives. 
But one would be wrong about that. Studies have repeatedly shown that 
stock option compensation awards seem to come on top of salary and 
bonus payments in cash.
---------------------------------------------------------------------------
    The rise to prominence in recent decades of stock option-based 
compensation, then, can be seen as the third development in financial 
markets that has encouraged widespread acceptance of the idea that it 
is the job of corporate directors to focus on improving share price. 
Stock option compensation is attractive to both the managers and the 
directors of corporations, relative to compensation in cash or even 
stock itself, because it provides substantial tax benefits to the 
corporation and to the executives receiving the options. If the strike 
price of a stock option is the same as the trading price of the stock 
on the day the option is granted to an executive, the company treats 
the grant as if it has zero cost to the company for accounting 
purposes. This means the company can record higher net profit than it 
actually earned because some true costs are not accounted for.
    Moreover, if an executive receives stock options as compensation, 
the executive does not have to declare the option grant as income for 
personal income tax purposes at the time of the grant. As far as the 
IRS is concerned, the executive does not get the compensation until he 
exercises the options. At that point, the executive is credited with 
receiving income equal to the difference between the stock price in the 
market, and the exercise price which the executive pays to buy the 
stock. And the company then takes a charge against earnings (and 
corresponding tax deduction) for the cost equivalent to what the 
executive records as income.
    During the 1980s, corporate directors and managers came to 
appreciate the fact that they could get extremely rich very quickly if 
their compensation packages included substantial blocks of stock 
options. And at the same time, the development of sophisticated models 
that could be used to estimate the value of options made the options 
seem less exotic and easier to understand. By the early 1990s, most 
corporate executives received more value in stock options each year 
than they did in cash compensation. This trend was given even more 
impetus by the boom in tech companies and dot.com companies of the 
1990s, because such firms were typically low on cash, and high on 
promise, and thus often paid their executives very little in actual 
cash, but huge numbers of stock options.
    Stock option compensation gives corporate executives exaggerated 
incentives to focus on stock prices, often over a relatively short 
period of time, rather than on other measures of corporate performance. 
This is because stock options are a ``heads I win--tails you lose'' 
proposition for corporate executives who receive them. If the market 
price of the underlying stock goes up, holders of stock options can get 
huge rewards, while if the price of the underlying stock goes down, 
option holders do not suffer corresponding losses. Thus stock options 
give corporate executives incentives to cause the company to choose 
highly risky strategies that may lose value on average, but that have a 
small chance at winning big. The executive will share in the winnings 
but not in the losses.
    The net effect of these developments--low returns to capital in the 
'70s, the introduction of junk bond financing, hostile takeovers, and 
leveraged buyouts as mechanisms for squeezing higher returns for 
shareholders out of corporations in the 1980s, and the acceptance of 
stock option-based compensation packages for corporate executives--have 
made ``shareholder primacy'' attractive for corporate executives as 
well as for shareholders. Meanwhile, agency theory, the Efficient 
Capital Markets Hypthesis and options pricing models, have provided a 
gloss of intellectual respectability to shareholder primacy. Although 
corporate law in the U.S. has never required managers and directors to 
maximize share value, the restructuring of compensation schemes and the 
revision of corporate norms that has taken place over the last two 
decades means that it is now in the interest of most managers, 
executives, and directors, as well as of shareholders, to do so.

Q2.  Can the holder of shares in a corporation be regarded legally as 
an owner of that corporation? If not, what differentiates a shareholder 
from an ``owner'' in the normal legal sense of the term?

A2. Although it is common practice in the media and even in occasional 
scholarly article or court cases to refer the shareholders as the 
``owners'' of corporations, the structure and rules of the relationship 
between shareholders and the corporations whose shares they hold make 
it clear that, while shareholders own their ``shares,'' they do not 
``own'' the corporation itself.
    Property, according to Barron's Law Dictionary, ``describes one's 
exclusive right to possess, use, and dispose of a thing, . . . as well 
as the object, benefit, or prerogative which constitutes the subject 
matter of that right.'' \16\ William Blackstone, in his 1765 treatise, 
stated that property ``consists in the free use, enjoyment and disposal 
of all . . . acquisitions, without any control or diminution, save only 
by the laws of the land.'' \17\ Property is also widely understood to 
convey responsibilities as well as rights with respect to the owned 
asset. Property owners can be held personally liable for damage to 
others caused by the misuse or neglect of their property.
---------------------------------------------------------------------------
    \16\ See Steven H. Gifis, Barron's Law Dictionary, Third Ed., 1991, 
p. 380.
    \17\ 1 Blackstone, Commentaries on the Laws of England 134 (1765).
---------------------------------------------------------------------------
    Clearly, none of these characteristics apply to shareholders' role 
in corporations. Shareholders may not take possession of the assets of 
a corporation, or manipulate its machinery for their own personal 
benefit, especially if there are other shareholders. And by virtue of 
the doctrine of ``limited liability,'' shareholders are generally not 
held personally liable for corporate debts, or for actions of the 
corporation that cause harm to others. Instead, the law creates a 
separate legal person when a corporation is formed, and that legal 
person is the owner of all corporate assets as well as the party that 
is held legally responsible for corporate liabilities and for harm 
caused by the improper use of corporate assets. Corporate officers and 
directors are charged with making decisions for the corporation, but 
since they are fiduciaries, they may not treat the assets of the 
corporation as their own personal assets.
    Even where there is a sole proprietor who creates a corporation for 
carrying out his business activities, the corporate form is generally 
employed precisely because it protects the proprietor from personal 
responsibility for the debts and liabilities of the business. Just as 
in a corporation with multiple shareholders, the sole shareholder in a 
private corporation may not appropriate the assets of the corporation 
for his personal use, or intermingle the corporate assets with his 
personal assets, or he may lose the protective benefit of limited 
liability.
    Ironically, some of the strongest shareholder primacy advocates 
concede this point. In their classic book, The Economic Structure of 
Corporate Law, authors Frank Easterbrook and Daniel Fischel argue that 
a corporation is a ``nexus of contracts,'' not a thing that can be 
owned.\18\ It is a legal mechanism that facilitates contracting among 
the suppliers of capital and the managers and directors. Easterbrook 
and Fischel nonetheless argue that the corporation should be run for 
the benefit of shareholders because, they argue, shareholders are the 
``residual claimants'' to proceeds of the enterprise.
---------------------------------------------------------------------------
    \18\ See Frank H. Easterbrook and Daniel R. Fischel, The Economic 
Structure of Corporate Law, Harvard University Press, 1991, pp.------.
---------------------------------------------------------------------------
    Shareholders are legal owners of the equity shares that they hold. 
They are entitled to the full set of rights and benefits that go along 
with ownership of the shares--they can receive dividends if paid, they 
can sell their stock, or borrow against it, or pass it to heirs. But it 
is a great distortion of the words ``property'' and ``ownership'' to 
argue that shareholders are the ``owners'' of the corporations 
themselves.

Q3.  If corporate officers and directors are not required by law to 
maximize share value, what are their duties, and what should they try 
to do? And what constraints or incentives are available to make sure 
they do these things?

A3. Corporate law statutes provide that ``all corporate powers shall be 
exercised by or under the authority of the board of directors of the 
corporation, and the business and affairs of the corporation shall be 
managed by or under the direction, and subject to the oversight, of its 
board of directors.'' \19\ Beyond this, neither the statutes nor case 
law prescribe how directors and managers should go about their duties, 
except to make it clear that the they are in a fiduciary role with 
respect to the corporation, and must not appropriate its assets for 
their own personal benefit to the detriment of the corporation.
---------------------------------------------------------------------------
    \19\ Model Business Corporation Act, 8.01(b). State statutes 
generally follow this language or other language to the same effect.
---------------------------------------------------------------------------
    I have argued elsewhere that, in an ideal world, directors and 
managers ``should understand their jobs to be maximizing the total 
wealth-creating potential of the enterprises they direct. In doing 
this, they must consider the effect of important corporate decisions on 
all of the company's stakeholders. For this purpose, stakeholders 
should be defined as all parties who have contributed inputs to the 
enterprise and who, as a result, have at risk investments that are 
highly specialized to the enterprise. Those parties inevitably share in 
the residual risk of the firm. The law and culture of the boardroom 
should support this broader view of the role of management and 
directors.'' \20\
---------------------------------------------------------------------------
    \20\ See Margaret M. Blair, Ownership and Control: Rethinking 
Corporate Governance for the Twenty-first Century, Brookings, 1995, p. 
239.
---------------------------------------------------------------------------
    This is, of course, much easier said than done. In practice, there 
are many reasons why corporate officers and directors might nonetheless 
try to manage the firm in a way that maximizes total wealth creation, 
even though it is difficult and often requires balancing competing 
interests. These range from financial benefit to themselves, to 
personal satisfaction, concern about their reputations, and social 
pressures. In the past two decades, however, the financial, 
reputational, and social pressures have all shifted so that they now 
generally encourage managers and directors to focus on share value to 
the exclusion of, and sometimes at the expense of, total value 
creation.
    Can these sources of pressure be shifted back so that they push 
corporate officers and directors to try to maximize the total value 
created by corporations, instead of just the value that can be 
extracted by shareholders? That, it seems to me, is the major policy 
question at stake in this debate, and I don't know the answer. But it 
seems possible that a combination of changes in tax incentives, and 
changes in certain social and reputational factors might help. The 
following are a few suggestions along these lines:

          The tax system should not make it more attractive to 
        use stock options in compensation packages rather than direct 
        stock ownership.

          Tax benefits might instead be used to encourage 
        corporate managers and directors to be compensated in 
        restricted stock, with holding periods of at least five to ten 
        years. If officers and directors are rewarded for share price 
        performance over long periods of time, rather than over a few 
        months or quarters, this should encourage them to pay attention 
        to the long run implications of their actions and decisions on 
        all of the parties whose investments and effort contribute to 
        the long run viability and profitability of the corporation.

          Shareholder primacy rhetoric should be continuously 
        challenged, on the grounds that the law does not, in fact, 
        require shareholder primacy, and that what is best for 
        shareholders at any point in time is not necessarily what is 
        best for the U.S. economy or for society at large.

          Changes in corporate or securities laws that would 
        enhance shareholders' ability to pressure or compel 
        corporations to accept takeover offers, or pay dividends, or 
        take other actions that would benefit shareholders at the 
        expense of the long run health of the corporation, should be 
        avoided and even repudiated.\21\
---------------------------------------------------------------------------
    \21\ Lucian Bebchuk has argued, for example, that shareholders 
should have the power to initiate and approve distributions to 
shareholders in cash or in other corporate assets, and to distribute 
new debt securities to shareholders (to compel managers to pay out cash 
flow rather than reinvest it), to initiate mergers and/or 
consolidations with other companies, to initiate a sale of all of the 
assets of the company to a particular buyer, or to initiate dissolution 
of the company. See Lucian Arye Bebchuk, The Case for Increasing 
Shareholders Power, 118 Harvard Law Review, 3, 2005. These are all 
matters that under current corporate law are reserved to corporate 
directors. In prior work I have argued that any or all of the above 
changes in the law would be misguided. See Margaret M. Blair, Reforming 
Corporate Governance: What History Can Teach Us, 1 Berkeley Business 
Law Review, 1, 1 (2004).

    The above changes might alter the cultural and financial pressures 
on officers and directors to some degree, but even if all were to 
happen, they would be unlikely to alter the massive economic pressures 
that are driving U.S. corporations to move their important investment 
and job-creating activities overseas. Addressing these pressures will 
require changes in tax and trade policy that are beyond the scope of 
this testimony.
                   Answers to Post-Hearing Questions
Responses by Bruce R. Scott, Paul Whiton Cherington Professor of 
        Business Administration, Harvard Business School

Questions submitted by Chairman Brad Miller

Q1.  In your written testimony, you call ``one of the great risks of 
capitalism'' the fact that ``powerful people can use the system to 
appropriate common resources from their neighbors, all in the name of 
greater efficiency through privatization.'' Is it easier for the 
powerful to ``use the system to appropriate common resources from their 
neighbors'' under capitalism than under other economic systems, or more 
likely for any other reason that they will do so? As a corollary, is 
such behavior easier or more likely under certain forms of capitalism 
than under others?

A1. We think of our economy as one based on private property, and 
private enterprise in particular. While true, our economy relies on 
public resources as well, both natural resources and public goods such 
as an educational system, public health and the entire regulatory 
system that protects our resources. Often we fail to recognize that 
these public resources are exposed to capture and or abuse by economic 
actors, as for example when private actors pollute the water, the air, 
or the appearance of an area, a situation called creating negative 
externalities, meaning that the polluter can get away without being 
charged for the transgressions. Some degree of negative externalities 
is almost inevitable, but it is the job of the regulators to hold this 
type of behavior in check, for example through monitoring by the EPA or 
the Department of the Interior, etc.
    However, a version of capitalism premised on extreme deregulation, 
or still worse self regulation, creates a culture not only of contempt 
for the protection of public resources it invites business interests to 
corrupt the regulators and the extreme to try to privatize government 
through taking it over piece meal. Whole services such as logistics 
support for the military in Iraq have been privatized, as have others 
in the U.S. If this much is obvious it may not be so obvious that much 
the same can be done for the market frameworks more broadly. Lobbying 
can transfer revenues from the IRS and thus the taxpayers to the firms 
through the creation of subsidies or less visible loopholes. Similar 
transfers can be effected from consumers or employees to business 
interests, all in the spirit of enjoying a free for all at public 
expense. Our news papers carry such stories day by day and week by 
week.
    Rising inequalities of income are a sign that the market frameworks 
are being tilted in favor of the rich, as they have been in this 
country since 1981. The U.S. now has the most unequal incomes among 
industrial countries as a result of just such tilting of its market 
frameworks. One of the most egregious examples was the business 
lobbying that prevented the FASB and the SEC from requiring the 
expensing of stock options as a business expense. About 75 percent of 
CEO pay in large firms has been in the form of payments such as options 
that did not have to be reported or recorded as expenses. This created 
a totally phony market of extraordinary CEO pay that was ``free'' for 
the company so far as its profit and loss accounts were concerned.

Q2.  Recalling that U.S. states were once able to ``ask for something 
in return'' for granting a corporate charter, in your written testimony 
you advocate establishing ``a mandatory standard of stakeholder 
welfare,'' which you say ``would put U.S. firms more nearly in step 
with some of the major European countries.'' What is a ``mandatory 
standard of stakeholder welfare''? How does it work in countries where 
it is in existence, and what form might it take in the United States?

A2. The U.S. is in a small minority of countries where firms may view 
their primary mission of the firm as the maximization of shareholder 
value. Since in practice this translates into maximizing the likelihood 
of regular stock price increases this tends to induce corporate 
cultures of management by the numbers, where the importance of 
relationships with customers, employees and communities is devalued. It 
also produces a tendency to continuously take risks to boost share 
price, even to the point of ``overvaluing the stock'' to achieve 
numerical targets. Over-valuation in turn increases the temptation to 
fudge the accounts in subsequent periods to maintain performance, as 
was obvious in the Enron situation among others.

Q3.  You testified that the growth of economic inequality that began in 
the United States during the decade of the 1980s has not been in 
evidence in at least some European countries. Can you comment on the 
implications of the degree of economic equality or inequality for the 
health of a national economy, its prospects for growth, and the general 
health of the society?

A3. Most countries have a single authority that charters firms, and 
historically these authorities have demanded that the firm be managed 
for the long-term health of the firm, with due care for its employees, 
customers, suppliers and affected communities. With that commitment 
built into the charter a firm can be held to much higher standards of 
sensitivity for its actions, and by government as well as shareholders. 
Since most firms in the U.S. have been chartered by the individual 
states, there has long been a race to the bottom to compete for 
chartering fees and other revenues by having minimal requirements for a 
charter. As Theodore Roosevelt pointed out a century ago, the U.S. 
needs a chartering authority whose reach is as extensive as the market, 
and whose power exceeds that of even a very large firm. We are an 
exception in allowing out continental market to be exploited as an 
under-regulated common resource of incredible value. A federal charter 
or license could change this, by mandating a broader sense of corporate 
purpose.
                              Appendix 2:

                              ----------                              


                   Additional Material for the Record




























          
          



  AMERICAN DECLINE OR RENEWAL? PART 2--THE PAST AND FUTURE OF SKILLED 
                                  WORK

                              ----------                              


                         TUESDAY, JUNE 24, 2008

                  House of Representatives,
      Subcommittee on Investigations and Oversight,
                       Committee on Science and Technology,
                                                    Washington, DC.

    The Subcommittee met, pursuant to call, at 1:07 p.m., in 
Room 2318 of the Rayburn House Office Building, Hon. Brad 
Miller [Chairman of the Subcommittee] presiding.


                            hearing charter

              SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT

                  COMMITTEE ON SCIENCE AND TECHNOLOGY

                     U.S. HOUSE OF REPRESENTATIVES

  American Decline or Renewal? Part 2--The Past and Future of Skilled 
                                  Work

                         tuesday, june 24, 2008
                          1:00 p.m.-4:00 p.m.
                   2318 rayburn house office building

Purpose

    This hearing will focus on how the United States can maintain and 
expand high-skilled, high-paying jobs here at home. To examine this 
question, which is central to the Nation's competitiveness in a 
globalized economy, the hearing will survey the efficacy of past and 
current efforts to aid dislocated workers and communities. 
Manufacturing, the traditional engine of value-added production in our 
economy, has been deeply affected by globalization, and service 
industries--even those relying on highly trained personnel--are coming 
under increasing pressure from foreign competitors.
    The hearing will also assess the structure of international trade 
in order to predict how well domestic efforts at retraining and 
reinvestment can be expected to succeed in the future. For the health 
of the national economy, and the scientific and technological 
enterprises dependent on it, we must learn what our workers and 
communities need. The goal must be, as the former Chair of the Council 
of Economic Advisers, Laura D'Andrea Tyson, put it, ``to produce goods 
and services that meet the test of international competition while our 
citizens enjoy a standard of living that is both rising and 
sustainable.''
    The Committee on Science and Technology has jurisdiction that 
directly relates to the competitiveness of the United States through 
our authorization of programs that directly contribute to innovation. 
The Committee has a specific interest in the health of the Nation's 
manufacturing industries through its connection to the National 
Institute of Standards and Technology, whose budget it authorizes. In 
addition, the Committee annually authorizes the expenditure of billions 
of dollars to support scientific research and the training of the next 
generation of scientists and engineers, and has taken steps to support 
retraining of workers for high tech employment opportunities.
    This hearing has been designed to help the Committee in identifying 
measures that might increase the likelihood of high-value-added 
activities remaining, increasing, and succeeding within U.S. borders. 
By so doing, it will contribute to the future health of America's 
economy and the future prosperity of its citizens.
    The hearing will take testimony on the impact on workers and 
communities when jobs move abroad; problems with the current program of 
Trade Adjustment Assistance in supporting workers whose jobs have been 
sent off-shore; successes of using community colleges, working with 
local businesses, to retrain displaced workers; the need for rethinking 
the supports and our approach to global trade if high-paying employment 
and a good standard of living are key economic policy goals for the 
country.

Witnesses:

Dr. John Russo is the coordinator of the Labor Studies Program at the 
Warren G. Williamson School of Business Administration of Youngstown 
State University in Ohio, and the founder and Co-Director of Youngstown 
State's Center for Working-Class Studies. He is co-author with Sherry 
Linkon of Steeltown, USA: Work and Memory in Youngstown.

Mr. Frank H. Morgan is an attorney at the Washington, DC, firm of White 
& Case LLP. He has pled before the International Court of Trade in New 
York City on behalf of workers whose petitions for Trade Adjustment 
Assistance have been denied by the U.S. Department of Labor.

Mr. Howard F. Rosen is the founder and Executive Director of the Trade 
Adjustment Assistance Coalition and a visiting fellow at the Peterson 
Institute for International Economics in Washington, DC. He is a 
leading expert on and advocate for programs designed to aid dislocated 
workers.

Ms. Jeanie Moore is Vice President for Continuing Education Programs at 
Rowan-Cabarrus Community College in Salisbury, NC. Her work on the 
effort to revive Kannapolis, NC, has been recognized by the U.S. 
Department of Labor, which in 2005 presented her with its Workforce 
Innovations Award for ``Serving Special Populations in the Workplace.''

Dr. Thomas I. Palley is the founder of the Economics for Democratic & 
Open Societies Project in Washington, DC. He earlier served as the 
chief economist of the U.S.-China Economic and Security Review 
Commission and as Director of the Open Society Institute's 
Globalization Reform Project.

Ms. Diana Furchtgott-Roth is a senior fellow at the Hudson Institute in 
Washington, DC. She earlier served at chief economist of the U.S. 
Department of Labor and as Chief of Staff of the President's Council of 
Economic Advisers. She writes a weekly column for the New York Sun.
    Chairman Miller. Good afternoon. This hearing will now come 
to order.
    A casual examination of the usual measures of economic 
confidence among working families, the unemployment and 
inflation rates shows that everything is just fine. The current 
unemployment rate of 5.5 percent and the inflation rate of 4.2 
percent are a far cry from the June, 1980, 7.6 percent 
unemployment and 14.4 percent inflation. But a closer look 
presents a very different picture for working Americans. 
Consumer confidence last month came in at its lowest levels 
since June of 1980. Only 13 percent of Americans rate the 
national economy positively, and 74 percent say it is getting 
worse according to a national poll released just a week ago.
    Over the last generation economic conditions have 
fundamentally changed for American families, and simple 
comparisons of unemployment and inflation rates fail to capture 
those changes. Today American households carry debt that is 
equal to 132 percent of their disposable annual income, nearly 
twice the average debt load of 68 percent in 1980. For the past 
four years Americans have spent the equivalent of every penny 
they have earned, including what they have earned for 
retirement. In 1980, they were saving at a rate of 10 percent; 
the employment rate may be lower now, but the consequences of 
joblessness are likely to be dire for most Americans.
    Still, an illusion of well-being persists in the minds of 
those who cling to the usual or traditional ways of looking at 
things. This mirage really obscures the profound changes in the 
American economy and keeps us from taking a hard look at the 
realities that so many of our families and communities face.
    Now, here is another statistic that would provide comfort 
from a traditional economic viewpoint. American manufacturing 
productivity rose 3.6 percent in the first quarter of 2008. If 
that is true, why are Americans so worried? Here is why. 
Manufacturing output actually dropped during the same period. 
American workers' hours dropped even more. Productivity is 
manufacturing output divided by the number of hours worked. 
That apparent positive for the economy is, therefore, only 
statistical. In reality both output and workers' hours are 
down. When output and employment are rising, a productivity 
gain shows a robust economy, but in today's economy it masks 
the fact that we are producing less of what we need and taking 
home less for doing it.
    It is obvious that we must go beyond the traditional 
analysis if we are to form an accurate picture of what is 
happening to Americans. We need to ask what changes in the last 
30 years have skewed the results of familiar economic formulas. 
We need to ask what is behind those changes. Finally, we need 
to understand what we do know, whether it is scientific, 
technological, or educational, can be applied effectively to 
assure that our citizens and our communities can look forward 
to a secure and prosperous future in this globalized economy.
    This hearing presents a second step along that path. On May 
22 this subcommittee heard suggestions offered from a variety 
of perspectives on how to structure incentives so that American 
firms will maintain and expand at home in America. Today we 
will hear about what has happened when we failed at this in the 
past and about the effectiveness of our efforts to aid the 
recovery of those individuals and communities who have directly 
paid the price.
    We are fortunate to have with us witnesses who speak from a 
wide variety of experiences. Dr. John Russo is an academic who 
has lived through and studied one of the leading episodes of 
de-industrialization in America, that affecting Youngstown, 
Ohio.
    Frank Morgan is an attorney who has represented displaced 
workers whose applications for Trade Adjustment Assistance, or 
TAA, have been denied by the Labor Department.
    Howard Rosen is one of the leading advocates for the TAA, 
who will report on the program's shortcomings and put forward a 
national strategy for dealing with economic dislocation.
    Jeanie Moore, a community college official, has played a 
leading role in one of the most striking community turnarounds 
in the country, that of Kannapolis, North Carolina.
    Thomas Palley is not with us yet, but we assume he will be 
here in a short while. He is an economist who has long studied 
globalization and will assess our options for shaping its 
influence and addressing its effect.
    And, finally, Ms. Diana Furchtgott-Roth, a senior fellow at 
the Hudson Institute in Washington. She earlier served as chief 
economist to the U.S. Department of Labor and as Chief of Staff 
of the President's Council of Economic Advisors.
    This is obviously a complex topic. At our last hearing we 
heard completely contradictory viewpoints. Coming to grips with 
what it will involve is a challenging proposition, but long-
held assumptions have to be examined and replaced sometimes 
with original thinking and novel ideas. But the difficulty of 
the task is no excuse for shrinking from it.
    And I now recognize the distinguished Ranking Member from 
Wisconsin, Mr. Sensenbrenner.
    [The prepared statement of Chairman Miller follows:]
               Prepared Statement of Chairman Brad Miller
    A casual examination of the time-honored measures of economic 
confidence among working families, the unemployment and inflation 
rates, shows that everything is just fine. The current unemployment 
rate of 5.5 percent and inflation rate 4.2 percent, are a very far cry 
from June 1980's 7.6 percent unemployment and 14.4 percent inflation. 
But a closer look presents a very different picture for working 
Americans. Consumer confidence last month came in at its lowest level 
since June 1980. Only 13 percent of Americans rate the national economy 
positively, and 74 percent say it's getting worse, according to a 
national poll released just one week ago.
    Over the last generation, economic conditions have fundamentally 
changed for American families and simple comparisons of unemployment 
and inflation rates fail to capture these changes. Today, U.S. 
households carry debt that is equal to 132 percent of their disposable 
annual income, nearly twice the average debt load of 68 percent in 
1980. For the past four years, Americans have spent the equivalent of 
every penny they've earned--including what they've earned for 
retirement. In 1980, they were saving at a rate of 10 percent. The 
unemployment rate may be lower now, but the consequences of joblessness 
are more likely to be dire.
    Still, an illusion of well-being persists in the minds of those who 
cling to the traditional ways of looking at things. This mirage 
obscures the profound changes in the American economy and keeps us from 
taking a hard look at the realities that so many of our families and 
communities face.
    Here's another statistic that would provide comfort to traditional 
thinkers: U. S. manufacturing productivity rose 3.6 percent in the 
first quarter of 2008. If this is true, why are Americans so worried? 
Here's why: Manufacturing output actually dropped during this same 
period and, American workers' hours dropped even more. Productivity is 
manufacturing output divided by the number of hours worked. This 
apparent positive for the economy is only statistical; in reality both 
output and workers hours are down. When output and employment were 
rising, a productivity gain signified a robust economy. In today's 
climate, it masks the fact that we are producing less of what we need, 
and taking home less for doing it.
    It is obvious that we must go beyond conventional analysis if we 
are to form an accurate picture of what is happening to our people and 
our nation today. We need to ask what changes in the past 30 years have 
skewed the results of familiar economic formulas. We need to ask what 
is behind those changes. Finally we need to understand how what we do 
know--whether its scientific, technological, or educational--can be 
applied effectively to ensure that our citizens and our communities can 
look forward to a secure and prosperous future in this globalized 
economy.
    This hearing represents a second step along that path. On May 22, 
this Subcommittee heard suggestions offered from a variety of 
perspectives on how to structure incentives so that U.S. firms will 
maintain and expand, at home in America. Today, we will hear about what 
has happened when we have failed at this in the past, and about the 
efficacy of our efforts to aid the recovery of those individuals and 
communities who have directly paid the price.
    We are fortunate to have with us witnesses who speak from widely 
varied experience:

          John Russo--an academic who has lived through, and 
        studied, one of the leading episodes of de-industrialization in 
        America, that affecting Youngstown, Ohio;

          Frank Morgan--an attorney who has represented 
        displaced workers whose applications for Trade Adjustment 
        Assistance, or TAA, have been denied by the Labor Department;

          Howard Rosen--one of the leading advocates of TAA, 
        who will report on the program's shortcomings and put forward a 
        national strategy for dealing with economic dislocation;

          Jeannie Moore--a community college official who has 
        played a leading role in one of the most striking community 
        turnarounds in the country, that of Kannapolis, North Carolina;

          Thomas Palley--an economist who has long studied 
        globalization and will assess our options for shaping its 
        influence and its addressing its effects; and

          Ms. Diana Furchtgott-Roth--a senior fellow at the 
        Hudson Institute in Washington, DC. She earlier served at chief 
        economist of the U.S. Department of Labor and as chief of staff 
        of the President's Council of Economic Advisers.

    This is a complex topic. Coming to grips with it will involve 
challenging received wisdom and long-held assumptions and replacing 
them with original thinking and novel ideas. But the difficulty of the 
task is no excuse for shrinking from it.
    Now I recognize the distinguished Ranking Member from Wisconsin, 
Mr. Sensenbrenner.

    Mr. Sensenbrenner. Thank you very much, Mr. Chairman.
    Today's hearing is the Subcommittee's second hearing on 
globalization in a month. These hearings closely follow a 
series of four hearings on the same topic in the Science and 
Technology Committee. In addition to these hearings and over 
the vocal objections from the Minority, the Committee also 
hired an outside consultant and paid $20,000 for, ``studies and 
advice,'' on issues of globalization.
    In March, 2007, Chairman Gordon wrote Members of the 
Committee and asked that they support the consulting agreement. 
In his letter he argued that the consultant, Dr. Ron Hira, had 
unique knowledge and experience in this field that could not 
easily be duplicated by the Committee staff.
    Without doubting Dr. Hira's qualifications, the Minority 
questioned the need to hire him as a consultant. With numerous 
hearings planned, why not invite Dr. Hira to testify? And why 
did the Committee have to enter into a costly consulting 
agreement when experts routinely testify before Congress for 
free?
    Those questions are renewed now that we have seen the 
Majority's report. That report was due to the Committee by 
December 31, 2007. It was presumably delivered on time, but the 
Minority was not given a copy until a few weeks ago when it was 
made publicly available as a Committee print. This print has an 
official look to it just like our hearing records and lists all 
of the Committee Members names on it, even though half of us 
never saw it before it was released.
    The report itself was 12 pages long and included five full 
pages of background. This report which reportedly could not 
have been accomplished by the Committee staff itself, is little 
more than a summary of the Committee's hearings on this topic.
    I would like to enter this report into the record for 
taxpayers to decide if their $20,000 is well spent. I look 
forward to hearing from today's witnesses, who like most 
Congressional witnesses, have generously agreed to appear today 
without charge. I must say that I have a meeting in my office 
with a constituent at 1:30 which I can't break, but my staff 
will inform me of what each of the witnesses say, and if I can 
make it back, I will be happy to do so.
    And I ask unanimous consent that this Committee print, 
which represents a waste of $20,000, be included in the record.
    [The prepared statement of Mr. Sensenbrenner follows:]
    Prepared Statement of Representative F. James Sensenbrenner Jr.
    Today's hearing is the Subcommittee's second hearing on 
globalization in a month. These hearings closely follow a series of 
four hearings on the same topic in the Science and Technology 
Committee. In addition to these hearings, and over vocal objections 
from the Minority, the Committee also hired an outside consultant and 
paid $20,000 for ``studies and advice'' on issues of globalization.
    Last March, Chairman Gordon wrote to Members of the Committee and 
asked that they support the consulting agreement. In his letter, he 
argued that, the consultant, Dr. Ron Hira, had ``unique knowledge and 
experience in this field'' that could not ``easily be duplicated by 
Committee staff.''
    Without doubting Dr. Hira's qualifications, the Minority questioned 
the need to hire him as a consultant. With numerous hearings planned, 
why not invite Dr. Hira to testify? Why did the Committee have to enter 
into a costly consulting agreement when experts routinely testify 
before Congress for free?
    Those questions are renewed now that we have seen the Majority's 
report. The report was due to the Committee by December 31, 2007. It 
was presumably delivered on time, but the Minority was not given a copy 
until a few weeks ago, when it was made publicly available as a 
``Committee Print.'' The Print has an official look and lists all the 
Committee's Members--even though nearly half of us never saw it before 
it was released.
    The report itself is 12 pages long and includes five full pages of 
background. This report, which reportedly could not have been 
accomplished by Committee staff, is little more than a summary of the 
Committee's hearings on this topic.
    I would like to enter the report into the record for taxpayers to 
decide if their $20,000 were well spent. I look forward to hearing from 
today's witnesses, who like most Congressional witnesses, have 
generously agreed to testify without charge.

    Chairman Miller. Without objection the Committee print will 
be entered into the record, not necessarily as a waste but as 
Mr. Sensenbrenner's evidence. And I don't know anything about 
it. This all has to do with something done at the Committee 
level and not the Subcommittee, but we will enter that print in 
the record.
    [The information appears in Appendix: Additional Material 
for the Record.]
    Chairman Miller. All additional opening statements by any 
Member on any topic, germane or not germane, to this 
subcommittee's work will be included in the record.
    [The prepared statement of Chairman Gordon follows:]
               Prepared Statement of Chairman Bart Gordon
    I would like to thank Chairman Miller for holding this hearing on 
the very important topic of globalization. This hearing complements the 
work begun in the last session by the Technology and Innovation 
Subcommittee. Mr. Sensenbrenner referred to a small portion of that 
work, and I would like to take a moment to discuss the Committee 
consultant we hired in the first session.
    Dr. Ron Hira was contracted to advise the Committee on the issue of 
outsourcing and offshoring of high skilled jobs and research and 
development. His work resulted in the Committee's holding four hearings 
on the issue over a period of six months: The Globalization of R&D and 
Innovation, Part I; The Globalization of R&D and Innovation, Part II: 
The University Response; The Globalization of R&D and Innovation, Part 
III: How Do Companies Choose Where to Build R&D Facilities?; and, The 
Globalization of R&D and Innovation, Part IV: Implications for the 
Science and Engineering Workforce. Those hearings were printed together 
in a hearing print entitled, ``The Globalization of R&D and 
Innovation.'' This print is 359 pages long.
    After the series of hearings was completed, Dr. Hira worked with 
Committee staff to compile a brief report containing policy 
recommendations based on the testimony we received at the four 
hearings. This summary document is the 12 page report my colleague from 
Wisconsin refers to.
    Dr. Hira's work with us over those many months, along with the work 
of our talented staff, produced excellent hearings on a very important 
topic to Americans everywhere.
    I would again like to thank my friend from North Carolina for 
maintaining the Committee's focus on the issue of globalization. This 
is an issue that isn't going away, and the Committee will continue its 
work in this area.

    [The prepared statement of Mr. Costello follows:]
         Prepared Statement of Representative Jerry F. Costello
    Mr. Chairman, I would like to thank you for overseeing this hearing 
today and for your leadership of this subcommittee. The Science 
Committee's jurisdiction over the competitiveness of America's 
workforce is an especially important one as our economy has suffered as 
U.S. jobs have been moved overseas and unemployment rates continue to 
rise.
    While the American economy remains relatively strong, the average 
American worker's wagers have stagnated, and most manufacturing workers 
that lose their jobs make less in their next job.
    This committee must ensure that Trade Adjustment Assistance, our 
primary program to combat the effects of fewer manufacturing jobs, is 
administered efficiently and fairly in order to achieve its objectives.
    We must focus our intentions towards the goal of rebuilding the 
American job base. I believe part of the solution to the problem of 
declining competitiveness lies in successfully training the American 
workforce to provide the skills needed to survive the demands of the 
21st century economy.
    I look forward to our testimony today, Mr. Chairman, and I would 
like to thank our witnesses for taking to time to discus these 
important issues with the Subcommittee today.

    [The prepared statement of Ms. Johnson follows:]
       Prepared Statement of Representative Eddie Bernice Johnson
    Thank you, Mr. Chairman. Globalization has in some ways been good 
for our nation, but for our manufacturing sector, it has been 
detrimental.
    Today's hearing is designed to assess the impact on workers and 
communities when jobs move abroad.
    Should the Federal Government provide Trade Adjustment Assistance 
to support workers whose jobs have been sent offshore?
    Globalization is changing the way Americans view the future of 
business in our nation. Educational institutions question the jobs of 
the future, and how to go about adequately preparing tomorrow's worker 
to compete in a global workforce market.
    We will determine the impact that community colleges have in 
working with local businesses to retrain displaced workers, and how 
trends in retraining are changing with time.
    Mr. Chairman, I have always asserted that a good education is the 
root of future success.
    It is my desire for the students of today to obtain high-paying 
jobs that are fulfilling and that offer long-term financial security.
    This forward-thinking committee is in a position to steer our 
research and education efforts in directions to keep us globally 
competitive.
    I want to welcome our panel of distinguished witnesses.

    Chairman Miller. It is now my pleasure to introduce our 
witnesses.
    First Dr. John Russo is Co-Director of the Center for 
Working-Class Studies and Coordinator of the Labor Studies 
Program at the Warren G. Williamson School of Business 
Administration at Youngstown State University in Youngstown, 
Ohio.
    Mr. Frank H. Morgan is an Attorney with the Washington 
Office of the Law Firm White & Case.
    Mr. Howard F. Rosen is the Executive Director of the Trade 
Adjustment Assistance Coalition and a visiting fellow at the 
Peterson Institute for International Economics in Washington.
    Ms. Jeanie Moore, who may be called upon to translate the 
Chairman's remarks to the rest of those here in the Committee 
room, is the Vice President of Continuing Education Programs at 
Rowan-Cabarrus Community College in Salisbury, North Carolina.
    Dr. Palley, thank you for joining us. Dr. Thomas I. Palley 
is the Founder of Economics for Democratic and Open Societies 
Project in Washington.
    And Ms. Diana Furchtgott-Roth is the Director of the Center 
for Employment Policy and senior fellow at the Hudson Institute 
in Washington.
    Each of you will have five minutes for your oral testimony. 
Your written testimony will be included in the record of the 
hearing. When you complete your testimony, we will have 
questions. Each Member will have five minutes to question the 
panel.
    It is the practice of the Subcommittee to take testimony 
under oath, although with this kind of hearing prosecutions for 
perjury seem unlikely. Do any of you have an objection to being 
sworn in, to taking an oath?
    All right. The Committee also provides that you may be 
represented by counsel, although, again, this hearing makes 
that somewhat less pertinent than some of our other hearings. 
Are any of you represented by counsel today?
    If you would now all please stand and raise your right 
hand. Do you swear to tell the truth and nothing but the truth? 
Okay. The witnesses the witnesses all took the oath, and Dr. 
Russo, would you now begin?

  STATEMENT OF DR. JOHN B. RUSSO, COORDINATOR, LABOR STUDIES 
    PROGRAM; CO-DIRECTOR, CENTER FOR WORKING-CLASS STUDIES, 
WILLIAMSON COLLEGE OF BUSINESS ADMINISTRATION, YOUNGSTOWN STATE 
                        UNIVERSITY, OHIO

    Dr. Russo. My name is John Russo, and I am a Professor of 
Labor Studies at the Warren P. Williamson Jr. College of 
Business Administration and Co-Director of the Center for 
Working-Class Studies at Youngstown State University. I am also 
the co-author with Sherry Linkon of the book, Steeltown USA: 
Work and Memory in Youngstown. I want to thank the House 
Committee on Science and Technology for giving me this 
opportunity discuss my research on de-industrialization and its 
impact on local communities such as Youngstown, Ohio.
    This spring I was interviewed by more than 20 journalists 
from around the world on working-class voting patterns and on 
local and State economic issues. The attention is not new. 
Every four years reporters and candidates return to Youngstown 
to test conventional wisdom about economic renewal and the 
political responses in the face of de-industrialization. Since 
the 1980s, Youngstown has become the poster child for de-
industrialization, losing 50,000 jobs in steel and steel-
related industries. This decade the Youngstown area has 
continued to hemorrhage jobs, most recently because of the 
downsizing of the automobile industry with Delphi and General 
Motors. Since 2000, in fact, the State of Ohio has experienced 
the worst job losses, reduced standards of living, and social 
disruptions associated with unemployment since the Great 
Depression. But what seems different this time is the reports 
seem to understand what Sherry Linkon and I wrote in our book, 
Steeltown USA: the Youngstown story of the 1980s has become 
Ohio's and the America's stories today.
    De-industrialization undermines the social fabric of 
communities and nation-states. The social costs of de-
industrialization include the loss of jobs, homes, and health 
care; reductions in tax base, which lead in turn to reductions 
in necessary public services such as police and fire; declines 
in non-profits and cultural resources, decaying local 
landscapes; and increases in crime, both immediately and long-
term; increase in suicide, drug and alcohol abuse, family 
violence, and depression; and the loss of faith in institutions 
such as government, business, unions, churches, and traditional 
political organizations.
    So job losses do not affect individuals only, although, it 
touches many who having dedicated their lives and sometimes 
their health to employers now feel betrayed and economically 
expendable. As one steelworker suggested to me, ``We are too 
old to work and too young to die.''
    Rather, de-industrialization is a systemic problem that 
affects the identity of whole families and communities and the 
Nation. De-industrialization brings with it a great deal of 
cynicism and underlying discontent that may not be apparent to 
outsiders. Economic cheerleading and bootstrap journalism that 
labels large-scale job loss as ``creative destruction'' just 
reinforces a community's identity loss. When you lose your 
identity, other people define who you are, and you get blamed 
for your own situation.
    Nor can simple government interventions ameliorate the 
dramatic social costs of de-industrialization and offshoring. 
Attempts to revitalize our area have largely failed. Many 
represent what we might call the economics of desperation. Many 
displaced steelworkers in Youngstown in the 1980s got trained 
or retrained in refrigeration. There are no refrigeration jobs 
in Youngstown, Ohio. Between 1992 and 2000, nine percent of the 
economic growth in the area was the result of building prisons.
    Youngstowners have begun to understand that the current 
economic thinking and political decision-making have often 
exacerbated these problems. For example, technologies developed 
with public research dollars are being used to offshore jobs. 
Tax incentives to multi-nationals are being used to export 
jobs. In both cases, public policy is contributing to putting 
hard-working Americans out of work.
    When challenged, many politicians and corporate leaders 
tender platitudes about long-range economic adjustments and 
suggest that displaced workers train for jobs that either don't 
exist or will be moved offshore in the next wave of economic 
change. Increasingly, Americans understand that they are being 
sacrificed at the altar of economic theory. They reject the 
argument that de-industrialization and offshoring are part of 
the natural economic order and that job losses and declining 
wages are an inevitable part of globalization.
    Instead, they see themselves as victims of conscious 
decisions by corporate leaders and government officials, and 
they are resentful. No longer will they accept the short-term 
solutions and amelioration efforts. While important, such 
approaches are ultimately ineffectual. Americans are beginning 
to recognize that we are in a new period of global capitalism 
and that the resulting problems and issues are systemic and 
will require systemic solutions.
    If we are to reach solutions, we must raise the following 
questions: What is the purpose of the corporation? What is the 
relationship between markets, corporations, and nation-states? 
How is international trade structured? How can trade and tax 
policies better reflect changes in the global economy? Anything 
less than serious answers to these difficult questions will be 
window dressing. Without serious answers, cities like 
Youngstown will continue to lose faith in the American dream.
    In summary, while we need programs that more widely share 
benefits and risks from globalization and offshoring, I would 
argue that the global economy demands new forms of corporate 
and international regulation that will prevent some nation-
states and some corporations from engaging in economic 
blackmail by playing one country or one workforce against 
another. We can no longer afford to tinker with economic and 
trade policy or enact reforms that are simply window dressing. 
Without systemic reform, growing discontent and the incipient 
rebellion in American politics over globalization and de-
industrialization will only grow and breed a new politics of 
resentment.
    [The prepared statement of Dr. Russo follows:]
                  Prepared Statement of John B. Russo
    My name is John Russo and I am a Professor of Labor Studies at the 
Warren P. Williamson Jr. College of Business Administration and Co-
Director of the Center for Working-Class Studies at Youngstown State 
University. I am also the co-author with Sherry Linkon of the book, 
Steeltown USA: Work and Memory in Youngstown. I want to thank the House 
Committee on Science and Technology for giving me this opportunity to 
discuss my research on de-industrialization and its impact on local 
communities such as Youngstown, Ohio.
    This spring I was interviewed by more than 20 journalists from 
around the world on working-class voting patterns and on local and 
State economic issues. This attention was not new. Every four years, 
reporters and candidates return to Youngstown to test conventional 
wisdom about economic renewal and political responses in the face of 
de-industrialization. Since the 1980s, Youngstown has been the poster 
child for de-industrialization, losing 50,000 jobs in steel and steel-
related industries. This decade the Youngstown area has continued to 
hemorrhage jobs, most recently through the downsizing of Delphi 
Automotive and GM (Lordstown). Since 2000, the State of Ohio has 
experienced the worst job losses, reduced standards of living, and 
social disruptions associated with unemployment since the Great 
Depression.\1\ But what seems different this time is that reporters 
understand what Sherry Linkon and I wrote in Steeltown USA: 
Youngstown's story has become both Ohio's and America's story today.\2\
---------------------------------------------------------------------------
    \1\ Charles W. McMillion, ``Ohio's Job Losses: 2000-2007 Worst 
since the Great Depression,'' MBG Information Services, Washington, 
D.C., February 2008.
    \2\ Forester Research, a consulting firm, estimates that 3.4 
million white-collar jobs will be sent offshore between 2003 and 2015. 
The estimate of the exodus includes 542,000 computer jobs, 259,000 
management jobs, 191,000 architectural jobs, 79,000 legal jobs, and 1.6 
million back-office jobs. Outsourcing can also have a negative effect 
on the workers who remain in the U.S. A study by three Harvard 
economists estimates that for every one percent that employment falls 
in a manufacturing industry because of moving overseas, wages fall by 
five-tenths of one percent for workers who remain. As the recent, 
concessionary bargaining at American Axle, suggests those numbers may 
be an underestimate.
---------------------------------------------------------------------------
    De-industrialization undermines the social fabric of communities 
and nation-states. The social costs of de-industrialization include the 
loss of jobs, homes, and health care; reductions in tax base, which in 
turn lead to reductions in necessary public services like police and 
fire protection; declines in non-profits and cultural resources; 
decaying local landscapes; increases in crime both, immediately and 
long-term;\3\ increases in suicide, drug and alcohol abuse, family 
violence, and depression; and loss of faith in institutions such as 
government, business, unions, churches, and traditional political 
organizations.
---------------------------------------------------------------------------
    \3\ In the early 1990s, the per capita murder rate in Youngstown 
was among the highest in the Nation. Interestingly, criminal justice 
experts determined that the murders were being committed by young 
adults that were born between 1977 and 1984, the most intense period of 
the de-industrialization. But for the mill closings, Youngstowners of 
this age might have found well-paying work in the steel industry.
---------------------------------------------------------------------------
    So job loss does not affect individuals only, although it touches 
many who, having dedicated their lives and sometimes their health to 
employers, now feel betrayed and economically expendable. As one 
steelworker suggested to me, ``We are too old to work and too young to 
die.''
    Rather, it is a systemic problem that affects the identity of whole 
families, their communities, and the Nation. De-industrialization 
brings with it a great deal of cynicism and an underlying discontent 
that may not be apparent to outsiders. Economic cheerleading or 
``bootstrap journalism'' that labels large-scale job loss as ``creative 
destruction'' just reinforces the community's identity loss: When you 
lose your identity, other people define who you are, and you get blamed 
for your own situation.
    Nor can simple governmental interventions ameliorate the dramatic 
social costs of offshoring and de-industrialization. Attempts to 
revitalize our area have largely failed: many represent what we might 
call the economics of desperation. Many displaced steelworkers in 
Youngstown got trained in refrigeration, but there were no jobs in 
refrigeration. Between 1992 and 2000, about nine percent of the 
economic growth in the area was a result of building prisons.
    Youngstowners have begun to understand that the current economic 
thinking and political decision-making have often exacerbated the 
problem. For example, technologies developed with public research 
dollars are being used to offshore jobs. Tax incentives to 
multinationals are being used to export jobs. In both cases, public 
policy is contributing to putting hard-working Americans out of work.
    When challenged, many politicians and corporate leaders tender 
platitudes about long-range economic adjustments and suggest that 
displaced workers train for jobs that either don't exist or that will 
be moved offshore in the next wave of economic change.\4\ Increasingly, 
Americans understand they are being sacrificed at the altar of 
traditional economic theory. They reject the argument that de-
industrialization and offshoring are part of the ``natural economic 
order'' and that job losses and declining wages are an inevitable part 
of globalization. Instead, they see themselves as victims of conscious 
decisions by corporate leaders and government officials, and they are 
resentful. No longer will they accept short-term solutions or 
amelioration efforts. While important, such approaches are ultimately 
ineffectual. Americans recognize that we are in a new period of global 
capitalism and that the resulting problems and issues are systemic and 
will require systemic solutions.
---------------------------------------------------------------------------
    \4\ Training and education have been the hope for many. But I in 
good faith cannot tell my students that just because they get a BA or 
an MBA now, or a degree in engineering, they are going to do better 
than their parents. A sense prevails that there is a decline in 
America, and that only by accepting a lowered standard of living will 
we be able to compete.
---------------------------------------------------------------------------
    If we are to reach solutions, we must raise the following 
questions: What is the purpose of the corporation? What is the 
relationship between markets, corporations, and nation-states? How is 
international trade structured? How can trade and tax policies better 
reflect changes in the global economy? Anything less than serious 
answers to these difficult questions will be window dressing. Without 
serious answers, cities like Youngstown will continue to lose faith in 
the American Dream.
    Let's just take the first few questions. What is the purpose of the 
corporation? Is it merely a legal entity whose purpose is to maximize 
profits for shareholders by moving inputs and assets around like pieces 
on a chess board? Or do corporations have reciprocal responsibilities 
with shareholders, managers, employees, and nation-states in the 
creation of value? As earlier speakers before this Committee have 
suggested, current practice appears to be in line with the former.
    How we answer the first question informs how we approach our second 
question, on the relationship between corporations, nation-states, and 
markets. If we believe that corporations have little social 
responsibility other than creating wealth, then government should 
support free markets globally and pay scant attention to forms of 
government or working conditions in and between countries. In such a 
world, corporations can become as powerful as nation-states and 
override democratic values. If, however, we believe that government 
needs to balance reciprocal relationships and provide a social safety 
net for capitalism, then economic and trade policies must be systemic 
and proactive. Governments should make decisions that benefit all 
citizens and hold corporations accountable to all stakeholders, not 
just a few. For example, government leaders need to take seriously 
labor, environmental, and political conditions in all countries that 
can lead to unfair trade.
    In summary, while we need programs that more widely share the 
benefits and the risks arising from globalization and offshoring, I 
would argue that the global economy demands new forms of corporate and 
international regulation that will prevent some nation-states and 
corporations from engaging in economic blackmail by playing one country 
or one workforce against another. We can no longer afford to tinker 
with economic and trade policy or enact reforms that are simply window 
dressing. Without systemic reform, the growing discontent and incipient 
rebellion in American politics over globalization and de-
industrialization will only grow and breed a new politics of 
resentment.

                      Biography for John B. Russo
    John Russo is the Coordinator of the Labor Studies Program in the 
Williamson College of Business Administration at Youngstown State 
University. He received his doctorate from University of Massachusetts, 
Amherst, where he also served as a postdoctoral research fellow at the 
Labor Relations and Research Center. Dr. Russo has written widely of 
labor and social issues and is recognized as a national expert on labor 
unions and working-class issues. His current research interests involve 
two book length projects, Who Will Protect Worker Rights?: Unions and 
the Use of Codes/CSR, Capital Strategies, Framework Agreements and 
Strategic Campaigns and an historical study of the famous GM 
(Lordstown) Assembly plant. His most recent publications are a book co-
authored with Sherry Linkon, Steeltown, USA: Work and Memory in 
Youngstown (2002). Also with Sherry Linkon, an edited book entitled New 
Working-Class Studies was published in 2005 by Cornell University 
Press. For his many activities, Dr. Russo is one of the few professors 
at YSU to have ever received Distinguished Professorship Awards in each 
of three areas: research and scholarship, teaching and public service.
    Dr. Russo is also a founder and the Co-Director of the Center for 
Working-Class Studies at Youngstown State University. The Center is an 
interdisciplinary center for research, teaching, and community activity 
on working-class life, work, culture, and thought. Since its inception, 
the CWCS has provided a regional and national forum for scholarly 
activities; supported YSU faculty research; fostered collaborations 
within the academic institution and between the university and 
community; developed an annual lecture series; and become a national 
and international clearinghouse for information on working-class 
culture and pedagogy. For its work, the Center has been the recent 
recipient of two major Ford Foundation grants.

    Chairman Miller. Thank you, Dr. Russo.
    Mr. Morgan.

 STATEMENT OF MR. FRANK H. MORGAN, ATTORNEY, WHITE & CASE LLP, 
                        WASHINGTON, D.C.

    Mr. Morgan. Good afternoon, Chairman Miller and Members of 
the Committee. My primary practice area is in the international 
trade disputes, and I must say that my remarks today are my own 
and do not reflect those of my firm or its clients. And I thank 
Michael O'Connor and Sara Sargeantson whose assistance made my 
testimony possible.
    Thank you, Mr. Chairman, for inviting me to offer my 
experience and to convey the concerns of countless frustrated 
workers who have unsuccessfully petitioned the Employment and 
Training Administration [ETA] of the Department of Labor for 
Trade Adjustment Assistance, TAA.
    I know this committee is considering broader and more 
fundamental issues surrounding globalization. Regardless of 
one's views on the merits of free trade, it is a no-brainer to 
make sure that the Department of Labor investigates each TAA 
claim and that workers who are entitled get prompt assistance.
    Congress has directed the ETA to investigate each petition 
and to do so with the utmost regard for the workers. In 
preparing this testimony I came across a startling statistic. 
From 2002 to 2005, approximately 45 cases were litigated at the 
Court of International Trade, and in all but four there were 
reversals of Labor's decision not to certify. Since 2005, there 
have been a further 15 cases litigated, resulting in reversals 
of Labor's decision not to certify. Such a large number of 
reversals in the face of further scrutiny shows that Labor is 
not conducting the investigation that Congress directed it to 
do in the first instance. And while this litigation has dragged 
on, Labor has denied workers the relief to which they are 
entitled and need.
    The Court of International Trade has written much about 
this topic, and I commend anyone who is concerned with the 
problem to read Judge Ridgway's decision in BMC Software, which 
I have attached to my written materials.
    My written testimony elaborates fully on the problems that 
exist in Labor's investigation of TAA petitions, and I 
summarize those here today. In cases that I have litigated and 
those I have analyzed, the failure of Labor to investigate 
starts at the Agency level and consists of a complete failure 
to conduct a basic investigation beyond the four corners of the 
information provided in the petition. Often the record consists 
of a few e-mail messages and a few summaries of telephone 
calls. There is no excuse for this, and I have practiced before 
many other agencies, and none of them would call this an 
administrative record.
    This is even more disturbing when you consider the fact 
that Labor is conducting an investigation that is not supposed 
to be adversarial in nature. Labor is supposed to be looking 
out for the interests of the workers. For TAA to serve its 
intended purpose, the system has to function properly at the 
agency level, and it will not do so until Labor conducts a 
thorough investigation of each petition.
    An unsuccessful TAA petitioner at Labor faces three 
options: appeal immediately to the Court of International Trade 
(CIT), seek administrative reconsideration, or give up. Labor 
sends a denial letter that informs the petitioner of their 
right to administrative consideration but not of their right to 
seek a Court appeal. There is no excuse for Labor's failure to 
inform workers of the right to appeal, and I fear that many 
give up unaware of that right.
    For the few cases that do eventually make it to the Court 
of International Trade, the TAA petitioner faces a whole new 
round of challenges, frustration, and delay. The average case 
at the CIT took approximately 354 days to resolve. Contrast 
that with the fact that Congress contemplated that these 
decisions would be made within 40 days of the filing of the 
petition by the Department.
    In almost every case Labor will ask the CIT's permission to 
conduct what is known as a ``voluntary remand proceeding.'' In 
essence, Labor will go back and revisit the facts and 
reconsider its decision.
    Aside from being a concession that the agency's decision 
isn't supported by the investigation that it conducted, it adds 
further delay to the process of up to 60 days or more. More 
disturbing, Labor often uses these proceedings as a means of 
bullet-proofing its initial decision not to certify. This means 
multiple Court-directed remands are necessary to get Labor to 
do what a reasonable decision-maker would have done from the 
outset. Labor engages in several other litigation tactics that 
cause delay, including implausible interpretations of the law 
and the facts. Each day of delay makes an eventual Court 
victory less meaningful for the workers.
    The problems with Labor's investigations and subsequent 
litigation tactics are widespread. My written testimony 
contains excerpts from several CIT judges criticizing Labor on 
this score. The Judiciary has done its level best, but the 
problem persists and has persisted irrespective of which party 
occupies the Executive Branch. So in my view, the solution 
requires legislative pressure and changes to the law.
    To conclude, the biggest problem is ETA's conduct and 
approach to investigations, and fixing this does not require 
any changes to the law. Congress simply must hold the agency 
accountable. Several changes to the law could help, including 
establishing swift and strict timeframes, allowing for more 
meaningful participation by the workers and their counsel in 
remand proceedings, and clarifying that the CIT has the 
authority to order Labor to certify workers.
    Thank you, Mr. Chairman and Members of the Committee, for 
affording me the honor of representing the interests of 
hardworking men and women of America who have been failed by 
the very agency that Congress designated to protect their 
interests.
    [The prepared statement of Mr. Morgan follows:]
                 Prepared Statement of Frank H. Morgan
    Good afternoon Mr. Chairman and Members of the Committee. My name 
is Frank Morgan and I am an attorney at the law firm of White & Case 
LLP where I practice primarily in the area of international trade 
disputes. My remarks today are necessarily my own and do not reflect 
the views of my firm or our clients. I thank Michael O'Connor and Sara 
Sargeantson, two summer associates at my firm whose assistance made 
this testimony possible.
    Thank you for inviting me to offer my experience and to convey the 
concerns of the many frustrated workers who have unsuccessfully 
petitioned the Employment and Training Administration (``ETA'') of the 
Department of Labor for trade adjustment assistance (``TAA'').\1\ The 
primary mission of the Department of Labor is to protect and promote 
the American worker's interests. It should go without saying that in 
administering TAA, the ETA must act with the utmost regard for the 
American workers who seek assistance. But, all too often, the ETA fails 
to do so. And regardless of one's views about international trade, 
ensuring that workers who are adversely affected by trade get prompt 
retraining and transitional assistance is a no brainer. In preparing 
this testimony I came across a startling statistic: from 2002-2005, 
approximately 45 TAA cases were litigated, and in all but four, Labor 
ultimately certified the workers. That is shocking and it shows that 
Labor is not fulfilling the responsibilities that Congress entrusted to 
it.
---------------------------------------------------------------------------
    \1\ Throughout my testimony, I refer interchangeably to the agency 
as ``the ETA'' or Labor.
---------------------------------------------------------------------------
    Before I joined White & Case, I served as a law clerk to the 
Honorable Judith M. Barzilay at the U.S. Court of International Trade 
(``CIT''). It was during my clerkship that I first encountered the 
difficulties unsuccessful TAA petitioners face. In addition to working 
for an outstanding jurist, I had the privilege of knowing many other 
judges on the court. A review of their decisions reflects just how 
frustrated and disturbed most (if not all) of the CIT judges are with 
ETA's handling of TAA cases. Among a frustrated bench, Judge Delissa A. 
Ridgway stands out for her efforts to call attention to the problem and 
to catalogue the breadth and enduring nature of it. Attachment 1 of my 
written testimony contains Judge Ridgway's decision in Former Employees 
of BMC Software, Inc. v. U.S. Sec'y of Labor, 454 F. Supp.2d 1306 (Ct. 
Int'l Trade 2006) which is a must read for anyone that is concerned 
about this problem. My remarks today are mere footnotes to the expert 
treatment Judge Ridgway already has given to the topic.

I.  DIFFICULTIES FACED BY THE UNSUCCESSFUL TAA PETITIONER

    My testimony focuses on the unsuccessful TAA applicant both at the 
agency level and in the subsequent battles to use the judicial process 
to overturn an incorrect agency decision. Without question (as I am 
sure Labor would be quick to note), many workers are successful in 
petitioning for TAA. But--even if Labor reaches the correct result much 
of the time--the workers who succeed at the agency level are the easy 
cases, where little or no independent inquiry by the agency is 
necessary: the cases where it would be patently obvious to anyone that 
the workers satisfy the criteria for TAA certification; the cases where 
the workers have themselves compiled and neatly served up for Labor's 
convenience all the evidence required to support certification; and 
(perhaps) the cases where certification of the workers is the 
politically expedient thing to do.
    The problem arises in all the other cases: the cases where it is 
not immediately obvious whether the workers are entitled to TAA, where 
all the evidence is not served up to the agency on a silver platter--
the cases where a true investigation is required. These are the cases 
where the agency fails the workers. Labor often reaches the wrong 
result because it has conducted an inadequate investigation. It is one 
thing to deal with the easy cases, and an entirely different one to 
resolve those that require a deeper investigation. But Congress did not 
intend for Labor to shirk the difficult investigations.
    Of course, the statute does not entitle every petitioning worker to 
be certified for TAA. But, as the Court's opinion in BMC emphasized, 
``every worker is entitled to a thorough agency investigation of his or 
her claim--without being forced to resort to the courts. The law 
mandates no less.'' \2\ It is for these reasons that I believe my focus 
on the unsuccessful TAA applicant is appropriate.
---------------------------------------------------------------------------
    \2\ Former Employees of BMC Software, Inc. v. U.S. Sec'y of Labor, 
454 F. Supp.2d 1306, 1357 (Ct. Int'l Trade 2006) (quoting 29 C.F.R.  
90.12).
---------------------------------------------------------------------------
    In order to understand the difficulties unsuccessful TAA applicants 
face, it is necessary to understand how a case starts, proceeds through 
the ETA, and how it may, eventually, end up in the judicial system. TAA 
initially is sought at the agency level, specifically, at the ETA. A 
petition for TAA generally is filed by three or more workers who have 
been laid off by a firm, a union representing workers that have been 
laid off, or the firm that has laid off workers. Eligibility for TAA is 
governed by statute. To grossly summarize the law, Labor is supposed to 
certify workers for TAA if one of the following three conditions is 
met: 1) there has been an increase in imports that caused job losses, 
or 2) the workers' firm shifted production to a country that has a free 
trade or other preferential trade agreement with the United States, or 
3) the workers' firm shifted production to a foreign country and there 
have been subsequent imports of that product into the U.S. market.\3\ 
If Labor does not certify, the workers have the right to appeal that 
decision to the CIT. I know that this committee has been examining the 
effects of globalization, and I thought the Members might be interested 
to know that appeals involving a shift in production to a foreign 
country have accounted for approximately 22 of 40 appeals filed with 
the CIT since 2005.
---------------------------------------------------------------------------
    \3\ Workers who are employed by a firm that supplies components to 
a firm that has been certified for TAA also may be eligible. See 19 
U.S.C.  2272(b). Please see Attachment 2 for the full text of the 
statutory provision governing eligibility for TAA.

A.  Difficulties for TAA Petitioners at the Agency Level
    At the agency level, TAA petitioners almost never have counsel 
representing them. As a consequence, individuals who often have little 
or no experience with federal law and agency regulations are largely 
relying on the ETA to perform its functions with the utmost regard for 
protecting their interests. Indeed, as the BMC opinion pointedly 
observes, that is precisely the situation that Congress contemplated:

         Congress designed TAA as a remedial program, recognizing that 
        petitioning workers would be (by definition) traumatized by the 
        loss of their livelihood; that some might not be highly-
        educated; that virtually all would be pro se; that none would 
        have any mastery of the complex statutory and regulatory 
        scheme; and that the agency's process would be largely ex 
        parte. Congress did not intend the TAA petition process to be 
        adversarial. Nor did Congress intend to cast the Labor 
        Department as a `defender of the fund,' passively sitting in 
        judgment, ruling `thumbs up' or `thumbs down' on whatever 
        evidence petitioning workers might manage to present.

         Quite to the contrary, the Labor Department is charged with an 
        affirmative obligation to proactively and thoroughly 
        investigate all TAA claims filed with the agency--and, in the 
        words of its own regulations, to `marshal all relevant facts' 
        to make its determinations.\4\
---------------------------------------------------------------------------
    \4\ Former Employees of BMC Software, Inc. v. U.S. Sec'y of Labor, 
454 F. Supp.2d 1306, 1357 (Ct. Int'l Trade 2006) (quoting 29 C.F.R.  
90.12).

    Because counsel does not become involved until much later in the 
process we typically only see the shortcomings in Labor's initial 
investigations after the case has been appealed to the CIT--and the 
shortcomings can be tremendous. For example, in the first TAA case that 
I litigated, the ETA determined based on inconclusive and inaccurate 
information that the workers were service providers, and denied TAA on 
those grounds. It took almost four years and several court orders to 
get the ETA to correct that decision. Unfortunately, by that point, TAA 
was meaningless for my clients. For TAA to serve its intended purpose, 
the system has to function properly at the agency level. As I will 
discuss later, this will not occur until the ETA fully accepts the 
mandate that Congress has given it to conduct a full and thorough 
investigation--in every case.
    Congress has not set forth specific instructions on how Labor is to 
conduct its proceedings, but Congress has clearly expressed its intent 
that Labor is to conduct an investigation.\5\ By providing Labor with 
the power to subpoena witnesses and documents, Congress evinced a clear 
intent that the investigation should not be cursory.\6\ Labor's 
investigations, however, are often pro forma at best, and fall far 
short of what Congress intended.
---------------------------------------------------------------------------
    \5\ See 19 U.S.C.  2271(a)(3) (requiring Labor to publish notice 
of the initiation of an investigation).
    \6\ See 19 U.S.C.  2321(a).
---------------------------------------------------------------------------
    In addition to mandating that Labor conduct an investigation, 
Congress has recognized that the ETA must conduct its investigation 
swiftly, providing Labor with 40 days to determine whether the 
petitioners are eligible for TAA.\7\ In fact, Congress shortened the 
period to 40 days from 60 days in 2002. Yet Labor, by regulation, has 
granted itself the authority to conduct reconsideration proceedings 
that can greatly extend the time for making its ``final'' determination 
beyond 40 days.\8\ If a worker chooses to pursue this process, it can 
add up to 90 additional days to the process at the agency level.\9\
---------------------------------------------------------------------------
    \7\ See 19 U.S.C.  2273(a).
    \8\ See 29 C.F.R.  90.18. While Labor claims that the authority to 
conduct an administrative reconsideration is provided for by the Trade 
Act of 1974, as amended, my colleagues and I have been unable to locate 
the relevant provision in the statute.
    \9\ See 29 C.F.R.  90.18(c)&(g) (providing Labor with 15 days to 
decide whether reconsideration is warranted and, if so, 45 additional 
days to make the determination). In my view, the investigation that 
Labor performs on reconsideration is equally inadequate, so the 
additional time provides a TAA applicant with little benefit, and 
merely delays the time before an appeal is made.
---------------------------------------------------------------------------
    It is deeply disturbing--and, likely, telling--that the standard 
form letter that Labor uses to inform workers that their TAA petition 
has been denied advises the workers only of the ability to seek 
administrative reconsideration before the agency, and conveniently 
fails to inform them of their right to seek immediate judicial review 
instead.\10\ The vast majority of unsuccessful TAA petitioners simply 
end the process at this point, unaware of their right to appeal or too 
exhausted and frustrated to continue.
---------------------------------------------------------------------------
    \10\ My understanding is that Labor used to inform petitioners of 
that right and its omission from current notifications can only be 
taken as an attempt to limit petitioners' right to avail themselves of 
the judicial system.
---------------------------------------------------------------------------
    For the unsuccessful TAA petitioners with any fight left in them, 
there is one last hurdle, the 60 day deadline for filing an appeal at 
the CIT.\11\ This deadline is extremely short especially when 
considering that most aggrieved persons are not represented by an 
attorney. Congress should consider extending the time for filing an 
appeal to reflect this reality.
---------------------------------------------------------------------------
    \11\ See 19 U.S.C.  2395(a).

B.  Difficulties Faced After the Administrative Process Has Concluded 
        and Litigation Begins
    Once a TAA case gets to the CIT, it takes too long to litigate, 
and--even then--the ETA generally fails to carry out its 
responsibilities with the utmost regard for the workers. Fully 
litigated TAA cases from 2005 to present took an average of 354 days to 
resolve, with one case lasting 954 days, or a little over two and one-
half years. As I mentioned earlier in my testimony, the first case I 
litigated took four years to resolve. In my case and in at least 15 of 
the cases litigated since 2005, there was a change in Labor's decision. 
Instead of receiving TAA within 40 days, as Congress intended, these 
workers were unjustly denied TAA for far too long, and all because 
Labor's investigation was inadequate. During this time, those 
unsuccessful TAA petitioners suffered the full brunt of the adverse 
effects attendant to being laid off, and even though the court action 
was successful, it can never remedy the harm that workers suffer due to 
delay in receiving the TAA benefits to which they were entitled.
    As the CIT observed in the Chevron case, the consequences of agency 
delays in certification can be profound--sometimes, quite literally, 
life-or-death:

         There is a very human face on [TAA cases]. Workers who are 
        entitled to trade adjustment assistance benefits but fail to 
        receive them may lose months, or even years, of their lives. 
        And the devastating personal toll of unemployment is well-
        documented. Anxiety and depression may set in, with the loss of 
        self-esteem, and the stress and strain of financial pressures. 
        Some may seek refuge in drugs or alcohol; and domestic violence 
        is, unfortunately, all too common. The health of family members 
        is compromised with the cancellation of health insurance; 
        prescriptions go unfilled, and medical and dental tests and 
        treatment must be deferred (sometimes with life-altering 
        consequences). And college funds are drained, then homes are 
        lost, as mortgages go unpaid. Often, marriages founder.\12\
---------------------------------------------------------------------------
    \12\ Former Employees of Chevron Prods. Co. v. U.S. Sec'y of Labor, 
298 F. Supp. 2d 1338, 1349 (2003).

The bottom line is this: Where displaced American workers seeking TAA 
benefits are concerned, litigation will never be an adequate substitute 
for Labor doing its job. For this reason, it is imperative for Labor to 
conduct a proper investigation in the first instance.
    In large measure, Labor creates the delays in the litigation 
process by: 1) seeking a voluntary remand in virtually every case that 
is appealed, 2) making excessive requests for extensions, 3) failing to 
conduct the type of investigation (in the first instance and in 
response to court ordered remands) that Congress contemplated, 4) 
failing to interpret the statute in a good faith manner, consistent 
with the remedial nature of the TAA statute, 5) failing to concede that 
cases with similar facts should be resolved in a similar manner, and 6) 
failing to respect the CIT's authority. These failings suggest to me, 
and I am not alone in this view, that Labor is defaulting on its 
obligations to fulfill the responsibilities that Congress entrusted to 
it.

1.  Labor Often Uses Voluntary Remand Proceedings to Support its 
Original Determination

    In the cases I have litigated, the ETA has sought consent to 
conduct what is referred to as a voluntary remand proceeding. This 
means that Labor is asking the court for permission to conduct 
additional fact finding, clarify areas of confusion, and reconsider its 
decision. In other words, Labor is admitting that it did not do a 
proper investigation in the first instance. Moreover, in other cases 
that I have reviewed, it appears that Labor seeks a voluntary remand in 
almost every case. In contrast, other agencies that appear before the 
CIT rarely ask for voluntary remands. In short, the ETA's own actions 
at the CIT demonstrate that it is not conducting a proper investigation 
in the first instance.
    Adding to this frustration is the fact that Labor often does not 
conduct a better investigation after asking for the remand. Often the 
ETA conducts the remand investigation with an aim towards ``bullet 
proofing'' its original decision.\13\ For example, in the Former 
Employees of Merrill Corporation Labor asked for 90 days to reconsider 
its original determination, the plaintiffs consented and the CIT 
granted the request.\14\ A fundamental issue was whether the workers 
produced an article. Labor had originally contended that the workers 
provided a service; and thus, were not eligible for TAA. Yet in the 
voluntary remand proceeding, and despite requests that it do so, Labor 
did not even examine whether the workers' firm produced printed 
materials which would have qualified as articles. As the CIT noted, 
``Labor failed to undertake even a minimal investigation of Merrill's 
production of printed matter. The record is devoid of any information 
concerning the percentage of [printed documents].'' \15\
---------------------------------------------------------------------------
    \13\ As I discuss below, even when the remand proceeding is ordered 
by the CIT, Labor sets out to justify its original determination.
    \14\ See Former Employees of Merrill Corp. v. U.S. Sec'y of Labor, 
Slip Op. 04-2, 2004 WL 34548 (Ct. Int'l Trade Jan. 4, 2004).
    \15\ Former Employees of Merrill Corp. v. U.S. Sec'y of Labor, 387 
F. Supp. 2d 1336, 1346 (Ct. Int'l Trade 2005).

---------------------------------------------------------------------------
2.  Labor's Requests for Extensions Are Excessive

    As I have explained earlier in my testimony, the TAA statute 
reflects Congress' considered judgment that 40 days is ample time for 
Labor to complete a thorough investigation of even the most complex TAA 
petition. But not only is the agency failing to fulfill that mandate, 
it is routinely seeking periods far in excess of 40 days to conduct its 
remand investigation--precious time on top of the time the ETA already 
had to conduct the initial investigation. In short, the agency's 
dilatory conduct in the course of litigation greatly compounds and 
exacerbates the effects of its failures and omissions in the conduct of 
its initial investigation. For the unsuccessful TAA petitioner, the 
feeling of frustration and anger builds each time Labor seeks an 
extension.
    I have been involved in litigation (either in private practice or 
as a law clerk) with almost every agency over which the CIT has 
jurisdiction. Parties (both private and government) often seek 
extensions of time to perform certain acts. But Labor stands out both 
in terms of the number of extensions requested and the apparent lack of 
need for them. In the Former Employees of Merrill Corporation 
litigation, Labor sought two extensions of time to file various remand 
results.\16\ Like Charlie Brown hoping to finally kick the football, we 
consented in the belief that Labor needed the time and was acting in 
good faith. Yet this proved not to be the case, as Labor reached the 
same result over and over.
---------------------------------------------------------------------------
    \16\ Labor's counsel also sought extensions for various reasons. 
While the reasons given were understandable, the combined effect was to 
significantly delay the resolution of the case.
---------------------------------------------------------------------------
    In the TAA case I am currently litigating, Labor sought a voluntary 
remand (which it originally had 60 days to complete) and then asked for 
two extensions of time to file the remand results. We consented to the 
first because a legitimate reason was provided. We objected to the 
second because it was requested in the afternoon on the very day the 
remand determination was supposed to be filed with the CIT, and Labor 
did not even offer a reason for making the request. Labor eventually 
filed its remand determination with the CIT, again denying eligibility. 
We were disappointed with the result but not surprised given Labor's 
track record. What outraged us was what Labor did in those 70 days: 
seven e-mail messages (four of which were non-substantive), a few voice 
mail messages, and a visit to a website. This did not require seven 
days, much less 70.
    Again, these are not isolated incidents. Labor typically has 
requested at least one extension in each fully litigated case since 
2005, and has requested as many as six extensions in a single case. The 
requests averaged approximately 20 days each but some were as long as 
90 days. This is troubling because the extension follows on what are 
almost always 60 or 90 day periods that already had been given to 
Labor. In my experience, other agencies do not request so many 
extensions for such lengths of time, and when they do, it is usually 
because the private parties also need additional time.

3.  Labor Does Not Conduct Investigations in the Manner Congress 
Contemplated

    As I discussed earlier, Labor does not conduct an adequate 
investigation in the first instance. In my experience, this does not 
change even after the case reaches the CIT. The ETA's failure to 
conduct an adequate investigation causes significant delays in the 
resolution of a CIT proceeding.
    First, the amount of information that Labor obtains is 
insignificant and insufficient to resolve the issues that are presented 
in most cases. In the cases I have litigated, the investigation mainly 
consisted of a few e-mail messages and a few phone conversations. The 
agency record, even after several remand investigations, often consists 
of fewer than fifty pages after accounting for duplicative material. 
Moreover, when information supports a negative determination, Labor 
accepts it without question.
    In contrast, other agencies with which I am intimately familiar 
(such as the International Trade Commission (``ITC'') and Department of 
Commerce (``DOC'') ) obtain far more information in similar time 
frames, and critically assess it. I am convinced that Labor does not 
seek more information, and does not conduct the kind of investigation 
that Congress intended for fear that it will undercut the decision not 
to certify.
    Second, Labor does not conduct its investigations in a manner that 
gives counsel for the workers a meaningful opportunity to participate. 
Labor does not provide information to counsel for the workers as it is 
obtained, but only after Labor has made and submitted its remand 
determination to the CIT. In contrast, the ITC and DOC release 
information that is submitted to the agency (or obtained by it) to 
parties on the same day or shortly thereafter. The ex parte nature of 
Labor's investigation, even within the context of an appeal, means that 
the workers' first opportunity to challenge the relevance, accuracy, 
and completeness of the information is after the case re-commences at 
the CIT. Not only does this cause further delay, but it suggests that 
Labor is not interested in arriving at the correct result. Counsel for 
employees of IBM referred to the manner in which Labor conducts its 
remand investigations as a ``sham which lacked transparency and was 
conducted to reach a predetermined negative result.'' \17\ Again, this 
suggests that Labor is not acting in accordance with the utmost regard 
for the workers, which is the mission that Congress entrusted to it. 
Indeed, when workers succeed in achieving TAA certification through 
litigation, it is only because the workers and their counsel have 
provided evidence to the ETA, which the ETA appears to be wholly 
unwilling to obtain on its own. Accordingly, Labor's standard practice 
of excluding the workers and counsel from playing an active role in the 
remand investigation in effect postpones an accurate determination on 
the workers' entitlement to TAA benefits, and is indefensible.
---------------------------------------------------------------------------
    \17\ Former Employees of IBM Corp. v. U.S. Sec'y of Labor, 483 F. 
Supp. 2d 1284, 1287 (Ct. Int'l Trade 2007 (quoting Plaintiffs' brief).
---------------------------------------------------------------------------
    Third, Labor arbitrarily relies on information that supports its 
decision to deny TAA certification, and disregards that which does not. 
For example, the CIT has criticized Labor for over-reliance on employer 
provided information that supported no certification for TAA when there 
was contradictory information submitted by the workers that 
contradicted it and supported certification.\18\ If Labor uniformly 
relied on employer information at least there would be consistency, but 
even this is not the case. In the cases I have litigated, the employer 
generally was supportive of the workers' request for TAA, and in one 
instance, the employer even filed the TAA petition and continued to 
press for Labor to find that the employees were eligible. Labor chose 
to ignore the employers' statements and information favorable to TAA 
certification. Yet had the employers submitted information unfavorable 
to certification, I suspect Labor would have relied on the information. 
Again, Labor's pattern of seizing on any evidence that supports its 
decision to deny benefits--and its utter disregard for that evidence 
which supports certification--demonstrates a lack of good faith in 
resolving the dispute and adds to the delay in the resolution of the 
case.
---------------------------------------------------------------------------
    \18\ See Former Employees of BMC Software, Inc. v. U.S. Sec'y of 
Labor, 454 F. Supp. 2d 1306, 1328-36 (Ct. Int'l Trade 2006).

4.  Labor Arrives at Interpretations of the Statute that Do Not Reflect 
---------------------------------------------------------------------------
a Good Faith Effort to Resolve the Problem

    The agencies that I primarily appear before (the ITC and DOC) 
almost always offer well-reasoned views in their interpretations of the 
statute. Even when I have occasion to challenge the reasonableness of 
an ITC or DOC interpretation, I have never faced one as absurd and 
unreasonable as the one Labor offered in Former Employees of Merrill 
Corporation.
    My clients in that case produced financial documents (SEC filings, 
annual reports, etc.) for many different customers. The firm shifted 
certain functions (typesetting, proof reading, formatting) to India, 
and the finished financial document was imported into the United 
States. After the firm shifted that aspect of production offshore, it 
laid off the workers who had performed those functions. Following 
several court ordered remands, and years into the case, Labor found a 
new and previously unarticulated reason for denying TAA to my clients. 
Labor reasoned that the articles my clients produced were not like or 
directly competitive with the imported articles.\19\
---------------------------------------------------------------------------
    \19\ It took several CIT orders just to get Labor to grudgingly 
accept that my clients produced an article.
---------------------------------------------------------------------------
    The ETA took the position that each financial document was unique. 
For example, an annual report for Microsoft was not like or directly 
competitive with an annual report for Apple, and even quarterly 
financial reports were not like or directly competitive with one 
another because they contained different financial data from different 
reporting periods. On the basis of this tortured reasoning, Labor 
argued that the workers who lost their jobs after the shift to India 
were not eligible because each and every article they produced was 
unique, and thus did not fall within the meaning of ``like or directly 
competitive'' as Labor interpreted the term. Nonsense, as the CIT 
astutely noted. Nowhere did Congress (or even Labor) restrict TAA 
eligibility ``to workers engaged in mass-production to the exclusion of 
workers whose output may require skills, training, and expertise 
necessary to produce custom-made articles.'' \20\ I believe that 
Labor's reliance on tortured interpretation of the statute to defend a 
negative decision shows how deep the problems are in the ETA's 
administration of the statute. Again, this is not a unique instance of 
Labor engaging in an absurd interpretation of the statute in order to 
reach Labor's desired result. The CIT chastised Labor in another case 
as follows: ``To put it bluntly, the Labor Department's pinched, 
formalistic analysis verges on intellectual dishonesty.'' \21\
---------------------------------------------------------------------------
    \20\ Former Employees of Merrill Corp. v. U.S. Sec'y of Labor, 483 
F. Supp. 2d 1256, 1268 (Ct. Int'l Trade 2007).
    \21\ See Former Employees of IBM v. U.S. Sec'y of Labor, 483 F. 
Supp. 2d 1284, 1326 (Ct. Int'l Trade 2007).

5.  Labor Does Not Concede that Cases with Similar Facts Should Have 
---------------------------------------------------------------------------
Similar Outcomes

    Another disturbing trend that adds to the unsuccessful TAA 
petitioners' plight is the unwillingness of the ETA to acknowledge that 
similarly situated applicants should receive the same treatment. Labor 
ignored this basic tenet of law in Former Employees of Merrill 
Corporation. During the course of that multi-year litigation, but in a 
different case, Labor announced a change in policy that recognized 
certain products could be considered articles even if the goods were 
intangible, and workers manufacturing them would thereby qualify for 
TAA. Labor, however, did not notify the CIT of this change--that burden 
fell on the workers. Upon learning of this policy change, the CIT 
ordered Labor to reconsider its decision.\22\ Incredibly, Labor again 
denied certification (as noted above, on the grounds that the articles 
were unique). But this time, Labor ignored its practice in still a 
different case in which it had certified workers who produced custom 
logos, which--by definition--were unique.\23\ In other words, Labor 
twice in the same proceeding failed to accord a similar outcome to 
similarly situated individuals. Labor's failure in this regard is not 
unique, as the CIT has expressed a similar concern in three recent 
cases.
---------------------------------------------------------------------------
    \22\ See Former Employees of Merrill Corp. v. U.S. Sec'y of Labor, 
Slip Op. 06-72, 2006 WL 1491616 (Ct. Int'l Trade May 17, 2006).
    \23\ Former Employees of Merrill Corp. v. U.S. Sec'y of Labor, 483 
F. Supp. 2d 1256, 1268-69 (Ct. Int'l Trade 2007).

---------------------------------------------------------------------------
6.  Labor Appears to Lack Respect for the CIT's Authority

    In the cases in which I have been involved, and in analyzing many 
CIT decisions, it is evident to me that Labor has little respect for 
the CIT's authority. Short of holding Labor officials in contempt, 
there is little the CIT can do to remedy this situation. In my view, 
this is partly responsible for the untenable situation that exists 
today, where Labor strives to maintain its original determination 
without regard to the duty prescribed by Congress to conduct TAA cases 
with the utmost regard for the workers.
    Labor, itself, has argued that the CIT has no authority to order 
the certification of workers, and that Labor, alone, can do so. For 
support, Labor cites two statutory provisions. The first states that 
Labor's factual findings are conclusive if they are supported by 
substantial evidence.\24\ The second states that the CIT may not grant 
an injunction or issue a writ of mandamus in an appeal of Labor's 
denial of TAA.\25\ Taken together, Labor reads these provisions to mean 
that there can only be an endless back and forth between the agency and 
the court until one side surrenders. At no point, in Labor's view, does 
the CIT have authority to order certification. The consequence of this 
battle of wills is delay in the final resolution of the case and issues 
that already had been settled during a prior segment of the same 
proceeding often are reargued.\26\
---------------------------------------------------------------------------
    \24\ See 19 U.S.C.  2395(b).
    \25\ See 28 U.S.C.  2643(c)(2).
    \26\ See Former Employees of Merrill Corp. v. U.S. Sec'y of Labor, 
483 F. Supp. 2d at 1266 n.7 (stating ``This Court does not appreciate 
Labor's attempt to reargue this point in the third remand results.'').
---------------------------------------------------------------------------
    Common sense dictates that Labor's view is incorrect. Congress must 
have intended for meaningful judicial review and for the courts to have 
the authority to ensure that their rulings were implemented. This is 
evident from the fact that Congress created three levels of judicial 
review of Labor decisions including the CIT, the Court of Appeals for 
the Federal Circuit, and, ultimately, the Supreme Court.\27\ Yet 
Labor's position is that if Labor decides not to change its decision, 
not one of the three reviewing courts can do anything about it.
---------------------------------------------------------------------------
    \27\ See 19 U.S.C.  2395(c).

III.  THE PROBLEMS WITH LABOR ARE WIDESPREAD

    My testimony thus far has focused primarily on my own experience. 
The following quotes are intended to show the Committee the breadth of 
the problem. In my experience, some CIT judges direct occasional harsh 
words towards the government agencies that appear before it. But I am 
unaware of an agency that has received more uniform criticism from so 
many different judges. To me, this is further evidence of the severity 
of the problem with the ETA's investigations.
    The following quotations are taken from two opinions by Judge 
Ridgway in which she catalogued the court's various criticisms of 
Labor's investigations.

A.  Former Employees of BMC Software, Inc. v. U.S. Sec'y of Labor, 454 
        F. Supp. 2d 1306, 1313 N.10 (Ct. Int'l Trade 2006).

          agency's investigation was ``merely perfunctory,'' 
        and petition was denied based on only ``scant evidence;'' 
        action remanded to agency with instructions to supplement 
        ``shockingly thin'' record of investigation\28\ (Judge 
        Barzilay)
---------------------------------------------------------------------------
    \28\ Former Employees of IBM Corp., Global Servs. Div. v. U.S. 
Sec'y of Labor, 387 F. Supp. 2d 1346, 1350-51, 1353 (Ct. Int'l Trade 
2005).

          agency's determination both ``betrays . . . [any] 
        understanding of the industry it is investigating and the 
        requirements of the [TAA statute]'' and ``failed to make 
        reference to relevant law . . ., including Labor's own 
        regulations on the matter;'' and, although agency was granted 
        three extensions of time to file results of second remand, 
        remand results nevertheless still failed to comply with court's 
        remand instructions\29\ (Judge Pogue)
---------------------------------------------------------------------------
    \29\ Former Employees of Murray Engineering, Inc. v. Chao, 358 F. 
Supp. 2d 1269, 1274, 1275 n. 10 (Ct. Int'l Trade 2004).

          ``Labor repeatedly disregarded evidence of critical 
        facts,'' ``refused to accept information submitted by [the 
        petitioning workers], which allegedly contradicted statements 
        made by [company] officials,'' ``rel[ied] on incomplete and 
        allegedly contradictory information to support its position,'' 
        and ultimately ``failed to provide any analysis regarding the 
        change in its position to certify [the workers] as eligible'' 
        \30\ (Judge Carman)
---------------------------------------------------------------------------
    \30\ Former Employees of Tyco Electronics v. U.S. Dep't of Labor, 
350 F. Supp. 2d 1075, 1089 (Ct. Int'l Trade 2004).

          agency's finding ``is not only unsupported by 
        substantial evidence, but is contradicted by the scant 
        evidence'' that exists\31\ (Judge Eaton)
---------------------------------------------------------------------------
    \31\ Former Employees of Ericsson, Inc. v. U.S. Sec'y of Labor, 
Slip Op. 04-130, 2004 WL 2491651 at *5 (Ct. Int'l Trade Oct. 13, 2004).

          because ``Labor never acknowledged its receipt of 
        [the workers'] petition and wholly failed to initiate an 
        investigation thereof,'' ``the displaced workers' claims were 
        ignored for over three months;''' once initiated, ``[t]he 
        entire investigation consisted of two communications with only 
        one individual, [the company's] HR manager;'' and even ``the 
        investigation upon [the workers' request for] reconsideration 
        was perfunctory at best'' \32\ (Chief Judge Restani)
---------------------------------------------------------------------------
    \32\ Former Employees of Sun Apparel of Texas v. U.S. Sec'y of 
Labor, Slip Op. 04-106, 2004 WL 1875062 at *6-7 (Ct. Int'l Trade Aug. 
20, 2004).

          ``the entirety of the Labor Department's initial 
        investigation consisted of forwarding the standard [form 
        questionnaire]'' to company official, with no follow-up by the 
        agency, ``even though the company's responses . . . were, in a 
        number of instances, ambiguous or inconsistent, and called for 
        clarification;'' ``Moreover, the agency's investigation 
        conducted in response to the Workers' request for 
        reconsideration was little more than a rubber stamp of its 
        initial Negative Determination,'' ``consist[ing]--in toto--of 
        two phone conversations with company officials on a single day, 
        which were in turn documented in two memoranda that, together, 
        constituted a mere three sentences'' \33\ (Judge Ridgway)
---------------------------------------------------------------------------
    \33\ Former Employees of Ameriphone, Inc. v. U.S., 288 F. Supp. 2d 
1353, 1358-59 (Ct. Int'l Trade 2003).

B.  Former Employees of Ameriphone, Inc. v. U.S., 288 F. Supp. 2d 1353, 
---------------------------------------------------------------------------
        1355 N.3 (Ct. Int'l Trade 2003).

          castigating agency for ``a sloppy and inadequate 
        investigation'' which was ``the product of laziness,'' and 
        holding that a fourth remand would be ``futile'' \34\ (Judge 
        Tsoucalas)
---------------------------------------------------------------------------
    \34\ Former Employees of Hawkins Oil and Gas, Inc. v. U.S. Sec'y of 
Labor, 814 F. Supp. 1111, 1115 (Ct. Int'l Trade 1993).

          characterizing agency's actions as ``unreasonable'' 
        and its investigation as ``misguided and inadequate at best'' 
        where agency, inter alia, failed to clarify important aspects 
        of information provided by company, relied on company's 
        unsubstantiated statements on critical point, and ignored other 
        relevant information\35\ (Judge Goldberg)
---------------------------------------------------------------------------
    \35\ Former Employees of Swiss Indus. Abrasives v. U.S., 830 F. 
Supp. 637, 641-42 (Ct. Int'l Trade 1993).

          ``conclud[ing] that Labor . . . conducted an 
        inadequate investigation and analysis of the plaintiffs as 
        `production' workers'' and, similarly, that ``Labor's service 
        worker [analysis was] inadequate''\36\ (Judge Musgrave)
---------------------------------------------------------------------------
    \36\ Former Employees of Pittsburgh Logistics Sys., Inc. v. U.S. 
Sec'y of Labor, SLIP OP. 03-111, 2003 WL 22020510 at *11 (Ct. Int'l 
Trade 2003).

    With so many well-respected jurists of the same mind on this issue, 
there is no question in my mind that my clients' painful experiences 
---------------------------------------------------------------------------
are not unique--they are suffered by all unsuccessful TAA applicants.

IV.  COMMON MISUNDERSTANDINGS ABOUT PROBLEMS WITH LABOR'S 
                    ADMINISTRATION OF TAA

    In discussions that I have had with my colleagues over the years, 
it occurs to me that there are a number of misunderstandings that 
attempt to explain (or even justify) the inadequacy of Labor's 
investigations (both at the agency level and in subsequent litigation). 
Generally, the misconceptions fall into one of the following three 
categories: 1) Labor receives inadequate funding for the TAA program, 
2) Labor follows the wishes of the company that has laid off the 
workers, and 3) Labor has the same track record as the other agencies 
that appear before the CIT. My reason for addressing these 
misconceptions is that I believe each, in its own way, suggests that 
some factor, other than sheer unwillingness explains the ETA's action. 
In my view, there is no valid excuse for the appallingly low quality of 
Labor's investigations.

A.  Inadequate Funding or Lack of Resources Cannot Explain Labor's 
        Stance
    There is little question that Labor has limited resources in terms 
of staff, funds, and even the time it is given to conduct its 
investigations. At first glance, these would appear as a reasonable 
basis for excusing Labor's shortcomings. On closer inspection, the 
above factors cannot explain or justify Labor's failure to investigate 
TAA cases in the manner Congress intended.
    First, Congress has directed Labor to evaluate a worker's 
eligibility for TAA through an investigation that should consist of 
gathering all relevant evidence and applying the law to the facts 
found. Labor, surely, does not have the time or resources to compile 
the same extensive records as do other agencies such as the ITC and 
DOC. If Labor needs more than just the handful of investigators that it 
has, it should ask for them. To my knowledge, Labor has not done so. 
But even with the resources Labor does have, surely the agency could do 
far more than sending a few e-mail messages and making a few phone 
calls, especially in the context of a remand proceeding. Not allowing 
parties to meaningfully participate in the remand investigation, which 
would greatly improve the information gathering, also is not a question 
of resources. As I have previously discussed, Labor's failure to 
conduct the kind of investigation Congress intended is because the 
agency has lost sight of the need to hold the interests of the workers 
in the utmost regard.
    Second, Congress did not intend for funding concerns to drive 
Labor's determinations on TAA eligibility. Instead, Congress spelled 
out the conditions for eligibility and specified that if those 
conditions were satisfied, Labor was to certify the workers for TAA. To 
the extent Labor is making determinations on eligibility based on 
funding concerns, it is at complete odds with Congressional will.
    Third, my view is that Labor's overall approach to the unsuccessful 
TAA applicant demonstrates a lack of concern for the workers--not a 
lack of resources. Last minute requests for extensions of time, absurd 
interpretations of the statute, and a general unwillingness to accept 
the CIT's authority cannot be explained by resource constraints. In 
fact, by not following the statute and the CIT's instructions in good 
faith, Labor creates more work for itself--not less.

B.  Labor Follows the Will of the Company that Laid Off the Workers
    The CIT has expressed concern that Labor unquestioningly relies on 
employer-provided information to the exclusion of that provided by 
employees or other sources.\37\ In particular, the CIT was concerned 
that some companies might want to avoid the negative publicity that 
might be associated with laying off workers for trade-related 
reasons.\38\ As a result, such companies might have an incentive to see 
the petition fail, and would provide information to influence the 
decision in that direction. Consequently, if those circumstances were 
present and Labor accepted the information provided by company 
officials in the face of contradictory information provided by the 
employees, Labor clearly would not be fulfilling its responsibilities.
---------------------------------------------------------------------------
    \37\ See Former Employees of BMC Software, Inc. v. Sec'y of Labor, 
454 F. Supp. 2d 1306, 1328-37 (Ct. Int'l Trade 2006).
    \38\ See Former Employees of BMC Software, Inc. v. Sec'y of Labor, 
454 F. Supp. 2d 1333 (Ct. Int'l Trade 2006).
---------------------------------------------------------------------------
    While I do not doubt that the court's concerns were justified in 
the case before it and are present in others, my concern is that Labor 
seizes on whatever information supports its decision not to certify--
irrespective of the source. In the cases I have litigated, Labor 
ignored information provided by company officials, which if taken at 
face value, should have resulted in a certification of the workers for 
TAA. In one case, the company's human resources department was even 
responsible for filing the petition with Labor. A review of the cases 
filed at the CIT since 2005 shows that the company filed the TAA 
petition with Labor in at least six instances. So I do not believe that 
Labor tends to take the position favored by the firm laying off the 
workers. Rather, Labor relies on information that supports its decision 
not to certify.

C.  Labor Has the Same Track Record as Other Agencies that Appear 
        Before the CIT
    A number of agencies who enforce and administer the U.S. customs 
and trade laws are frequent litigants at the CIT. While I have not 
performed an objective assessment to compare the agencies' track 
records, I am able to offer my views based on the cases in which I have 
participated. In most trade and customs cases, the dispute between the 
private parties and the government agencies focuses on several discrete 
issues. Rarely (in my own experience, never) are challenges made to the 
overall adequacy of the investigation, and rarely does an agency ask 
for a voluntary remand, thereby conceding a flawed investigation. Even 
when Labor does not seek a voluntary remand, the record is so poorly 
developed that there is little to do but ask the CIT to remand to the 
agency.
    The large number of remands in TAA cases also makes Labor stand out 
from the other agencies administering the customs and trade laws. In my 
experience, and in all but the most unusual cases, if an ITC or DOC 
determination is not upheld by the CIT without remand proceedings it 
often is upheld after the remand proceedings. But in a TAA case, one 
must expect that multiple remands are going to be necessary just to 
settle the basic facts, which the CIT has described as the ``ping pong 
phenomenon.''
    Finally, there is no question that the CIT has expressed concern 
with agencies besides Labor. But if one looks earlier in my testimony 
at the excerpts from the opinions of a wide range of judges that 
contain scathing criticisms of the ETA, it is clear that Labor is in a 
class by itself.

V.  SOLVING THE PROBLEMS FACED BY UNSUCCESSFUL TAA PETITIONERS

    In my view, fixing the existing system will require one significant 
non-statutory change and several statutory ones. Sadly, the biggest 
obstacle to unsuccessful TAA petitioners is the Employment and Training 
Administration of the Department of Labor. Possibly no other change 
could have as beneficial an effect as holding the ETA responsible for 
conducting a meaningful investigation. The CIT has been trying to do 
this, yet the problem persists. As I mentioned earlier in my testimony, 
for TAA to be effective, Labor has to get it right the first time. Once 
the court steps in to force Labor to do a proper investigation it 
already is too late. By that time, most workers will have suffered the 
brunt of the adverse economic consequences associated with the job 
loss. While I can diagnose the problem, I cannot prescribe an exact 
cure for a problem that is deeply entrenched and long standing. I do 
think it will require active involvement by the legislature because in 
my view, the problem has persisted irrespective of which political 
party occupies the White House. In other words, I do not believe that a 
new occupant in the White House, irrespective of party, is going to 
solve the problem without active pressure from the legislative branch.
    In terms of legislative changes, I believe the following statutory 
amendments would improve unsuccessful TAA petitioners' chances of 
obtaining meaningful relief: 1) mandatory and swift time frames for 
judicial resolution of TAA cases, 2) mandatory changes to the manner in 
which the ETA conducts its investigations, and 3) clarifying that the 
CIT has the authority to order Labor to certify workers for TAA.
    Although it is not common for Congress to impose mandatory time 
frames on Article III courts, it is not without precedent. Congress has 
established express and speedy time frames under which the courts must 
act in laws ranging from the Crime Victims' Rights Act and the 
Antiterrorism and Effective Death Penalty Act to procedures dealing 
with the disclosure of classified information.\39\ I do not mean to 
convey the impression that TAA cases rise to the level of severity 
present in these other situations, but Congress created the program 
because it felt these individuals needed help, and if lengthy judicial 
proceedings are preventing that intent from being realized, Congress 
can impose time limits if it so chooses.
---------------------------------------------------------------------------
    \39\ See 18 U.S.C. 3771(d)(3); 18 U.S.C. 2339B(f)(5)(B); 28 U.S.C. 
 2261 et seq.
---------------------------------------------------------------------------
    Another improvement for unsuccessful TAA petitioners would be to 
require Labor to change the manner in which it conducts its 
investigations. As I have indicated throughout my testimony, I do not 
believe that the manner in which the ETA currently conducts 
investigations is consistent with what Congress intended. Two 
modifications would go a long way towards improving the quality of the 
investigation the ETA conducts. First, counsel for the workers should 
have the right to participate and ask questions in any fact-finding 
missions by Labor, whether conducted telephonically or otherwise. 
Second, Labor must provide counsel for the workers with the information 
it obtains on the day it receives the information, or shortly 
thereafter. These two changes are needed to ensure that the workers, 
through counsel, have a meaningful opportunity to participate in the 
remand proceedings.
    Finally, Congress needs to clarify the statute to protect the CIT's 
authority. As I noted earlier, Labor construes 19 U.S.C.  2395(b) and 
28 U.S.C.  2643(c)(2) to preclude the CIT from having the authority to 
order Labor to certify workers for TAA. As a consequence, litigations 
drags on endlessly, and getting to a final resolution becomes a war of 
wills. This cannot be what Congress intended when it enacted these 
provisions, and a clear statement to that effect is needed to end this 
absurd impasse.
    Thank you, Mr. Chairman and Members of the Committee, for affording 
me the honor of voicing these concerns on behalf of the countless 
hardworking men and women of America who have been failed by the very 
agency that Congress designated to protect their interests.


















































































































Attachment 2

19 U.S.C.  2272

(a) In general
    A group of workers (including workers in any agricultural firm or 
subdivision of an agricultural firm) shall be certified by the 
Secretary as eligible to apply for adjustment assistance under this 
part pursuant to a petition filed under section 2271 of this title if 
the Secretary determines that--

         (1) a significant number or proportion of the workers in such 
        workers' firm, or an appropriate subdivision of the firm, have 
        become totally or partially separated, or are threatened to 
        become totally or partially separated; and

         (2)(A)(i) the sales or production, or both, of such firm or 
        subdivision have decreased absolutely;

         (ii) imports of articles like or directly competitive with 
        articles produced by such firm or subdivision have increased; 
        and

         (iii) the increase in imports described in clause (ii) 
        contributed importantly to such workers' separation or threat 
        of separation and to the decline in the sales or production of 
        such firm or subdivision; or

         (B)(i) there has been a shift in production by such workers' 
        firm or subdivision to a foreign country of articles like or 
        directly competitive with articles which are produced by such 
        firm or subdivision; and

         (ii)(I) the country to which the workers' firm has shifted 
        production of the articles is a party to a free trade agreement 
        with the United States;

         (II) the country to which the workers' firm has shifted 
        production of the articles is a beneficiary country under the 
        Andean Trade Preference Act [19 U.S.C. 3201 et seq.], African 
        Growth and Opportunity Act [19 U.S.C. 3701 et seq.], or the 
        Caribbean Basin Economic Recovery Act [19 U.S.C. 2701 et seq.];

         or

         (III) there has been or is likely to be an increase in imports 
        of articles that are like or directly competitive with articles 
        which are or were produced by such firm or subdivision.

(b) Adversely affected secondary workers

    A group of workers (including workers in any agricultural firm or 
subdivision of an agricultural firm) shall be certified by the 
Secretary as eligible to apply for trade adjustment assistance benefits 
under this part if the Secretary determines that--

         (1) a significant number or proportion of the workers in the 
        workers' firm or an appropriate subdivision of the firm have 
        become totally or partially separated, or are threatened to 
        become totally or partially separated;

         (2) the workers' firm (or subdivision) is a supplier or 
        downstream producer to a firm (or subdivision) that employed a 
        group of workers who received a certification of eligibility 
        under subsection (a) of this section, and such supply or 
        production is related to the article that was the basis for 
        such certification (as defined in subsection (c)(3) and (4) of 
        this section);

         and

         (3) either--

                 (A) the workers' firm is a supplier and the component 
                parts it supplied to the firm (or subdivision) 
                described in paragraph (2) accounted for at least 20 
                percent of the production or sales of the workers' 
                firm; or

                 (B) a loss of business by the workers' firm with the 
                firm (or subdivision) described in paragraph (2) 
                contributed importantly to the workers' separation or 
                threat of separation determined under paragraph (1).

(c) Definitions
    For purposes of this section--

         (1) The term ``contributed importantly'' means a cause which 
        is important but not necessarily more important than any other 
        cause.

         (2)(A) Any firm, or appropriate subdivision of a firm, that 
        engages in exploration or drilling for oil or natural gas shall 
        be considered to be a firm producing oil or natural gas.

         (B) Any firm, or appropriate subdivision of a firm, that 
        engages in exploration or drilling for oil or natural gas, or 
        otherwise produces oil or natural gas, shall be considered to 
        be producing articles directly competitive with imports of oil 
        and with imports of natural gas.

         (3) Downstream producer.--The term ``downstream producer'' 
        means a firm that performs additional, value-added production 
        processes for a firm or subdivision, including a firm that 
        performs final assembly or finishing, directly for another firm 
        (or subdivision), for articles that were the basis for a 
        certification of eligibility under subsection (a) of this 
        section of a group of workers employed by such other firm, if 
        the certification of eligibility under subsection (a) of this 
        section is based on an increase in imports from, or a shift in 
        production to, Canada or Mexico.

         (4) Supplier.--The term ``supplier'' means a firm that 
        produces and supplies directly to another firm (or subdivision) 
        component parts for articles that were the basis for a 
        certification of eligibility under subsection (a) of this 
        section of a group of workers employed by such other firm.\40\
---------------------------------------------------------------------------
    \40\ 19 U.S.C.  2272.
    
    
    
    
                     Biography for Frank H. Morgan
    Frank H. Morgan is an associate with White & Case LLP's 
International Trade Group with an active practice in injury 
investigations before the U.S. International Trade Commission (ITC), 
anti-dumping and countervailing duty investigations before the U.S. 
Department of Commerce and in related trade litigation and appeals 
before the U.S. Court of International Trade and the U.S. Court of 
Appeals for the Federal Circuit.
    Mr. Morgan has represented manufacturers from numerous countries in 
a wide and diverse array of industries, including paper, lumber, steel, 
fertilizers, and agricultural goods. Mr. Morgan has served as a member 
of the Court of International Trade's planning committee for the 13th 
and 14th Judicial Conferences and has spoken on trade law issues to 
industry groups and professional organizations.
    Prior to joining White & Case LLP, Mr. Morgan served as a law clerk 
to the Honorable Judith M. Barzilay, Judge, U.S. Court of International 
Trade from 1998-2000. From 1997-1998, Mr. Morgan worked in the Office 
of the General Counsel of the ITC.

Publications

    ``Tips for the New Practitioner at the U.S. Court of International 
Trade,'' Georgetown University Law Center Continuing Legal Education 
Seminar Materials, Trade and Customs Law Refresher, January 2007

Bars and Courts

District of Columbia Bar, 2000

Virginia State Bar, 1998

U.S. Court of Appeals for the Federal Circuit

U.S. Court of Appeals for the Fourth Circuit

U.S. Court of International Trade

Education

B.A., Villanova University, 1995

J.D., Columbus School of Law, Catholic University of America, cum 
        laude, 1998

    Chairman Miller. Thank you, Mr. Morgan.
    Mr. Rosen.

STATEMENT OF MR. HOWARD F. ROSEN, VISITING FELLOW, THE PETERSON 
INSTITUTE FOR INTERNATIONAL ECONOMICS; EXECUTIVE DIRECTOR, THE 
             TRADE ADJUSTMENT ASSISTANCE COALITION

    Mr. Rosen. Thank you very much, Mr. Chairman, for the 
invitation this morning to discuss this very important issue.
    The U.S. economy faces intense competition from at home and 
abroad, and although this competition has its benefits, it 
places significant costs on American workers and their 
families, firms, and communities.
    Approximately 16 million jobs are terminated each year of 
which four million result in serious unemployment. Although the 
probability that a worker will become unemployed has declined, 
the duration of unemployment has actually increased.
    Approximately 700,000 firms go out of business each year, 
affecting six million workers. An additional 1.7 million firms 
contract each year, affecting another 11.8 million jobs. About 
40 percent of dislocated workers do not find a job within a 
year or two after their layoff. Another 40 percent who find 
jobs actually experience long-term earning losses. Forty-five 
counties representing a half a million workers have 
unemployment rates twice the national average currently, and 20 
metropolitan areas currently have unemployment rates 50 percent 
higher than the national average. Of these, 13 are in 
California, two are in Michigan, and one in each New Jersey, 
Washington, Florida, North Carolina, and Arizona.
    And finally, federal spending on training and employment 
and community development, as a share of GDP, has fallen 
sharply over the last 20 years. The country does not have a 
national, coherent, comprehensive strategy to deal with these 
economic dislocations. Instead, we have a collection of 
disparate, ad hoc, and inadequate programs that tend to provide 
assistance too little, too late.
    As a result, efforts to expand economic liberalization and 
introduce new technologies are facing significant political 
backlash. Over the long run reluctance to embrace economic 
flexibility will cost U.S. economic growth and seriously affect 
U.S. living standards.
    If I could, let me just give you some examples of some of 
the problems that we have with our existing programs. 
Currently, only one-third of unemployed workers actually 
receive unemployment insurance. If you are lucky enough to 
receive that unemployment insurance, it replaces only one-third 
of your previous wage, and one-third of unemployed people who 
receive unemployment insurance exhaust their assistance before 
they find a new job.
    As you have heard, there are targeted programs like the 
Trade Adjustment Assistance Program, and I commend Mr. Morgan 
for his statements that are really right on. The program, 
though, for those people who receive it, is quite effective. 
The problem is only a minority of workers receive that 
assistance.
    Programs designed to assist firms respond to competitive 
pressures such as the Manufacturing Extension Partnership and 
the Trade Adjustment Assistance Program for Firms, are also 
effective, but their funding is minuscule. The Department of 
Defense provides comprehensive assistance to communities that 
are hurt by military base closings, but there is no equivalent 
program for civilian dislocations.
    I am, therefore, this afternoon calling for a national 
economic adjustment rapid response as part of the country's 
broader competitiveness strategy. This national economy 
adjustment rapid response would be based on the following 
elements: comprehensive assistance to workers, firms, and 
communities; assisting everyone in need regardless of cause of 
dislocation; flexible, not one-size-fits-all; based on early 
intervention; and coordinating public and private assistance.
    Let me give you some examples. Instead of providing workers 
a one-size-fits-all list of assistance so that they must take 
it or leave it, we would provide a menu of assistance to 
workers which would include, in addition to income maintenance 
and training, possibly wage insurance and a tax credit to 
maintain their health insurance during their period of 
unemployment. We could expand and build on the Manufacturing 
Extension Partnership and the Trade Adjustment Assistance 
Program for Firms and apply the base-closing model to civilian 
economic dislocations.
    In conclusion, I just want to state some very basic facts. 
Number one, we do not live in a textbook. Markets are not 
perfect. The labor markets are also not completely flexible. 
There are transition costs. Unfortunately, many economists tend 
to ignore those transition costs. By contrast, I think that 
much of public policy is actually made to address transition 
costs.
    The debate is not over should we act or not. That debate 
was settled decades ago. The question is what kind of 
assistance do we provide and who should we assist. The 
challenge is designing government assisted programs that are 
cost effective and appropriate.
    Mr. Chairman, the Bear Stearns Adjustment Program could 
potentially cost the American taxpayers $30 billion, many 
multiples of the amount that the government currently spends to 
help workers, firms, and communities. If we can devote this 
many resources to save one financial institution, certainly we 
can find the resources to assist workers, firms, and 
communities throughout the country facing severe economic 
dislocation.
    I look forward to the discussion. Thank you.
    [The prepared statement of Mr. Rosen follows:]
                 Prepared Statement of Howard F. Rosen

  Designing a National Strategy for Responding to Economic Dislocation

    The U.S. economy faces intense competition from home and abroad. 
Although increased competition may benefit the economy through access 
to more, better and less expensive products and services, it places 
significant costs on American workers and their families, firms and 
communities. These costs are exacerbated by the lack of a national 
comprehensive strategy to deal with these economic disruptions. In 
place of a national strategy, there is a collection of ad hoc, out-of-
date and inadequate programs that provide too little assistance too 
late to those in need. As a result, efforts to expand economic 
liberalization and introduce new technologies in the economy are facing 
significant political backlash. Over the long run, reluctance to 
embrace economic flexibility may result in lower economic growth and 
risk long-term improvements in U.S. living standards.
    American workers, their families, firms and communities experience 
significant dislocations every day:

          Between 1995 and 2004, approximately 16 million jobs 
        were terminated each year. (See Figure 1.) Four million 
        terminations resulted in serious unemployment.

          Although the national unemployment rate has been 
        failing over the last several, years, the duration of 
        unemployment has been rising. (Figure 2.)

          No region is exempt from the recent changes in the 
        labor market. There has been a convergence of unemployment 
        rates across all 50 states and the District of Columbia.

          Between 1995 and 2004; approximately 690,000 firms 
        closed each year, affecting 6.1 million workers. An additional 
        1.7 million firms contracted each year, affecting 11.8 million 
        workers. (See. Figure 3.)

          Between 1996 and 2007 there were on average 16,400 
        mass layoff plant closings each year, affecting 1.8 million 
        workers.\1\ (See Figure 4.)
---------------------------------------------------------------------------
    \1\ Layoffs affecting 50 or more workers is considered a mass 
layoff.









          Forty-five counties, representing one-half million 
        workers, currently have unemployment rates twice the national 
---------------------------------------------------------------------------
        average.

          Of the 20 metropolitan areas currently 50 percent 
        above the national average unemployment rates, 13 are in 
        California, two are in Michigan and one each in New Jersey, 
        Washington, Florida, North Carolina and Arizona. (See Table 1.)
        
        

    Workers are the first to feel the negative consequences of economic 
restructuring due to increased domestic and international competition. 
They may be asked to cut back their hours, accept lower wages and/or 
benefits, or ultimately lose their jobs. Lori Kletzer finds that almost 
40 percent of displaced workers do not find new jobs within a year or 
two after their initial job loss.\2\ (See Figure 5.) Although 40 
percent of workers find new jobs, their new jobs pay less than their 
previous ones. Only a little more than 20 percent of displaced workers 
find new jobs that pay as much or more than their previous jobs.
---------------------------------------------------------------------------
    \2\ Kletzer, Lori, Job Loss from Imports: Measuring the Costs, 
Washington, D.C.: Institute for International Economics, 2001.
---------------------------------------------------------------------------
    Job loss can place enormous strain on household finances. The 
Congressional Budget Office reports that Unemployment Insurance (UI) 
played a significant role in maintaining family incomes of recipients 
who experienced long-term spells of unemployment, particularly for 
those families that had only one wage earner. Before becoming 
unemployed, recipients' average family income was about $4,800 per 
month. UI helped offset the reduction in average family income by 20 
percent points.\3\
---------------------------------------------------------------------------
    \3\ Long-term recipients are defined in this report as unemployed 
workers who received UI benefits for a spell of at least four 
consecutive months, in 2001 or early 2002.



    These pressures are not restricted to those workers employed in 
industries that directly face increased domestic and international 
competition. Workers employed in up-stream and down-stream industries 
may also experience economic dislocation as a result of the effect of 
increased competition on final goods-producing and service-providing 
industries. For example, in addition to its production workers, an 
apparel plant closing might affect textile workers, as well as 
maintenance and food service workers, designers, cutters, sales 
representatives and accountants associated with the production of 
apparel. Depending on the number of workers laid off from the apparel 
plant, there may also be a third ripple effect on the broader 
community. Communities with a high concentration of industry may 
experience further cutbacks and job losses, as workers and their 
families spend less money on consumer goods and services.
    Job loss is not restricted to production workers. Firm closures can 
also affect white-collar management workers. Although these workers 
tend to be more highly educated and earn higher incomes than production 
workers, their adjustment to economic dislocation can also be costly. 
Limited job opportunities in the local community may require these 
workers to move, causing significantly disruptions to their families.
    Mass layoffs and plant closings, and the associated drops in 
household disposable income, can also hurt a community's tax base, 
having implications for the provision of government services, including 
schools, transportation and health care. In summary, what starts as a 
``limited'' lay off or plant closing affecting a select group of 
workers can very easily result in successive ripple effects with 
consequences on an entire community.

Current Policy Responses to Economic Dislocation

    Existing government programs designed to cushion the effects of 
economic dislocation are, for the most part, out-of-date, ad hoc and 
inadequate. These programs are often targeted to assist select groups 
of workers or communities that have some political importance. Overall, 
these programs are not part of any comprehensive or coherent strategy. 
This ``segmentation ``of assistance is not a new phenomenon. Early 
examples include assistance programs for workers employed by 
Studebaker, the railroad industry and the meat packing industry in the 
1960s.\4\
---------------------------------------------------------------------------
    \4\ Frank Jr., Charles, Foreign Trade and Domestic Aid, Washington: 
The Brookings Institution. 1974.
---------------------------------------------------------------------------
    Many targeted programs are designed to ``compensate'' workers 
deemed to be adversely affected by changes in discrete policies, in 
order to reduce opposition to those changes. The largest example is 
Trade Adjustment Assistance (TAA), which was established in 1962 and 
subsequently expanded as part of Congressional approval of negotiations 
to liberalize trade. Other examples include targeted programs to assist 
workers affected by the Clean Air Act and legislation to protect 
Spotted Owls. Congress in currently considering establishing a program 
to assist workers potentially adversely-affected by policies aimed at 
reducing greenhouse gas emissions.
    Although there may be a political motivation for these targeted 
programs, the economic justification for them may not be as compelling. 
There is not much evidence that the adjustment burden placed on workers 
covered by these targeted programs is significantly different from that 
experienced by other dislocated workers. In addition to discriminating 
between groups of workers, these programs create a bureaucratic maze, 
making it harder for worker to get the assistance they desperately 
need.
    For example, the Catalogue of Federal Domestic Assistance lists 52 
programs under the category of ``Economic Development,'' 44 programs 
under ``Community Development'' and 60 programs under ``Job Training 
and Employment.'' \5\ Although the information included in the 
catalogue is extremely useful, the catalogue is difficult to navigate 
and the material is written at a highly technical level. A more brief 
and use-friendly version of this catalogue could provide invaluable 
assistance to workers, their families, firms and communities facing 
economic dislocations.
---------------------------------------------------------------------------
    \5\ Executive Office of the President, Office of Management and 
Budget, Catalog of Federal Domestic Assistance, Washington: Government 
Printing Office, 2008.
---------------------------------------------------------------------------
    The following are examples of some of the more well known programs 
designed to assist workers, firms and communities adjust to economic 
dislocation.

Worker assistance

Unemployment Insurance

    Despite significant changes in U.S. labor market conditions there 
have been no major changes in the basic structure of UI since it was 
established 70 years ago. As a result, UI does not currently meet its 
initial goals, leaving millions of workers without the assistance they 
desperately need.\6\
---------------------------------------------------------------------------
    \6\ Kletzer, Lori G. and Howard F. Rosen, ``Reforming Unemployment 
Insurance for the Twenty-First Century,'' The Hamilton Project, 
Discussion Paper 2006-06, Washington: The Brookings Institution, 
September 2006.
---------------------------------------------------------------------------
    UI's original goals were to smooth a worker's income stream by 
providing income support during periods of unemployment, to provide 
insurance against the risk of job loss, and to serve as counter-
cyclical stimulus during periods of economic down-turns.
    Although a federal entitlement, UI is administered by the states, 
allowing each state to set its own program parameters. On average, 
workers can receive up to 26 weeks of benefits. The national average 
weekly benefit in 2007 was $281.17.
    The following program indicators suggest that the current UI 
program falls short in meeting its initial goals:

          The average recipiency rate, i.e., the percent of 
        unemployed receiving UI, over the past 27 years is 
        approximately 37 percent.

          The average replacement rate between 1975 and 2004; 
        i.e., the amount of assistance relative to a worker's previous 
        wage, was 36 percent, far short of the initial goal of 50 
        percent.\7\
---------------------------------------------------------------------------
    \7\ Author's calculations based on Department of Labor data.

          The exhaustion rate, i.e., the percent of workers who 
        exhaust their benefits before finding new jobs, averaged 
---------------------------------------------------------------------------
        approximately 30 percent between 1974 and 2007.

    Restrictive eligibility criteria constitute a large hole in the 
existing UI program. The current look back and job tenure provisions, 
as well as the exclusion of contingent workers, i.e., temporary and 
part-time workers, particularly affect low-income workers.\8\ Thirty-
seven states do not provide dependent payment supplements.
---------------------------------------------------------------------------
    \8\ Some workers associated with temporary placement agencies may 
receive UI. Twenty states currently do not cover part-time or temporary 
workers.
---------------------------------------------------------------------------
    After taking inflation into account, the real value of the national 
average weekly benefit has not changed much over the last 30 years. Nor 
has it changed much relative to the poverty threshold or average weekly 
earnings. It has improved relative to the minimum wage only because 
that was not increased for a decade.
    Figure 6 presents the real annualized value of the national average 
UI weekly benefit relative to the real annualized value of the hourly 
minimum wage, the poverty threshold for a family of four adjusted by 
inflation, and the annualized value of the real average weekly wage for 
all workers. On average over the last 35 years, the real value of the 
weekly UI benefit has been about 40 percent below the poverty rate for 
a family of four adjusted by inflation, and approximately 44 percent of 
real average weekly earnings.



    In 1970, Congress enacted the Extended Benefit (EB) program with 
automatic triggers to provide assistance in an orderly fashion during 
periods of high unemployment. Under the current program, UI benefits 
can be extended for an additional 13 weeks when the unemployment rate 
reaches a certain level.
    Changes in the labor market, combined with the static nature of the 
triggers, have produced an extended benefit system that is no longer 
automatic. As a result, Congress has occasionally found it necessary to 
extend UI through legislation. Although helpful to millions of workers, 
these temporary stopgap measures politicize UI, thereby undermining one 
of the initial goals of the program. These temporary programs have 
proven to be clumsy, typically being enacted after hundreds of 
thousands of workers have already exhausted their. UI. In.addition, the 
sunset provisions are arbitrarily set and usually fall before 
employment has recovered. Overall, the Nation's UI program has become 
less automatic and more dependent on Congressional action in response 
to prolonged periods of economic slowdown.
    UI is financed by a combination of federal and State payroll taxes. 
Revenue from the federal payroll tax is used to finance the costs 
incurred by Federal and State governments in administering the UI 
program and to cover loans to states that exhaust their regular UI 
funds. States are required to raise the necessary revenue to finance 
regular UI benefits paid to their unemployed workers. Currently, 
federal taxes finance 17 percent of the UI program. The remaining 83 
percent is financed by State taxes.
    The federal tax established by the Federal Unemployment Tax Act 
(FUTA) is currently 0.8 percent on the first $7,000 of annual salary by 
covered employers on behalf of covered employees. A maximum of $56 is 
collected annually for each worker who is covered under the program.
    There have been few adjustments in the FUTA taxable wage base since 
it was first established in 1939. The last adjustment was in 1983. Had 
the taxable wage base been automatically adjusted for inflation over 
the past 65 years, it would currently be about $45,000.
    The following are some proposals to improve UI:\9\
---------------------------------------------------------------------------
    \9\ Kletzer, Lori and Howard Rosen, ``Reforming Unemployment 
Insurance for the Twenty-First Century,'' The Hamilton Project, 
Discussion Paper 2006, Washington: The Brookings Institution, September 
2006.

          Shift the determination of eligibility to hours 
---------------------------------------------------------------------------
        rather than earnings.

          Amend the work test to allow job search for part-time 
        employment.

          Standardize benefit levels to at least half of lost 
        earnings.

          Increase the federal taxable wage base, in steps, 
        from $7,000 to $45,000.

          Set a maximum weekly benefit equal to two-thirds of 
        State average weekly earnings.

          Fix the extended benefit triggers so that they are 
        more automatic and workers can receive assistance during 
        economic down-turns without disruption.

          Standard allowances for dependents across all states.

          Provide a Health Coverage Tax Credit (HCTC) similar 
        to the one currently included in the TAA program.

    Changes necessary to move UI into the twenty-first century require 
significant federal leadership. The very basic structure of UI must be 
reformed, broadening it from the single-employer, full-time worker, 
temporary layoff model to an approach that accommodates permanent job 
loss, part-time or contingent work, self-employment, and the incidence 
of job loss and national, rather than local or regional, unemployment. 
American workers are currently facing considerable pressure due to 
corporate restructuring, technological change and increased competition 
from home and abroad. These pressures are likely to intensify as the 
economy faces new challenges.
    Reforming UI is an important step toward providing workers with the 
assistance they need to adjust to these challenges.

Training

    The Workforce Investment Act (WIA), passed in 1998, provides job 
training and related employment services to unemployed and 
underemployed individuals. The Act establishes training programs for a 
wide array of individuals, including, youth, adult, dislocated workers, 
Veterans, Native Americans. Although all of these programs fall under 
the responsibility of the federal Department of Labor, they are 
administered by State and local One-Stop Career Centers. Federal 
spending on all of these programs was $3.7 billion in FY 2007, of which 
$1.4 billion was dedicated to dislocated worker training. Of the 
approximately 260,000 workers who participated in the program in PY 
2007, approximately 182,000 workers received core and intensive 
employment services and only 77,000 enrolled in training.\10\
---------------------------------------------------------------------------
    \10\ Budget data are presented according to fiscal year (October to 
September) and participate data are collected according program year 
(April to March).
---------------------------------------------------------------------------
    Although designed to assist all dislocated workers regardless of 
cause of job loss, the number of participants in WIA programs account 
for only 6.6 percent of the annual estimate of dislocated workers. In 
addition, since the program is not an entitlement, there is no 
guarantee that workers in need will receive training assistance. 
Training funds are distributed on a ``first come, first served'' basis, 
with little regard for a worker's needs.

Trade Adjustment Assistance (TAA)

    TAA provides Workers 78 weeks of income maintenance payments, in 
addition to the traditional 26 weeks of UI, for as long as they 
participate in training. In addition, the program includes a 65 percent 
HCTC, a limited wage insurance program, job search and relocation 
assistance. Under wage insurance, otherwise known as Alternative Trade 
Adjustment Assistance (ATAA), workers above the age of 50, earning less 
than $50,000, can receive half of the difference between their old and 
new wages, for up to two years, subject to a maximum of $10,000. This 
program is designed to assist the large number of workers who 
experience earnings losses after re-employment.
    In order to be eligible for TAA, workers must have been laid off 
from a plant for which at least one of the following three criteria 
``contributed importantly'' to its decline in employment and sales:

          An increase in imports

          Laid off from an upstream or downstream producer

          A shift in production to another country

    ATAA and HCTC are two examples of how assistance under the TAA for 
workers program has shifted from traditional income transfers to more 
targeted, cost effective assistance. Despite the benefits associated 
with these new forms of assistance, enrollment in ATAA and the HCTC are 
disappointingly low. A 2006 GAO study of five large plant closings 
found that less than half of those TAA eligible workers who visited 
one-stop career centers were even informed of the HCTC during their 
visits to one-stop career centers. A little over half of eligible 
workers were aware of the ATAA program.
    One of the gapping holes in the existing program is that it does 
not cover all service workers. As recent press stories suggest, 
American service workers are experiencing dislocations due to 
international outsourcing. Although some service workers, like computer 
programmers and accountants, have the necessary tools to ease their 
adjustment from job to job, other workers, like call center operators 
and data entry clerks may not, making their adjustment more costly. 
Congress is currently considering proposals to expand TAA eligibility 
to cover all service workers.
    Other reform proposals currently under consideration include:

          Raising the cap on training funds

          Increasing the HCTC from 65 percent to 85 percent

          Expanding ATAA to cover workers over the age of 40 
        making less than $60,000

          Technical changes to make the program more user-
        friendly

    Although the TAA for workers program has been the subject of some 
criticism over the years, it has and continues to provide critical 
assistance to millions of workers and their families as they face 
probably the most severe financial burden of their lifetime. More than 
25 million workers have received assistance under the program since it 
was established in 1962.
    The TAA for workers program works; the problem is that it helps 
only a minority of potentially affected workers. Only 10 percent of 
estimated group of potentially eligible workers receive assistance. 
(See Figure 7.)



Assistance to Firms

Manufacturing Extension Partnership (MEP)

    MEP provides a wide spectrum of services, including business 
support, technical assistance and training, to manufacturing companies 
throughout the United States. Presently, the MEP program includes 59 
centers with approximately 440 locations serving manufacturing 
establishments across the country. The Centers are financed through a 
partnership between Federal and State governments with additional 
project funding from private industry. The program fosters partnerships 
with public institutions, including the Small Business Development 
Centers (SBDC), community colleges, technical colleges and 
universities, trade associations, local Chambers of Commerce and 
organizations focused on economic development. The purpose of the 
program is to improve the productivity and enhance competitiveness of 
U.S. manufacturers. Despite numerous reports of effectiveness, the 
program's funding has been low and relatively flat over the last few 
years. (See Figure 8.)



TAA for Firms

    Congress established the TAA for Firms program in 1962 to help U.S. 
firms respond to the pressures resulting from increased import-
competition in order to avoid possible cutbacks and layoffs. Initially 
the program provided technical assistance, loans and loan guarantees. 
Congress eliminated the loans and loan guarantees in 1986. Technical 
assistance is currently provided to firms by 11 Trade Adjustment 
Assistance Centers (TAAC) located around the country. Eligibility 
criteria mirror, although are not exactly the same as those for the TAA 
for Workers program.
    The TAA for Firms program has historically been quite small. 
Between 2001 and 2006, the program assisted approximately 150 firms a 
year that employed some 16,000 workers. Average spending over the last 
nine years has been approximately $11 million per year.

Assistance to Communities

    Similar to worker assistance programs, community assistance has 
tended to be targeted to politically sensitive regions and not widely 
available to all communities. The best example is a program designed to 
assist communities adversely affected by military base closings.

Department of Defense (DOD) Office of Adjustment Assistance

    The DOD Economic Adjustment program has been successful in helping 
communities in the aftermath of a military base closing. Under the 
program, the DOD provides intensive technical assistance and funds to 
help communities prepare strategic plans for economic development. 
Economic development specialists are assigned to regions to help local 
public and private leaders design and implement its strategic plan. The 
specialists also help local communities identify and, apply for federal 
and State assistance.
    In 1998, in response to the Levi Strauss plant closing in Roswell, 
New Mexico, Senator Bingaman initiated a series of steps aimed at 
assisting the workers and the community modeled after DOD's base 
closing program.\11\ The Levi Strauss plant was Roswell's largest 
single employer and as a result, the economic impact of the plant 
closing was felt throughout Roswell and the surrounding communities.
---------------------------------------------------------------------------
    \11\ Rosen, Howard. 2001. A New Approach to Assist Trade-Affected 
Workers and Their Communities: The Roswell Experiment. Journal of Law 
and Border Studies 1:1.
---------------------------------------------------------------------------
    Senator Bingaman's plan included the following elements:

          A committee was established including representatives 
        from State and local government, private industry, unions and 
        other non-profit organizations.

          An economic development specialist from the DOD 
        Office of Adjustment Assistance was assigned to provide 
        technical assistance to the committee in developing and 
        implementing a strategic plan to revitalize the region's 
        economy.

          Senator Bingaman invited representatives from 
        numerous Federal and State government agencies to meet with 
        public and private sector officials in Roswell. The purpose of 
        the meeting was to describe the various government programs 
        designed to assist workers, their families and communities 
        facing economic dislocation.

          The Clinton administration established an interagency 
        working group to provide assistance to the economic 
        redevelopment committee in Roswell, as well as to State and 
        local government officials.

    It is difficult to evaluate the impact of these measures, since the 
effort was disbanded prematurely due to political factors. Individual 
elements of this initiative have subsequently been tried in response to 
other plant closings. Congress is currently considering a TAA for 
Communities program, modeled on Senator Bingaman's efforts in response 
to the Levi Strauss plan closing in Roswell.

Summary

    This survey suggests that the United States has a series of ad hoc 
and under-funded programs that serve only a limited number of workers, 
firms and communities. Most of the programs are motivated by political 
considerations, with little economic justification. As a result, these 
programs discriminate between workers and communities. Although these 
programs may be effective in winning support for discrete policy 
changes, they certainly do not constitute a national strategy for 
responding to economic dislocation, regardless of its cause.
    Ironically, funding for most of these programs has declined, 
despite increased pressures on the U.S. economy, resulting is greater 
demand for these programs' services. At 0.05 percent of GDP, federal 
spending on employment and training programs is at its lowest rate in 
almost 45 years.\12\ Federal spending on community development programs 
was also 0.05 percent of GDP in 2006, down considerably from its peak 
of 0.18 percent of GDP in 1980. (See Figure 9.)
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    \12\ Federal spending on employment and training peaked at 0.46 
percent of GDP in 1978 and 1979.



The National Economic Adjustment Rapid Response (NEARR)

    Developing a comprehensive national strategy to respond to economic 
dislocation would require four steps:

          Update existing adjustment programs, e.g., UI, to 
        meet the needs of the current workforce.

          Reform existing programs borrowing from effective 
        elements in targeted programs, e.g., TAA.

          Remove discrimination resulting from assistance 
        programs targeted toward select groups of workers.

          Bring all programs under the umbrella of a 
        comprehensive national strategy.

    The National Economic Adjustment Rapid Response (NEARR) would be 
based on the following principles:

          Assist all in need, regardless of cause of 
        dislocation

          Comprehensive assistance to all workers, firms and 
        communities

          Flexible, not ``one size fits all'' assistance

          Coordinate public and private assistance

          Early intervention

    Any response to economic dislocation needs to be built on the 
foundation of encouraging investment in new or expanding existing plant 
and equipment, in order to create high skilled, high wage jobs. At 10 
percent of GDP, current investment in plant and equipment is 
significantly below its 50-year trend. (See Figure 10.) Inadequate 
investment hurts the prospect of raising productivity that in turn 
affects the creation of high skilled, high wage jobs. Sustainable 
increases in productivity growth are necessary in order to achieve 
long-run improvements in living standards.



    Ironically, over the last several years, adjustment assistance 
programs targeted to small groups of workers and communities have been 
expanding while general programs designed to those facing severe 
economic dislocation have become more out-of-date and inadequate. Any 
national strategy should be designed to provide adequate assistance to 
all workers, firms and communities facing economic dislocation, 
regardless of cause.
    The existing ``one size fits all'' worker assistance programs need 
to be reformed in order to make them more flexible and tailored to the 
needs of individual workers and local economic conditions. One way to 
achieve this goal would be to allow workers to formulate their own 
assistance program from a menu of various forms of assistance, 
including income maintenance payments, training, employment services, 
wage insurance, health insurance assistance, as well as job search and 
relocation assistance.
    Most of the current resources devoted to worker assistance are 
devoted to reducing the costs associated with job loss. The limited 
wage insurance program under TAA is an effort to shift assistance more 
toward re-employment. Wage insurance, re-employment bonuses and other 
wage subsidy schemes, deserve further study and experimentation.
    Re-employment services, including job banks, resume-writing and 
interview workshops, have proven to be extremely cost effective. These 
efforts should be expanded and made available to workers prior to their 
lay off. Training may be necessary for workers with little prospect of 
returning to their original occupation. Programs aimed at encouraging 
on-the-job training (OJT) should be promoted, since by definition, this 
form of training is most closely related to re-employment. Dislocated 
workers should be able to take advantage of the myriad of education-
related financial assistance programs available to college-age 
students.
    Providing technical assistance to firms facing intensified domestic 
and international competition may prevent, or at least minimize, 
economic dislocations. MEP and the TAA for Firms programs are 
effective, but have limited reach. These kinds of programs should be 
expanded and made available to all firms, regardless of location, 
industry or cause of economic dislocation. These programs should also 
be integrated into worker and community adjustment programs.
    Designing a community adjustment program should begin by borrowing 
from DOD's base closing program. This program currently assists 
communities develop and implement a strategic plan for responding to 
severe economic dislocation, as well as helps communities identify and 
apply for appropriate federal and State grants and loans.
    Communities are rarely ``prepared'' for significant economic 
dislocations. For example, most communities do not have the capacity 
and expertise to assess the needs of workers and assist them in 
designing their own adjustment plans. Since it is inefficient for each 
community to develop and maintain this kind of resource, the Federal 
Government might establish economic dislocation ``swat teams'' to 
provide logistical assistance to communities in a timely fashion. These 
teams would be assigned to communities in need, moving on once they 
complete their tasks.
    Communities need to have the necessary and adequate infrastructure 
in order to provide effective training. Since communities may not 
experience large-scale layoffs often, they may not have resources 
necessary to meet workers' training needs. For example, training 
facilities, like community colleges, may not have sufficient room and 
equipment to accommodate large increases in enrollment. Addressing 
these considerations should be part of any comprehensive adjustment 
program.
    In order to insure that a community's adjustment efforts are 
coherent and that all the pieces are fully coordinated, it might 
convene a group of Federal, State and local governments officials, as 
well as private sector representatives. The group might include local 
representatives from unions, community colleges, religious and social 
service organizations and other non-profit groups, as well as regional 
coordinators of federal assistance programs, like the Economic 
Development Administration and the Employment and Training 
Administration. This group can potentially play an instrumental role in 
the development and implementation of the community's strategic plan 
for responding to the economic dislocation it is experiencing.
    In some instances, firms may provide their own assistance to laid 
off workers and local communities. Firms should be encouraged to 
voluntarily provide this type of assistance, since this is difficult to 
mandate it. The local board described above might help coordinate and 
leverage the various forms of public and private assistance.

Conclusion

    Pressures facing American workers, firms and communities resulting 
from increased domestic and international competition are not likely to 
dissipate any time soon. On the contrary, they are likely to continue 
intensifying. Existing programs designed to assist workers, firms and 
communities respond to economic dislocation are ad hoc, out-of-date and 
inadequate. These piecemeal efforts tend to be ``too little too late,'' 
placing an additional burden on workers, firms and communities.
    The lack of a national strategy designed to respond to economic 
dislocation is contributing to political backlash against further trade 
liberalization and the introduction of new technologies. The growing 
resistance to economic change could jeopardize future increases in 
economic growth and risk long-term improvements in U.S. living 
standards.
    Economic flexibility brings costs and benefits. Movement out of 
activities that require low skills and pay low wages and into 
activities that require high skills and pay high wages can improve 
overall productivity providing benefits to all Americans. On the other 
hand, this movement can place a significant burden on workers, firms 
and communities. Easing this adjustment burden through public and 
private efforts may reduce opposition to economic change.
    Establishing a comprehensive and integrated National Economic 
Adjustment Rapid Response, primarily based on updating and expanding 
existing programs, may be a first step toward responding to the 
economic dislocations being experienced through the United States.

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