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


 
          THE GROWING INCOME GAP IN THE AMERICAN MIDDLE CLASS

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON WORKFORCE PROTECTIONS

                              COMMITTEE ON
                          EDUCATION AND LABOR

                     U.S. House of Representatives

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, JULY 31, 2008

                               __________

                           Serial No. 110-107

                               __________

      Printed for the use of the Committee on Education and Labor


                       Available on the Internet:
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                    COMMITTEE ON EDUCATION AND LABOR

                  GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice       Howard P. ``Buck'' McKeon, 
    Chairman                             California,
Donald M. Payne, New Jersey            Senior Republican Member
Robert E. Andrews, New Jersey        Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia  Peter Hoekstra, Michigan
Lynn C. Woolsey, California          Michael N. Castle, Delaware
Ruben Hinojosa, Texas                Mark E. Souder, Indiana
Carolyn McCarthy, New York           Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts       Judy Biggert, Illinois
Dennis J. Kucinich, Ohio             Todd Russell Platts, Pennsylvania
David Wu, Oregon                     Ric Keller, Florida
Rush D. Holt, New Jersey             Joe Wilson, South Carolina
Susan A. Davis, California           John Kline, Minnesota
Danny K. Davis, Illinois             Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona            Kenny Marchant, Texas
Timothy H. Bishop, New York          Tom Price, Georgia
Linda T. Sanchez, California         Luis G. Fortuno, Puerto Rico
John P. Sarbanes, Maryland           Charles W. Boustany, Jr., 
Joe Sestak, Pennsylvania                 Louisiana
David Loebsack, Iowa                 Virginia Foxx, North Carolina
Mazie Hirono, Hawaii                 John R. ``Randy'' Kuhl, Jr., New 
Jason Altmire, Pennsylvania              York
John A. Yarmuth, Kentucky            Rob Bishop, Utah
Phil Hare, Illinois                  David Davis, Tennessee
Yvette D. Clarke, New York           Timothy Walberg, Michigan
Joe Courtney, Connecticut            [Vacancy]
Carol Shea-Porter, New Hampshire

                     Mark Zuckerman, Staff Director
                Sally Stroup, Republican Staff Director
                                 ------                                

                 SUBCOMMITTEE ON WORKFORCE PROTECTIONS

                LYNN C. WOOLSEY, California, Chairwoman

Donald M. Payne, New Jersey          Joe Wilson, South Carolina,
Timothy H. Bishop, New York            Ranking Minority Member
Carol Shea-Porter, New Hampshire     Tom Price, Georgia
Phil Hare, Illinois                  John Kline, Minnesota


                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on July 31, 2008....................................     1

Statement of Members:
    Wilson, Hon. Joe, ranking minority member, Subcommittee on 
      Workforce Protections......................................     3
        Prepared statement of....................................     4
        Newspaper article submissions:
            ``Battleground for Sound Science,'' New York Sun, 
              July 30, 2008......................................    56
            ``A Desirable Option,'' New York Sun, August 6, 2008.    58
            ``Teenager's Right to Work,'' New York Sun, August 6, 
              2008...............................................    59
    Woolsey, Hon. Lynn C., Chairwoman, Subcommittee on Workforce 
      Protections................................................     1
        Prepared statement of....................................     2

Statement of Witnesses:
    Bernstein, Jared, senior economist, Economic Policy Institute    28
        Prepared statement of....................................    30
    Furchtgott-Roth, Diana, senior fellow, Hudson Institute......    22
        Prepared statement of....................................    23
    Greenstein, Robert, executive director, Center on Budget and 
      Policy Priorities..........................................     6
        Prepared statement of....................................     8
    Minow, Nell, editor, the Corporate Library...................    17
        Prepared statement of....................................    19


                       THE GROWING INCOME GAP IN
                       THE AMERICAN MIDDLE CLASS

                              ----------                              


                        Thursday, July 31, 2008

                     U.S. House of Representatives

                 Subcommittee on Workforce Protections

                    Committee on Education and Labor

                             Washington, DC

                              ----------                              

    The subcommittee met, pursuant to call, at 10:08 a.m., in 
Room 2175, Rayburn House Office Building, Hon. Lynn Woolsey 
[chairwoman of the subcommittee] presiding.
    Present: Representatives Woolsey, Bishop, Shea-Porter, 
Hare, and Wilson.
    Staff present: Aaron Albright, Press Secretary; Tylease 
Alli, Hearing Clerk; Jordan Barab, Senior Labor Policy Advisor; 
Lynn Dondis, Senior Policy Advisor, Subcommittee on Workforce 
Protections; David Hartzler, Systems Administrator; Sara 
Lonardo, Junior Legislative Associate, Labor; Joe Novotny, 
Chief Clerk; Michele Varnhagen, Labor Policy Director; Robert 
Borden, Minority General Counsel; Cameron Coursen, Minority 
Assistant Communications Director; Rob Gregg, Minority Senior 
Legislative Assistant; Jim Paretti, Minority Workforce Policy 
Counsel; Molly McLaughlin Salmi, Minority Deputy Director of 
Workforce Policy; Linda Stevens, Minority Chief Clerk/Assistant 
to the General Counsel; and Loren Sweatt, Minority Professional 
Staff Member.
    Ms. Woolsey [presiding]. A quorum is present. The hearing 
of the Subcommittee on Workforce Protections will come to 
order.
    I will now give my opening statement. Following will be our 
ranking member.
    So I want to welcome all of you to this hearing on ``The 
Growing Income Gap in the American Middle Class.'' But before I 
proceed with my opening remarks, I think we should all say 
happy birthday to Ranking Member Wilson. ``Happy Birthday.''
    Mr. Wilson. Thank you very much.
    Ms. Woolsey. And, you know, Joe, our staff person's 
birthday is today too. See, it is a nice day.
    Income inequality between the top income earners and those 
in the middle class has been growing rapidly over the last 
three decades. For a frame of reference, the top one percent of 
the population, those making $450,000 or more in the year 2006, 
consisted of 1.4 million tax filers. The gap has grown so wide 
that some compare the era we live in to the Gilded Age, a 
period between 1870 and 1900 that was distinguished by the 
excesses of the rich.
    In the 1960s and 1970s, the top one percent of earners took 
in 10 percent of the total income of this country--now, that is 
going from the 1960s and 1970s--to 2006, the top one percent of 
earners took in over 20 percent of the total income pie. The 
last time the top had this much of total income was in 1928. In 
addition, the average tax rate for these top earners has fallen 
to its lowest levels in 18 years.
    CEOs are making record salaries, irrespective of 
performance, and these outrageous amounts affect the growing 
gap directly. In 2006, the average Fortune 250 CEO was paid 
over 600 times the average worker. Six hundred times is a 
staggering figure.
    And this past Monday, the Washington Post published its 
annual survey of executive compensation at large public 
companies and found that in 2007 the average annual pay of the 
top 100 highest paid executives was $6.6 million. While those 
at the top of the income scale are prospering, since the 1990s, 
income has actually declined for workers at the bottom rung and 
has actually increased only slightly for middle class workers.
    We know that Americans are very tolerant of differences in 
pay and, in general, choose to focus on opportunity instead. I 
feel like they think--everybody thinks that they are eventually 
going to be one of the top one percent. This opportunity, and 
the attitudes toward it, are vastly different in the United 
States than the attitudes of European workers who actually see 
fairness in equal outcome, not in the potential for equal 
outcomes.
    But opportunity is slipping away for those in the middle 
classes in our country, as wages remain stagnant, and consumer 
goods, such as food, health care, and gas, have skyrocketed, 
health care. Many are losing their homes, and, as I said, 
health care is becoming more expensive and less available.
    This, in turn, affects the ability of hardworking 
Americans, and it affects their ability to save for retirement, 
and it affects their ability to put their kids through college.
    How important is the middle class, anyway? Why do we care? 
Well, the middle class is the glue that holds this country 
together. Otherwise, we are just scraping by.
    This hearing will examine the causes and extent of the gap 
and how this inequality affects American workers.
    Nell Minow of the Corporate Library is here to fill us in 
on the issue of excessive pay. This ever-widening pay disparity 
is bad for workers; it is bad for their health; and it is bad 
for their families. And there is even evidence that the rich in 
this country have a shorter life span than wealthy people who 
live in countries where the income gap is not as great as ours. 
This ever-widening gap has broad implications for society as a 
whole, and if not dealt with, will threaten our democracy.
    I look forward to hearing from our witnesses and yield the 
floor to Ranking Member Wilson for his opening statement.
    [The statement of Ms. Woolsey follows:]

Prepared Statement of Hon. Lynn C. Woolsey, Chairwoman, Subcommittee on 
                         Workforce Protections

    I want to welcome you all to this hearing on ``The Growing Income 
Gap in the American Middle Class.'' But before I proceed with my 
opening statement, I want to wish Ranking Member Wilson a very happy 
birthday.
    Income inequality between the top income earners and those in the 
middle class has been growing rapidly over the last 3 decades. For 
frame of reference, the top 1% includes those making $450,000 or more; 
in 2006 that consisted of about 1.4 million tax filers.
    The gap has grown so wide that some compare the era we live in to 
the Gilded Age, a period between 1870 and 1900 that was distinguished 
by the excesses of the rich.
    In the 1960s and 1970s the top 1 percent of earners took in 10 
percent of the total income in this Country.
    By 2006 the top 1 percent of earners took in over 20 percent of the 
total income pie. The last time the top had this much of total income 
was in 1928.
    In addition, the average tax rate for these top earners has fallen 
to its lowest levels in 18 years. CEOs are making record salaries, 
irrespective of performance, and these outrageous amounts affect the 
growing gap directly.
    In 2006, the average Fortune 250 CEO was paid over 600 times the 
average worker. That is a staggering number.
    And this past Monday, the Washington Post published its annual 
survey of executive compensation at large public companies and found 
that in 2007, the average annual pay of the top 100 highest-paid 
executives was $6.6 million.
    While those at the top of the income scale are prospering, since 
the 1990s, income has actually declined for workers at the bottom rung, 
and increased only slightly for middle class workers.
    We know that Americans are very tolerant of differences in pay, and 
in general, choose to focus on opportunity instead.
    This is vastly different than the attitudes of European workers who 
see fairness in equal outcomes, not in the potential for equal 
outcomes.
    But opportunity is slipping away for those in the middle class as 
wages remain stagnant and consumer goods, such as food and gas, have 
skyrocketed.
    Many are losing their homes and their health care.
    This in turn affects the ability of hard-working Americans to save 
for retirement and put their kids through college.
    How important is the middle class anyway?
    They are the glue that holds this country together; otherwise we 
are just scraping by.
    This hearing will examine the causes and extent of the gap and how 
this inequality affects American workers.
    Nell Minow of the Corporate Library is also here to fill us in on 
the issue of ``excessive executive pay.''
    This ever widening pay disparity is bad for workers; it is bad for 
their health; and it is bad for their families.
    And there is even evidence that the rich in this Country have 
shorter life spans than wealthy people who live in countries where the 
income gap is not as great as ours.
    This ever-widening gap also has broad implications for society as a 
whole, and if not dealt with, will threaten our democracy.
    I look forward to hearing from our witnesses and yield the floor to 
Ranking Member Wilson for his opening statement.
                                 ______
                                 
    Mr. Wilson. Thank you, Madam Chairwoman, and thank you for 
the birthday greetings. And good morning.
    I will be brief in my opening remarks. I want to get to our 
witnesses as quickly as possibly.
    I, too, would like to welcome each of our witnesses. We 
look forward to hearing your testimony and appreciate you 
taking time out of your busy schedules to educate us here 
today.
    As you have noted, Madam Chair, we are here today to look 
at improving the incomes of the American middle class. I 
believe 90 percent of the constituents I represent are of the 
middle class. I want everyone, as you indicated, to be in the 
top one percent. I suspect that we will hear about many factors 
in today's economic environment that contribute to income 
differences among families.
    On its face, some of the data indicates large differences 
in the economic well being of families. Other data shows that 
Americans of all income levels are better off today than they 
were a generation ago. We all know that there is usually more 
than one way to interpret data, so I think it is important that 
we use caution in extrapolating too far.
    Out of the many factors that contribute to income 
differences, and I believe a very significant one, is 
education. The difference in earnings between individuals with 
a high school education and those with advanced degrees or 
high-skilled training is significant. Arguably, one of the best 
ways to find a meaningful solution for boosting pay is to 
bolster our education and training systems. Education and 
ongoing training is essential for future job growth and 
economic security in today's global economy.
    As we examine the difficulties faced by those at the lower 
end of the economic spectrum, we should--we would be remiss if 
we did not acknowledge the burden of rising energy costs. 
Lower-wage workers have been shown to suffer disproportionately 
when fuel costs rise. Gas is likely to consume a greater share 
of their likely earnings even when fuel costs are low, 
exacerbating the burden of today's nearly $4 per gallon fuel 
cost. Moreover, lower-income Americans are more likely to own 
older, less efficient vehicles.
    I hope somewhere in the context of the continuing debate on 
the current state of the middle class of workers that Congress 
can do something about addressing increasing fuel costs.
    This hearing will provide us with a clearer picture of the 
level of income differences among families and a better 
understanding of the factors that contribute to those 
differences.
    Thank you, Madam Chairwoman, and I yield back the balance 
of my time.

    Prepared Statement of Hon. Joe Wilson, Ranking Minority Member, 
                 Subcommittee on Workforce Protections

    Thank you, Madam Chairwoman, and good morning. I will be brief in 
my opening remarks. I know we want to get to our witnesses as quickly 
as possible.
    I too, would like to welcome each of our witnesses. We look forward 
to hearing your testimony and appreciate you taking time out of your 
busy schedules to educate us today.
    As you have noted, Madam Chair, we are here today to look at 
improving incomes of the American middle class. I suspect that we will 
hear about many factors in today's economic environment that contribute 
to income differences among families.
    On its face, some of the data indicates large differences in the 
economic well-being of families. Other data shows that Americans of all 
income levels are better off today than they were a generation ago. We 
all know that there is usually more than one way to interpret data, so 
I think it's important that we use caution in extrapolating too far.
    Out of the many factors that contribute to income differences, and 
I believe a significant one, is education. The difference in earnings 
between individuals with a high school education and those with 
advanced degrees or high-skilled training is significant. Arguably, one 
of the best ways to find a meaningful solution for boosting pay is to 
bolster our education and training systems. Education and ongoing 
training is essential for future job growth and economic security in 
today's global economy.
    As we examine the difficulties faced by those at the lower end of 
the economic spectrum, we would be remiss if we did not acknowledge the 
burden of rising energy costs. Lower-wage workers have been shown to 
suffer disproportionately when fuel costs rise. Gas is likely to 
consume a greater share of their earnings even when fuel costs are low, 
exacerbating the burden of today's nearly $4.00 per gallon fuel costs. 
Moreover, lower-income Americans are more likely to own older, less 
efficient vehicles. I hope somewhere in the context of the continuing 
debate on the current state of middle class workers, that Congress can 
do something about addressing increasing fuel costs.
    This hearing will provide us with a clearer picture of the level of 
income differences among families and a better understanding of the 
factors that contribute to those differences.
    Thank you, Madam Chairwoman, and I yield back the balance of my 
time.
                                 ______
                                 
    Ms. Woolsey. Thank you, Mr. Wilson.
    Without objection, all members will have 14 days to submit 
additional materials for the hearing record.
    I now have the privilege to introduce our very 
distinguished panel of witnesses here with us this morning, and 
I welcome our witnesses.
    Thank you for being here.
    Before I introduce you, I think I should remind everybody 
how the lighting system works. Some of you have not been here 
before; most of you have, though. What you will know is that 
you are limited to five minutes. When you start speaking, the 
light will go on in front of you. It will be green. When you 
are down to one minute, it will be yellow, and when it is red, 
that means your time is up. So when you see the yellow light, 
start tying it up and coming to conclusion. We won't--your 
chair doesn't fall through the floor when it turns red, but we 
would like you to start ending it there, and if you have more 
to say, we will make sure that you get to during the question 
and answer.
    So, here we go. We are going to start with Robert 
Greenstein. Robert is the founder and executive director of the 
Center on Budget and Policy Priorities. In 1996, he was awarded 
a MacArthur Fellowship, in part, for making the center a model 
for nonpartisan research and policy organization. In 1994, he 
was appointed by President Clinton to serve on the Bipartisan 
Commission on Entitlement and Tax Reform. Prior to founding the 
center, Mr. Greenstein was administrator of the Food and 
Nutrition Service at the U.S. Department of Agriculture. He 
graduated from Harvard College and has received numerous 
honorary degrees.
    Nell Minow is editor and co-founder of the Corporate 
Library. Prior to founding the Corporate Library, she was a 
principal at Lens, an investment firm that uses shareholder 
activism to increase the value of underperforming companies. 
She previously served as an attorney at the U.S. Environmental 
Protection Agency, the Office of Management and Budget and the 
Department of Justice. She is a graduate of Sarah Lawrence 
College and the University of Chicago Law School.
    Diana Furchtgott-Roth is a senior fellow at the Hudson 
Institute and director of the Center for Employment Policy. She 
has been a chief economist at the U.S. Department of Labor and 
previously served as chief of staff for the president's Council 
of Economic Advisors. She received her B.A. from Swarthmore 
College and her master's from Oxford University.
    Jared Bernstein is director of the Living Standard Program 
at the Economic Policy Institute, EPI. He joined the EPI in 
1992 and has written extensively on issues, such as income 
equality, mobility and trends in employment and earnings. His 
latest book is, ``Crunch: Why Do I Feel So Squeezed and Other 
Unsolved Economic Mysteries.'' Mr. Bernstein earned his Ph.D. 
in social welfare from Columbia University.
    We will now hear from our first witness, and don't forget 
to turn on your microphone.

 STATEMENT OF ROBERT GREENSTEIN, EXECUTIVE DIRECTOR, CENTER ON 
                  BUDGET AND POLICY PRIORITIES

    Mr. Greenstein. Thank you for the invitation to testify 
today on inequality. There is broad consensus among analysts 
and economists that inequality has been rising for about 30 
years and is at levels that cause concern. As former Federal 
Reserve Chair Alan Greenspan said a couple of years ago, 
``There is a really serious problem here in the concentration 
of income that is rising.''
    Let me start with a brief overview of the data and a 
cautionary note. And the cautionary note is that in looking at 
inequality one cannot place much stock in data--in official 
census data and what is called the Gini coefficient that comes 
out of those data, because the official census data is not 
based on full income reporting at the top of the income scale.
    Specifically, the census data does not count any earnings 
above $999,999 a year. If you earn $20 million a year, it is 
recorded in the census data as $999,999. If your income rises 
from $20 million to $30 million a year, census shows that it is 
staying flat at $999,999. And the census data do not include 
capital gains income, which is very big at the top of the 
income scale.
    To address these problems in the data, fortunately, about 
15 years ago, the Congressional Budget Office came to the 
rescue and developed a data series that blends census data and 
data from the IRS so that the CBO data count all income, and 
they also count as income, as one should for these purposes, 
things like food stamps, housing subsidies and the earned 
income credit for the people at the bottom of the income scale. 
The CBO data are widely recognized by analysts as the best data 
available on inequality, they cover after-tax as well as 
before-tax income, and they span the period from 1979 to 2005.
    So let's take a look at what those CBO data tell us. They 
show a stark picture of rising inequality. After adjusting for 
inflation, after-tax income for the bottom fifth of the 
population, average after-tax income for the bottom fifth was 
only six percent higher in 2005 than it had been 26 years 
earlier in 1979. And for the middle, the middle fifth, income 
was 21 percent higher than in 1979. That is less than an 
average of one percent gain per year over the 26-year period. 
In contrast, income rose 80 percent among the top fifth, and it 
more than tripled, rising 228 percent, among the top one 
percent of the population.
    In dollar terms, the CBO data show that the average income 
for the bottom fifth is all of $900 per household higher in 
2005 than it was 1979. The gain was $8,700 per household for 
the middle fifth, and for the top one percent, the gain was 
$745,000 per household.
    We also have a data source on the distribution of before-
tax income that goes back to 1913. This is based on IRS data.
    And it shows, as you noted, Madam Chair, in your opening, 
that the share of before-tax income going to the top one 
percent is now greater than at any time since 1928.
    I would note that the rise in inequality in after-tax 
income--for before-tax and after-tax income, the main causes 
are in the private economy, but there is a question as to 
whether government policy ameliorates or exacerbates the 
trends. And the evidence is compelling that the tax cuts of 
this decade have exacerbated the trend in inequality in after-
tax income.
    The CBO data show that the percentage of income that the 
top fifth pays in federal taxes fell in 2005 to its lowest 
level on record in these data. Data from the Urban Institute-
Brookings Tax Policy Center show that the 2001 and 2003 tax 
cuts increase after-tax income by a far larger percentage for 
those at the top of the income scale than for those in the 
middle or the bottom.
    And in dollar terms, the Tax Policy Center data show that 
in 2010, when the tax cuts are fully in effect, the average tax 
cut per household for those with incomes over $1 million a year 
will be $158,000 tax cut per household. The average tax cut in 
the middle, the Tax Policy Center tells us, will be $810 per 
household.
    This is why the noted economist, Alan Blinder, in talking 
about rising inequality, recently noted that recent federal 
policies were the equivalent, if I may use the sports--I am 
really just using Alan Blinder's sports analogy, he used a 
sports analogy--he said they were the equivalent of piling on, 
which in football would draw a 15-yard penalty for unnecessary 
roughness.
    Let me conclude with just a few very quick comments about 
the implications for federal policy going forward. As you all 
know, we face tough challenges in a series of areas: An 
unsustainable long-term deficit, need for health care reform, 
need for tax reform, need to address climate change. In every 
one of those areas, how you address the problem can either 
exacerbate inequality or mitigate it, and I would submit that 
this ought to be one of, certainly not the only by no means, 
but one of the factors you look at as you evaluate potential 
responses in those areas.
    In addition, of course, we need a strong economy and rising 
productivity as a necessary, but not sufficient condition to 
get more widespread prosperity, and that does mean sound 
investments in preschool education, education worker training, 
infrastructure and basic research.
    There are a variety of things that Congress could start 
doing next year, and among them, I would argue, would be such 
things as looking at what are bipartisan proposals to make 
things like the higher education and savers tax credits 
refundable. We, right now, have tax benefits that subsidize the 
cost of higher education for people higher up the income scale 
who would go to school anyway. We shut out people at the 
bottom. I think more focus on poverty reduction goals would be 
helpful. We need to remove barriers to labor organizing.
    There are an array of things we need to do, and the first 
step, of course, is simply focusing more attention on the 
inequality issue and the need to address it.
    And I think this hearing is an important step in what we 
have to do first in order to put on the agenda that one of the 
lenses through which we should evaluate policy in a whole range 
of areas is, does it exacerbate the inequality already being 
driven by trends in the international and national economy or 
does it lean against it and help mitigate it and help us have 
prosperity that is more broadly shared across our people?
    Thank you.
    [The statement of Mr. Greenstein follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                                ------                                

    Ms. Woolsey. Ms. Minow?

 STATEMENT OF NELL MINOW, EDITOR AND CO-FOUNDER, THE CORPORATE 
                            LIBRARY

    Ms. Minow. Thank you very much, members of the committee. I 
am really honored to be here.
    I am here just to make a couple of points about CEO 
compensation: First of all, that it is not determined by the 
market and, second, that it does matter.
    I am a passionate capitalist. If I thought that these 
excessive CEO pay plans were beneficial to shareholders or to 
anybody else, I would stand up and cheer. If I thought that 
they resulted from the market or that they promoted market 
efficiency, I would be enthusiastic about them, but they do 
not.
    As you pointed out, Madam Chair, disparity between the 
average worker and the CEO is increasing, and the velocity of 
the increase is also increasing, it is snowballing. And I 
appreciate especially your emphasis on equality of potential as 
our goal.
    So I am here to talk about the tip of the iceberg, CEOs, 
because it is both a symptom and a contributing factor to 
market failure. It makes the days of the robber barons no 
longer the correct analogy. I think the analogy we should be 
working off of right now is Marie Antoinette.
    The key points I want to make are, first of all, it is not 
the market that determines CEO pay. The CEO process exploits 
market inefficiencies. If you look at the people at the top of 
the pyramid on pay, everybody else is the ultimate pay-for-
performance. Whether you are talking about athletes or 
musicians or movie stars, they are all pay-for-performance. But 
CEOs pick the people who set their pay and get rid of the ones 
who don't pay them enough. And for that reason, the pay just 
continues to go up.
    I think that the most important point to consider in 
looking at CEO pay is that like any other allocation of assets 
by the board of directors, it has to be looked at in terms of 
its return on investment, and the return on investment, as 
documented by Professor Rakesh Khurana at Harvard University, 
is less than a piggybank. It is less than T-bill. It is not a 
productive use of the corporate assets.
    I have a lot of examples in my testimony, and I encourage 
you to take a look at them. I noticed that after I filed my 
testimony this week there was a headline in the New York Times 
that said--about IndyMac. It said, ``Bad Loans: The Cause of 
the Failure at IndyMac.'' Excuse me, it was bad CEO pay that 
was the cause of the failure at IndyMac, because in the 
subprime--this is a perfect example of what I am talking 
about--subprime, the executives were paid on the volume of 
business they created, not on the quality of business they 
created.
    Now, we could never pay Congress what you are worth, 
because your worth is beyond price, but let's say we did decide 
to pay you based on the number of laws you passed. I think 
there would be more laws. That doesn't necessarily mean that 
they would be better laws, and that is pretty much what 
happened in the subprime circumstance.
    Very, very few companies, very few--we have a list of them 
that we keep--have what are called clawbacks, meaning that 
after you find out that someone has been paid based on 
falsified accounting or inflated earnings, they have to 
actually give the money back. So, in other words, there is 
really no downside for them, and it creates all kinds of 
perverse incentives.
    Bad pay misaligns the interests of the executives with 
shareholders and with employees, and, furthermore, our office 
has shown that the primary indicator of litigation, liability 
and investment risk is disparity between CEO pay and 
performance.
    And I think I will reserve the rest of my time, because I 
want to have a free and frank exchange of ideas.
    Thank you.
    [The statement of Ms. Minow follows:]

    Prepared Statement of Nell Minow, Editor, the Corporate Library

    Madame Chairman and members of the committee, thank you very much 
for the opportunity to appear today. I am very pleased that this 
committee is looking into this vital area of concern.
    I am a passionate capitalist. If our current system of executive 
compensation tied pay to performance, if it provided an effective 
incentive to create long-term shareholder value, if it met any possible 
market test, I would stand up and cheer. If I thought, as some have 
argued, that the amounts at issue are so small in proportion to the 
assets being managed that they do not have any material impact, I would 
not be here. On the contrary, the CEO compensation in America's public 
companies is a perversion of the market that imposes enormous and 
growing costs on America's working families--as shareholders, 
customers, employees, and members of the community. Executive 
compensation must be looked at as any other asset allocation. And the 
return on investment for the expenditures on CEO pay is by any measure 
inadequate. We are not getting what we pay for. These outrageous pay 
packages juxtaposed with losses in share value and jobs diminishes our 
credibility and increases our cost of capital. In today's global 
economy this is an expense we clearly can no longer afford.
    The economist John Kenneth Galbraith said, ``The salary of the 
chief executive of the large corporation is not a market award for 
achievement. It is frequently in the nature of a warm personal gesture 
by the individual to himself.''
    He said that in the 1950's. The primary change since then is the 
number of zeroes at the end of the figures.
    My firm, The Corporate Library, maintains an extensive database on 
corporate governance in public companies, and that includes a great 
deal of information and analysis of executive compensation. The data 
show that the disparity between pay and performance is enormous and 
growing. We have done a series of studies showing that the largest 
percentage increases in total compensation for CEOs had very little 
connection to long-term value creation.
    It's a very small group in the stratosphere of pay: rock stars, 
movie stars, athletes, investment bankers, and CEOs. Of that group, the 
first four are in the ultimate pay-for-performance category, with a 
tiny percentage at the very top making millions of dollars, and with 
deals that evaporate quickly if a movie, a CD, or a corporate 
acquisition tanks. Their pay is set through tough arms-length 
negotiations.
    CEOs are the only ones who pick the people who set their pay, 
indeed they pay and provide information to the people who set their 
pay. And no matter what ``independence'' standard we try to impose, the 
board room culture of congeniality and consensus is so powerful that it 
makes it very hard to object, especially when the compensation 
consultant helpfully provides an avalanche of numbers designed to 
justify pay increases. In the wonderful world of CEOs, like the 
children in Lake Woebegon, everyone is above average. Even Warren 
Buffett acknowledges his own failings as a director, particularly in 
approving excessive compensation: ``Too often, collegiality trumped 
independence.'' If Warren Buffett, always a significant shareholder in 
any company on whose board he serves, does not feel able to oppose 
excessive pay, something is wrong.
    In the 1990s, the cult of the CEO was based on the idea that vision 
and the ability to inspire were what made the CEOs worth the hundreds 
of millions of dollars they were paid. But a book by Harvard Business 
School professor Rakesh Khurana, Searching for a Corporate Savior: The 
Irrational Quest for Charismatic CEOs, makes a compelling case that 
corporate boards err seriously when they pick chief executives based on 
``leadership'' and ``vision'' or when they pay huge premium pay that is 
not sensitive to performance to attract a ``superstar.'' Bringing in a 
CEO with a great record at another company may give the stock price a 
short-term boost. But high-profile transplants such as Al Dunlap at 
Sunbeam (which went into bankruptcy) and Gary Wendt at Conseco (which 
went into bankruptcy), CEOs should have to make the same disclaimers 
that money managers do: ``Past performance is no guarantee of future 
performance.''
    Some have argued that CEO pay is set by the market. But it is not, 
as a return on investment assessment shows. And the consequence can be 
disastrous.
    For example: the very first report we ever issued at The Corporate 
Library, in January of 2000, we said that we thought there was a 
problem at what was then the fastest-rising stock in the history of the 
New York Stock Exchange. We said that the CEO's insistence on receiving 
2 million stock options at $10 a share below the stock's trading price 
indicated that he expected the stock to decrease in value and did not 
want to pay the price for that decline that the shareholders did. It 
also indicated that the board of directors had no ability to provide 
any independent oversight and no ability to say ``no.''
    That was Global Crossing which a year later became the fourth 
biggest bankruptcy in U.S. history.
    At one financial services company there was a pay plan that had 
nine different measures of performance. But the plan gave the board 
discretion to award all of the bonuses for meeting any or all of those 
goals. They decided for fiscal 2006 to base the formula on the single 
metric of return on equity. The company was Bear Stearns. Another 
harbinger of and contributor to disaster. We also noted problems at a 
bank where the CEO's pay was as large as CEO salaries at firms 
exponentially larger and included $260,000 one-time initiation fee to a 
country club; reimbursement for payment of taxes ($12,650), financial 
planning ($15,000) and other perks. Is there any reason that the 
shareholders should be paying a CEO's taxes or financial planning? That 
bank is IndyMac, now the second-largest bank failure in history.
    The subprime crisis was in part caused by pay plans that were based 
on volume of loans rather than quality of loans. That was a guarantee 
of disaster. Here are some of the mind-boggling numbers:
    For 2006, Angelo Mozilo's total actual compensation was valued at 
over $102 million. His annual bonus for that year was based on a 
performance target of diluted earnings per share, or ``EPS.'' For 
Fiscal 2006, Countrywide Financial's reported EPS was $4.30, which was 
an increase of 4.62% over Fiscal 2005 EPS of $4.11, resulting in a cash 
incentive award of $20.5 million to Mr. Mozilo. These inflated earnings 
forced the company's stock up by 26%.
    But by the end of 2007, when Countrywide finally revealed the 
losses it had previously obscured, shareholders lost more than 78% of 
their investment value. Meanwhile, in early 2007 Mr. Mozilo sold over 
$127 million in exercised stock options before July 24, 2007, when he 
announced a $388 million write-down on profits. On August 16, 
Countrywide narrowly avoided bankruptcy by taking out an emergency loan 
of $11 billion from a group of banks. Mr. Mozilo continued to sell off 
shares, and by the end of 2007 he had sold an additional $30 million in 
exercised stock options. Mr. Mozilo received more than $102 million in 
compensation and $157 million in exercised stock options, while total 
shareholder return was negative 78% over the same period. He was 
entitled to receive another $58 million in non-qualified deferred 
compensation and supplemental pension benefits when he retires in 
connection with the Bank of America merger in 2008.
    At Citigroup, Charles Prince received total compensation valued at 
over $25.9 million in 2006. His incentive awards for that year totaled 
more than $23 million and were based on multiple performance 
measurements. Specifically, the company stated that ``revenues grew 7%, 
almost all of which was organic,'' ``net income from continuing 
operations grew at about the same rate as total revenues (about 7% in 
each case),'' ``the 2006 return on equity was 18.8%,'' and ``total 
return to stockholders was 19.6%.'' Then in 2007, the company announced 
its $24.1 billion write-down in connection with sub-prime lending. Soon 
after, Charles Prince announced his resignation and left the company 
with $40 million in severance. Shareholders lost 45% of their 
investment value by the end of the year.
    At Merrill Lynch, former-CEO Stanley O'Neal received total 
compensation of more than $91 million for 2006. His incentive 
compensation was also based on multiple performance measurements. The 
company stated the following about the Mr. O'Neal's performance against 
objectives:
    The Committee considered performance against the CEO objectives 
determined at the beginning of the year and noted that all financial 
targets were met or exceeded and all strategic and leadership 
objectives were met with distinction. This review included 
consideration of numerous objectives.
    On October 24, 2007, Merrill Lynch reported an $8.4 billion 
subprime mortgage-related write-down. Just days later, Stanley O'Neal 
announced his retirement. He received more than $160 million in stock 
and retirement benefits in connection with his departure, while 
shareholder lost more than 41% of their investment value over the year. 
On January 17, 2008, Merrill Lynch took an additional $14.1 billion 
write-down, bringing its subprime mortgage-related losses to nearly $23 
billion.
    During 2006, management at New Century Financial Corp issued false 
and misleading statements about the company's financials to boost 
earnings, which allowed New Century stock traded at artificially 
inflated prices. On March 2, 2007, the company announced that it was 
the subject of federal criminal probes related to securities trades and 
accounting fraud. On April 2, 2007, the company filed for Chapter 11 
bankruptcy. Over the three year period prior to filing for bankruptcy, 
Robert K. Cole, Chairman and CEO of New Century Financial Corp, 
received over $22 million in total compensation, most of which he 
received from exercised stock options that he sold at artificially 
inflated stock prices.
    In 2006, management at Novastar Financial Inc. reported a rise in 
earnings after the company originated a record $2.8 billion in loans, 
boosting the company's stock price to inflated levels. Then in February 
2007, the Novastar's stock fell by 42% after announcing fourth quarter 
and year-end 2006 results, and warned that NovaStar was expecting to 
earn little or no taxable income in the next five years. In November 
2007, Novastar stock plunged after the subprime mortgage lender posted 
a $598 million third-quarter loss and said that bankruptcy was 
possible. Over the three-year period leading to the enormous losses, 
Scott F. Hartman, Chairman and CEO of Novastar, received more than 
$13.6 million in total compensation.
    In January 2007, American Home Mortgage earnings soared 288% after 
the sub-prime lender originated a record $15.5 billion in loans during 
the fourth quarter of 2006. Just eight months later, on August 6, 2007, 
American Home Mortgage Corp filed for bankruptcy. The stock was at 44 
cents a share, down from an annual high of $36.40. Total compensation 
awarded to Michael Strauss, Chairman and CEO of American Home Mortgage, 
over the three-year period prior to the bankruptcy was over $8 million, 
largely based on bonuses tied to inflated earnings targets.
    On June 15, 2008, American International Group (AIG) announced its 
plans to replace Chief Executive Officer Martin Sullivan with a 
director of the company who has been chairman since 2006, Robert 
Willumstad after the company posted losses for two consecutive quarters 
totaling $13 billion. Mr. Sullivan's contract entitled him to 
approximately $68 million.
    There is an obvious disconnect between the performance of these 
CEOs and the compensation they received. They led the companies in a 
risky strategic direction that resulted in significant losses for 
investors across nations. Incentive compensation based on earnings and 
revenue increases is problematic in a situation like that of sub-prime 
mortgages. Principal officers, for themselves and in particular for 
those down the line who are similarly incentivized, can push ``sales'' 
without adequate concern for quality. There is a disconnect in that 
bonuses are ``earned'' as business is booked; only when it is clear 
that the business is defective--and that such defect should have been 
apparent at the outset--is the hit to earnings recognized. By that 
time, the CEO has been paid based on the inflated numbers. Fewer than 
13 percent of public companies have clawback policies requiring 
executives to return bonuses based on inflated numbers. So why should 
they worry about manipulating the figures to get the money upfront?
    There is no way to justify any of these pay plans by saying they 
meet a market test. Marie Antoinette would be ashamed to get paid like 
this while shareholders are losing money and employees are losing jobs. 
The last time Congress tried to fix this problem it made it worse by 
adopting the notorious 162m of the tax code. It poured gasoline on the 
fire by encouraging the award of stock options. Just thirty years ago, 
a CEO might get 30,000 options. Now million-option grants are not 
unusual and even stock option grants have only a tangential 
relationship to the creation of long-term, sustainable value. As long 
as CEOs pick the people who serve on their boards and shareholders have 
no ability to remove them, this will continue. In the 2006 proxy 
season, 25 director candidates failed to get the support of a majority 
of the shareholders. Yet 24 of them continue to serve on those boards. 
If shareholders cannot get rid of directors who agree to pay completely 
disconnected from performance, it will only get worse.
    The pay-performance disparity is so outrageous, so atrocious that 
it undermines the credibility our system of capitalism. In a global 
environment, information and the ability to trade in any market at any 
time will provide our system with the toughest market test in the 
history of our country. As we compete for capital, we must be able to 
show those inside and outside our country that we deserve their trust 
and will provide them with a competitive return instead of shoveling 
more money into the pockets of the top executives.
    I would like to acknowledge the assistance of Paul Hodgson, Alex 
Higgins, Marjorie Schwietering, Lauren Warmington, and other staff 
members at The Corporate Library in preparing this testimony. Many 
thanks to the committee and its staff for the opportunity to appear, 
and I will be glad to answer any questions.
                                 ______
                                 
    Ms. Woolsey. Well, thank you, and thank you for knowing how 
valuable we are.
    Mr. Wilson. Particularly the chairwoman.
    Ms. Woolsey. All right.
    Ms. Furchtgott-Roth?

STATEMENT OF DIANA FURCHTGOTT-ROTH, DIRECTOR OF THE CENTER FOR 
              EMPLOYMENT POLICY, HUDSON INSTITUTE

    Ms. Furchtgott-Roth. Madam Chairwoman, thank you very much 
for inviting me to testify, and I would like to submit my 
written remarks for the record, if that is all right.
    I chose to wear this ring today, because it was the one 
piece, the one thing that was sent over in 1976 when my father-
in-law's family was in Czechoslovakia. They could only send one 
child to the United States in 1976, and they chose to send my 
father-in-law. He came with nothing except this ring, which was 
sent with him in case of emergency.
    The ring symbolizes mobility. He came with nothing, yet he 
became chair of the psychology department in South Carolina. I, 
his daughter-in-law, am testifying before you today in 
Congress. His son became an FCC commissioner.
    What is important is not equality but mobility and 
opportunity. We can all be equally poor, like Cuba and Haiti, 
but what we need to do is focus on workplace opportunities, not 
on workforce protections that result in reduced opportunities. 
It is because of opportunities that so many people want to come 
to the United States today.
    There are many problems with traditional measures of 
inequality, one of the most important being that they don't 
take into account mobility. One problem is some measures use 
pre-tax, pre-transfer income, and that doesn't account for the 
income people actually have to spend.
    In the latest data released by the IRS, 97 percent of taxes 
are paid by the top 50 percent, so people who earn a lot don't 
have all that income to spend. And people at the lower end 
receive Medicare, Medicaid, food stamps, housing vouchers. When 
after-tax and after-transfer incomes are measures, the Commerce 
Department's data show that inequality has not changed.
    Another reason that income inequality looks like it has 
changed is the Tax Reform Act of 1986, and that changed the 
taxation of corporate and individual income taxes. Before that, 
corporate income taxes were lower, so a lot of small businesses 
were encouraged to file as corporations. After that, it became 
advantageous for small businesses to file as individuals. So it 
looked like people--normal people--were making a lot more 
money, but really it was just a change from corporate tax 
receipts into individual tax receipts.
    Another problem with measures of inequality is demographic 
changes. Not all households are the same size, and households 
have shrunk over time, as there are more single parents, more 
divorces. There are 1.7 people per household in the lowest 
fifth and about 3.1, on average, in the top fifth. The 
differences in household income are larger than differences in 
income per person.
    Also, with the entry of greater numbers of women in the 
workforce over the past 25 years, something that all of us 
appreciate, a growing tendency toward dual-income couples 
polarizes income distribution without any change in individual 
income inequality. Two earners marrying, if they are two 
attorneys or two automotive mechanics, results in an immediate 
change in the distribution, because it takes two lower-income 
households and makes them into one upper-income household.
    A police officer married to a nurse, each at the top of 
their profession, can earn about $200,000; whereas, if the 
police officer just had his own income, it would be closer to 
$100,000.
    If more teenagers take after-school jobs, the number of 
low-income taxed households balloons and income inequality 
appears to increase.
    The demographic characteristics at the bottom fifth of 
households shed light on consumption patterns. The bottom 
quintile has the highest average age, 52, while the top 
quintile has the second youngest age of 47. Believe or not, 
only 17 percent of households in the top fifth own their houses 
free of mortgage; whereas, 30 percent of people in the bottom 
quintile actually own their houses free of mortgage. So we have 
more assets in the bottom quintile even though they appear to 
be worse off.
    Many people in the bottom quintile are not truly poor. They 
are older citizens living off accumulated assets and 
accumulated wealth that has been decried by some witnesses 
today.
    America's workforce isn't in the middle of a surge of 
inequality--we should be wary of conclusions reached from 
dubious data, and we should keep in mind other ways of 
determining inequality, such as by adjusting for household size 
and consumption expenditures.
    To the extent there is inequality in incomes, differences 
in education are an important factor. A better education gives 
everyone a better shot at the workplace. Yet putting in place 
more government benefits and mandated employer-provided 
benefits to combat alleged problems of inequality isn't going 
to help the people that we are trying to help, especially 
women. With the Paycheck Fairness Act on the floor today, we 
need to be especially careful of different kinds of employer 
mandates that hurt women, because the unemployment rate for 
women in the United States is far lower than in those countries 
that have those larger mandates.
    Members should consider doing ways to help the economy 
grow, such as keeping taxes low, making use of America's oil 
and gas reserves through oil drilling and exploration so we 
have a reliable source of domestic energy and removing ethanol 
mandates that are driving up our food prices.
    Thanks so much for giving me the opportunity to testify 
today.
    [The statement of Ms. Furchtgott-Roth follows:]

  Prepared Statement of Diana Furchtgott-Roth, Senior Fellow, Hudson 
                               Institute

    Mr. Chairman, members of the Committee, I am honored to testify 
before your Committee today on the subject of the income gap in the 
American middle class.
    American workers are earning more today than they were a year ago. 
Real disposable personal income has increased steadily since 1996. 
Between January 1996 and May 2008, real disposable personal income 
increased 54.5 percent. Over past year, from May 2007 to May 2008, real 
disposable income increased by 7.3 percent. In addition, the Census 
Bureau reported 0.7 percent increase in median household income from 
2005 to 2006 (the 2007 numbers will come out next month).
    With increases in income, what has happened to inequality? The 
popular perception of income inequality is dire. A quick search through 
the popular press will yield dozens of articles and speeches decrying 
the increasing excesses of the super-rich while the poor grow ever 
poorer. Robert Frank's best-selling book, Richistan, portrays the ``new 
rich'' who have multiple mansions and staffs of household helpers. 
David Shipler's The Working Poor: Invisible in America describes those 
in low-wage jobs, struggling to get by. Yet rather than relying on 
anecdotes, we should base our views of inequality on a firm 
understanding of the data.
    Economists use a variety of measures to determine how equally the 
income ``pie'' is divided. These measures include inequality indices 
and earning shares.
    Common to all these measures, however, are certain challenges. All 
measures need a definition of income, and defining income is not as 
straightforward as it seems. Some researchers will use pre-tax income, 
while others will look post-tax income before transfer payments such as 
food stamps, Medicare, or Social Security. Others use post-tax, post-
transfer income. What measure is used makes a significant difference.



    For example, consider the Gini coefficient, as calculated by the 
Census Bureau. The Gini coefficient is a statistical index inequality 
ranging from zero to one, calculated from the distribution of income 
throughout the population. Low values represent low levels of 
inequality, while values near one mean that income is concentrated 
among a few individuals. As can be seen from a Census Bureau table 
using alternate measures of income, the official Gini coefficient is 
consistently overestimated by about 5 percentage points,\1\ after taxes 
and transfers are accounted for (see figure above).
    A report from the Census Bureau concludes that ``there have not 
been any statistically significant annual changes in the Gini index 
over the last 10 years.'' \2\ A Congressional Budget Office report 
found that, between 1991 and 2005, the quintile of households with 
children with the lowest earnings experienced the second greatest 
percentage increase in income, after the top quintile. The lowest 
quintile experienced the largest percentage growth in earnings.\3\



    The Internal Revenue Service reports that the top 50 percent of 
earners paid 97 percent of income taxes in 2006, a percentage which 
increased in almost every year since 1992 \4\ (see figure above). 
Meanwhile, personal current transfer receipts, as reported by the 
Bureau of Economic Analysis, have been steadily increasing (see figure 
below). These transfer payments go disproportionately to lower-income 
individuals. The net effect of taxes and transfer programs is to bring 
greater equality to the purchasing power of individuals.



    Additionally, we need to consider the spending power of American 
dollars. Low-income households spend a greater portion of their income 
on goods that have become cheaper with international trade, such as 
food. High-income households, on the other hand, spend for ``high-end 
services like private secondary schools, college tuition, high-end 
spas, message therapists, landscape gardeners, and other service 
providers whose relative prices rise steadily relative to the overall 
consumer price level.'' \5\ Jerry Hausman and Ephraim Leibtag found in 
2004 that a Wal-Mart in a new market decreases food prices by 15 to 25 
percent.\6\
    Demographic changes can create potentially spurious increases in 
income inequality. Most inequality measures are calculated from 
household or family income. So the increasing tendency of high-income 
men to marry high-income women will boost the inequality among 
household incomes without changing inequality among individual earners.
    Furthermore, not all households are the same size, and household 
size has diminished over time due to later marriages, fewer children, 
and divorce. There are 1.7 people in the average household in the 
lowest fifth of households, and this number rises steadily to 3.1 
persons in the top fifth of households. Differences in household 
income, then, are larger than differences in income per person. 
Similarly, there are differences in the number of earners per 
household, with the top fifth averaging 2.1 earners compared to the 
bottom fifth's half an earner per household.\7\ Since more people are 
working in the higher income households, it is hardly surprising that 
the household as a whole is earning more.
    Besides the questions of determining the ``true'' Gini coefficient 
highlighted above, there are concerns when using the Gini coefficient 
for comparison. It is important to realize that the Gini coefficient 
represents a snap-shot of inequality. As the working force population 
changes its average characteristics, the Gini coefficient likewise 
changes.
    Consider an economy where workers have the same earnings experience 
over their lives. Younger workers earn less than older workers, and 
earnings rise throughout workers' careers. A snap-shot of this economy 
will show income inequality between workers even though lifetime income 
is more equal. In this case, the Gini coefficient indicates less an 
egregious lack of income equality than a need for good credit markets.
    But even more than properly understanding the nuances of the 
numbers used to track income inequality, we need to understand the data 
that are used to generate them. A study by Thomas Piketty and Emmanuel 
Saez is the basis, directly or indirectly, for many of the commentators 
warning of rising income inequality. This study uses individual income 
tax returns from 1913 to 1998 (updated to 2001) to chart changes in the 
top earners' income shares over the past century.
    To calculate these shares, Piketty and Saez aggregate the reported 
income of the top percentage groups of interest (specifically, the top 
1 percent) and divide this number by the total personal income reported 
in the National Income and Product Accounts by the Bureau of Economic 
Analysis.\8\
    Unfortunately, this simple measure is wholly dependent on the 
consistency of the underlying data. Individual income tax returns 
provide complicated data to work with, especially over time, because 
income tax returns provide data on tax units, not individuals. A 
married couple filing together represent one tax unit, as does their 
teenage son whose earned $3,350 at his part-time and summer jobs.\9\ 
These three represent one household, but two tax units: one relatively 
rich, the other relatively poor.
    With the entry of greater numbers of women into the workforce over 
the past 25 years, the growing tendency towards dual income couples 
polarizes the income distribution without any change in individual 
income inequality. Two earners marrying, whether they be attorneys or 
automotive mechanics, results in an immediate change in the income 
distribution. A police officer married to a nurse, each at the top of 
their profession, can earn almost $200,00. If more teenagers take 
after-school jobs, the number of low-income tax ``households'' balloons 
and income inequality appears to rise.
    The Tax Reform Act of 1986 lowered the top income rate from 50 
percent to 28 percent, and raised the capital gains tax to equal the 
ordinary income rate.\10\ Prior to the passage of the Tax Reform Act, 
it was advantageous for many small-business owners to file under the 
comparatively lower corporate tax rate. After the Act, the individual 
tax rate was more favorable than the corporate rate, so small 
businesses switched to filing individual tax returns. This explains 
that large jump in the inequality series of Piketty and Saez between 
1986 and 1988. A mass switch from corporate to individual filings by 
small-business owners fits this pattern perfectly.\11\ After correcting 
for this change and the effect of transfer payments, Cato Institute 
economist Alan Reynolds finds that ``the apparent increase of 1.7 
percentage points in the top 1 percent's share from 1988 to 2003 in the 
unadjusted Piketty-Saez estimates becomes no increase.'' \12\
    As well as analyzing income inequality directly, we can consider 
consumption inequality. This provides a better view of how much 
citizens actually spend, and therefore how well Americans live. 
Consumption spending generally has fewer fluctuations than income, so 
consumption data will be influenced less by transitory shocks. Data 
from the Consumer Expenditure Survey of the Bureau of Labor Statistics 
adjusted for the number of people per household gives us insight into 
spending equality among Americans.\13\
    In 2006, the last year for which data are available, Americans in 
the lowest quintile of pre-tax income spent $12,006 per person, 
compared to $16, 572 per person in the middle fifth household, and $30, 
371 per person in the top quintile. On a per person basis, the top 
quintile spends only 2.5 times what the bottom quintile does, and 1.8 
times what the middle fifth does.
    When spending is broken down into categories, results are similar. 
The bottom quintile spends $874 per person for health costs, about 1.5 
times as much as the top quintile's $1318 per person. For food, the 
bottom fifth paid $1,878 while the top fifth paid $3,304. The top 20 
percent spend only 1.8 times as much. In housing, the lowest quintile 
spent $4,781 to the top's $9,700--about two times as much. In all these 
categories, the middle quintiles are roughly in between.
    The areas where the high-income quintile outspends the low-income 
quintile are personal insurance and pension, entertainment, and 
transportation. The top 20 percent spend 14.6 times more on personal 
insurance than the lowest fifth, but only three times more than the 
middle fifth. In both entertainment and transportation, the top 
quintile expends about three times as much as the bottom quintile. The 
top quintile outspends the middle quintile in entertainment and 
transportation by 2.2 times and 1.7 times, respectively. The pattern 
that emerges is not one of extreme inequality. The top income earners 
do not outspend the lowest earners by extreme amounts.
    The demographic characteristics of the bottom fifth of households 
shed light on consumption patterns. The bottom income quintile has the 
highest average age, 52, while the top quintile has the second youngest 
age at 47 (the second-highest quintile has an average age of 46). Only 
17 percent of the top twenty percent own homes mortgage-free, with 75 
percent still paying off their mortgage; 30 percent of the bottom fifth 
own homes free of any mortgage, and only 13 percent have to spend for 
mortgages.\14\
    These data support the conclusion that some households in the 
bottom income quintile are not truly poor. Instead, they are older 
citizens living off accumulated savings. Some of those in the top 
quintile are at the peak of their earning careers, and are saving up 
for their future.
    Another important difference between income quintiles is in 
education. The percentage of reference people in each household with a 
college education rises to 83 percent in the top quintile, starting at 
40 percent for the lowest 20 percent of households.\15\
    Studies consistently find high returns to education. A study by 
economists Louis Jacobson, Robert LaLonde, and Daniel Sullivan on 
displaced workers in Washington State found that workers increased 
their incomes by 7 to 10 percent per year of community college, the 
same as students entering directly from high school.\16\ Another study 
by economists Thomas Kane and Cecilia Rouse found that these returns, 
about a 5 to 10 percent improvement in earnings per year of education, 
are remarkably similar across community colleges and four-year 
colleges.\17\
    Perhaps more importantly, the subjects studied make a difference. A 
related study by Jacobson, LaLonde, and Sullivan find higher returns, 
14 percent income improvement per year of education for men and 29 
percent for women, when more technical or quantitative subjects are 
taken.\18\
    Education gives Americans the skills they need to succeed in 
today's dynamic business world. Improvements to the education system 
focused on providing quality education in key areas will increase the 
human capital of America's citizens and help workers attain their 
potential in the workplace.
    America's workforce is not in the midst of a surge of inequality as 
popularly portrayed. We should be wary of conclusions reached from 
dubious data, and keep in mind other ways of determining inequality, 
such as through consumption expenditures. To the extent that there is 
inequality in incomes, differences in education are an important 
factor. A better education system gives everyone a fairer shot in the 
workplace.
    Putting in place more mandated employer-provided benefits to combat 
alleged problems of inequality would hurt those Americans that members 
of Congress are seeking to help. Many of the protections are aimed at 
women. Examples of such protections include paid maternity leave, 
government-provided child care, and ``paycheck fairness''--mandating 
that women be paid the same as men not for equal work, as is the case 
now, but for jobs of equal worth.
    Yet women in the United States have enjoyed a low unemployment 
rate, one comparable to men's, because low taxes and lack of employer 
mandates encourage women to work outside the home and be hired. This 
has remained true over the past year, as the economy has slowed. 
According to BLS data, the 2007 unemployment rate for American women 
was 4.5 percent and the rate for men was 4.7 percent. In June, 2008, 
the adult female unemployment rate in the United States was 4.7 
percent, compared to the male rate of 5.1 percent. Of particular note 
is that the unemployment rate for American women moves closely to the 
rate for men.
    In other countries, unemployment rates for women are higher than in 
the United States. In 2007, compared to the rate for American women of 
4.5 percent, the rate for women in Canada was 4.8 percent; Australia, 
at 4.8 percent; France, at 9.1 percent; Italy, at 7.9 percent; Sweden, 
at 6.4 percent; and the UK, at 5 percent. In Italy, France, the 
Netherlands, and Sweden, women have a significantly higher unemployment 
rate than men.\19\
    Not only do women in the United States have a lower unemployment 
rate, they also find jobs more quickly. According to the latest release 
from the OECD, only 9.2 percent of unemployed women in the United 
States had been unemployed for a year or more. This compares favorably 
to Australia, where 15.2 percent of unemployed women were unemployed 
for a year or more; France, where it was 43.3 percent; Germany, where 
it was 56.5 percent; Italy, where it was 54.8 percent; Japan, where it 
was 20.8 percent; the Netherlands, where it was 43.6 percent; Spain, 
where it was 32.2 percent; Sweden, where it was 12.2 percent; and the 
UK, where in 2006 14.9 percent of unemployed women had been unemployed 
for a year or more.\20\
    The labor force participation rate for American women is also high. 
From 1980 to 1990, the participation rate rose 6 percentage points to 
57.5 percent as large numbers of women entered the workforce. The rate 
peaked in 1999 at 60 percent, and in 2007 was only seven tenths of a 
percentage point lower, at 59.3 percent. In April 2008, 59.6 percent of 
women were in the labor market. The 2007 labor force participation rate 
for women was higher than in Australia at 59 percent; Japan, at 47.9 
percent; France, at 51.3 percent; Italy, at 37.9 percent; the 
Netherlands, at 59 percent; and the UK, at 56.5 percent.
    The way to reduce economic inequality is to provide more education 
and job opportunities for those in lower income groups. To that end, we 
need to focus not only on education, but also on how to spur economic 
growth and keep prices low. Members could consider keeping taxes low, 
making use of America's oil and gas reserves through oil drilling and 
exploration so that we have a reliable source of energy, and removal of 
the ethanol mandates that are driving up our food prices.
    Thank you for giving me the opportunity to testify today. I would 
be glad to answer any questions.

                                ENDNOTES

    \1\ U.S. Census Bureau, Current Population Survey, Annual Social 
and Economic Supplements, Table RDI-5, ``Index of Income Concentration 
(Gini Index), by Definition of Income: 1979 to 2003.'' Available at 
http://www.census.gov/hhes/www/income/histinc/rdi5.html
    \2\ Ibid.
    \3\ Dahl, Molly, Congressional Budget Office, ``Changes in the 
Economic Resources of Low-Income Households with Children'' May 2007. 
Available at http://www.cbo.gov/ftpdocs/81xx/doc8113/05-16-Low-
Income.pdf
    \4\ Internal Revenue Service, SOI Tax Stats--Individual Income Tax 
Rates and Tax Shares, Table 1 ``Number of Shares, Shares of AGI and 
Total Income Tax, AGI Floor on Percentiles in Current and Constant 
Dollars, and Average Tax Rates.'' Available at http://www.irs.gov/
taxstats/indtaxstats/article/0,,id=129270,00.html
    \5\ Gordon, Robert and Ian Dew-Becker. ``Controversies about the 
Rise of American Inequality: A Survey.'' NBER Working Paper No 13982 
(May 2008), pg 33.
    \6\ Hausman, Jerry and Ephraim Leibtag. ``CPI Bias From 
Supercenters: Does the BLS Know that Wal-Mart Exists?'' NBER Working 
Paper No 10712 (August 2004).
    \7\ U.S. Department of Labor, Consumer Expenditure Survey, Table 
55. Available at ftp://ftp.bls.gov/pub/special.requests/ce/aggregate/
2006/quintile.txt
    \8\ Piketty, Thomas and Emmanuel Saez. ``Income Inequality in the 
United States, 1913-1998.'' Quarterly Journal of Economics, Vol 118, Is 
1 (Feb 2003) pp 1-39.
    \9\ Internal Revenue Service, ``2007 Inst 1040 Instructions for 
Form 1040 and Schedules A, B, C, D, E, F, J, and SE.'' Chart B, pg 7, 
for dependent children who are not blind or over 65 years of age.
    \10\ Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, as 
reported by Stacey Kean and David Brumbaugh, Congressional Research 
Service, CRS Report for Congress No. 87-231E, ``Tax Reform Act of 1986 
(P.L. 99-514): Comparison of New with Prior Tax Law.''.
    \11\ Reynolds, Alan. ``Has U.S. Income Inequality Really 
Increased?'' Policy Analysis no 586, Jan 8, 2007.
    \12\ Ibid., at 11.
    \13\ All calculations on per-person spending are performed using 
U.S. Department of Labor's Consumer Expenditure Survey, table 1, 
available at http://www.bls.gov/cex/home.htm.
    \14\ Ibid.
    \15\ Ibid.
    \16\ Jacobson, Louis, Robert J LaLonde and Daniel Sullivan. ``The 
Impact of Community College Retraining on Older Displaced Workers: 
Should We Teach Old Dogs New Tricks?'' Industrial and Labor Relations 
Review, Vol 58, No 3 (April 2005) pp 398--415.
    \17\ Kane, Thomas J. and Cecilia Elena Rouse. ``The Community 
College: Educating Students at the Margin Between College and Work,'' 
Journal of Economic Perspectives, 13, no. 1 (Winter 1999): 63-84.
    \18\ Jacobson, Louis, Robert J LaLonde and Daniel Sullivan. ``Is 
Retraining Displaced Workers a Good Investment?'' FRB of Chicago 
Economic Perspectives, Vol 29, Iss 2 (2nd Quarter 2005) pp 47-66.
    \19\ Bureau of Labor Statistics, ``Comparative Civilian Labor Force 
Statistics, 10 Countries, 1960-2007,'' Washington, DC: Department of 
Labor, Updated April 18, 2008.
    \20\ OECD Employment Outlook 2007, Statistical Annex Table G, p 
267.
                                 ______
                                 
    Ms. Woolsey. Thank you.
    Dr. Bernstein?

  STATEMENT OF JARED BERNSTEIN, DIRECTOR OF LIVING STANDARDS 
               PROGRAM, ECONOMIC POLICY INSTITUTE

    Mr. Bernstein. Chairman Woolsey, Ranking Member Wilson, I 
thank you for the opportunity to testify--happy birthday--and I 
commend the committee for examining what many economists and 
policymakers consider the most important economic challenge we 
face.
    Of course, in the current economy challenges abound. The 
economy, while not officially in recession, is clearly weak in 
key sectors, most notably in the job market. As we meet today, 
even as the economy continues to expand, the paychecks of 
middle income families are--the paychecks of middle income 
persons are falling behind their families' economic needs, and 
living standards are sliding.
    Though these problems are of recent vintage, they are also 
a microcosm of the topic we are here to discuss today: The 
inequality of economic outcomes.
    Other witnesses have presented the statistics to make the 
case. I will only add a few examples and then discuss the 
causes of the problem and suggest some policy ideas.
    The gap between the economy's growth and the income of the 
median family in the 2000s, in this business cycle, is one of 
the clearest examples of the inequality phenomenon. While 
output per hour of productivity increased smartly in the 2000s, 
up 19 percent, the real income for the typical family fell--
fell--by about one percent. Given the concentration of growth 
at the top of the income scale, middle income families 
responsible for creating that growth are failing to reap its 
benefits.
    The increase in inequality is remarkably consistent across 
data sets, income definitions and other adjustments. The CBO 
data, as Bob Greenstein described, is the most complete source. 
It adjusts for taxes, it adjusts for transfers, it adjusts for 
family or household size, as was just raised. In large part, 
because of their addition of capital gains, critically 
important, these data show particularly large increases in 
inequality compared to, say, census, which admit those gains.
    Consumption inequality trends reflect those of income 
inequality. Again, in the 2000s, spending data revealed that 
expenditures fell three percent real for households in the 
bottom two-fifths, relatively flat in the middle and up seven 
percent for households at the top of the scale.
    Inequality is much more severe in the U.S. compared to that 
of most other advanced economies, and in reference to what 
Diana was just talking about regarding mobility, it is a 
particularly troubling aspect of such comparisons that income 
mobility is greater in these countries, except in the U.K.
    Now, these differences are often raised to suggest that 
more extensive social protections in Europe and the Nordics 
hurt their macro economy, but the evidence belies this claim: 
Both Norway and the Netherlands, for example, have higher 
productivity than the U.S. and lower unemployment rates. 
Excluding the U.S., average OECD employment growth was greater 
in the 2000s than it was here, and poverty was considerably 
lower.
    Now, turning to causes, increased inequality of labor 
earnings is usually attributed to technological change and the 
unmet demand of employers for skilled workers. Now, the idea 
here is that the production of the goods and services in the 
economies become more complex, and employers need more highly 
skilled workers. When the supply of such workers is low 
relative to employers' demand, the relative wage increases.
    Now, this common sense explanation certainly makes sense 
and describes the relevant dimension of the problem, but it is 
too reductionist. It happens to be a very good idea for any 
economy to increase the skilled labor force--that is integral 
to a productive economy--but it can't be the sole reaction to 
rising inequality.
    Now, first, we have to recognize that 70 percent of today's 
workforce has less than a college degree. Thus, unless we are 
willing to consign this majority to stagnant living standards, 
simply pressing for higher skills is too narrow an agenda.
    Another important reason why the skills explanation is 
incomplete is that it refers largely to labor earnings, while 
non-labor, or capital income--profits, dividends, interest 
income, capital gains--has become increasingly important as a 
component of rising inequality.
    Bob Greenstein mentioned the first ``do no harm'' principle 
of public policy regarding the contribution of tax changes 
since 2001 to increasing inequality, so I won't spend any time 
on that, but beyond tax policies there are other sins of 
omission that have contributed to higher inequality. We failed 
to strengthen workers' legal ability to organize, we have 
gutted investments in their skills and training, under-invested 
in their public--in our public infrastructure and stood by 
while the employer-based systems of health coverage and 
pensions slowly unraveled.
    I can elaborate on those items as--in the Q and A, but I 
will stop there in the interest of time.
    Thank you.
    [The statement of Mr. Bernstein follows:]

   Prepared Statement of Jared Bernstein, Senior Economist, Economic 
                            Policy Institute

    Chairwoman Woolsey, Ranking Member Wilson, I thank you for the 
opportunity to testify, and I commend the committee for targeting the 
critical challenge of economic inequality and the American middle 
class. In doing so, you are targeting what many economists and policy 
makers consider the most important economic challenge we face.
    Of course, in the current American economy, challenges abound. We 
are faced with the aftermath of the bursting of a massive housing 
bubble, and the spillovers from that event are significantly 
constraining financial markets. The economy, while not officially in 
recession, is clearly weak in key sectors, most notably in the job 
market, where employment is down by about 440,000 jobs on net, and 
unemployment up about a point compared to one year ago to 5.5%. The 
underemployment rate, a more comprehensive measure of diminished job 
opportunities was 9.9% in June. These job market declines, in tandem 
with spiking prices driven by higher food and energy costs, are leading 
to real declines in compensation. Simply put, the paychecks of middle-
income are falling behind these families' economic needs, and their 
living standards are sliding.
    Though these problems are of recent vintage, and can to some extent 
be closely tied to the bursting of the housing bubble, they are also 
microcosm of the topic we are here to discuss today: the inequality of 
economic outcomes.
    Figure 1 shows this relationship by plotting the productivity of 
the American workforce against the real income of the median family. 
While output per hour increase smartly in the 2000s, up 19%, real 
income for the typical family fell by about 1%. In fact, this split 
between productivity and median family income has been ongoing since 
the mid-1970s, and is regarding as one symptom of increasing 
inequality. When economic growth is concentrated at the top of the 
income scale, many families responsible for creating that growth will 
fail to reap its benefits.



    This period stands in stark contrast to the first few decades of 
the post-WWII era, when, as shown in the next figure, productivity and 
median family income grew in lock-step, both doubling over these years. 
Clearly, the current era of rising inequality began in the mid-1970s, a 
fact that will be useful in diagnosing the problem later in this 
testimony.



    Since committee staff has asked me to focus on causes and 
solutions, I will spend little time on the spate of statistics that 
document the increase in inequality. Those interested in such analysis 
should examine Chapter 1 of the book State of Working America, wherein 
myself and co-authors (Mishel, Shiersholz) present the evidence in 
great detail. Here, I will offer one very long term look at the issue, 
which tracks the share of national income held by the top 1%, including 
capital gains (an important component of income/wealth inequality), 
going back to 1913 (Figure 3). In 2006, most recent data point for this 
series, this share was 23% the second highest in the series. As the 
figure reveals, there was only one year with a higher share: 1928. Note 
also that the current share is twice that of the early 1970s.



    Such evidence of historically high levels widely accepted. The 
causes, on the other hand, are hotly debated. And since appropriate 
solutions require accurate diagnoses, I will spend the rest of this 
testimony on causes and solutions.
Inequality: Causes and Solutions
    Labor Earnings: Most commonly, increased inequality of labor 
earnings is attributed to technological change and the unmet demands of 
employers for skilled workers. Often, this explanation is discussed 
under the rubric of ``skill biased technological change,'' or SBTC. 
Simply stated, the theory maintains that the production of the goods 
and services in the economy has become more complex, and employers need 
more highly skilled workers to undertake the necessary tasks. When the 
supply of such workers is low relative to employers' demands for them, 
the relative wage--the pay of highly skilled workers compared to 
others--increases, i.e., wage inequality goes up.
    In this sense, some economists view wage inequality as a race 
between technology and the supply of skilled workers. In periods when 
technological advances win that race, inequality rises, and visa-versa. 
Offsetting rising inequality in this framework requires an increase in 
the relative share of skilled workers, which, in the policy debate, 
usually translates into more college graduates with the skill sets that 
are complementary to the relevant technologies.
    This common-sense explanation certainly makes sense and describes a 
relevant dimension of the problem, but it is too reductionist. By 
definition, if inequality is increasing in this model, skill deficits 
are to blame. Such analysis can only return one policy recommendation: 
more skilled workers, or, more precisely, raise the relative supply of 
college graduates. That is generally a good idea for any economy, since 
skilled labor is integral to a productive economy, but it cannot be the 
sole reaction to rising inequality.
    First, we must recognize that 70% of today's workforce has less 
than a four-year college degree. Thus, unless we are willing to consign 
this majority to declining living standards, either relative or 
absolute (i.e., real income stagnation), simply pressing for higher 
skills is too narrow an agenda.
    Second, in recent years, the college wage premium has actually been 
fairly flat, as shown in the table below. The values in the table are 
the wage advantage of college-education over high-school educated 
workers, controlling for the variety of factors noted above. The 
measure grew by about 14 percentage points over the 1980s, about half 
that much over the 1990s, and about zero in the 2000s. Thus, to the 
extent that wage inequality rose over the 1990s and especially the 
2000s, it was increasingly a function of growing disparities within 
educational groups.

                   REGRESSION-ADJUSTED COLLEGE PREMIUM
------------------------------------------------------------------------
                Year                               Percent
------------------------------------------------------------------------
1979                                 23.4%
1989                                 37.8%
2000                                 45.3%
2006                                 45.4%
------------------------------------------------------------------------
Source: State of Working America, 2006/07

    Heuristically, this might be understood be considering a school 
teacher, a mid-level office manager or HR director, a lower-level 
computer programmer, compared to an investment banker. All of these 
workers could be college-educated, but many faced stagnant earnings in 
recent years (the real college wage rose 2.5%, 2000-07, compared to 
15%, over the 1990s), while others--the banker in our example--
experienced large gains. This is an example of ``within-group'' 
inequality growth, and it is less amenable to skill upgrading 
solutions.
    Thus, while increasing the share of skilled workers is part of the 
solution, it is not the sole solution. It remains a critically 
important one, and I return to it below. But those interested in 
wielding policy to turn this inequality tide need also consider various 
mechanisms and institutions within our economy that have historically 
ensured that the benefits of growth are more broadly shared.
    Capital Income: \1\ Another important reason why the skills 
explanation is incomplete is that it refers largely to labor earnings, 
while non-labor, or capital income--profits, dividends, interest 
income, capital gains--has become an increasingly important component 
of rising inequality, particularly at the very top of the income scale.
---------------------------------------------------------------------------
    \1\ This section is adapted from the forthcoming State of Working 
America, 2008/09, by Mishel, Bernstein, and Shierholz.
---------------------------------------------------------------------------
    Two trends have reinforced the increasing important role of capital 
income: 1) such income has become more concentrated among households at 
the top of the income scale, and 2) capital income accounts for a 
larger share of total income.
    On the first point, the receipt of capital income has become much 
more concentrated over the last few decades, according to the data from 
the Congressional Budget Office. Whereas the top 1% received 34.2% of 
all capital income in 1979, their share rose to 58.6% by 2000 and rose 
further to 65.3% in 2005 (the latest year for these data). Thus, the 
top 1% roughly doubled its share of capital income between 1979 and 
2005. Correspondingly, the share of capital income going to the bottom 
90% declined from 36.7% in 1979 to just 15.1% in 2005.
    Second, the economy, particularly the corporate sector (excluding 
government, non-profits, and proprietors) is now generating both higher 
returns to capital income (greater profits and interest), and this has 
expanded capital's share of total income. For instance, income such as 
capital gains, interest, and dividend income comprised 18.0% of 
personal market-based income in 1979 and 24.2% in 2007. This 
necessarily generates greater income inequality since, as the CBO 
reveal, most capital income is received by those who are well off.
    Likewise, the share of income in the corporate sector going to 
capital income in the recent recovery was the highest in nearly 40 
years: in the 2004-07 recovery capital income accounted for 22.3% of 
corporate income, a jump from its 19.2% share in the 1976-99 recovery. 
The share going to compensation was correspondingly at a low point. The 
resulting historically high returns to capital are associated with the 
average worker's compensation being 4.4% lower and the equivalent of 
transferring $206 billion dollars annually from labor compensation to 
capital incomes.
    First, Do No Harm: All of the data and arguments presented this far 
are in regards to inequality from market outcomes, i.e., before taxes 
and transfers. And clearly, these market outcomes have become much more 
unequal in terms of distribution. It is thus important not to 
exacerbate the problems we have with policies that further amplify 
market-driven inequalities. For example, changes since 2001 to the 
Federal tax code have worsened the distributional outcomes, by 
disproportionately lowering the tax liabilities of the wealthiest 
families.
    Such regressive tax policies hurt most families both directly and 
indirectly. Directly, they exacerbate the already excessive 
inequalities in market outcomes (i.e., the pretax distribution). 
Indirectly, they diminish revenues such that the Federal government is 
less able to perform needed functions (without borrowing), many of 
which, like safety net policies, disproportionately benefit the least 
well off. While the direct impact of the regressive tax cuts has been 
extensively measured and is well-appreciated, this indirect effect--the 
defunding of public services that boost economic security of the least 
advantaged--is also important and problematic.
    Beyond tax policy, other policy ``sins of omission'' have 
contributed to higher inequality. We have failed to strengthen workers' 
legal ability to organize, gutted investments in their skills and 
training, under-invested in our public infrastructure, or stood by as 
the employer-based systems of health coverage and pensions slowly 
unravel.
    The following section briefly suggests policies to proactively push 
back against the trends toward greater inequality.
Reconnection Growth and Living Standards of Middle and Lower Income 
        Families\2\
    These policies can be grouped into four categories, bargaining 
power, macro conditions, safety nets, and investments in human and 
physical capital.
---------------------------------------------------------------------------
    \2\ Some of this section originally appeared in earlier testimony 
(http://www.epi.org/content.cfm/webfeatures--viewpoints--testimony--
20080213) though I have updated some of the analysis.
---------------------------------------------------------------------------
    Bargaining Power: The inability of most workers' to bargain for a 
greater share of the value they're adding to our economy is at the 
heart of the various gaps documented above. Historically, a broad set 
of policies and norms, including unions, minimum wages, defined-
benefits pensions, and health care provisions, helped to lift workers' 
ability to bargain, and were thus associated with more broadly shared 
prosperity.
    Many factors have eroded these institutions and norms. Global 
competition clearly has strong upsides, as the increased supply of 
goods and capital has lowered prices and interest rates. But this same 
increased supply has hurt the bargaining power of many workers in this 
country, particularly those with less than a college education. Indeed, 
recent trends in the offshoring of white collar work are reducing the 
bargaining power of more highly educated workers as well.
    Unions play a key role in precisely this area. Research reviewed in 
Mishel et al (2007, table 3.37) shows that the decline in union density 
explains one-fifth to one-half the increase in male wage differentials 
over the past 25 years, and union wage premiums remain highly 
significant, even after controlling for human capital and observable 
characteristics.
    The decline in unions is partly a mechanical function of the loss 
of jobs in unionized industries, like manufacturing, but the more 
important explanation is the very unbalanced playing field on which 
unions try to gain a foothold. In fact, Freeman (2007) argues that 
slightly more than half of the non-union workforce would like some type 
of union representation, a finding that is not particularly surprising 
given the divergence of incomes and productivity shown above.
    The problem here is that the legal and institutional forces that 
have historically tried to balance the power of anti-union employers 
and their proxies have significantly deteriorated in recent decades, as 
described by Shaiken (2007). One legislative solution is the Employee 
Free Choice Act (EFCA), a bill that helps to restore the right to 
organize in the workplace. A central component of EFCA is so-called 
majority sign-up or ``card-check,'' which gives the members of a 
workplace the ability to certify a union once a majority sign 
authorizations in favor the union. The law also puts much needed teeth 
back into labor law by ratcheting up the penalties for those who 
violate the rights of workers trying to organize or negotiate a 
contract.
    Macro-Economic Conditions: Full employment--a tight match between 
labor supply and labor demand--is another important criterion for 
reducing the gap between overall growth and living standards of working 
families. Historically, very low unemployment rates have also been a 
key contributor to workers' bargaining power, ensuring that employers 
needed to bid compensation up to get and keep the workers they needed 
in order to meet the demand for their goods and services.
    We do not need to look back too far in time to corroborate such 
assertions, as the latter 1990s was a period of uniquely low 
unemployment in the context of the last few decades (unemployment was 
4% on average in 2000). Overall poverty fell by 2.5 points, 1995-2000, 
but declines among minorities that were more than twice that magnitude. 
In the 2000s, though unemployment did fall to the mid-four percent 
range at its lowest, job markets were never as tight, job creation was 
much weaker, and poverty was higher at the end of the cycle than at the 
beginning.
    Such trends are not at all unique to the 1990s cycle: longer term 
analysis confirms the result. For many of the years over the period 
1949-73, the unemployment rate was actually below the so-called NAIRU: 
the lowest unemployment rate considered to be consistent with stable 
prices.\3\ Recall from Figure 2, however, that this was the period when 
real median family income grew in step with the overall economy. 
Conversely, over the post-73 period, the labor market was often slack, 
as unemployment was higher than the rate associated with full 
employment. As has been shown, middle-incomes grew much more slowly 
over these years and inequality increased.
---------------------------------------------------------------------------
    \3\ NAIRU is an acronym for non-accelerating rate of unemployment. 
These findings are described in Bernstein (2007a).
---------------------------------------------------------------------------
    Of course, the conventional response would be that inflation must 
have grown more quickly over the earlier period, when job markets were 
especially tight but, in fact, the opposite is true. Even controlling 
for the steep inflation of the latter 1970s, inflation actually grew 
more slowly when the job market was ``tight than recommended,'' at 
least based on the NAIRU criterion. We relearned this lesson in the 
latter 1990s, also a period of decelerating price growth, even while 
the unemployment rate was headed for 30-year lows.
    In order to take a closer look at the benefits of full employment, 
and the costs of its absence, the next table examines these dynamics 
from the perspective of African-American median income. I take 
advantage of the Congressional Budget Office's series of the so-called 
``natural rate'' of unemployment (the rate associated with stable price 
growth). By comparing this rate to the actual unemployment rate, we 
have a measure of whether the job market was above or below full 
employment (i.e., slack, meaning lots of job seekers and too few jobs, 
or taut, meaning the a tight match between the number of workers and 
the number of jobs).
    The first column of the table accumulates the annual percentage-
point differences over the two time periods. Thus, if CBO's natural 
rate was 5% and the actual jobless rate was 4.5%, this would show up as 
a -0.5 percentage point in the analysis. Between 1949-73, the 
unemployment rate was often below the ``natural rate,'' cumulatively 19 
percentage points. This happens to be about the same number of points 
that unemployment was above this rate in the latter period. In other 
words, in the first period, job markets were typically much tighter 
than in the second period.
    When job markets were much tighter--when the unemployment rate 
average 4.8%--the incomes of black families grew at an average annual 
rate of 3.7%, compared to less than 1% in the latter period, when 
unemployment average 6.2%. Of course, many other factors were in play 
here. As shown above, every group's income grew more slowly in the 
latter period. The early progress of blacks grew off of a very low 
base, making it easier to post large percentage gains. Also, a larger 
share of black families was headed by single parents in the latter 
period, and this too contributed to the income slowdown. But less 
favorable job market conditions surely played an important role as 
well.
    The last column in the table is offered to rebut the commonly heard 
caveat regarding tight job markets: they generate unacceptably high 
levels of inflation. This simple comparison shows that inflation was 
lower when job markets were much tighter, contradicting the simple 
story. Clearly, tight labor markets, persistently below the supposed 
natural rate, have been associated with much better income growth for 
African-American families.

             FULL EMPLOYMENT, AFRICAN-AMERICAN FAMILY INCOME, UNEMPLOYMENT, AND INFLATION, 1949-2006
----------------------------------------------------------------------------------------------------------------
                                                          Real Annual
                                   Cumulative Points    Growth, Median          Average
                                    Below or Above      Income, Afr-Am       Unemployment         Inflation*
                                    Full Employment        Families
----------------------------------------------------------------------------------------------------------------
1949-73.........................             -19.1%                3.7%                4.8%                2.4%
1973-2006.......................              20.7%                0.8%                6.2%                3.7%
----------------------------------------------------------------------------------------------------------------
*Post-73 comparison leaves out 1979-82 to avoid upward bias. Including these years gives an average of 4.3%.

Sources: CBO NAIRU estimates; Census Bureau, median family income (RS deflator); BLS, unemployment; BLS, CPI-RS
  deflator.

    In this regard, the 2000s were an important reminder of the impact 
on minorities of less then full employment. Interestingly, once the 
jobless recovery ended in the fall of 2003, the job market over this 
cycle was roundly praised by many commentators, mostly with reference 
to the low unemployment rate. But employment growth was weak over this 
recovery, and the low unemployment rate partially masked other problems 
(like declining employment rates) that depressed the bargaining power 
of minority workers.
    The policy levers here, at least in normal times, i.e., outside of 
recessions, rest mainly with the Federal Reserve, but Congress can also 
play an important role which I discuss below under the rubric of 
investment policy.
    Safety Nets: Historically, working families in our country have 
depended on employers to provide health care and pensions, but it is 
not an exaggeration to observe that this system of employer-based 
coverage is slowly unraveling. A slow but undeniable shift is 
occurring, as the economic risks associated with illness and aging out 
of the workforce are shifting from employers to workers. This shift is 
not simply affecting the least skilled workers, but, as Gould (2007) 
shows in the area of employer-based health coverage, it is reaching 
workers at all wage and skill levels. In the area of pensions, the 
shift from defined benefits (a guaranteed pension) to defined 
contribution has been at the heart of the process of shifting risks 
from firms to workers.
    These shifts have motivated a vibrant debate regarding reform of 
our health care system. Such reform is especially urgent given the 
realization that the rate of increase in health spending in both the 
public and private sector is unsustainable. But this debate also has 
considerable bearing on the inequality debate, since the distribution 
of health care coverage and even outcomes have increasingly been skewed 
in a similar manner to other economic variables discussed thus far.\4\ 
And in this regard, certain types of health care reform, such as ``pay 
or play,'' or single payer models, could also involve considerable 
redistribution from the with above average care to those with less (or 
no) coverage. Similarly, the lack of savings preparedness among many 
persons approaching retirement (see Weller and Wolfe, 2005) and the 
shift from guaranteed pension underscores the need for pension reform 
as well.
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    \4\ http://www.epi.org/content.cfm/webfeatures--snapshots--
20080716.
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    It is beyond my scope here to review these plans. I refer 
interested parties to EPI's Agenda for Shared Propserity, an initiative 
by our institute to elaborate in some detail the best plans for meeting 
these challenges. I raise these issues in the context of this testimony 
because in this era of increasing inequality, health and pension 
coverage, especially through the job, are eroding, even as the economy 
expands. As ongoing technological change, globalization, and the lost 
bargaining power of many in the workforce have led to trends documented 
above, employers have been in the process of backing off their 
historical commitments to their workforce in many ways, including these 
types of coverage. And of course, the least advantaged workers rarely 
had such coverage to lose in the first place.
    The inequality data along with information on profitability reveal 
that it is not for lack of resources that firms have been cutting back 
on health and pension coverage, although rising health costs can and 
should also be viewed as a competitiveness issue. Instead, it is yet 
another symptom of the unbalanced nature of growth in the current 
economy, as wealth flows upwards and risks flow down.
    As these policy debates unfold, I urge the committee to view the 
issue of health care and pension reform as one that is intimately 
related to the findings regarding incomes, wages, and inequality in the 
first section of my testimony. By helping to provide workers with 
access to health care and pensions, we take a huge step towards 
improving job quality and blocking the ongoing risk shift.
    Finally, given the changes in the structure of work and the 
demography of the workforce, our nation's Unemployment Insurance system 
is also in need of reform and modernization. The Unemployment Insurance 
Modernization Act, already passed by this chamber, would make such 
changes, including providing benefits to both part-time workers and 
those who leave their jobs for compelling family reasons. The bill also 
accounts for shorter job tenures by considering a worker's most recent 
work history when determining eligibility for UI benefits.
    Investments in Human and Physical Capital: The emphasis in this 
section thus far has been more towards creating good jobs than on 
improving the skills of workers. That ``demand-side'' emphasis is 
important, because, as noted earlier 70% of the workforce is non-
college educated, and we must have a strategy for improving the quality 
of all jobs, not just those for workers with high levels of education. 
Similarly, regardless of skill levels, all workers will benefit from 
more effective and efficient safety nets.
    But it's also critical to invest in the skills of the workforce of 
both today and tomorrow. Unfortunately, our budgetary priorities have 
been moving in the opposite direction, as federal budgets over the past 
few decades have shortchanged training programs. Eisenbrey (2007), for 
example, shows that Federal investment in employment services and 
training is down about $1 billion in real terms since 1986 (from about 
$6 to $5 billion, 2006 dollars) even while the workforce has grown in 
size considerably over those years. The result is a decline in the 
budget for worker training and services from $63 to $35 per worker, in 
2006 dollars.
    According to the Coalition for Human Needs (2008) analysis of 
Congressional appropriations for a number of training programs, real 
declines have occurred in a number of job training programs between 
FY05 and FY08. Spending on both adult (-12%) and youth training (-14%) 
through the Workforce Investment Act are down, as are dislocated worker 
training (-9%) and adult basic education (-12%).
    As Savner and Bernstein (2004) discuss, one reason this 
disinvestment is misguided is that recent initiatives in worker 
training have shown considerable promise relative to earlier, less 
effective approaches. Our analysis was partly motivated by the evident 
limitations of work-first policies, i.e., programs that placed workers 
in jobs with little attention to job quality or career opportunities. 
In reaction, there has been a growing emphasis on programs designed to 
help job seekers prepare for good jobs and advance to careers. As we 
wrote:
    ``This new generation of programs shares several key elements. 
First, they're grounded in extensive knowledge of the local labor 
market, focusing on occupations and industries that offer the best 
opportunities for advancement. Second, they help workers access 
education and training at community colleges, community-based training 
programs, and union-sponsored programs that work with employers to 
design curricula based on the skills that employers actually need. And 
third, they provide access to remedial services--often referred to as 
``bridge'' programs--so that people who have weak basic skills can 
prepare for postsecondary-level programs.''
    Savner and I also recognized that even the best training programs 
will not work when the jobs aren't there. There will always be 
disadvantage localities beyond the reach of even the strongest 
macroeconomic booms, and neither full employment in the rest of the 
economy nor the most integrated training program will help. In these 
cases, we advocate the creation of public-service jobs to keep people 
gainfully employed, drawing on the successful experience of 
transitional jobs programs that have sprung up around the country using 
public funds to create work for people struggling to get a foothold in 
the labor market.



    Of course, educational disadvantages begin well before most people 
reach the workforce. Income inequality itself is a factor, preventing 
children's whose abilities should lead to higher academic achievement, 
but whose income class blocks their opportunity. Figure 4 shows that 
even once we control for academic ability, it remains the case that 
higher income children are more likely to complete college. Each set of 
bars shows the probability of completing college for children based on 
income and their math test scores in eighth grade. For example, the 
first set of bars, for the students with the lowest test scores, shows 
that 3% of students with both low scores and low incomes completed 
college, while 30% of low-scoring children from high-income families 
managed to complete college.
    The fact that each set of bars has an upward gradient is evidence 
against a meritocratic system. The pattern implies that at every level 
of test scores, higher income led to higher completion rates. The third 
set of bars, for example, shows that even among the highest scoring 
students in eighth grade, only 29% of those from low-income families 
finished college, compared with 74% of the from the most wealthy 
families. In fact, this 29% share is about identical to the completion 
rates of low-scoring, high-income students (30%), shown in the first 
set of bars. In other words, high-scoring, low-income children are no 
more likely to complete college than low-scoring, wealthy children.
    Such barriers to higher education revealed in these last two 
figures are costly in terms of reduced mobility. Recent research by 
mobility analysts at the Brookings Institution revealed that among 
those who lived as children in the lowest income families, college 
completion was strongly associated with leaving the bottom fifth in 
adulthood: 16% of those with a college degree remained low-income as 
adults, compared to 45% without college. Similarly, 54% of high-income 
children who completed college were high-income adults. But less than 
half that share--23%--without a college degree managed to maintain 
their top-fifth status. That is, 77% of the children who grew up in 
top-fifth families but failed to complete college, fell to lower income 
classes as adults.
    Though much recent educational policy has stressed accountability 
and standards, these results should serve to remind us that education 
policy designed to offset inequality also needs to be concerned with 
access to educational opportunity. Students with the cognitive 
strengths to achieve higher educational completion are too often 
blocked by income constraints, and the costs of such barriers in terms 
of diminished mobility are very high indeed.
    Along with human capital, investments in public physical capital 
should also be considered. Though such ideas are not typically 
discussed in the context of inequality, I raise them as such here, 
because I believe they are an important complement to the macroeconomic 
discussion above. The reality of a recession-like contraction in the 
job market means that the bargaining power associated with tighter 
labor markets is conspicuously absent. As such, workers wages and 
compensation are falling in real terms, due to slower wage growth and 
fewer hours of work (faster price growth is also a major factor for 
real wage losses in the current context). In this regard, investment in 
public infrastructure can be considered one way to generated much 
needed labor demand and jobs for those falling behind.
    Three facts motivate this contention. First, American households 
are highly leveraged, and may well be poised for a period of enhanced 
savings and diminished consumption. In this context, public investment 
should be viewed as an important source of macro-economic stimulus and 
labor demand--the creation of new, and often high quality jobs--which 
is clearly lacking from our current labor market.
    Second, there are deep needs for productivity-enhancing investments 
in public goods that will not be not made by any private entities, who 
by definition cannot capture the returns on public investments in 
roads, bridges, waste systems, water systems, schools, libraries, 
parks, etc. Three, climate change heightens the urgency to make these 
investments with an eye towards the reduction of greenhouse gases and 
the conservation of energy resources.
    One area of particularly significant job loss has been in 
construction. Jobs in residential building and contracting are down 
480,000 over the past two years, and when we include other jobs related 
to housing, such as real estate, we find a decline of over 600,000 jobs 
since June 2006. In other words, there exists considerable labor market 
slack that will certainly deepen if the economy is in or near 
recession.
    In this regard, infrastructure investment serves a dual role of 
deepening on investments in pubic capital while creating good jobs for 
workers that might otherwise by un- or underemployed. One common 
argument against such investment in the context of a stimulus package 
is that the water won't get to the fire in time, i.e., the 
implementation time lag is too long to quickly inject some growth into 
the ailing economy. However, research by EPI economists has carefully 
documented current infrastructure needs that could quickly be converted 
into productive, job-producing projects (Mishel et al, 2008).
    Take, for example, the August 2007 bridge collapse in Minneapolis. 
The concrete for the replacement bridge began flowing last winter, and 
the bridge is now halfway done, with full completion expected by 
December. The American Association of State Highway and Transportation 
Officials claim that according to their surveys, ``state transportation 
departments could award and begin more than 3,000 highway projects 
totaling approximately $18 billion within 30-90 days from enactment of 
federal economic stimulus legislation.'' \5\
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    The following are other relevant examples identified by these 
researchers:
     There are 772 communities in 33 states with a total of 
9,471 identified combined sewer overflow problems, releasing 
approximately 850 billion gallons of raw or partially treated sewage 
annually. In addition, the Environmental Protection Agency (EPA) 
estimates that between 23,000 and 75,000 sanitary sewer overflows occur 
each year in the United States, releasing between three to 10 billion 
gallons of sewage per year.
     According to a survey by the National Association of Clean 
Water Agencies, communities throughout the nation have more than $4 
billion of wastewater treatment projects that are ready to go to 
construction, if funding is made available. Funds can be distributed 
immediately through the Safe Drinking Water and Clean Water State 
Revolving Funds and designated for repair and construction projects 
that can begin within 90 days.
     The National Center for Education Statistics (NCES) put 
the average age of the main instructional public school building at 40 
years. Estimates by EPI find that the United States should be spending 
approximately an [additional] $17 billion per year on public school 
facility maintenance and repair to catch up with and maintain its K-12 
public education infrastructure repairs.
     According to a 1999 survey, 76% of all schools reported 
that they had deferred maintenance of their buildings and needed 
additional funding to bring them up to standard. The total deferred 
maintenance exceeded $100 billion, an estimate in line with earlier 
findings by the Government Accounting Office (GAO). In just New York 
City alone, officials have identified $1.7 billion of deferred 
maintenance projects on 800 city school buildings.
     The U.S. Department of Transportation has identified more 
than 6,000 high-priority, structurally deficient bridges in the 
National Highway System that need to be replaced, at a total cost of 
about $30 billion. A relatively small acceleration of existing plans to 
address this need--appropriating $5 billion to replace the worst of 
these dangerous bridges--could employ 70,000 construction workers, 
stimulate demand for steel and other materials, and boost local 
economies across the nation.
     The House Committee on Transportation and Infrastructure 
has identified more than $70 billion in construction projects that 
could begin soon after being funded. An effective short-term stimulus 
plan could include resources directed at projects for roads, rails, 
ports, and aviation; only projects that can begin within three months 
would be considered.
    Finally, while I have discussed these infrastructure needs in the 
context of recession and stimulus, it is important to recognize that a) 
these are all necessary and productivity-enhancing investments that 
should be made regardless of the state of business cycle, and b) recent 
history suggest that it is a mistake to think that labor market slack 
will no longer be a problem when the recession officially ends.
    This last point deserves a bit of elaboration. Much of the current 
recession/stimulus debate has stressed that recent recessions--the ones 
in 1990-91 and 2001--were both mild and short-lived, and perhaps the 
next recession will follow the same pattern. It is critical to 
recognize that these claims are based solely on real output growth, and 
not on job market conditions. The allegedly mild 2001 recession, 
wherein real GDP barely contracted, was followed by the longest 
``jobless recovery'' on record. Though real GDP grew, payrolls shed 
another net 1.1 million jobs. The unemployment rate rose for another 19 
months and for just under two years for African-Americans. The pattern 
was similar, though not quite as deep, after the early 1990s recession.
    Part of the explanation for this disjuncture has to do with the way 
recessions are officially dated by the committee at the National Bureau 
of Economic Research, as they have apparently given less weight to the 
job market and greater weight to output growth. But policy makers are 
likely to give greater consideration to working families whose 
employment and income opportunities are significantly weakened as 
unemployment rises and job growth contracts. Thus, from a stimulus 
perspective, these investments will be still be relevant well after the 
recession is officially ended.

Conclusion
    The existence of historically very high levels of income 
concentration in the American economy is well documented. While there 
is certainly debate about the causes of this trend, one factor widely 
agreed upon is education, in that skilled workers clearly have a large 
and growing wage and income advantage over less skilled workers. But 
other factors, including weakened distributional institutions, the 
absence of full employment, and deficient safety nets and investment 
are also problematic. At the same time, changes in tax policy have 
exacerbated inequalities that are already being driven up by imbalanced 
market outcomes.
    I have elaborated ways to strengthen the mechanisms which 
historically have been called upon to ensure a fairer distribution of 
the fruits of growth. I recognize that many of these steps are 
ambitious, such as creating greater access to higher education by 
economically disadvantaged children. Others, such as tight labor 
markets or infrastructure investment, cut across many committees in 
Congress and even across government institutions, like the Federal 
Reserve.
    Such an ambitious agenda is necessary, if we are to accomplish what 
must be a foremost goal of public policy: the reconnection of growth 
and living standards. The existence and expansion of this gap strikes 
at the heart of our core economic values, such as the belief that 
working families' living standards should reflect their contribution to 
the economy's growth. Every year that productivity rises, but middle 
incomes stagnate, poverty increases, and children are blocked from the 
opportunities to realize their potential, is another year in which the 
basic American economic contract is broken. I commend the committee for 
investigating this serious problem and look forward to working with in 
any way that would to helpful to fix it.

                              BIBLIOGRAPHY

Mishel, L., Bernstein, J., & Allegretto, S. (2007). The State of 
        Working America 2006/2007. Ithaca: Cornell University Press.
Freeman, R. B. (2007). America Works: Critical Thoughts on the 
        Exceptional US Labor Market. New York, Russell Sage Foundation.
Mishel, L., Eisenbrey, R., & Irons, J. (2008, January). Strategy for 
        Economic Rebound: Smart stimulus to counteract the economic 
        slowdown. Washington, D.C.: EPI Briefing Paper No. 210, 
        Economic Policy Institute.
Savner, S., & Bernstein, J. (2004, August). Can Better Skills Meet 
        Better Jobs? The American Prospect.
Shaiken, H. (2007, February). Unions, the Economy, and Employee Free 
        Choice. Washington, D.C.: EPI Briefing Paper No. 181, Economic 
        Policy Institute.
Weller, C., & Wolff, E. N. (2005). Retirement Income: The Crucial Role 
        of Social Security. Washington, D.C.: Economic Policy 
        Institute.
                                 ______
                                 
    Ms. Woolsey. Thank you very much.
    And we will start right with you, Dr. Bernstein, because I 
would like you to elaborate on the importance of labor unions 
in building a middle class for our nation. And I think you 
could just keep going with where you wanted to go on that one.
    Mr. Bernstein. Thank you. I am glad you gave me that 
opportunity.
    The inability of workers to bargain for a greater share of 
the value that they are adding to our economy is at the heart 
of the gap that many of the panelists have described today.
    Now, historically, there has been a broad set of policies 
and norms, and they have included unions but also minimum 
wages, defined benefit plans, as opposed to defined 
contributions, health care provisions. Many factors have eroded 
these institutions and norms. Global competition, which I agree 
with other panelists, has clear, strong upsides; it has also 
hurt the bargaining power of many workers in this country.
    Unions play a key role in boosting bargaining power, and I 
stress the importance of legislation like the Employee Free 
Choice Act to level the playing field for workers hoping to 
organize.
    Ms. Woolsey. Thank you.
    Bob, I have a question, Bob Greenstein. In your testimony, 
you mention that reducing poverty is a major goal. The 
Progressive Caucus, of which I am co-chair with Barbara Lee, 
has endorsed the goal of cutting poverty in half over the next 
10 years.
    Do you see this as possible, and why is lifting Americans 
out of poverty so essential to our economic health?
    Mr. Greenstein. I think this is a very important goal. I 
also have endorsed that goal. I do think it will be a real 
challenge to get there, and it may be that if policymakers 
implement a striking array of policies to reduce poverty, the 
reduction may fall short of cutting it in half, but there is no 
question that one can make substantial progress on that front.
    I think there are a number of kinds of implications. One of 
them is obviously economic. Children who are the low--low-
income children today are a key part of the workforce of 
tomorrow. In order to have greater economic growth, we need a 
greater degree of growth in the productivity. We need a skilled 
and trained workforce. We have growing amounts of research 
evidence that poverty in childhood, especially early childhood, 
can have an inhibiting effect on the degree of skills that 
children ultimately develop, the level of education they 
ultimately get and so forth.
    So this is an area where we can benefit the overall economy 
while reducing poverty at the same time.
    Similarly, one of the reasons--if you look at the long-term 
fiscal picture, why do we have serious long-term fiscal 
problems, there are many factors. One of them--the biggest one 
is rising health care costs--but one of them is that economic 
growth is projected to slow in coming decades because of the 
slowdown in the growth of the size of the workforce as the 
population ages. Another way of saying this is every potential 
worker becomes more important.
    We have a lot of people, a number of people who are poor 
adults who, with more education and with various kinds of 
supportive services to overcome various barriers to employment 
they now have, might be able to become productive workers as 
part of our workforce. We can no longer afford, going forward, 
to have people like that who are not part of the workforce.
    Finally, I think it affects the whole social fabric of the 
country when we have significant numbers of people who are not 
sharing when the economy, as a whole, grows.
    So there are a whole variety of reasons here. As you know, 
when he was prime minister, Tony Blair set a goal of cutting 
child poverty--I forget if it was in half or in whole, the 
percentage--in Great Britain, and while they didn't fully meet 
that goal during his tenure, they made major reductions in 
child poverty. I would like to see us do the same thing here.
    Ms. Woolsey. Where there is a will there is a way.
    Ms. Minow, I am changing the subject a little bit now. Do 
you have any examples for us on golden parachutes versus laying 
off the regular rank and file, and let us--is there anything 
you can tell us about how the two different groups are treated?
    Ms. Minow. Yes. I think probably the better analogy rather 
than golden parachutes would be other kinds of bonuses, because 
golden parachutes occur usually after a merger.
    Yes, the problem is that, as I said, the pay plans, as 
structured, provide a lot of perverse incentives, and so the 
more money that they can save by--these executives can save by 
laying off employees or by clamping down on any increase in 
their benefits, the more it rebounds to them through bonuses. 
And I can give you some specific numbers on that if you will 
let me amend the record after the hearing.
    Ms. Woolsey. I would appreciate that. Thank you.
    Mr. Wilson?
    Mr. Wilson. Thank you very much.
    And, Ms. Furchtgott-Roth, I am happy to hear of your South 
Carolina connection.
    As we face the issues discussing the middle class, the 
definition of middle class is something that I would like to 
know more about. And if you could explain how we measure what 
the middle class is, I have had the extraordinary opportunity 
to visit China, visit India. Both countries have phenomenal 
growth of what is called middle class, possibly exceeding the 
population of the entire United States in either country--over 
300 million in India, possibly 300 million in China. And so, 
how in the world do you define middle class?
    Ms. Furchtgott-Roth. Well, it is an excellent question, 
because it is a very difficult thing to do. You can take 
average household income, which is about $48,000 right now, but 
that hides the fact that a lot of people are moving through 
different life cycles.
    So we have my interns back here, Steven and Jeff. They are 
right now working for free. I can't pay them less than minimum 
wage, but I am allowed to employ them as interns for free. But 
when they graduate from Swarthmore and Princeton, they are 
going to be able to make a good introductory salary, and then 
they are going to rise up, and if they marry other people, then 
they will have maybe two incomes and a family, a car, house. 
Their peak incomes will be around when they are about, you 
know, in their 50's or 60's, then they will retire, they won't 
have any income at all. They will look poor, they will drop 
into that bottom income quintile, but hopefully they will have 
saved enough assets to--so they will have a comfortable 
retirement.
    So the middle class, at some point they will hit that maybe 
$48,000, but it will be moving through a life cycle, a life 
cycle of earnings, and most Americans work through a different 
life cycle of earnings depending on their skills and their 
education qualifications. That is why it is important to make 
sure we have as important skill base as possible. There are 
some states where there are only 70 percent of high school 
students that graduate, but that needs to be changed.
    I would also like to add that in terms of what Mr. 
Bernstein was saying about unions, right now only seven percent 
of private-sector workers choose to belong to unions. The 
percent of workers choosing to belong--private-sector workers 
choosing to belong to unions has steadily declined over the 
past 25 years. At the same time, GDP in the United States has 
been steadily increasing, and our country has been getting 
wealthier.
    The Employee Free Choice Act would take away the rights to 
a secret or a private ballot to vote for unions. It would have 
a card check phenomenon where someone could come up to you and 
say, ``Hey, Mr. Wilson,''--come to you at your home, ``Hey, Mr. 
Wilson, don't you want to join a union? Here is a card, you 
check it, and, by the way, I know where you live, I know your 
car, I can slash your tires if I want.''
    Mr. Bernstein works for the Economic Policy Institute, 
which is funded by the AFL-CIO, so he has to take that 
position, but that is not an accurate representation of the 
problem in American living standards and inequality.
    Mr. Wilson. Well, in fact, I appreciate--I live in a right-
to-work state. We are very, very grateful for investments. I 
have got three Michelin plants in the district that I 
represent. They have had a phenomenal impact on increasing wage 
rates throughout the region. I am also grateful that we have 
BMW located in South Carolina. In fact, every X5, Z3, Z4 in the 
world is made in South Carolina, and they have just announced a 
three-quarter of a billion dollar expansion. And a key part of 
that has been a labor force which is truly emancipated, and it 
is doing very well. So that would back up what you said.
    In your written testimony, you noted that a variety of 
measures are used to determine how equally the income pie is 
divided. All of the measures need a definition of income, and, 
as you noted, defining income is not as straightforward as it 
seems. Does that factor explain why researchers have reached 
vastly differently conclusions concerning the economic state of 
the middle class?
    Another side issue is, when we try to figure out 
unemployment I was startled to find out that people who work at 
home, who sell on the Internet, aren't included in the 
employed. And I know many people in very wonderful businesses 
who work 24 hours a day on the Internet. They are not 
considered employed, so how do we address these different 
determinations?
    Ms. Furchtgott-Roth. Right. Yes, yes. Well, it is very 
difficult to do depending on the measures of income you use, 
whether you use before-tax or after-tax. A lot of income grows 
out of taxes, and so depending on whether you use pre-tax or 
after-tax income, that affects the measure of inequality. 
Whether you include transfer payments in income, lower income--
many lower income people receive Medicare, Medicaid, housing 
vouchers, food stamps. Whether those are included in income 
also affects measures.
    And also if you look at different households, because the 
lowest fifth of households has a different size than the top 
fifth of households--1.7 people in it rather than 3.1 people. 
And so the fact that the bottom quintile has often lower 
incomes that is also a reflection of the number of earners and 
family size in that particular quintile.
    Whether someone is employed is determined in a Labor 
Department survey. There is a survey called, ``The Household 
Survey,'' 60,000 households every month. They call up and they 
say, ``Are you employed, are you working?'' So if someone says, 
``Well, no, I am not working,'' but they are really selling 
things on EBay, trading things on the Internet, then they would 
be counted as not working. So that also adds to the definition.
    I think we need to look at what we have around us, I mean, 
cell phones, iPods. I mean, this BlackBerry here was amazing 
when Al Gore used it in 2000, and now a lot of people have 
BlackBerrys. So we have so much increase in technology. People 
go out to eat a lot more than they did before. People have 
houses that are routinely built with air conditioning and 
heating and multiple bathrooms. So I think we need to take a 
look at--around us and see what the real picture is.
    Mr. Wilson. Thank you very much.
    Ms. Woolsey. Mr. Bishop?
    Mr. Bishop. Thank you, Madam Chair, and thank you for 
holding this hearing.
    And to the witnesses, thank you for your testimony.
    I want to start with a question about the 2001 and the 2003 
tax cuts. One of the challenges that the next president will 
have, and, certainly, the next Congress will have, will be what 
to do with those tax cuts.
    Mr. Greenstein, you make the case that those tax cuts 
contribute to the income inequality that currently is the case. 
My own view is that only the most committed ideologue, given 
our recent experience, would be able to cling to the notion 
that tax cuts pay for themselves, that tax cuts generate an 
incredible amount of business activity and that a rising tide 
lifts all boats, that if we increase income distribution at the 
high ends, that people at the low ends will benefit.
    So my question to you, Mr. Greenstein, and then to Ms. 
Furchtgott-Roth--I hope I am--I am sorry, I am mangling your 
name--but I am going to guess that your position on this is 
going to be different from Mr. Greenstein's, so if I could 
first hear from you, sir, on how we should go forward with the 
2001 and the 2003 tax cuts and then from you.
    Mr. Greenstein. Well, I would start by saying that the 
biggest problem with those tax cuts, I think the inequality 
issue is part of it, but it isn't what I grade first. What I 
grade first is that making those tax cuts permanent without 
paying for them will cost several trillion dollars over the 
next 10 years. We are on a path toward long-term deficits that 
if not addressed, ultimately, will significantly reduce growth 
in the economy and cause a debt explosion. We simply can't 
afford tax cuts of that magnitude.
    And most economists, if you look at the work of the Joint 
Tax Committee, the Congressional Budget Office, mainstream 
economists, the general consensus is that if one made those tax 
cuts permanent without paying for them, they would be more 
likely to reduce economic growth over the long-term than to 
increase it because of the negative effects on growth of the 
enlarged deficits and interest payments on the debt that would 
result.
    I would also note that the Bush administration's own 
Treasury Department put out a report a year or so ago, and 
under its best case scenario, with its most optimistic 
assumptions, the tax cuts would produce enough growth, if fully 
paid for, that 10 percent of their costs would be offset by the 
higher growth, and 90 percent would remain.
    Mr. Bishop. If I may interrupt you, I just--I want to zero 
in on a particular point. The McCain tax plan, as I understand 
it, would call for the permanent--making permanent the 2001 and 
the 2003 tax cuts, the permanent elimination of the alternative 
minimum tax and making permanent the 2009 rates for the estate 
tax. Do I have it about right?
    Mr. Greenstein. Yes. I don't think he makes--yes, I think 
that is right.
    Mr. Bishop. Okay. So at any rate, in other words, we will 
do it all. We clearly can't do it all. I mean, that would be 
spectacularly irresponsible in terms of our debt. So of those 
three, which are, sort of, the big three, 2001, 2003 
alternative minimum tax, and estate tax, which of those three 
do you think demands the most immediate action on the part of 
the Congress and the president?
    Mr. Greenstein. The most immediate action, I think, 
probably has to be the estate tax, because you need to deal 
with it in 2009, and I would--this wouldn't be my--but based on 
where we are today, I would just make the 2009 parameters 
permanent.
    You, obviously, need to at least temporarily deal with the 
AMT, but all the other issues you clearly need to deal with no 
later than the end of 2010. And they are the fiscal issues 
involved but, obviously, also these big distributional issues. 
I mean, it is hard to imagine, given the long-term fiscal 
problems and the unmet needs of the country, do the people in 
the top one percent really need an average tax cut of 
$160,000--people with incomes over $1 million--need an average 
tax cut of $160,000 apiece? This really doesn't make sense.
    Mr. Bishop. Ms. Furchtgott-Roth, could you comment on that?
    Ms. Furchtgott-Roth. Sure, sure. I am sure that I am one of 
these committed ideologues that you are talking about.
    Mr. Bishop. Perhaps so.
    Ms. Furchtgott-Roth. My book, ``Overcoming Barriers to 
Entrepreneurship in the United States,'' was just published by 
Lexington Books in March, and part of it addresses taxes and 
taxes on entrepreneurs. So the current tax rate on 
entrepreneurs who file under the individual tax system their 
top tax rate now is 35 percent. On January 1, 2011, it is 
scheduled to go up to almost 40 percent--39.5 percent. This has 
an effect on entrepreneurs and people who create jobs. They are 
not going to want to create jobs here. There are certain 
investments that they are not going to want to do. Of course, a 
lot of them will just keep growing and keep creating 
businesses, but some of them won't. Some of them are going to 
go other places.
    And what is important is, how are we going to generate the 
most wealth in the United States, because that gives us tax 
revenue and enables you to do all these things that you want to 
pass, the housing bailout bill, foreign aid, different kinds of 
health benefits, Medicare and--that comes from tax revenue. We 
want to get as much tax revenue as we can.
    And tax revenue from these top percent, the top income 
earners, has been going up since the tax cuts in 2001 to 2003. 
And so the federal government has been getting more of this 
revenue. It is more money to play with, more money to fund 
everything that we want to fund. That is why we need to keep 
these tax cuts low.
    And in terms of, ``Can we afford it, can we afford these 
tax cuts,'' it is not a--what we are talking about is making 
the current rate permanent. You are talking about, do we want 
to raise taxes on January 1, 2011, and I would say, no. It is 
going to drive businesses overseas; it is going to make it less 
productive for businesses to start here. It is going to make 
the United States a less welcoming place to do business. And in 
a global economy, entrepreneurs are going to go elsewhere. So I 
say we cannot afford not to leave the taxes as they are, and 
you can call me a committed ideologue if you like, but that is 
the way I see it.
    Ms. Woolsey. Mr. Hare?
    Mr. Hare. Thank you, Madam Chair.
    Ms. Furchtgott-Roth, I know this isn't the subject of the 
hearing, but as long as you are here, I just wanted to take a 
minute to express the strong concern that I have with the DOL 
risk assessment regulation that is currently under OMB review 
that you have written about recently.
    As you know, this regulation was not listed in the 
regulatory agenda, and almost no information was initially sent 
to OMB, and it is clear--in clear violation of the White House 
chief of staff's directive that all rules expected to be 
finalized by the end of this administration must be proposed by 
June the 1st, except in ``ordinary circumstances.''
    It is hard for me to understand why OSHA, who has barely 
managed to get a single health regulation issued during this 
entire administration, would have actually protected workers. 
Suddenly, this high support, risk assessment is an 
extraordinary circumstance and a major Department of Labor 
policy. So I hope at some point we will be able to have you 
come back and maybe answer some questions about that.
    Let me--with all due respect, you----
    Ms. Furchtgott-Roth. I would be honored to do so.
    I have not seen the rule, because the rule has not been yet 
published by the Department of Labor. There has been a rule--a 
version of a rule that was leaked to the Washington Post. It 
was put on the Washington Post Web site, but I don't know if it 
is the final rule or what rule this is.
    Mr. Hare. Let me just take issue with a couple of things. 
You mentioned the organized labor only having seven percent, 
and it is a secret ballot.
    Ms. Furchtgott-Roth. That is right.
    Mr. Hare. We just had the Delta Air Lines people in here 
yesterday at a hearing, and they were going to go out of their 
way on the flight attendants to do everything that they 
possibly could to keep flight attendants from organizing. They 
had posters that they were sending out and talking to the 
employees, ``Grip it and rip it,'' on their ballots.
    But, look, this whole secret ballot process, to me, with 
all due respect, is the silliest thing I have ever heard of. If 
you can decertify a union with a petition of 50 percent plus 
one on signatures, it would seem to me the employees could be 
able to join a union for the very same way. So we can boot a 
union out by 50 percent plus one, but we can't bring a union 
in. And I have to tell you, quite candidly, that I believe that 
if we get this EFCA passed, you will see a tremendous boost in 
labor--in labor--be able to join labor unions.
    Also--and I may be a bit naive--I don't believe these 
employers get up in the morning and say, ``You know, I feel 
very benevolent today. I think I will work the 40-hour work 
week, pay overtime, do health care and all the things that the 
workers in this factory deserve, because I just feel like I am 
a good guy today.'' They got those benefits because ordinary 
people were willing to stand up and, in some instances, have to 
go out on strike. Some of them lost their lives, with all due 
respect.
    So I think this whole secret ballot thing is the biggest 
charade I have ever seen on the other side, talking about--it 
is basically to prevent people from joining unions, because it 
is so titled as it is.
    Let me just ask you, Mr. Bernstein, one of the greatest 
things about being American is the feeling that opportunity and 
upward mobility is out there, it is available to everybody. If 
we work hard enough and we are smart, we can attain wealth and 
success. And I was surprised to find out that the statistics 
you support don't support this belief.
    Opportunity in the U.S. is often predetermined by one's 
parent's economic status and intergenerational mobility is no 
higher in the U.S. than in other developed nation. In fact, 
about 42 percent of children born to parents in the bottom 
fifth are still in the bottom fifth, and 39 percent born to 
parents at the top are still at the top.
    Can you explain this?
    Mr. Bernstein. Yes, I can. The problem that we face is that 
inequality cannot be discussed separately--the inequality 
problem can't be discussed separately from the mobility 
problem. Inequality itself is now at such excessive levels that 
it is precluding opportunity and mobility and in that sense 
violating a basic economic or even a value-based norm in our 
country.
    One of the figures I have in my testimony looks at college 
completion by children who are ranked both by their income and 
by their test scores when they were in eighth grade. And what 
it shows is that if you were poor but you had high cognitive 
skills, that is, you had high test scores--think about it as a 
high IQ poor child--your college completion rate is almost 
exactly the same as a low-testing rich kid. That is, 
controlling for academic ability, income barriers are keeping 
our children from realizing their educational and, of course, 
their economic potential.
    Now, fascinatingly, we have far less economic mobility in 
this country than we do in European countries with some extent, 
excepting the U.K., and much more--and the disparities 
particularly start if we compare the U.S. to the Nordic 
countries.
    Now, I want to respond to a couple of other things that 
have been said in ways my work has been evoked.
    Would that be okay, Madam Chairman?
    Ms. Woolsey. We are going to have a second round of 
questions, and I am going to ask all of you to be able to 
comment just on your own----
    Mr. Bernstein. Okay. Then let me just close out this 
comment to Mr. Hare. The point is that you can separate, as 
Diana does in her discussion, the notion of inequality and 
mobility, that you can--don't worry about inequality because 
mobility offsets it. Mobility does not offset the inequality 
problem, and, in fact, at this point, one can make a very 
strong and, I believe, compelling causal argument that the 
spillover from the inequality problem is precluding upward 
mobility.
    Mr. Hare. I yield back.
    Ms. Woolsey. Right.
    Ms. Shea-Porter?
    Ms. Shea-Porter. Thank you.
    Ms. Furchtgott-Roth, I have a question. Do you think the 
minimum wage is high enough or too low?
    Ms. Furchtgott-Roth. I think the minimum wage now is too 
high.
    Ms. Shea-Porter. Okay. Do you think----
    Ms. Furchtgott-Roth. It should be lower because a lot of 
teenagers are having problems finding jobs this summer. So it 
is something we have got to----
    Ms. Shea-Porter. But, of course, we do know that a lot of 
single women with children earn that minimum wage.
    Ms. Furchtgott-Roth. Well, actually, a very small----
    Ms. Shea-Porter. That is okay. Let's go on, please, so we 
can get through all this.
    So you think the minimum wage is too high. Do you think 
that everybody is going to be able to go to college and raise 
their income dramatically, that that is the answer for 
everybody? Just go to college, go to grad school and you will 
now earn a decent wage? Or you think that the decent wage is 
the minimum wage, right?
    Ms. Furchtgott-Roth. Only about one million of our 154 
million workforce earns minimum wage.
    Ms. Shea-Porter. Let's just stick to what----
    Ms. Furchtgott-Roth. And most of those are part-time 
workers and workers who----
    Ms. Shea-Porter. Do you--yes, but we have to--I disagree 
with that, but let me follow the questioning, please.
    Do you think that everybody in this country should go to 
college, grad school and raise their own income, that that is 
the key?
    Ms. Furchtgott-Roth. No. No.
    Ms. Shea-Porter. Okay.
    Ms. Furchtgott-Roth. I definitely do not think everyone 
should go to college or grad school. There are many jobs in the 
skill trades that have--that are high paying, good paying jobs.
    Ms. Shea-Porter. Okay. Now, let me ask you, you are talking 
about skilled trades. Do you think that there are certain 
people in this country that we accept are going to be poor, for 
example, housekeepers, because you think that it is okay to 
earn minimum wage? So are you basically accepting that people 
who work as housekeepers or people who work in restaurants or 
people who work as cashiers and serve us and make our daily 
lives possible, is that okay that they earn that minimum wage?
    Because what I am asking you is, if we keep them at that 
minimum wage, aren't we guaranteeing that they are going to be 
part of a permanent underclass? If they are not going to 
college and they are not getting skilled jobs, and you know 
that we need that kind of work, are you basically sanctioning 
the fact that they are going to be underpaid or are they 
already overpaid?
    Ms. Furchtgott-Roth. BLS data shows that about one million 
people are on minimum wage jobs, and those are usually stepping 
stones to other jobs. So----
    Ms. Shea-Porter. Okay. Wait. Can I--I am not going to let 
you take me down that path, because you and I both know that 
that is just not so.
    If you work----
    Ms. Furchtgott-Roth. Well----
    Ms. Shea-Porter. Have you ever worked as a housekeeper, for 
example, in a hotel, changing the sheets and scrubbing the 
sinks and that kind of work, because those people are working 
very hard? We can't do without them, and they are not making 
enough money, and they go to a second job to--maybe it is 7-11 
or whatever. And don't tell me they don't exist, because I 
worked with them as I worked my way through college.
    What about them? And you still haven't addressed that. You 
said they can get Medicaid----
    Ms. Furchtgott-Roth. You haven't let me address it.
    Ms. Shea-Porter. Yes, but you know what? The problem that I 
am having here is that you are just disregarding a certain 
percentage of the population like you have just written them 
off, ``It is okay, we are not going to discuss them today,'' 
and I really want to talk about them.
    Ms. Furchtgott-Roth. Well, that is--I have not written them 
off, but there are jobs in those skilled trades that you----
    Ms. Shea-Porter. No, but then we talked about the skilled 
trade, because we still have to have people that change the 
sheets and scrub the sinks and peel the potatoes and do the 
kitchen work. What do we do about them? I am asking you to 
focus on them. Don't talk about the skilled jobs, because if 
everybody moved into a different sector, who would do that 
work?
    Ms. Furchtgott-Roth. In a dynamic workforce, people change 
jobs all the time, and the people who are changing the sheets 
are not in those jobs, necessarily, permanently.
    Ms. Shea-Porter. Well, I would have to disagree with you, 
but let me, again, get back to----
    Ms. Furchtgott-Roth. I mean, you said that----
    Ms. Shea-Porter [continuing]. Who will take care of them 
while they are in those jobs? What I am asking you is, are you 
acknowledging that we have an underclass in this society, and 
you keep----
    Ms. Furchtgott-Roth. No. No, I am not. I am not.
    Ms. Shea-Porter. Okay. Well, that is--that is exactly what 
I thought you were doing. You are not acknowledging they were 
there. Well, I would like to tell you they are there, and, as 
you travel about and if you stop at a grocery store or you stop 
at your drycleaner, ask them how much they earn, ask them how 
long they have worked in those jobs, and ask them if they have 
a second job, because I think you could learn something, 
frankly, about that group of people that you think are 
overpaid.
    So let me--and I appreciate your comments.
    Okay. Now, I have a couple of minutes left, so Mr. 
Greenstein, would you please----
    Ms. Furchtgott-Roth. I thought you were asking me a 
question, and you haven't let me respond.
    Ms. Shea-Porter. What I asked you is you thought they were 
overpaid--if you thought the minimum wage was acceptable or if 
they were overpaid. And then I asked you if you thought we had 
created a permanent underclass, and you said, ``No.''
    Ms. Furchtgott-Roth. Last year, we had about 59--in our 
workforce of 154 million, we had about 59 million new hires and 
about 57 million separations. People are changing jobs all the 
time. People who----
    Ms. Shea-Porter. You know, the problem I have is that what 
I am hearing you do is hide behind numbers, which aren't even 
in front of us, okay? So you are talking about numbers, and I 
am trying to ask you about people, you know, the real people, 
what their lives are like. And what your answer is for those 
people--because our responsibility sitting here in Congress is 
to make sure that all boats do indeed rise with the tide, and 
you don't have any plan to help them come into the middle 
class.
    And in order to keep this country's strengths, we have to 
have a robust middle class, and in order to have that, they 
have to have a livable wage. And you just told me that you 
think they are paid too much. So there is really no other place 
that we can go in this conversation, because we are divided by 
ideology.
    So I just want you to know that I know they exist and that 
we know they exist, and we get letters from the constituents, 
and we are the ones who hear about their plight, and I didn't 
like the idea that we were hiding behind numbers instead of 
talking about what do we do with the people when they don't 
earn enough to get by.
    Thank you.
    Ms. Furchtgott-Roth. If you----
    Ms. Shea-Porter. Sorry, my time is up. Thank you.
    Ms. Woolsey. We are going to have a second round, and we 
are going to start right now.
    I would like to ask Mr. Greenstein, Ms. Minow and Mr. 
Bernstein to respond to anything they have heard this morning.
    Now, I only have five minutes, so do everything you can, 
please, to answer in a minute and a half.
    And we are going to start down here with you, Dr. 
Bernstein.
    Mr. Bernstein. Yes. With due respect, Ranking Member 
Wilson, you said researchers reach vastly different conclusions 
regarding economic inequality. That is absolutely wrong. 
Researchers reach vastly similar conclusions.
    Mr. Wilson. [off mike]
    Mr. Bernstein. Right. The views that you heard from Diana 
are very distant outliers. The consensus among research, you 
heard Bob Greenstein quote Alan Greenspan. Now, Alan Greenspan 
is a purveyor of conventional wisdom in the economy. He doesn't 
make statements like that until he reviews research on all 
sides of the issue. Ben Bernanke has said the same thing, by 
the way, regarding the inequality discussion.
    There is--you know, this notion of ideology has come up--we 
have thrown this word around. In my view, ideology is really 
described by those who are impenetrable to evidence. And I 
think the evidence is overwhelming on this point. Now, we can 
have great dissent about what we ought to do about it, and 
there are those, for example, Nobel laureate, Gary Becker, who 
writes, ``Sure, inequality is happening, and it is absolutely 
the outcome of a meritocratic economy, and we shouldn't do 
anything about it,'' and that is fine. But to question the fact 
is not only off point but I think destructive to the progress 
we need to make.
    One small point--I will be very quick here--that work that 
I have done for today comes out of our book, ``The State of 
Working America.'' None of that work is funded by unions; it is 
funded by philanthropic organizations. And I will say, for the 
record, that my views that I espouse on policy are not 
influenced by any funder. I speak to what I believe are the 
causes and the solutions for these. I simply don't carry water 
for any institution.
    Ms. Woolsey. Thank you.
    Ms. Minow?
    Ms. Minow. I would like to respond to Mr. Bishop's line of 
questioning, if I may.
    First, I want to say that I am a serial entrepreneur. I 
started--helped start three companies, including my current 
one, which employs 35 people, and I would much rather start a 
new company with a higher tax rate than start one with a higher 
deficit. And I am not going offshore.
    The second point I want to make with regard to the tax 
issue is, as long as I am here to talk about CEOs, I have to 
say that one of the most loathsome aspects of CEO compensation 
is what is called a gross out, which is where they have the 
shareholders paying their taxes. It is the Leona Helmsley 
approach where you pay your taxes, I pay my taxes, but the CEOs 
don't want to pay their taxes. If Congress could eliminate 
that, that would be wonderful.
    Ms. Woolsey. Mr. Greenstein?
    Mr. Greenstein. There is certainly disagreement about how 
much of a problem--how much we should be concerned about 
inequality and what we should do about it. There is not much 
disagreement among researchers across the political spectrum 
that inequality has been rising. It is true that the census 
data on inequality have issues because they don't take taxes 
into account--that is true--they don't take benefits at the 
bottom into account--that is true--the bottom quintile is made 
up disproportionately of elderly people,--that is true--but 
none of those criticisms apply to the CBO data, which adjusts 
for all of those things. And it is the CBO data, after 
benefits, after taxes, after adjusting for family size that 
showed the increase since 1979 of six percent at the bottom and 
average income, 21 percent in the middle, and 228 percent at 
the very top.
    The other comment I would make is about the issue of 
whether we will have a huge destruction of jobs if the tax 
rates at the top return to their levels prior to 2001. Those 
would have been the levels that prevailed in the 1990s when we 
created dramatically more jobs than during this decade. And 
those rates would still be far below the top rates in the 
1950s, 1960s and 1970s, the first two decades of those three 
being big job creation periods.
    Last quick comment has to do with business proprietors. You 
know, this small business thing really needs to be looked at 
carefully. The number of small business proprietors, mom-and-
pop owners, who are--pay the top rate appears to be 
significantly smaller than the number who get the earned income 
credit. We have to distinguish extremely wealthy individuals 
who are passive investors in businesses from the real small 
business proprietors.
    For the real small business proprietors, they benefit more 
from an expansion of the earned income credit than from cutting 
the top rate.
    Ms. Woolsey. Thank you.
    Mr. Wilson?
    Mr. Wilson. Again, thank all of you for being here.
    Ms. Furchtgott-Roth, I was happy to hear the discussion 
about housekeepers. I represent Hilton Head Island, which has 
possibly some of the highest income people in the world, but 40 
miles into the state, in Allendale, South Carolina, we have 
some of the poorest people in North America--in the United 
States.
    And the best employment, highest and best employment for 
many of the persons from Allendale has been to be a 
housekeeper, to work at the extraordinary resorts that exist at 
Hilton Head and different communities around, and it has been 
wonderful as an entry-level job--clean, positive work 
environment. Housekeepers, by becoming the lead housekeepers, 
can make up to $40,000 a year. And, indeed, this is a 
phenomenon across the South and particularly in my home state 
with Myrtle Beach. Again, you have very wealthy beach 
communities, but then you have communities in transition, from 
agriculture to tree farming now. It is just great employment.
    And so in defense of the housekeeping profession, I can 
tell you from my experience, and from what I have seen with the 
ability of people who have good, clean employment, they are 
very proud of this. And then they are--it is just an 
extraordinary opportunity for people who wouldn't have 
opportunity before.
    So with that background, there has been much discussion 
about the vanishing middle class in the media and many studies 
on the economic state of the middle class. If there is, in 
fact, a decline in the number of families that make up the 
middle class percentile, do you know--how many of those 
families have moved into different income brackets and to which 
brackets they have moved into?
    Ms. Furchtgott-Roth. Well, it is very difficult to say 
exactly which income brackets they have moved into. We have 
different families in different places on the scale.
    I would like to say, I do have the latest BLS release in 
front of me, and the unemployment rate last June for teenagers 
was 16 percent; this June it rose to 18 percent. Increasing the 
minimum wage is one of the consequences of that. And increasing 
the minimum wage even further would drive some of these hotel 
workers out of work. It is not as though they would get the 
same job at a higher pay. Many of them would lose their jobs.
    The kinds of jobs that are possible from--without a 
graduate school or a college degree, nurses, for example, we 
have a great need for nurses, police officers. These are all--
there are many kinds of skilled trade jobs--electricians, 
plumbers--that one can have without a college degree.
    I would agree that it is not from the benevolence of the 
employer that people get benefits but because the employer 
doesn't want the worker to go anywhere else. The employer wakes 
up thinking, ``How am I going to keep my workers,'' and one way 
to do that is to give them benefits. Otherwise, they are going 
to go to some other employer, not at all because the worker--
the employer feels at all benevolent but because we have 
competition.
    The secret ballot is something I think Americans are 
entitled to, a private ballot for voting and for other kinds of 
things. And I think that it is very important that people 
should have the privacy and a particular vote when it comes to 
joining unions.
    Mr. Wilson. And thank you for hitting each one of those 
issues. In fact, related to that are mandates, and as we look 
at ways to increase income for certain wage earners, there are 
some who will say that employer mandates in the areas of 
pensions, health care and wages are necessary.
    Could you elaborate on what increasing employer mandates 
would do for the least skilled and less educated employees? And 
you have touched on this before, but this is a very important 
matter.
    Ms. Furchtgott-Roth. Well, increasing the benefits would 
have two potential effects. One is that the actual wages would 
go down. And we have seen that worker compensation has become 
more oriented toward benefits and less toward wage increases. 
So if benefits were mandated, then the worker would get less 
cash take-home pay. That is one point.
    Another point is that the worker might not even have a job 
at all. That job might not be created yet. We hear a lot about 
outsourcing and off-shoring and a lot of those jobs might just 
go elsewhere.
    Mr. Wilson. And it seems like that would encourage 
companies to consider movement overseas to Mexico or China or 
India.
    Ms. Furchtgott-Roth. Right. Exactly, yes.
    Mr. Wilson. And, finally, again, I just--some of the most 
heartwarming experiences I have had are to visit with my 
constituents who have--who are housekeepers, who live in rural 
communities where there are zero opportunities. But now they 
have fulfilling lives of where they work in areas 30, 40 miles 
away, and it is meant so much to their families. It is just a--
they are able to stay in their home community but yet have 
good, clean employment.
    So thank you very much.
    Ms. Furchtgott-Roth. Sure. Thank you.
    Ms. Woolsey. Mr. Bishop?
    Mr. Bishop. Thank you Madam Chair. Let me say at the outset 
that I would become only slightly less agitated at the 
discussion of intimidation of workers who are being organized 
to join a union if the people who make that case would also, as 
a corollary, talk about intimidation of the workers on the part 
of management as they seek to organize. And I don't think there 
can be any reasonable discussion of intimidation in the 
workplace, irrespective of source, without including that.
    Now, let me go back to the issue that I have talked about, 
which is tax cuts, the 2001 and 2003 tax cuts aggregate to 
about 10--pardon me, about $2 trillion in foregone revenue. It 
represents, perhaps, the only economic policy of this 
administration, and here is what we have to show for it after 
seven years: 2.5 million more people without jobs, five million 
more people living in poverty and seven million more people who 
don't have health insurance.
    So tell me again why this is working so well. Tell me again 
why this ought to be the centerpiece of our economic policy, as 
we go forward. Does anyone want to comment on that?
    Dr. Bernstein?
    Mr. Bernstein. Well, I don't think you even go far enough 
in describing the failure of this economic policy, which is 
typically under the rubric of supply side economics, over this 
business cycle, which I now believe has likely come to the end. 
Certainly, the labor market is in recession, if not the overall 
economy.
    If you look at job creation over the 2000s, employment grew 
by four percent. Now, the average business cycle employment 
growth is 14 percent, so on the employment side--one of the 
arguments about the entrepreneurial story that Diana and others 
tell is that this will create more employment. Well, that is 
demonstrably untrue, didn't happen.
    Secondly, the other part of the story is it will create 
more investment. These are macro economic indicators. This is 
evaluating the program on its own merits. Investments--outside 
of residential investment, this is factories investing based on 
this notion of firms and factories--investment has performed 
extremely poorly over this recovery. It has been one of the 
worst recoveries for investment.
    GDP growth has been moderate at best. And, of course, 
wages, employment and poverty have performed poorly.
    So if the notion is that trickle-down economics, or supply 
side economics, leads to faster growth and that growth then 
reaches down throughout the income scale, it is wrong on the 
growth part, and it is wrong on the distribution part. Other 
than that, it is fine.
    Mr. Greenstein. Could I add a quick note? If the tax cuts 
had these big, positive economic benefits, then in a whole 
array of areas, overall economic growth, job growth, investment 
growth, as Jared mentioned, wage and salary growth, this 
recovery that ended in 2007 should have had an average annual 
rate of growth greater than that in prior recoveries when we 
either didn't cut taxes or we raised taxes at the beginning, as 
in the 1990s. And, in fact, as Jared just noted, in every one 
of those indicators, this recovery had lower rates of growth 
than the average recovery since the end of World War II.
    So if the recoveries where we didn't cut taxes or even 
raised them at the start experienced better rates of growth 
than this one, it is a little hard to make the case that in the 
absence of these kinds of tax changes that the economy would 
have somehow been in the tank.
    Ms. Furchtgott-Roth. The economy and the labor market are 
not doing nearly as bad as you are portraying. The last month 
we had was June, we are going to get more data tomorrow, but 
the payroll job survey shows that we have 5.17 million more 
jobs than we had in January 2001. According to the household 
survey, we had 8.1 million more workers working since January 
2001. We have created millions of jobs. The unemployment rate 
for men is 5.1 percent, for women it is 4.7 percent.
    Mr. Bishop. Can I interrupt you for a second? My 
understanding is that average job growth over the last eight 
years has been about 57,000 jobs per month and that that number 
is less than half of the number necessary to keep pace with the 
growth in workforce. Is that or is that not correct, what I 
just said?
    Ms. Furchtgott-Roth. I don't have the right number off the 
top of my head.
    Mr. Bishop. Mr. Greenstein?
    Ms. Furchtgott-Roth. I have the total since January 2001.
    Mr. Bishop. I don't know if that number is right, but what 
I do know is in the 1990s, after taxes were increased in 1990 
and 1993, there were over 20 million new jobs created. The five 
million that was just mentioned is a very poor performance for 
a full economic recovery.
    I am sorry, I interrupted you.
    Ms. Woolsey. Well----
    Mr. Bishop. I am out of time.
    Ms. Woolsey [continuing]. You are out of time.
    Mr. Hare?
    Mr. Hare. Thank you, Madam Chair.
    I am hearing a lot of numbers thrown out. I just find it--
and maybe I am not the sharpest knife in the box up here, but 
when we have CEOs making more in four hours than their 
employees make in one year, I think the question has to be 
asked, how much is too much for some of these folks?
    Listen, I am a card-carrying capitalist, I want to see 
people make money, but, for heaven sakes, I mean, how far are 
we going to go here?
    I don't know how many more dollars Warren Buffet and other 
people at the top one percent in this country need. They have 
been having it their way for six years.
    It would seem to me that you lead by example. I had the--I 
lost 1,600 jobs that my friend from South Carolina talks 
about--and maybe I should visit there, and I would invite him 
to visit Galesburg, Illinois where the CEO of Maytag, who put 
1,600 people out of work, said to me, ``I don't care about your 
houses, your educational benefits, the town, I am here to make 
money for my shareholders.'' And after my state gave--and we 
are talking about money and figures--$9 million for this 
company, and the workers gave not one but two wage concessions, 
they bolt and go to Reynosa, Mexico.
    And this guy, I don't know what he is making, but I have to 
tell you, after what he did to that town and to those people, 
if he is making 50 cents an hour, he is making too much from 
this congressman's perspective, because he turned on his back 
on people who really thought that this guy and this corporation 
was going to have corporate responsibility. And the sad part 
about it is we have laws in this country that actually pay for 
companies to be able to outsource their jobs.
    Now, I would just like to ask maybe the panel, in general, 
how much is too much for these folks, and are they ever going 
to get to the day where we have some fairness here? Look, I 
don't mind them making a good dollar. They have every right. 
They have a tremendous amount of responsibility. But we have 
heard numbers today, you know, about, well, we are doing--the 
numbers I have seen, unless I am getting them fed incorrectly 
by the Department of Labor, show for the last six months we 
have had a steady loss every single month of jobs. So we are 
not growing this economy.
    And one last comment, and then maybe just open this up as 
to the question of how much is too much or where do you think 
this Congress ought to go, but I just have to tell you, there 
are a lot of people that I know in my district that are on 
minimum wage. They work--they are single moms. Their husbands 
have left, they can't make it, they are doing the best that 
they possibly can. This whole attitude that the more you raise 
the minimum wage, the job losses--I am seeing it in my 
district. As a matter of fact, these are people, particularly 
with the fuel prices at $4 plus per gallon, are having a hard 
time even getting to work at their minimum wage job.
    So my--with all due respect, I think the minimum wage, 
first of all, is too low, and it ought to be indexed for 
inflation. I don't think we ought to have to wait, as a 
Congress, 8 or 10 years to have to revisit whether or not 
people making $8 an hour, while a man comes before the--from 
the oil company comes before the Senate and says he is 
saddened--or I forget what it was--but he is only making $14 
million a year. Get my Kleenex out.
    My point here is that this is a responsibility, I think, 
that corporations have, and we don't have any corporate 
responsibility, it seems to me. The workers are the last to 
really be taken a look at here. And when this guy tells me from 
Maytag, to be honest, that all he cares about is making money 
for his shareholders and doesn't care about that community and 
the educational system, I say shame on him and shame on that 
corporation for having that guy as a CEO.
    How much is too much for these people?
    Ms. Minow. I would like to respond to that. First of all, I 
would like to point out that Warren Buffet is one of the lowest 
paid CEOs in the country. He has got an exemplary pay package. 
His money is made by his investments. And I think--and I--we 
agree that we want them to be paid a lot of money because they 
earn a lot of money. We just don't want to create the risk 
incentives. The tragic thing--I am from Illinois myself, by the 
way, and the tragic thing about the Galesburg situation is that 
those shareholders that he is making money for, who are they? 
They are the pension funds. They are the pension funds of the--
you know, it is like we have--as--said, ``We have met the 
enemy, and he is us.''
    If we had some kind of ability for the pension funds of the 
police and the firemen and the workers at Maytag themselves to 
send some kind of feedback to create a real market system, we 
wouldn't have this outrage. I track CEO pay data, and I will 
provide you with the data on----
    Mr. Hare. I would love to have that.
    Ms. Minow [continuing]. The pay package at Maytag.
    Mr. Hare. If you could send that to me, I would love to 
have that. Thank you.
    Ms. Minow. I will definitely do that.
    But that answer is that we don't--Bill Gates created a 
tremendous company and we are happy that he made the money that 
he made. The problem is, the former CEO of Exxon made $400 
million when he left, and that is----
    Mr. Hare. Maybe he could buy us dinner.
    Ms. Minow. That is an outrage. That is just appalling. You 
know, he benefited because of the price of oil that had nothing 
to do with his performance. We have to tie that pay to 
performance.
    Ms. Furchtgott-Roth. Well, I----
    Ms. Woolsey. Well, I am sorry, we are through. His time is 
up. He knows that, he leaned back.
    I was going to tell you, you had one minute to divide up 
among all of them, and then that was--so Mr. Wilson is going to 
give his closing remarks, and then I will, and then you will 
all be free.
    Mr. Wilson. And thank you, Madam Chairwoman, and I was 
happy Mr. Hare referenced the district I represent. Indeed, I 
am really grateful that in many of the communities I represent 
95 percent of the persons there are transplants from the 
Midwest and Northeast. And from the suburbs of Columbia to 
Hilton Head, Bluffton, Sun City, Hardeeville, 95 percent. We 
welcome transplants, and many years from now, when Mr. Hare 
contemplates retirement, we will still have a condo left, so 
please come on down.
    And, indeed, Madam Chair, as I conclude, I would like to 
request unanimous consent to include in the hearing record a 
column by Diana Furchtgott-Roth in yesterday's New York Sun 
regarding, ``The Battleground For Sound Science.'' This 
information follows up the question that we previously had. And 
at this time, again, make such a motion.
    Ms. Woolsey. Without objection.
    [The information follows:]

                 [From the New York Sun, July 30, 2008]

                     Battleground for Sound Science

                        By Diana Furchtgott-Roth

    Congress is in favor of protecting employees from dangerous working 
conditions, right? Yet a new draft rule to protect employees from 
hazardous substances by requiring more rigorous scientific analysis by 
the Labor Department is facing opposition from leaders of the two 
congressional committees with jurisdiction.
    Senate Health, Education, Labor, and Pensions Chairman Edward 
Kennedy of Massachusetts and House Education and Labor Chairman George 
Miller of California asked the Labor Department to withdraw a so-called 
``secret regulation'' even before the two Democrats had seen its 
contents.
    According to their July 23 letter to Labor Secretary Elaine Chao, 
``We are deeply disappointed that the Department of Labor is working to 
slip through a rule that may have a profound negative impact on the 
health and safety of American employees. It is equally disturbing, 
according to today's Washington Post, that the Department is moving 
this proposal over the objections of career staff in the relevant 
health and safety agencies. ``
    An examination of the alleged draft proposal published by the 
Washington Post shows that the letter from Mr. Kennedy and Mr. Miller 
was premature and incorrect. The draft rule would set higher standards 
for assessing dangers to employees of substances in the workplace, 
increasing their protection.
    The Labor Department would get more public feedback and use peer 
reviewed studies; provide more information and calculations in reports; 
and make industry-specific calculations. This would be more precise 
than current Labor Department procedures.
    For instance, the Labor Department is in the process of regulating 
two substances, beryllium and silica. If the new rule were in place, 
workers would have access to all the scientific studies on these 
compounds, different industries would have sent in information on 
worker exposure, and the public would be able to see detailed comments 
from unions and businesses.
    Instead, in June 2007, the federal District Court for New Jersey 
had to order the Department's Occupational Safety and Health 
Administration to provide documents on toxic exposures of its own 
workplace inspectors, because it refused to do so. This followed a suit 
by University of Medicine and Dentistry of New Jersey Professor Adam 
Finkel, a former chief regulator and regional administrator at OSHA.
    Although I served as chief economist of the Labor Department 
between 2003 and 2005, I did not work on this proposed rule. Between 
September 2007 and January 2008, however, the Hudson Institute, where I 
work now, was part of a team of outside economists under contract to 
the Labor Department to evaluate risk assessment procedures in federal 
agencies. So, I know a lot about the problem.
    The new rule would follow the pattern of transparency in regulation 
adopted by Ms. Chao with union financial disclosure regulations. It 
would give the public and Congress more input into future decisions 
about how to regulate harmful substances.
    Government officials would have to demonstrate, using peer-reviewed 
scientific studies, that substances were harmful. This helps employees 
by making sure that OSHA regulates real hazards and uses real science, 
not junk science and bogus risks.
    When determining the consequences of exposure to potentially 
harmful substances, OSHA now estimates how long employees will be 
exposed. The proposed rule improves these estimates by requiring 
realistic estimates of time worked by employees who spend their entire 
lives in one industry. Now, the Labor Department assumes that employees 
work at the same job for 45 years, and work for 40 hours a week, 50 
weeks a year.
    This does not accord with reality. Employees tend to work fewer 
total years for one industry and have more vacation days. Yet, with 
overtime becoming increasingly common, they spend far more than 40 
hours a week on the job. Workers may need more protection, because 
exposure to a carcinogen 55 hours a week for 10 years could potentially 
be more harmful than exposure for 40 hours a week for 45 years.
    Critics complain that these requirements for sound science are too 
sweeping and may prevent OHSA from regulating hazardous substances.
    In particular, some OSHA career staff have opposed the proposal, 
taking their case to the Washington Post as frequently happens in 
Washington. A rule based on sound science would diminish the power and 
discretion of government staffers, because the burden of proof would be 
on the scientific evidence rather than on their decisions.
    Yet disclosure of competing interpretations and gaps in the data 
are elements of intellectual honesty.
    The proposed rule would give the public--including unions and 
employers--an earlier voice in the regulatory process. An Advance 
Notice of Proposed Rulemaking would be required for every health rule, 
and scientific studies on the potential hazards would have to be posted 
by the Labor Department within seven days of a rulemaking announcement.
    The congressional Democratic critics are probably unaware that the 
Labor Department is following the recommendations of a 1997 report by 
President Clinton's Commission on Risk Assessment and Risk Management.
    The mystery is not why the Labor Department moves so fast, but why 
Congress wants it to move even more slowly.

    Ms. Furchtgott-Roth, former chief economist at the U.S. Department 
of Labor, is a senior fellow at the Hudson Institute.
                                 ______
                                 
    Mr. Wilson. And at this time, thank all of you for being 
here today.
    And thank you, Madam Chairwoman, for a very interesting 
hearing.
    Ms. Woolsey. Well, thank you all for attending this 
hearing, and, again, happy birthday, Mr. Wilson.
    Mr. Wilson. Thank you. Thank you.
    Ms. Woolsey. I want to thank our witnesses for being 
available to testify. This is a very exciting, interesting 
subject, and you were great, every one of you.
    What we have heard today makes it clear that the current 
income gap is unsustainable. It threatens the stability of the 
middle class, it hurts the economy, it hurts our society, and 
excessive executive compensation is a major contributor to the 
problem, which must be addressed.
    The problem of income inequality will not go away on its 
own. We need a national policy or a set of policies devoted to 
reducing the gap, to preventing a permanent underclass in the 
United States of America. This includes finding ways to protect 
our workers by passing the Employee Free Choice Act to 
strengthen unions and increase workers' bargaining powers. And 
this also includes a renewed commitment to training. We need to 
devote more resources to training, and we need to use these 
resources wisely on programs that work.
    I have named only a few of the solutions that our witnesses 
have outlined today. I thank you for that. We need to use all 
the tools at our disposal to turn things around.
    So, again, I thank you all for coming to today's hearing.
    As previously ordered, members will have 14 days to submit 
additional materials for the hearing record. Any member who 
wishes to submit follow-up questions in writing to the 
witnesses should coordinate the majority--with the majority 
staff within 14 days.
    Without objection, this hearing is adjourned.
    [Additional submissions by Mr. Wilson follow:]

                [From the New York Sun, August 6, 2008]

                           A Desirable Option

                            By David Fischer

    School reform has been a top priority for the Bloomberg 
administration ever since the mayor took office. But it wasn't until 
this year that Mayor Bloomberg and Chancellor Klein took aim at one of 
the most overlooked and underfunded parts of the school system--
vocational education, now known as career and technical education or 
CTE.
    A task force convened by the mayor earlier this year just released 
its final report on July 30, calling on the city to transform CTE into 
``a desirable, respected, and accessible option'' for city students.
    In an era when ``college for all'' has become the universal goal 
and high-stakes standardized testing has taken hold as the measure of 
success or failure, CTE might not seem to have a place in the public 
high school of the 21st century.
    But the numbers don't lie: a May 2008 report I authored for the 
Center for an Urban Future showed that 64% of New York City's CTE 
students in 2002--students who began high school that September--had 
graduated by October 2007, compared to 50% of the non-CTE high school 
students in the five boroughs who graduated. Over the same period, the 
dropout rate among CTE students in the city was 5%; for non-CTE 
students it was 20%.
    These vocational schools produce superior outcomes in spite of 
drawing disproportionately at-risk students, and groom young people for 
decent-paying jobs in occupations that are now in high demand, from 
automotive technicians to opticians.
    The secret to CTE's success is that the courses engage students to 
a much greater extent than typical classroom fare. Research has shown 
that a large portion of those who drop out from high school do so 
because their classes seem boring and meaningless. At its best, CTE not 
only holds their interest, but also furnishes them with real world, in 
demand skills for which employers will pay well.
    The city is home to a number of standout CTE schools, such as 
Aviation High School and Thomas Edison High School, both in Queens, and 
Manhattan's High School of Fashion Industries and Food and Finance High 
School. But the quality of New York's 21 CTE high schools is far from 
uniform, and CTE enrollment overall has dipped in recent years.
    Programs have suffered from years of inattention and indifference 
on the part of city education officials, who have failed to provide 
schools with sufficient resources to pay for up-to-date equipment and 
training tools.
    Commendably, the report released last week by the mayor's task 
force grapples with most of the major problems facing the city's CTE 
schools. In particular, it highlights lingering--and false--negative 
perceptions around ``voc ed'' as a lesser academic track for students 
who can't handle demanding schoolwork. The report also identifies the 
absence of integrated curricula to inculcate both core academic 
competencies and career-related skills, and the ``disjointed'' nature 
of engagement with the private sector--a vital partner in any 
successful CTE effort.
    The report also is clear about how New York City and State must 
work together around defining new competencies, adjusting requirements 
for the amount of time spent in class, and other key areas of 
collaboration.
    Unfortunately, the task force is more powerful in its diagnosis 
than in its prescriptions. Perhaps the biggest shortcoming is a lack of 
candor and detail about what it will cost to implement the suggested 
reforms. As just one example, the report urges the city's Department of 
Education to ``[support] principals and teachers to redesign and create 
new courses and adapt new teaching methods * * * [and provide] 
appropriate, ongoing and embedded professional development * * * .'' 
But none of that is free, and the Department has not shown great 
facility in delivering this support in the past. This is a goal, not a 
plan.
    With few exceptions, such as the calls to develop ``an inventory of 
existing partnerships linked to CTE schools * * * to provide a baseline 
from which to gauge the effectiveness of new efforts,'' and for 
``defin[ing] quantifiable targets for internship development across 
schools/programs,'' this absence of specifics characterizes the report. 
Moreover, there is little sense of how city officials and other 
stakeholders will know if reforms are working. In part, the problem is 
that this effort comes so late in the Bloomberg administration: the 
report calls for a five-year CTE Strategic Plan, but the last four of 
those years will unfold with a new mayor and, presumably, a new 
chancellor in charge.
    Given the high profile of the effort--the task force was co-chaired 
by a former New York mayor, David Dinkins, and the chief executive 
officer of New York Life, Sy Sternberg--and commitments from business 
leaders, CUNY, the state Board of Regents, and other key players, the 
stars seem aligned for a needed overhaul of CTE. The risk is that with 
no strong follow-up plan and too little detail on what is to be done, a 
failed effort at reform will ensure many more years of underperforming 
programs.

    Mr. Fischer, project director for workforce development at the 
Center for an Urban Future, is the author of the May 2008 study about 
New York's CTE programs, ``Schools that Work.''
                                 ______
                                 

                [From the New York Sun, August 6, 2008]

                        Teenagers' Right to Work

                        By Diana Furchtgott-Roth

    Teenagers, if you couldn't find a job this summer, call your 
senator or representative, because Congress wants to make it even 
harder next year. Tell Congress to stop pricing you out of a job.
    Next July, New York's minimum wage will rise to $7.25 from its 
current level of $7.15 to match the new federal rate. This will be the 
third in a series of increases in the federal minimum wage, following 
increases to $6.55 last month and $5.85 in July 2007. All this 
represents a significant increase from the $5.15 rate that had 
prevailed for a decade.
    With the increase in teenage unemployment rates, Congress should 
rethink next year's minimum wage hike.
    Last week's July employment data showed that teenagers are paying 
the price of Congress's generosity. The overall unemployment rate rose 
to 5.7% in July from 5.5% in June, but teen unemployment rate rose 
faster, to 20.3% from 18.1%.
    It's even worse compared to last year. The overall unemployment 
rate has increased by one full percentage point, to 5.7% from 4.7%, yet 
teenage unemployment has risen five full percentage points, to 20.3% 
from 15.3%. This is an unprecedented historical increase for an economy 
that is still growing. Prior increases of this size have only occurred 
during recessions, and, press hype to the contrary, America is not in a 
recession.
    Teenagers are particularly vulnerable to minimum wage increases due 
to their relatively low levels of experience and job-learned skills.
    Congressional representatives, notably Democrats Carol Shea-Porter 
of New Hampshire and Phil Hare of Illinois, who assert that the minimum 
wage doesn't affect employment, as they did in last week's House 
Committee on Education and Labor hearing, aren't thinking about 
teenagers and low-skill workers. According to Ms. Shea-Porter, those 
who oppose a higher minimum wage favor ``a permanent underclass.''
    New Hampshire and Illinois have minimum wage laws that exceed the 
federal one, so their residents aren't affected by the new law. So do 
California and Massachusetts, homes to House Speaker Nancy Pelosi, 
House Education and Labor Committee Chairman George Miller, and Senate 
Health, Education, Labor and Pensions Chairman Edward Kennedy, who led 
the charge for the higher federal minimum wage.
    Yet the workforce in California, Massachusetts, and Illinois is 
declining, with residents migrating to fast-growing states without 
state minimum wage laws such as South Carolina and Alabama. Increasing 
the federal minimum wage is the latest in the blue state vs. red state 
battles, with the congressional leadership spreading the pain and 
reducing the growth of states with more sensible policies.
    Minimum wage workers are overwhelmingly young, part-time, and work 
in the food service industries. Workers under the age of 25 make up 
roughly half of the 1.7 million minimum wage workers. Employed 
teenagers are almost five times more likely to be among the minimum 
wage earners than workers older than 25.
    Members of Congress assume that if the minimum wage were raised, 
all workers would retain their jobs. But, according to my calculations, 
an increase to $7.25 an hour, plus the mandatory employer's share of 
social security, unemployment insurance, and workers' compensation 
taxes, brings the hourly employer cost close to $8, even without any 
benefits.
    Teenagers already are feeling the unemployment pinch: next year, 
those whose productivity is worth less than $8.00 an hour to their 
employer won't be employed.
    It sounds compassionate to alleviate poverty by mandating that 
employers give away their money. But employers won't necessarily 
cooperate. Instead, they will only employ workers who can produce $8.00 
an hour of goods or services. That will be fewer people, especially 
teenagers, than they employ today. Employers can change technologies or 
hire more skilled workers to keep their firms in business.
    Denying work opportunities to those whose skills and output don't 
add up to $8.00 per hour is not compassionate, it's manifestly unfair. 
The federal government essentially would be mandating that workers 
below a given level of skill have no right to work.
    Much of Europe keeps a quarter of its youth unemployed, not with 
minimum wages, but with generous benefit packages (also proposed by 
Congress) that discourage work. The predictable effect is high 
unemployment rates with a substantial percentage out of work for more 
than a year, leading to deteriorating skills and a permanent 
underclass. This is not a good route for America.
    Most American employers have to pay more than minimum wage just to 
attract and hold the workers they need. More than 140 million workers 
now earn above minimum wage, not because of federal or state law, but 
because that is the only way that firms can attract and keep employees 
with skills.
    Rather than increasing the minimum wage in 2009 and taking away 
teenagers' right to work, Congress should focus on increasing their 
skills and growing our economy. Then, next summer, the unemployment 
rate might go down instead of up.

    This column was featured in The New York Sun edition of August 6, 
2008.
    Diana Furchtgott-Roth is a senior fellow and director of Hudson 
Institute's Center for Employment Policy. She is the former chief 
economist at the U.S. Department of Labor.
                                 ______
                                 
    [Whereupon, at 11:36 a.m., the subcommittee was adjourned.]

                                 
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