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


                                                        S. Hrg. 110-102
 
   ENSURING OUR ECONOMIC FUTURE BY PROMOTING MIDDLE-CLASS PROSPERITY

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            JANUARY 31, 2007

                               __________

          Printed for the use of the Joint Economic Committee

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34-752 PDF                 WASHINGTON DC:  2007
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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

SENATE                               HOUSE OF REPRESENTATIVES
Charles E. Schumer, New York,        Carolyn B. Maloney, New York, Vice 
    Chairman                             Chair
Edward M. Kennedy, Massachusetts     Maurice D. Hinchey, New York
Jeff Bingaman, New Mexico            Baron P. Hill, Indiana
Amy Klobuchar, Minnesota             Loretta Sanchez,  California
Robert P. Casey, Jr., Pennsylvania   Elijah Cummings, Maryland
Jim Webb, Virginia                   Lloyd Doggett, Texas
Sam Brownback, Kansas                Jim Saxton, New Jersey,
John Sununu, New Hampshire           Kevin Brady, Texas
Jim DeMint, South Carolina           Phil English, Pennsylvania
Robert F. Bennett, Utah              Ron Paul, Texas

                Chad Stone, Executive Director (Acting)
             Christopher J. Frenze, Minority Staff Director








                            C O N T E N T S

                              ----------                              

                      Opening Statement of Members

Hon. Charles E. Schumer, Chairman, U.S. Senator from New York....     1
Hon. Jim Saxton, Senator, Ranking Minority, U.S. Representative 
  from New Jersey................................................     4

                               Witnesses

Statement of Robert E. Rubin, director and chairman of the 
  Executive Committee, Citigroup; former U.S. Treasury Secretary.     9
Statement of Dr. Lawrence Summers, Charles W. Eliot University 
  professor, Harvard University; former U.S. Treasury Secretary..    11
Statement of Dr. Alan Blinder, professor of economics and 
  director of the Center for Economic Policy Studies, Princeton 
  University; former Vice Chairman of the Federal Reserve........    15
Statement of Dr. Richard Vedder, distinguished professor of 
  economics, Ohio University; visiting scholar, American 
  Enterprise Institute...........................................    18

                       Submissions for the Record

Prepared statement of Senator Charles E. Schumer, Chairman.......    38
Prepared statement of Representative Carolyn B. Maloney, Vice 
  Chair..........................................................    39
Prepared statement of Representative Jim Saxton, Ranking Minority    39
Prepared statement of Senator Edward M. Kennedy..................    40
    Washington Post editorial series on inequality...............    41
Prepared statement of Robert E. Rubin, director and chairman of 
  the Executive Committee, Citigroup; former U.S. Treasury 
  Secretary......................................................    53
Prepared statement of Dr. Lawrence Summers, Charles W. Eliot 
  University professor, Harvard University; former U.S. Treasury 
  Secretary......................................................    54
Prepared statement of Dr. Alan Blinder, professor of economics 
  and director of the Center for Economic Policy Studies, 
  Princeton University; former Vice Chairman of the Federal 
  Reserve........................................................    56
Prepared statement of Dr. Richard Vedder, distinguished professor 
  of economics, Ohio University; visiting scholar, American 
  Enterprise Institute; co-author of the Wal-Mart Revolution.....    58


   ENSURING OUR ECONOMIC FUTURE BY PROMOTING MIDDLE-CLASS PROSPERITY

                              ----------                              


                      WEDNESDAY, JANUARY 31, 2007

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The Committee met at 9:40 a.m. in room 106 of the Dirksen 
Senate Office Building, the Honorable Charles E. Schumer 
(Chairman of the Committee) presiding.
    Senators present: Bennett, Bingaman, Casey, Klobuchar, 
Schumer, and Webb.
    Representatives present. Saxton.
    Staff present:  Katie Beirne, Daphne Clones Federing, Chris 
Frenze, Nan Gibson, Rachel Greszler, Colleen Healy, Brian 
Higginbotham, Katie Jones, Bob Keleher, Michael Laskawy, Zach 
Luck, Jeff Schlagenhauf, Chad Stone, Annabelle Tamerjan, and 
Adam Wilson.
    Chairman Schumer. The Committee will come to order. I want 
to welcome both my colleagues and or guests. I have an opening 
statement. I know Jim Saxton has an opening statement, then 
we'll go right to the remarks.
    If either of my colleagues would like to say something at 
the beginning, they're welcome to. Senator Kennedy and Vice 
Chair Maloney were not able to attend, but have asked to have 
statements put in the record, so, without objection, they will 
be.
    [The prepared statements of Representative Maloney and 
Senator Kennedy appear in the Submissions for the Record on 
pages 39 and 40 respectively.]
    Chairman Schumer. Any other statements for the record? No.

OPENING STATEMENT OF HON. CHARLES E. SCHUMER, CHAIRMAN, A U.S. 
                     SENATOR FROM NEW YORK

    Chairman Schumer. Well, good morning. I'm very pleased to 
open the first hearing of the Joint Economic Committee in the 
110th Congress.
    I want to welcome Ranking Member Maloney, the Vice Chair, 
who couldn't be here today, and Ranking Member Mr. Saxton. Jim 
and I were friends in the House. We're continuing to work on a 
variety of legislation when I crossed the Capitol.
    We're going to have a great time and a great relationship. 
I'm so glad you're here, Jim.
    I know we're going to have some disagreements along the 
way, but I really do hope we'll be able to develop a shared 
view of the problems the American people will want us to be 
working on, and look forward to working with the Minority 
closely, and, I dare say, neighborly, with all of you.
    Now, this Committee is a Committee that's going to ask 
difficult questions, challenge our assumptions, and seek to 
define our Nation's economic challenges, using the best minds 
in the Nation as our witnesses for much of the next 2 years.
    Our hearings are going to focus on two things that are 
related: One is just the changing nature of the economy. We 
live in a totally different world, economically, than we did 
even 20 years ago.
    Technology has revolutionized everything: The way we live; 
the way we work; the way we buy; the way we sell. Globalization 
is now a word that everyone uses, but it has enormous, enormous 
effects.
    But it's not just globalization that's affected our lives. 
We're living longer. Technology has made dramatic advances, 
and, as we live longer, there are the issues of 30 years of 
leisure at the end of a life, getting married later, having 
kids in different ways; everything is changing before our eyes.
    It's a revolutionary period, in a certain sense--peaceful, 
but revolutionary, and our hearings are going to focus on that.
    There's going to be a particular emphasis in these 2 years, 
on the middle class. That's because I believe that the middle 
class is the engine of the American economy. When they do well, 
America does well; when the middle class is anxious, America is 
anxious.
    If we want to expand or reform aid to the poor, we can only 
do so, if the middle class feels that they are prosperous, 
moving ahead, and secure.
    If we want to expand trade, because we believe it grows the 
economy, we can only do so, if the middle class feels that they 
will benefit as much from our national growth as those at the 
very top.
    This hearing couldn't come at a better time, because on all 
of those measures, the middle class feels a little bit shaky. 
They're not struggling to get by, but they are struggling to 
get ahead, and if you look at the poll results, while people 
think they're doing OK right now--and we'll hear from our 
distinguished witnesses about this--they're much more worried 
about the future and their children's future, than they were, 
even 2 or 3 years ago.
    They are unsure of their footing in an economy and a world 
that is about change, technology and even disruption. They feel 
they are alone to navigate the contours of change, and that 
government isn't really helping them where they need it.
    They see the economic fortunes of different groups in our 
economy, growing apart, not together. They're rightfully 
worried that this gap will grow into an unbridgeable chasm.
    We all know the statistics; we went through the most 
prolonged job slump since the 1930s, after the 2001 recession.
    Productivity continued the strong trend that began in the 
mid-90s, much of it technology-driven, but real wages stagnated 
as the benefit of economic growth showed up in the bottom lines 
of companies and in executive salaries, but not in the 
paychecks of most workers.
    But the middle class doesn't need statistics to tell them 
that they're on shaky ground. American families know they can't 
work any harder than they already do, and that for the last 6 
years, they have mostly run in place, as new expenses and new 
troubles hit them: Paying for the cost of education, 
particularly college; longer life; the number of people who 
help support their parents is greater and greater and greater.
    And so we know that the anxiety of the middle class is not 
just perceived, but real. This morning, President Bush will 
give a State of the Economy Address in my home State of New 
York, and he'll try to make the case to the American public, 
that our economy is strong and everyone is benefiting.
    The President will surely point to today's news that 
economic growth picked up in the Fourth Quarter, and a key 
measure of wages, showed some real growth, as well.
    No one is happier than we are that we had a nice quarter, 
but if you spend time out in middle class America, if you 
descend from the 30,000-foot level to the communities of Main 
Street, you know that all is not well with the middle class.
    The basic success and aspirations of middle class life--
raising a family, buying a home, paying for college, saving for 
retirement, and health care--are becoming intimidating hurdles 
for average, ordinary people.
    So the President is right when he says that a future of 
hope and prosperity in this country begins with a growing 
economy, but he could not be more wrong when he says that all 
Americans have benefited from economic growth over the past 
several years.
    The fact is that the middle class has never been so unsure 
of its footing, since I came to Congress in 1980. I believe we 
need a new direction to promote an economic growth for all 
Americans in the 21st century.
    We need a new map, because technology has changed our 
world. How do we address income inequality? How do we address 
trade? How do we address longer life? How do we change our 
health care, our education systems, to meet the new global 
challenges that we face?
    We need to throw away the old map that has been favoring 
those with influence and wealth and leaving the middle class 
behind. Our economic fortunes need to grow together, not apart.
    I said that the JEC would seek advice from the best of the 
best, and that's what we have to offer for our first hearing.
    Bob Rubin and Larry Summers presided over a period that was 
quite different from today. When they were Secretaries of the 
Treasury, not only was there growth, but the growth was more 
spread out and the middle class had much more confidence than 
they do today.
    The changes that have occurred since then, are not--I am 
not blaming George Bush for all of them, or even most of them. 
Most of them are due to the changes in the economy and because 
of technology. But, when that changes, we have to adapt, and 
just sticking with the same policies that might have been good 
in 1980, or even 1990, probably doesn't work today.
    There are no four better witnesses than the four who are 
here today: Bob Rubin, Larry Summers, and Alan Blinder, need no 
introduction to people who have followed economic policy in 
this country over the past decade or more. Their reputations 
are stellar, and deservedly so.
    We all wish we could go back to the times of the 1990s, 
when everyone was doing so well and everyone thought they were 
doing so well, as well.
    I'm going to give each a proper introduction before they 
give their testimony. I also want to welcome Dr. Vedder. 
Professor Richard Vedder is the distinguished professor of 
economics at Ohio University, and he's going to lend a 
different perspective than maybe Dr. Blinder, Mr. Rubin, and 
Dr. Summers. We welcome hearing that, as well, because we 
should always be hearing different points of view to keep us 
all on our toes and challenge our assumptions.
    With that, let me call on Jim Saxton.
    [The prepared statement of Senator Schumer appears in the 
Submissions for the Record on page 38.]

OPENING STATEMENT OF HON. JIM SAXTON, RANKING MINORITY, A U.S. 
                 REPRESENTATIVE FROM NEW JERSEY

    Representative Saxton. Mr. Chairman, thank you. It's a 
pleasure to be here to be able to congratulate you as you take 
the gavel of this very useful and important Joint Economic 
Committee.
    I have had the pleasure on three occasions, to serve as 
Chairman, and, during the years, since 1995, I have found this 
to be a challenging set of issues, that gives us, as Members of 
the House and the Senate, and gives those who wish to attend, a 
view through technology to observe the great witnesses that we 
have had over the years in discussions of economic issues.
    As you pointed out very well and accurately in your opening 
statement, it's also a pleasure to join in welcoming the 
distinguished panel as witnesses before us today, all of whom, 
I believe, have appeared here previously.
    So, former Treasury Secretary Bob Rubin; former Treasury 
Secretary Larry Summers; Professor Alan Blinder; and Professor 
Richard Vedder, thank you for being here with us today.
    The hearing today will likely cover a number of topics, 
including the performance of the U.S. economy. It is useful to 
recall that in 2003, a new policy mix of accommodative Federal 
Reserve policy and tax incentives for investment, led to a 
rebound in investment.
    The pace of economic growth picked up, and the employment 
growth rebounded. Since August of 2003, over 7 million jobs 
have been created and the unemployment rate has fallen to 4.5 
percent--good news for all Americans.
    Economic growth has generally been quite good in 2005. The 
Fed referred to the solid performance of the economy and said 
that it should continue to perform well through 2006 and 2007.
    Some have criticized the U.S. economic performance for 
producing excessive income inequality. However, according to 
the Census Bureau, its key measure of income equality has been 
statistically unchanged since 2001.
    Some have also focused on slow wage growth, that many of 
the data used understate progress, because they are based on 
measures that overstate inflation and exclude fringe benefits 
from the equation.
    Even so, various measures of real wages and earnings growth 
have been rising at a faster pace recently. It should be noted 
that during the 1990s expansion, it also took several years 
before real wages and earnings increased at a strong rate.
    The continued prosperity of middle-income households, can 
be facilitated by pro-growth economic policies. It would also 
be reasonable to examine Federal policies regarding research, 
personal savings and investment, education, and social safety 
net programs, to determine what changes might be helpful.
    For example, I have long supported various tax incentives 
for personal savings, to provide tax security and a reserve 
fund for middle class investors.
    However, in Congress today, there is in some quarters, 
increasing support for a policy response that would be 
profoundly destructive to middle-income families, in my 
opinion. That is generally known as protectionism.
    Much has been said about the effect of international trade 
on our economy. According to many economists, the quickening 
pace of technological change is more responsible for shifting 
employment patterns, than is international trade.
    The economic policies that promote the flexibility and 
dynamism of the U.S. economy are the best course for improving 
the future of middle-income Americans.
    As Congress examines these issues, it should avoid policies 
that would hamper the ability of the economy to adapt to future 
change. Mr. Chairman, you and I certainly agree on that point.
    Let me take the opportunity, again, to thank you, Mr. 
Chairman, for the courtesies extended by you. I look forward to 
hearing from our witnesses, as you have said you do, as well. 
Thank you.
    [The prepared statement of Representative Saxton appears in 
the Submissions for the Record on page 39.]
    Chairman Schumer. Thank you, Congressman. Would you like to 
make a statement, Jeff? Bob?

         OPENING STATEMENT OF HON. ROBERT F. BENNETT, 
                    A U.S. SENATOR FROM UTAH

    Senator Bennett. Normally, Mr. Chairman, I would pass, but 
since I have to go to the Banking Committee--and I don't think 
you'll give me your proxy for that, to hear Secretary Paulson, 
if I could, I would like to make a bit of an opening statement, 
and welcome the witnesses here, people with whom I have worked 
in the past.
    I congratulate you, Mr. Chairman, on your assignment here. 
In anticipation of a different kind of outcome in the election, 
I had assumed I would be Chairman, and, therefore, prepared 
some material,* and I would like the material* included in the 
record.
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    * The material referred to was unavailable at press time.
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    Chairman Schumer. Without objection, and you would have 
been a good Chairman.
    Senator Bennett. You're very kind to say that, and I'm sure 
you will be.
    Let me just share with you, out of this material, two 
charts that I think summarize what we need to understand about 
the issue of income inequality. I don't know if we have them in 
large form. I have copies which I will distribute.
    We often hear of the gap in household income, income 
distribution, and say that the highest quintile is 10 times--
more than 10 times higher than the lowest quintile.
    In this chart, Mr. Chairman, see the blue on the chart, 
that's the lowest quintile and that's the highest quintile. 
That is the Census figures on income.
    That's right; it's more than 10 times, because over there, 
it's only 3.5 and over here, it's 49.6. However, if you include 
taxes and transfers in your calculation, because the folks down 
here don't pay very many taxes and the folks up here pay a lot, 
and down here, you get the Earned Income Tax Credit, so, 
transfers, this number goes up and this number, appropriately, 
comes down.
    Now, in the light tan bars, we have the number of people 
per household. Many of the folks in the lowest quintile, are 
retired, and there are only two people or one person per 
household, whereas the folks here, are younger and have bigger 
households, so, this goes up and this comes down, when you 
adjust there.
    Finally, in the green bar, you adjust for hours worked, 
because, again, many of these people are not working; they are 
retired, and these folks are working, and, therefore, have more 
income.
    So, you see that the difference between the green bars of 
the lowest and the highest, is 3:1, rather than 10:1. I think 
we need to keep that in mind, as we talk about income 
distribution, instead of just, as some people do, take the blue 
bar at the end and say, gee, it's 10, 11 times, the top 
quintile to lower quintile.
    The other chart I would share with you is one I share with 
my grandchildren and children as an incentive on this whole 
situation. This is earnings, income, and wealth by education 
level.
    Earnings is the blue bar; income is the purple bar--pardon 
me--yes, income, and then the green is the wealth. These folks 
have relatively low earnings, but, from a variety of sources, 
they have a little bit higher income and that's as much wealth 
as they are able to acquire, $68,000 in wealth.
    These are the folks with no high school. The next one is 
high school, and there's virtually no difference. It's $58,874, 
high school; $68,530, no high school, in the amount of wealth 
that they've accumulated.
    Then, as I say, this I share with my children. They've all 
gone to college, but with others in the families, this is what 
happens when you go to college.
    This----
    Chairman Schumer. I'd just ask, is it any college, or 
graduates?
    Senator Bennett. The narrative that goes along with this, 
simply says household heads with a college education, earned 
3.7 times more than those without a high school education, so--
--
    Chairman Schumer. Senator, your staff says it's graduates.
    Senator Bennett. It's graduates, OK, that's pretty 
dramatic, and as we talk about trying to solve the problem of 
income gap, we should help people understand that the best way 
to solve income gap--it's basically a skill gap, and if you 
don't go to college, you're not getting it.
    With that, Mr. Chairman, I would ask your permission to 
move on to the Banking Committee. I apologized to our 
witnesses, and I have a number of other neat charts with 
wonderful colors that I'd be happy to submit to the record.*
---------------------------------------------------------------------------
    * The charts referred to were unavailable at press time.
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    Chairman Schumer. Well, thank you, Senator, and, as usual, 
your thoughtful approach makes us think. I don't think anybody, 
and certainly I would not dispute that education is really 
probably the No. 1 key to all of the problems we are facing, or 
most of them, anyway.
    Senator Klobuchar, would you like to make an opening 
statement?
    Senator Klobuchar. Yes, I would.
    Chairman Schumer. Please, and welcome, welcome to the 
Committee and to the Senate.

           OPENING STATEMENT OF HON. AMY KLOBUCHAR, 
                 A U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. It's wonderful to be here with these 
distinguished guests, and thank you for heading this up. I 
think I heard someone say yesterday that this is not going to 
be your daddy's Joint Economic Committee anymore, and we're 
going to really focus on these middle class issues and what 
matters.
    I can tell you that in Minnesota, this is what I heard for 
the last 2 years: It's about rising healthcare costs--many of 
our people in our State have jobs, we have a strong economy, 
but basically, it's getting harder and harder for them to get 
by with health premiums up 60 percent in the last 6 years.
    Tuition at the University of Minnesota is up 80 percent in 
7 years. We had gas prices, as you know, up toward 3 bucks a 
gallon this summer, and it was tough for people, for two income 
families, barely getting by.
    It was getting harder and harder for them to make it. And 
we would have these living room forums all across our State, 
where people would suddenly stand up and they realized they 
were blaming themselves. They said, I have a job, but my kid 
went to college and now he can't afford to get a house, or I'm 
a small business owner and it's getting harder and harder for 
me to afford health care and I have a pregnant employee and I 
don't want to drop the health care, but I can't afford it 
anymore.
    Those were the things that we were hearing throughout our 
State, in what is really a strong economy.
    The other thing that people, surprisingly, were aware of, 
was the debt. And they were very focused on what the government 
was going to do to try to rein in the spending and also do 
something about what they perceived as unfairness in the 
system.
    One in 12 tax dollars, as you know, goes to service the 
debt. We pay $900 million a day in interest and we're also 
seeing an increase in the interest rates, as a result of the 
national debt.
    One of the things I'd hear from people a lot, is that they 
didn't understand why, in the past, Congress and Washington 
were giving tax shelters to wealthy people and 
multimillionaires, while it was getting harder and harder for 
them to make it.
    The tax cut gave, by our calculations, $111 to the super 
wealthy for every dollar that a middle class family got.
    They passed healthcare legislation that was written, in 
part, by the pharmaceutical companies and an energy policy that 
was written by the oil companies.
    We actually put out a budget plan. I'm not sure it would 
pass muster with you two, but we put out a plan of how to 
basically get rid of the deficit by rolling back the tax cuts 
for the top 1 percent, by closing the tax loopholes for 
multimillionaires that were shielding money on the Cayman 
Islands; by closing down the oil royalties, which this 
Committee has already put a report out on; by posting capital 
gains taxes so that people who were not posting capital gains, 
people that were not paying them, would be required to pay 
them.
    And we put all these things together and presented it to 
the people of our State, including rolling back the tax cuts on 
the top 1 percent, and they responded very positively to this, 
because, with this, came help for them: $10,000 in tax 
deductibility for college tuition; help for adults who are 
helping their elderly parents; trying to look at how you can 
help first-time home buyers with a $3,000 tax credit.
    And we put those things out and showed the disparity of 
what was going on in the government and how it was hurting 
everyday people.
    When I was a prosecutor, we'd always say, follow the money, 
and when you follow the money, you find the bad guys. Well, 
that's what I hope, Senator Schumer, that this Committee does, 
which is to follow where some of the money has been going in 
Washington, and put it back in the hands of the people who 
deserve it, and that's the people who are driving this economy, 
which is the middle class.
    Chairman Schumer. Thank you, Senator Klobuchar, and welcome 
in many ways.
    Senator Klobuchar. Thank you.
    Chairman Schumer. We're now ready to move on to our 
witnesses. Let me give a brief introduction. None of them need 
much of an introduction, because of their reputations, their 
fine reputations, proceed them.
    Robert Rubin is director and chairman of the Executive 
Committee and member of the Office of the Chairman of 
Citigroup, Inc. He has been involved with financial markets and 
public policy debates all of his professional life.
    As Secretary of the Treasury from 1995 to 1999, Mr. Rubin 
played a leading role in a host of issues, including: Balancing 
the Federal budget; acting to stem financial crises in Mexico, 
Asia, and Russia; and guiding sensible reforms at the Internal 
Revenue Service.
    Lawrence Summers is the Charles W. Eliot University 
professor at Harvard University. He served as its 27th 
president from 2001 to 2006. Dr. Summers has taught on the 
faculty at Harvard and MIT, and he has served in a series of 
senior public policy positions, including succeeding Bob Rubin 
as Treasury Secretary.
    Alan Blinder is the Gordon S. Renchler Memorial professor 
of economics at Princeton, and director of Princeton Center for 
Economic Policy Studies, which he founded in 1990.
    He served as Vice Chairman of the Board of Governors of the 
Federal Reserve System from June 1994 to January 1996, and, 
before that, he served as a member of President Clinton's 
original Council of Economic Advisors, January 1993 to June 
1994.
    And Richard Vedder, last but certainly not least, holds the 
title of distinguished professor of economics at Ohio 
University. He is a Visiting Scholar at the American Enterprise 
Institute.
    Dr. Vedder is the author of several books, including: The 
American Economy in Historical Perspective; Out of Work--
Unemployment and Government in 20th Century America; and the 
Wal-Mart Revolution--How Big-Box Stores Benefit Consumers, 
Workers, and the Economy.
    Secretary Rubin, please proceed.

    STATEMENT OF ROBERT RUBIN, DIRECTOR AND CHAIRMAN OF THE 
     EXECUTIVE COMMITTEE, CITIGROUP; FORMER U.S. SECRETARY

    Secretary Rubin.  Thank you, Mr. Chairman. Let me start by 
saying that I believe that, as you and I have discussed, that 
you're holding this hearing at an exceedingly important time. I 
think of this as a critical juncture for the longer-term 
outlook with respect to the American economy, and I think that 
your Committee can contribute enormously by catalyzing serious 
public discussion of the kinds of issues you just illuminated, 
and by helping develop sound approaches to the complex and 
uncertain issues that this country faces.
    The American economy has enormous strengths: A dynamic 
society, a willingness to take risks, flexible labor markets, 
and a great deal else. On the other hand, we face hugely 
consequential, longer-term challenges, and I'll touch on those 
briefly in a moment.
    At the same time, the global economy is undergoing change 
of historic proportions, including: Technological developments, 
globalization, effective productivity regimes in quite a number 
of emerging market countries.
    And as a consequence of all of this, China and India are 
emerging not only as large potential markets, but as powerful 
competitors. I don't think that there is any question that we 
can thrive in this environment, but I believe that in order to 
do so, it is absolutely imperative that we meet our challenges, 
and I believe that failure to meet our challenges, could lead 
to very serious difficulty.
    Currently, in my judgment, we are on the wrong track on 
almost every front, independently of how you allocate political 
responsibility.
    This contributes substantially, No. 1, to the unsound 
fundamentals underlying our economy, despite good GDP growth, 
which could auger badly for the future; and, No. 2, to the 
struggle that far too many Americans are having economically.
    Median real wages and median real compensation have been 
roughly stagnant for the last 5 years, and grew at relatively 
slow rates for 25 of the last 30 years, the only exception 
being the last 5 years of the 1990s, while inequality 
benefiting a very small top tier, has increased substantially.
    Moreover, economic dislocation and economic insecurity have 
increased substantially.
    I believe strongly, Mr. Chairman, in markets as the most 
effective organizing principle for economic activity, but 
government also has a critical role in providing the requisites 
for economic success that markets, by their very nature, will 
not optimally provide.
    Moreover, I believe that the objectives for economic policy 
should be growth, but also, and, absolutely critically, broad 
participation in that growth and improved economic security, 
both as a matter of values and because these objectives can be 
mutually reinforcing.
    More specifically, sustained growth is the single most 
effective way of promoting broad income growth, both because 
you have a larger pie to split and because of sustained tight 
labor markets.
    Conversely, broad income increases and increased economic 
security are critical to economic growth, for two reasons: 
First, they provide workers with resources to access education, 
training, rapid redeployment into the mainstream economy when 
dislocated, and other factors that contribute so importantly to 
productivity, and, second, as you said, Mr. Chairman, sound 
economic policies around trade and market-based economics, will 
only have broad public support, if the great preponderance of 
our people expect to benefit from those policies.
    I think we can most effectively achieve our interrelated 
economic objectives by meeting the challenges I mentioned 
earlier, and I think of those challenges as falling into four 
categories:
    Number one, our multiple financial imbalances, including 
the debt that you mentioned, Senator;
    Two, serious shortfalls in education, infrastructure, basic 
research, energy policy, healthcare policy, inner city 
programs, and so much else that are critical with respect to 
economic success.
    Number Three: Cost/benefit imbalances in our regulatory and 
litigation regimes, and,
    Number Four: International economic policy, including 
trade, relatively open immigration, and working toward flexible 
exchange rates around the world.
    These all occur alongside of serious exogenous risks: 
Terrorism, oil shock, and so many others that are a serious 
threat economically.
    In my limited time, I will not try to describe the 
relationship between each of these challenges and the three 
objectives I set out. Let me just comment on two of these 
challenges, and very briefly.
    As to financial imbalances, current economic conditions 
rest on high levels of borrowing at multiple levels in our 
society. These include:
    Significant projected deficits over the 10-year Federal 
budget window, assuming the 01 and 03 tax cuts are extended 
permanently, as proposed, and assuming AMT reform, and that is 
instead of the surpluses we should have had in a time of 
healthy GDP growth;
    A net national savings rate of something under 2 percent, a 
projected increase of the major entitlements--Social Security, 
Medicare and Medicaid--as a percentage of GDP of over 50 
percent over the next 15 years;
    A current account deficit, that is to say, a trade deficit, 
plus some other items of almost 7 percent of GDP, caused partly 
by our fiscal deficits and heavy over-weighting of dollar-
denominated holdings in many foreign portfolios.
    The combination of these factors, in my view, is a deep 
threat to American job creation, American standards of living, 
and our American economy.
    The vast flows of capital from abroad that have sustained 
us are exceedingly unlikely, in my view, to continue 
indefinitely in the face of these imbalances, though the timing 
of trouble, whether in the near term or years out is 
unpredictable.
    I believe that we should establish a fiscal path that 
systematically reduces the debt-to-GDP ratio, year-by-year, 
instead of that ratio increasing, as is going on at the present 
time, and that leads to balance, and, at the same time, we must 
make room for critical public investments.
    As to globalization and trade, the pressures from 
globalization on wages and economic security are one of the 
factors, along with the even greater effect of technological 
change, that has led to real economic difficulty that so many 
Americans are experiencing.
    In this context, there is an understandable temptation to 
erect trade barriers, but in my view, that would be deeply 
harmful, leading to higher consumer prices, higher input costs 
for our producers versus foreign competitors, loss of the 
benefits of comparative advantage, loss of the pressure of open 
markets on business to increase productivity, and, finally, 
likely retaliation by countries to which we export, and 
possible disruptive effects on the dollar.
    Moreover, and very importantly, other countries are 
continuing to move forward with trade liberalization and trade 
agreements, so that the only question is whether we will be in 
or out of this network of preferential arrangements.
    However, and having said all that, trade liberalization, 
which I believe, on net, greatly benefits our economy and the 
great preponderance of our people, must be combined with a 
powerful domestic agenda to promote productivity, broad-based 
income growth, and greater security along the lines I briefly 
discussed.
    Mr. Chairman, I believe we can have a bright economic 
future, but we must address with great seriousness of purpose, 
many complex and uncertain matters, and this Committee can 
contribute greatly to achieving those purposes. Thank you for 
the opportunity to be here today, Mr. Chairman.
    [The prepared statement of Secretary Rubin appears in the 
Submissions for the Record on page 53.]
    Chairman Schumer. Secretary Summers.

STATEMENT OF DR. LAWRENCE SUMMERS, CHARLES W. ELIOT UNIVERSITY 
      PROFESSOR, HARVARD UNIVERSITY; FORMER U.S. SECRETARY

    Secretary Summers. Thank you very much, Mr. Chairman. Not 
surprisingly, I find myself in substantial agreement with what 
Secretary Rubin said, and I too, am grateful to this Committee 
for undertaking these investigations at what I believe is a 
critical time in our economic history.
    It is a cliche, following elections, to declare that policy 
is at a critical juncture and that we are at a unique moment, 
but in this case, it is, in very important respects, correct.
    Without precedent, are:
    The magnitude of our current account deficit and looming 
problems;
    The degree of integration between the United States and the 
global economy;
    The rise of major trading partners, where economic growth 
in China is now rising at a level where the size of their 
economy doubles every 7 years;
    The pervasive and changing impact of technology on the way 
Americans work and consume, and;
    The unprecedented increases in economic inequality and 
insecurity that have been observed in recent years.
    We are, to an important extent, in uncharted territory, and 
so this Committee's discussions and deliberations are of great 
importance.
    I believe the United States faces three main economic 
policy challenges at this juncture:
    Making, assuring that its finances are on a sustainable 
basis, because without sustainable finance, one runs the risk 
of disruption that will make the achievement of any other goal, 
impossible.
    Assuring an adequate foundation for growth, through a 
sufficient rate of investment, and
    Assuring that the benefits of growth are widely shared, and 
so that we continue to have the strong middle class that has 
long been the underpinning of our democracy.
    Let me say a few words about each of these challenges: 
First, the nation's finances are not now on a sustainable 
basis. While projections vary, most observers believe that 
without a significant policy change, the debt-to-GDP ratio of 
the United States will increase quite rapidly in the next 
decade and beyond.
    In part, this is the reflection of an aging society; in 
part, it is a reflection of the fiscal policies of the last 5 
years, in which very large tax cuts have coincided with 
substantial increases in both defense and domestic spending.
    This move toward fiscal unsustainability has been one of 
the drivers of the deterioration in the international economic 
position of the United States, as our current account deficit 
has now reached record levels and is approaching a trillion 
dollars.
    The current account deficit reflects both the very 
substantial international borrowing by the United States, due 
to significant fiscal deficits, as well as the continuing 
decline in the private savings rate.
    Indeed, for the first time in our history in recent years, 
we have observed moments when the net national savings rate of 
our country approached zero.
    The consequences of these adverse and unsustainable 
developments have been masked by the very substantial 
investment in U.S. short-term financial securities made by 
central banks around the world, and, in particular, made by the 
central banks of emerging Asian countries and oil exporting 
countries.
    This has created a unique, and, I believe, unprecedented 
situation where the world's greatest power is also the world's 
greatest borrower.
    In the short run, the United States benefits from the 
availability of low-cost capital, however, this low-cost 
capital has as its counterpart, our very substantial trade 
deficit. And it also raises profound questions of how long 
foreign investors will be prepared to lend us funds on such 
generous terms.
    Clearly, a policy priority has to be increasing the 
stability of the nation's financial position.
    The most important step that Congress can take is to adopt 
a fiscal policy that puts the government's finances on a 
sustainable footing. There is no silver bullet here. It is 
important to address the excesses of recent years, to take on 
entitlement issues, and perhaps, most critically and 
immediately, to return to budget discipline with respect to any 
new initiatives on either the spending or the tax side.
    The second large economic policy challenge is assuring 
adequate growth in the years ahead. For reasons that economist 
do not fully understand, productivity growth fluctuates 
substantially.
    It was rapid from the end of the Second World War until the 
mid-1970s. It slowed radically from the mid-1970s until the 
mid-1990s. After the mid-1990s, it has accelerated 
substantially again, although there are some signs that this 
acceleration may be tailing off.
    There can be no certainty as to the links between public 
policy and productivity, but equally, there is no question that 
public investments are essential. I would highlight three areas 
of public investment:
    First, our investments in research and development, after 
increasing rapidly during the 1990s, have materially lagged. In 
a time when the world stands on the brink of revolutionary 
progress in the life sciences, it cannot be rational for the 
NIH budget to decline as it did this past year for the first 
time in nearly 40 years.
    If one looks at funding levels adjusted for inflation, the 
decline in our national commitment to basic research is even 
more remarkable.
    As President of Harvard, I had the opportunity to observe 
the remarkable potential of research in the life sciences. I've 
also had the opportunity to observe many extraordinarily 
talented young scholars abandoning the field, as the average 
age of funded investigators rose in the face of budget 
pressures. Similar trends can be observed in the physical 
sciences.
    The second key element to public investment in productivity 
growth is education funding. Ultimately, nothing is more 
important to our prosperity than the quality of the American 
labor force. It is essential at the level of preschool, where 
an increasing body of evidence suggests very high rates of 
return on investment in preschool education, particularly for 
disadvantaged children.
    It is essential at the level of the Nation's public 
schools, as you know better than I, and it is crucial in terms 
of affordability of higher education.
    Of the many disturbing statistics I have encountered in 
recent years, one of the most disturbing is the observation 
that in our leading universities, only 10 percent of the 
students come from families in the lower half of the American 
income distribution. This is clearly not a matter of ability; 
it is, importantly, a matter of access.
    There are also crucial issues in infrastructure investment, 
as well.
    The third, and in some ways, most pressing economic 
challenge, is that of assuring a strong middle class. This has 
three related but distinguishable elements:
    Assuring equality of opportunity; assuring long-term 
economic security for those who currently have good jobs; and 
assuring that prosperity and economic growth are shared widely, 
rather than benefiting a small part of the population.
    How best to do this is a question that will require all our 
efforts in the years ahead, but I think there are at least 
three crucial areas that require attention:
    First, assuring the fair collection of taxes. There are a 
number of ways in which we can improve the effectiveness of the 
tax system, while at the same time, increasing its fairness.
    These include: Making a serious assault on the tax gap 
resulting from noncompliance with the Internal Revenue Code. I 
would note that the tax gap is greatest for those categories of 
income that go disproportionately to the upper ends of the 
income distribution.
    There are also important issues and abuses associated with 
transfer pricing and the sheltering of both individual and 
corporate income that require Congressional attention. I'm 
convinced that substantial revenues can be gained from these 
sources.
    If we are to assure adequate economic security for all of 
our citizens, we need to recognize that in a world where jobs 
are going to be increasingly impermanent, economic security 
cannot come only from the employment relationship.
    This will require new approaches in the areas of health 
insurance and retirement security. I believe it is also 
appropriate that consideration be given to thinking about 
methods of wage insurance that would enable increasingly 
inevitable economic mobility to take place, without significant 
and painful dislocation.
    A third type of response to economic insecurity involves 
taking comprehensive and systematic policy approaches to the 
issue of the future of key industries and regions.
    I was struck, Mr. Chairman, by the recent report that you 
and other leaders from your State released on the steps 
necessary to keep New York at the center of the global 
financial services industry.
    I could not help but wonder whether similar comprehensive 
efforts to devise a strategy and assure the leadership of 
American firms and opportunity for American workers in other 
regions, would not be availing with respect to many different 
sectors.
    Indeed, reliance on the strength of communities of clusters 
of Americans, is, it seems to me, profoundly important for our 
economic future. Any individual faces the possibility of 
competition with the lower-earning and equally skilled 
individual abroad, but it is much more difficult to compete 
with or replicate entire clusters of economic activity. Indeed, 
the supremacy of New York City as the world's financial 
capital, illustrates this point.
    Mr. Chairman, these are just a few of the crucial areas of 
policy that we face. I look forward to answering your questions 
and engaging in a wide-ranging discussion. Thank you for 
inviting me to be here this morning.
    [The prepared statement of Secretary Summers appears in the 
Submissions for the Record on page 54.]
    Chairman Schumer. Thank you, Dr. Summers.
    Dr. Blinder.

   STATEMENT OF DR. ALAN BLINDER, PROFESSOR OF ECONOMICS AND 
              DIRECTOR OF THE CENTER FOR ECONOMIC 
 POLICY STUDIES, PRINCETON UNIVERSITY; FORMER VICE CHAIRMAN OF 
                      THE FEDERAL RESERVE

    Dr. Blinder. Thank you, Mr. Chairman. I'd like to devote my 
time to two big problems that you mentioned in your opening 
statement that haven't been mentioned too much by the two 
distinguished witnesses that preceded me, although both 
mentioned them.
    One is having to do with income inequality and one having 
to do with globalization. I'm not going to mention the word 
``deficit'' in my 7 minutes, because I anticipated it would be 
pretty well covered by the distinguished former Secretaries of 
the Treasury that preceded me, but suffice it to say that I 
align myself with their remarks; that's it.
    The first problem, rising income inequality, has been with 
us so long now that I feel that this country is becoming inured 
to it, as if it's part of the normal patterns of life.
    Statistical measures of poverty and inequality can be and 
have been disputed. You already heard some of that this morning 
from Mr. Saxton and from Mr. Bennett, and you'll hear some 
more, I believe, from the next witness.
    That notwithstanding, the basic story is very clear, which 
is that inequality in the United States was mostly falling for 
the 30 or 35 years or so from the end of the Second World War, 
until the late 1970s, and has been mostly rising since then.
    The main factor behind this story has not been vast capital 
gains accruing to a tiny minority, nor a massive shift of 
income from labor to capital, although both of those have 
played roles at particular intervals, including right now.
    But rather, the basic story is that earnings from work have 
grown vastly more unequal over these three decades or so. There 
are many ways to measure that change, but here's one that I 
find both dramatic and very easy to understand:
    According to IRS data on wages and salaries, in 1979--so 
that's when this process started--the average taxpayer in the 
upper one-tenth of 1 percent of the income distribution, way at 
the top, earned about as much as 44 average taxpayers in the 
lower half--44.
    By 2001, that ratio had risen to about 160, and we're 
pretty sure, from other fragmentary data, it's gotten worse, 
not better since then.
    Now, let me be clear. As you yourself said, Mr. Chairman, 
at the beginning, the main culprit in this story was not the 
government, but the marketplace.
    While there are a number of competing explanations, some of 
which have been alluded to already, the fact is that starting 
in the late 1970s, the market turned ferociously against the 
less skilled.
    Now, you could ask yourself, how should the government, in 
the abstract, how should a government react to such a 
development? Well, one clearly wrong approach would have been 
to try to stop the market forces that were generating the 
rising inequalities.
    Such an effort would have produced undesirable side effects 
and probably would have failed anyway. A much more reasonable 
approach would have been--would have included using the tax and 
transfer system to cushion the blow, raising the minimum wage, 
devoting more resources to compensatory education, making 
health insurance, universal, and so on and so forth.
    These, by the way, are still useful ideas, because this is 
not a problem of the past; this is a problem of the present.
    Now, a social Darwinist would have looked at this 
phenomenon and rejected palliatives like that and said, let the 
market rule and the chips fall where they may.
    Now, you might think that that sounds heartless, but the 
fact of the matter is, for the most part, over these 30 to 35 
years, the U.S. Government followed a much harsher policy than 
that.
    As the market forces turned ferociously against the middle 
class and the poor, the government pile on, by enacting tax 
cuts for the rich, while permitting large holes to develop in 
the social safety net.
    We're about to have the Superbowl. In football, we call 
that unnecessary roughness and we penalize it 15 yards. It 
should have been penalized, in fact, in national economic 
policy, as well. It's a policy direction that was misguided, 
always, I believe, and needs to be changed right now.
    The second issue I want to talk about is one whose present 
importance, ironically, has been greatly exaggerated, but whose 
future importance appears to be underappreciated, and that's 
the off-shoring of service jobs from the United States and 
other wealthy countries. But I'm going to concentrate on the 
United States.
    Now unfortunately, no comprehensive numbers on the size of 
this phenomenon are available. It's not in the government's 
statistical gathering system, but from fragmentary evidence 
from a number of sources, it appears certain that fewer than a 
million U.S. service jobs have been off-shored to date.
    Now, when I say ``a million,'' that sounds like a lot, but 
in a Nation of over 140 million jobs, it's a drop in the 
bucket, not even 1 month's normal turnover of the U.S. 
workforce.
    However--and this is the point, I believe that what we've 
seen so far is just the tip of what will be a very big iceberg, 
once it's revealed, and here's why:
    Only a minority of American workers, mainly manufacturing 
workers, have historically faced job competition from abroad. 
Now, while they haven't liked it over the years, they've grown 
to understand that foreign competition is one of the hazards of 
industrial life, like bankruptcies and business cycles. It 
happens.
    But most American workers have never, never had to worry 
about foreign competition. Until recently, neither low-skilled 
work like call centers, or high-skilled work like computer 
programming, could easily be move offshore.
    Now, both of them can be, and, of course, are being done. 
And the share of American jobs, that is, potentially--and I 
want to underscore the word, ``potentially,'' because it's 
mostly a story of the rest of the iceberg that we haven't seen 
yet--potentially vulnerable to off-shoring, is certain to rise 
over time as the technology improves and as countries like 
India and China modernize and prosper and move up the skill 
ladder.
    These are inevitabilities; we know they're going to happen. 
As this occurs, tens of millions of additional American workers 
who have never experienced such competition from abroad before 
will start to experience this additional element of job 
insecurity on top of the job insecurities they have now, which 
you've already--you and others have mentioned, and the 
concomitant downward pressure on wages. This kind of 
competition does have an effect on wages.
    Problems that have been reserved for manufacturing workers 
up till now--and I want to remind the Committee that 
manufacturing workers these days constitute about 10 percent of 
the U.S. workforce. Service workers, depending on how you 
define it, are 60 to 70 percent of the U.S. workforce.
    Now, many people have concluded, falsely, I believe, that 
off-shoring is a particularly acute problem for the less well 
educated workers, precisely the people that have been left 
behind over the last 25 years.
    I'm not so sure that that is right. Indeed, I suspect it's 
wrong. As I see it, the key labor market divide in the 
information age, going forward, will not be between the high-
skilled and the low-skilled, which has been the right way to 
look at the problem for the last 25 years, but rather, between 
those who provide services that can be delivered electronically 
with little loss of quality, and those who provide services 
that cannot be so delivered.
    And that cuts across the skill spectrum, so think about a 
few examples. It seems to me most unlikely that the services of 
either waiters or brain surgeons will ever be delivered over 
the Internet. On the other hand, we know that both typing 
services, a low-end skill, and security analysis, a high-end 
skill, are already being delivered electronically from India at 
very high quality.
    These disparate examples illustrate two important points: 
First, the dividing line between jobs that are deliverable 
electronically and those that are not does not correspond to 
the traditional distinctions between high-end work and low-end 
work that we've become so accustomed to thinking about.
    Frankly, I don't have any idea whether the future off-
shoring is going to make the distribution of wages more unequal 
or less unequal.
    Second, the fraction of U.S. jobs that can be moved 
offshore is certain to rise as the technology improves, and it 
only improves; it never deteriorates.
    In some ongoing research that I'm doing right now, I've 
estimated that something between 22 and 29 percent of all 
current U.S. jobs might potentially be off-shore-able. That's a 
very big number. And I want to emphasize ``potentially.'' It's 
not all going to happen, of course.
    Now, finally, what can or should the government do about 
all this? I don't have a laundry list of concrete proposals to 
suggest to you, but I think the appropriate governmental 
responses fall into two generic categories which Congress 
should be thinking about:
    First, we need to repair and extend the social safety net 
for displaced workers. That includes unemployment insurance, 
trade adjustment assistance, job retraining, the minimum wage, 
EITC, universal health insurance, pension portability, all of 
those things--maybe not the pensions, maybe--all of those 
things have been mentioned up to now, plus other newer ideas 
like wage loss insurance.
    If we fail to do these things, or, perish the thought, turn 
back to social Darwinism, or worse, the piling on, then a large 
fraction of the U.S. population is going to experience a great 
deal of anxiety and economic distress.
    These people, by the way, will constitute a much larger, 
more vocal and more politically engaged group than the poor and 
the uneducated. You will hear about them in this building.
    Second, we must take steps to ensure that our workers and 
our businesses supply and demand the types of skills and jobs 
that will remain in America, rather than the ones that will 
move offshore.
    So, among other things, that may require substantial 
changes in our educational system. After all, the 5-year-old 
that comes into the kindergarten system now, 17 years from now, 
comes out with a college degree to a quite different world.
    And it will certainly entail a variety of steps to ensure 
that the United States remains the home of innovation and 
invention; that we get there first.
    Now, notice that I didn't mention a third possible category 
of governmental response, which is trying to impede 
globalization, in general, or off-shoring, in particular.
    The U.S. Government, powerful as it is, cannot hold back 
the tides of history, and it shouldn't try. Mr. Chairman, you 
may be and I am old enough to remember a 1960s musical comedy 
called ``Stop the World, I Want to Get Off.'' I understand the 
sentiment very well. You hear a lot of it these days.
    But the truth is that we can't stop the world, and we 
certainly can't get off. Instead, we Americans need to prepare 
ourselves for the future, whether we like it or not. Thank you 
for the opportunity to testify here today.
    [The prepared statement of Dr. Blinder appears in the 
Submissions for the Record on page 56.]
    Chairman Schumer. Thank you very much, Dr. Blinder, and 
now, Dr. Vedder.

  STATEMENT OF DR. RICHARD VEDDER, DISTINGUISHED PROFESSOR OF 
    ECONOMICS, OHIO UNIVERSITY; VISITING SCHOLAR, AMERICAN 
   ENTERPRISE INSTITUTE; Co-AUTHOR OF THE WAL-MART REVOLUTION

    Dr. Vedder. Thank you, Mr. Chairman. By the way, as an 
economic historian, I would note that, if memory is correct, 
this Committee is now beginning its 61st year. It has just 
completed 60 years in existence, having come into service with 
the Employment Act of 1946. You've done good deeds over the 
last 60 years, and I hope it continues, as I'm sure it will in 
the future.
    Chairman Schumer. It was intended as a counterbalance to 
the Council of Economic Advisers when it was passed. They were 
passed in the same legislation.
    Dr. Vedder. Yes, and as a former employee of the Committee, 
I appreciate that point.
    I anticipated, since two of my predecessors are tenured 
professors, that they would ignore the 10-minute limit, and 
speak for 15, so I will omit part of my prepared statement, but 
I would like the whole thing entered into the record.
    Chairman Schumer. Without objection.
    Dr. Vedder. My distinguished colleagues have painted a 
somewhat pessimistic and perhaps mildly alarming picture of the 
American economy. We learn that many Americans have not shared 
in our Nation's rising prosperity.
    The income and wage gap between the rich and the poor is 
growing. We are told that we're becoming a more economically 
divided and bankrupt Nation.
    My message is somewhat more optimistic and skeptical of the 
analysis that suggests vast portions of the American populous 
are languishing economically.
    Let me just briefly touch on three points: First, the 
conventional measures that are typically cited to denote 
greater inequality are fundamentally flawed and grossly 
overstated, as Senator Bennett pointed out in his earlier 
analysis.
    And, second, even if you accept the proposition that 
America has insufficient equality of economic condition, 
history tells us that public policy efforts to deal with the 
problem often are relatively ineffective.
    Third, some policies that conceivably might lower 
inequality, as conventionally measured, would, if adopted, have 
serious adverse consequences to the economy as a whole, and on 
this point, I entirely agree with all of the panelists with 
respect to most of their comments with respect to 
globalization, outsourcing, and the need not to try to impede 
market forces.
    We might disagree on some other aspects of that, but there 
is an inevitability to globalization. Markets need to be 
encouraged, and public policy should not try to stop it.
    But first, turning to my first major point, looking at the 
conventional statistics on income distribution, three factors 
make them overstate inequality: First, and least important is 
that statistics traditionally are based on pre-tax income, and 
exclude a variety of in-kind, non-cash payments that primarily 
benefit lower-income persons--Medicaid benefits, food stamps, 
housing subsidies, and so forth.
    Any analysis or comparison of income levels or of income 
inequality today, with, say, 1960, using published income data, 
will tend to overstate the rise in inequality because of the 
growth of the social safety net.
    A second factor that we should be truly interested in is 
the economic well being of Americans which is best measured by 
consumption, not by income.
    Dollar-for-dollar, people derive more joy from what they 
spend than from what they earn. As many elementary economics 
textbooks point out in the first chapter, the ultimate purpose 
of economic activity is consumption.
    And we also know that in any given year, consumer spending 
is far more equally distributed than income. If you compare the 
income distribution statistics derived from the Current 
Population Survey with the BLS's Consumer Expenditure Survey, 
you get revealing results.
    For example, the poorest one-fifth earned only slightly 
over 7 percent as much income as the richest one-fifth in the 
year 2002, but they consumed more than 24 percent as much. 
Roughly speaking, conventional measures show that consumption 
inequality is at least one-third less than for income 
inequality.
    The third point relating to the overstatement of 
inequality, relates to the remarkable income mobility of the 
American people. For example, at the request of this Committee, 
the Treasury Department in the 1990s, provided data suggesting 
that the overwhelming majority of persons in the bottom 
quintile of the income distribution were in another quintile a 
decade later, and a large percent even moved up and down from 
one year to the next.
    Researchers at the Urban Institute and other places have 
reached similar conclusions.
    Now, while we're talking about measurement problems, they 
are particularly prevalent in our discussion of changes in 
earnings over time which have been alluded to in previous 
testimony.
    Go to page 338 of the latest Economic Report of the 
President--a new one's coming out shortly--but go to the last 
Economic Report and go to page 338. We learn that average 
weekly earnings of workers in private, non-agricultural 
industries in 2005, were over 8 percent less than they were in 
1964, the year Lyndon Johnson announced his Great Society 
initiative.
    This isn't a 5-year problem; it's a 40-year problem, if you 
believe page 338. But go to page 340--turn the page--and look 
at real compensation per hour in the non-farm business sector 
in the same period. We learn it has gone up 75 percent.
    Page 338 is consistent with a Marxian, even, or a 
Malthusian interpretation of our economic history, a tendency 
for wages to fall to subsistence, or mass exploitation of the 
working proletariat by exploitive capitalists.
    Page 340 is consistent with the view that with economic 
growth, the earnings of workers have risen sharply, and it's 
also consistent with national income accounting data that shows 
real per capita consumption spending has increased about 2 
percent a year.
    Even the data on page 340 suffers from deficiencies, which 
gets to some other things that we mentioned earlier. We learned 
that productivity in the non-farm business sector in 2005 was 
2.3 times as great as it was in 1964. Compensation was only 1.8 
times as great, a pretty huge difference inconsistent with 
neoclassical economic theory and suggesting that owners of 
capital are indeed deriving extraordinary profits as a result 
of paying workers less than what they contribute to output at 
the margin.
    This should have resulted in a significant decline in 
compensation of workers as a percentage of the national income, 
but going to page 314 and 315 of the same book, we see a 
different picture. Compensation of employees actually rose in 
this time period. The share of national income accounted for by 
corporate profits actually fell, albeit very slightly, in the 
same time period.
    I'm making two points here. First, the interpretation of 
economic data can be exceedingly misleading. Second, the 
analysis of broader measures of economic performance suggest 
that workers as a group have shared in our national prosperity 
of the past several generations. You don't need a Ph.D. in 
economics to observe that never has a society had a middle 
class more used to what once were considered goods and services 
available only to the uber-rich. Middle income people today 
live in larger homes, buy more gadgets like iPODs and cell 
phones, live longer, are more if not better educated and take 
nicer vacations than either their parents did or do their 
counterparts in any other major nation in the world.
    I just returned 2 days ago from a trip to the Caribbean on 
a cruise traveling less with business executives or even elite 
Ivy League professors than with equipment salesmen, butchers 
and teachers, ordinary folk. That just simply didn't happen 30 
years ago.
    My second major point relates to public policy dealing with 
economic inequality. Time certainly doesn't permit a detailed 
exegesis of past efforts. But a reminder of some historical 
experiences is sobering in this regard. Attempts, for example, 
to make the tax system more progressive have often had 
unintended effects. For example, the sharp reductions in 
marginal tax rates in the 1920s, the 1960s and 1980s, seen by 
some as favoring the rich, actually led to sharp increases in 
the tax burden of the rich relative to the poor.
    I worked for this Committee in the 97th Congress, 1981-82, 
in a political environment exactly like today: Divided 
government, Republicans controlling the executive while 
Congress was more under Democratic control, yet the two 
branches seemed to work together to fashion a more growth-
oriented tax policy, with lower marginal tax rates that 
contributed mightily to the boon that followed. I hope the 
110th Congress is capable of similar accomplishments.
    Taxes have behavioral consequences. The CBO greatly 
underestimated revenues that would be realized from reducing 
the top capital gains rate to 15 percent, for example, as 
falling rates unlocked billions in unrealized gains that have 
helped fund our rapidly expanding government. Sharp reductions 
in the number of estates subject to death taxation as a result 
of reform in those laws has not led to a sharp decline in 
revenues from that source, as some may have expected.
    I think it would be a tragedy to reverse the positive 
effects of the tax reductions of the past few years that, like 
the Kennedy tax reductions of the sixties, has had a positive 
impact on economic activity.
    On the spending side, history again shows disappointing 
results of many initiatives to help the poor and middle 
classes. The January 20th issue of The Economist shows work 
training programs of governments have internationally been 
largely failures. Spending initiatives in the area of 
education, medical care and public assistance usually have 
brought about disappointing results. Despite spending far more 
in real terms per student than a generation ago. American 
students do not appear to be learning much more and the 
education for lower income students is particularly deficient.
    A tripling of Federal aid to college students since 1994 
has been accompanied by a decline, not an increase in the 
proportion of students from the lowest quartile of the income 
distribution attending and graduating from our finest 
universities. Picking up on Secretary Summers' comment, our 
universities are increasingly becoming taxpayer-subsidized 
country clubs for the children of the affluent.
    While Medicaid has certainly brought about increases in 
medical care for the poor, it has not done so at an enormous 
cost to society and the cost pressures of a highly inefficient 
system are leading companies to cut back on health care 
benefits for working middle class Americans. We can go on and 
on and I will not do so because of time limitations.
    I agree with everything that's been said about 
protectionism or the implication of the earlier testimony that 
protectionist policies would be undesirable for the economy. 
Almost all economists would agree with that. And I would hope 
that what I might call the intelligent wing of the Democratic 
party prevails in intraparty debates and that Secretaries Rubin 
and Summers and Professor Blinder win that battle with the 
money bags in the labor unions.
    Now at the macro level, I believe the single biggest factor 
in the slowdown in growth rates in this decade relative to the 
eighties and Nineties has been the sharp increase in government 
expenditures. I think we agree on that. From fiscal 2001 to 
fiscal 2006, total Federal outlays rose 42 percent, $790 
billion. Tax revenues went up 20 percent, about the same 
percent as GDP, so the problem has not been that our tax burden 
has been falling, the problem has been that our expenditures 
have risen and we need to bring that under control.
    I thank you for listening to me and I'll be glad to engage 
in the discussion that inevitably will follow.
    [The prepared statement of Dr. Vedder appears in the 
Submissions for the Record on page 58.]
    Chairman Schumer. Thank you. I want to thank all four of 
our witnesses for really stimulating testimony in reference to 
what Mr. Rubin, Dr. Summers and Dr. Blinder have talked about. 
You all paint a far more sobering picture than the President's 
view. The President is speaking on Wall Street today. We don't 
know what he's going to say, but based on what he said in 
Peoria yesterday, I think it's a very fine and pointed 
contrast.
    I'd also thank Dr. Vedder for his enthusiasm and it's sort 
of interesting here, at least on this little panel. Democrats 
are more emphasizing issues like productivity and production 
and Republicans are emphasizing consumption. There's a little 
bit of switch here, which is sort of interesting.
    Dr. Vedder. The hearing talked about income and equality as 
a focus. I love to talk about productivity, too.
    Chairman Schumer. Good. We'll have that at another hearing.
    We're going to proceed to the questions where each Member 
will get 5 minutes.
    My first question is to all of the panelists. You've given 
very interesting--particularly Secretary Summers and Rubin and 
Dr. Blinder, very interesting analyses of the economy which, as 
I say, are sobering and a contrast, I think, to what the 
President is saying. I'd also note that when we look at income 
and equality I think these days to do it in just quintiles 
probably doesn't tell the whole story. If you look at the top 1 
percent or even the top 0.1 percent, you'd get a much more 
pointed picture than a picture in quintiles.
    But my two questions are these. Again, if each of you could 
elaborate if you believe it to be true, how a slowdown in 
upward mobility for the middle class takes its toll on economic 
growth as a whole. In other words, just looking at the macro 
picture is not enough.
    And the second, if you could have one wish for a 
significant change in government policy to reverse that, what 
would you point to? I'll just give you something to play off 
of.
    When I talk about globalization, one of the people who 
couldn't come today--we invited him--Chairman Greenspan 
basically said that if we were to significantly improve our 
educational system K through 12, at college, that would be the 
greatest, the best thing we could do to ensure growth and 
particularly ensure less income inequality among the classes.
    Secretary Rubin.
    Secretary Rubin.  Mr. Chairman, in brief, on the first 
question, I think the Senator said it before. Unless the 
American people believe that trade liberalization and 
multinational economics generally are going to benefit them, 
support for those policies--which I think are central to a 
strong economy--will continue to diminish. I think also having 
broad based income growth better equips the average American to 
access education and so much else that's critical to 
productivity.
    On your second question, I'm going to take one wish with a 
semicolon. President Clinton said in 1993 there was a 
tremendous amount he wanted to do but that the threshold issue 
was to get our country back on a sound fiscal path. Chairman 
Bernanke said I think 2 or 3 weeks ago that he thought the 
long-term fiscal prospects for the United States were a real 
threat to our economic well being. There's much else we need to 
do in the areas of education, infrastructure and everything 
else. I do think the threshold question remains the same then 
as it did for President Clinton, so that would be my answer. 
But I do think we need to combine that with all these areas of 
public investment.
    Let me just add on inequality, if I may say so, Chairman 
Greenspan also said some time ago, Mr. Chairman, that growing 
inequality was a deep threat to what he called democratic 
capitalism and I think that is correct.
    Chairman Schumer. Secretary Summers.
    Secretary Summers. You know, in a long historical 
perspective, Mr. Chairman, in the first decade of the last 
century when industrialization was having profound effects, we 
instituted a whole set of public policies: Antitrust laws, the 
first wave of regulation, that they in a very important sense 
saved capitalism and support for the market economy from 
itself. Something similar happened when the market system 
stopped working in the 1930s and, in historical terms, what 
Franklin Roosevelt did was save the market system by enabling 
it to work for the vast majority of citizens.
    And ultimately the same thing is at stake in the response 
to the middle class concerns right now. So the stakes in this 
era of globalization are very large. I would agree completely 
with Secretary Rubin on the urgency of restoring our finances 
to a sustainable basis, but I would emphasize that that is in a 
sense defensive. If we don't do it, we are taking an enormous 
and imprudent risk. But we're not going to drive the economy 
forward merely by putting our finances on a much sounder 
footing.
    And I would emphasize the issue of addressing our health 
care system as absolutely central to questions of security, 
questions of competitiveness, and questions of everybody 
feeling like they're part of the same country.
    Chairman Schumer. Dr. Blinder.
    Dr. Blinder. I guess I think that there's probably more 
fear of falling mobility than actual falling mobility. 
Secretary Rubin made the point that it gives people a reason 
and a motive to try to resist change in general, from whatever 
source. And, in particular, as an example of that, it gives 
people a reason to resist globalization--which, as I said 
before, is an inevitable force and will raise productivity in 
the United States and elsewhere.
    To illustrate what I mean, just imagine if the United 
States had tried to hunker down in 1958--when we were 
undisputed kings of the hill in everything--and say ``we're 
going to try to defend this economy, this industrial 
structure'' and so on. That's a loser's strategy, from which we 
have to stay away. We're vastly different now than we were in 
1958; and 50 years from now we're going to be vastly different 
still.
    If I had a wish list, I guess I would put at the top some 
of the things I mentioned earlier. It starts with the theme 
that we have to do a better job of cushioning the people who 
fall. I would say, stronger than that, we want to turn the 
cushion or the safety net, as it's called, into a trampoline 
that bounces people back into productive employment. These are 
not easy things to do. But I don't think we've tried that hard, 
and we just need to try a lot harder.
    Chairman Schumer. Dr. Vedder.
    Dr. Vedder. I actually agree largely with Chairman 
Greenspan with respect to education, but I think the important 
thing to keep in mind, the critical role that education plays 
in income mobility as well as in economic growth.
    Incidentally, I also would in large part agree with 
Secretary Summers on the R&D comments that he made. A colleague 
of Professor Summers, however, Carolyn Hoxby, once estimated in 
recent years that the productivity of K through 12 education in 
the United States has fallen by up to 60 to 65 percent in the 
last 30 to 40 years and we have productivity declines occurring 
in the education sector. I think it's also occurring in higher 
education. I've written a lot about that and I've served on the 
Spellings Commission recently on that.
    So I think we have some inefficiencies, a need to 
restructure our educational system to make it able to be more 
competitive, to make it less of a Soviet style system and more 
of a competitive, lean and mean system. In doing that, we may 
need to devote more resources to it. That's a possibility. But 
I think an essential prerequisite is making the system work.
    Chairman Schumer. Thank you.
    I'd just like to go back and just ask Secretary Rubin to 
elaborate on one thing and Dr. Summers on a second, then my 
time will expire.
    Could you draw out the link a little bit between fiscal 
responsibility and economic growth? I think many people in the 
country--some reject it; I guess the President sort of rejects 
it or gives it lip service--but many others think it's a moral 
thing to do, but it doesn't really get to growth and some other 
things.
    To Dr. Summers, you mentioned health care first and 
foremost. I have mentioned education because I believe that 
without the growth in education our incomes, our international 
share of income but also our relative growth in income will 
decline and we wouldn't have the dollars to do what we need in 
health care or other things. Could you answer that?
    Secretary Rubin.  Mr. Chairman, in brief, to the extent 
that the Federal Government through deficits absorbs our 
savings, we have less savings available for investment and 
we've had these enormous inflows from abroad, largely to 
support the dollar and in order to maintain exports mainly from 
petrodollar countries for safe haven. It's almost inconceivable 
that that's going to continue indefinitely in the face of these 
imbalances.
    I think Dr. Summers said that this--somebody said, I think 
it was Dr. Summers--this masked our real problems. So one 
problem is crowding out private investment. I'm deeply involved 
in markets every day of my life and I'm deeply troubled at the 
potential that at some point--and it may be years out, it could 
be near term, there's no way of predicting which--that the 
global markets will develop concerns about the combination of 
our low savings rate, our high current account deficit, our 
fiscal prospects, the large increase in entitlements coming in, 
and, as a consequence it will have serious disruptions with 
respect to our markets which will mean much higher interest 
rates and all that flows from that, including serious economic 
slowdowns. As I say, that could be way off in time. It has been 
masked, as I think Dr. Summers said, by these vast inflows. But 
that won't go on indefinitely.
    What we discovered in 1993 but did not anticipate, but I 
think it was very important, was that once we reestablished 
sound fiscal conditions that greatly increased business and 
consumer confidence generally. What had happened was that our 
deficits had become kind of a symbol for more general concern 
about our ability to manage economic affairs in this country.
    And finally two other items. President Clinton made this 
observation: If we're going to have serious public investment, 
the American people have to have confidence in government. That 
in turns requires you to have sound fiscal conditions.
    Finally we had the tragedy of 9/11. We also had a 
recession. The economic resilience, the budgetary resilience to 
deal with that came because we had substantial surpluses. Had 
we had deficits, we'd then have to pile additional deficits on 
top of that. It might have been deeply harmful to our economy.
    Secretary Summers. I would not want to contrast health and 
education in any way that would disparage. What I would agree 
with you is the overwhelming importance of improving our 
educational system. There's much, as I did mention in my 
testimony, that can be done at every level.
    I would stress that in the education area the investment of 
resources is essential, but the improvement of performance is 
also absolutely essential to any success and that there are 
probably some limits on how much of that can be done at the 
Federal level, which is why I emphasized the health care 
issue--which it seems to me is increasingly important to the 
perception of security or middle class families, is essential 
to the competitiveness of very large numbers of American 
businesses and to the overall sense that this society is 
working well.
    Chairman Schumer. I want to thank all of our witnesses. You 
have provided a real contrast to what we are hearing from the 
White House and I hope we certainly on this Committee are going 
to continue to make those points, then take it from there and 
try to figure out the kinds of policies that you have 
discussed, put them into practical terms so we can address our 
future with confidence. Thank you, all four of you, for your 
comments.
    Senator Klobuchar. Thank you.
    Dr. Blinder, you talked about, I think it was in your 
words, ``unnecessary roughness on people and some of the 
government policies that have made it worse.'' This is apart 
from your testimony about the need to fix the safety net. But 
when you talk about these tax policies and how they made it 
worse, could you elaborate on that?
    Dr. Blinder. Glad to. I think you yourself were talking 
about this in your opening statement. We've cut taxes several 
times in this decade. If you leave aside incentive effects--
which is something that is very relevant and we should argue 
about, because it is important--and look at the distributional 
aspects of these tax cuts, it's hard to imagine a less 
progressive, a more regressive set of tax cuts. If you had 
solved the hypothetical problem of giving away this much 
revenue in the most regressive way we can, that's pretty close 
to what we got.
    The minimum wage--which is in the Congress right now--has 
been allowed to dwindle in real terms to its lowest in 50 
years. We haven't raised the Earned Income Tax Credit since we 
did it at the beginning of the Clinton Administration in 1993. 
That's the biggest--I don't want to quite call it an 
antipoverty program, because it's antipoverty and near poverty 
because lots of people collect EITC that aren't below the 
poverty line. But it's probably the best redistributive tool 
that we have in the arsenal. These are the kinds of things that 
I was talking about.
    Then if you look on the other side of the ledger, what did 
we do to try to cushion the blow for the people who were taking 
the blow? The answer is essentially nothing, except for a few 
things that happened in the 1990s like the EITC liberalization 
and so on. We had a little bit of greater trade adjustment 
assistance put into one of the tax bills. Was that in the tax 
bill of 2003? I'm forgetting. People from the staff behind you 
will know the answer to that. And there's been almost no take-
up, there's been almost no use of enhanced trade adjustment 
assistance. That's another example.
    Senator Klobuchar. Thank you.
    Then the other thing, I was reading this great book last 
night, I don't know if you've seen it----
    [Laughter.]
    Senator Klobuchar [continuing]. Called ``Positively 
American'' by our Chairman----
    Chairman Schumer. The Senator from Minnesota has half an 
hour additional.
    [Laughter.]
    Secretary Rubin.  Senator, I plan to wait until it becomes 
a television series.
    Senator Klobuchar. In addition to learning a lot about what 
the Chairman likes to eat, like grilled octopus and all these 
oatmeal cookies, he makes a point of all the things we can do 
to help the middle class, including investment in education, 
which you, Dr. Summers, had mentioned.
    What I'm trying to reconcile here, I guess, is how we do 
this and we still manage to bring down the deficit--and I threw 
out some ideas that I had--and start working on the debt. 
Because I think in the end that's going to eat away at the 
middle class that we're trying to help.
    What exact policy prescriptions do you have where we can 
start doing things with this Congress where we're actually 
reducing the debt, bringing down this deficit and at the same 
time helping the people that the Chairman talks about?
    Secretary Summers. I think in your statement, Senator, you 
pointed to a number of areas where I believe that tax changes 
would both raise revenue and, in all likelihood, improve the 
function of the tax system as a contributor to economic health. 
One is the tax gap where the volume of taxes that are owed, but 
not paid, is large and growing.
    It defies belief that in a world where the CitiGroup 
organization is able to track people who spend money on their 
Visa cards at 30 million locations around the world, get them a 
statement within 30 days and collect what they owe, that we 
cannot collect as a country more than 85 percent of the taxes 
that are owed, and the gaps are far and away the largest in 
categories related to profits and various kinds of capital 
income that go disproportionately to people who are very well 
off.
    If you look at the location of U.S. corporate foreign 
profits, where are the foreign profits as reported on tax 
returns greatest for U.S. companies? You might expect them to 
be in places like Japan and Germany and England that have the 
largest economies where they would be doing business. They are, 
in fact, much more in places like Ireland and various Caribbean 
locales that provide extraordinarily generous tax treatment. 
And there is room for improvement in that area as well.
    One of the things that we launched--initially raised during 
Secretary Rubin's time as treasury secretary that I pushed very 
hard during my time was the issue of corporate tax shelters 
where it's very difficult to know, but there appear to be very 
significant losses. And I might say that this is an area where 
I think the technical economic community has some work to do, 
because our efforts to address these problems are, I think, 
held back by the fact that they are often scored in extremely 
conservative ways that reflects a legitimate concern that 
they've sometimes been used as a somewhat phone item in various 
Congressional budget efforts. So they're scored in a very, very 
conservative way which in turn makes it harder to build the 
impetus for necessary policy changes.
    So I think there is a significant agenda of things that 
would actually make the tax code more of a level playing field, 
more efficient in the way it collected income and also raise 
revenue that could be coupled with the various initiatives that 
I think you have in mind to address key needs of middle income 
families.
    Senator Klobuchar. Thank you.
    Chairman Schumer. Senator Webb.
    Senator Webb. Thank you, Mr. Chairman.
    I want to thank all the witnesses for their testimony 
today. This is a great opportunity for us to hear from some of 
the great minds in America about how we can work to solve these 
problems, and I appreciate your holding these hearings. I look 
forward to more of them and participating.
    And, if I may say with the greatest deal of respect, Mr. 
Chairman, I think you got 10 minutes in your questioning and 
we're getting 5. In the spirit of egalitarianism.
    Chairman Schumer. Ask our Chief of Staff. I said what's 
that all about, everyone should have the same before you even 
brought it up. We don't want to have time income inequality 
here.
    [Laughter.]
    Senator Webb. First of all, Dr. Summers, I appreciate what 
you just said in your response to Senator Klobuchar. It goes a 
long way toward, I think, what a lot of us are thinking.
    Dr. Blinder, your comments about the functional breakdowns 
here in terms of globalization among skill sets, electronic 
transmission and those sorts of things, I think if you look at 
where the typical American worker is having to see the 
challenges, the squeeze they're facing come from three 
directions. That is certainly one of them.
    The other is, looking at the manufacturing base, when we 
are having such dramatically different economic systems with 
which we are competing, the iPODs and the cell phones that are 
mentioned are made in China. Even on infrastructure issues, you 
can't export a waiter's job. But the situation we have right 
now with respect to immigration is that in many cases the wage 
levels are being held down by this vast labor pool that's kind 
of under the water, infrastructure projects in such places as 
waiters and this sort of thing. That's sort of a dilemma when 
we're talking about these issues across the aisle and in other 
ways, it does often depend on whether you're focusing on the 
economy writ large or whether you're talking about the 
opportunity for personal advancement.
    I know, Dr. Summers, you mentioned access. This is such a 
key of what's going on right now, all this talk of social 
Darwinism really neglects the reality of starting points of 
access of the ability, quite frankly, of people with wealth and 
power to manipulate government policies, as well as to take 
care of their future generations. And those are the sorts of 
things that I and other people have been trying to focus on.
    I wanted to ask a specific question. I was really taken by 
an article in the Economist last summer--I don't have it in 
front of me. It was a 19-page special on the impact of 
globalization. And, as you would expect, it was very positive 
about the future of globalization.
    One thing that it did point out was that the impact on the 
American workforce is quite different than the other so-called 
first world economies and that it extended beyond the blue 
collar workforce. In fact, Dr. Blinder, as you were pointing 
out, it is now beginning to dramatically affect white collar 
America. Some of the conclusions that they had reached, 
outsourcing, the impact of outsourcing on our economy, some of 
them talked about illegal immigration. And the other, I think, 
really focused differential we were talking about was the way 
that we traditionally construct our medical programs, our 
health care programs--which all of you addressed. Their 
prediction was basically that if we don't come to some sort of 
fair conclusions on these issues, we are going to move toward 
protectionism in the political system and possibly toward 
political unrest.
    As I'm listening here about the comments about education 
being a fix, that's a very long-term fix. It's certainly a 
laudable goal, but we have to have some other things that we 
can put into the works. Health care is possibly a shorter-term 
fix, but I'm also curious as to the recommendations that the 
people on the panel would have--or even if you agree, 
particularly in the case of Dr. Vedder.
    Dr. Rubin, if you could start.
    Secretary Rubin.  Thank you, Senator. I don't think that 
any of the three Ph.Ds on the panel would agree with my being 
called ``Doctor Rubin.'' But nevertheless, I think you 
identified a very serious issue and I don't think it's a simple 
one to deal with because the reality of life is that China and 
India have very effective productivity regimes and as they 
become more and more productive--as I think Dr. Blinder said--
it's going to create serious competitive pressure with respect 
to our economy.
    I think there are productive things to do and 
counterproductive things to do. Too much of the temptation goes 
in the counterproductive direction. Having said that, I think 
health care is certainly one.
    Another area that we should pursue is trade adjustment 
assistance. It isn't just trade adjustment, but assistance for 
any sort of dislocation.
    There's a man named Bruce Katz at Brookings who has a 
project around local economic development, to approach job 
creation and new activity creation not in some national sense 
directly from Washington but, rather, around local strengths, 
building on our great university systems and building around 
the strengths of localities. I think there's a tremendous 
potential in that.
    But I think the answer to this, Senator--such as portable 
pension funds, there are a lot of specifics you can get 
together, but I think trying to interfere with markets or stop 
markets isn't going to work and I think there's an enormous 
amount we can do in a dynamic society to create greater 
opportunity here, and that's the direction in which I, at 
least, think we ought to go.
    If I could just say, by the way, Dr. Vedder, you referred 
to the struggle within the Democratic party and hoping we would 
prevail. I don't view it that way at all. I think what you've 
got is a very serious set of issues which we've all been 
raising--including the Senator right now--and within our party, 
we're all working to find sensible solutions, recognizing the 
difficulties.
    Thank you.
    Secretary Summers. A couple points that I would add. First, 
I don't think any of us on this panel have minimized the 
magnitude of the challenges that we face. At the same time, I 
would rather face our problems than the problems facing any 
other industrialized country in the world in terms of the 
tremendous productive capacity, dynamism and growth potential 
of the American economy. That's why I believe so strongly that 
it is important to make neither of the two major errors that 
are so often suggested in the political debate: One is to 
simply be passive and reliant on the market and assume that all 
will be well--that's the mistake we avoided in the first part 
of the century, that's the mistake we avoided in the 1930s, 
that's the mistake we've consistently avoided to our very great 
benefit.
    The other is to take a whole set of measures that would go 
against the grain of the market system, which I think would run 
the risk of creating the kinds of problems for ourselves that 
Europe and Japan face, which have essentially become stagnant 
societies in ways that have reduced enormously their potential 
to take on whatever challenges they define for themselves. 
That's why I think the challenge.
    And if there's one theme, it would be to take a more 
collective approach to prosperity and economic security by 
having broad systems that assure that health care is available 
for all, that whatever happens to you in the market economy, 
you don't lose your home, you don't lose your capacity to have 
an adequate retirement, that the economic success of the area 
where you live is not just a matter of the individual economic 
successes of a set of individual people there, but is a 
collective responsibility to formulate a strategy. And I think 
it is taking that kind of more collective view of prosperity 
and economic security, while at the same time insisting that 
you go with the grain rather than against the grain of the 
basic market system that has produced all this potential. 
That's, I think, the policy challenge.
    Dr. Blinder. I very much agree with that. I appreciate the 
sense of your question, Senator. Some of the hard truth of this 
matter is that, in terms of cures, the short-term plate is kind 
of bare, but not empty; I'll come back to that in 1 second. And 
the long-term plate is bountiful; but these are hard things to 
do, and they take a long time. When prescribing long-term 
remedies, it's very good if you're in a position like we on the 
panel are; you don't have to run for election, because they do 
take a long time.
    On the short-term plate, I think the right way to think is 
just where Secretary Summers finished. When we teach our 
students about the gains from international trade, most of us 
emphasize that there are winners and losers. And to make the 
case intellectually airtight, you need to compensate the losers 
for their losses. And there are losers. People lose their jobs. 
They lose their health insurance. They lose their pensions. 
They shouldn't be losing all of that stuff.
    We in the United States ought to be taking much more 
seriously the ideas that the losers should be compensated so 
that the society can reap gains from trade. Some of this can be 
done in the short run, like pension reform and maintenance of 
health insurance. There is COBRA, for example we can do more 
things like that. The long-term fixes have to do with 
education.
    You mentioned health care.
    I believe it was an historic mistake, though made for 
understandable reasons, that the United States made a long time 
ago when--just about uniquely in the world it decided--to 
attach health insurance to employment. It's now a huge burden. 
It wasn't such a burden in the good old days of the 1950s, but 
it's a big burden now. It's an anchor that is pulling down real 
wages.
    You know, when you look at total compensation--which most 
economists prefer to look at--a large and growing hunk of that 
is health insurance.
    If the worker is getting more and more compensation to pay 
for less and less health insurance, he's not really better off. 
It's an anchor on wages, to some extent, and it's an anchor 
pulling down business competitiveness. You talk about long 
term? It's going to take us a long time to get out from under 
that system.
    Dr. Vedder. Senator, I've been sort of mystified in this 
hearing. To some extent, I think we're proceeding from sort of 
an erroneous factual basis on some of these things and I think 
we're overly concerned. Now I'm not saying that everything is 
right about our economy, and I'm not a apologist for the Bush 
administration's policies, some of which I would disagree with 
as strongly as others on this panel. But it is a fact that in 
November of last year there were 8,630,000 more jobs than there 
were 5 years earlier. Maybe globalization is a problem, but it 
is a fact that in the year 2006 the unemployment rate will come 
in as the fourth lowest in the last 37 years. That is a fact.
    It is a fact that our budget deficit this year, while it is 
a deficit--I don't know if it's a fact, because we're in the 
midst of the fiscal year, but if the numbers run the way they 
have run in the early part of the fiscal year, it seems likely 
that the budget deficit this year will be less than 2 percent 
of GDP. That's a deficit and zero is better than 2 percent.
    But 2 percent relative to modern historical experience, not 
only in the United States, but certainly in Europe, Japan, 
anywhere else, is actually on the conservative side. It's 
relatively modest. True, maybe it should be zero.
    The trade deficit--we ran a trade deficit from 1607 to 
1870, nearly every year for 263 years. The Nation somehow 
muddled through. And I think with respect to income 
inequality--Census data show that in 2005 there's no 
statistically significant difference in the G&E coefficient 
using the conventional income measures than there were 5 years 
ago. We should reach some common ground on what the problem is 
before we try to solve it.
    Chairman Schumer. Thank you, Dr. Vedder.
    I just want the record to show Mr. Webb has gotten 4 more 
minutes than he asked.
    Senator Webb. I owe you for the next hearing.
    Chairman Schumer. Senator Casey.
    Senator Casey. Mr. Chairman, thank you very much. I don't 
have your book in front of me. I was going to show it if I did. 
But Senator Klobuchar is out advertising it, so I'll do it 
later.
    Chairman Schumer. You can't do it too often.
    Senator Casey. I do want to thank Senator Schumer for 
focusing the work of this Committee and especially the work 
we're doing here today in this hearing. I think on a very 
important distinction which gets lost in the translation which 
is growth and numbers can be presented and some of them are 
positive, but the different between growth and who benefits is 
the disconnect there and I think that's very important. It gets 
lost in the discussion beyond this hearing room. It's not 
happening today because we're focused on that.
    I wanted to focus on just maybe two areas to stay within my 
time limit. First of all, Secretary Rubin, again I want to 
thank the entire panel for your great work here today, your 
scholarship, and your contribution to helping us better serve 
the people we represent.
    I was struck--as a Senator from Pennsylvania having just 
gone through a long, long campaign, I was struck by much of 
what was said here this morning, some of which I missed 
earlier. But I wanted to focus in particular, Secretary Rubin, 
on your statement starting at the top of page 4 and continuing 
from page 3, if I'm reading it--and I don't want to simplify 
this too much. But I break this down as growth equals income 
growth plus increased security. That kind of juxtaposition of 
growth plus security.
    I thought it was interesting and important for the people I 
represent in Pennsylvania that you said that we must provide 
workers with--quote--``the resources to access education, 
training, rapid deployment into the economic stream'' and then 
you go on from there.
    I thought it was important that sometimes in Washington 
when we're debating these issues about programs and support for 
workers we talk about education and training or some people 
talk about them as something that we're giving. It's kind of a 
handout, so to speak. But I appreciate the fact that you 
identified them as resources for those workers to bring about 
economic growth. I'd ask for your comment on that.
    Plus, later on that page, where you talk about serious 
shortfalls in education, infrastructure, basic research, energy 
policy, and especially the last two that I'll cite here, health 
care policy and inner-city programs, as much as you and Dr. 
Summers and others have contributed to the Democratic party's 
better understanding that growth is good, that balanced budgets 
are good, and fiscal discipline is good--and I appreciate that 
because we don't focus on it enough as a party, I speak only 
for my fellow Democrats here. But I guess just a general 
comment on how those supports help our workers create better 
economic growth and, in particular, the impact of health care 
and focus on the inner city. I know that's broad, but if you 
could just elaborate on that.
    Secretary Rubin.  Let me try to make just a broad general 
statement on the inner city piece, but first I'd like to make 
another comment. As a general proposition, the point I was 
trying to make was that these are exactly what you said, 
Senator Casey, these are economic issues and by providing 
education and health care and effective energy policies and so 
much else, we're enabling our workers to be more productive and 
more competitive and that, in turns, fuels economic growth.
    I was also trying to make the point that if you have broad-
based income growth and workers are able themselves to better 
access all of this through their incomes and so forth, that was 
the point there. Both Dr. Summers and Dr. Blinder can speak 
better to health care issues than I can on the specifics.
    I would like to make one comment, if I may though, because 
I believe the inner city issues are every bit as much of an 
economic issue as they are a values issue. I don't think 
there's any question that there are tremendous productivity 
gains to be had if you can reduce the social costs to America 
by having effective programs to bring people in the inner 
cities back or into the economic mainstream and there are 
tremendous productivity gains to be had.
    When I have been in China and have met with public and 
private sector leaders and in India as well--in both, the 
political leaders, the governmental leaders will say to you 
that one of the great economic productivity challenges for them 
is to equip the poor to enter the economic mainstream. We 
should have exactly the same focus for pure hard-headed 
economic reasons, and that was the point of that.
    By the way, I might add that all three of us happen to be 
involved in something called the Hamilton Project, which has 
been developing a series of projects relating to all these 
kinds of issues.
    Senator Casey. Thank you.
    I wanted to ask one more in my limited time here. Dr. 
Summers, as you know from your work and the great work that 
President Clinton's administration did on returning us to 
fiscal stability and a path to sustain that, one of the most 
important things that I thought that Administration did was 
make a major commitment on children's health insurance. We have 
an opportunity this year, in my judgment--if the Congress fails 
to do a very good job on that reauthorization, it's not only a 
moral failing, I think it's a big economic failing.
    So I ask in light of the fact that we now have a very solid 
program on children's health insurance but we also have 8.3 
million kids with no health insurance at all, based upon your 
earlier statement about the critical impact of health care, if 
you could elaborate on them, on what's ahead of this Congress 
with regard to children's health insurance and health insurance 
generally.
    Secretary Summers. I'm not an expert on these specific 
issues regarding children's health insurance, but let me make 
three comments that may be relevant. First, it's a basic policy 
problem that we all have difficulty dealing with, which is if 
you don't fund somebody's health insurance, to some extent they 
don't get health care and that's terrible.
    But to a substantial extent, they get health care by going 
to an emergency room and getting the care and not paying for it 
and then we all pay for it in higher insurance premiums, in 
higher costs for government programs. It's a kind of stealth--
the uninsured represent a kind of stealth tax increase.
    When we address the problem of non-insurance, we're 
reducing that stealth tax increase, but we don't have good ways 
of taking full account of it and, therefore, we move forward 
with insufficient energy. If we could always recognize that a 
lot of what we're doing is when we're paying for the uninsured 
is taking a burden off businesses, off the rest of us who pay 
premiums, off the taxpayers who pay for government insurance, I 
think we would get toward better outcomes.
    Second, there are critical issues here for children for 
others that go beyond questions of simply the categories of 
insured and uninsured. I was exposed to some data not long ago 
on hypertension, which is an easily controllable condition with 
the right medical care and the right follow-up, but accounts 
for major gaps in life expectancy, and the particular studies 
that I was exposed to suggested that less than a quarter of 
those with hypertension in America were having it adequately 
and sufficiently controlled.
    That's in part a matter in part of not having health 
insurance, in part a matter of the way the health care system 
functions. And the costs down the road when it is uncontrolled, 
in terms of disability, not to mention the moral costs, are 
enormous. In part, these are questions of the way in which care 
is organized to be provided.
    The third point that I would make is that I believe--and 
it's not something that can be proven--that the degree of 
anxiety surrounding questions of health care is crucial to our 
capacity as a society to accept a whole set of dynamic changes 
that are necessary if we're to move our economy forward. So I 
could not imagine morally, in terms of its consequences for the 
premiums and the burdens all people in this society bear in 
terms of the ultimate impact on the ability to be educated and 
to be a productive member of our society, or in terms of the 
impact on our sense of economic security as we take on the 
challenges of globalization that it would be wise for the 
Congress to do anything other than to strongly support the 
reauthorization and expansion of the benefits in the child 
health care area.
    Senator Casey. Thank you. I know we're over time, but do 
any of the other panel members want to follow up on that?
    Dr. Blinder. If I could just say very briefly, a lot of 
Americans, though not all, believe that universal health care 
is an imperative--eventually. That we have to get there, and 
that it's a disgrace that we have so many Americans without 
health insurance. It's also economically inefficient and all of 
that.
    But I think it starts with the view that it's a national 
disgrace that we have this many people uninsured. Politically, 
over the years, Congress has picked off the low-hanging fruit. 
We had Medicare; we've got a national consensus that senior 
citizens should not be without health care. Then we got 
Medicaid so poor people would not be out on the streets without 
health care. And then, in the nineties, we got coverage for 
children--but not all of them, as you pointed out.
    I think, in some sense, the next logical step along the 
road is children. I started by saying this yellow brick road is 
leading eventually to universal health care. But we're doing it 
categorically. I think it makes all the sense in the world to 
not only, of course, continue to reauthorize the program we 
have, but to extend it to more children.
    Senator Casey. Good point. Thank you.
    Chairman Schumer. Thank you.
    I have a bunch of things. First, to my colleagues who are 
here, but particularly our three freshmen who are on the 
Committee, I think everyone can see why the rest of us have so 
much faith in their coming and really injecting a lot of 
enthusiasm, a lot of knowledge, different perspective as we 
move forward.
    Finally, I want to thank our witnesses. I think this was a 
great panel. I want to thank you, Dr. Vetter, for a forceful 
and lively opposition to the three big artillery here. But I 
want to thank our three witnesses. I think we accomplished--
began to accomplish two things today. There is--as I mentioned, 
the President's giving his speech and he basically is saying 
everything is great and you're focused on some of the anxieties 
that average folks have in terms of income and service and 
everything else, I think shows, the contrast and shows that all 
is not well.
    But second, we're attempting here to sort of lay out or 
begin to lay out a new vision, where do we go? I think you all 
put it so well, each in a different way, that we're at a real 
crossroads economically and the new vision we're trying to 
grapple with here, if I had to describe it and maybe describe 
what you're saying and I agree with it--accepts economic forces 
but acknowledges and deals with the changes that have occurred 
within those forces and it's the latter that the Administration 
hasn't done.
    Now we have a real problem if we run away from economic 
forces. You put it one way, stop the world, I want to get off, 
Dr. Blinder. I put it--I wrote this in my book--you can't have 
water flow uphill. But you can have water down one side of the 
mountain rather than the other side of the mountain and our job 
is to make sure that we acknowledge and accept those economic 
forces, but also are able to use them and direct them for the 
greatest benefit of the greatest number of our people. And you 
can't ignore the changes that have occurred economically, you 
just can't. That's why we're at such a crossroads here. It's a 
different economy than it was 20 years ago or even 10 years ago 
when all of you served in the government in the last decade of 
the 20th century.
    So our challenge here, as we try to develop a new vision, 
is to understand and accept those forces, but also acknowledge 
that changes have occurred and figure out the best way to deal 
with those changes for the benefit of our people, and you've 
given us a terrific first start.
    I want to assure all my colleagues, present and not, that 
this Committee is going to pursue that vision and that goal, I 
think, hopefully not in a partisan way, in a bipartisan way as 
best we can. But the future of our country really depends on 
it.
    We're in interesting times, as the Chinese say. Thank you.
    Mr. Secretary, please.
    Secretary Rubin.  Could I just make one brief comment, Mr. 
Chairman? You made a comment before, and I'd like to suggest a 
slightly different framework. The panel was presenting an 
overly sober view of the contrast to the more optimistic view 
of the Administration. I actually feel--I have a slightly 
different way of thinking about that. I think all of us 
expressed a very robust view of the potential for the American 
economy and believe the American economy can do very well. I 
think what we are saying, though, is in order to do that, we've 
got to recognize the challenges that relate to the economy and 
also relate to making sure, as you just said, that the great 
preponderance of our people benefit from our economy, and we 
need to meet our challenges.
    Chairman Schumer. I think you put it better than I did. I 
think the challenges are sobering. But the economy itself, I 
like what Dr. Summers said, if you had to pick a developed 
country to be in, there is no question, we'd pick this one with 
our vigor, with our open system with immigrants, with 
everything we have to offer. It's simply if we put our head in 
the sand and ignore the changes that have occurred, it may not 
be that way 25 years from now. And our challenge is to begin to 
lay out a new vision. There are moments in history that you 
need to sort of--where ideas make a real difference. Then, 
after that, society carries along. I believe this is one of 
those moments and we're just at the start of it and all of you 
have made a real contribution toward moving us forward.
    I thank you for taking the time to come and the interest, 
erudition and concern which you really showed for this great 
country of ours. Thanks. The hearing is adjourned.
    [Whereupon, at 11:40 a.m., the Committee meeting was 
adjourned.]
                       Submissions for the Record

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

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       Prepared Statement of Senator Charles E. Schumer, Chairman
    Good morning. I am pleased to open the first hearing of the Joint 
Economic Committee in the 110th Congress. I want to welcome Ranking 
member, Mr. Saxton, who was a colleague of mine when I was in the 
House.
    I know we will have some disagreements over solutions along the 
way, but I hope that we will be able to develop a shared view of the 
problems the American people will want us to be working on. And I look 
forward to working closely and, dare I say, neighborly with all of you.
    This is a committee that will ask difficult questions, challenge 
our assumptions, and seek to define our nation's economic challenges 
using the best minds in the Nation as our witnesses.
    For much of the next 2 years, our hearings are going to focus on 
the middle class. That is because I believe that the middle class is 
the engine of the American economy.
    When they are doing well, America is doing well. When they are 
anxious, America is anxious.
    If we want to expand or reform aid to the poor, we can only do so 
if the middle class feels that they are prospering, moving ahead, and 
are secure.
    If we want to expand trade because we believe it grows the economy, 
we can only do so if the middle class feels that they will benefit as 
much from our national growth as those at the very top.
    This hearing couldn't come at a better time because on all of those 
measures, the middle class feels a bit shaky. They are not struggling 
to get by, but they are struggling to get ahead. They are unsure of 
their footing in an economy and world that is about change, technology, 
and disruption.
    They feel they are alone to navigate the contours of change and 
that government isn't really helping them where they need it.
    They see the economic fortunes of different groups in our economy 
growing apart--not together. And they are rightfully worried that this 
gap will widen into an unbridgeable chasm.
    We all know the statistics: we went through the most prolonged jobs 
slump since the 1930s after the 2001 recession; productivity continued 
the strong trend that began in the mid-1990s, but real wages stagnated 
as the benefits of economic growth showed up in the bottom lines of 
companies and in executive salaries but not in the paychecks of most 
workers.
    But the middle class doesn't need statistics to tell them they're 
on shaky ground. American families know they can't work any harder than 
they already do, and that for the last 6 years they have mostly run in 
place.
    This morning, President Bush will give a ``State of the Economy'' 
address in my home state of New York. And he will try to make the case 
to the American public that our economy is strong and everyone is 
benefiting.
    The President will surely point to today's news that economic 
growth picked up in the fourth quarter and a key measure of wages 
showed some real growth as well. No one is happier than me that we had 
a nice quarter.
    But if you really spend time out in middle class America--if you 
descend from the 30,000 foot level to the communities of Main Street 
America--you know that all is not well with the middle class.
    The basic successes and aspirations of middle-class life--raising a 
family--buying a home--paying for college--saving for retirement--are 
becoming intimidating hurdles for average, ordinary people.
    The price of college, for example, the ticket to the middle class 
for future generations--has increased faster than inflation for 26 
consecutive years.
    So, the President is right when he says that a future of hope and 
prosperity in this country begins with a growing economy. But he could 
not be more wrong when he says that all Americans have benefited from 
economic growth over the past several years. The fact is that the 
middle class has never been so unsure of its footing since I came to 
Congress in 1980.
    I believe that we need a new direction to promote economic growth 
for all Americans in the 21st century. We need to throw away the old 
map that has been favoring those with influence and wealth and leaving 
the middle class behind. Our economic fortunes need to grow together, 
not apart.
    I said that the JEC would seek advice from the best of the best and 
that's what we have to offer for our first hearing.
    Bob Rubin, Larry Summers, and Alan Blinder really need no 
introduction to people who have followed economic policy in this 
country over the past decade or more-although I will give them a proper 
introduction before they give their testimony. We also welcome 
Professor Richard Vedder, Distinguished Professor of Economics at Ohio 
University to lend us a different perspective.
    I want to give the Vice Chair, the ranking member, and the senior 
Senate Republican a chance to make their opening statements, but I hope 
we can proceed quickly to our witnesses and get down to business.
                               __________
   Prepared Statement of Representative Jim Saxton, Ranking Minority
    It is a pleasure to join in welcoming the distinguished panel of 
witnesses before us today: former Treasury Secretary Robert Rubin, 
former Treasury Secretary Larry Summers, Professor Alan Blinder, and 
Professor Richard Vedder. I would also like to congratulate Senator 
Schumer in joining the Committee and being designated as the incoming 
Chairman.
    The hearing today will probably cover a number of topics, including 
the performance of the U.S. economy. It is important to recall that in 
2003, a new policy mix of accommodative Federal Reserve policy and tax 
incentives for investment led to a rebound of investment. The pace of 
economic growth picked up and employment growth rebounded. Since August 
of 2003, over 7 million jobs have been created, and the unemployment 
rate has fallen to 4.5 percent. Economic growth has generally been 
quite good. In 2005, the Fed referred to the ``solid performance'' of 
the economy and said that it ``should continue to perform well in 2006 
and 2007.''
    Some have criticized U.S. economic performance for producing 
excessive income inequality. However, according to the Census Bureau, 
its key measure of income inequality has been statistically unchanged 
since 2001. Some have also focused on slow wage growth, but many of the 
data used understate progress because they are based on measures that 
overstate inflation and exclude fringe benefits. Even so, various 
measures of real wages and earnings growth have been rising at a faster 
pace recently. It should be noted that during the 1990s expansion it 
also took several years before real wages and earnings increased at a 
strong rate.
    The continued prosperity of middle income households can be 
facilitated by pro-growth economic policies. It would also be 
reasonable to examine Federal policies regarding research, personal 
saving and investment, education, and social safety net programs to 
determine what changes might be helpful. For example, I have long 
supported various tax incentives for personal saving and investment to 
provide financial security and a reserve fund for middle class 
investors.
    However, in Congress today there is increasing support for a policy 
response that would be profoundly destructive to middle income 
families: protectionism. Protectionism would undermine economic growth, 
trigger international retaliation, and raise prices for middle income 
consumers.
    Three of the witnesses before us this morning are associated with 
the Hamilton Project of the Brookings Institution, a project that seems 
designed to head off the rising tide of protectionism among the 
Majority in Congress. While I may not agree with the Hamilton Project 
recommendations, the project is a well-intended effort to fend off a 
very real threat to middle income families. Protectionist policies 
would be a very valid reason for middle class anxiety.
    According to many economists, a quickening pace of technological 
change is more responsible for shifting employment patterns than is 
international trade. Thus economic policies that promote the 
flexibility and dynamism of the U.S. economy are the best course for 
improving the future of middle income Americans. As Congress examines 
these issues, it should avoid policies that will hamper the ability of 
the economy to adapt to future challenges.
                               __________
  Prepared Statement of Representative Carolyn B. Maloney, Vice Chair
    Thank you, Chairman Schumer. I am pleased to be here at the first 
hearing of the Joint Economic Committee held under your leadership and 
I am proud that I will be the Vice Chair of the Committee. Together, we 
and the other members of the Committee have an exciting opportunity to 
take economic policy in this country in a new direction that helps 
American families meet the challenge of continuing to compete and 
prosper in an increasingly competitive world economy.
    I am pleased to welcome our witnesses, three of whom helped 
President Clinton preside over the longest economic expansion in our 
nation's history--when 22.7 million jobs were created, the unemployment 
rate came down to 4 percent, and families up and down the income ladder 
made real economic progress and had a sense of confidence in their 
economic future.
    I am proud to have Bob Rubin as a constituent. Americans benefited 
from his skillful work as Treasury Secretary and they are continuing to 
benefit from his wise counsel about how to address the economic 
challenges we face. Professor Summers and Professor Blinder each have 
combined highly distinguished academic careers with equally 
distinguished careers in public service and I am pleased that they are 
here so that we can draw on their experience and wisdom. Dr. Vedder, I 
am sure that you will be coming at these issues from a different 
perspective, but I look forward to a serious policy discussion and 
competition among ideas.
    The issues we are discussing today are critically important. The 
middle class is the fabric of our nation, but they are feeling a bit 
frayed at the moment. And they probably feel frustrated when they hear 
the President and his surrogates continually heap praise upon this 
country's economic performance. Many of them are probably thinking: Is 
the President talking about the same economy? And: If the economy is 
doing so well, then why am I left with this empty feeling?
    When the President says his policies are working to make the 
economy strong and that all Americans are benefiting, he is only 
looking at the situation from a distance. The bird's eye may not look 
so bad, but the facts on the ground tell a different story.
    Despite 4 years of economic expansion, job growth has been modest, 
wages are barely keeping pace with inflation, real incomes have fallen, 
household debt is rising, employer-provided health insurance coverage 
is declining, and private pensions are in jeopardy. These are the 
economic barometers that matter most to families. These are facts and 
figures that affect their pocketbooks.
    The growing divide between the `haves' and the `have nots' is also 
tearing the fabric of our nation. A recent analysis by the 
Congressional Budget Office shows that the President's policies have 
aggravated the widening gap between the rich and everyone else in the 
last several years. The policies of this Administration simply do not 
address the problems of families trying to maintain a middle class way 
of life and they certainly do not address the problems of working 
families trying to make it into the middle class.
    The American people want us to create an economic environment that 
produces better jobs with better pay, raises the minimum wage, makes 
health care and college more affordable, cuts middle-income taxes, 
guarantees a dignified retirement for our seniors, moves the Nation 
toward energy independence, and restores fiscal responsibility. In the 
House of Representatives, we have already acted on many of these 
issues, but there is much work left to do.
    I look forward to the testimony of our witnesses and their thoughts 
on policies that can help us fulfill our promise to restore the 
American Dream to middle-class families.
                               __________
            Prepared Statement of Senator Edward M. Kennedy
    In the decades following World War II, increased overall 
productivity and economic expansion brought an increased standard of 
living for Americans across the economic spectrum. It provided a strong 
middle class in stark contrast to today's economy where the middle 
class has felt more insecure than at any time since the Great 
Depression.
    GDP is rising, productivity is up and corporations are earning 
record profits, but economic growth is largely leaving working families 
behind. Middle class wages have been virtually stagnant, while prices 
for essentials such as housing, health care, gas and utilities have 
skyrocketed. Families are exhausting their savings and falling into 
debt. To keep their heads above water, they put in longer hours at work 
or accept multiple jobs, sacrificing time with their families and 
jeopardizing their children's well-being.
    More and more middle class jobs with decent wages and benefits are 
disappearing. Millions of jobs are being shipped overseas, and the new 
jobs being created often come with lower pay, fewer benefits, and less 
stability.
    The American economy is becoming more and more stratified, and that 
threatens our democracy. The divide between the haves and have-nots is 
the largest since the Depression and it's growing wider every year, 
putting our economy and our society at greater risk.
    We need to find concrete solutions to these very real challenges 
that employees are facing. We need to restore their confidence that the 
American Dream still exists. Citizens need to believe again that we can 
all find a good job with fair wages and benefits that can support a 
family.
    The Administration touts the productivity and job growth numbers to 
show how well the Bush economy is doing. But the vast majority of the 
American people know differently. The hard-working men and women of 
America deserve real solutions to the economic challenges that they 
face every day.
    I commend my colleague Senator Schumer for holding this hearing on 
this very important challenge, and I look forward to the testimony and 
recommendations from this distinguished panel.
    Mr. Chairman, between March and December last year, The Washington 
Post published an excellent series of ten editorials on the issue of 
inequality. I believe they will be of interest to all of us concerned 
about this issue, and I ask that the series be made part of the record 
for today's hearing.

    [The editorials referred to follow:]

[From the Washington Post Series on inequality, Sunday, March 12, 2006; 
                                  B06]

                             A Rising Tide?

    THIS NATION prefers not to discuss inequality. Lacking a unifying 
religion, ethnicity or even language, it is held together by an 
appealing faith: that anyone who works hard and plays by the rules can 
attain the American dream, sharing the fruits of economic progress. But 
the trends of the past quarter-century compel a reexamination of this 
creed. When President Kennedy promised that ``a rising tide lifts all 
boats,'' he was correct. Today that claim could be disputed.
    A few numbers show why. In the 25 years from 1980 to 2004, a period 
during which U.S. gross domestic product per person grew by almost two-
thirds, the wages of the typical worker actually fell slightly after 
accounting for inflation. So, too, did wages for the 50 percent of the 
work force that earned less than the typical, or median, employee. The 
rising tide helped only workers at the top. Wages for workers in the 
90th percentile--that is, workers who earned more than 90 percent of 
their peers--jumped by more than a quarter.
    Other measures tell variants on this story. More women are working, 
so household income, as distinct from individual wages, has risen. The 
value of health benefits has increased, so counting these plus other 
non-wage income from investments also paints a brighter picture. 
Between 1980 and 2003, total after-tax income for the bottom fifth of 
households rose 8 percent, and the second-bottom fifth gained 17 
percent; in other words, all boats did rise, albeit by less than 1 
percent per year. But it's hard to celebrate such modest gains when the 
top fifth advanced 59 percent over the 24-year period.
    Depending on which statistics you choose, the tide is either not 
lifting most boats or lifting many of them modestly. At times over the 
past quarter-century, commentators have hoped that this disappointing 
performance was temporary. Perhaps it was caused by a one-time shock 
from the arrival of the personal computer, which made junior clerical 
workers less valuable? Perhaps it reflected a one-time jump in 
competition from foreign workers following the creation of the World 
Trade Organization and the North American Free Trade Agreement? Or 
maybe it reflected social pathologies among the poor that could be 
changed by welfare reform? All these theories had their day; but after 
a quarter-century of disappointment, the struggles of Americans in the 
bottom half of the income distribution cannot be viewed as temporary.
    Many argue that, as long as most households are not retreating, 
inequality shouldn't be a worry. The rich are entitled to the fruits of 
their labor: These reflect talent, hard work, risk-taking and 
innovation, and only an economy that rewards such things can be 
dynamic. This is true up to a point. But when big rewards for high 
achievers don't produce an economy that helps ordinary folk, the case 
for big rewards loses some of its appeal.
    Moreover, Americans have tolerated divisions between rich and poor 
because they believed that anyone could get ahead, given enough talent 
and determination. But the truth is that rags-to-riches stories have 
never been the norm: One study of people reaching adulthood between 
1968 and 1998 found that 42 percent of those born into the poorest 
fifth ended up there also. As the distance between the top and bottom 
grows wider, it becomes harder to traverse the gulf. Family background 
has a larger impact on people's prospects. The talent of people born 
into poor families goes wasted.
    The idea that everyone should start life with decent opportunities 
helped to inspire the American Revolution and the civil rights 
movement; it is an idea that this nation forsakes at its peril. But 
there are other reasons to worry about inequality. Surveys find that if 
you ask people whether they'd prefer to earn $100,000 in a society in 
which the average pay is $80,000, or $110,000 in a society in which 
average pay is $130,000, respondents pick the lower salary in order to 
feel rich in relative terms.
    This isn't just irrational. Riches and poverty are partly relative 
concepts. The more unequal a society, the more citizens in the bottom 
half will experience hardship. When people at the top gain more 
disposable income, they bid up the prices of goods in limited supply--
homes in top school districts, or places at top colleges. Tuitions at 
4-year colleges have more than doubled since 1980, with the result that 
gaps in enrollment by class and race, which declined in the 1960s and 
1970s, are as wide now as 30 years ago. The wealth of people in the top 
half also bids up the common understanding of what a middle-class 
lifestyle entails. People feel obliged to spend more on birthday gifts, 
children's sneakers or a suit for the next job interview. Since 1980, 
the median size of a newly built house has increased by a third--even 
while the household savings rate has fallen to about zero.
    So it's not quite true that the rich can enjoy their riches without 
harming anyone; their money changes life for people lower down. This 
might not matter if inequality brought compensating gains: if the 
growth of relative disadvantage were offset by absolute wage rises or 
by social mobility. But increases in wages have been small or negative, 
and the United States has become less socially mobile than nations such 
as Sweden and Germany.
    This editorial marks the start of an occasional series about 
inequality. We do not believe that reducing it should become the sole 
priority for economic policy, as the next installment will explain, and 
we recognize that trends in the global economy may make some rise in 
inequality inevitable. But the quest for a more equal society should 
not be smothered by protests of ``class warfare.'' Yes, some popular 
remedies for inequality would backfire, stifling growth or wasting 
money. But there are promising policies out there, too: policies that 
would reduce inequality without damaging growth; in fact, policies that 
might boost it.
                                 ______
                                 

 [From the Washington Post series on inequality, Wednesday, March 22, 
                               2006; A20]

                     Joining the Inequality Debate

    THE BUSH administration seems ready to debate inequality, the 
subject of the occasional series that we began 10 days ago. In recent 
conversations with us and with the Wall Street Journal, Treasury 
Secretary John W. Snow has described inequality as ``the new sort of 
battle line in the political arena,'' suggesting that this may have 
something to do with desperation among the administration's critics. 
The way the secretary tells it, economic pessimists used to gripe that 
the economy was not growing; then, when the economy accelerated, they 
grumbled that growth was not producing jobs; now, with unemployment 
down at 4.8 percent, they protest that jobs aren't paying enough to 
ordinary folks. Mr. Snow, for his part, is an optimist. ``We may now be 
at a tipping point for higher real wages going forward,'' he told us.
    The secretary bases his optimism partly on short-term arguments. He 
correctly points out that declines in unemployment are generally 
followed by increases in wages; given that joblessness has declined 
from 6.3 percent to 4.8 percent during the current recovery, wages may 
indeed rise over the next year or so. But the question is whether these 
gains will dent the long-term pattern of stagnation. For the bottom 
half of the workforce, wages have actually fallen since 1980 after 
accounting for inflation. Although it's true that households have done 
better, this is not exactly comforting. The gain in income for the 
typical household, about a fifth since 1980, has been smaller than the 
increase in the household workload. Since 1980, the number of hours 
worked by the average husband-and-wife team has increased by a quarter, 
as more women have entered the labor force.
    In his conversation with The Post, Mr. Snow drew attention to an 
apparent fall in inequality between 2000 and 2003. In 2000, according 
to data compiled by the Congressional Budget Office, the top fifth of 
households pocketed 51.3 percent of all post-tax income; in 2003 they 
pocketed 48.8 percent, allowing the rest of the country to increase its 
share of the pie. But this isn't the basis for optimism that Mr. Snow 
supposes. The top fifth lost ground for 2 years after 2000 because they 
stopped cashing in on the stock market bubble. But between 2002 and 
2003 their share of national income rose again, a fact obscured by Mr. 
Snow's choice of statistics; the numbers for 2004 and 2005 have not yet 
been crunched. Besides, Mr. Snow's focus on 3 years' worth of data 
should not distract him from the bigger picture. Between 1980 and 2003, 
the top fifth of households increased their share of national income by 
6 percentage points.
    At other times in the conversation, Mr. Snow accepted that 
inequality has grown over the long term but sought to explain it as the 
natural product of market forces. It's true that the ``star system'' 
has grown more pronounced in many professions, from sports to medicine 
to academia: Globalization has allowed top performers to attract a 
global following, driving remuneration up. But if this is a big reason 
for inequality, as indeed seems likely, one should expect the gap 
between the stars and the majority to grow even more in the future--
globalization is not about to go away. Far from providing a reason to 
embrace inequality as ``natural'' and therefore, presumably, 
acceptable, Mr. Snow's argument underlines why inequality is a rising 
social challenge that policymakers must reckon with.
    Mr. Snow indicated an open-mindedness on these issues, which is a 
good thing. ``I want to get deeper into the data because it's a very 
important question,'' he said of wage disparities. We look forward to 
the debate.
    This is the second editorial in an occasional series on inequality.
                                 ______
                                 

[From the Washington Post series on inequality, Sunday, April 2, 2006; 
                                  B06]

                      The Case for Economic Growth

    It may not lift all boats as it used to, but it's still essential.

    FOR PERHAPS half a century, the central preoccupation of economic 
policy has been to promote growth. Until 1980, the reasons for this 
were evident: Expanding national output boosted everybody's living 
standards, and advancing living standards were presumed to underwrite 
that most American of occupations, the pursuit of happiness. Yet the 
cult of gross domestic product is now open to question. Because of 
rising inequality, growth is a less reliable provider of higher living 
standards to most Americans, as earlier articles in this series have 
noted. And a new area of research, blending psychology and economics, 
challenges the assumed connection between income and happiness.
    Despite headlong growth in rich countries since 1950, there has 
been no rise in the share of people who describe themselves as 
``happy'' in opinion surveys. So what, you might say; how can people 
accurately report on such a fickle and subjective mood?
    Well, self-reported happiness can be cross-checked by asking 
friends and colleagues how happy someone is, and neuroscientists have 
figured out how to measure the experience of good feelings in the left 
front of the brain. People who say they are happy do turn out to be 
objectively happy. The stature of this new science was recognized 4 
years ago when one of its founders, psychologist Daniel Kahneman, 
received a Nobel Prize in economics.
    The evidence from this new science is unsettling for advocates of 
growth. It shows that as nations escape poverty they benefit greatly; 
progressing from African-style penury to the condition of South Korea 
or Portugal entails huge jumps in happiness. But once nations pass the 
$10,000-per-person mark, roughly a third of today's level in this 
country, the happiness payoff ceases. Individual Americans can still 
grow happier by becoming richer, because it feels good to do better 
than the neighbors, but society as a whole can't raise its income 
relative to itself. As a national objective, therefore, GDP growth no 
longer makes such obvious sense.
    An impressive range of thinkers, from Benjamin M. Friedman, a 
former chairman of Harvard University's economics department, to 
British economist Richard Layard, has accepted this critique of growth. 
We would not go as far as they do: Even if a higher national income 
does not measurably raise human happiness, it will expand opportunities 
to travel, learn, yak with grandma on her cellphone--surely this is 
worth something? Moreover, there remain two other reasons to care about 
growth.
    The first comes from Mr. Friedman: It's that as Americans get 
richer relative to their past, forward momentum makes them optimistic 
and tolerant: They expect life to get better, so they act more 
generously toward racial minorities, immigrants and the poor. In a 
recent book on this subject, Mr. Friedman has argued that steady 
economic growth promotes enlightened social policies. In the late 19th 
century, stagnation in the American South created the conditions for 
the reimposition of segregation. In the 1960s, galloping growth created 
the conditions for civil rights legislation and the Great Society 
programs. Perhaps if France were growing more robustly, it would not 
have experienced the riots and demonstrations of the past few months.
    The other argument for growth is a particularly American one: To 
exercise global leadership, the United States needs financial clout. In 
a narrowly economic sense, it's great if foreigners catch up to U.S. 
living standards; this means richer markets for American products, so 
everybody gains. But in a political sense, a loss of economic 
preeminence would be crippling--both for American statecraft and for 
the enlightened causes that it defends. The world relies on the United 
States to secure the world's sea lanes, lead the push for trade 
liberalization, fight international diseases, contain terrorism and 
stabilize failed states. The rise of China, with its vast population 
and illiberal values, underscores the importance of U.S. vitality.
    In sum, the case for economic growth remains convincing, but 
policymakers need to balance its pursuit with a concern for equity. Mr. 
Friedman's argument--that growth can cause a society to feel more 
optimistic--depends on the sharing of its benefits. Equally, our sense 
that higher incomes expand the range of human experience, even if they 
don't expand the sum of happiness, carries weight only if the boost to 
incomes is broadly shared. The policy challenge, therefore, is to 
promote growth while also promoting equity. That is where this series 
will go next.
    This is the third editorial in an occasional series on inequality.
                                 ______
                                 

[From the Washington Post series on inequality, Sunday, April 23, 2006; 
                                  B06]

                               Do No Harm

    Some remedies for inequality would be worse than the disease.

    INEQUALITY IN the United States has been growing for a generation. 
The top fifth of households enjoyed post-tax incomes worth 6.7 times 
those of the bottom fifth a quarter of a century ago; that multiple has 
since jumped to 9.8, a 46 percent increase. But this distressing trend 
hasn't forced the right policy response, in part because advocates of 
equity are often their own enemies. Some of their proposed remedies 
would be ineffective, wasteful or harmful to the economy.
    One unproductive critique of inequality targets corporations for 
cutting wages and benefits. Companies must respect market forces: If 
they pay workers more than is necessary to keep them, they will lose 
out to competitors, as thousands of jobless car workers can testify. 
You can debate whether government should force all companies to 
increase pay or benefits--by raising the minimum wage or by requiring 
employers to offer health insurance, as Massachusetts has just done. 
You can talk about fairer government enforcement of the collective 
bargaining rights of workers or opportunities for shareholders to 
control executive salaries. But to blame corporations for ripping up 
the social contract is to misunderstand their function. Firms began 
offering workers health coverage because government controls capped 
what they could offer in wages; now that wage controls are history, the 
health plans that companies provide reflect tax rules. So politics and 
government create the social contract; it is not managers' place to do 
so.
    The next sort of blunt critique calls for policies that sound good 
but don't work. Cracking down on immigration, for example, is no 
solution. Tough enforcement is expensive, harsh and doomed to be at 
best partially effective; moreover, the best economic studies predict 
that it would lift the pay of unskilled natives imperceptibly if at 
all. Equally, economists find no evidence that tax-privileged 
empowerment zones in depressed areas boost local wages, though this 
didn't stop President Bush from proposing a ``GO Zone'' (Gulf 
Opportunity Zone) as part of his response to Hurricane Katrina. The 
same applies to tax credits for employers who hire people on welfare or 
food stamps; in at least two-thirds of cases, firms that hire such 
workers don't even know they are eligible for the tax break, according 
to studies by Sarah Hamersma of the University of Florida. Training 
programs for jobless youths also have a disappointing record: They 
boost future earnings of participants marginally and may do so at the 
expense of youths who don't attend the sessions. Because they achieve 
so little, all these interventions set back the fight against 
inequality by making it seem wasteful or futile.
    The most pervasive and misplaced reaction to inequality is 
protectionism. Trade liberalization since 1945 has delivered a vast 
stimulus to growth, boosting U.S. incomes by $1 trillion a year, 
according to an extensive survey of the evidence by the Institute for 
International Economics. It's true that these gains are unevenly 
distributed, but the skewing is subtle. Unionized labor in the heavily 
traded manufacturing sector has been hit hard. But the poorest and 
least skilled Americans actually gain from trade, because they tend to 
work in low-end service jobs that do not face foreign competition. As a 
result, trade does nothing to depress their pay, but it does ensure 
that the goods they buy are cheaper.
    Moreover, additional trade liberalization would help the poor, 
because the nation's remaining trade barriers are regressive. Cheap 
sneakers are subject to a tariff of 48 percent, whereas expensive 
leather shoes face a border tax of 10 percent. Polyester underwear 
attracts a tariff of 16 percent, while fancy silk underwear glides into 
the country with a tariff of 1 percent. Edward Gresser of the 
Progressive Policy Institute calculates that residual trade barriers 
cost a low-wage working mother 2 percent of her income, four times more 
than the impact on a high-income family.
    So protectionism would have disastrous consequences for growth and 
would help limited numbers of exposed workers rather than the majority 
of poor and middle-income families. But the pressure to close borders, 
bash corporations and experiment with ineffective social programs will 
continue until government addresses inequality in a serious way. The 
next installments in our series will suggest how to do this.
    This is the fourth editorial in an occasional series on inequality. 
Previous editorials in the series may be found at http://
www.washingtonpost.com/inequality
                                 ______
                                 

 [From the Washington Post series on inequality, Sunday, May 7, 2006; 
                                  B06]

                           The Top Takes Off

    That rhetoric about giveaways for multimillionaires? It's accurate.

    THE QUEST for ways to reduce inequality begins with taxation. 
Unlike spending programs, redistribution through taxation is 
administratively simple; besides, putting money directly into people's 
pockets allows them to spend it on whatever they need most. But the tax 
tool has been wielded badly. Rather than using it to offset rising 
inequality, politicians have contrived to do the opposite.
    The Bush administration refuses to acknowledge this extraordinary 
fact. It argues that the tax system has grown more progressive because 
the rich provide a larger share of government revenue than in the past. 
But this isn't because tax rates for the rich are higher; it's because 
the pretax earnings of the rich have taken off. While the income of the 
families in the middle fifth of society has grown 12 percent since 
1980, the income of the top tenth has grown 67 percent, and the income 
of the top 1 percent has more than doubled. In short, the rich have 
grown a whole lot richer: That's why they pay a larger share of total 
tax.
    The administration also argues that the Federal income tax is 
already progressive enough. Thanks to the earned-income tax credit and 
Mr. Bush's refundable child credit, almost a third of tax filers pay 
either zero income tax or less than zero--meaning that they take money 
out of the system. But it's nonetheless true that the income tax is 
less progressive than it used to be. People still have to pay the 
regressive payroll tax. And changes to the estate tax must be factored 
in as well.
    Our chart shows the combined effect of the Bush tax cuts. It leaves 
no doubt that the tax system has become less progressive, even as the 
need for progressivity has grown. Over the past quarter of a century, 
the tide of the American economy has failed to lift the bottom half of 
society, damaging the faith on which capitalism depends. Seven out of 
ten say the Nation is headed in the wrong direction even though 
economic growth is galloping, and many are hostile to trade, 
immigration and big business. But rather than crafting a tax policy 
that responds to those sentiments, the administration has done the 
opposite.
    The chart makes a second point. The loss of tax progressivity has 
not occurred in the middle of society; it's not as though someone a 
quarter of the way down the income scale is doing better at the expense 
of someone three-quarters of the way down. Rather, it's the top tenth 
who have benefited, and the top within the top has done fabulously 
well. According to Thomas Piketty of the Ecole Normale Superieure in 
Paris and Emmanuel Saez of the University of California at Berkeley, 
the top 0.01 percent of households has seen its tax bite fall by 6 
percentage points since 2000 and by an astonishing 25 percentage points 
since 1980.
    It's clear that some of these changes should be rolled back. Yes, 
raising taxes on the rich can mean more evasion and duller incentives. 
Some footloose financiers might leave the country. Some managers might 
spare themselves the heartache of restructuring companies if their 
performance-linked bonuses were subject to high taxes; they might 
prefer to coast along comfortably--as many do in Europe or Japan and as 
many did in the United States of 30 years ago. But the risks of raising 
taxes have to be weighed against the risks of not raising them. 
Inequality is not only bad in itself; it also will intensify pressure 
for bad policies that threaten growth more acutely than higher taxes 
would.
    Economics cannot predict how high taxes can be raised before they 
reach counterproductive levels. But it would almost certainly be safe 
to increase taxes on the top 1 percent by 5 percentage points, 
restoring the level of the mid-1990s--hardly a period of lethargic 
chief executives. This tax hike would raise $85 billion annually or 
perhaps a bit less if it spurred some extra tax evasion; sharing that 
revenue among the bottom three-fifths of households would give each 
family $970 a year. That would be a big help to families at the bottom, 
but it would deliver a boost of less than 3 percent to the median 
household.
    To remedy stagnant middle-class living standards, more radical tax 
hikes would be necessary. But given that taxes will have to increase 
anyway because the budget deficit is running at around $300 billion, 
raising more than $85 billion for the purpose of redistribution is 
possible only if it's part of a wide-ranging tax reform.
    Which brings us to the possibility of closing loopholes in today's 
tax system. Closing loopholes that allow people to shelter income does 
not dull incentives, because it does not raise tax rates on the 
additional income people earn by putting in an extra effort. Meanwhile, 
closing loopholes does reduce the time Americans devote to gaming the 
tax code, freeing their energy for more productive things. Since the 
rich make greatest use of loopholes, closing them is good for equality 
and good for efficiency. The next editorial in this series will explore 
some of these win-wins.
    This is the fifth editorial in an occasional series on inequality. 
Previous editorials in the series may be found at http://
www.washingtonpost.com/inequality.
                                 ______
                                 

 [From the Washington Post series on inequality, Sunday, June 4, 2006; 
                                  B06]

                         A Plan for Mr. Paulson

    An economic agenda that might bring both parties together.

    IN ACCEPTING President Bush's invitation to serve as Treasury 
secretary, Henry M. Paulson Jr. is said to have extracted a promise 
that he will be more than just a salesman for policies devised in the 
White House. So the big question is: How will Mr. Paulson use his 
clout? He is not going to reverse the administration's tax cuts; 
unfortunately, neither he nor Mr. Bush has any appetite for that. He is 
unlikely to tackle entitlements; unfortunately, congressional Democrats 
showed in last year's Social Security fight that they will frustrate 
any such effort. But if Mr. Paulson really has authority to push sound 
policy regardless of any misgivings of political operatives in the 
White House, he should focus on tax reform. Done right, this could be 
good for economic growth and for social equity. Indeed, it could 
correct the central failings in the administration's economic record: 
its indifference to long-term budget deficits and to the accumulating 
evidence that a rising tide no longer lifts all boats.
    The goal of tax reform is to rationalize the deductions that 
clutter the tax code. There are tax incentives to encourage saving for 
retirement and education; to promote home ownership; to buy medical and 
life insurance; to own municipal and local bonds; to give to charities. 
Not all these tax breaks achieve what they are supposed to: Britain and 
Australia have no subsidies for home ownership in their tax codes, yet 
Britain has the same rate of home ownership as the United States and 
Australia has a higher one. But besides being sometimes ineffective, 
tax incentives are often scandalously regressive. According to the 
Congressional Joint Committee on Taxation, in 2004 more than 55 percent 
of mortgage-interest subsidies went to taxpayers with an income of 
$100,000 or more, even though that group represents only 12 percent of 
tax filers.
    Tax incentives to buy health insurance are also egregious. In 2004 
the 12 percent of households in that $100,000-plus group pocketed 27 
percent of the tax breaks for health spending. These subsidies cause 
people who would buy health insurance anyway to choose overly inclusive 
Cadillac plans, which in turn fosters indifference to medical prices; 
the resulting boost to health inflation puts insurance beyond the reach 
of some lower-income workers. According to Treasury estimates, the 
ranks of the uninsured could be reduced by 1 million to 2 million if 
Cadillac plans lost their privileged status. Capping tax deductions for 
health insurance at around $11,000, a level sufficient to purchase an 
ordinary family plan, would simultaneously prevent affluent workers 
from shortchanging the Treasury by overspending on doctors.
    Tax incentives to promote retirement savings cry out for reform 
also. In 2004, 49 percent of subsidies for IRAs, 401(k)s and other 
defined-contribution pensions flowed to the richest one-tenth of 
households, according to analysis done by the nonpartisan Tax Policy 
Center; the bottom two-fifths got only 3 percent of the subsidy. This 
upside-down system, in which savings incentives are directed at the 
people who least need them, is economically inefficient as well as 
socially unfair: Affluent households capture the subsidies by putting 
money they would have saved anyway into tax-favored accounts, so 
national savings are unchanged. Meanwhile households that are not 
saving don't get an adequate incentive to do so: A chance to boost 
national savings is squandered.
    Badly designed tax breaks are not a marginal problem. Taken 
together, incentives in the tax code reduced Federal revenue by a 
stunning $730 billion in 2004, according to the Government 
Accountability Office. That's the equivalent of nearly one-third of 
Federal spending; it's more than three times the cost in 2005 of all 
the Bush tax cuts and seven times the annual cost of the wars in Iraq 
and Afghanistan. Eliminating just a quarter of these subsidies would 
generate twice as much money for redistribution as an increase of 5 
percentage points in tax rates for the richest 1 percent, a measure we 
proposed in a previous editorial in this series.
    Of course, some tax breaks either cannot or should not be 
eliminated, but they should at least be reformed. Many take the form of 
deductions: Taxpayers subtract privileged types of spending from their 
income before calculating what tax they owe. The value of these 
deductions depends on your tax bracket: The richer you are, the higher 
your bracket and the more valuable the tax subsidy. Converting these 
deductions into refundable credits that are worth the same to all 
taxpayers would reduce inequality sharply. Thus a poor family that pays 
no income taxes currently gets no tax subsidy if it puts, say, $2,000 
into a retirement plan, whereas a rich family in the 35 percent tax 
bracket gets a Federal subsidy of $700. Under a recent proposal that 
replaces deductions with credits, both families would get $600.
    This sort of reform ought to attract support from both parties. 
Republicans should favor curbing wasteful subsidies because the 
alternative is higher tax rates. Democrats should seize the chance to 
refashion a regressive class of government programs and thus counter 
the forces of technology and globalization that are deepening 
inequality. Judging by the administration's rhetoric, which includes a 
number of creative claims about the progressive impact of the tax cuts, 
it should embrace both arguments for reform. Opposition will come from 
special interests that benefit from tax loopholes--real-estate 
developers, mortgage lenders, health insurers and so on.
    Those special interests have a powerful voice in politics, which is 
why the Bush administration has yet to act on last year's sensible 
proposals from its own tax-reform commission. But now, at least 
according to the spin from the administration, there is a brand-new 
Treasury secretary with the power to push serious policy ideas. We look 
forward to discovering whether that spin has substance.
    This is the sixth editorial in an occasional series on inequality. 
Previous editorials in the series may be found at http://
www.washingtonpost.com/inequality.
                                 ______
                                 

[From the Washington Post series on inequality, Wednesday, October 11, 
                               2006; A18]

                       Globalization and Schools

    It's time to recall Martin Luther King's challenge.

    BACK IN 1979, the average worker with a college degree earned 75 
percent more than the average high school graduate. Because of 
technology and globalization, the gap has leapt to 130 percent. This 
rising ``college premium'' does much to explain the growth of 
inequality over the past generation, so any serious response to 
inequality must make access to college broader and fairer. It should be 
broader because a higher rate of college attendance would share the 
fruits of globalization more widely. It should be fairer because, if 
the prizes for attending college are growing, it's essential that 
everyone begin life with a decent shot at winning them.
    Because education boosts economic growth, and because it threatens 
no powerful lobby, virtually everyone claims to support it. The 
question is how it should be improved. Some commentators, pointing to 
the fact that schools in low-income districts already spend more per 
pupil than schools in affluent ones do, argue that failures at poor 
schools reflect complacent management rather than a lack of resources. 
Signaling at least partial acceptance of that theory, the Bush 
administration has tried to improve schools by holding them accountable 
and subjecting them to competition. Choice and accountability are 
attractive in principle, but studies of voucher programs in New York 
City, Milwaukee and Cleveland have found negligible gains from them. 
Costlier interventions must also be part of the solution.
    The first opportunity for extra investment in education comes when 
children are young. That's when they are most malleable and when poor 
children start to fall behind: Even at age 3, researchers find class-
based differences in linguistic and emotional maturity. The Federal 
Head Start program, bolstered by a variety of state preschool programs, 
has succeeded in reaching many poor 3- and 4-year-olds. In 2001, 49 
percent of 4-year-olds whose mothers were high school dropouts attended 
some type of preschool program, up from 36 percent a decade earlier. 
But that participation was still way below the 70 percent rate for 
children of college graduates. And the quality of many preschool 
programs is poor.
    Head Start requires that only half of its teachers have 2-year 
college degrees. In contrast, a 1960s experiment in Michigan known as 
the Perry Preschool program provided a fully qualified teacher for 
every six or seven students, and teachers visited each child at home 
weekly. The program raised IQ test scores by eight to 10 times the 
increase achieved by Head Start. It also reduced the likelihood that a 
student would require special education (by 43 percent), drop out of 
high school (by 25 percent) or be arrested (by 50 percent). A range of 
other studies, including recent ones in Michigan and Chicago, confirms 
that high-quality programs have lasting effects on poor children. 
Upgrading the 900,000 children in Head Start programs to something like 
the Perry program might require around $2 billion a year, according to 
W. Steven Barnett of Rutgers University. But quality preschools reduce 
spending on special education, jails and welfare, saving money for 
society in the long term.
    Early intervention would help schools from kindergarten through 
12th grade do their job properly, since teachers would face fewer 
students who can't keep up. But it also makes sense to invest in K-12 
education directly. Although it's true that low-income districts 
already spend more per pupil than do rich ones, this slight advantage 
is swamped by the challenge of teaching poor children, who on average 
have more discipline problems and require more remedial attention--and 
will continue to do so even if preschool is improved. Because of the 
challenge of teaching poor children, the higher cost of special 
education and other factors, schools in low-income neighborhoods have 
less-experienced teachers and worse facilities than do schools in 
affluent ones, according to research by Cecilia Rouse of Princeton and 
Lisa Barrow of the Federal Reserve. These schools might spend more 
money per pupil, but they lack more money per pupil, too.
    Which K-12 investments would be effective? Smaller classes are a 
leading candidate: A Tennessee experiment that divided pupils into 
classes of differing size in kindergarten and then returned them to 
regular-size classes in third grade found benefits from smaller classes 
that persisted to high school. Improving the quality of teachers is 
also likely to boost performance, though teacher quality is not 
necessarily linked to teacher certification. Publicly funded summer 
school could make a difference. The performance gap between privileged 
and poor children appears to be linked to the way they spend their 
summers, with the privileged attending enrichment programs while the 
poor are underoccupied.
    Nearly 30 years ago, Martin Luther King Jr. declared that the 
challenge for schools is ``to teach so well that family background is 
no longer an issue.'' By increasing the rewards for education, 
globalization has added urgency to King's argument, but globalization 
paradoxically creates a temptation to ignore him, too. By driving down 
the cost of tradable goods such as cars and DVD players, it leaves 
untradable ones such as education looking expensive. There's a tendency 
for policymakers to say that education spending is growing a bit faster 
than inflation--isn't that generous enough? But inflation is low partly 
because globalization brings us goods from cheap foreign suppliers. The 
economic challenge posed by those cheap foreign suppliers is precisely 
the reason we should invest more in our children.
                                 ______
                                 

[From the Washington Post series on inequality, Wednesday, December 13, 
                               2006; A20]

                       Inequality and Health Care

    Two fixes for middle-class insecurity

    THE RISE of inequality over the past generation calls for a 
rethinking of tax and education policies, as earlier editorials in this 
series have said. But it also calls for reform of the health system. 
Because of a historical accident--wage controls during World War II 
drove employers to compensate workers with perks such as medical 
insurance--the health system is tied to corporations. This exacerbates 
inequality.
    In most countries, rising medical costs are shouldered by 
taxpayers. Because tax systems are progressive, this means that the 
extra cost is borne by those who can afford it. But in the United 
States, where health spending per person has doubled since 1975 (after 
adjusting for inflation), the non-poor and non-elderly are expected to 
pay their own way. This is most clearly the case for Americans who lack 
a company health plan and must pay directly out of pocket. It's 
increasingly the case for Americans who have corporate coverage that 
comes with high deductibles and co-payments. But even workers who have 
generous, all-you-can-eat health plans end up paying indirectly, since 
their wages are held down to offset the cost of the plans.
    This individualistic system goes a long way toward explaining the 
``middle-class squeeze'' so frequently invoked on the campaign trail. 
Workers' total compensation may be rising, but health benefits gobble 
up an increasing share of that, so wages lag. Equally, out-of-pocket 
medical expenses are believed to cause at least 425,000 bankruptcies 
annually, and one in six working-age adults carries medical debt.
    The U.S. health system distributes risk as unforgivingly as cost. 
Because health care comes courtesy of the human-resource policies of 
big companies, anyone who gets pushed out of a big company may lose 
coverage. According to Yale's Jacob Hacker, 82 million people, or one 
in three non-elderly Americans, went without health insurance at some 
point during the 2 years beginning in 2003. As more companies drop 
coverage, the prospect of losing health care will be a growing source 
of anxiety for all but the most financially secure Americans. This will 
reduce people's willingness to change jobs or set up their own 
ventures. The flexibility of the workforce, one of this nation's 
traditional economic trump cards, may be compromised.
    HOW TO DEAL with the twin problems of insecurity and squeezed pay? 
The answer starts with a fix for the insurance market that serves 
individuals and small firms. As health insurance has grown more 
expensive, young and healthy individuals, or small firms that employ 
mainly young and healthy individuals, have chosen to go without 
coverage. As low-cost patients leave the insurance pool, health plans 
are left with older, sicker people, which forces them to raise premiums 
further--which in turn drives more young and healthy workers to exit. 
Because of this vicious cycle, health insurance for individuals and 
small firms has become prohibitively expensive. Even among workers 
earning the median wage or higher, an astonishing 19 percent of 35- to 
44-year-olds lack insurance, a near doubling of the percentage in 1979.
    The best-known solution to this problem is the Massachusetts health 
reform, enacted earlier this year. This approach prevents healthy 
individuals from dropping out of the insurance pool by mandating that 
everyone buy coverage; it promotes affordability by subsidizing 
individuals who are at or below 300 percent of the poverty line; it 
ensures that coverage is available by allowing people to buy into the 
plans that are currently offered to Medicaid patients. There are other 
ways to achieve the same objectives. Rather than mandating individual 
coverage, taxpayers could cover part of the cost of insuring sick 
individuals, thereby driving premiums down and enticing healthier 
people to buy insurance. Rather than allowing individuals to buy into 
Medicaid, states could invite them to buy into the health plans that 
are offered to state employees. Whatever the precise formula, some fix 
for the insurance market should be adopted by all states. Or it could 
be done nationally by allowing people to buy into Medicare or into the 
health system for Federal employees.
    This reform would make insurance available for everyone. It should 
be affordable: The current system, in which 47 million go without 
insurance, is wasteful as well as shameful because it obstructs the use 
of cheap preventive medicine and funnels people into expensive 
emergency rooms.
    But promoting universal insurance may be easier than reining in the 
costs that cause the middle-class pay squeeze. However strange it is 
that health care should have grown out of corporate compensation 
policies, switching to an entirely tax-financed system (euphemistically 
known as ``single-payer'') may be politically infeasible at this point. 
The challenge is to graft cost-cutting reforms onto the public-private 
jumble that is the U.S. system.
    The Bush administration's approach is to turn patients into cost-
conscious consumers by steering them into high-deductible plans. The 
idea is that when people pay out of pocket for health care, they will 
refuse to overpay for it; witness the dramatic fall in the price of 
procedures that insurance does not cover, such as Lasik eye surgery. 
But this approach has a cost--it shifts more risks directly onto 
individuals--and the benefit is smaller than advertised. Consumers 
can't be expected to start researching which doctors offer good value 
for the money when they face a medical emergency, and emergencies 
account for a large chunk of health spending. Besides, major medical 
events are likely to cost more than the deductibles of even high-
deductible policies, so patients would still have little incentive to 
shop carefully for surgery and other big-ticket procedures.
    SO A SHIFT to out-of-pocket spending can only discipline medical 
costs up to a point. A better approach is for insurers to take the lead 
on price discipline. Back in the 1990s, this meant health maintenance 
organizations crudely denying care and turning themselves into pariahs. 
But the cost containment of the future could be smarter and more 
palatable if government encouraged doctors to maintain electronic 
records.
    Consider one cost in the system: the overuse of diagnostic tests. 
At present, doctors order these tests because they perceive (maybe 
wrongly) little medical downside to doing so; insurers resist them 
because they are expensive. But if detailed patient records allowed 
researchers to measure the benefits of doing tests on certain types of 
patients, this dispute could be resolved intelligently. Data on 
millions of cases, stripped of personal information to protect privacy, 
could show whether patients with herniated discs gain anything from 
MRIs, or whether whole-body CAT scans achieve anything. Equally, the 
data could show which sorts of patients benefit from a brand-new anti-
inflammation drug and which will do fine on cheap ibuprofen. In this 
way the medical system could switch from the indiscriminate use of 
expensive new technology to a more targeted approach based on evidence.
    The health system is a huge problem in its own right, irrespective 
of inequality. The United States spends almost twice as large a share 
of its economy on health care as do other rich countries, yet it still 
has lower life expectancy; it still has 47 million uninsured; and 
future health costs threaten crippling budget deficits. But the rise of 
inequality provides an extra reason to tackle the health challenge. 
Struggles with medical bills and fears of losing coverage are at the 
root of middle-class anxiety, and that anxiety creates pressure for 
misguided populist policies that would spread the dysfunction of the 
health system to the broader economy. So long as a third of the 
workforce lives in fear of losing access to doctors, nobody should 
expect the Nation to believe that a rising tide is lifting all boats.
    This is the eighth editorial in an occasional series on inequality. 
Previous editorials in the series can be found at http://
www.washingtonpost.com/inequality.
                                 ______
                                 

 [From the Washington Post Series on inequality, Friday, December 22, 
                               2006; A32]

                            Just Capitalism

    Not all attacks on business are crazy. Here is the sane version.

    THIS SERIES has described ways to address inequality: Increase tax 
progressivity; invest more in education; reform health care. But 
there's pressure to reach beyond that: to tackle inequality where it 
apparently originates, meaning the workplace. This pressure can be 
dangerous. Companies are not instruments of social policy; their first 
duty is to make money by serving customers, and they can provide for 
their workers only so long as they do that. Nevertheless, two sorts of 
corporate reform are warranted. It should be easier for labor unions to 
organize. And it should be harder for top executives to pay themselves 
outlandish sums.
    Union membership has fallen from 20 percent of the workforce in 
1980 to 13 percent in 2005, and part of this decline is inevitable. It 
reflects attrition in the manufacturing industries that are most easily 
organized. It reflects the rise of sophisticated human resource 
departments that provide workers with training, savings plans and 
grievance procedures--usurping some of unions' traditional functions. 
And it reflects the deregulation of domestic industries such as 
trucking and airlines, plus tougher foreign competition. These forces 
spur businesses to innovate, but they also constrain their ability to 
make wage concessions to unions. In competitive markets, companies will 
pay workers what it takes to prevent them from being lured away by 
rivals--and not more.
    Yet the decline of organized labor also reflects a legal climate 
that is neither inevitable nor desirable. The way labor law is enforced 
now, employers can block attempts to establish unions by intimidating 
workers; a supervisor can summon an employee to daily meetings to 
discuss the dangers of unions or ban discussion of a union during work 
hours. If these tactics are not enough, employers can fire union 
organizers; although this is supposed to be illegal, the penalties are 
too feeble to serve as a deterrent. Meanwhile, a series of decisions 
from the National Labor Relations Board has narrowed the definition of 
workers who are eligible for union membership. Two months ago, for 
example, the three board members appointed by President Bush outvoted 
the two appointed by President Bill Clinton in ruling that relatively 
junior workers can be defined as ``supervisors,'' thus restricting 
their right to join a union.
    A fairer legal climate might reduce inequality slightly. According 
to David Card of the University of California at Berkeley, de-
unionization explains about 15 percent of the increase in wage 
inequality among men over the past quarter-century. But the larger gain 
from reforming labor law would be political. Freedom of association is 
a core democratic right, and polls suggest that between 30 and 50 
percent of nonunion workers would choose union representation if they 
had a chance to vote for it. The suppression of freedom of association 
is wrong in itself, and it fosters the suspicion that the rules of the 
economy are rigged against workers. Setting aside the debate over how 
much union membership can improve wages or benefits, the option of 
union membership is crucial to the legitimacy of capitalism.
    The same goes for rules on executive compensation. Since 1970, the 
pay of chief executives has jumped from less than 30 times the average 
wage to almost 300 times that level. This helps explain why the richest 
1 percent of Americans pocketed 21.6 percent of all the gains in 
national income between 1996 and 2001, according to Ian Dew-Becker of 
the National Bureau of Economic Research and Robert J. Gordon of 
Northwestern University. As with the decline of labor unions, some of 
the rise in executive compensation reflects market forces and is 
inevitable. Yet similar market forces are at work in other advanced 
nations, where executive pay has grown more modestly. In 2003, the 
ratio of U.S. chief executives' pay to that of manufacturing workers 
was more than double the norm in 13 other rich countries.
    This reflects the way that bosses' pay is often set in the United 
States. Chief executives negotiate with a committee of board members 
whose independence is sometimes suspect, whose personal interests 
(particularly if they are CEOs of their own companies) may be served by 
rising executive-pay scales and who see little upside in risking a 
fight with the chief executive. In the absence of real discipline from 
compensation committees, CEOs can get away with pointing to the typical 
pay rate in their industry and asserting that they deserve a little 
more. The result is an inflationary spiral in executive compensation, 
unhinged from CEOs' real contribution to firms' performance.
    What proportion of bosses' pay should be regarded as excessive? In 
a paper published last year, Harvard's Lucian Bebchuk and Cornell 
University's Yaniv Grinstein take a careful look at this question. They 
begin by noting that executive pay was already raising eyebrows back in 
1993 and that it has nonetheless grown mightily since then. Then they 
observe that sales and profits of top companies have risen, which would 
tend to cause the bosses' pay to rise in tandem; and that an increasing 
share of the top companies are new-economy outfits, which tend to pay 
more. By analyzing the statistical relationship between executive pay 
and firms' size, profits and product mix, Mr. Bebchuk and Mr. Grinstein 
calculated how much compensation could have been expected to rise 
between 1993 and 2003. Their result: In 2003 the top five executives at 
the average public company could have been expected to earn a 
collective $6 million--but they actually received almost twice that.
    Overall, that means that the 1,500 companies studied ``overpaid'' a 
total of $8.7 billion in 2003--and this number is an understatement 
because it leaves out executive pensions, which are thought to have 
grown especially dramatically. If corporate governance reforms 
reestablished discipline over executive compensation, that excessive 
pay might shrink a bit. Inequality would decline, though only 
slightly--the money would flow to shareholders, and more than three-
quarters of all stocks are owned by the richest 10 percent of the 
population. But, as with labor law reform, the chief gain from 
corporate governance reform would be political. Executive overpayment 
running into the billions sends a terrible signal about the justice of 
the capitalist system.
    Most critics of business are misguided. It is wrong to denounce 
managers who relocate factories to other countries or who fight to 
control wages; they are responding to market signals, as indeed they 
should. But when managers distort market forces by rigging the legal 
environment, that is a different matter. An entire industry of 
consultants exists to advise companies on how to avoid recognizing a 
union; a second industry of consultants exists to legitimize super-
sized executive pay. Until this changes, the growing material 
inequality in the Nation will be compounded by the corrosive perception 
that the rules are unequal, too.
    This is the ninth editorial in an occasional series on inequality. 
Previous editorials in this series can be found at http://
www.washingtonpost.com/inequality.
                                 ______
                                 

 [From the Washington Post Series on inequality, Sunday, December 24, 
                               2006; B06]

                            Seize the Chance

    The politics of inequality have shifted. Now policy must follow.

    THIS SERIES opened with the observation that Americans prefer not 
to discuss inequality. Nine months later, the climate has changed. John 
W. Snow, who served as Treasury secretary until July, broke ground for 
this administration by acknowledging that inequality was worth 
debating--though he never quite conceded it was a problem. His 
successor, Henry M. Paulson Jr., forthrightly declared that ``amid this 
country's strong economic expansion, many Americans simply aren't 
feeling the benefits.'' Meanwhile, Ben S. Bernanke, installed by 
President Bush as Federal Reserve chairman, has called for the fruits 
of globalization to be distributed more evenly. During his 2000 
Presidential campaign, Mr. Bush quipped that his base consisted of the 
``haves and the have-mores.'' We doubt he would make this joke now.
    The question is whether the new climate will lead to a policy 
breakthrough. Some of the Democrats who unseated incumbents in the 
midterm elections--notably Sens.-elect James Webb in Virginia and 
Sherrod Brown in Ohio--campaigned on the issue of inequality and feel 
that they have a mandate for action. But the action they emphasize is 
trade protectionism, which would harm growth without necessarily 
reducing inequality. Higher tariffs might help workers in struggling 
manufacturing companies, but they would push up prices for workers in 
the service sector, which includes janitors, fast-food workers and 
other low-income employees.
    The field is therefore open for leaders in both parties to come up 
with better ideas. This series has suggested several options and 
explained their policy merits. But we also believe that our proposals 
are politically marketable.
    Take our suggested tax increase: A 5-percentage-point increase in 
the rate paid by the top 1 percent of households. Members of Congress 
appear to believe that calling for a tax increase--any tax increase--is 
political suicide. But can it really be true that voters are wedded to 
all of the tax cuts enacted this decade, even though the richest 1 
percent stand to pocket more than a third of the windfall? By 
definition, the tax increase we suggest would not affect 99 percent of 
households, and it would not damage growth either. It would merely 
restore the top rate that existed in the 1990s--a period when the U.S. 
economy performed excellently.
    The same goes for tax reform, another policy endorsed in this 
series. Members of Congress may think they'll be skinned alive for 
messing with mortgage-interest deductions or tax shelters for savings. 
But what if they explained that half the benefits of these schemes flow 
to the richest tenth of households? What if they promised that the 
majority of voters would keep their tax breaks, and only those with 
mortgages of $500,000 or more would suffer the indignity of reduced 
subsidies? If voters understood that these tax deductions are unfair, 
inefficient and condemned by policy experts of all stripes, they would 
applaud the politician who tamed them.
    This series has also proposed a boost to education spending, 
including an increase of $2 billion annually to upgrade the quality of 
the Head Start preschool program. Of all the policies we offer, this is 
perhaps the easiest sell. Mr. Bush has demonstrated that it's possible 
to generate a bipartisan coalition on education, and this month a 
commission headed by former education and labor secretaries from both 
parties endorsed the idea of starting school for most children at 3 
years old. The chief obstacle to action is the fear that education 
reform seldom yields real improvement. But experiments with high-
quality preschool have shown dramatic reductions in later dropout and 
arrest rates for students, proving that education investments are 
effective and save money for society in the long run.
    Then there is the dysfunctional health system, which national 
politicians often shy away from in the belief that it is impossibly 
complex. But the pressure for reform is stronger now than it was when 
President Bill Clinton's proposal crashed spectacularly: The nation has 
suffered another decade of galloping health costs that eat into take-
home wages, damage the bottom lines of companies and leave a shamefully 
large number uninsured. Besides, the idea that ambitious health-care 
proposals will explode in the face of their sponsors is belied by 
recent experience. Gov. Mitt Romney of Massachusetts signed a plan for 
universal health coverage and is now running for president. A dozen 
other states are pushing health-reform experiments; California's 
Governor, assembly speaker and Senate president are coming out with 
rival ways to expand coverage. This month Sen. Ron Wyden, Democrat of 
Oregon, unveiled a voluminous bill that promises to extend coverage to 
all Americans without costing taxpayers a cent more.
    Inequality has increased in most rich countries over the past 
quarter-century. We do not claim that eliminating it is possible, nor 
even desirable: Unequal rewards help motivate people to work and 
innovate. But excessively unequal rewards can backfire. They can allow 
a successful elite to insulate itself from the rest of society, 
actually dulling competition and incentives, which is why economists 
find no evidence that more unequal societies grow faster--and some 
evidence of the opposite. The level of inequality in the United States 
is bad for the social fabric without being good for economic dynamism. 
There are win-win opportunities to reduce inequality and at the same 
time boost efficiency. When the new Congress convenes in January, it 
should seize them.
    This is the 10th and final editorial in a series on inequality. 
Previous editorials in this series can be found at http://
www.washingtonpost.com/inequality.
                               __________
  Prepared Statement of Robert E. Rubin, Director and Chairman of the 
     Executive Committee, Citigroup; Former U.S. Treasury Secretary
    Thank you Mr. Chairman. I believe that you are holding this hearing 
at an historic juncture with respect to the longer-term outlook of the 
American economy, and that your Committee is exceedingly well 
positioned to catalyze serious public discussion and to develop sound 
approaches with respect to the issues that face us.
    The American economy has enormous strengths: the dynamism of our 
society, the willingness to take risk, our flexible labor markets, and 
much else. On the other hand we also face hugely consequential longer-
term challenges, which I'll touch on briefly in a moment. Moreover, the 
global economy is undergoing change of historic proportions, including 
technological developments, globalization, effective productivity 
policies like education and market-based economics in a number of 
emerging market economies, and, as a consequence of all this, the 
emergence of China and India as potentially large markets but more 
immediately as powerful competitors. We can thrive in this transforming 
environment, but to do so it is imperative that we meet our challenges, 
and failure to meet our challenges could lead to serious difficulty.
    Currently, in my judgment, we are far from being where we need to 
be on almost every front, independently of how you allocate the 
political responsibility. This contributes substantially both to the 
unsound fundamentals underlying our economy despite good GDP growth, 
which could augur trouble for the future, and to the struggle that many 
if not most Americans are having economically. As to this latter, 
median real wages and median real compensation have been roughly 
stagnant for the last 5 years, and grew relatively slowly for the last 
30 years, except for the last 5 years of the 1990s, while income 
inequality, focusing on a very small top tier, has increased 
substantially. Moreover, economic dislocation and economic insecurity 
have increased substantially.
    As we address all of these conditions, I believe strongly in 
markets as the most effective organizing principal for economic 
activity; but government has a critical role in providing the 
requisites for economic success that markets, by their very nature, 
will not provide. Moreover, the objectives of policy should be growth, 
but also broad participation in that growth and improved economic 
security, both as a matter of values and also because these objectives 
can be mutually reinforcing.
    More specifically, sustained growth is the single most effective 
way of promoting broad income growth and economic security--through the 
effect of sustained tight labor markets. And, broad income growth and 
increased security are critical to growth for two reasons. First, they 
provide workers with the resources to access education, training, rapid 
redeployment into the economic stream when dislocated, and other 
contributors to productivity, and, second, because sound economic 
policies around trade and market based economics will only have broad 
public support if the great preponderance of the people expect to 
benefit from these policies.
    I think we can most effectively achieve the three objectives I set 
out--growth, broad distribution of that growth, and greater economic 
security--by meeting the challenges I mentioned earlier, which I think 
of as falling into four baskets: (1) our multiple financial imbalances; 
(2) serious shortfalls in education, infrastructure, basic research, 
energy policy, health care policy, inner-city programs and so much else 
that are critical requisites for economic success; (3) the cost/benefit 
imbalances in our regulatory and litigation regimes; and (4) 
international economic policy, including trade, relatively open 
immigration, and working toward flexible exchange rates. These all 
occur alongside of economically significant exogenous risks, including 
terrorism, oil shock and others.
    Addressing our challenges will require a dramatic change in our 
strategic orientation and commensurate change in our policies. In my 
limited time, I won't try to describe the relationship between each of 
our challenges and the three objectives I set out, but just comment 
briefly on two of those challenges.
    As to financial imbalances, current economic conditions rest on 
high levels of borrowing at multiple levels in our society. These 
include significant projected fiscal deficits over the 10-year Federal 
budget window--assuming the 2001 and 2003 tax cuts are made permanent 
as proposed--instead of the surpluses we should have had in a time of 
healthy GDP growth; a net national savings rate of about 2 percent of 
GDP; a projected increase in Social Security, Medicare and Medicaid 
entitlements as a percentage of GDP over the next 15 years of 50 
percent; a current account deficit of almost 7 percent of GDP, caused 
partly by our fiscal deficits, and heavy overweighting of dollar 
denominated holdings in many foreign portfolios. The combination of 
these factors is a deep and multi-faceted threat to job creation, to 
standards of living, and to our economy. The vast capital flows from 
abroad that have sustained us are exceedingly unlikely to continue 
indefinitely, though the timing of trouble--whether in the near term or 
years out--is unpredictable.
    I believe that we should establish a fiscal path that 
systematically reduces the debt to GDP ratio year-by-year and leads to 
balance, and at the same time makes room for critical public 
investments. These critical public investments--and other key domestic 
policy issues--also will require change that will be very difficult, 
substantively and politically, but that are imperative.
    As to globalization and trade, let me start by saying again that 
many Americans are experiencing real difficulty economically, and the 
pressures from globalization on wages and economic security are one of 
the factors--including, far more significantly, technological change--
contributing to this.
    Thoughtful people on this committee and your colleagues in both 
chambers are working to find effective policy responses to these 
difficulties, a search made more complicated by the transformative 
change taking place in the global economy.
    There is an understandable temptation to erect trade barriers. 
However, I believe that would be deeply harmful: that path would lead 
to higher consumer prices, higher input costs for our producers vs. 
foreign competitors, loss of the benefits of comparative advantage, 
loss of pressure of open markets on business to increase productivity, 
and finally, likely retaliation of the countries to which we export and 
possible disruptive effects on the dollar. Moreover, other countries 
are continuing to move forward on trade liberalization; the only 
question is whether we will be in or out of the net of preferential 
arrangements.
    However, trade liberalization--which I believe on net still greatly 
benefits our economy and the great preponderance of our people--must be 
combined with a powerful domestic agenda to promote productivity, 
broad-based income growth, and greater security, along the lines I 
already discussed, and drawing on past experience but also innovative 
and creative thought.
    Mr. Chairman, we can have a bright future, but we have much 
substantively and politically difficult work to do, and this committee 
can contribute greatly to achieving those purposes.
                               __________
    Prepared Statement of Dr. Lawrence H. Summers, Charles W. Eliot 
    University Professor, Harvard University; Former U.S. Treasury 
                               Secretary
    Mr. Chairman, Members of the Committee, I appreciate very much this 
opportunity to testify before the Joint Economic Committee at what I 
believe is a critical juncture for U.S. economic policy. There are a 
variety of features of the current economic environment that are 
without precedent. These include:
     the magnitude of our current account deficit and looming 
fiscal problems;
     the degree of integration in the global economy;
     the spectacular rise of China, India and other emerging 
markets;
     the pervasive impact of technology; and
     the substantial increases in inequality and economic 
insecurity that have been observed in recent years.
    We are, to an important extent, in un-chartered territory in 
setting economic policy and so this Committee is to be commended for 
taking up these policy challenges at this crucial juncture.
    In this new economic environment, the United States faces three 
main policy challenges:
     returning its finances to a sustainable basis;
     making necessary investments for the continuation of rapid 
economic growth; and
     assuring the benefits of growth are widely shared, and in 
particular, that we continue to have the strong middle class that has 
long been the underpinning of our democracy.
    Let me say a few words about each of these challenges.
    First, the nation's finances are not now on a sustainable basis. 
While projections vary, few observers believe that without significant 
policy changes the debt-to-GDP ratio of the United States will increase 
quite rapidly in the next decade and beyond. In part, this is a 
reflection of an aging society. In part, it is a reflection of the 
fiscal policies of the last 5 years in which very large tax cuts have 
coincided with substantial increases in both defense and domestic 
spending.
    This move toward fiscal un-sustainability has been one of the 
drivers of the deterioration in international economic position of the 
United States, as our current account deficit has now reached record 
levels and is approaching one trillion dollars. The current account 
deficit reflects both the very substantial international borrowing by 
the United States government due to significant fiscal deficits as well 
as a continuing decline in the private savings rate. Indeed, in recent 
years, the United States has had a net national savings rate that is 
close to zero.
    The consequences of these adverse and unsustainable developments 
have been masked in recent years by the very substantial investments in 
U.S. short-term financial securities made by central banks around the 
world, and in particular by the central banks of emerging Asian 
countries and the oil-exporting countries. This has created a situation 
where the world's greatest power is also the world's greatest borrower.
    In the short run, the United States benefits from the availability 
of low-cost capital. However, this low-cost capital has as its 
counterpart the very substantial volume of exports to the United States 
in excess of our own imports and the resulting significant trade 
imbalances. There is also the question of how long foreign investors 
will be prepared to lend us funds on such generous terms to support 
deficits of this magnitude.
    Clearly, a policy priority in this regard has to be increasing the 
stability of the nation's financial position. The most important step 
the Congress can take is to adopt a fiscal policy that puts the 
government's finances on a sustainable footing. There is no silver 
bullet here. Undoubtedly, it is important to address the excesses of 
recent years, to take on entitlement issues, and, perhaps most 
critically, to return to budget discipline with respect to any new 
initiatives on either the spending or the tax side.
    The second large economic policy challenge is assuring adequate 
growth in the years ahead. From the end of the Second World War until 
the mid nineteen-seventies, Americans benefited from rapid productivity 
growth. Subsequently, a sharp slowdown in productivity growth 
manifested itself and lasted until the mid nineteen-nineties. Since 
then, productivity growth has been quite rapid, though there are signs 
that it may be slowing once again. Economists do not fully understand 
all the determinants of these trends.
    There can be no certainty as to how best to increase productivity 
growth going forward in the United States. But equally, there is no 
question that public investments are essential. I would highlight three 
areas of public investment where I believe our national effort has been 
insufficient in recent years.
    First, our investments in research and development, after 
increasing rapidly since the nineteen-nineties, have lagged. In a time 
when the world stands on the brink of revolutionary progress in the 
life sciences, it cannot be rational for the NIH budget to decline as 
it did this past year for the first time in nearly forty years. If one 
looks at funding levels adjusted for inflation the decline in our 
national commitment to basic research is even more remarkable.
    As President of Harvard, I had the opportunity to observe the 
remarkable potential of research in the life sciences. I also had the 
opportunity to observe many extraordinarily talented scholars 
abandoning the life sciences as the average age of funded investigators 
rose in the face of budget pressures. Similar trends can be observed in 
the physical sciences.
    The second key element of public investment in productivity growth 
is education funding. Ultimately, nothing is more important to our 
prosperity than the quality of the American labor force. It is 
particularly important that investments be made to ensure that all of 
our citizens have a chance to fully participate and share in our 
prosperity. A growing body of evidence suggests that pre-school 
education has an enormous rate of return, particularly for children 
from disadvantaged background, and funding these kinds of programs 
should be a high priority.
    There is also a major need for national investment to ensure the 
affordability of higher education for all of our citizens. One of the 
most disturbing statistics I encountered in recent years is the 
observation that just 10 percent of students attending our leading 
universities come from the lower half of the American income 
distribution.
    The third crucial area of investment is in infrastructure. Here, 
there are clearly areas in which there has been excess national 
investment in response to political pressures. But there are also key 
areas such as transportation and other infrastructure facilities where 
investment has been grossly inadequate.
    The third, and in some ways most pressing, economic challenge is 
that of assuring a strong middle class. This has three related but 
distinguishable elements: assuring equality of opportunity; assuring 
long-term economic security for those who currently have good jobs; and 
assuring that prosperity and economic growth are shared widely, rather 
than benefiting a small part of the population. How best to do this is 
a question that will require all of our effort in the years ahead, but 
I think there are three crucial areas that require attention.
    First, assuring the fair collection of taxes. There are a number of 
areas in which we can improve the effectiveness of the tax system while 
at the same time increasing its fairness. These include making a 
serious assault on the tax gap resulting from non-compliance with the 
Internal Revenue Code, which may represent as much as fifty billion 
dollars per year. I would note the tax gap is greatest for those 
categories of income that go disproportionately to the upper ends of 
the income distribution. There are also important issues and abuses 
associated with transfer pricing and the sheltering of both individual 
and corporate income that require Congressional attention. I am 
convinced that substantial revenues can be obtained from these sources.
    If we are to assure adequate economic security for all of our 
citizens, we need to recognize that in a world where jobs are going to 
be increasingly impermanent, economic security cannot come only from 
the employment relationship. This will require new approaches in the 
areas of health insurance and other benefits. I believe it is also 
appropriate that consideration be given to thinking about methods of 
wage insurance that would enable increasingly inevitable economic 
mobility to take place without significant and painful dislocation.
    A third type of response to economic insecurity involves taking 
comprehensive and systematic policy approaches to the future of key 
industries and regions. I was struck, Mr. Chairman, by the recent 
report you and other leaders from your state released on the steps 
needed to keep New York at the center of the global financial services 
industry. I could not help but wonder whether similar comprehensive 
efforts to devise a strategy and assure the leadership of American 
firms and other regions would not be availing in many different 
sectors. Indeed, reliance on clusters is, it seems to me, profoundly 
important for our economic future. Any individual faces the possibility 
of competition from a lower earning and equally skilled individual, but 
it is much more difficult to compete with or replicate entire clusters 
of economic activity. Indeed, the supremacy of New York City as the 
world's financial capital illustrates this point.
    Mr. Chairman, these are just a few of the crucial areas of policy 
that we face. I look forward to answering your questions and engaging 
in a wide-ranging discussion. Thank you again for inviting me to be 
here this morning.
                               __________
 Prepared Statement of Dr. Alan S. Blinder, Professor of Economics and 
     Director of the Center for Economic Policy Studies, Princeton 
        University; Former Vice Chairman of the Federal Reserve
    Thank you for holding this hearing, Mr. Chairman. I'd like to use 
my brief time to focus on two broad-brush, long-term issues, one 
pertaining to income disparities and one pertaining to globalization. 
They are, of course, related.
              rising income inequality: first, do no harm
    The first problem has been with us for so long that I fear we may 
be becoming inured to it. The plain fact is that America does a very 
poor job of caring for its poor, for its weak, and for its 
downtrodden--as was illustrated, for example, by the woefully 
inadequate response to Hurricane Katrina.
    Although specific statistical measures of poverty and inequality 
can be--and have been--disputed, the basic outlines of the story are 
clear enough. Inequality in America was basically constant for the 35 
years or so from the end of World War II until the late 1970s, but has 
been mostly rising since. The one notable exception was the boom years 
of the second Clinton administration, when labor markets were 
extraordinarily tight.
    This phenomenon has not been mainly a story of vast capital gains 
accruing to a tiny minority, nor of a massive income shift from labor 
to capital-although both of these have played roles in certain time 
periods. Rather, the basic story is that earnings from work have grown 
vastly more unequal over the last quarter-century. There are many ways 
to measure that change, but here is one that I find both dramatic and 
easy to understand. According to IRS data, in 1979 the average taxpayer 
in the top 1/10th of 1 percent of all wage and salary earners earned 
about as much as 44 average taxpayers in the bottom half.\1\ By 2001, 
that number had risen to almost 160.\2\ And we know from other data 
sources that inequality has gotten worse since.
---------------------------------------------------------------------------
    \1\ The unit of observation in tax data is the tax return, not the 
individual or the family.
    \2\ These are my calculations, based on data in Table 7 (p. 104) of 
Ian Dew-Becker and Robert Gordon, ``Where did the Productivity Growth 
Go?,'' Brookings Papers on Economic Activity, 2005:2. 2001 is the last 
year for which comprehensive tax data were available at the time.
---------------------------------------------------------------------------
    What accounts for this alarming trend? Let me be clear: The main 
culprit has not been the government but the marketplace. While there 
are a number of competing theoretical explanations, the fact is that, 
starting sometime in the late 1970s, the market turned ferociously 
against the less skilled and the less well educated.
    How should the government have reacted to such a development? One 
clearly wrong approach would have been to try to stop the market forces 
that were generating rising inequality. Such an effort would have 
produced undesirable side effects and would probably have failed 
anyway.
    A more reasonable approach would have included using the tax-and-
transfer system to cushion the blow, raising the minimum wage and the 
EITC, devoting more resources to compensatory education, making health 
insurance universal, etc. These are still useful ideas, and we should 
use them.
    A Social Darwinist would have rejected palliatives like these in 
favor of letting the market rule and the chips fall where they may. (By 
the way, it strikes me as ironic that some of these Social Darwinists 
are not biological Darwinists.)
    That may sound heartless. But, with a few notable exceptions, the 
U.S. Government has followed an even harsher policy course for most of 
the past quarter century.\3\ As market forces turned against the middle 
class and the poor, the Federal Government piled on by enacting tax 
cuts for the rich while either permitting or causing large holes to 
emerge in the social safety net. In football, that would be called 
``unnecessary roughness''--and penalized severely. It's a policy 
direction that, in my view, needs to be changed--and fast. The first 
step is to stop piling on.
---------------------------------------------------------------------------
    \3\ The main exception was the Clinton administration's huge 
increase in the Earned Income Tax Credit in 1993.
---------------------------------------------------------------------------
                     offshoring: the sleeping giant
    Let me now turn to an issue whose present importance has been 
greatly exaggerated, but whose future importance appears to be 
underappreciated: offshoring of service jobs. While no comprehensive 
numbers are available, scattered studies make it appear likely that 
fewer than a million U.S. service jobs have been lost to offshoring to 
date. A million may sound like a lot, but in a nation with over 140 
million jobs, it is not even 1 month's normal turnover. No big deal, in 
other words.
    However, I believe we have seen only the tip of a very big iceberg. 
Here's why. Only a minority of American workers--mainly manufacturing 
workers--have historically faced job competition from abroad. They 
haven't welcomed it, of course. But they have long understood that 
foreign competition is one of the hazards of industrial life, like 
bankruptcies and business cycles.
    But most American workers, including the vast majority of service 
workers, have never had to worry about foreign competition. Until 
recently, neither low-skilled work like call centers nor high-skilled 
work like computer programming could easily be moved offshore. Now both 
can be. My point is that the share of American jobs that is potentially 
vulnerable to offshoring is certain to rise over time as the technology 
improves and as countries like India and China modernize and prosper. 
As this occurs, tens of millions of additional American workers will 
start to experience an element of job insecurity--and downward pressure 
on real wages--that has heretofore been reserved for manufacturing 
workers. It is predictable that they will not like it.
    Many people have concluded that offshoring will be a particularly 
acute problem for less-skilled and less-well-educated workers--
precisely the people who have been left behind for the last 25 years. 
I'm not so sure. As I see it, the key labor-market divide in the 
Information Age will not be between high-skilled and low-skilled 
workers, as it has been in the recent past, but rather between services 
that can be delivered electronically with little loss of quality and 
those that cannot be.\4\
---------------------------------------------------------------------------
    \4\ See Alan S. Blinder, ``Offshoring: The Next Industrial 
Revolution?,'' Foreign Affairs, March/April 2006, pp. 113-128.
---------------------------------------------------------------------------
    Consider a few examples. It seems unlikely that the services of 
either waiters or brain surgeons will ever be delivered over long 
distance. On the other hand, both typing services and security analysis 
are already being delivered electronically from India--albeit on a 
small scale so far. These disparate examples illustrate two 
fundamentally important points. First, the dividing line between jobs 
that are deliverable electronically (and thus are threatened by 
offshoring) and those that are not does not correspond to traditional 
distinctions between high-end and low-end work. Frankly, I have no idea 
whether future offshoring will make the distribution of wages more or 
less equal. Second, the fraction of U.S. jobs that can be moved 
offshore is certain to rise inexorably as the technology improves. 
Despite all the fuss, it is pretty low now; but it will eventually be 
quite high. In some ongoing and still preliminary research, I have 
estimated that 22-29 percent of all (current) American jobs might 
potentially be offshorable, although only a fraction of those jobs will 
actually be offshored.\5\
---------------------------------------------------------------------------
    \5\ Alan S. Blinder, ``Estimating the Potential for Offshoring in 
the United States,'' unpublished, Princeton University, December 2006.
---------------------------------------------------------------------------
    What can or should the government do about all this? I don't have a 
laundry list of concrete proposals, but I think the appropriate 
governmental responses fall into two generic categories.
    First, we need to repair and extend the social safety net for 
displaced workers. This includes unemployment insurance, trade 
adjustment assistance, job retraining, the minimum wage, the EITC, 
universal health insurance, and pension portability--plus other, newer 
ideas like wage loss insurance. If we fail to do these things or, 
perish the thought, turn again to Social Darwinism or piling on, a 
large fraction of the U.S. population is going to experience a great 
deal of anxiety and economic distress. These people will constitute a 
much larger, more vocal, and more politically engaged group than the 
poor and uneducated. So it seems unlikely that they will just sit there 
passively and take their medicine. Rather, Congress will hear from 
them.
    Second, we must take steps to ensure that our labor force and our 
businesses supply and demand the types of skills and jobs that are 
going to remain in America rather than move offshore. Among other 
things, that may require substantial changes in our educational 
system--all the way from kindergarten through college. And it will 
certainly entail a variety of steps to ensure that the U.S. remains the 
home of innovation and invention, for we will never compete on the 
basis of cheap labor. Nor do we want to.
    Notice that I did not mention a third category of governmental 
response: trying to impede globalization in general or offshoring in 
particular. The U.S. Government cannot hold back the tides of history, 
and it should not try. Mr. Chairman, you may remember a popular 1960s 
musical comedy called Stop the World, I Want to Get Off. I understand 
the sentiment. You hear it a lot these days. But we cannot stop, and we 
cannot get off. Instead, we Americans need to prepare ourselves for the 
future of globalization, whether we like it or not. There is much to be 
done.
    Thank you.
                               __________
 Prepared Statement of Dr. Richard Vedder, Distinguished Professor of 
   Economics, Ohio University; Visiting Scholar, American Enterprise 
                              Institute; 
                  Co-Author of the Wal-Mart Revolution
    Good morning Senator Schumer and members of the Committee. The JEC 
has just completed 60 years of existence, and during those six decades 
it has assisted importantly in the making of economic policy, and I am 
pleased to be part of today's proceedings.
    My distinguished colleagues on this panel have painted a somewhat 
pessimistic and perhaps mildly alarming picture of the American 
economy. We learn that many Americans have not shared in our nation's 
rising prosperity. The income and wage gap between the rich and the 
poor is growing. We are told we are becoming a more economically 
divided nation.
    My message is somewhat more optimistic and skeptical of the 
analysis suggesting that vast portions of the American populace are 
languishing economically. Let me very briefly touch on three points. 
First, the conventional measures that are typically cited to denote 
greater inequality are fundamentally flawed and grossly overstate 
inequality in this nation, and the growth in it over time. Second, even 
if one accepts the proposition that America has insufficient equality 
of economic condition, history tells us that public policy efforts to 
deal with the problem often are ineffective. Third, some policies that 
conceivably might lower inequality as conventionally measured would, if 
adopted, have serious adverse consequences to the economy as a whole.
    Turning to the first point, looking at conventional statistics on 
income distribution, three factors lead us to overstate inequality. 
First, and probably least important, those statistics are traditionally 
based on money income, excluding a variety of in-kind, non-cash 
payments that primarily benefit lower income persons--Medicaid 
benefits, food stamps, and housing subsidies are three good examples. 
Any comparison of income levels or income inequality today with, say 
what existed in 1960 using published income data will tend to overstate 
any reported rise in inequality, and understate any estimate of income 
gains for lower income Americans, since non-cash payments have become 
relatively more important in the intervening time period.
    A second factor is that what we should be truly interested in is 
the economic well-being of Americans, and a far better measure of that 
economic well-being is consumption spending. Dollar for dollar, people 
derive more joy from what they spend than from what they earn. As many 
elementary economics textbooks point out in the first chapter, the 
ultimate purpose of economic activity is consumption.
    We know that in any given year consumer spending is far more 
equally distributed that income. Comparing the income distribution 
statistics derived from the Current Population Survey with the BLS's 
Consumer Expenditure Survey is revealing. For example, the poorest one-
fifth earned only slightly over 7 percent as much income as the richest 
one-fifth in 2002, but they consumed more than 24 percent as much. 
Using the most recent data for 2005, we see the richest one-fifth of 
the population earned 3.47 times as much as the middle quintile, but 
consumed only 2.31 times as much. Roughly speaking, conventional 
measures show consumption inequality is at least one-third less than 
for income inequality.
    The third point relating to the overstatement of inequality relates 
to the remarkable income mobility of the American people. For example, 
at the request of this Committee, the Treasury Department in the 1990s 
provided data suggesting that the overwhelming majority of persons in 
the bottom quintile of the income distribution were in another quintile 
a decade later, and a large percent even moved up or down the 
distribution from one year to the next. Researchers at the Urban 
Institute and other organizations have made similar observations. This 
phenomenon helps explain the narrowness of the distribution of 
consumption spending relative to the distribution of income, as 
observed decades ago by the late Milton Friedman and in a different 
context by Albert Ando and Franco Modigliani. Failure to consider the 
income mobility of people contributes to the inadequacies of 
traditional measures of income distribution and also leads us to create 
some inequities and inefficiencies when devising tax policies based on 
single year definitions of income.
    While we are talking about measurement problems, they are 
particularly prevalent in our discussions of changes in earnings over 
time. Go to page 338 of the 2006 Economic Report of the President. We 
learn that average weekly earnings of workers in private 
nonagricultural industries in 2005 were over 8 percent less than they 
were in 1964, the year Lyndon Johnson announced his Great Society 
initiatives. Yet turn the page, to page 340. Looking at real 
compensation per hour in the non-farm business sector for the same time 
period, we learn it has risen 75 percent. Page 338 is consistent with a 
Marxian or even Malthusian interpretation of the economy--a tendency 
for wages to fall to near subsistence, and evidence of mass 
exploitation of the working proletariat by exploitive capitalists. Page 
340 is consistent with the view that with economic growth, the earnings 
of workers have risen sharply, and also consistent with national income 
accounts data that shows per capita real consumption has increased 
about 2 percent annually.
    Yet even the data on page 340 suffer from deficiencies. We learn 
that productivity per hour in the non-farm business sector in 2005 was 
2.28 times as great as in 1964, yet compensation rose only 1.75 times, 
a pretty big difference that is inconsistent with the neoclassical 
economic theory of factor prices and suggestive that owners of capital 
are indeed deriving extraordinary profits as a result of paying workers 
less than what they contribute to output at the margin. This should 
have resulted in a significant decline in compensation of workers as a 
percent of national income. Yet the national income data taken from 
pages 314 and 315 of the same source show a radically different story. 
Compensation of employees actually rose from 60.75 to 61.51 percent as 
a percent of the national income. The share of national income 
accounted for by corporate profits fell slightly in the same time 
period.
    I am making two points here. First, interpretations of economic 
data can be exceedingly misleading. Second, the analysis of broader 
measures of economic performance suggests that workers as a group have 
shared in our national prosperity of the past several generations. The 
original wage data I cited suffer from two enormous deficiencies. 
First, they fail to take account non-wage forms of compensation, 
particularly health care and retirement benefits. These have soared in 
magnitude over time. Second, the calculation of changing values in 
constant dollars is fraught with peril, and the Consumer Price Index 
used in these calculations very significantly overstates inflation in 
the eyes of virtually every mainstream economist, liberal, 
conservative, vegetarian, Presbyterian, what have you. Similarly, 
analysis of wage changes by wage or income category suffers not only 
from these problems, but from the aforementioned phenomenon of the 
rapidly changing economic status of individual members of our 
opportunity society over time.
    You don't need a Ph.D. in economics to observe that never has a 
society had a middle class more used to what once were considered goods 
and services available only to the uber rich. Middle income Americans 
live in larger homes, buy more gadgets like IPODS and cell phones, live 
longer, are more if not better educated, and take nicer vacations than 
either their parents did or do and their counterparts in any other 
major nation. I returned 2 days ago from a 2-week cruise in the 
Caribbean, traveling less with top business executives or even elite 
Ivy League professors than with equipment salesmen, butchers, and 
teachers -ordinary folk. That simply did not happen even 30 years ago.
    My second major point relates to public policy dealing with 
economic inequality. Time does not permit a detailed exegesis of past 
efforts. But a reminder of some historical experiences is sobering. 
Policy can come from the tax, spending or regulatory side. I will 
ignore regulatory matters in the interest of time, although I would 
hasten to commend Senator Schumer for recent statements showing his 
concerns about the abusive use of the tort system as a growth-impeding 
way of redistributing income. Looking at taxes, attempts to make the 
system more progressive often have unintended effects. For example, 
sharp reductions in top marginal tax rates in the 1920s, 1960s, and 
1980s, viewed by some as favoring the rich, actually led to sharp 
increases in the tax burden of the rich relative to the poor. I worked 
for this Committee during the 97th Congress in 1981 and 1982 in a 
political environment much like today with divided government, with the 
Republicans controlling the Executive while Congress was more under 
Democratic control, yet the two branches managed to work together to 
fashion a more growth oriented tax policy with lower marginal tax rates 
that contributed mightily to the boom that has followed. I hope the 
110th Congress is capable of similar accomplishments.
    Taxes have behavioral consequences. The CBO greatly underestimated 
revenues that would arise from the reducing in the top capital gains 
rate to 15 percent, for example. Falling rates unlocked billions in 
unrealized gains that have helped fund our rapidly expanding 
government. Similarly, sharp reductions in the number of estates 
subject to death taxation as a result of reform in those laws has not 
led to a sharp decline in revenues from that source, as some had 
expected. It would be a tragedy to reverse the positive effects of the 
tax reductions of the past few years that, like the Kennedy tax 
reductions of the 1960s, have had a positive impact on economic 
activity.
    On the spending side, history again shows disappointing results of 
many initiatives to help the poor or middle class. As the January 20 
issue of the Economist notes, government job training programs have 
internationally been largely failures. Spending initiatives in the 
areas of education, medical care, and public assistance have usually 
brought about disappointing results. Despite spending far more in real 
terms per student than a generation or two ago, American students do 
not appear to be learning much more, and the education for lower income 
students is particularly deficient. A tripling of Federal aid to 
college students since 1994 has been accompanied by a decline, not an 
increase, in the proportion of students from the lowest quartile of the 
income distribution attending and graduating from our finest 
universities, which are increasingly becoming taxpayer subsidized 
country clubs for the children of the affluent. While Medicaid has 
brought some increase in medical care for the poor, it has done so at 
an enormous cost to society, and the cost pressures of a highly 
inefficient system are leading companies to cut back on health care 
benefits for working middle class Americans. As to public assistance, 
it is far greater today in real per capita or per poor person terms 
than in 1973, yet the current poverty rate is higher. The welfare 
reforms of the 1990s were an important achievement, but the overall 
picture is, at the very least, mixed.
    Speaking of public assistance, I have to make one statement that 
may sound a bit callous or insensitive to some, but it is an important 
but often neglected truism. Comparing the rich and the poor, it is 
worth noting that the rich work a lot more. Of those persons in 
poverty, only a tiny minority work full-time. We have relatively few 
working poor in America. And it is worth noting that employment 
creation is greatest in periods when the government allows the 
incredible job machine generated by the competitive private sector 
operating in a market environment to work. The job creation of the 
1980s was stimulated by a halt to the growth in government's share of 
GDP characterizing earlier decades, and by tax reductions that 
stimulated the spirit of enterprise. The job creation of the 1990s was 
stimulated by an unprecedented decline in government expenditures as a 
percent of GDP for eight consecutive years--a reverse crowding out 
phenomenon that propelled an enormous outpouring of American creative 
and entrepreneurial endeavor.
    Turning to my final point today, there is a temptation to do things 
in the interest of protecting middle and lower income Americans that 
might have highly undesirable effects on the economy as a whole. In 
this regard, the rise in protectionist sentiment in Congress is 
appalling, particularly as is largely centered in a party which 
historically has favored free trade, a policy that has brought 
prosperity to almost all Americans while at the same time has 
contributed enormously to eliminating global disparities in the 
distribution of income and wealth. I hope the intelligent wing of the 
Democratic Party, represented by able persons such as those who 
preceded me on this panel, will be able to prevent a return to policies 
reminiscent of that old Democratic bete noire, Herbert Hoover. The 
Smoot-Hawley Tariff and rising taxes were a factor, along with Hoover's 
inane wage policies, for the Great Depression of the 1930s. Let us not 
repeat that today. I hope the Democratic Party will try to emulate 
Franklin D. Roosevelt, John F. Kennedy and Bill Clinton in the area of 
trade policy, not Herbert Hoover.
    At a macro level, I believe the biggest single factor in the modest 
slowdown in growth rates in this decade relative to the 1980s and 1990s 
is the sharp increase in government expenditures. From fiscal year 2001 
to fiscal year 2006, total Federal outlays rose by 42.4 percent, or 
$790.1 billion. By the way, the overwhelming majority of that was for 
non-defense or national security purposes. This was nearly double the 
percent growth in GDP. Receipts rose well over 20 percent or roughly 
equal to the growth in GDP, so the burgeoning deficit reflected a 
spending binge that resulted in some crowding out of private economic 
initiatives. Dollar for dollar, the evidence is crystal clear that 
private spending has more productivity-enhancing effects than public 
spending because of the discipline that competitive markets impose on 
market enterprise. The tax cuts largely corrected for the natural 
tendency for taxes to rise relative to national output. Raising taxes 
again would reduce the deficit, but would have direct unfortunate 
disincentive effects on human economic behavior and would also reduce 
the political costs to Congress of incremental spending initiatives, 
which almost certainly would have severe economic effects. I hope some 
early indications of spending constraint are maintained in the months 
and years ahead. While I am not the financial guru that Secretary Rubin 
is, an analysis that I have conducted with Lowell Gallaway for this 
Committee in the past suggests that the two best determinants of the 
growth of wealth as measured in equity prices are the rate of inflation 
and government spending as a percent of GDP. Rising government spending 
is associated with falling market values and wealth, with all the 
adverse consequences that has for pensions. And stable prices are much 
better than inflation. The Fed has done a pretty good job on the 
inflationary front, but the Congress and the Executive are guilty of 
having shown insufficient constraint with respect to Federal 
expenditures.
    Again, I praise the JEC for providing a needed forum for the 
analysis of policy possibilities informed by factual evidence. I hope 
the next 60 years are as successful for this Committee as the last 60 
have been.
    Thank you.
  

                                  
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