[Senate Hearing 111-281]
[From the U.S. Government Publishing Office]
S. Hrg. 111-281
THE UNITED STATES AS GLOBAL COMPETITOR:
WHAT ARE THE ELEMENTS OF A NATIONAL MANUFACTURING STRATEGY?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
ECONOMIC POLICY
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
ON
EXAMINING WHAT POLICIES CONGRESS SHOULD CONSIDER TO HELP REVITALIZE
U.S. MANUFACTURING
__________
JULY 17, 2009
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.access.gpo.gov /congress /senate/
senate05sh.html
----------
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii BOB CORKER, Tennessee
SHERROD BROWN, Ohio JIM DeMINT, South Carolina
JON TESTER, Montana DAVID VITTER, Louisiana
HERB KOHL, Wisconsin MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Edward Silverman, Staff Director
William D. Duhnke, Republican Staff Director
Dawn Ratliff, Chief Clerk
Devin Hartley, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Economic Policy
SHERROD BROWN, Ohio, Chairman
JIM DeMINT, South Carolina, Ranking Republican Member
JON TESTER, Montana
JEFF MERKLEY, Oregon
CHRISTOPHER J. DODD, Connecticut
Chris Slevin, Staff Director
(ii)
C O N T E N T S
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FRIDAY, JULY 17, 2009
Page
Opening statement of Chairman Brown.............................. 1
WITNESSES
Mark Zandi, Chief Economist and Cofounder, Moody's
Economy.Com................................................ 4
Prepared statement....................................... 26
Leo Hindery, Jr., Managing Partner, Intermedia Partners...... 7
Prepared statement....................................... 27
Scott N. Paul, Executive Director, Alliance for American
Manufacturing.............................................. 9
Prepared statement....................................... 31
(iii)
THE UNITED STATES AS GLOBAL COMPETITOR: WHAT ARE THE ELEMENTS OF A
NATIONAL MANUFACTURING STRATEGY?
----------
FRIDAY, JULY 17, 2009
U.S. Senate,
Subcommittee on Economic Policy,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 10:08 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Sherrod Brown (Chairman of the
Subcommittee) presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Senator Brown. The Subcommittee on Economic Policy will
come to order. Thank you for joining us, all of you, those of
you in the crowd, and especially our three witnesses, whom I
will introduce in just a moment.
Not too long ago, middle-class families worked hard, played
by the rules, and had something to show for it: A good wage, a
secure job and home, and the belief that their children would
have a future full of opportunity. Our Nation and our economy
relied on workers throughout the country to build the cars and
the appliances and lay down the rail lines and the highways in
our country. We relied on workers to build aircraft and
computers and semiconductors and more high-tech manufactured
goods. Their work put them squarely--which they earned. Their
work put them squarely in the middle class. Too often, that is
no longer the case.
Until recently, if you look at actions by Congress, until
the economy got so much worse, if you look at what makes the
news, you would hardly know that our Nation's largest economic
sector has been in serious decline. Perhaps years of relative
prosperity and economic bubbles hid the fact that our country's
industrial base has been struggling to survive.
Since 1987, manufacturing's share of GDP has declined by
some 30 percent. That is almost exactly the percentage increase
in the financial services industry over that same period. For
far too long, the prevailing belief guiding our economic and
trade policy in Washington was that an advanced economy like
ours no longer needs a strong manufacturing sector. In fact, we
have heard CEOs and policymakers say that the offshoring of
manufacturing industries is part of a natural economic process
that fosters new technologies and resources.
Perhaps now, finally, Washington has caught on to the fact
that manufacturing builds a strong middle class and a strong
Nation. The risks associated with allowing U.S. manufacturing
to wither on the vine, the risks to our economic securities,
the risks to our energy future, the risks, in fact, even to our
national defense are too great to sit on our hands and let it
happen. For decades, manufacturing has led the economy out of
recession because it tends to respond quickly to changing
economic conditions.
A few weeks ago, a New York Times headline read, ``Once a
key to recovery, Detroit adds to the pain.'' The auto industry
contributed significantly to past recoveries, including the
1981-82 recovery. But this time, we cannot expect autos to lead
the way.
In Ohio, a rich auto supply State, our challenge is to help
those and other suppliers to retool for the industries that are
attracting significant investment like wind and batteries and
medical IT. We will be squandering an opportunity to bolster
our economy and secure our energy independence if most of the
clean technology, though, is made outside of America.
That brings us to today's hearing. What we are considering
today are the elements of a national manufacturing strategy.
What policies should Congress consider to help revitalize U.S.
manufacturing? Manufacturing towns across the country deserved
an answer to this question years ago. Now that it is being
asked in corporate board rooms and in the highest levels of
Government, maybe the answers will finally come.
Last month, the gathering of top CEOs in Detroit said that
America cannot count on consumer spending and Wall Street to
maintain our high standard of living. General Electric CEO
Jeffrey Immelt said his company has outsourced too much and
that the U.S. needs to double the percentage of American
workers engaged in manufacturing from 10 to 20 percent. Yet
while promoting manufacturing may make sense from a public
relations perspective during this economic crisis, it is what
major American companies must do--it is what they do, not what
they say, that counts.
Today we are fortunate to have witnesses with us who can
talk about how we got to this point and how we can restore our
global competitiveness. To restore competitiveness to keep our
middle class thriving, we need a new national manufacturing
strategy that fosters an environment in which our manufacturing
sector can grow, can diversify, and can compete on a level
playing field in the global marketplace.
To help give shape to a national manufacturing strategy, I
would like to propose five areas of focus for today's
discussion and beyond. This is not an exhaustive list, to be
sure. Just a starting point.
One, innovation. We must create a predictable climate for
investment in research and development and establish an
Innovation Research Fund for work in clean energy, information
technology, defense, and aerospace. There is a building on
Oberlin College's campus--about 10 miles from where I live--
that was built perhaps 5 years ago. It was at that point the
largest totally solar-powered building on any college campus in
America, yet all the solar panels were built in Germany and
Japan because we did not make enough of them in our country and
because investors were looking for a more predictable tax
system than they had in the United States to invest money in a
largely capital-intensive business. That needs to change.
Number two, supply chains. Give supply manufacturers the
tools to transition from contracting industries such as autos
to growing industries like clean energy. Invest in the
Manufacturing Extension Partnership as outlined in the
Investments for Manufacturing Progress and Clean Technology
Act. The National Innovation Marketplace, as announced by Vice
President Biden, is also a positive step in that direction.
Number three, job skills. We need sector-based systems that
link highly skills workers with emerging industries to promote
long-term competitiveness. That means job training in areas of
work and job skills developed by local businesses and unions
and community colleges and workforce investment boards--people
by region who know best about their region.
Number four, coordination. When there is a natural
disaster, the Federal Government has a strategy and has
resources to rapidly assist communities in need. When there is
a massive disruption in the economy due to layoffs, there is no
similar national strategy to assist businesses and workers and
communities. I propose an Office of Community Economic
Adjustment modeled after the Defense Department's Office of
Economic Adjustment in response to base closings, which
coordinates support for communities faced with a base closure.
And, last, fair trade. Without strong enforcement of our
trade laws, our trade deficit continues to grow. We need to
defend against unfair trade, initiate more cases at the WTO,
and through existing trade agreement tools, we need to ensure
that our trade negotiators and trade negotiations yield
meaningful access for our producers. We must not allow our
Nation to become dependent on other countries for manufactured
goods. Our role in the global economy and the security of our
country depend on our ability to produce our own energy, equip
our own military, and sustain our own infrastructure. The
stakes are that high.
I will introduce the members of the panel now, and we will
start with Mark Zandi, and then we will work our way across.
Mark Zandi is the Chief Economist and Cofounder of Moody's
Economy.com. It is a division of Moody's Analytics and provides
economic research and consulting services to business,
governments, and other institutions. Dr. Zandi directs the
company's research and consulting activities. He focuses on
macrofinancial and regional economics. Dr. Zandi was an
economic adviser to the John McCain campaign for President. He
has provided advice to the Obama administration and regularly
testifies in front of this Committee and other committees in
the Congress, or this full Committee and other committees. His
most recent testimony has been on the economic impact of the
fiscal stimulus and the merits of providing Government aid to
the vehicle industry. Dr. Zandi received his Ph.D. at the
University of Pennsylvania and received his B.S. from the
Wharton School at the same university.
Leo Hindery, Jr., is Managing Director of InterMedia
Partners and chairman of the Smart Globalization Initiative at
the New America Foundation. Mr. Hindery has been recognized as
International Cable Executive of the Year, Cable Television
Operator of the Year, one of Business Week's Top 25 Executives
of the Year, and one of the cable industry's 25 Most
Influential Executives over the past 25 years. He is the
Managing Partner of InterMedia Partners, a media industry
private equity fund manager which he first founded some 20
years ago. Through most of the 1990s, he was President and CEO
of AT&T Broadband. From 2001 to 2004, Mr. Hindery was Chairman
and Chief Executive Officer of the YES Network, the Nation's
largest regional sports network, which he founded in the summer
of 2001 as the television home of the New York Yankees. Mr.
Hindery is Chairman of the Smart Globalization Initiative at
the New America Foundation.
Mr. Hindery. For which he still apologizes for.
Senator Brown. For which he should still apologize,
correct.
Mr. Scott Paul is Executive Director of the Alliance for
American Manufacturing. Welcome, Scott. He is the founding
executive director of the alliance, which was launched in April
2007. AAM is a unique partnership between the United States
Steelworkers and leading U.S. manufacturers. It has published
reports on the effectiveness of domestic trade laws and
manufacturing. The alliance has sponsored several successful
``Keep It Made in America'' tours and events, including an 11-
State bus tour focused on the auto sector, town hall meetings
on manufacturing issues, and a nationally televised
Presidential candidates forum on manufacturing. Prior to
forming the alliance, Mr. Paul was the principal lobbyist for
the Industrial Union Council, was a trade lobbyist at the AFL-
CIO where he led the labor movement's legislative initiatives
on trade, manufacturing, and foreign policy issues. He worked
on Capitol Hill for 15 years, beginning with an internship for
Senator Richard Lugar, Indiana Republican, to 2001, to serving
as the chief foreign policy and trade adviser to House
Democratic Whip David Bonior from Michigan.
So if you would like to begin, Mr. Zandi. Thank you for
joining us, and thank you all for joining us. Dr. Zandi.
STATEMENT OF MARK ZANDI, CHIEF ECONOMIST AND
COFOUNDER, MOODY'S ECONOMY.COM
Mr. Zandi. Thank you, Senator. Thanks for the opportunity
to be here today. I am an employee of the Moody's organization,
but the views I express today are my own.
I will make eight quick points in my remarks this morning.
First, the recession continues on. It is 18 months in
length. But aside from the housing market, manufacturing has
suffered more in this recession than any other sector of the
economy. The statistics are grim. Industrial production is down
17 percent from the peak in December of 2007. That is the
largest decline in industrial production in any recession since
World War II. Capacity utilization in manufacturing hit a
record low. We got a data point for June, I believe yesterday,
and it is at an all-time low.
Manufacturing capacity is actually declining, which is very
rare. The only other time that has happened was a brief period
in the immediate wake of the tech bust earlier this decade.
And, of course, employment continues to slide. We have lost
5 million jobs since the beginning of this decade, and
employment in manufacturing is now back to where it was just
prior to World War II.
Another very amazing statistic to me, industrial
production, real value-added manufacturing, has actually
declined in this decade. There is only one other decade that
comes close, and that is the 1930s' Great Depression, and in
that decade we actually eked out a small gain in manufacturing.
Just to highlight the severity of the situation.
Point number two, the unprecedented decline in
manufacturing in this downturn is the result of a number of
things: the collapse of the housing and vehicle markets, a deep
recession throughout the global economy--of course, many
manufacturers sell their goods overseas--and draconian cuts by
U.S. businesses in their investment in technology and other
equipment. The longer-running decline in manufacturing is also
related to the loss of market share to global competitors in
this decade. Of course, that has been almost entirely due to
losses vis-a-vis trade with the Chinese.
Point number three, manufacturing has played an outsized
role in our business cycle, both in recessions and early
recoveries. The average decline in GDP, peak to trough, in
recessions since World War II is 2 percent. Manufacturing is
responsible for over half that decline.
In the first year of economic recovery, manufacturing was
responsible on average for one-fifth of the growth. In the
first year of the last economic recovery coming out of 9/11, it
contributed more than half of the economic growth. A very
significant contributor to our business cycle.
Point number four, manufacturing will not be able to
contribute to growth in the early stages of this economic
recovery. The problems are very severe in the vehicle and
housing markets. The vehicle industry will improve, will see
better sales off these incredibly low levels, but not enough to
provide any significant lift to manufacturing and to the
broader economy.
Housing, similarly, it will improve off its current very
low levels. Construction is at a World War II low. But the
improvement will be very modest because there is a tremendous
amount of excess housing inventory, a lot of vacant housing out
there in the country. And as a result of that, we are not going
to see a measurable pick-up in activity, and that is going to
constrain manufacturers that provide supplies to the housing
industry.
So the problems in the vehicle and housing industries will
limit the ability of manufacturing to play its traditional role
of helping drive the economy out of a recession and into
recovery.
Point number five, manufacturing's importance to the
broader economy goes well beyond its share to GDP and
employment. It is clearly vital to national defense. It is
instrumental to the living standards of lower- and middle-
income households, and many smaller metropolitan area and rural
communities across the country depend on their manufacturing
base. Manufacturing is also vital to research and development,
innovation, and ultimately the ability of the economy to grow.
It is key to underlying productivity growth. If the
manufacturing sector is not healthy, then that will impair
productivity growth and, therefore, the long-term growth in our
living standards.
Point number six, there are number of things policymakers
should not do and should do in response to the manufacturing
downturn. The most obvious thing policymakers should not do is
to erect trade barriers. I think that would be very
counterproductive, particularly in the current economic
environment. I think policymakers globally have done a very
admirable job ensuring that protectionist sentiment does not
boil over despite rising unemployment throughout the world
economy. But the risks are quite high and will remain very
high. Erecting trade barriers would undermine any recovery and
be very counterproductive.
Now, having said that, I think it is very important for
policymakers to continue to guide the chase to allow their
currency to appreciate. They began revaluation 4 years ago.
They have allowed the yuan to appreciate about 17 percent. That
has been very helpful. That has contributed to a slowing in our
trade--the deterioration in our trade deficit with China. But,
nonetheless, they have more work to do. The yuan is still
undervalued, by my calculation, somewhere between 20 and 25
percent. I think it would be appropriate if the Chinese allowed
the yuan to appreciate 3 to 5 percent per annum over the next 5
years. That would be significant. It would allow their
manufacturers to transition in an orderly way and also give
some much needed and well-deserved relief to U.S.
manufacturers.
Point number seven, policymakers should implement policies
that reduce the costs of doing business for manufacturers. To
lower labor cost, I think policymakers could invest in
technical and community schools. We underinvest in that form of
education, which is very key to many smaller communities and to
developing skill sets that are necessary for manufacturers. I
think also facilitating the use of work share programs would be
very helpful. Unemployment insurance is very, very costly, and,
of course, layoffs are even more costly, and work share would
be productive. And, of course, health-care reform is vital if
it lowers the growth in health-care costs going forward.
To lower the cost of capital, policymakers could establish
direct lending from the SBA--I think that would be very
helpful; CIT's situation highlights the necessity of that
during the current crisis--and establish other lending
facilities to finance investment in clean energy and other
technologies.
To lower the cost of transportation, telecommunications,
and energy, I think it is important for policymakers to support
consistent public investment in infrastructure. The Build
America bonds that were issued as part of the fiscal stimulus
plan I think have been very successful.
Finally, point number eight, I think targeted industrial
policies to specific manufacturing industries have not been
successful in stemming the long-term decline of these
industries. To be sure, we do not have a lot of historical
experience with targeted IP, but looking at our record and at
the record of other developed economies, I do not view it as
very helpful. A much more efficacious policy effort is to
facilitate lowering the costs of production and opening up
global markets to all businesses, with special attention to and
consideration of these costs and markets that are important to
manufacturers.
So, in conclusion, the severe slide in the Nation's
manufacturing base will constrain the ability of the overall
economy to rebound from this Great Recession. And it certainly
jeopardizes the financial well-being of many lower- and middle-
income households in many communities across the country.
Policymakers should carefully consider this when designing and
implementing future economic policy.
Thank you.
Senator Brown. Thank you very much, Dr. Zandi.
Mr. Hindery.
STATEMENT OF LEO HINDERY, JR., MANAGING PARTNER, INTERMEDIA
PARTNERS
Mr. Hindery. Mr. Chairman, thank you for this honor, and in
the short time I have, I hope to discuss with you and your
colleagues the largely jobless economic recovery that we have
underway and what I believe, as I think you do, is the
desperate need for a national manufacturing and industrial
policy. I have lengthier comments, and I would ask with your
indulgence that they be placed into the record.
The concern that I have is that these two issues are
greatly tied together. President Obama has recently affirmed
his Administration's belief that the economic stimulus plan
will actually save or create only 3.5 million jobs over 2
years. Yet this number represents only a quarter of the 13.3
million jobs that have effectively been lost since the
recession began in December of 2007 and just 12 percent of the
more than 30 million workers already effectively unemployed,
when you include those workers who are either part-time of
necessity, marginally attached, or in the labor force reserve
because they have quit the labor force out of frustration.
The reason this hearing is so very important is because our
economy, as you have noted, is mostly hemorrhaging jobs in the
very sector--manufacturing--that must grow in order for us to
move permanently away from debt-financed consumption as the
principal engine of economic growth.
Despite these facts and despite the overhang that they
represent, aside from the emergency restructuring of Chrysler
and GM, with respect, the Administration has not yet developed
a national manufacturing and industrial policy, a genuine
policy designed to simultaneously ensure the competitiveness of
U.S.-based businesses and to grow high-value jobs in America.
Congress and the Administration working together need, in my
opinion, to immediately enact such a policy, a formal one that
puts American workers first, and, Senator, as comparable to the
policies of our major trading partners. And as you have noted,
we need to integrate this policy with efforts to be the world's
dominant manufacturer of green technologies and components, and
I applaud you, Senator, and your former colleagues in the
House, Congressmen John Boccieri and Space, for sponsoring the
Investments for Manufacturing Progress and Clean Technology, or
IMPACT, Act.
I believe--and this is perhaps the most important part of
my comments--that two things are holding the U.S. back from
having our own manufacturing and industrial policy and that we
need to quickly disabuse both of them.
First, again, with respect, some in the Obama
Administration wrongheadedly believe that one job is as good as
another, whether it is in manufacturing or service. However,
even simplest comparison of the two sectors shows that:
compensation in manufacturing jobs is 20 percent greater than
in nonmanufacturing jobs; service jobs do very little, as that
chart behind you will show, to help our balance of trade, and
mostly they just move incomes around the country; and
manufacturing overall has by far the largest multiplier effect
of any job sector in the country, creating $1.40 of additional
economic activity for each $1.00 of direct spending but, most
importantly, creating two-and-a-half jobs in other sectors for
each job in it.
Second is the deep concern on my part that these same
individuals assume, with no supporting evidence whatsoever,
that new jobs associated with exported services will make up
for past and future manufacturing job losses. In fact, large-
scale, high-quality service jobs are heavily dependent on a
strong manufacturing sector, and they do not readily substitute
for good manufacturing jobs.
In addition to throwing its full weight behind a new
national industrial policy, the Administration must also be
willing to pick winners in the economy and then support them,
despite a pretty apparent aversion to doing so, because frankly
all other developed nations and China do so every day, to great
effect. They need to fund, Senator, a 10-year not a 2-year
program of significant public investment in order to upgrade
and rebuild our Nation's infrastructure. They need to adopt,
consistent with the Without rules, Buy America requirements
related to all Federal procurement. America, we now sadly know,
is the only Nation--the only Nation among the major developed
nations and China without a significant ``buy domestic''
program, and we need to enact major corporate tax reform,
including the reduction of corporate income taxes and payroll
taxes and the movement to a value-added tax, or a VAT, to
replace that lost revenue.
I believe, contrary a bit to Mr. Zandi's comments, than a
national industrial policy cannot succeed without complementary
trade policies that prevent other economies from gaining unfair
competitive advantages.
I believe, Senator, that we need to immediately move away
from these decades of misguided trade policies. We need to
demand agreements that have meaningful labor and environmental
standards, but especially those that forbid illegal subsidies
and currency manipulation. And, with respect, I think we need
to dispense once and for all with ``one size fits all''
agreements that ignore significant differences in levels of
development, forms of government, and reciprocity.
But, most important, we need a fundamental reexamination of
our relationship with China. Challenging China over its unfair
trade practices is not just necessary for the future of U.S.
manufacturing jobs, it is also critical world economy. The
global economy, Senator, simply cannot function if the third
largest individual economy runs current account surpluses on
the order of 8 to 10 percent of GDP, as China has done year
after year.
I look forward to the questions and answers, and, again, it
has been an honor to appear before you. Thank you very much.
Senator Brown. Thank you, Mr. Hindery.
Mr. Paul, thank you for joining us.
STATEMENT OF SCOTT N. PAUL, EXECUTIVE DIRECTOR, ALLIANCE FOR
AMERICAN MANUFACTURING
Mr. Paul. Mr. Chairman, thank you for inviting me to
testify today on behalf of the Alliance for American
Manufacturing.
As you mentioned, we go on the road a lot, and I can tell
you from our experience that manufacturing has seen elements of
a recession and a downturn for most of the last 10 years, and
it has been precipitous. It has really been turbo-charged over
the last 19 months when the rest of the economy has experienced
recession. It is clear that bold solutions are required to
revitalize manufacturing.
Out latest contribution to the debate is a book called
``Manufacturing a Better Future for America.'' We delivered it
to every Senate office, and we commend it to you for reading.
We think it takes a good comprehensive and fresh look at many
of the issues that we are talking about today.
We all know something is terribly wrong with this economy.
But if the solution of Congress is simply to regulate or re-
regulate the financial services sector industry, we are missing
the bigger picture, and the response will ultimately be
unsatisfying.
There are much more deep, structural issues that we have to
address. Otherwise, this horrible positive feedback loop that
we have between consumer debt, subsidized Chinese imports, lost
American jobs, the U.S. current account deficit going up,
growing Chinese currency reserves which number over $2
trillion, inflating more American debt and new bubbles, that
cycle will only be reinforced, and we will be back where we
started from 5 years from now.
We knew that this type of economic strategy was doomed to
fail. The warnings came not only from labor leaders, from
domestic manufacturers, and an insightful group of elected
officials; they came also from very conservative economic
quarters. But they were ignored. Well before this new, great
recession began, Warren Buffet said, ``Our trade deficit has
greatly worsened, to the point that our country's `net worth,'
so to speak, is now being transferred abroad at an alarming
rate. A perpetuation of this transfer will lead to major
trouble.''
Martin Feldstein, Chairman of President Reagan's Council of
Economic Advisers, said, ``The present level of the current
account deficit is enormous, it is unprecedented, and I believe
it is unsustainable.'' And they were right.
The result of growing current account deficits has been
more manufacturing job loss and a healthy share of the blame
for the economic collapse this Nation experienced last year.
Some say the total number of manufacturing jobs has been
falling anyway, and that this isn't such a bad thing as we
transition to a new economy. Mr. Chairman, I believe that is a
dangerous and misguided view.
Manufacturing employment has dropped precipitously since
China entered the World Trade Organization in 2001, and our
bilateral trade deficit has exploded with that nation. We have
concluded that--outside of recessions--the single most
detrimental factor to manufacturing employment in the United
States has been the expansion of our one-sided trade
relationship with China. China is certainly not our only
competitor engaged in unfair, predatory, and protectionist
policies, but the scale of their activities swamps that of many
of our other trading partners and is in need of immediate
attention.
Other explanations for this decline in manufacturing, while
conforming to orthodox economic views, are not satisfying. The
decline of manufacturing employment and manufacturing's share
of GDP are not inevitable, they are not desirable, nor can they
be explained solely through theories of churning capitalism,
advances in productivity and technology, high compensation
costs, or other sorts of inefficiencies. I think we can
discredit all of those explanations.
Consider this: More than 40,000 factories have shut down
over the last decade. They weren't making buggy whips. In fact,
in many cases they were making very high-tech products. They
were manned by some of the most efficient workers in the world.
Even the supposed growth sectors of our future--advanced
technology products and clean energy--we are already running
trade deficits that are dramatically increasing.
The failure of our domestic and international trade
policies to support manufacturing must be quickly reversed. We
urgently need a national manufacturing strategy.
This is hardly a radical concept. Alexander Hamilton
constructed America's first industrial policy in 1791. We had
one until the end of World War II. Globalization and economic
approaches such as a strong dollar policy favoring domestic
consumption have helped to steadily erode manufacturing as a
percentage of gross domestic product, private sector
employment, and other key measures. If today's leaders spent
more time studying Hamilton and less time studying Smith and
Ricardo, I do not think we would be facing the prospects of a
jobless recovery.
The idea of a manufacturing strategy is also not a partisan
one. President Reagan--spurred on by a Democratic Congress--
adopted a flurry of measures to counter a grossly imbalanced
trade relationship with Europe and Japan in the 1980s. The
Plaza Accords, which raised the value of currencies relative to
the dollar, had a positive effect in lowering our trade
deficit. Key Government investments in the semiconductor
industry and other technologies spurred their development and
commercialization. President Reagan signed into law enhanced
Buy America requirements for certain infrastructure projects to
boost domestic employment. His Administration implemented the
Market Oriented Sector Specific--or MOSS--talks with Japan that
focused on market access with measurable results.
Yesterday, U.S. Trade Representative Ron Kirk delivered a
message outlining the beginning of a new enforcement approach
as part of our overall trade agenda, and I believe there is a
strong difference between trade enforcement, strong trade
rules, and protectionism. And I view this news as being very
welcome.
If we take a dash of Reagan and a dash of this trade
enforcement and add some other ingredients, we have the
foundations of a manufacturing strategy. We need to raise the
value of China's yuan relative to the dollar up to market-based
levels, we need to invest in value-added manufacturing such as
clean energy, and I can tell you we strongly support your bill,
and we join Leo Hindery in joining in supporting the IMPACT
Act; We need to make sure that are our trade partners,
especially China, live up to their obligations to gain access
to this market.
Finally, we need to keep Buy America requirements in place
so that tax dollars are reinvested in our economy and that
infrastructure spending benefits accrue not only to the
construction industry in the United States but also to our
manufacturers.
I am going to summarize a couple of other key planks of
manufacturing before I conclude my remarks.
It is not inevitable that we will develop the new
industries without public assistance. The semiconductor, the
Internet, the railroad network that we see in the United States
today, all had a healthy dose of public assistance, and there
was a strong public investment that was made in them. If we
invest in those types of prosperous industries, the new
energies as well as traditional manufacturing, if we also
continue a public investment in infrastructure where we have a
$2.2 trillion deficit of infrastructure needs over the next 5
years, and we have a strong Buy America requirement attached to
it, that will produce growth.
We also need to view certain issues before the Congress
through a manufacturing frame, and I am going to conclude with
this. The climate change legislation that the Senate will
consider, there will be an issue dealing with global
competitiveness. We need to strongly consider the interests of
energy-intensive, import-sensitive manufacturers in this
through border adjustment and allowances and get the right
solution. Otherwise, we will not accomplish either of our
objectives, which are lowering global levels of greenhouse
gases and boosting the domestic economy.
President Obama, when he was speaking to the G20 Summit in
London in April, talked about balance and how the United States
could not be the world's consumer; and that if everyone
realized there needs to be balance in policies, we would be
much better off. A manufacturing strategy is a key part of
achieving that balance, and we welcome the opportunity to work
with you to help achieve that.
Thank you very much.
Senator Brown. Thank you, Mr. Paul.
Dr. Zandi, Mr. Hindery referred to the effective
unemployment rate is much higher than the official statistics.
The Government today said the unemployment rate in my State is
now over 11 percent. We are not nearly the highest in the
country. We are above the average, but not nearly the highest.
He counts the effective rate prior to this recent announcement
of unemployment rates at 18.7 percent.
What do you make of the Bureau of Labor Statistics'
determination of official unemployment? And what do you make of
Mr. Hindery's effective unemployment rate discussion and
assertions?
Mr. Zandi. Well, the official unemployment rate is 9.5
percent, and then the Bureau of Labor Statistics also publishes
alternative measures of unemployment and underemployment. If
you consider official unemployment at 9.5 percent and then add
in workers that are working part-time for economic reasons,
workers that are discouraged and, therefore, not looking for
work and, therefore, not counted as unemployed, then you get a
measure of underemployment that is very similar to Mr.
Hindery's estimate of excess capacity in the labor market,
underemployment in the labor market. So I think it is very
consistent with that data and with those measures.
Senator Brown. Should we be talking more in those terms?
Should the Government adjust the way that it talks about
unemployment? I think following from Mr. Hindery's comments,
not just today from op-eds he has written and from his comments
in the past that I have watched, it follows that if the
unemployment rate released by the Government is under 10 and
the effective unemployment rate is twice that, Government would
probably step in more and do more, and there would be more of a
concerted effort by Government and the private sector to deal
with the much more troubling unemployment rate than the already
9-plus percent.
Does that follow in your mind?
Mr. Zandi. Yes, well, I think it would be useful for us to
focus on these broader measures of underemployment, yes, not
only unemployment and underemployment, but lost hours. That is
the other way people are losing compensation. Hours worked per
week are at record lows.
Senator Brown. And there is little discussion of that in
the official statistics, right?
Mr. Zandi. They are part of the official statistics, but
that is not what many of us focus on when we talk about what is
going on in the labor market.
But I think one of the reasons why we are focused on the
official unemployment rate, which is bad and terrible just as
it is, is that we have a long time series and we can compare it
historically all the way back to World War II, the Great
Depression; whereas, these alternative measures of
underemployment we only have back to the early 1990s. And,
therefore, we do not have as much historical context, so we do
not know how--it is harder to conclude definitively it is as
bad as we think it is.
But I think no matter how you cut the data, no matter how
you look at it, it is about as bad as it has ever been--as bad
as it has been since the Great Depression.
Senator Brown. Talk to me, although you can make the
argument that if we do not--now that we are starting to collect
those--not starting, but that we have had some years of
collecting the underemployed numbers, that there is no better
time than the present to begin to start talking about those. So
the historic record, the historic context is built, so we can
make those determinations.
Dr. Zandi, you had said that manufacturing, as I suggested
in my opening statement, it is sort oversized or over--you did
not use the term ``oversized.''
Mr. Zandi. Outsized.
Senator Brown. Outsized, I am sorry. Outsized, going in and
out of recession, and that this year, coming out of this
recession, manufacturing, because of housing and autos
especially, will not play as big a role.
How can we drive the economy--when we drive the economy
into recovery, how can we use manufacturing better? How we can
help assist that shortfall that you project?
Mr. Zandi. Well, I think the principal reason for this
shortfall is what is happening in the vehicle and housing
industries, and those are very significant, long-running,
almost near intractable problems. So we are not going to be
able to lift those two sectors out of the current downturn
easily or quickly. So it would be difficult to get those
sectors contributing in the way that they have historically.
Now, it is possible that we may be able to provide a little
bit more lift in other parts of manufacturing that have less
serious, more fundamental problems. Technology would be a good
example of that. I think the prospects for tech, broadly
defined, are quite good--tech manufacturing. So that would be
computer technology, semiconductors, satellites, sophisticated
instrumentation, sophisticated materials. These are things that
I think will be in significant demand, and not only here in the
United States but globally.
So, you know, I think if we could focus policy on trying to
help those industries move out of the recession, that might
provide a little bit more lift and allow manufacturing to
contribute more to the overall economic recovery.
But it is going to be very difficult to do anything quickly
to make a big difference in the next year or two because of the
problems in the vehicle and in the housing industries.
Senator Brown. Are there ways that we can help stimulate
demand, especially in the housing and auto side? The Congress,
as you know, passed the Cash for Clunkers, which I was actually
speaking today with the CEO of General Motors before I came
over here about this hearing, but about a couple other things.
And one of the things we need to do is move quickly, you know,
once we put something out there that this is going to be
available to consumers, make sure that it is in place so people
are not waiting to buy cars in this case. Those are my words,
not his.
Is there anything--or give me an assessment or any ideas
about what we do to stimulate that part of the economy
especially so that people--because, obviously, if there is more
demand for auto production and appliances and all that comes
from housing that this economy--that manufacturing can play a
bigger role in driving us into the recovery, if you will.
Mr. Zandi. Yes, very good points. In the case of housing,
one policy effort that is in place now as part of the stimulus
is the housing tax credit up to $8,000 for the purchase of a
home if you close on that home by December 1st. It might be
worth it, after we see how this works over the next couple
months, to expand and to extend that credit. Right now the
credit is for first-time homebuyers only. It could be, if it is
effective, expanded to all homebuyers, and that may be helpful
in working off some of that excess inventory that I alluded to
or mentioned earlier that is limiting the ability of housing
construction to increase and, therefore, increase the demand
for manufactured product.
Senator Brown. Is there a danger if all of a sudden, if we
start--if we start talking about extending that tax credit to
people other than just first-time homebuyers, that that in some
sense stops home purchases or slows home purchases until we
actually enact it?
Mr. Zandi. Yes, that would be a possibility.
Senator Brown. The danger of talking about this in some
sense without actually doing it quickly.
Mr. Zandi. Yes, that would be a clear risk, yes. So it may
be that--and I think it would be also useful to see how this
works. I would not short-circuit this process now, because the
benefit of that tax credit should be hitting in the next
couple, 3 months.
Senator Brown. So there is not evidence yet that it is
working or not working?
Mr. Zandi. No. We do have some experience with incentives
that have been provided in various States. California, for
example, had a tax credit for purchases of new homes, and that
seemed to have worked quite well in jump-starting new home
sales in the State of California. So I would counsel to wait
until we get toward the end of the year to see how this tax
credit worked, and then at that point, if things do not seem to
be engaging and improving, then think about expanding that
credit and extending it.
Similarly with the Cash for Clunkers. I believe the way the
program works, you can take advantage of that beginning at the
end of this month through November 1st. I believe that is the
case. So there is a lot of debate how effective that program is
going to be. I think it would be worthwhile to see, in fact, if
we do see a pick-up in sales as a result of the Cash for
Clunkers over the next couple, 3 months. And if it does work,
if it seems to be jump-starting vehicle sales and providing all
the other benefits that the program is intended to provide,
then it might make sense to expand and/or extend that as well
into 2010 to try to generate more sales, which would help with
respect to production and manufacturing activity.
Senator Brown. You had said--and then I want your answer
and then go to the other two panelists on this question also.
You had said some things we should not do from Congress and the
Administration and, that is, erect trade barriers.
Then you went on to say that we need to correct the
undervalued Chinese currency. How do we ratchet up efforts--I
mean, you had said, I believe, 5 percent a year would be, if
not ideal, maybe attainable. I am not sure what you meant
exactly by that. But how do we ratchet up efforts if it is, in
fact, desirable, as Mr. Paul suggested--and I know Mr. Hindery
has said it in the past--to get China to correct its
undervalued currency? Do we need a more aggressive SED? So we
need legislation in Congress? Should we move faster than the
hoped-for 5 percent? Should we be satisfied with 5 percent
currency?
Clyde Prestowitz, before some of this currency has slowly
moved up in valuation, said it was as much as, I believe, 70
percent undervalued. That number was challenged by some
economists, but others didn't.
What is your thought on that?
Mr. Zandi. I think the Chinese have made good progress in
the 4 years since they began the revaluation of the currency.
As I mentioned, the currency is revalued by 17 percent. They
have slowed that process over the past year given the global
financial and economic situation, and I think that is
understandable given the uncertainty and the volatility in
global financial markets and----
Senator Brown. Understandable from their viewpoint, the
Chinese.
Mr. Zandi. Yes, I think so.
I think as the crisis fades--and it is already seeming to
face--the Chinese economy is gaining traction, in part because
of their very large stimulus and monetary policy efforts. If we
get into next year and they begin revaluing, allowing the
currency to appreciate in an orderly way--I mentioned 3 to 5
percent per annum--then I think that would be the most
desirable response from their perspective. And, you know, I
think it would provide relief to our manufacturers as well. It
would be a reasonable way of going about doing it.
If they follow along that path, then I think there is no
need to try to put more added pressure on them because it
might, in fact, be counterproductive.
Senator Brown. You would be satisfied, you would consider
it a victory for U.S. manufacturing, the U.S. economy, the U.S.
Government, all of us, if China did 5 percent a year for the
next 3 or 4 years? You would consider that satisfactory?
Mr. Zandi. Yes, I would.
Senator Brown. OK.
Mr. Zandi. And let me say just one other thing. The
deterioration in trade with Chinese has, indeed, contributed
significantly to the erosion in our Nation's manufacturing base
since the beginning of the decade, but it has not played a
significant role in the erosion of manufacturing in this
economic downturn over the last 18 months. It has not been the
key factor.
Senator Brown. Nor has the current account deficit?
Mr. Zandi. No. In fact, the current account deficit has
narrowed quite substantially.
Senator Brown. I understand it has narrowed, but that--I am
sorry. I did not make my question clear. You do not believe--
from your statement, you are suggesting the current account
deficit as existing and as has grown, particularly up until a
year ago, that that has played little role or no role in the
economic situation now, the economic downturn?
Mr. Zandi. What matters in terms of manufacturing is the
change in the current account deficit. When you see the current
account deficit growing, that is a real problem for
manufacturing. It is a very significant constraint on the
broader economy.
The narrowing in the current account trade deficit over the
past year, year and a half, suggested that the pressure from
trade and manufacturers is alleviated.
Senator Brown. Well, I guess I will ask it another way. Let
us go back to October. The fact that we have had a $2-billion-
a-day overall trade deficit which China--it is about a third
that, I believe. Are you saying that has little to do with our
severe economic problems today?
Mr. Zandi. The way I would put it is that I think the
current account deficit and the growing of the current account
deficit in the first half of the decade--it peaked in 2006,
2007--was a major contributing factor to our economic problems
today, yes, on many different levels, most directly through its
impact on the manufacturing base because of the erosion in the
trade deficit, indirectly because of the fact that those
dollars we sent overseas in the form of trade came back in the
form of investment in securities that drove the housing boom
and bubble, so forth and so on. So I agree entirely with that
view.
I think, though, that in the current downturn of the last
18 months, the trade and current account deficits have actually
narrowed and actually have helped to cushion the blow on our
economy and on the manufacturing base. And so the problem in
the last 18 months in this recession has not been trade in
China.
Senator Brown. And I think that has little to do with any
trade policy as much as it does less demand from American
consumers, correct?
Mr. Zandi. And also, I think, the revaluation of the
currency by the Chinese, that that has played some role. And if
they allow it to appreciate another 15, 20 percent over the
next 3 to 5 years, we will see the benefit of that in the form
of further improvement in our trade situation with the Chinese.
Senator Brown. You seem, Dr. Zandi, a good bit more polite
toward the Chinese than they are toward us, but that is
certainly your right.
Mr. Hindery and Mr. Paul, I would like your comments on Dr.
Zandi's comments, especially on China and on the issue of--and
be a bit prescriptive, if you would, both of you, on the
currency issue, what you suggest, and take his comments and the
questions where you want, and then I will come back with
another series of questions.
Mr. Hindery. Senator, thank you. Let me, if I might, I am
just going to go back in reverse order from your questions to
Mr. Zandi and his answers.
Just very clinically, the Chinese currency manipulation has
on the surface been abated. I can suggest to you that it has
been offset, more than offset by increases and by China
policies and by the furtherance of illegal subsidies. And the
Chinese are not without insight to our political environment,
and as we have called them to question on their currency, they
have begun to take baby steps to the wall and made up for every
baby step with more Buy China, as Mr. Paul can testify,
particularly in the area that is covered by your IMPACT Act. We
are seeing very conscious efforts to Buy China. That is one of
the reasons, I think, Mr. Paul and I argue for Buy America. But
we have also seen a furtherance of the illegal subsidy
behavior.
What we need is a USTR that looks at trade barriers across
the board, not just in the traditional Reagan era tariff
environment, or the Nixon era, and include subsidies and
currency manipulation as a pronounced trade barrier.
On the state of the economy, which was the middle question,
30 years ago we partitioned this country and put about half of
its wealth in the hands of a very few million taxpayers and
particularly weighted toward roughly 300,000 taxpayers. We took
the other half of the wealth, and we left it with the other 140
million taxpayers. We fueled that with auto and housing through
credit bubbles. And the old saw is: Every time the economy
sputtered, we juiced up auto and we juiced up housing.
The reason I spend so much time on effective unemployment
is with 30 million Americans effectively unemployed today,
immediate resuscitation of housing, Senator, and of autos is a
pipe dream. It is not going to work. Nor is it going to work
that we are going to comfortably pay for health-care reform or
comfortably pay for climate change. When 30 million, 20
percent, of your workforce is unemployed, as Mr. Zandi
comments, when the full-time workforce is working 33.1 hours a
month, we have lost all overtime----
Senator Brown. A week.
Mr. Hindery. A week. I am sorry. We have lost all overtime.
We dropped to 40. We plummeted through 40 and we have stopped
at 33.1 hours.
Senator Brown. What was that number in good economic times
in the late----
Mr. Hindery. It was 46 because of overtime components that
actually drove the----
Senator Brown. The average full-time worker in the U.S. in
the late 1990s was working 46 hours a week?
Mr. Hindery. It was, because----
Senator Brown. Do you agree with that number, Dr. Zandi?
Mr. Zandi. You are adding in the overtime hours.
Senator Brown. Of course, yes.
Mr. Zandi. Yes, but even that--well, it is a matter of--
that sounds high.
Senator Brown. It was certainly over 40.
Mr. Hindery. It was over 40, Senator.
Senator Brown. OK.
Mr. Hindery. The reason that, again, I raise that is I do
think there are immediate responses that we can take. One of
them is the IMPACT Act that you have pushed through both this
body and the House. Infrastructure, as both Mr. Paul and I have
testified, a 10-year fulsome program as opposed to a 2-year
meager program, and one that is of particular moment, has a
great deal of advantage to this country would be building
retrofits. It is domestic content, it is immediate, and it
would go a long way to solving both the energy issue but also
the employment issue.
Let me finish by the imperative--and I would make one
change from what Mr. Paul said. I would not call it a
``strategy.'' I would call it a ``policy.'' The absence of a
policy of manufacturing and industrial policy allowed us
yesterday to let CIT fail as a financial institution it would
appear today. This is an institution that funds roughly 60
percent of the small and medium-sized businesses in this
country. But it did not garner the attention that Goldman Sachs
and the Bank of America and Citibank did because it does--we do
not have a national industrial and manufacturing policy.
The reality, Senator, that 90,000 out of the remaining
282,000 manufacturers in this country are by every measure
gravely at risk of failure over the next 24 months is ignored
because we do not have a national policy.
And so absent that gaping issue, with all respect, none of
these questions, none of these concerns rise to the moment of
this hearing, which, again, is why I think this is one of the
seminal hearings that could happen up here on the Hill. Without
a national industrial and manufacturing policy, we cannot fix
this economy. We cannot fix that chart.
Thank you.
Senator Brown. Mr. Paul, your thoughts.
Mr. Paul. I will speak to the currency issue first. I think
that it takes a multipronged approach to be effective with
China, and I agree with Mr. Hindery's assessment that what
China has given in terms of slight revaluations in the
currency, it has taken away in other export rebates and
subsidies and other sorts of incentives that are provided to
domestic producers to make up the difference. And so I think
the comparative level of subsidy that Chinese producers are
receiving has remained essentially the same.
Most economists whom we work with on this issue I think
estimate there is still about a 30-percent difference in the
currency rate from what it should be based on market levels.
I think that a congressional response is helpful. I think
that currency manipulation should be considered to be
countervailable. I do think that an aggressive trade case
should be brought, and it should be initiated either by
Congress, or it could come from the Administration as well.
I also think that a global multilateral effort is required
along these lines similar to the Plaza Accords in the 1980s.
And I do think that we need the involvement of the European
Union and some other major industrialized nations to pressure
China, because, otherwise, China has done a particularly adept
job of playing trade partners off of each other.
I think that we need to assemble a coalition to do this,
but I think that it takes a number of these efforts together to
effect the change that we need.
The last component of a successful strategy would be--as
Ambassador Kirk outlined yesterday, and that I think that we
need to expand on--is aggressive trade enforcement. Again, this
is not protectionism. This is countering protectionism and
mercantilism, and the failure to honor a contract which China
agreed to when it gained greater access to our market in 2001.
This relief has been long overdue for U.S. manufacturers,
and I think that the urgency of this is a--it makes it
imperative to take action in the Congress within the
Administration in a multilateral effort as well.
I wanted to say one word about the auto issue, which I
think is very important. The number of paychecks connected to
the auto industry, even though there are only about 200,000
assembly jobs, is staggering. Probably 7 million direct,
indirect, and induced jobs are dependent on a healthy auto
economy in the United States. And I do worry about the approach
that has been taken because I think it may be shrinking the
auto production base in the United States to a point where
large sectors of the related and allied manufacturing economy
are going to suffer. Twenty percent of the steel market is in
autos right now, and as you know, everything from rubber to
paper to semiconductors, healthy demand for that depends on a
thriving auto industry.
It certainly needs to retool, but it needs to be part of a
strategy moving forward to build the next generation of clean
energy vehicles. And I will say this will not happen through
market forces alone.
In every country where an industry like this has been
incubated, it has been done with public assistance and with
public investment and with a strategy in mind. And it is going
to take an American strategy as well; otherwise, we are going
to lose out on the opportunity.
Senator Brown. Thanks, Mr. Paul. Each of you has mentioned
trade protectionism, Buy America in your answers in some way. I
would like each of you for 2 minutes--and I will start with Mr.
Paul and work this way--to make your best case for or against a
strong Buy America provision in the next stimulus, if there is
another stimulus, or just in U.S. law generally. Make your best
case either for or against a strong Buy America provision. Let
us start with you, Mr. Paul.
Mr. Paul. It is a great question, Mr. Chairman. There are a
couple of very strong reasons to include domestic sourcing
requirements.
First, they work. Economists as the University of
Massachusetts at Amherst have shown that if you have a strong
domestic sourcing requirement, you create 33 percent more
manufacturing jobs than you would otherwise.
Infrastructure investment in general is a very good form of
stimulus because just by definition most of that money is going
to stay in the United States for construction. What may not
stay in the United States is materials. To the extent that you
can guide it to the U.S., you are going to create more
manufacturing jobs that way.
Second, it has been longstanding U.S. policy. We have had
domestic sourcing requirements since 1933. They were used to
build the Interstate Highway System. President Reagan expanded
them in the early 1980s in the midst of a recession. They have
been part of virtually every major infrastructure spending bill
that the Congress has done, and there is no reason to change
that right now, especially since there is strong evidence that
they work and they do not raise costs of projects.
Third, everyone else does it. I mean, there is a--the U.S.
is a leader in opening global procurement markets, including
its own. However, very few countries are actually part of these
agreements, and most countries have carved out major exceptions
in their domestic procurement markets. China is not even a
party to the Government Procurement Agreement.
We were well within our trade legal rights to enact strong
Buy America requirements, and it is a--it does not have a
dramatic effect on trade flows globally. If you consider the
amount of two-way trade that takes place across our borders
every year, the domestic procurement market is a small portion
of that, but the value-added for manufacturing is something
that is worth doing.
Senator Brown. Thank you.
Two minutes, Mr. Hindery, on that question.
Mr. Hindery. Senator, I love Mr. Paul's number three, which
is everybody else is doing it. I think that is the fundamental
issue, and that chart behind you shows the consequence of our
not doing it.
Let me just take a slightly different tack. There are two
principles overriding, I think, our jobs policies in this
country today, and I think both of them need to be disabused.
One is that a job is a job, and the second is that we can make
up for, as I said in my testimony, the loss of manufacturing
jobs with exported services.
Both of those are just explicitly and implicitly in error.
They are held by senior members of this Administration, and
they are simply wrong. And we can argue and show why they are
wrong.
Where Mr. Paul is taking you is that if you believe they
are wrong, then you believe that we cannot as an economy
survive with 8.7 percent of our employees working in
manufacturing and only 11.7 percent of our GDP being
manufacturing. A meaningful way to increase both of those
percentages would be with Buy American, which, again, everybody
else is doing.
I am very conscious of our obligations, as I know, Senator,
you and your colleagues are, under WTO. But Mr. Paul has
described, and correctly, that we can have Buy American
policies, abide by our trade agreements and principles, and
everybody else, Senator, as he said, is doing it.
Senator Brown. Thank you.
Dr. Zandi, for or against strong Buy America policy?
Mr. Zandi. I would be opposed to a strong Buy America
policy in, let us say, another stimulus package. I think it
would be counterproductive. I think one of the reasons why we
did not suffer a more severe economic downturn, something more
akin to the Great Depression, was because policymakers were
able to forestall rising protectionist sentiment in legislation
here in the United States in the stimulus package that we are
currently working through and overseas; that if protectionist
sentiment had boiled over and we saw barriers erected in
various forms--quotas, tariffs, Buy America provisions--that
would lead to a much more serious collapse in global trade and
would, in fact, have resulted in a much more serious economic
downturn.
In fact, I think there are many reasons for the 1930s'
Great Depression, one of which was the increase in trade
barriers across the globe during that period. So I think that
would be very counterproductive.
Moreover, I do not know that it is necessary. I think we
are doing measurably better in our trade with the rest of the
world. I think the U.S. dollar was significantly overvalued
back earlier in the decade. China's entry into the global
economy in 2002 with the WTO was a very significant dislocation
of manufacturers all across the globe, and it was very
wrenching. But I think with the now more appropriately valued
dollar and the Chinese now recognizing that they now need to
play a more responsible role in the global financial system and
in the economy, we are seeing improvement in our trade balance,
and I think we will continue to do so going forward, that we
are much better positioned in that regard.
Then, finally, I think Buy America is incredibly difficult
to implement. I am not even sure what it means. You know, I can
understand it in the context of infrastructure spending and
steel. I think that is easier to see and to understand. But
once you move beyond that, it gets very difficult to know what
does it really mean. Most of the products and services that we
produce are the result of coordination and cooperation among
businesses and people that work all across the globe.
Just take my business. I have got people working in--my
very narrow business within the Moody's organization, I have
got people working in London, in Sydney, in China, and, you
know, every day we are coordinating working together.
So what I produce here, is that American or--I mean, what
does it mean?
So, you know, I think it just incredibly difficult to
implement, so I would--you know, I think what you did in the
stimulus package was fine, it was OK. I mean, I understand it,
and I think it makes some sense. It was reasonable. But I think
if you strengthen that somehow in some way or broaden it, I
think that would be counterproductive.
Mr. Hindery. Senator, I had 21 seconds left in my 2
minutes. Can I just offer one quick comment?
Three weeks ago, the U.S. Chamber of Commerce gave a major
speech decrying Buy America provisions of any sort. In that
very week, China announced formally, publicly, with no
embarrassment, its own Buy China policy related to all of the
energy issues covered by the IMPACT Act, 80 percent and 90
percent domestic requirements on wind and solar.
Senator Brown. So that begs the question. Dr. Zandi, do you
think that other countries are doing strong buy domestic,
stronger than we are? Or do you not accept that as something
they actually are doing?
Mr. Zandi. You know what, I think probably they do. They
probably do, although I think what is really important is are
they strengthening their own ``buy my country'' provisions. And
I do not think they are. In fact, I think that goes to one of
the most admirable things about the policy response to the
current crisis, and that is that we seem to have a G20, G8
meeting every other month, and I think largely because we want
to make sure that nobody does that, strengthens those
protectionist rules and laws and regs that they have, because
if they did, this would become tit for tat, and it would hurt
global trade in our global----
Senator Brown. So how do you account, then, when you make
that statement, that China exports--you know, China's is the
world's largest solar panel manufacturing country. They export
over 95 percent of their output to the U.S. and Europe. Then
they implement a 90-percent ``China-made equipment'' to do
that. How do you reconcile that with what you say the
discipline of the G20 seems to be exerting?
Mr. Zandi. Well, I would submit that they have been doing
that all along. I mean, this is no worse or better than what
they have been doing from time immemorial.
What I am arguing is that it is not becoming worse, and
that is what really matters. You could get into a situation
where we provided a much stronger Buy America provision. It
will reverberate across the globe. The Chinese, the Europeans,
the South Americans would respond, and I think it would under--
potentially could under----
Senator Brown. If you are already doing it, and we are not
to the same degree, that is OK in terms of not erecting
barriers to dampen economic output or cause us more economic
problems in this recession.
Mr. Zandi. No, it is not OK, but I do not want to do more
damage.
Senator Brown. The answer is worse, the response is worse.
Mr. Zandi. Yes. And I think that if they can continue to
show progress that they are moving away from these policies,
then I think the best policy response is to allow them to do
that.
Senator Brown. When I hear ``if they show progress,'' that
suggests patience, and there is--and it always suggests to me
when I think about China and patience, I think of when Chou En-
Lai was asked when he was--I think you will know this story.
When he was a Chinese leader 25 years ago, he was asked what he
thought of the French Revolution, and he said, ``It is too
early to tell.''
[Laughter.]
Senator Brown. And I think that they are perhaps a more
patient people than we are.
Do these numbers, Dr. Zandi, concern you very much?
Mr. Zandi. Yes, they do. And I do think they represent why
we are in this mess on lots of different levels, that that
represents a loss--a lot of those lost manufacturing jobs and
production. That represents all those dollars going overseas
that came back in the form of investments in our Treasury
bonds, our mortgage securities, our CDOs, and contributed to
the surge in consumer borrowing and the mortgage crisis and led
to the financial crisis.
I think this imbalance is symbolic and highlights the
imbalance that led to the situation we are in. I entirely agree
with that.
Senator Brown. Do you think that, understanding these three
entities--EU, Japan, and China--were not covered by these trade
agreements, if not trade model, that trade agreements with
NAFTA, CAFTA, and what we did with PNTR with China was--did
that feed into that, the models of trade we do, not NAFTA per
se in those three, but the NAFTA trade model? And, generally,
did those contribute or did not make the situation slightly or
markedly better?
Mr. Zandi. I think the most fundamental thing that happened
was China's entry into the WTO. That was the key that----
Senator Brown. Did we make a mistake in the way we
facilitated--not try a value-laden word there--the way we
facilitated their entry, did we make a mistake in setting the
rules and building the road in the way that we did for their
entry?
Mr. Zandi. Certainly, in hindsight, yes, we made a mistake.
We did not--I do not think anyone recognized in 2002 when they
entered into the WTO what would happen over the course of the
subsequent almost decade. I do not think we----
Senator Brown. Well, there were 190 House Members who voted
against it. There may not have--maybe not predicting per se.
OK.
Mr. Zandi. Right. But, you know, I think that could have
been handled differently, yes.
Senator Brown. OK. On a more softball question for all of
you--not that I am that hard, but you have all talked about
manufacturing. Elizabeth Warren came to see me the other day--I
think you all know her--and she is a brilliant woman who has
pretty much--I heard her sort of predict what housing was going
to do to us 2 years ago. She predicted 2 years ago what housing
would do to us today and what housing led to and Wall Street
greed and all of those things together. But she told me a
statistic that even as recently as 2 years ago, almost half the
students at Harvard--undergraduate, not MBA students, Harvard
Business School, but close to half the students graduating from
Harvard undergraduate were going to into finance one way or
another. Almost nobody I know thinks that is a good thing for
our society, our country, or, frankly, perhaps even for those
students.
But how do we make manufacturing more attractive to young
people? You have thought about this, I know, as much as
anybody, Mr. Paul. I would like the answer from all three of
you. And I will preface it again with this.
I was speaking with a gentleman who--it was a confidential
conversation, so I will not tell you his name, but somebody
that was--yesterday, who was brilliant in starting businesses,
manufacturing and otherwise. And he was talking about how when
he was a kid he went into an auto manufacturing plant and was
taken--he is an engineer now, although he does not practice
engineering per se, but how he was taken by how the human mind
can put together the complexities of auto manufacturing so that
the windshield comes in at the right time, with the suction
cups putting it on the car, how the paint shop works, all of
that. And anybody who has never been in an auto plant, it is an
incredible thing to watch.
How do we get people, how do we get a 15-year-old high
school kid, a middle-school kid, whatever, how do we get that
person wanting to be an engineer, wanting to be a
mathematician, wanting to go into the sciences, then wanting
ultimately to go into manufacturing, you know, as a community
college graduate to operate at a--you know, it is an $18-an-
hour job or as an engineer designing part of it. How do we get
people to want to do that?
Mr. Paul. It is the right question to ask, Senator, and we
have thought a lot about it. There are a couple of things that
need to be done.
First, it is clearly changing the image, the outdated image
that many Americans have of manufacturing. If you get a young
person into a plant today, there is a ``Wow'' factor that you
cannot replace any other way if they see it firsthand. And if
you have been in a steel plant, you know, in the last 5 or 6
years, it is dramatically different than your father's or your
grandfather's steel mill. It is high-tech. It is highly
efficient. The same with the auto industry, or nearly any other
kind of manufacturing that you will find in America today.
Unfortunately, the images that you see when you go to a
Hollywood movie, if a worker is portrayed, he is portrayed as
somewhat of an uneducated, overweight guy who lacks ambition.
If you see a factory in a Hollywood image today, it is most
likely abandoned, and there is a sequence in an action move
that is moving through an abandoned factory.
And so the image is something that we need to alter, and
that is partly on the industry and the workers and we need to
do that.
We also need to have the right sort of educational skills
and training policies to move people into these high-value sort
of industries. Too often our training policies move people into
the first job and not the right job. Too often our schools look
to achieve their standardized test objectives and do not
prepare young people for careers, especially those who are not
necessarily going to go on to a 4-year college degree. And so I
think that is an important component of it as well.
I think also there needs to be--and this is the issue that
we are talking about today. There needs to be a job market for
them. We need to develop the right set of policies, an
industrial policy, a manufacturing policy, that says this is
going to be a bigger part of our GDP, it needs to be, because
part of this happens due to market forces, part of it certainly
happens due to the types of Government policies, the types of
tax, trade, and other sorts of policies that we have in place
that effectively discriminate against one sector of the economy
or the other.
And what we need to understand as policymakers as well is
that we are not saying that we need to have a manufacturing
economy alone. We need to be saying that we need to have a
diverse economy, and if there is anything that shows us that,
it is the last 18 months that we have experienced. We need a
diverse economy. But we need to understand, as Dr. Zandi says,
that manufacturing plays an outsized role, and we need to
recognize that and promote that.
Senator Brown. Thank you.
Mr. Hindery.
Mr. Hindery. Senator, I love this question. I grew up as a
sheet metal journeyman and a merchant seaman, and the problem,
with all respect to Mr. Paul, is not image. It is certainty. We
have a national finance policy, a national finance industry
policy. We saw it in the hands of Secretary Paulson, and now we
see it in the hands of Secretary Geithner. We have a policy for
that industry. We do not have a policy for this industry. And
young people are not ill-advised or uninformed. They look at an
industry path that says certainty or uncertainty.
And when I left college as a journeyman sheet metal worker,
having spent a couple of years in the Merchant Marine, neither
of those careers presented uncertainty. I just took my skill
set and went toward business. Today, I would not have that same
opportunity, that same perspective.
I think, in closing on that, I think we have compounded the
issue dramatically through compensation. I have written much
about the problem of compensation in this country. When the
average CEO for a century made roughly 20 to 25 times what his
or her average employee made, career choices were done
psychically and skill-wise. They were not done financially. We
have now seen that number jump to 400 on the corporate side,
and we have seen counterparts on the finance industry side.
Those young women and men at Harvard, the decision they made
was, on the one hand, compensation; it was obscene, and they
could capture it. And the other is they could capture it in an
industry that is clearly loved, clearly has the attention of
this Administration and this Congress, or they could go, as I
had a chance when I left Stanford Business School, to Procter &
Gamble or Colgate or GM or Ford, and they said, ``Are you
crazy?'' That is the decision process in all of 40 years.
Senator Brown. Dr. Zandi, how do we get more young people
interested in manufacturing?
Mr. Zandi. I think if you lowered their cost of education,
I think that would help. That would be very helpful. I think
part of the problem is that it is increasingly difficult to pay
for the education and training you need to be a skilled worker.
And if Government can lower that cost, that would be something
to attract young people into the industry. And I mentioned
technical schools, community college; you know, I think those
are very cost-effective ways of providing those skill sets in
that form of education.
The other key thing, I think, is to broaden the definition
of ``manufacturing.'' I think we are thinking about this pretty
narrowly. It is not just the person on the factory floor. It is
the engineer, it is the designer, it is the quality control, it
is the credit risk management. It is the people who hedge the
currency risk and the trading that the manufacturer has to do
to bring in supplies and export.
So, you know, it is not--in fact, the folks that work on
the factory floor are increasingly going to be a small
proportion of the people who work in actual manufacturing. So I
think if we lower the cost of education and training and
provide the education for these kinds of other jobs that are
involved in the manufacturing process, I think manufacturing
will be just fine.
Let me just broadly say one other thing. You know, to me it
is a little confusing as to where manufacturing ends and
services begin. Take the iPod. What really makes the iPod the
iPod? Is it the physical thing that we have produced here, or
is it the music that goes into the iPod? The Web site that we
created to pull down the music into the iPod? The people who
financed the production of the factory that produces--I mean,
to the commercials that go on TV, and you listen to the music
and go, ``I want that thing.''
So, you know, the thing that really makes it a product that
is valuable is all of those things, and you cannot separate
them. So I think part of the problem is we have gotten into
this box where we think manufacturing is one thing and services
are the other. They are increasingly the same thing. I do not
know how you separate them.
Senator Brown. That is a very good point, and thank you for
that. I was actually thinking about that as you were talking,
because we in some sense do separate them. We too often do the
design--you know, if you take an iPod, its packaging says
``Designed in California,'' but it is actually manufactured in
China. And I do not want to get into that as the hearing will
conclude, but where we as a Nation go and we so often provide
the intellectual fire power and the skills and the creativity
to design these products, so many of them, and then we do not
commercialize them well. We certainly do not often manufacture
them here. And that is perhaps a whole other hearing and whole
other set of questions. But I think the integration of that
would certainly serve us well all across the board there.
I thank you all for being here. Thank you for your candor
and your good answers, and thank you for your service to this
country in what you are doing to contribute to all that we are
doing. Thank you all.
The Subcommittee is adjourned.
[Whereupon, at 11:30 a.m., the hearing was adjourned.]
[Prepared statements supplied for the record follow:]
PREPARED STATEMENT OF MARK ZANDI
Chief Economist and Cofounder, Moody's Economy.com
July 17, 2009
Mr. Chairman and Members of the Committee, thank you for the
opportunity to testify on such an important matter in a time of
economic and financial crisis. I am an employee of the Moody's
Corporation, but my remarks today reflect my personal views.
I will make eight quick points in my remarks this morning:
1. The economic crisis continues, and aside from housing, manufacturing
has suffered more during this period than any other sector of the
economy. The statistics are grim. Industrial production has fallen over
17 percent since peaking a year-and-a-half ago, capacity utilization is
at a record low, manufacturing capacity is falling, and close to 80
percent of manufacturing industries are suffering consistent declines
in manufacturing production and employment. Manufacturing's problems
began long before the current recession. Industrial production has
actually declined during this decade. This is the worst performance on
record. Even during the decade of the 1930s' Great Depression,
production eked out a small gain. Manufacturing employment has been
declining even more sharply, losing more than 5 million jobs this
decade. The less than 12 million currently employed in manufacturing--
accounting for less than 10 percent of total payroll employment--is the
lowest level since just prior to World War II.
2. The unprecedented decline in manufacturing during this downturn is
the result of the collapse of the vehicle and housing industries, a
deep recession throughout the global economy, and draconian cuts by
U.S. businesses in their investment in technology and other equipment.
The longer-running decline in U.S. manufacturing is largely due to the
loss of market share to global competitors; since the turn of this
decade, most of the decline in market share has been to Chinese
manufacturers.
3. Manufacturing has played an outsized role in economy-wide recessions
and supporting growth early during economic recoveries. Real GDP has
fallen by an average of 2 percent peak to trough during recessions
since World War II, with manufacturing contributing well over one-half
of the decline. In the first year of recovery, manufacturing has been
responsible for over one-fifth of the growth in GDP. In the first year
after the recession in 2001, manufacturing accounted for almost one-
half of total GDP growth. Manufacturing's large role in the ups and
downs in the business cycle results from the impact of large inventory
swings and the high interest-rate sensitivity of many manufacturing
industries.
4. Manufacturing will not be able to contribute as much to the
economy's growth in the recovery from the current downturn. The
problems in the vehicle and housing industries will not abate quickly.
Vehicle sales and production and housing construction will rise from
their currently extraordinarily depressed levels in the next 12 to 24
months, but only very modestly. Weighing on vehicle sales and
production will be the lingering effects of the GM and Chrysler
bankruptcies and the spent-up demand created by sales levels above
those that could be supported by underlying demographic, wealth and
income trends during the strong sales years earlier in the decade.
Housing construction and thus the demand for manufactured construction
supplies will also be constrained by the large amount of excess housing
inventory built up during the housing boom and bubble.
5. Manufacturing's importance to the broader economy goes beyond its
share of GDP and employment. It is vital to national defense, lower-
and middle-income households that rely on manufacturing's relatively
high-paying jobs, and many smaller metro area and rural communities
across the Nation in which the factory is one of the largest employers.
Manufacturing is also important to research and development,
innovation, and ultimately the economy's productivity growth and the
growth in the Nation's living standards. It is also important to note
that manufacturing will need to play a more important role in the
Nation's longer-term economic growth, as the most significant growth
opportunity for U.S. businesses lies in selling to customers overseas.
U.S. manufactured goods must be a large part of what we sell to them.
6. There are a number of things policymakers should and should not do
to address the manufacturing downturn. The most obvious thing
policymakers should not do is to erect trade barriers to limit trade in
manufactured goods. This would be very counterproductive, particularly
at this time, when the global economy is in recession and protectionist
sentiment is building nearly everywhere. A trade war could very well
ensue, derailing prospects for recovery here and elsewhere. However,
policymakers should work to guide the Chinese to continue revaluing the
yuan once global financial and economic conditions stabilize. The yuan
has appreciated by 17 percent since the revaluation process began 4
years ago, but the currency remains 20 percent to 25 percent overvalued
against the dollar. This gives Chinese manufacturers an unfair
competitive advantage in global markets.
7. Policymakers should implement policies that reduce the costs of
doing business for manufacturers. To lower the cost of labor,
policymakers could invest in technical schools and community colleges,
facilitate work share programs to reduce the cost of unemployment
insurance and worker layoffs, and more aggressively establish and fund
worker retraining efforts. Health-care reform that results in slower
growth in health-care costs is also very important. To lower the cost
of capital, policymakers could establish a direct lending program at
the SBA and perhaps even establish lending facilities to help finance
investment in clean energy and other technologies. To lower the cost of
transportation, telecommunications, and energy, policymakers could
provide consistent support to public investment in transportation
networks, the Internet backbone, and the electric grid. As a potential
example of this support, Build America bonds issued as part of the
current fiscal stimulus have been very successful.
8. Industrial policies directed to specific manufacturing industries
have not been successful in stemming the long-running decline of these
industries. To be sure, there has not been extensive historical
experience with such policies here in the U.S., but what experience we
do have and what we have learned from the experience of other developed
economies suggest that such targeted industrial policies are not
productive. A much more efficacious policy effort is to facilitate
lowering the costs of production and opening global markets for all
businesses, with special attention to and consideration of those costs
and markets generally most important to manufacturers.
In conclusion, the severe slide in the Nation's manufacturing base
will constrain the ability of the overall economy to rebound from the
current Great Recession. It also jeopardizes the financial prospects of
many lower- and middle-income households, the economic well-being of
many communities across the country, and even the innovation and
technological progress necessary to power the broader economy's long-
term growth. Policymakers should carefully consider this when designing
and implementing economic policy.
______
PREPARED STATEMENT OF LEO HINDERY, JR.
Managing Partner, InterMedia Partners
July 17, 2009
Mr. Chairman, other Subcommittee Members, I am Leo Hindery and I am
Chairman of the Smart Globalization Initiative at the New America
Foundation, where I spend my time on jobs and trade issues.
Occupationally, I am an investor in media companies, and I was formerly
CEO of AT&T Broadband and its predecessors, Tele-Communications and
Liberty Media. It is an honor for me to appear before you.
I want to discuss our largely jobless economic recovery and
desperate need for an all-of-government national manufacturing and
industrial policy.
President Obama has recently reaffirmed the Administration's belief
that the economic stimulus plan passed by Congress in February will
``save or create'' 3.5 million jobs over 2 years. There's obviously a
huge difference between a job that's saved and one that's created--the
Labor Department does not even collect data on ``jobs saved,'' nor does
anyone else--but much more important, 3.5 million jobs represent only a
quarter of the 13.3 million jobs effectively lost since the recession
began in December 2007 and just 12 percent of the more than 30 million
workers already effectively unemployed.
I would offer that it is important that Congress always consider in
its deliberations the millions of unemployed workers not included each
month in the BLS's determination of the officially unemployed,
specifically those workers who are either part-time of necessity,
marginally attached, or in the ``labor force reserve'' because they
have quit the labor force out of frustration. In the past, the number
of ``uncounted'' unemployed almost never exceeded a third or so of
those who were officially counted, albeit still a very large number.
However, right now, there are actually 800,000 more uncounted
unemployed workers than counted ones, making the total number of
effectively unemployed workers an unprecedented 30.2 million instead of
the official 14.7 million and the effective unemployment rate 18.7
percent instead of 9.5 percent. And yet as numbing as these numbers
are, I believe we are going to see additional significant net job
losses for at least another 18 months.
We are already deep into a jobless recovery, and in the process we
are headed toward an economic base so weakened that it will be
incapable of sustaining a vibrant middle class. There is also the
reality that this jobless recovery will be particularly susceptible to
a new downturn because of the way it is already feeding back on itself,
actually worsening in some cases the circumstances that originally
triggered it. Finally, a jobless recovery means there will be little or
no relief for State and local governments whose budgets have been hard
hit by falling tax revenues.
When nearly 19 percent of workers are already effectively
unemployed and while even the Nation's current full-time workers are
working only 33.1 hours a week--the fewest hours on record since the
BLS began counting in 1964--and seeing their wages reduced at an
average 6.2 percent annual rate, significant and timely job retention
and creation must be an urgent priority, on a par with health-care
reform. Right now, neither initiative can take a back seat to the
other, as both are integral to true economic recovery.
And the reason this particular hearing is so important is because
the massive job-creation deficit we face really tells only the macro
side of our sad employment story. We need to be just as worried about
the fact that our economy is mostly hemorrhaging jobs in the very
sector--manufacturing--that must grow in order for us to move
permanently away from debt-financed consumption as the principal engine
of economic growth.
Since the recession began, manufacturing has lost 13 percent of its
workforce; manufacturing industries now represent just 11.7 percent of
GDP, after being 15.5 percent as recently as 1996 and much higher
earlier; people working in manufacturing now account for only 8.7
percent of the jobs in the country; a quarter of the Nation's 282,000
remaining manufacturing companies--90,000 in all--are now deemed
severely ``at risk''; and we have run an average trade deficit in
manufactured goods of more than $500 billion over the past 5 years.
Yet despite 30 years or so of extreme neglect, our now depleted
manufacturing sector still accounts for a critical 60 percent of all
exports from the U.S. and for 70 percent of the Nation's entire R&D.
However, aside from its emergency restructuring of Chrysler and GM,
the Administration has not developed an all-of-government national
manufacturing and industrial policy designed to simultaneously ensure
the competitiveness of U.S.-based businesses and grow high-value jobs
in America.
Congress and the Administration, working together, need to
immediately enact such a policy, one that puts American workers first
and is comparable to the policies of our major trading partners. We
also need to integrate this policy with efforts to be the world's
dominant manufacturer of green technologies and components, and I
applaud you, Senator Brown, and your former colleagues in the House,
Congressmen John Boccieri and Zack Space, for sponsoring the
``Investments for Manufacturing Progress and Clean Technology'' or
IMPACT Act.
The need for an elaborate American industrial policy was first
widely observed as far back as the early 1980s, and by 1993 some in the
Clinton administration and especially some enlightened members of
Congress tried to enact such a policy. Regrettably they failed, and now
16 years later, we sit here in 2009 still without one.
Even if some in leadership today don't understand and accept this
basic imperative, America's main trade competitors certainly do. All of
the other members of the G20 have such policies, and they are using
them today to great effect to resuscitate their broken economies and
further weaken ours. Germany, Japan, and South Korea especially are
doing everything possible to preserve their manufacturing bases, while
China, which consistently accounts for 60 percent of the U.S. trade
deficit in manufactured goods, is aggressively accelerating its efforts
to grow its manufacturing sector.
To this latter point, while the U.S. was losing 1.4 million
manufacturing jobs from 2002 to 2006, manufacturing employment in China
during these 5 years was increasing by 10 percent to 112 million, which
is about 100 million more than the total number of manufacturing
workers left in America--and this trend is now only worsening.
I believe that two things are holding the U.S. back from having its
own manufacturing and industrial policy--and we need to quickly
disabuse both of them.
First, some in the Obama administration, as well as others of
influence outside the Administration, wrong-headedly believe that one
job is as good as another, whether it is in manufacturing or service.
This is simply not true, and even the simplest comparison of the two
sectors shows that:
Compensation in manufacturing jobs is 20 percent greater
than in nonmanufacturing jobs;
Service jobs do very little to help America's balance of
trade, and mostly just move incomes around the country; and
Manufacturing overall has by far the largest multiplier
effect of any job sector in the country, creating: $1.40 of
additional economic activity for each $1.00 of direct spending;
on average, 2.5 jobs in other sectors for each job in it; and,
at the upper bounds, 16 jobs for each high-tech manufacturing
job.
Second, these individuals assume, with no supporting evidence
whatsoever, that new jobs associated with exported services will make
up for past and future manufacturing job losses. One Administration
official even said recently that America's export future resides, and I
quote, in exporting ``consulting and legal services, software, movies,
and medicine.'' It is naive to speak so optimistically of these
nonmaterial activities, and it is simply wrong to view exported
services as ready substitutes for good manufacturing jobs, since large-
scale high-quality service jobs are heavily dependent on and correlated
to a strong manufacturing sector. The reality is that in the future,
high-quality service jobs are at least as much at risk of being
offshored as are manufacturing jobs, with India and China especially
keen on seeing such jobs domiciled on their own shores.
To offer just one big example of what the failure to have our own
manufacturing and industrial policy has wrought, the State of
California, which is now confronting the largest annual budget deficit
in the history of the Union, would in fact have a dramatically smaller
deficit, or maybe even none at all, if in the State manufacturing
workers today represented simply the same share of total workers as
they did in the year 2000, which was 12.8 percent. Instead, however,
California lost, over this period, more than 400,000 manufacturing jobs
which, after considering multiplier effects, would have benefited the
State on the order of $300 billion of cumulative income taxable wages.
In addition to throwing its full weight behind an all-of-government
manufacturing and industrial policy, the Administration must also be
willing to:
``Pick winners'' in the economy and then support them,
despite its apparent aversion to doing so, because frankly all
other developed nations and China do so every day, to great
effect. The Administration moved modestly in this direction
with its proposals to encourage private investment in wind and
solar energy and by making targeted Federal investments in
building retrofits, smart grids and meters, and clean
transportation systems. However, it needs to do much, much more
if we are to create new comparative advantages in these and
other industries, and particular attention needs to be paid to
associated training, access to low-cost energy, and financing
provisions for small and medium size manufacturers.
Fund a 10-year (not the current 2-year) program of
significant public investment to upgrade and rebuild our
Nation's infrastructure, which would provide the much-needed
foundation for higher-value added production and advanced
business services.
Adopt, consistent with WTO rules, ``Buy American''
requirements related to all Federal procurement, especially
procurement associated with new investments in infrastructure
and green energy initiatives. Federal purchases make up about
20 percent of the economy, yet America appears to be the only
nation among the major developed nations and China without a
significant ``buy domestic'' procurement program.
Enact major corporate tax reform to make incentives for
corporations to create jobs here and eliminate the incentives
for them to relocate manufacturing jobs, as well as service
jobs, abroad. This should include reducing the corporate income
tax and payroll tax and moving to a value-added-tax or VAT to
replace that lost revenue.
A national industrial policy cannot succeed, however, without
complementary trade policies that prevent other economies from gaining
unfair competitive advantages. The trade deficits accumulated just
during the Bush administration--a whopping $4.7 trillion--were a major
cause of the loss overseas of 5.3 million manufacturing jobs and more
than 2 million service jobs, and they made the U.S. economy about $1.5
trillion smaller today than it would have been otherwise.
We couldn't afford these economy-zapping job losses then, and we
certainly can't afford them now. Notably, even today's recession-
shrunken trade deficit of 2.5 percent of GDP will subtract more from
the demand for U.S. goods and services than the economic stimulus plan
will add, and in normal times our trade deficits consistently aggregate
an even more economy-draining 5 percent or so of GDP.
The Administration and Congress should, I believe, immediately move
away from our decades of misguided trade policies and demand trade
agreements that have meaningful labor and environmental standards and
forbid illegal subsidies and currency manipulation. We also need to
dispense with ``one size fits all'' trade agreements that ignore
significant differences in levels of development, forms of government,
and reciprocity.
At the same time, we need meaningful trade policy coordination
among especially the G8, and we need it to counter the confusing
statement out of the Administration recently that ``floating exchange
rates mean that economic policies don't have to be harmonized among
nations.'' Of course, they do!
And on an overall basis, right now the major ``surplus nations''--
specifically, China with its enormous $2 trillion of foreign currency
reserves, Germany and the oil-exporting nations--also need to
immediately deploy a significant portion of their accumulated foreign
reserves where doing so will most stimulate the world economy, whether
it be within their own economies, overseas, or, in order to assist the
poorer countries, in a combination of long-term development loans and
Official Development Assistance or ODA.
Most important when it comes to trade and globalization, however,
we need a fundamental reexamination of our relationship with China.
China's massive trade surplus with the United States--a staggering
$277 billion of manufactured goods just in 2008--is the result of its
severely undervalued currency, massive subsidies to its own
manufacturers, and elaborate policies to induce foreign corporations to
shift their production facilities and technology to it. These policies
have already cost us millions of jobs, and they will keep costing us
jobs until they are fixed.
Challenging China over its unfair trade practices is not just
necessary for the future of U.S. manufacturing jobs, however--it is
also critical for the world economy. The global economy simply can't
function if the third-largest individual economy runs current account
surpluses on the order of 8 to 10 percent of GDP, as China has done
consistently for the past few years.
In closing, these are truly unprecedented times, and thus looking
at past business cycles and responses is likely to be of only very
limited relevance and utility. To address the current desperate
situation, we need, as soon as possible, an Emergency National Summit
on Manufacturing, to be attended by relevant Cabinet officers, the
bipartisan leadership of both Houses of Congress, and a small number of
the top corporate and labor leaders on this issue. And we especially
need an activist executive branch and Congress willing to turn around
the excessive laissez faire and deregulatory approaches of the last
eight and, in some cases, the last 30 years, and to enact a national
manufacturing and industrial policy that matches and competes fairly
with the industrial policies of our major trading partners, especially
China.
Thank you, and I am happy to answer any questions you may have.
Sources:
1. ``Building the Next American Century: The Past and Future of
American Economic Competitiveness'', by Kent H. Hughes (Woodrow Wilson
Center Press, 2005).
2. ``U.S. Needs a VAT'', March 7, 2009, by Economyincrisis.org--
America's Economic Report--Daily.htm.
3. ``Manufacturing 2.0: A More Prosperous California'', June 2009, by
the Milken Institute.
4. ``Manufacturing and the U.S. Economy'', June 4, 2009, by Samuel
Sherraden and Sherle Schwenninger, New America Foundation.
5. ``Not Out of the Woods: A Report on the Jobless Recovery Underway'',
June 9, 2009, by New America Foundation.
6. ``Senator Brown's `IMPACT Act' Included in House Climate Change
Bill'', press release, June 26, 2009.
7. re June 2009 U.S. effective unemployment figures, Bureau of Labor
Statistics ``Current Population Survey'' of employment (released July
2, 2009).
8. American Small Manufacturers Coalition.
9. Alan S. Blinder, Gordon S. Rentschler Memorial Professor of
Economics and Public Affairs at Princeton University, Codirector of
Princeton's Center for Economic Policy Studies, and Vice Chairman of
the Promontory Interfinancial Network.
10. Nouriel Roubini, Chairman of RGE Monitor and Professor of Economics
at New York University's Stern School of Business.
______
PREPARED STATEMENT OF SCOTT N. PAUL
Executive Director,
Alliance for American Manufacturing
July 17, 2009
Mr. Chairman and Members of the Subcommittee, I want to thank you
for taking the time to study manufacturing and global competitiveness,
and for inviting me to testify on behalf of the Alliance for American
Manufacturing.
First, I would like to introduce the Alliance for American
Manufacturing. We are a partnership formed in 2007 by some of America's
leading manufacturers and their workers to explore challenging public
policy topics such as international trade, health and retirement
security, and global competitiveness. AAM works in a cooperative,
nonpartisan way, bringing together labor and management, Democrats,
Republicans, and Independents, to work for one goal: Strengthening
American manufacturing and therefore our Nation's economic and national
security. Our mission is to provide policymakers like you with useful
analysis of the issues, as well as innovative policy ideas to move us
toward effective solutions.
Over the past 2 years, we've visited with tens of thousands of
workers and hundreds of manufacturers to see what's happening on the
ground firsthand. As you can imagine, the news is grim. That's because,
for manufacturing, this recession began about a decade ago. Over the
past 19 months, this decline has been turbocharged. It's clear that
bold solutions are required to revitalize manufacturing, which is why
we have sought to collect the wisdom of innovative thinkers around the
Nation.
To that end, we published a book this week titled ``Manufacturing a
Better Future for America,'' copies of which have been provided to each
Senator. With contributions from 10 leading academics and experts, the
book takes a comprehensive look at some of the major issues facing
manufacturing today: international trade, an array of subsidies offered
by our global economic competitors, the consequences of the offshoring
of research and development, the shocking lack of support for
investment in advanced manufacturing, the appalling state of skills and
training programs, the challenges for domestic manufacturers in
globalized supply chains, and the consequences of deindustrialization
on society, communities, and our defense industrial base.
Even without reading this book, we all know that something has gone
terribly wrong with the U.S. economy. But chalking up the blame to a
few bad apples on Wall Street and their risky financial instruments,
and responding by simply providing appropriate regulation in the
financial services sector, will ultimately be unsatisfying. There are
much deeper, structural issues which must be urgently addressed.
Otherwise, the positive feedback loop between consumer debt, subsidized
Chinese imports, American job loss, the U.S. current account deficit,
and growing Chinese currency reserves reinvested in American debt, thus
inflating new bubbles, will only be reinforced.
Some of us warned that this day would come. We knew that an
economic strategy predicated on replacing wage growth with debt and
credit to maintain a certain standard of living was doomed to fail. We
knew that this Nation could not replace manufacturing jobs and their
multiplier effect, as well as their positive impact on the trade
balance and wealth generation, with lower-wage service and retail jobs.
We knew that our national security would begin to suffer if we did not
have a vibrant enough manufacturing base to resupply our troops and
provide the armaments for the future. We knew that if our leaders
viewed international trade as a foreign policy tool and a path to cheap
imports, rather than as an essential element for economic growth and
domestic production, the consequences would be disastrous.
The warnings came not only from labor leaders, domestic
manufacturers, and an insightful group of elected officials--they came
also from very conservative economic quarters. Well before this new,
great recession began, Warren Buffet said ``Our trade deficit has
greatly worsened, to the point that our country's `net worth,' so to
speak, is now being transferred abroad at an alarming rate. A
perpetuation of this transfer will lead to major trouble.'' Martin
Feldstein--former Chairman of President Reagan's Council of Economic
Advisors--said, ``The present level of the current account deficit is
enormous, it is unprecedented and I believe it is unsustainable.''
The result of growing current account deficits has been more
manufacturing job loss and a healthy share of the blame for the
economic collapse this Nation experienced last year. Some say that the
total number of manufacturing jobs has been falling anyway, and that
this isn't such a bad thing as we transition to a new economy. Mr.
Chairman, I believe that particular view is dangerous and misguided.
Contrary to a widely held analysis, manufacturing employment held
steady from 1982 to 1999, hovering around 17.2 million jobs, with ebbs
and flows in downturns and recoveries. There were a number of reasons
for this stability, including more aggressive trade enforcement and
currency policies in the 1980s and more domestic investment in the
1990s. But manufacturing employment has dropped precipitously since
China entered the World Trade Organization in 2001 and our bilateral
trade deficit has exploded. We have concluded that--outside of
recessions--the single most detrimental factor to manufacturing
employment in the United States has been the expansion of our one-sided
trade relationship with China. China is certainly not our only
competitor engaged in unfair, predatory, and protectionist policies,
but the scale of their activities swamps that of many of our other
trading partners and is in need of immediate attention.
Other explanations, while conforming to orthodox economic views,
are not satisfying. The decline of manufacturing employment and
manufacturing's share of GDP are not inevitable, desirable, nor can
they be explained solely through theories of churning capitalism,
advances in productivity and technology, compensation costs or
inefficiency.
Consider this: more than 40,000 factories have shut their doors
over the last decade. They weren't making buggy whips; they were manned
by some of the most efficient workers in the world. To wit, we already
have large and growing trade deficits in advanced technology and clean
energy, even though these supposedly represent ``new economy'' sectors
and the jobs of the future in the eyes of many.
The failure of our domestic and international trade policies to
support manufacturing must be quickly reversed. We urgently need a
national manufacturing strategy.
The idea of a manufacturing strategy or industrial policy is hardly
a radical concept. Alexander Hamilton constructed America's first
industrial policy in 1791. Setbacks during the War of 1812 due to a
lack of domestic capacity to build naval vessels and military equipment
cemented the determination of the Federal Government to grow
manufacturing, a policy that continued until the end of World War II.
Globalization and economic approaches such as a strong dollar policy
favoring domestic consumption have helped to steadily erode
manufacturing as a percentage of Gross Domestic Product, private sector
employment, and other key measures. If today's leaders spent more time
focusing on Hamilton and less time on Smith and Ricardo, I don't think
we'd be facing the prospects of a jobless recovery.
The idea of a manufacturing strategy is also not a partisan one.
President Reagan--spurred on by a Democratic Congress--adopted a flurry
of measures to counter a grossly imbalanced trade relationship with
Europe and Japan in the 1980s. The Plaza Accords, which raised the
value of currencies in Japan and Europe relative to the dollar in a
managed way, had a positive effect in lowering our trade deficit. Key
government investments in the semiconductor industry and other
technologies spurred their development and commercialization. President
Reagan signed into law enhanced Buy America requirements for certain
infrastructure projects to boost domestic employment. His
Administration implemented the Market Oriented Sector Specific--or MOSS
talks--with Japan that focused on market access with measurable
results.
Yesterday, United States Trade Representative Ron Kirk delivered an
address outlining the beginning of a new enforcement approach as part
of our overall trade agenda. That comes as welcome news to those
manufacturers and their employees who have seen a flood of imports flow
into our market often benefiting from subsidies and other unfair
practices by their governments. His speech comes as welcome news, but
the success of his efforts are going to be measured on a daily basis.
Apply those principles to the economic challenges of today, and you
have the foundation of a manufacturing strategy: raise the value of
China's yuan to market-based levels, invest in value-added
manufacturing such as clean energy and industries with strategic
significance, and engage in serious bilateral talks with China to
ensure that it honors the commitments it made upon entry into the WTO
in 2001 to eliminate its myriad mercantilist and protectionist
policies. Finally, keep Buy America requirements in place so that tax
dollars are reinvested in our economy and the employment benefits of
infrastructure spending accrue not only to the construction industry,
but also to our manufacturers.
But a successful manufacturing strategy must go deeper than that. I
join Leo Hindery, Mr. Chairman, in expressing support for your IMPACT
legislation, which would provide access to much-needed capital for
small- and mid-sized manufacturers to help capture new clean energy
markets, both here and abroad. At a time when access to capital is
still very tight, a public commitment like this is essential. Moreover,
those who say the market alone should dictate winners and losers forget
three important lessons. First, some of the greatest innovations since
World War II--the semiconductor and the Internet--were developed with
public assistance. Second, our policies already pick winners and
losers, but we tend to pick the wrong winners--those who profit through
selling cheap, subsidized imports, or those companies heavily invested
in fossil fuels. Let's pick winners in more productive, wealth-
generating activities like domestic manufacturing for a change. Third,
other nations are aggressively supporting emerging industries like
clean energy. Unless we want green manufacturing jobs created in
Shanghai instead of Cincinnati, or Dusseldorf instead of Denver, we
must support domestic development of these industries.
A key component of any manufacturing strategy must be public
investment, especially in infrastructure. The American Recovery and
Reinvestment Act made a down payment on infrastructure investment, but
our Nation will still be hampered by what the American Society of Civil
Engineers estimates is a $2.2 trillion deficit in infrastructure
investment over the next 5 years. Improving our infrastructure provides
a greater return on investment for taxpayers than tax cuts and
virtually every other form of spending. In the process, it boosts
construction jobs, stimulates demand for manufactured goods, and
improves productivity and economic growth by making transportation more
efficient. According to a recent study by economists at the University
of Massachusetts at Amherst, ensuring that the materials purchased with
tax dollars for infrastructure projects are sourced domestically
creates 33 percent more manufacturing jobs, which is why we urge the
Senate to continue its strong support for Buy America provisions.
The cost, supply and composition of energy resources consumed by
our manufacturers must also be considered, especially in the context of
Federal and international efforts to reduce greenhouse gas emissions.
As the Senate begins its deliberations over a legislative solution to
combating global climate change, it is essential that provisions be
included to prevent the shifting of manufacturing jobs to countries
with less regulation. A poorly designed approach to this issue will
result in a net increase in global emissions and will put millions of
energy-intensive manufacturing jobs here in the United States at risk.
Specifically, it is essential for any climate change bill to
include a fair and equitable allocation of allowances to rebate the
full cost of complying with new legislation. Sufficient allowances from
the total pool should be devoted to energy and trade intensive
industries; the allowances should be available for as long as
practicable to bring other nations into compliance with a global regime
and to develop new technologies to improve energy efficiency and reduce
carbon use. Second, the legislation must include a mechanism to impose
a ``border adjustment'' on goods imported from countries that do not
have comparable limits on carbon emissions. Such a mechanism would
impose a fee on the carbon content of goods imported from these
countries and should be bypassed only with Congressional approval. And,
the border adjustment must be rebatable to our exporters so that
action--or inaction--on climate change is not used as a competitive
tool by our trading partners to limit trade flows.
It is important to note that such a provision would be permissible
under our international obligations. A June 26, 2009, report released
by the WTO and the United Nations Environment Programme said: ``Rules
permit, under certain conditions, the use of border tax adjustments on
imported and exported products . . . The objective of a border tax
adjustment is to level the playing field between taxed domestic
industries and untaxed foreign competition by ensuring that internal
taxes on products are trade neutral.''
These provisions are essential to preventing a shift of our
domestic manufacturing base in energy-intensive industries to
industrialized nations such as China, the world's largest emitter of
carbon dioxide, and India, which has publicly rejected efforts to
control emissions.
To illustrate this point, in March, we released a study outlining
the competitive advantage already enjoyed by Chinese steelmakers, who
operate under less stringent environmental standards than most
developed countries. Levels of pollution are 3 to 20 times higher per
ton of steel produced in China than in the U.S., depending on the
specific pollutant and industrial process analyzed. China is the
world's leading industrial carbon dioxide emitter. Meanwhile, our
domestic steel producers are the most efficient in the world, with the
lowest energy consumption and lowest emissions per ton of production.
It would be a grave mistake to put our energy intensive industries
(including chemicals, paper, iron and steel, aluminum, rubber, cement,
and glass) at a competitive disadvantage as an unintended consequence
of seeking to control greenhouse gas emissions. We look forward to
working with you to ensure the Senate legislation includes these
important measures.
Mr. Chairman, I want to close by framing the broad goal of an
American manufacturing strategy, as outlined by President Obama in
April. The President, appearing at a Group of 20 Summit in London,
said:
. . . in some ways the world has become accustomed to the
United States being a voracious consumer market and the engine
that drives a lot of economic growth worldwide . . . We're
going to have to take into account a whole host of factors that
can increase our savings rate and start dealing with our long-
term fiscal position, as well as our current account deficits.
Those are all issues that we have to deal with internally,
which means that if there's going to be renewed growth, it
can't just be the United States as the engine. Everybody is
going to have to pick up the pace . . . I should add, by the
way, that to the extent that all countries are participating in
promoting growth, that also strengthens the arguments that we
can make in our respective countries about the importance of
world trade--the sense that this isn't a situation where each
country is only exporting and never importing, but rather that
there's a balance in how we approach these issues.
Balance is the key. And if balance is the goal, the surest path
forward is to invest more in domestic manufacturing and reform our
trade policies. Such actions will create more exports, more jobs, more
innovation, and more growth. Mr. Chairman, we look forward to working
with you and Members of the Subcommittee on strategies to revitalize
this important sector of our economy.