[Senate Hearing 113-55]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 113-55

 
  STATE OF THE AMERICAN DREAM: ECONOMIC POLICY AND THE FUTURE OF THE 
                              MIDDLE CLASS

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                            ECONOMIC POLICY

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

  EXAMINING THE STATE OF THE MIDDLE CLASS AND THE ``AMERICAN DREAM'' 
              TODAY FROM PERSONAL AND POLICY PERSPECTIVES

                               __________

                              JUNE 6, 2013

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

                    Subcommittee on Economic Policy

                     JEFF MERKLEY, Oregon, Chairman

             DEAN HELLER, Nevada, Ranking Republican Member

JOHN TESTER, Montana                 TOM COBURN, Oklahoma
MARK R. WARNER, Virginia             DAVID VITTER, Louisiana
KAY HAGAN, North Carolina            MIKE JOHANNS, Nebraska
JOE MANCHIN III, West Virginia       MIKE CRAPO, Idaho
HEIDI HEITKAMP, North Dakota

               Andrew Green, Subcommittee Staff Director

        Scott Riplinger, Republican Subcommittee Staff Director

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                         THURSDAY, JUNE 6, 2013

                                                                   Page

Opening statement of Chairman Merkley............................     1

Opening statements, comments, or prepared statements of:
    Senator Heller...............................................     3
    Senator Warren...............................................     4

                               WITNESSES

Diedre Melson, Portland, Oregon, subject of documentary movie 
  ``American Winter''............................................     6
    Prepared statement...........................................    42
John Cox, Newberg, Oregon, subject of documentary movie 
  ``American
  Winter''.......................................................     9
    Prepared statement...........................................    43
Pamela Thatcher, Tualatin, Oregon, subject of documentary movie 
  ``American Winter''............................................    11
    Prepared statement...........................................    44
Atif Mian, Professor of Economics and Public Policy, Princeton 
  University.....................................................    13
    Prepared statement...........................................    45
Amy Traub, Senior Policy Analyst, Demos..........................    14
    Prepared statement...........................................    53
Nick Hanauer, Second Avenue Partners.............................    17
    Prepared statement...........................................    95
Steven D. Hill, Director, Nevada Governor's Office of Economic 
  Development....................................................    19
    Prepared statement...........................................    96

                                 (iii)


  STATE OF THE AMERICAN DREAM: ECONOMIC POLICY AND THE FUTURE OF THE 
                              MIDDLE CLASS

                              ----------                              


                         THURSDAY, JUNE 6, 2013

                                       U.S. Senate,
                           Subcommittee on Economic Policy,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 9:35 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Jeff Merkley, Chairman of the 
Subcommittee, presiding.

               STATEMENT OF CHAIRMAN JEFF MERKLEY

    Chairman Merkley. Good morning. I call this hearing to 
order. It is terrific to have all of you joining us, and I want 
to start by thanking all of our witnesses for their 
flexibility. Senator Lautenberg's passing and then his funeral 
yesterday caused us to need to reschedule everything on a very 
short time period, and so I apologize for the inconvenience 
that that created. I know that you all have traveled from afar, 
and thank you for rearranging your plans to be able to come 
this morning.
    Because of the complexity of rescheduling to today, we are 
going to be split into two parts, going from 9:30 to just after 
10. Then there will be a vote and then a full Committee markup, 
and then we will return at about 11:15, as soon as the full 
Committee is done, to about 12:15 to 12:30.
    And so welcome to the complexity of the U.S. Senate, and we 
may well have Senators coming and going as their schedules 
allow.
    This is the first hearing that I have held as a 
Subcommittee Chair, and so I feel very honored to be holding it 
and to have the topic be the American Dream and the American 
middle class.
    The American Dream is a powerful concept that has driven 
generations of Americans to strive for a better life. Every 
American might define the American Dream a little differently, 
but for most, it is a concept broadly based around prosperity 
and economic opportunity, regardless of where one started in 
life.
    For many, like my own family growing up, the real-life 
essence of the American Dream was that, with hard work and 
determination, one could obtain a good living-wage job and 
provide for a family, own a home, and maybe start a small 
business--in short, work your way into the middle class with a 
belief that things might be better for each generation building 
on the foundation of the previous generation.
    Unfortunately, over the last decade at least, the American 
Dream has slipped slowly out of reach for many families. 
Working families face increasingly steep challenges in 
accessing and staying in the middle class. Some of these 
challenges, such as underwater homes and high joblessness, are 
a specific result of the financial crisis of 2008 and the Great 
Recession that followed. Others arise from broader trends, such 
as globalization and technological change. Still others arise 
from misplaced priorities in our tax budget and investment 
policies. Here are just a few background points.
    Between 1989 to 2010, hourly productivity grew more than 
three times as fast as wages. But young men ages 25 to 34 
working full-time today are earning 10 percent less than their 
fathers did 30 years ago. The entire bottom 20 percent of wage 
earners has seen hourly wages decline by 30 cents, inflation 
adjusted, and the next lowest 20 percent saw those earnings 
fall 60 cents on the dollar, a 3.9-percent and 4.3-percent 
decline, respectively.
    This is against a backdrop of explosive earnings growth for 
those at the top, nearly a 30-percent increase for the top 20 
percent in our society.
    Meanwhile, the costs of basic features of the middle class, 
such as public college, rent, utilities, and health 
expenditures have increased between 41 to 80 percent over the 
time period between 1970 and 2009.
    In trying to account for these rising costs and the 
increasing income disparity, median family holdings of debt 
have gone from $25,300 in 1989 to $70,700 in 2010. And that 
debt is hitting our next generation hard because our students 
are incurring a lot more debt as they work to get a college 
education. In 2011, 66 percent of college seniors at public or 
nonprofit schools graduated with debt compared to only 33 
percent in 1992.
    And due primarily to a collapse in home values, median net 
worth fell from $126,000 in 2007 to $77,000 in 2010, lower than 
it was in 2001. And as of March of this year, about one in four 
homeowners is underwater, meaning they owe more on their home 
than their home is worth.
    Our unemployment rate remains stubbornly high, stuck above 
7 percent, and 60 percent of the jobs that we lost in the 
recession were living-wage jobs and 60 percent of the jobs that 
are being restored after the recession are not living-wage 
jobs. So this continues to have a compressing effect on the 
middle class. In 1998 through 2012, just 14 years, we lost 5 
million manufacturing jobs and 40,000 factories.
    So however one looks at it, from income perspective, debt 
perspective, net worth perspective, unemployment perspective, 
student debt, things are tough. The data paint this picture: 
Working families have been hurting for a long time, and with 
the crisis in 2008, a lot of the families were financially 
crushed.
    Today's hearing aims to shed light on both the challenges 
of the Great Recession and those that have been developing over 
a longer period of time. Most importantly, the hearing will 
address the real-life impacts these challenges have on working 
families striving to hold onto life in the middle class.
    We will hear from three Oregon families who were recently 
featured in the documentary film ``American Winter''. They were 
chosen for this film not because their stories are exceptional, 
but precisely because the challenges and choices that they have 
faced in the aftermath of the recession are so typical of the 
challenges and choices that families face, working families 
face across America.
    Frankly, we do not hear enough from ordinary working 
families who, in tough times, are fighting as hard as they can 
to get by. So I hope all of Washington will take note of their 
experiences, and I particularly want to thank them from coming 
a very long way to share their stories.
    We are also fortunate to have joining us a panel of experts 
in economics and business. I hope we can have a robust 
conversation about the causes of our shrinking middle class and 
what we can do at the national level to restore the pathways to 
the middle class. Those pathways are living-wage jobs, 
education, home ownership, and small business.
    After Senator Heller's opening statement, Senator Heller 
and I will provide a brief biography for each witness, and then 
we will jump into the conversation.
    I now invite my colleague Senator Heller to offer an 
opening statement.

                STATEMENT OF SENATOR DEAN HELLER

    Senator Heller. Thank you, Mr. Chairman, and you are off to 
a good start. And I would agree that this is a critical, 
critical issue and topic, and I am pleased to be part of this 
Subcommittee today working on these issues that I think are 
critically important.
    I want to thank the witnesses for taking time out of your 
schedule and rearranging your schedule so that we could be here 
today and certainly do appreciate that, and everybody that is 
also here that find this topic as interesting as both the 
Chairman and I do.
    It is no secret that the middle class is struggling, and 
what we are talking about today is on the mind of every 
American. I can tell you that in my home State Nevadans are 
fighting every day for a decent paycheck, a safe home, and a 
strong economy.
    Unfortunately, Nevada has been ground zero of our economic 
collapse. For too long, we have led the Nation in unemployment, 
foreclosures, and bankruptcies. It is absolutely unacceptable 
that the unemployment rate around the country remains so high 
because these are not just numbers. These are people, families 
who are struggling day by day to reclaim the American Dream.
    Every week I hold a telephone town hall meeting. I hear 
directly from my constituents about the issues that are 
important to them, and I literally get thousands of people on 
the line when I do this. Every week the number one topic that 
Nevadans raise with me are jobs and the economy. During these 
calls, I often ask a poll question and ask participants to give 
me feedback. Recently I asked a simple question: Is the economy 
improving? Seventy-nine percent say they do not see any signs 
that things are getting better.
    I have always said we must ensure a strong safety net for 
the unemployed and those who are struggling. Ultimately 
improving the health of our economy and the middle class hinges 
upon job growth, and it has not received the attention it 
deserves in Congress.
    It is past time for a genuine effort to work in a 
bipartisan manner to create the certainty and stability that 
will allow American families and businesses to thrive.
    Now, I do not believe that Washington, DC, has all the 
answers to our problems. The real recovery will come from small 
business owners who hire a new employee, the worker who re-
entered the labor market, and when students who recently 
graduate can find a job.
    Again, I want to thank all the witnesses for being here 
today to share their experiences and to offer their suggestions 
as to how we can bring the American Dream back for everyone.
    Thank you, Mr. Chairman. I look forward to all the 
testimonies from our witnesses.
    Chairman Merkley. Thank you very much. And we have been 
joined by Senator Warren. Would you like to make an opening 
statement?

             STATEMENT OF SENATOR ELIZABETH WARREN

    Senator Warren. I will just make a remark, and that is to 
start by apologizing for being late. I was on the floor talking 
about the approaching increase in student loan interest rates 
and how Congress needs to take action now. And I hope that is 
something we can explore more in the questions.
    I want to thank you, Mr. Chairman, for holding this 
hearing, thank the Ranking Member. There is no issue that is 
more important than what we are discussing today. So thank you.
    Chairman Merkley. Well, and the issue of interest rates on 
student loans goes right to the heart of the challenges of 
sustaining the middle class and debt.
    Senator Warren. Yes.
    Chairman Merkley. So thank you.
    I want to remind my colleagues that the record will be open 
for the next 7 days for opening statements and any other 
materials that you would like to submit. And now I will turn to 
introducing our witnesses.
    First of all, let me extend my gratitude to everyone on the 
panel. Everyone traveled a long way to be here, from Seattle, 
Las Vegas, Princeton, New York City, and, of course, from 
Oregon. Thank you very much. We deeply appreciate your 
commitment to sharing your views with the Senate.
    I would now like to introduce Diedre Melson, John Cox, and 
Pamela Thatcher, who are joining us all the way from Portland, 
Oregon. Ms. Melson, Mr. Cox, and Ms. Thatcher were the 
subjects, or you might say ``the stars,'' of the documentary 
film ``American Winter''. This documentary was produced and 
directed by Emmy Award-winning film makers Joe and Harry Gantz. 
It aired nationally on HBO as of March 18th of this year. 
Filmed over the course of one winter, the movie tells the real-
life stories of ordinary families who, during the financial 
crisis and recession, sought assistance from 211info, a 
nonprofit service that helps connect individuals in need with 
available public and private resources.
    As these families faced dramatic unemployment and job loss 
from the financial crisis, as well as ongoing shifts in our 
economic landscape, they struggled to keep their heads above 
water, faced overwhelming challenges, and confronted what to do 
with dwindling resources available to assist them. Since each 
is going to tell his or her own story, I am not going to give 
extensive introductory remarks, just a sentence or two.
    Diedre Melson worked through high school and went to 
college immediately after graduating. After a few years of 
college, she was no longer able to afford it and transferred to 
actual career school, where she obtained certifications in the 
medical field. Diedre was laid off from her job as a 
phlebotomist along with 1,500 other employees during the 
recession.
    John Cox is now facing a third year of unemployment and 
concerns about losing his home. He went to college and paid for 
it by working full-time and taking other jobs and worked 
continuously until October of 2008 when the recession created 
havoc and he was laid off.
    Pamela Thatcher taught preschool for 9 years to save up 
before starting a family, at which point she and her husband 
relied solely on her husband Brandon's income. He has never 
been without work, had a good-paying job; however, he lost his 
job shortly after their second child was born.
    I will leave the other details to their own description of 
how they faced these challenges.
    Let me say simply that I hope the Subcommittee can hear the 
ground-up view of the state of our economy as it is playing out 
for so many American families and that we can think about the 
policies that will address these real challenges on the ground.
    We are also lucky to be joined by several experts on 
economic policy.
    Atif Mian is a professor of economics and public policy in 
the Department of Economics at the Woodrow Wilson School and 
Julis-Rabinowitz Center for Public Policy and Finance at 
Princeton University. He holds a bachelor's degree in 
mathematics and a Ph.D. in economics from MIT. His recent work 
centers on understanding the origins of the global financial 
crisis, the political economy of Government intervention in 
financial markets, and the link between asset prices, household 
borrowing, and consumption.
    Amy Traub serves as senior policy analyst at the think tank 
Demos. She has a broad research focus on consumer debt, job 
quality and job creation, and policies to build the American 
middle class. Prior to Demos, Amy worked for Drum Major 
Institute for Public Policy, where she authored a number of 
influential reports, including ``Principles for an Immigration 
Policy To Strengthen and Expand the American Middle Class''. 
She has contributed essays and opinion articles to a variety of 
publications, and her book chapter, ``A Strengthened Middle 
Class'', appeared in ``Thinking Big: Progressive Ideas for a 
New Era''.
    Nick Hanauer is a partner in the venture capital firm 
Second Avenue Partners. One of the Pacific Northwest's most 
successful entrepreneurs and investors, he has founded or 
financed dozens of companies across a broad range of 
industries, including manufacturing, retail, e-commerce, 
digital media, software, aerospace, and banking.
    How is all that possible in one lifetime?
    Notably, he was one of the first investors in Amazon.com, 
served 5 years as a board adviser, also founded--he was also 
CEO and then chairman of A--is it ``quantitative''?
    Mr. Hanauer. aQuantive.
    Chairman Merkley. Thank you--aQuantive, which was purchased 
by Microsoft in 2007. Mr. Hanauer is involved in numerous civic 
and philanthropic causes and coauthor of two books, ``The True 
Patriot'' and ``The Gardens of Democracy'', both national best 
sellers in politics.
    And now I would like to invite Senator Heller to introduce 
Mr. Hill.
    Senator Heller. Thank you, Mr. Chairman. I want to welcome 
Steve Hill from my home State of Nevada and thank him for being 
here today.
    Mr. Hill is the director of the Governor's Office of 
Economic Development. He is charged with stimulating business 
expansion and retention, encouraging entrepreneurialism, 
attracting new businesses, and facilitating community 
development in Nevada. No small task.
    Mr. Hill is founder of the Silver State Materials, a 
concrete, sand, and gravel supplier in the Las Vegas area since 
1987. Silver State was purchased recently by CalPortland in 
2008.
    Prior to accepting his appointment, Mr. Hill served as 
CalPortland's senior vice president, responsible for Nevada and 
Arizona operations, as well as chairman of the Service1st Bank 
of Nevada, chairman of the Las Vegas Chamber of Commerce State 
Policy Task Force, and commissioner on the Nevada Commission on 
Economic Development.
    Mr. Hill is a past chairman of the Chamber's Board of 
Trustees and the Boys and Girls Clubs of Las Vegas. He also 
served as chairman of Government Affairs for the Las Vegas 
Chamber, the Associated Builders and Contractors, and the 
Associated General Contractors.
    Mr. Hill, thank you for being here today and for giving us 
your testimony. Good to see you.
    Chairman Merkley. Thank you, Senator Heller, and welcome, 
Mr. Hill.
    And with that, we will begin our testimony, and, Ms. 
Melson, you are up first, and we will ask you to take about 5 
minutes, but we will not be too strict on that time.

   STATEMENT OF DIEDRE MELSON, PORTLAND, OREGON, SUBJECT OF 
             DOCUMENTARY MOVIE ``AMERICAN WINTER''

    Ms. Melson. Good morning. Thank you, Chair Merkley and 
Ranking Member Heller--excuse me if I am a little nervous--and 
thank you to the Subcommittee.
    Chairman Merkley. You are among friends.
    [Laughter.]
    Ms. Melson. Like Senator Merkley explained, I am an Oregon 
resident. If you saw the film ``American Winter'', I was 
starting at WorkSource at that time. I now work for 211. I have 
been working since I was 13 years old. Like he explained, I 
worked all through high school and went to college straight out 
of high school.
    When I was not able to afford college, I decided that I 
needed to do something practical, so I was certified as a 
medical assistant cardiac technician and phlebotomist. 
Phlebotomy is my favorite part of that whole suite, and I was 
fortunate to move from Los Angeles to Oregon and get a dream 
job, and that was at the Alpha Plasma Center.
    Unfortunately, shortly after me being hired, there was a 
management issue, and we were taken over by another company. 
That company decided to close everything down, so like Senator 
Merkley explained, that resulted in 1,500 jobs lost.
    Of course, it always takes you time to dig yourself out of 
a hole, so I was unemployed and went out to try to search for 
employment, and the job market was really, really bad at the 
time. So when I was rehired, it took forever to try to dig 
myself out of debt.
    I have four children. I have a son who is 6 feet tall, he 
weighs 280 pounds. He eats a whole bunch.
    [Laughter.]
    Ms. Melson. He is a wrestler and football player. I am so 
proud to say that he went to the Reno World Champions this past 
April. He took fifth, and he is now an all-American wrestler. 
And so I am so excited and happy for him, but I also fear for 
his future. He is looking to go to college this coming fall, 
and because like you guys mentioned before with the increase in 
tuition, with the decrease in scholarships, I am fearful of how 
he is going to do that. I know that his prospects are limited 
if he does not further his education. That was why I went to 
college, because I felt like I needed that in order to secure a 
job. And even after I was not able to complete my degree, which 
was in communications, I went ahead and did something that I 
thought was practical.
    Setbacks are really hard. I have had to take advantage of 
social services. I am currently receiving SNAP benefits, and 
for those of you that do not know, that is the food stamp 
program, although I do work a full-time schedule.
    In Oregon our minimum wage is $8.90, and I think that that 
is probably one of the higher ones in the country. I make 
$13.52, and it is just not a living wage. It is not enough for 
me to support my four kids, especially with two of them being 
in college. My daughter is at a community college right now, 
but the expenses are still the same. Books are high, really 
high, and so it is really difficult.
    I want people to know, like I said before, I work for 211 
now, and I speak to people every day who are in the same 
situation, if not worse, than what I am in. I talk to people 
who--I literally talked to a lady not too long ago who called 
me from work, and her water had been shut off. Her 13-year-old 
daughter was the one who discovered it. She was at home by 
herself, so she was very afraid, and the lady, she calls me, 
and she is in tears. And I told her, you know, ``You have to 
leave work, and you have to go so that you can get your water 
reconnected.'' She had been making, you know, small payments, 
but--and like I said, she is employed full-time. So she is not 
sitting around wanting a handout. She is just in over her head, 
just like so many of us are.
    I had to, like, literally kind of pull teeth for her to 
leave her job because, of course, when she leaves work, then 
she is missing money. But if she does not leave work, then she 
has no water. So it is a double-edged sword. It is kind of a 
lose-lose situation.
    I talk to people like that every day who are humiliated to 
have to go and ask for services, myself included. I never 
expected to work a full-time schedule and still depend on 
rental assistance, to still depend on SNAP benefits, to still 
depend on those services that you think are reserved for those 
who are simply unemployed.
    I know the media, they exploit that 1 or 2 percent that may 
be taking advantage of the system, but the reality is that 
other 98 percent, they do not want to be there.
    Our former CEO, Liesl Wendt, has moved over to the 
Department of Human Services, and she sends us over reports 
sometimes, and she sent over a report that said prospectively, 
in 2016, that 1,000 families per month will be cutoff the TANF 
program. And the TANF program is Temporary Assistance for Needy 
Families.
    What they have in place now is 60 months lifetime, and that 
is a little unrealistic because you never know what life is 
going to deal you, and you never know when you may need those 
services. But the way they have it set up now is that after 
that 60-month period, if the parents have not found employment, 
then they are cutoff of the system but their children still 
receive the benefits that they need.
    The potential in 2016 is that the entire family is cutoff, 
so there is no more assistance. There is no medical, there is 
no SNAP benefits. They are completely cutoff. And my question 
is: What happens at that time? Because, realistically, we do 
not have 1,000 jobs to offer people, so what happens at that 
time?
    Also at WorkSource I had the opportunity to work with 
people like John who were in the warehouse field, production 
field, construction. They worked those jobs 15, 20 years and 
felt like they would retire from those jobs. Now they are in 
their mid-50s, and they cannot find employment. It is virtually 
impossible. They are competing against the new technology. They 
are not familiar with the Internet. They are trying to fill out 
online applications, and it is scary. It is scary. And I fear 
the same thing because in less than 10 years I will be there. 
And so what happens at that time?
    So I just would really, really like for people to 
understand that people who are taking advantage of this a lot 
of the times are not those people that we see in the media, 
those greedy people who are wanting to take advantage of the 
system. These are people who are really in a financial crisis. 
We are the working poor. We are people who get up every day, 
and we try to pay our fair share and we try to pay our dues. 
But despite what we do, despite our efforts, we are sinking.
    So thank you guys again for allowing me a moment.
    Chairman Merkley. Thank you for speaking really from your 
own personal front-line experience as well as the folks you 
speak to every day on 211info who are challenged very 
similarly. Thank you.
    Mr. Cox.

STATEMENT OF JOHN COX, NEWBERG, OREGON, SUBJECT OF DOCUMENTARY 
                   MOVIE ``AMERICAN WINTER''

    Mr. Cox. Hi, I am John Cox, and I appreciate the 
opportunity to come and meet with you folks. I just want to 
make sure people understand. I am just a representative of 
millions of people around the United States that are in similar 
situations as we are.
    Senator Heller, Nevada, I am very aware of the employment 
issues over there. My hat goes off to you.
    And, anyway, just to kind of give you a little background, 
you know, my childhood, I was always raised to believe in the 
American Dream. My grandparents, my parents, church, 
community--everybody, you know, talked about how great the 
United States was and what the American Dream was. And, you 
know, the American Dream mantra was just driven into me and I 
still believe in it. I really do.
    You know, I was raised, I always heard, you know, ``Work 
hard.'' You know, ``If you work hard, you will have no 
worries.'' You know, ``Get an education. If you get an 
education, you will never have to worry about a job ever 
again.'' You know, ``You are going to be in the middle class,'' 
all that. You know, ``Save money for the future, you know, in 
case something comes up you have a little nest egg to fall back 
on.''
    My family also was very adamant about volunteering in the 
community, you know, giving a little of yourself back. It was 
not just a slogan. It was, you know, ``Help your community, 
help your neighbor.''
    You know, and then my father's famous words were, ``Take 
care of your job and the job will take care of you.'' You know, 
I always believed that. I do not know how many times I heard 
that. You know, I knew the rules, I played by the rules that I 
thought were laid out for me. I took seriously the expectations 
placed on me by the Government and the community and my family.
    Working hard was not a choice with me. I was raised--as a 
kid, I was raised on a cattle ranch. And from the time I could 
walk, almost, it seemed like, I was having to get up at 4 
o'clock in the morning and go out and feed the cattle in the 
winter. And that was not going out in the barn. That was 
actually out in open pastures.
    Anyway, you know, in the springtime, when it was what we 
called ``calving season,'' my brother and my dad and I, we 
would take shifts during the night to go check on the cattle 
during calving season, you know, make sure that they were not 
having any problems. And, you know, my--unlike a lot of people, 
my brother, similar I guess, my brother and I, we used to--we 
not only fought over whose turn it was to wash the dishes, it 
was also whose turn was it to milk the family milk cow. And, 
you know, there was always work to be done.
    My father, he is college educated, and it was instilled in 
me that it was not a question of whether you are going to go to 
college or not. It was, ``You are going to college.'' I funded 
myself through school. I did not take out any student loans or 
anything else. I took on jobs like--well, I went up into Alaska 
commercial fishing, even going during school. I even brushed 
volcanic ash out of parking lots when Mt. St. Helen's blew back 
in 1980, I think somewhere around there, and, anyway, I had a 
job going around parking lots with the push broom and making 
money that way.
    So, you know, it is not that I am afraid of work at all. I 
would rather be at a job right now than here, although I am 
thankful to be able to speak. But I am kind of similar to 
Diedre. I have not been without a job since I was about 12 
years old until October 2008. The longest I think I had ever 
been going without a job was a week, and, anyway, you know, the 
mantra again was, you know, ``You take care of the job and the 
job will take care of you.'' And, you know, again--but, anyway, 
about 12 years ago, I invested in a house for my family, and I 
had saved, oh, about $35,000 in savings, kind of like an 
emergency fund. I had a 401(k) going. You know, I was on top of 
the world, I thought. I was making $60,000 a year salary as a 
cost accountant. And, anyways, you know, when I was laid off in 
October 2008, I was not too worried about getting another job. 
You know, it was like, well, you know, I always had one so, you 
know, it is not going to be too much of a problem. So a month 
went by, and I just kind of said, ``Well, you know, it is just 
right around the corner.'' You know, keep a positive attitude. 
And pretty soon 6 months go by, and, you know, now you are into 
that dreaded--trying to get rehired after being 6 months 
unemployed.
    And so, anyway, I was being able to supplement my house 
payments and all my bills. I was keeping current with all my 
bills, my mortgage and everything, out of this savings account 
I had. I had over $35,000 in savings. Anyway, I exhausted that, 
and then I pulled out a 401(k), and, you know, after all the 
early withdrawal penalties and blah, blah, blah, it gave me 
another $35,000, and I continued to keep up on my payments, 
because I had a great credit rating. You know, I cannot say 
excellent because, you know, very seldom have I seen anybody 
have an excellent credit rating. But, anyway, so I kept up on 
those, and then after about a year-and-a-half or so, I started 
seeing the handwriting on the wall where, you know, my funds 
are getting depleted. Finally, after a year and a half, I 
applied for unemployment. That was the first time I even 
applied for unemployment, because people on unemployment, that 
was not me. You know, that was the other people.
    And, you know, so anyway, like I say, after, you know, that 
dreaded 6-month unemployment, employers for some reason, they 
will not look at you. They say you are outdated or something 
like that, you know. You know, they are not anxious to hire a 
person of my age, anyway, it seems like. Right now, Wells Fargo 
is in the process of trying to foreclose on my home, you know, 
and I have been getting some awfully, awfully good help from 
people trying to help me save my house. This house is not for 
me. I have a Down's syndrome boy. He is 12 years old. And that 
was one of my intents of getting this house 12 years ago. It 
was not for me. It was kind of like a nest egg for my boy in 
the future for when I was not around. That is what drives me 
even today, is not looking out for myself so much as I am 
looking out for my kid.
    Anyway, I still do not sit--you know, I do not sit on my 
hands. I still am putting out job applications left and right 
trying to find a job. I just, you know, nothing has come to 
fruition yet. I have even looked at minimum wage jobs, and it 
is really difficult because, you know, if it was just me, I 
would have no problem working for minimum wage. But when you 
work for minimum wage and you have to pay for day care or a 
baby sitter for your kid, it is just a wash. You know, you 
cannot afford to work and pay a baby sitter and expect to be 
able to live comfortably.
    Right now, the jobs I have been looking at in the cost 
accountant area and everything that used to pay $60,000, right 
now you are lucky if you can find a similar job out there for 
$35,000.
    Chairman Merkley. Mr. Cox, on that note, I may have to stop 
you because the vote is underway, and we are going to miss it 
if we do not adjourn.
    Mr. Cox. Oh, I am sorry.
    Chairman Merkley. And I am sorry to interrupt your story, 
but the last point you are making is that challenge of living-
wage jobs disappearing and much lower wage jobs reappearing.
    Mr. Cox. Sure.
    Chairman Merkley. So we have three votes lined up, so we 
will be gone for a while. And then the full Committee will 
convene to mark up a bill. And then as soon as they are done--
and we expect that to be about 11:10 or so--we will reconvene 
this Subcommittee and continue, and we will ask Pamela to kick 
off the next session.
    So thank you all, and I will see you a few minutes down the 
road.
    [Whereupon, at 10:12 a.m., the Subcommittee recessed and 
reconvened at 11:53 a.m.]
    Chairman Merkley. I call the Subcommittee back into 
session, and we were just completing Mr. Cox's testimony, and 
thank you very much, and we are going to proceed with Ms. 
Pamela Thatcher. And I am going to ask folks to try to stick to 
the 5 minutes because, due to the craziness of the Senate 
schedule, our time has been substantially compressed.
    First we have to have the completion of the ceremonial 
passing of the water.
    [Laughter.]
    Chairman Merkley. Thank you. Ms. Thatcher.

  STATEMENT OF PAMELA THATCHER, TUALATIN, OREGON, SUBJECT OF 
             DOCUMENTARY MOVIE ``AMERICAN WINTER''

    Ms. Thatcher. Chairman Merkley, Ranking Member Heller, and 
Members of the Subcommittee, I just want to thank you for 
giving me this opportunity to testify before you and share my 
experience.
    I never would have imagined that I would have been in the 
position that I have been in these last couple of months. My 
husband, in the fall of 2011, lost his job, and the savings we 
did have in our account grew thin. The decision to reach out 
for help was incredibly difficult for my husband and me. I 
definitely had the mom survival mode that kicked in. I have two 
young children. Right now my oldest is 3\1/2\ and my youngest 
is 1\1/2\. So when that survival mom mode kicked in, I knew 
that I had to do anything and everything in my power to take 
care of my children. And for most parents, almost all parents 
would do that.
    So accepting assistance was very hard. Me and my husband, 
we had the American Dream. We dreamed that we would work hard, 
go to college, plan to have a family, have that white picket 
fence, have that job that you have had for years, retire--
everything that I think all of us as children figured that that 
would happen. And so we got married in 2008. We planned our 
family in stages. We had our first child, then our second 
child. I taught preschool for 9 years. When my first child was 
born--I think he was about a year--my husband was doing 
fantastic in his job. We were thinking that if I became a stay-
at-home mom that we were safe, secure. We were middle-class 
families working hard, and we had everything ahead of us. We 
knew that we would be fine.
    And that is exactly not what happened. My husband, when he 
lost his job, it was like the carpet was ripped right out under 
us. Our dream kind of went down. But we still had that hope. We 
still thought we were going to get through this. We did not 
know that it would be months, it would be months and months. We 
figured since he always worked, he always had a job, we always 
had that strength in us that we would never ask for assistance, 
we can do it on our own type thing.
    We did not find ourselves in this situation, and, 
unfortunately, we were. We had to ask to get food stamps. We 
had to be on TANF. I had to go on WIC. It is heartbreaking when 
you tell yourself, ``I will never, ever do that,'' and you have 
this stigma on these people that they are using it and they 
are--what is the word I am looking for? They bred abuse to the 
system, and that is what you think until you are in it. You 
have no idea. You are looking around here seeing these families 
that have worked hard their entire lives, and they are both 
working, mom and dad, and they have children, and they cannot 
survive. They are drowning.
    So in this situation, we did everything we can. We cut back 
on every possible expense, and when those were gone, we had to 
go--we had to ask for assistance. Being in ``American Winter'' 
opened my eyes, and I hope it opens up millions of people's 
eyes. I hope our statements here let other people open their 
eyes to really how bad the economy is. The middle class? What 
middle class? It is hard-working families. The middle class is 
falling. It truly is.
    One woman at the grocery store came up to me. I will never 
forget this. It was after the film aired on HBO, and she had 
said, ``You are that lady in that film.'' And I said, ``I am.'' 
She grabbed my hand and held it, and she says, ``You know what? 
I thought I was alone. I thought that when my husband lost his 
job I was all alone, and seeing this had made me feel stronger, 
that I can survive, that I am not alone, so thank you.'' And 
that really touched me.
    My husband did finally get a job. Yay. Unfortunately, it is 
half of what he was making, so we are still struggling and we 
are still on assistance, unfortunately. But I just hope that 
this country, since it is going down the wrong path, that we 
can get back on the same path again. I really do, because it is 
for the people.
    I just wanted to thank everyone here again for their time, 
and I know we do not have much time. I just wanted to thank you 
guys so much. Thank you.
    Chairman Merkley. Thank you very much, Ms. Thatcher, for 
sharing your story.
    Dr. Mian.

   STATEMENT OF ATIF MIAN, PROFESSOR OF ECONOMICS AND PUBLIC 
                  POLICY, PRINCETON UNIVERSITY

    Mr. Mian. Good morning, and thank you, Senator Merkley, for 
having me. It is a great honor and privilege.
    I want to focus my attention on the rules of the game in 
our financial system and how those rules of the game impact the 
middle class and the broader economy.
    In particular, I will just give the example of mortgage 
contracts, the way they have been written in the past and how 
they impacted the middle class and the economy.
    I can borrow the example of Mr. Cox, who gave testimony 
before us, to illustrate my first point, which is that when the 
decline in house prices happened starting in 2007-08, people 
like Mr. Cox, the middle class, had most of their wealth in 
their homes. They lost all of that wealth, but that was not 
all, as you heard in the testimony as well. Many of them 
continued to use their retirement income to pay off the debt 
that was really on a house that did not belong to them anymore 
because they were underwater. That is the first impact of the 
financial crisis, and it is a direct consequence of the way we 
wrote down those mortgage contracts. I will come back to that 
in terms of smarter policy choices toward the end.
    The net impact of that on the American middle class has 
been devastating, and in my written testimony, if you refer to 
Chart 2, you will see the enormous impact it has had in 
increasing wealth inequality in the U.S. It is really 
remarkable.
    The other important thing is that it is not just a question 
of middle class. What happens to middle class, because we live 
in an interdependent ecosystem, has a wider impact on the rest 
of the economy through two key channels in the mortgage 
context. One is the foreclosures that are imposed as a result 
of homeowners being underwater devastate home ownership across 
the country due to the fall in house prices that results from 
foreclosures. That is the foreclosure externality.
    The other negative impact is the aggregate demand effect. 
When people lose wealth on their homes as they become 
underwater, they cut back on their spending drastically, and it 
is the middle America that has the highest propensity to 
consume, to spend. So when their wealth goes down, they are the 
ones that restrict their spending the most. The result is a 
fall in aggregate demand, which does not just hurt the people 
who are cutting back on spending. The other important point is 
that it impacts everyone in the economy because the stuff they 
buy, other people's jobs depend on it. And so people in 
Indiana, for example, get laid off because people in California 
are not buying enough RVs or enough automobiles.
    The bottom line is that it is a result of the contracts 
that we decided to write down, the mortgage contract, that is, 
that leads to this destruction of wealth of middle class as 
well as the decline in aggregate demand and the overall 
economy.
    So what can we do to rectify this situation, to prevent it 
from happening again? This is where I am going to make my 
second key point, that we need to have smarter contracts and 
smarter policy. And, in particular, in my testimony I have laid 
out the details of what I refer to as ``the shared 
responsibility mortgages.'' These mortgages are very similar to 
your standard 30-year fixed-rate mortgages, exactly the same, 
with two important differences.
    The first one is that these mortgages offer downside 
protection for the homeowner based on her local house price 
index that is easily available these days. Under this 
protection, the standard 30-year fixed-rate mortgage payment, 
for example, will decline by X percent if the local house price 
index declines by X percent relative to when the mortgage was 
originally issued.
    Now, think of--it is very easy to implement, and think 
about what would have happened. There would be no such thing as 
an underwater homeowner, no foreclosures, and we would have 
prevented the negative externalities that I talked about.
    Now, one cost of doing this is that the lender is going to 
charge more up front for the protection that they are going to 
offer. So for that, I am going to offer a second suggestion, 
which is that we add to the mortgage contract a 5-percent net 
capital gain that will go to the lender whenever the homeowner 
chooses to sell their house or refinance their mortgage. Given 
the average appreciation in house prices and the average 
volatility in house price growth in the U.S., if you do the 
math, one can show that the 5-percent net capital gain sharing 
with the lender completely neutralizes the cost of the downside 
protection that the lender offers. And so we come back to the 
same cost for mortgages as we have under the current system, 
but, importantly, this suggestion gives us the opportunity to 
share risks equally across the population. It protects the 
middle class and it protects our overall economy and our 
overall labor market.
    Let me just end by pointing out that the solution that I am 
proposing, if we had this system in 2007--and I have worked 
through the numbers--one can show that we would have largely 
avoided the Great Recession itself. In fact, if you think about 
the details, the proposal is entirely market based. There is no 
subsidy from the taxpayers involved ever. In fact, the shared 
responsibility mortgages help reduce budget deficits in the 
long run because they limit the need for countercyclical fiscal 
policy in the first place.
    These mortgages give the lender a direct interest in 
worrying about potential bubbles, so that automatically imposes 
a safety valve in the system so the lenders will lean against 
the wind, so to speak, if they think they are in a bubble, 
because they are offering the downside protection so they will 
raise the interest rate or the cost of a mortgage if they think 
the housing market is in a bubble. So not only do these 
mortgages reduce the negative effects of the housing bubble, 
but they also reduce the likelihood of those bubbles from 
happening in the first place.
    Thank you very much.
    Chairman Merkley. Thank you very much, Doctor.
    Ms. Traub.

      STATEMENT OF AMY TRAUB, SENIOR POLICY ANALYST, DEMOS

    Ms. Traub. Yes, thank you, Senator Merkley and Senators 
Warren and Heller, for this opportunity. My name is Amy Traub. 
I am a senior policy analyst at Demos. We are public policy 
organization working for an America where we all have an equal 
say in our democracy and an equal chance in our economy.
    Widely shared middle-class prosperity has made America the 
most hopeful and dynamic country on Earth, but the creation of 
the American middle class in the decades following World War II 
was not an accident. It was the result of deliberate public 
policy, and it required business, Government, and workers to 
all contribute to a shared social contract.
    But over the past 40 years, that social contract has frayed 
even as it was expanded to include more Americans that were 
formerly excluded, including women and people of color. 
Government and business have become less committed to ensuring 
widespread gains, and individuals are shouldering virtually the 
entire burden. This go-it-alone economic system is creating 
record inequality, and it has stalled our engine of mobility 
for the next generation.
    In the years after World War II, as economic growth and 
productivity increased, the workers contributing to that 
prosperity saw commensurate gains in wages. However, in the 
late 1970s, that connection began to break. While productivity 
increased 80.4 percent in the three decades between 1979 and 
2011, the inflation-adjusted wages of the typical worker grew 
just 6 percent during that time period. What became of those 
economic gains?
    A rising share of the Nation's gross domestic product is 
flowing to corporate profits rather than wages, and a larger 
share of overall income is going to the highest paid 1 percent 
of earners. Between 2009 and 2011, the incomes of the highest 
paid 1 percent of Americans grew by 11.2 percent while the 
incomes of the rest of Americans actually declined by 0.4 
percent.
    A number of scholars have investigated why economic gains 
are now so concentrated. Changes to the Tax Code that benefit 
the wealthy, the declining power of the minimum wage and other 
workplace protections, trade policy, and the weakening of 
organized labor and the laws that protect the right to organize 
are among the causes. All of these trends were shaped by public 
policy and can be changed by public policy.
    In other cases, such as changing families and our 
increasingly diverse society, public policy has simply failed 
to keep pace with who Americans now are and how we now live. 
The result is that the traditional routes to the middle class 
have become more difficult to travel, and security has eroded 
for those already in the middle class, as we have heard today. 
Many jobs do not pay enough to cover basic living expenses, 
much less allow workers to save money and build assets for the 
future.
    A college education is now increasingly the price of entry 
to the middle class, yet policy makers have allowed it to be 
priced out of reach of most Americans. Tuition at public 4-year 
schools has more than tripled in the past three decades, rising 
faster than either inflation or growth in family income. A 
major factor in the rise of public college costs is declining 
State support for higher education, which our research shows 
has dropped by 26 percent in 20 years. Meanwhile, Federal 
support has shifted from majority grants to majority loans, and 
the result is a crisis in access and completion. More than half 
of students drop out, primarily for financial reasons. Two out 
of every three students must now borrow to attend college so 
that Americans now owe more than $1 trillion in student loan 
debt.
    Home equity and savings nest eggs can provide an important 
buffer against hard times and can increase household economic 
stability. Yet in recent decades, financial deregulation, wild 
speculation in securities, and the aggressive marketing of 
toxic loans preyed on Americans' aspirations to build assets. 
The economic crash that followed decimated the wealth of 
American families, causing more than 2.7 million homeowners to 
lose their single largest asset to foreclosure.
    This preventable tragedy has particularly wounded middle-
class communities of color. Latino families lost an average of 
66 percent of their wealth; African Americans, 53 percent. 
Instead of saving for the future, millions of working and 
middle-class Americans are now struggling just to service their 
debts. Demos' research shows that 40 percent of low- and 
middle-income households carrying credit card rely on their 
cards to pay basic living expenses. Credit cards are also 
widely used to pay medical bills and to cope with spells of 
unemployment. In effect, this is a high-interest way to make up 
for gaps in the public safety net.
    At the same time, half of working Americans currently have 
no retirement savings outside of Social Security. Here, too, we 
have shifted away from a system in which Government and 
employers as well as workers contributed to middle-class 
retirement security. We have now gone toward a go-it-alone 
policy of 401(k)s, which put the risk of retirement entirely on 
the individual worker.
    My written testimony offers a wide range of policy 
recommendations, and many of these policies are detailed 
further in our report, ``Millions to the Middle,'' which I 
would be very pleased to share with the Subcommittee. But I 
just want to end by saying a few words about why these 
policies, many of which are so strongly supported by the 
American public, nevertheless seem so difficult to enact.
    In Demos' recent study, ``Stacked Deck'', we have collected 
evidence of a distortion in policy outcomes that political 
scientist Martin Gilens describes this way: The preferences of 
the vast majority of Americans appear to have essentially no 
impact on which policy the Government does or does not adopt. 
This is because the affluent are overrepresented among voters, 
Beltway influencers, and campaign donors. This unequal 
political influence is particularly consequential because of 
significant differences in policy preferences by income level. 
The general public is far more open than the wealthy to a 
variety of policies that would help restore the middle class, 
including raising the minimum wage, providing more generous 
unemployment benefits, and using the power of the Government to 
directly create jobs.
    Growing economic inequality is intertwined with growing 
political inequality, and to strengthen and expand the middle 
class and reclaim the American Dream, it is really imperative 
that we address both.
    Thank you so much.
    Chairman Merkley. Thank you very much, and thank you for 
your offer to provide the report. ``Millions to the Middle 
Class'', is that the name?
    Ms. Traub. That is the name. I do have some copies over on 
the table.
    Chairman Merkley. Great. I look forward to looking at it. 
Thank you.
    Mr. Hanauer.

       STATEMENT OF NICK HANAUER, SECOND AVENUE PARTNERS

    Mr. Hanauer. Chairman Merkley, Senators Heller and Warren, 
thank you for being here and thank you for inviting me.
    For 30 years, Americans on the right and left have accepted 
a particular explanation for the origins of prosperity in 
capitalist economies, and that is that rich business people 
like myself are ``job creators,'' and if the taxes on us or on 
our companies go up, fewer jobs will be created; conversely, 
that the lower our taxes are, the more jobs we will create and 
the more general prosperity we will have.
    Most Americans and many people in this room are certain 
that these claims are true. But sometimes the ideas we know to 
be true are dead wrong.
    For thousands of years, people were certain, positive in 
fact, that Earth was at the center of the universe. It is not. 
And people who believe that it is have a very hard time doing 
astronomy.
    My argument today is this: In the same way that it is a 
fact that the Sun, not the Earth, is the center of the solar 
system, it is also a fact that the middle class, not rich 
business people like me, are the center of America's economy. I 
will argue here that prosperity in capitalist economies never 
trickles down from the top. Prosperity is built from the middle 
out.
    As an entrepreneur and investor, I have started or helped 
start dozens of businesses across a range of industries, and I 
have hired lots of people initially. But if no one could have 
afforded to buy what we had to sell, all my businesses and 
every one of those jobs would have evaporated.
    That is why I am so sure that rich business people like me 
do not create jobs, nor do businesses, large or small. What 
does lead to more employment is a ``circle of life'' like 
feedback loop between businesses and customers. And only 
consumers can set in motion this virtuous cycle of increasing 
demand and hiring.
    That is why the real job creators in America are middle-
class consumers. The more money they have and the more they can 
buy, the more people like me have to hire to meet demand.
    So when business people like me take credit for creating 
jobs, it is a little like a squirrel taking credit for creating 
evolution. In fact, it is the other way around.
    Anyone who has ever run a business knows that hiring more 
people is a capitalist's course of last resort. It is what we 
do if and only if rising customer demand requires it; further, 
that the goal of every business--profit--is largely a measure 
of our relative ability to not create jobs relative to our 
competitors. In this sense, calling ourselves ``job creators'' 
is not just inaccurate; it is disingenuous.
    That is why our current policies are so upside down. When 
you have a tax system in which most of the exemptions and the 
lowest rates benefit the richest, all in the name of job 
creation, all that happens is that the rich get richer.
    Since 1980 the share of income for the richest 1 percent of 
Americans has tripled while our effective tax rates have fallen 
by approximately 50 percent.
    If it were true that lower tax rates and more wealth for 
the wealthy would lead to more job creation, then today we 
would be drowning in jobs.
    If it were true that more profit for corporations or lower 
tax rates for corporations led to more job creation, then it 
could not also be true that both corporate profits and 
unemployment and underemployment are at 50-year highs.
    There can never be enough super-rich Americans like me to 
power a great economy. I earn literally a thousand times the 
median wage, but I do not buy a thousand times as much stuff. 
My family owns three cars, not 3,000. Like most American men, I 
buy a few pairs of pants and shirts a year. My family goes out 
to eat occasionally, like most American families.
    I cannot buy enough of anything to make up for the fact 
that millions of unemployed or underemployed Americans cannot 
buy any new clothes or cars or enjoy any meals out, or to make 
up for the decreasing consumption of the vast majority of 
American families that are barely squeaking by, buried by 
spiraling costs and trapped by stagnating or declining wages.
    This is why the fast increasing inequality in our society 
is killing our economy. When most of the money in the economy 
ends up in just a few hands, it strangles consumption and 
creates a death spiral of falling demand.
    Significant privileges have come to capitalists like me for 
being perceived as ``job creators'' at the center of the 
economic universe, and the language and metaphors we use to 
defend the current arrangements are telling. It is a small step 
from ``job creator'' to ``The Creator.'' When someone like me 
calls himself a ``job creator,'' it sounds like we are 
describing the economy. What we are actually doing is making a 
claim on status and privileges, such as the amazing 
differential between the 15- to 20-percent tax rate on capital 
gains, dividends, and carried interest that capitalists get and 
the 39-percent top marginal rate on work that ordinary 
Americans pay.
    So we have had it backwards for 30 years. Rich business 
people like me do not create jobs. Jobs are a consequence of an 
ecosystemic feedback loop animated by middle-class consumers, 
and when they thrive, businesses grow and hire, and owners 
profit--in a virtuous cycle of increasing returns that benefits 
everyone.
    I would like to finish quickly with a story.
    About 500 years ago, Copernicus and his pal Galileo came 
along and proved definitively that the Earth was not the center 
of the solar system. A great achievement, but you may recall it 
was extremely unpopular with the political leaders at the time.
    Remember that Galileo invented the telescope so you could 
see, with your own eyes, that it was a fact. But the leaders of 
the time were not much interested because if Earth was not the 
center of the solar system, then it was diminished; and if 
Earth was diminished, then so were they. And that was the only 
fact that they cared about, so they told Galileo to stick his 
telescope where the Sun did not shine, and they put him in jail 
for the rest of his life and, by so doing, put themselves on 
the wrong side of history and the fact forever.
    Oddly, 500 years later, we are having a similar argument 
about who or what is at the center of the economic universe--a 
few rich guys like me or the American middle class.
    But as sure as the Sun is the center of our solar system, 
the middle class is the center of our economy. If we care about 
building a fast-growing economy that provides opportunity for 
every American, then me must enact policies that build it from 
the middle out, not the top down.
    Let us not forget the fundamental law of capitalism: When 
workers have no money, businesses have no customers. Tax the 
wealthy and corporations--as we once did in this country--and 
invest that money in the middle class--as we once did in this 
country. Raise the minimum wage to $15. Those polices will not 
be just great for the middle class, they will be great for the 
poor, for businesses large and small, and the rich.
    Thank you.
    Chairman Merkley. Thank you, Mr. Hanauer.
    Mr. Hill.

STATEMENT OF STEVEN D. HILL, DIRECTOR, NEVADA GOVERNOR'S OFFICE 
                    OF ECONOMIC DEVELOPMENT

    Mr. Hill. Chairman Merkley, Ranking Member Heller, Senator 
Warren, thank you for having this hearing and for allowing me 
to participate. My name is Steve Hill. I am the director of the 
Nevada Governor's Office of Economic Development. I think I 
bring a couple of maybe distinct perspectives on the topic of 
the economy and the middle class.
    Nevada has been at the epicenter of one of the biggest 
booms since my 25 years in Las Vegas, has represented--the 
first 20 years were some of the biggest growth the U.S. has 
ever seen. And the last 4 or 5 years have really been the 
epicenter of the housing crisis, and it is the industry that I 
was in before taking this job about 18 months ago.
    I started a concrete company in 1987. In 19 of the first 20 
years I was in that business, we led the Nation in job growth, 
in population growth, and it was truly a place where the middle 
class could get ahead, largely because there was so much work, 
so much competition for employment that it was a great place 
for my employees and for the middle class throughout Nevada.
    We reached a point where the construction industry was 11.5 
percent of the employment in the State when the national 
average for the construction industry is five. One of the 
lessons that we have learned--and I hope we exercise as we move 
forward--is that doing things that are unsustainable causes a 
lot of pain once the unsustainability goes away.
    Our construction employment is now back to about 4.5 
percent of our employment in the State, and it is likely to 
stay roughly in that neighborhood moving forward.
    Approximately 100,000 construction workers lost their jobs, 
so they were hit with a one-two punch of a housing crisis, the 
value of their homes dropping while they were losing their 
jobs. And they are faced with a situation where they are going 
to probably need to find employment in a different field.
    So Nevada looked at this and decided that we needed a 
different approach, and so we have adopted that different 
approach. We are looking at this on a parallel path of trying 
to get the 150,000 workers in Nevada who have lost their jobs 
back to work as quickly as possible while building a broader 
economy in the State. We certainly want to do that in 
conjunction with the gaming and mining industries, which have 
historically been Nevada's predominant industries, what we are 
most known for. But we want the diversity that causes 
stability, and we also want to look at improving the quality of 
jobs and the pay that goes along with that for the citizens of 
Nevada. And that has started to work.
    We have focused on some targeted opportunities in sectors--
in energy, in aerospace, in logistics, just to name a couple; 
recently passed legislation to eliminate coal and to focus on 
renewable energy, which Nevada has in vast quantities. Partly, 
potentially, due to that legislation and partly due to the 
future prospects in Nevada, Warren Buffett and Berkshire 
Hathaway recently bought the monopoly energy company in Nevada, 
so I think that speaks to the prospects for Nevada moving 
forward. The ``Oracle of Omaha'' may become the ``Nostradamus 
of Nevada.''
    We have focused on the FAA's effort to test unmanned aerial 
vehicles and integrate those vehicles into the national air 
space. It is an opportunity that Nevada presents great assets 
for and an opportunity for us to get into robotics, which we 
think would provide great jobs moving forward.
    We are looking at broadening from a consumption-based 
market to an investment and export market. We think that is 
important for Nevada; we think that is important for the 
country. So that involves advanced manufacturing, research, and 
a commitment to research. We just funded during our last 
legislative session what we call the ``Knowledge Fund,'' which 
ties our economic development effort to the university system 
to commercialize research and innovation. We have started to 
reach out more robustly to countries where we have population 
based in Nevada that already has connections, so we have a 
strong Hispanic, a strong Asian population in Nevada, so we are 
reaching out to Latin America and Asia.
    I will just end by saying that workforce development is a 
big part of our economic development effort and a big part of 
mobility in the middle class, so we will continue to focus on 
that as well. But thank you for allowing me the time today.
    Chairman Merkley. Thank you very much, Mr. Hill. We are 
producing a lot of solar panels in Oregon, and we would like to 
send them down to Nevada.
    Senator Heller. We will take them.
    Chairman Merkley. We are going to try a little bit 
different procedure today in which, rather than do 5 minutes 
each, we are going to start with each doing questioning and 
just keep going in a circle. Senator Heller will start; Senator 
Warren will continue; I will do the third question. Maybe we 
will create a little more interaction among the points each of 
us making and the points you all are making.
    With that, Senator Heller.
    Senator Heller. Thank you very much, Mr. Chairman. This 
ought to be an interesting experiment in itself.
    I want to thank those who testified, the three that are 
here today, for your background, your experience, and we are 
all very understanding of the concerns that you do have.
    Ms. Melson, congratulations with your son.
    Ms. Melson. Thank you.
    Senator Heller. That is a big event in Reno, and for him to 
come in fifth, that is pretty incredible. And for that, tell 
him congratulations. That is a huge honor in his case. I also 
want to thank the other two.
    I think what I hear, what I think I am hearing in the 
overall testimony from the three of you is that for generations 
we had a country that said if you worked hard, you would 
succeed. That is what you were told by your parents, and that 
is what you told your own kids: If you work hard, you will 
succeed. If you play by the rules, you will be rewarded. And if 
you do not, there will be consequences. And for generations, 
that was true. And we are seeing now a generation of Americans 
where that is not true, and that is why we are seeing America's 
struggles today.
    My question is for Mr. Hill, but it is based on something 
that Mr. Hanauer in your testimony--your testimony does confuse 
me a little bit, I will say that. And I do not mean that with 
any disrespect, but to Mr. Hill, whose job is to create jobs in 
Nevada, appointed by the Governor, if I am not oversimplifying, 
your testimony, Mr. Hanauer, but the concern is--in fact, we 
just ended a legislative session this week. But if I am not 
mistaken, you believe that by raising taxes we can create jobs. 
Mr. Hill, do you agree with that?
    Mr. Hill. Senator Heller, I do not, and certainly not in 
and of itself. And part of the reason that I say that is we are 
in a competitive situation. Whether that is Nevada, whether 
that is the United States, not everyone will take that same 
approach. The businesses that we talk to are bottom-line driven 
and we do have to be competitive in order to attract them, or 
they will locate elsewhere. And so Nevada is looking in every 
way possible to try and be a competitive place so that the 
citizens there will have those opportunities. That is not just 
tax based, and it is certainly not just regulatory based. We 
need to provide a workforce that allows the business case for 
that business to want to do business in Nevada. The location, 
the logistic opportunities, the infrastructure that we have, 
there are many aspects of that. And every business will look at 
that differently.
    Demand is certainly a part of that business case, so we 
have to look at the demand side as well as the cost side. But 
in and of itself, I would not.
    Senator Heller. Thank you.
    Senator Warren. Thank you, Mr. Chairman. I want to thank 
Ms. Melson and Mr. Cox and Ms. Thatcher for being here. I think 
you said the most critical thing. You are not alone. And I 
commend your courage and your dedication that you will stand up 
and talk about what happened in your family so that other 
families that are going through the same thing have an 
opportunity to say, ``It is not just me. It is something 
larger; it is something bigger.'' And so I just want to say 
thank you very much for doing this.
    I also want to say to Dr. Mian, to Ms. Traub, to Mr. 
Hanauer, and Mr. Hill, thank you for the work you do that talks 
about these powerful forces at work in our country and the 
importance of getting our policies right so that we are growing 
a middle class, very much as you say, Mr. Hanauer, growing from 
the middle out. That is the key to our economy. It is also the 
source of our identity, who we are as a people, what we are as 
a country. It is about our opportunity. It is about how we 
build.
    What you have talked about today hit on the things that 
just keep pounding on America's middle class: what has happened 
on jobs, flat wages, lost jobs, what has happened on housing, 
high housing costs, and then getting slammed in a reversed 
market, and people still getting caught then in upside down 
mortgages.
    We could have talked about rising health care costs and how 
that puts another squeeze on the family and the costs of being 
able to get your children educated, whether we are talking 
about preschool or whether we are talking about postsecondary 
education. It is all out there. The consequences are clear. We 
have got more families living on the edge. They cannot afford 
to save for an emergency, certainly cannot afford to save for 
their retirements. It is a hollowing out of America's middle 
class.
    Now, this is something a lot of us have been talking about 
for a while, but the problem gets more acute when we take a 
look at each generation coming in, our young people coming in. 
We now have young people who collectively owe $1 trillion in 
student loan debt, and it continues to go up every single year. 
So we have put these young people in the position of saying, 
look, if you want to have a shot at making it in America's 
middle class, you have got to go to school. You have got to go 
back, you have got to get that education. But you are on your 
own to pay for it. You are going to have to borrow more and 
more and more money to do that, and then hit an economy like 
this.
    So what I would like to ask you about, what I would like 
you to talk about from your different perspectives, is this 
question: What happens to America's middle class when each 
succeeding group of young people is carrying more and more debt 
as they start their adult lives? Can we just talk about that 
for a minute? And maybe start with you, Ms. Traub. You 
mentioned student loans a little bit, so could we start with 
you?
    Ms. Traub. Certainly. There is some research; the Consumer 
Financial Protection Bureau recently came out with a study of 
young people who owe student loan debt and looking at the 
extent to which they are not buying homes, they are delaying 
marriage, they are delaying starting families, delaying--I do 
not know that they looked at delaying small businesses, 
starting a small business, but one would expect that that might 
be another consequence. And it is, as you say, a hollowing out 
of the middle class, and this level, the sheer level of 
indebtedness is a big part of that.
    In addition, credit reports and credit standing is eroded, 
and one issue that I have had an opportunity to look at is the 
use of credit reports for employment. And so an employer looks 
at a credit report and may decide this person has too much 
debt. They are not looking at the score. They just see a large 
burden of student loan debt and may decide not to hire that 
person. And then you have gone to school to improve your 
chances of being hired and find that that actually undermines 
your application for a job. It is very troubling.
    Senator Warren. Dr. Mian.
    Mr. Mian. I will just add one thing. The question of 
increasing debt, whether it is student loans or housing loans, 
basically reflects the goods and services that people used to 
consumer that they can no longer afford to the same extent and, 
hence, they are borrowing. It is a simple reflection of that 
fact.
    Historically, if you track debt to GDP, private debt to 
GDP, you see two peaks: one in 1929 and the other one in 2007. 
And we know what happened to the overall economy post-1929 and 
post-2007. What I am basically emphasizing is that when you see 
a rapid increase in private debt, that increase is not 
sustainable economically because it is basically reflecting 
reduced market power or reduced purchasing power of a core 
group of the population, and at some point they are going to 
collapse. And when that happens, it is going to affect 
everyone, because the demand is not going to be there anymore 
because they are not going to be able to borrow anymore, so 
they will stop going to school, they will stop buying homes, or 
they will stop buying cars, and everyone is going to suffer the 
repercussions of that. That is what happened in 1929; that is 
what happened in 2007.
    And so it is that process that we need to look at 
carefully, and even when we allow our credit markets to 
function--and, of course, they need to function and they should 
function. But this is exactly the point that I was trying to 
emphasize in my earlier testimony as well, that we need to set 
up these markets in a way so when they overstretch themselves, 
they do not lead everyone to collapse along with them. So we 
need to put in these safety valves.
    For example, student loans, I mean, this is a big ticking 
time bomb because people can get out of other kinds of debt 
through bankruptcy, but as you know, they cannot get out of 
student debt. So I worry about the situation that if this thing 
collapse and people are unable to find enough jobs which are 
paying enough to pay back their student loans, what is going to 
happen to the social fabric of this society as the lenders and 
the courts go after them, as they would be required to? So it 
is a very serious problem that we need to look into.
    Senator Warren. Thank you.
    Ms. Thatcher, I see you shaking your head. Would you like 
to add on this?
    Ms. Thatcher. Yes, I just have a few comments. Me, I have 
several friends that have gone through tons of schooling for 
their teacher's credential or business and things like that. 
They are hitting almost 30 years old, and they are still living 
in their parents' home due to that, because when they get out 
of college, they have so much debt. And then they are getting 
jobs due to the economy downfall that are not paying enough for 
them to live and pay their debt. So they are hitting 30 years 
old still living with their parents. And, I mean, if their 
parents are not doing that well, the whole family is not doing 
that well, and so they end up either not going back to college 
or they are stuck with a job that does not pay anything. It is 
kind of like a cycle, and I see it so, so often.
    Senator Warren. That is a very important point.
    Ms. Thatcher. Yes.
    Senator Warren. Ms. Melson, would you like to add to that?
    Ms. Melson. Yes. As a matter of fact, me and Pam had the 
opportunity to talk to a group of seniors, and it is incredible 
how knowledgeable they are. They understand and they are living 
in fear. They are afraid. I know my own children know that I 
was a pretty good student. They know that I went to college 
right out of high school. They also know that 20 years later I 
am still paying off that debt. So it is really scary. And it is 
scary for them, and they live with the unnecessary fear that 
they should not have to. They should be going into college 
prepared to study, not to think about the financial burden.
    Senator Warren. Twenty years, and you are still paying for 
this.
    Ms. Melson. Yes.
    Senator Warren. Mr. Cox, did you want to add anything? Go 
ahead.
    Mr. Cox. Well, I find it interesting. I was just talking 
here the other night to a person, and they mentioned that they 
had a college debt, and, quote-unquote, they will be paying for 
that college debt the rest of their life. And, you know, when 
the college costs come to a point where there is no--I guess 
the right word is ``residual'' value, I guess, you know, 
where--you know, the idea was you go to get a college 
education, which increases your opportunity for higher income, 
so to speak, but now the college costs, the college loans are 
preventing these people to be able to see the benefit of a 
college education, you know, the wait. And that is kind of 
where I see it.
    You know, I was fortunate in a sense where I paid my way 
through. I worked and paid my way through. But a lot of folks 
cannot do that.
    Senator Warren. When college costs were a lot lower.
    Mr. Cox. Yeah, yeah.
    Senator Warren. When you and I went. I paid $52 a semester 
in tuition.
    Mr. Cox. Yeah, I think when I started, it was like $68.
    Senator Warren. State schools, they were supported back 
then.
    Mr. Cox. Yeah, yeah. It was affordable.
    Senator Warren. That is right.
    Can I ask Mr. Hanauer to put this----
    Mr. Hanauer. Yes, I would love to respond, and to respond 
directly to Senator Heller, because I did not say that raising 
taxes created jobs. But what I did mean to point out is that if 
wealthy people like me and corporations that were profitable 
paid taxes at rates as we once did, then the middle-class 
families could afford to send their children to colleges 
without taking on an aggregate of $1 trillion worth of debt. 
And not only would middle-class families benefit massively from 
that, but eventually I would benefit massively from that 
because then they would not have to pay debts. They could buy 
products from my companies and create a virtuous cycle of 
increasing returns that capitalism is capable of doing. That is 
the point. The point is not should taxes go up but who should 
bear the burden in a way that animates a virtuous cycle in the 
economy.
    Senator Warren. Right. I want to thank you all, and I just 
want to note we are 3 weeks away from the interest rate on new 
student loans doubling. We are here today on the day that 
Congress could have prevented that. The U.S. Senate could have 
started the bill to prevent that. And we have just returned 
from a vote where the effort to try to keep the student 
interest rates the same failed.
    The U.S. Government is scheduled to make $51 billion in 
profits off our students this year on their loans. This is 
obscene. And what it does is both economically wrong, as you 
rightly point out, and morally wrong. We have to do better than 
this for our children. Thank you.
    Thank you, Mr. Chairman.
    Chairman Merkley. Thank you, Senator Warren.
    Before I ask my question, I think I mentioned earlier this 
is the first hearing that I have chaired. It is also an unusual 
moment in which my partner, my spouse, Mary Sorteberg, is able 
to join me, and she is sitting in the back. I do not know if 
she will be here by the time I get to my next question, so I 
just wanted to say I am delighted that my partner could join us 
today.
    [Applause.]
    Chairman Merkley. Now, this question we are all discussing 
is one that our family talks about all the time. We live on the 
east edge of Portland. We live in the David Douglas community, 
David Douglas High School community. A number of the families 
that--of course, in addition to the three families we have 
today, there were five other families in the ``American 
Winter'' film. A number come from our working-class community. 
And so we see this directly. We impact that the three of you 
are describing. And whether we are looking at it from the front 
line that you all are on or from the analysis that our experts 
have brought today, I think this is something of grave concern. 
Mr. Hanauer talked about a virtuous cycle. I am concerned about 
a cycle in which the message becomes one that depresses 
aspirations, that essentially our parents and our children say, 
you know what? There are not jobs out there. You cannot risk 
incurring student debt that will follow you and haunt you the 
rest of your life. Look what is happening to the neighbor who 
is 30, still living at home in the basement, not getting 
married. Better to try Track X or Track Y, or just that the 
system is so fixed against middle-class families that it will 
only be with--it will be like winning the lottery if you ever 
get a good job. That cannot be the message that a prosperous 
Nation is based on, and the system, therefore, is obviously 
broken.
    And so as I think about these pieces in which people are 
being set back by unanticipated health care expenses, which we 
have not talked about yet but is extremely common, about 
unexpected setbacks in living-wage jobs, and two of our 
families notes that the jobs that are reappearing are half what 
they paid before, both from the personal side on the front line 
as parents and from the experts' side, I wanted to just ask you 
to address any aspect of this kind of are we in danger now of a 
national cycle of depressed aspirations replacing the 
motivating vision of the American Dream. And if there is one 
thing you could say that we need to do to change where we are 
at, what would it be? I will take anyone in any order they 
would like. John, do I see you reaching for the button? Go 
ahead and turn on your microphone.
    Mr. Cox. Thank you. You know, one of the first--just 
listening to you right there, a few years back I was working 
for the State of Alaska, and one of the programs that they had 
going there was called the Job Training Partnership Act, JTPA. 
I do not know if it is still around. But, anyway, it was a 
national program, and what I specifically remember was there 
were paper mills in Sitka, in Ketchikan, Alaska, and I think 
there was a timber mill in Wrangell, Alaska, where they all got 
shut down because of the Tongass National Forest preservation. 
And this JTPA, what it did was it took these folks that were 
employed in the paper mills and the lumber industry and 
retrained them in something, you know, in a different industry. 
In other words, what it did was, you know, it helped keep them 
off the unemployment rolls and gave them a new tool to pursue 
another career. I do not know if something like that is still 
around or not. That is just one example right off the top of my 
head.
    You know, so in that respect, it was the Government 
helping, but at the same time, it was keeping these folks on 
their feet. And, you know, this is extremely outdated. It would 
be like the New Deal with FDR. You know, he implemented some 
jobs out there, you know, Government-assisted jobs, basically 
to get people employed. I do not know the mechanisms. I wish I 
did. You know, that is why we kind of lean on your folks, I 
guess a little bit, and we do appreciate you, believe me. But, 
anyway, thank you.
    Chairman Merkley. Thank you, Mr. Cox.
    Mr. Hanauer.
    Mr. Hanauer. It is a fantastic--it is the question, and I 
just wanted to say that when Senator Warren talked about rising 
college debt and that crisis, I think it is important to 
acknowledge that there is a parallel crisis, which is that we 
have structured our economy in a way that the only way in this 
country today that you can avoid a life of poverty is to go to 
college, and that is insane. It is insane to have an economy 
where the only possible way out of poverty is to take on 
$100,000 worth of debt to go to college.
    And I think that, you know, what we have to do is not just 
to pretend that if we put a few more people through college 
that we are going to fix this problem. We have to deal directly 
with the crisis of low-wage work. And the fact that most of the 
jobs our economy is creating today are jobs that have poverty 
wages.
    So if we--you said one thing? If I was God and could do 
anything I wanted, I would raise the minimum wage to $15 an 
hour over 3 years, starting tomorrow, because the only 
difference between--we imagine that workers in former years who 
worked for auto companies and made good middle-class wages 
somewhere were magically different or worked for magically 
different companies than a Starbucks employee. It is not true. 
The only difference between those workers is power. It is 
power. Those two enterprises create exactly the same amount of 
value in society. They are equally profitable--in fact, 
Starbucks is probably more profitable. The only difference--the 
only difference between those workers is their ability to 
extract part of the value created by the enterprise. And if you 
raise the minimum wage to $15 an hour, you would inject close 
to $500 billion into the economy from people definitionally who 
could afford it to people who definitionally desperately needed 
it and animate a virtuous cycle of increasing returns. All that 
money goes to the very businesses that have given those 
increases in wages. And now there is $500 billion that you do 
not have to tax people to send food stamps to people who work 
for Walmart because Walmart pays such low wages.
    Again, so you get this incredible two-fer where you change 
the nature of work, you give people a living wage, you ask the 
market to bear the burdens. You do not have to ask taxpayers to 
make up the difference. And you start this cycle of increasing 
returns. You generate demand, more workers, more wages.
    Ms. Traub. I would love to----
    Chairman Merkley. Thank you. Let us go back and forth 
between the family front line and the experts. Ms. Thatcher.
    Ms. Thatcher. Thank you, Chairman. I just wanted to add to 
his. He says that let us go ahead and raise the minimum wage to 
$15 an hour. I just want to ask, do a lot of you know, I mean, 
how to live off $15 an hour? Because I do. My husband makes 
$14.50, used to make $20-something. He now makes $14.50. We 
have two children, and we are supposed to survive off just 
that. I tried to get a part-time, full-time job. Paying day 
care, it is unrealistic, basically. I do not know if anyone in 
here has ever had the sad opportunity to think: How am I going 
to pay for a roll of toilet paper? How am I going to buy a 
razor? You know, just the simple necessities that you need, 
because $14.50 is not a lot. But if you do raise it, those 
students coming out of college, I mean, that is a great 
opportunity. I mean, that is a starting point. And I just 
agree. I agree with it. That is a wonderful, wonderful thing.
    Thank you.
    Chairman Merkley. Thank you.
    Ms. Traub.
    Ms. Traub. Thank you. Yes, I also would love to build off 
of Mr. Hanauer's point. The other difference between the 
Starbucks workers and the UAW workers, it is partly the minimum 
wage. It was higher at that point. The other reason that 
working people in the auto industry had that power that you are 
highlighting is a strong union, of course, and that is the 
other place that policy I think can make a tremendous 
difference, is in rebuilding that power to organize and to join 
a union. And I know right now that President Obama's appointees 
to the National Labor Relations Board are awaiting Senate 
approval. I think that is tremendously important. And having 
looked at the research on the challenges--and I did work at one 
point for a union in New York City--the challenges of trying to 
organize today, it is not a right that people really have 
anymore in this country. The National Labor Relations Act is 
still on the books, but it is not--it has been hollowed out. 
The right to organize is not something that people really have 
anymore, and neither is the right to bargain collectively. And 
rebuilding that right is what it would take to give working 
people power in this economy again and the ability to get some 
of the benefits of this very prosperous country that we all 
still live in.
    Chairman Merkley. Thank you.
    Ms. Melson.
    Ms. Melson. And just directly related to your initial 
question, the depression, I actually have a story. When I was 
employed with WorkSource, one of my coworkers was kind of 
training her daughter or preparing her daughter for the 
workforce. There were a lot of people who came through 
WorkSource because, of course, it is connected to unemployment, 
and they were wanting to further their education. They wanted 
to go into a new field. And she was deathly against people 
going into a new field trying to get an education, and her 
thing was, ``I am not telling my daughter to go to college.'' 
She is, like, ``Why should I? It is no guarantee that she is 
going to get a job, and then she is going to come out with 
debt.'' Her daughter is 16. Why would you feel that way?
    But I can understand the hopelessness. You know, I can 
understand how she feels, like, ``I am not going to set my 
daughter up for failure. So at 16, I am going to tell her, no, 
you do not pursue an education. You go out and you work.''
    And then where is she going to work? At a minimum wage job? 
And she will be stuck in that pattern for the rest of her life. 
So that is just a direct answer to your question, is hope--
people feel hopeless.
    Chairman Merkley. Thank you for sharing that story.
    Mr. Hill.
    Mr. Hill. Certainly in different walks that I go through in 
my job, I deal with many people who have struggled. In Nevada, 
there is no place folks have struggled more over the past 4 or 
5 years.
    On the other hand, we are pretty optimistic State, and I 
think I would point out that, you know, we have looked at 
developing our economy differently. And I really think the 
country needs to as well.
    There are alternatives between a 4-year college degree and 
no further education at all. We are focused on, for example, 
certificate completions that offer great opportunity at lesser 
cost. And I think it is a significant alternative to the 
reality of the level of debt that you may get into if you go to 
college and do not know what that is going to result in as far 
as an investment and a payback.
    So at the State level, we kind of look at things on a 
reality-based situation. This is the way it is. What do we do 
with this? How do we get our people back to work? But we feel 
pretty optimistic about where we are headed. We just need to 
earn it.
    Chairman Merkley. Thank you, Mr. Hill. And as your 
department studies the State, any evidence of the problem I was 
alluding to of people starting to say, you know what, as Ms. 
Melson was saying, we are not going to have our kids aspire to 
a college degree because of the debt that they will potentially 
face. Are you starting to--I realize optimism may be strong, 
but is there also an undercurrent of deep concern about whether 
or not there is a path, unless you are extremely lucky, if you 
will?
    Mr. Hill. Certainly, Senator, if after having been through 
5 years where--the statistics of their net worth having on 
average dropped from $150,000 to maybe $60,000 or $70,000, if 
they are fortunate enough not to be in an underwater mortgage, 
that period of time takes a toll. We need to see an economic 
recovery. I think at this period of time, we are certainly--as 
well as the rising cost of a higher education degree. One of 
the focuses in Nevada is on the Pell grant. It currently pays 
for approximately 64 percent of a college education where 20 
years ago it paid for about 98 percent. You were talking 
earlier about the shift from grants to loans. Those who cannot 
afford college need that kind of help. So there is some of 
that, certainly. But there are also alternatives.
    Thank you.
    Chairman Merkley. And, Dr. Mian, everyone else had a 
chance. Do you want to speak to this?
    Mr. Mian. Yes, I will just briefly say that, you know, the 
American Dream is a wonderful idea, and I have personally 
benefited from that. It is a country I love precisely because 
of that notion. But I do worry that that dream is slipping away 
from more and more people. And statistically, if you look at 
mobility, which is, you know, from a lower-income family going 
into a higher-income bracket, that mobility in the U.S. is now 
lower than in Europe, just to give you an example. Now, that is 
very worrying. Aspirations at the end of the day are based on 
what is happening on the ground in terms of the reality, and 
you have heard many stories that reflect that.
    I think given that situation, we also know that in terms of 
job creation and in terms of higher-income jobs, they do tend 
to be sort of jobs based on technology and so on and so forth. 
So to give lower-income families a chance to make it, education 
is the centerpiece. And we cannot have a system where the only 
way to get an education is to give up an arm and a leg to the 
student loan market. I think we need to revisit that piece very 
carefully.
    Again, if you go back to Europe and you look at Germany, 
take Germany as an example, they suffered a lot through the 
recession in terms of GDP, but they protected their labor 
market, and they invest a lot in their higher education. And, 
again, it is a hybrid system, college plus apprenticeship and 
so on. Different things work for different people. But we need 
to have resources that the society gives to us 15-, 16-, up to 
20-year-olds, to say, OK, we will give you a shot, now you go 
ahead and do what you can. And, of course, if they are 
successful, we will all take a piece of that. You know, that is 
how the Government works. But we need to have that system in 
place, and we cannot rely on private debt, then outsource the 
problem of education to the private market. That is not 
sustainable.
    Senator Heller. Thank you.
    Mr. Hanauer, you and I will probably agree to disagree.
    [Laughter.]
    Senator Heller. I do not want to go in circles on this, but 
I do appreciate your insight. I really do. And I think there is 
some truth to what you are saying. We probably philosophically 
come from different places, and I do believe that the key to 
success is to make sure that this economic engine is working. 
And I believe history has proven, back in the 1960s under 
President Kennedy, when he lowered taxes, that the economy took 
off and we had more revenues in this Federal Government. The 
same was true in the 1980s under Ronald Reagan. When he cut 
taxes, we increased revenue, and the purpose of that, of 
course, and that funding and the upside to it, of course, is 
that we were able to pay for higher education and have more 
funding available to some of these issues. So I guess we can 
agree to disagree, but I think history probably is more 
compelling when it talks about making sure people have more 
money in their pockets. And we have a progressive tax system 
here in this country, and it ought to remain progressive. I 
agree with that. And I do believe bits and pieces of what you 
are saying with the engine being the middle class, I would not 
disagree with that at all.
    But I want to change topics for just a minute because I 
want to talk about the American Dream and, Dr. Mian, what you 
were saying in your testimony. I want Mr. Cox to stay in his 
home. I really do. And I think everybody here wants you to stay 
in your home. We have had over 400,000 people in the State of 
Nevada receive foreclosure notices. Four hundred thousand 
people in Nevada--that is one-third the population of Maine--
have received foreclosure notices in our State. And you can 
imagine the economic impact something like that has, and we 
could have brought a myriad of people just like yourselves here 
talking about the issues.
    Now, I do not know if you had a fixed loan or a variable 
loan, but to your point, Dr. Mian, you talked about your 
solution. Your solution on a 30-year loan was to make sure that 
there was downside protection; and, second, to make sure that 
there was a 5-percent net capital gain for the lender on the 
sale of the home.
    I had a former Chairman of the FDIC in my office yesterday, 
and we had a brief discussion, and she wrote a book recently 
talking about had we taken aggressive action as a Government--
and this would have been pretty aggressive--on these variable 
loans, had we gone back to the original rates--as these were 
progressing, people were losing their homes. Had we gone back 
as a Government and said, OK, we are going to go back to the 
original rates on these variable rate mortgages, we could have 
saved a lot of people and kept a lot of people in their homes, 
and the impact of that that would have had nationally to where 
we are today. Now, it is probably too late to do it. Clearly it 
is too late to do it. But she believed at the time, had we 
stayed with the original rates that got people into these 
loans, that we could have saved a lot of homes, saved a lot of 
individuals, and a lot of economic turmoil that was caused by 
this housing problem.
    Do you believe that was a solution at that time?
    Mr. Mian. So I know these numbers very well because I look 
at these numbers for a living. Of course, if you go back to a 
lower rate, you would have helped some of the homeowners. I do 
not disagree with that at all. But I do not believe it would 
have been sufficient to have had a serious dent in the problem. 
The core issue was underwater homeowners, which is a question 
of where the principal is relative to the value of the home, 
and so you had to address that key issue. So it is not just 
about the interest rate that you are paying on the principal. 
It is about the amount of the principal itself, number one.
    Number two, from a legal perspective--and I am sure the 
private market as well as the legislature appreciates that--it 
is almost impossible and not advisable to ex post come in and 
tell people, you know, let us change the terms of the contract. 
That is why in my proposal, what I was suggesting was an ex 
ante solution where you go into the contract thinking about 
these possible scenarios and saying if that happens, the entire 
mortgage payment, which, as you know, includes the principal 
piece plus the interest piece, adjust proportionately downwards 
in case house prices decline enough. If we had had that kind of 
a system, we would have completely avoided the underwater 
problem, the foreclosure problem, and everything else that 
followed as a result of that.
    So I sincerely believe that, you know, we need to take that 
kind of an action looking forward, and it is sort of a very 
conservative principle. It is a market-based principle. The 
Government would remain out of it.
    I will say one point, though. I think the Government needs 
to kind of promote or encourage this kind of mechanism, and I 
will just give you one example. We currently have mortgage 
interest deductibility, which is very powerful as an incentive 
for people to kind of go for the 30-year mortgage. The proposal 
that I am giving, for example, will not work very well if this 
new contract does not count as debt because then it will not 
have that tax advantage.
    So I would add the piece that--you know, I would love if I 
had the power--obviously I do not, so here is the idea: Have 
the proposal that I gave you, get rid of completely the current 
interest deductibility on standard mortgages, and instead move 
that deductibility to the mortgages that I am talking about. So 
the entire market--from this point onward, you know, the entire 
market will shift to what I am referring to as socially 
responsible mortgages. And, you know, those payments they can 
deduct and so on, and now we will all be protected. The middle 
class will be protected from all of this mess, the foreclosures 
mess and everything else that followed, the next time there is 
a downturn in the housing market.
    Senator Heller. OK. I would like more information, if I can 
get that from you at some time, what you are talking about.
    Mr. Mian. Absolutely. But, Mr. Cox, you were shaking your 
head. Some of you were shaking--is there anything that this 
Government has done to make it easier for you to stay in your 
home? I mean, we have had a myriad of programs that we have 
passed through both the House and the Senate here, signed by 
this President. Has any of it helped you out?
    Mr. Cox. Well, personally, I have gone to about every--
through just about every option I can think of.
    Senator Heller. Is your home currently underwater?
    Mr. Cox. Yes, it is.
    Senator Heller. It is underwater.
    Mr. Cox. Yes.
    Senator Heller. See, this was the problem we had in Nevada.
    Mr. Cox. It is about $150,000 underwater, last I checked.
    Senator Heller. And I do not know what that percentage is, 
but----
    Mr. Cox. It is about 70 percent, maybe 65 percent of what I 
owe.
    Senator Heller. And that is why you probably do not qualify 
for any of these programs, because you are too far underwater.
    Mr. Cox. Right.
    Senator Heller. Most of these programs were based on not 
being that far underwater.
    Mr. Cox. Right.
    Senator Heller. And that is the problem we have in Nevada. 
These people are too far underwater, so all these Government 
programs that are out there, they are taking a look at how far 
they are underwater, and they are saying, hey, we cannot help 
you, it is too deep.
    Mr. Cox. And I would like to interject also, again, with 
this Wells Fargo and, what was it, the HARP or the HAMP 
program--I cannot--personally I thought that was a farce, and, 
you know, they string you along, having you send in tons and 
tons of documents. And then they--about 30 pages each time, and 
then they say, well, you forgot to sign this one piece of 
paper, you have to do it all over again. And this went on and 
on and on. This has been 2 years of doing this, and----
    Senator Heller. And I have seen some of that with the 
banks. I am having friends that are making their payments, and 
they are getting called by their banks saying, ``We would like 
to refinance your home.'' They did not even request it. But 
what they are doing is they are going by people that are making 
their payments and asking them, ``Let us refinance.'' They are 
not helping those that cannot make the payments, who are having 
difficulty making the payments. They are helping those that are 
already making the payments, and they may be underwater, but 
they certainly did not request help. They are going to people 
who are not requesting help and refinancing their loans.
    Ms. Melson.
    Ms. Melson. I do know of a couple of federally funded 
programs that are there for mortgage payment assistance, and I 
do actually know of a couple stories through 211 where the 
Government has stepped in and has helped people with their 
mortgages. So there are those programs, but they have very, 
very, very strict requirements. And so if you do not fall into 
those guidelines, then you are not going to be assisted. But 
there are a few out there.
    Senator Heller. Very good.
    Mr. Chairman, thank you.
    Chairman Merkley. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman. So I would like to 
go back to this conversation about wages, that low wages have 
been one of the reasons that we have hollowed out America's 
middle class. And I thought it was a great conversation about 
the minimum wage and how valuable increasing the minimum wage 
could be.
    You know, we need to remind ourselves, with a Federal 
minimum wage right now of $7.25, we have a bill pending to 
raise it to $10.10. I am a cosponsor on that bill. I support 
it. But it did not have to be there. I see you doing that, Mr. 
Hanauer, get that number higher.
    [Laughter.]
    Chairman Merkley. Senator, didn't you propose $20 at one 
point?
    Senator Warren. What I did is I pointed out that if the 
minimum wage had been linked to productivity starting back in 
the late 1960s, if we had just linked it to productivity, how 
much more each earner is working, our earners collectively are 
working, it would now be $22 an hour.
    Now, I did not advocate and I am not advocating a $22-an-
hour minimum wage, but the question is: Why didn't it rise? Why 
didn't it go up? If productivity went up, why didn't workers' 
earnings go up at the same time. Why didn't they get a piece of 
the pie that did not have to be a bigger slice but it would 
grow if the pie was growing?
    And I think you hit a big part of that, Ms. Traub, when you 
said, ``Because the workers do not have any power.'' And this 
is what happens with declining union membership, that they 
cannot bargain collectively; when they do not bargain 
collectively, they are not able to get out there and fight for 
wages--wages that affect not just those who are in unions, but 
they affect everybody. They help set the standard for everyone.
    So I take this very seriously, and I see the importance of 
supporting our unions, supporting the right to collectively 
bargain, the importance of getting our NLRB representatives 
through, and I should say the Secretary of Labor so that we 
have a functioning labor policy here.
    But I want to go back to a different part of this because I 
do take this seriously. The constant refrain is, no, we cannot 
raise the minimum wage because it will cost jobs, there will be 
fewer people employed. Now, there have been academic studies, 
very serious, very rigorous academic studies. For example, 
those that study what happens in a metropolitan area that is 
split and half of it is in one State, half is in another, and 
the minimum wage shifts in one State, goes up in one State. And 
basically they find there is no job loss or sometimes a very 
small job loss.
    So the major argument for not raising the minimum wage, 
that is, it will cost jobs, at least the academic studies seem 
to show is not right. What I thought I would give you the 
opportunity to do, though, is talk about it from your 
perspective. Mr. Hanauer, you have got a vision about how this 
works. If we raise the minimum wage, explain why it is that we 
will have more people employed or at least the same number of 
people employed. Mr. Hanauer.
    Mr. Hanauer. Sure. Great question. So the first thing to 
recognize, I think, is that most traditional economics and our 
perspectives about economics are rooted in a foundational 
misunderstanding about how these systems work, that they are 
linear and mechanistic, and if one thing goes up, another thing 
must go down.
    Nothing could be further from the truth. You know, 
capitalists need unions in the same way that animals need 
plants. If workers have no money, capitalists will have no 
customers. And I am a big supporter of unions. I am. But 
raising the minimum wage is a far more economically efficient 
way to generate growth, because everybody is on the same 
footing. Every company competes equally with other companies. 
And, look, you know, the problem with unionization is if one 
industry is unionized and another one is not, that creates a 
very difficult existential threat to one of those companies.
    The other idea is that if you raise these wages you will 
outsource these jobs, but the simple truth is that virtually 
every low-wage job in America is a service job that can neither 
be outsourced nor automated.
    So when you take these things together, by raising the 
minimum wage, yes, prices will go up a little bit. They will. 
But since everybody who is going to--so there are two classes 
of people. Either the people who are getting a big increase in 
the minimum wage will now be--who get a 40-percent increase in 
their wages will easily be able to absorb a 5-percent increase 
in prices. And people who did not get a raise but could afford 
it anyway, right? And the thing that is so obvious but is 
missing from these academic reports is the virtuous cycle 
thing. When minimum wages go up, workers have more money. And 
when workers have more money, they buy things from the very 
companies that raised those wages, generating more demand and 
more jobs. And that is why it works. And that is why it is such 
a crucial part of policy.
    Senator Warren. I appreciate that.
    Anyone want to add to that?
    Ms. Traub. I would like to add to that. I do not think we 
disagree about what a good idea it is to raise the minimum 
wage. I just want to point out that, in addition to minimum 
wage workers then making more money, it pushes up other wages 
across the board. Employers----
    Mr. Hanauer. A spillover effect.
    Ms. Traub. Yes, there is a spillover effect, and so 
employers raise wages for other workers. If we feel that $15 an 
hour is still a low wage, it is hard to get by even on that, 
even though that is more than twice as much as the Federal 
minimum wage is now, many workers would make more than that. 
Workers who are currently making $15 an hour would have a lot 
more bargaining power themselves in the workplace. And so it is 
not just something that lifts up minimum wage workers. It has a 
ripple effect throughout our economy, throughout the low- and 
middle-wage workforce.
    Senator Warren. All right. Dr. Mian.
    Mr. Mian. Just a quick point. First, in terms of, again, 
the data, statistics, if you look at the U.S., the share of 
output going to labor has declined tremendously in the last 5 
to 7 years, and it is at record lows. So just, I mean, 
something is happening in terms of this balance between capital 
and labor. The share of profits is very high, and the share 
going to labor is very low. So there is something going on, 
just to point that out.
    In terms of the minimum wage, given that we have agreed 
collectively as a society that there should be some minimum 
wage, I think a better approach might be as opposed to coming 
and arguing about a fixed-dollar number every few years to, as 
maybe you suggested it as well, index it to something that is 
meaningful so we do not have to come back to this issue, and so 
it naturally goes up with something like inflation or cost of 
living, or whatever you want. We can argue about that. But, you 
know, that I think is the way we should think of--in the long-
run sense, we should think of minimum wage.
    Thank you.
    Senator Warren. Good. Anyone else?
    [No response.]
    Senator Warren. Good. I just want to say thank you again to 
all of you for being here. I want to say thank you, Mr. 
Chairman. I am going to go fight about student loans for a 
little while now, so please excuse me. But keep up the good 
work. Thank you. Thank you all.
    Chairman Merkley. Thank you very much, Senator Warren.
    We are going to have to wrap up by about 12:25, so I am 
going to ask a more contained question than I asked the first 
time, and I think Senator Heller has one more question he would 
like to ask, and then I will ask a final question and we will 
wrap up.
    Mr. Hanauer, I wanted to ask you about the virtuous cycle 
that you were talking about and how consumers, the middle class 
drives this production cycle. One rebuttal that I have heard so 
many times would go like this: If I as a company manager or 
owner can cut costs and have profits at the end of the year, 
and maybe those costs are labor and maybe they are tax costs, 
if I can cut those costs, I now have this money, and I go, You 
know what? I can increase the size of my sales force; I can 
hire three more people to do research on the next generation of 
the product; I can do more advertising, which will increase 
demand; and then I will be able to have more people building 
the thing. And voila, I will have more jobs and society will 
have more jobs.''
    I think that is the most common presentation of the 
opposite version of cut expenses in any way you can and you 
will produce more jobs.
    Would you like to kind of examine that and see where you 
see the shortfalls and strengths are in that vision?
    Mr. Hanauer. Sure. So the only thing that compels a 
capitalist like me to add labor is the absence of alternatives 
to doing it to meet future customer demand or present customer 
demand. And all capitalists are profit seeking. We seek to 
maximize profit. I am a huge believer in capitalism. Sometimes 
I talk and people think I am not, but I am a huge--capitalism 
is the greatest social technology ever invented for creating 
prosperity and ennobling the human spirit. But it comes in a 
lot of flavors, some lousy and some good. And the thing is that 
if it was true that more profit led to more employment, then it 
could not also be true that American corporations are more 
profitable than they have ever been in history and unemployment 
and underemployment is also higher essentially than at any time 
in history. And that is because these two things are not 
linked. They are not linked. There is a rate limit to how many 
people you can employ to do research in the future. There is a 
rate limit to how many people you can employ to think about 
things. Capitalists make investments in people when demand 
makes that make sense.
    You know, there is this idea that capitalists--you know, 
the verb is ``give'' people jobs, right? You hear this all the 
time, and you are left with a sense that somebody like me gives 
somebody a job like I might give you wife a bouquet of flowers 
at Valentine's Day. Nothing could be further from the truth. 
You know, you do not give somebody a job. You reluctantly agree 
to maybe employ them because you cannot do the work yourself.
    And so it just is categorically untrue that we need to make 
capitalists sort of limitlessly profitable so that they will 
generously give other people in the society jobs. It just does 
not work that way. And there is, you know, indisputable 
evidence that it does not work. We are in that circumstance 
right now. Corporations are sitting on $2 trillion worth of 
cash--$2 trillion worth of cash. Corporate profits are at a 50-
year high, and labor is falling like that. This is just not how 
it works.
    Chairman Merkley. Thank you.
    Senator Heller. Thank you, Mr. Chairman. Again, thank you 
for this hearing. This was great. And I want to thank all the 
witnesses for taking time. Again, I think all of you are expert 
witnesses, and I certainly have learned something from today's 
hearing.
    This is a Banking Subcommittee, so I want to talk about 
banking for just a minute. We passed several years ago a pretty 
onerous piece of legislation called ``Dodd-Frank'' that I think 
hit the industry pretty hard. And through the last 4 or 5 years 
in the State of Nevada--and I am going to move this question to 
you, Mr. Hill--we have had some rough times, and one of the 
downsides to this tough economic moment that we are in is that 
we have lost half of the community banks in the State of 
Nevada. We have lost half of them.
    Now, these are small banks. These are the Main Street 
banks. It is not Wells Fargo. It is not Bank of America. It is 
not Citibank. These are the small banks. And these are the 
banks that know their communities, and these are the banks that 
make small business loans. Wells Fargo does not make small 
business loans. They may from time to time, but they are more 
worried about the bigger guys. Bank of America, the bigger 
guys. Citibank, the bigger guys. But we have seen a real 
downturn in the small community banks in our communities, and I 
think that is affecting our ability for economic growth. When 
these small businesses are coming to us all the time saying, 
``I cannot get a loan. I need some rotating cash or capital so 
that I can keep my business prosperous.'' The trend.
    You are president of a bank, Mr. Hill. What do you see? And 
do you see any change coming?
    Mr. Hill. Senator Heller, you mentioned that you had met 
yesterday with former Director Bair. I had as well when the 
bank that I was chairing was struggling because of the economy. 
We were in the process of trying to sell that bank, which we 
ultimately were able to do.
    We have shrunk in Nevada to, I do not know, eight or ten 
community banks left in the State, much bigger banks, which, 
you are right, naturally do not have the focus on smaller 
businesses that community banks do. And I guess it kind of 
relates to one of the observations I have today. We did not 
talk a lot about how to create jobs for the middle class today, 
and I think that the banking industry is a big part of that. 
Looking at our innovation and our ability to export, moving 
away a little bit from--or at least expanding from a 
consumption-based economy, which is 71 percent of our GDP at 
this point, I think are all important things to do.
    We need to look at what it takes for a small business to 
create a job right now. They do not have trillions of dollars 
in cash in the bank. They are trying to make it. And we need to 
think about that and tie it into the policies that go beyond 
just job creation so that it really does become our top focus.
    Mr. Hanauer. Senator Heller, I----
    Senator Heller. Yes, please, would you?
    Mr. Hanauer. I own a community bank, and, you know, I can 
only share our experiences in Seattle, Washington. We own a 
bank called Seattle Bank that we bought essentially out of 
bankruptcy through the downturn, and, boy, I tell you what, it 
was not Dodd-Frank that flipped that thing over. It was making 
crazy, irresponsible loans to people, mostly in the real estate 
business, that did not make any sense. And before you knew it--
I mean, you know, a bank can be 70 percent underwater, too, not 
just a homeowner, and they were. And so we ended up buying this 
enterprise for a dollar, and we put $70 million worth of 
capital in it, and we are trying to rebuild--we are trying to 
do precisely what you are pointing to, to rebuild a community 
bank that gives small businesses loans and stuff like that.
    But I will tell you, I can just share with you what our 
challenge is, and that is that the country, particularly the 
large institutions, are so awash in capital that we cannot 
compete, that the loan rates that people are willing to make, 
at least to medium-size businesses, are so low that, you know, 
it just does not make any sense to loan the money.
    It feels like there is plenty of money out there for well--
you know, for well-managed enterprises doing things that a 
reasonable person would want to finance, to me right now 
personally.
    Senator Heller. Thank you very much.
    Chairman Merkley. Thank you very much, Senator Heller.
    And I am going to give the closing question, and we will 
close this hearing. But I must say this has been an excellent 
dialog between experts and families on the front line, and the 
questions raised are huge questions for the future of our 
Nation.
    There are so many pieces of this that merit deeper 
exploration: the creation of living-wage jobs; the challenge of 
college education, the cost of it; empowering consumers to 
drive an economy, and so on and so forth.
    I wanted to turn to a piece of this puzzle which is related 
to changing technology, and I will point to two pieces, and I 
just want to get some feeling for what you all might have seen 
and be thinking.
    One is that some jobs that you would not imagine could be 
shipped overseas can now be shipped overseas via the Internet. 
Mr. Cox, you were in the accounting business where you can ship 
invoices and have people somewhere far around the world run the 
QuickBooks software, and it does not necessarily--it is a 
service, but it is a service that does not necessarily have to 
be local. And we are seeing this in architecture, legal 
services, all kinds of areas.
    Second is the technology of robotics. I went on a tour, a 
Made in Oregon tour, to look at many, many manufacturing 
operations and having seen a bunch in a short period of time, I 
saw lines where humans were doing the things they have 
traditionally done, from putting on labels to lids and boxing 
things up. And I saw lines that basically every single function 
had been replaced by a machine. And with the advance in 
computer chips and the advance in actual robotics guided by 
those chips, it is a phenomenal change.
    I will never forget the image, for example, of seeing a 
woman working to make knives, and she was taking blank knives 
and putting them into a machine that probably existed for 
decades. It rotates around, you flip the knife to the other 
side, rotates around again, you pull the knife off, and you are 
doing this continuously, there are so many slots, just as fast 
as your hands can move.
    And a few feet away was a robotic arm attached, bolted to 
the floor of the factory that was reaching over, picking up 
blank knife blades, grinding them on a large, 4-foot grinding 
wheel in front of it at a whole series of directions, and then 
dropping it over into a bucket. No workers' comp, no carpal 
tunnel, no time off, and so forth.
    When I see these converging pieces, I see living-wage jobs 
affected by forces that are happening so quickly. Now, often 
when we have had technological changes, it has happened at a 
pace in which new slots are created within the economy for 
living-wage jobs so that they are offset, if you will, and 
society marches forward with more productivity and more wages, 
we keep the living-wage jobs.
    Then we entered three decades from the middle 1970s until 
now--well, more than three decades now, almost four, in which 
wages have been flat for workers as productivity has increased, 
and the last 10 years in which we have seen real wages drop. 
And so we are seeing something very different now than we saw 
in the post-World War II era of increasing productivity and 
increasing wages.
    So I guess the question boils down to this: Do we have a 
challenge with the pace of technological change in having other 
parts of the economy change fast enough to create replacement 
living-wage jobs? And if we do have that problem, what can we 
do about it? Because without--a living-wage job is better than 
any program. Each of you has gone through the process, and you 
had living-wage jobs, you did not need benefits, you did not 
think you would ever need benefits. And now you need benefits. 
But it sounded like from your comments you would much prefer 
that living-wage job, that that is a foundation. I think that 
that is felt deeply across our society. That is the foundation 
for a family. You can buy that three-bedroom house. You can 
proceed to maybe take a family vacation each year. You can pay 
the sports fees for your kids to participate in activities at 
schools. And you are not asking for the world. You are asking 
for what we viewed as the basics of the middle class. And now 
so many of our new jobs do not provide that. How concerned 
should we be? Are these problems or are they not problems? Dr. 
Mian.
    Mr. Mian. Senator Merkley, I think you have asked the most 
important question regarding the labor market from a long-term 
perspective. Let me start with what I believe is the most 
important but least appreciated observation regarding 
unemployment and the labor market in the U.S.
    If you look at the most recent recession or even go back to 
the previous one, there are two kinds of jobs that have been 
very well protected. What I mean by that is even if people in 
those sectors lose their jobs, they gain them back. Those are 
the two kinds of people--they are either baby sitters or they 
are scientists.
    Now, what is common between these jobs? What is common is 
that you cannot outsource them. You know, one requires some 
thinking, OK, you know, do this, experiment with this or that. 
The other requires dealing with a child, depending on what the 
child demands, you have to adjust, you know, what you do for 
day care, the child--a robot cannot do that. Those two kinds of 
jobs come back.
    When you look at the jobs which are lost and do not come 
back, those are the kind of jobs that people sometimes refer to 
as routine jobs that involve routine tasks. And it is not 
necessarily about skilled or nonskilled, as you yourself 
pointed out, in terms of accounting and so on. Those are highly 
skilled professions. But more and more we are seeing the case 
that they can be turned into routine tasks that can be 
automated out of the labor market, and that is exactly what is 
happening. Those jobs are not coming back.
    So this is the most serious question from a long-run 
perspective, number one. Just statistically it is very much 
there in the data.
    In terms of what one can do about it, I think that is 
really at some level a philosophical question. I mean, take it 
to the extreme. Suppose machines can raise all the crops, they 
can, you know, manufacture all the iPhones for us that we need, 
clean the roads, do everything that we want. What do we need 
humans for now? We will still have everything that we need for 
consumption and living, but whoever owns those machines will be 
like the, you know, super-rich citizen and control everything 
in society.
    So at some level we are gradually moving toward that 
technologically. That is one view of the world. I do not want 
to go too far. But I think that raises some serious issues from 
a governance perspective in terms of how we think of taxes and 
how we think of redistribution and how we think of a living 
wage and a minimum wage. So I think there are some very deep 
challenges from the policy perspective given how technology is 
moving.
    One thing is for sure. We cannot fight with technology. You 
know, we cannot continue to use the rotary phone while the rest 
of the world is using iPhones. So you have to adapt to 
technology, and those are very serious questions. I wish I had 
more to say on this.
    Chairman Merkley. Would anybody else like to jump into 
this? Yes, Amy.
    Ms. Traub. I would just agree that the rise of technology 
makes these distributional issue all the more urgent. It could 
be a utopian world which Dr. Mian has just described in which, 
you know, robots and machines are doing all of the work, and 
people sit around and make music for each other and read poetry 
all day long. And that sounds pretty nice. Or it could be very 
dystopian, and these distribution--you know, people are 
starving and do not have a means of support because there are 
no more jobs.
    I think that it is all the more important then to be 
thinking about distributional issues and making sure that the 
gains and benefits that our economy is producing are shared 
more equally than they are now.
    Chairman Merkley. Yes, Nick.
    Mr. Hanauer. So I am in a technology business mostly and 
have participated in a lot of that disruption, and here is a 
fantastic way of proving that capitalists like me do not create 
jobs. I was the first investor in Amazon.com, and I consider 
Amazon.com to be one of the great economic achievements of our 
time. It is something I am very proud of. But make no mistake. 
Amazon.com does about $80 billion in sales, and it employs 
60,000 people today, and it has been an extraordinary windfall 
for me, for Bezos, and for some people who live in the Pacific 
Northwest. But if ordinary bricks-and-mortar retailers still 
did that $80 billion in sales and Amazon.com did not do it, 
then it would not be 60,000 people working. It would be a 
million, because the difference between Amazon.com and bricks-
and-mortar retailers is massive economic efficiency. Massive 
economic efficiency.
    The question is not, What are we going to do about 
technology? The question is, Who is going to bear the burden of 
that transition in a society, and who is going to get the 
benefit? And does it make any sense to have a society with laws 
and policies that allow a tiny minority of people to get all 
the benefit of these transitions and to push the costs off on 
other people in our society? And I think the answer ultimately 
will be no, not just because it will rip the society apart and 
destroy the democracy, but because ultimately it is horrible 
for business, because while it is awesome in the near term that 
Amazon is doing all this stuff and employing these people and 
Jeff has made all this dough, those 600,000 or 800,000 or 
million people who are no longer employed are not buying 
anything. Right?
    And so, you know, we are fooling ourselves. Ultimately what 
goes around comes around, and we have to find ways to animate 
this virtuous cycle and not create death spirals. I mean, to me 
that is the central role of Government.
    Chairman Merkley. Would anybody else like to jump into 
the--Mr. Cox.
    Mr. Cox. Yes, sir. Going along a little bit with Mr. 
Hanauer over there, I worked for a major apparel manufacturer 
there in Portland as a cost accountant, and one of the first 
things they tell you to do is cut costs. The first place you go 
to cut costs to make profitability is actually cutting 
employees. And I was just as guilty as anyone. I was making 
$60,000 a year, whatever. But one of the ways we did it, these 
engineers, we ended up putting in a new machine into the 
distribution center of this apparel place that the machine 
allowed us to lay off--they had--at peak seasons they had 700 
employees on the floor. With this new machine, we were able to 
cut 86 positions. It not only--you know, like you said earlier, 
it is not only just your wages. It is, you know, your health 
benefits, blah, blah, blah. You do not have to pay that with a 
machine. But it was 86 people. They were making between $10 and 
$13 an hour. OK? But that is 86 people. That kind of money--and 
it also increased productivity at the same time, which allowed 
the corporation to make more money and everything else. But 
that money was not being--you know, those 86 people not having 
that money was preventing them--Mr. Hanauer kind of said 
earlier something about getting feet through the door, you 
know, for them to buy something. You have 86 people there that 
are not able to buy anything anymore.
    The same situation with me when I was laid off making 
$60,000. One of the first things I had to do is I had to lay 
off--I did not lay them off. I no longer took my boy to a day 
care, and that was a little over $500 a month. Well, day care 
then turns around. They have to lay off somebody, an employee. 
Again, there is another foot that is not going through Mr. 
Hanauer's door to buy products.
    So I do not know where the magic potion is here, but, you 
know, sometimes I kind of think, you know, we are selling 
people short. Sometimes you--I do not know the solution. But, 
you know, it is like sometimes these folks have to have a 
realization, you know, that you have to have a human element; 
you know, you have got to keep them in there even though a 
machine might be more productive. You know, I do not know the 
solution there.
    Thank you.
    Chairman Merkley. Well, on that note, I think we are going 
to wrap up. We have heard kind of the virtuous cycle, and we 
have heard the death spiral, and it is something that I am so 
glad you all have come to testify about as we wrestle with the 
heart of this. How do we build a stronger, better middle class, 
strong family foundations? We should measure the success of our 
Nation not by the GDP or the Dow. We should measure it by the 
success of our families. And many folks like to talk about 
family friendly policies or family values. Well, having a good 
job is a very important family value.
    And so the issues that we have raised today are ones that I 
really appreciate Senator Heller and Senator Warren being here 
to wrestle with. We are going to keep pursuing these issues 
because citizens across the country demand it. They want us to 
struggle with what is happening in America and try to put 
America back on track. So that is a responsibility in a Nation 
that is a democracy of the people, by the people, for the 
people. And so thank you for contributing so much to that 
conversation.
    This hearing is hereby adjourned.
    [Whereupon, at 1:38 p.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]

                  PREPARED STATEMENT OF DIEDRE MELSON
   Portland, Oregon, Subject of Documentary Movie ``American Winter''
                              June 6, 2013

    Chairman Merkley, Ranking Member Heller, and Members of the 
Subcommittee: Hello, my name is Diedre Melson. I am an Oregon resident 
and since participating in the film, ``American Winter'', I have been 
hired as an employee at 211info, a nonprofit information and referral 
line people call when they need to learn where to go for help in their 
community. Every day at work I see firsthand how many people are 
struggling to make ends meet. I also live this reality as I struggle to 
raise four children with a paycheck that is never big enough to cover 
even just the basics.
    Growing up I believed hard work would bring rewards. I started 
working at age 13 in my aunt's hair salon. When I turned 15 I got a job 
at the Burger King on west Burnside in Portland, OR. I worked there for 
the next 3 years until I graduated high school. I knew how to work hard 
but I also knew that education was the key to a good job, which is why 
I went to college right out of high school. When I was no longer able 
to afford college I didn't give up. After 2\1/2\ years of college I 
transferred to a career school and obtained certifications in the 
medical field.
    Despite my continual efforts, getting ahead often feels just out of 
reach. Again, I have worked since I was 13 years old. The only gaps in 
my resume are due to layoffs, cut backs, and permanent closures at the 
places I've worked. I was unemployed as a phlebotomist when the company 
was shut down and 1,500 of us were laid off. I then was unemployed for 
2 years before I was able to find work again. And when I did find work, 
it was for minimum wage. In the meantime I was on food stamps and 
housing assistance. But that assistance, although very much 
appreciated, was not enough to live on and cover rent and food. So I 
would go scrapping 5 or 6 days a week, to make $25 to $50 dollars a 
day. And scrapping, for those that don't know, is collecting scrap 
metal on the side of the road. But because that didn't provide much 
income I would also sell my plasma once or twice a week to put food on 
the table and to keep our family from being homeless.
    Now that I work at 211 I make $13 an hour. And I can relate to 
folks who call in for help. When the phone rings at work the person 
calling 211 often has no idea where to turn for help. The people who 
call 211 come from every type of household you can imagine: single 
parent families, two parent families and seniors. The people who call 
are not much different from me. We are the working poor. On a daily 
basis we go to work and work a full time schedule yet fall short on 
basic necessities. They, like me, believed that if they did everything 
right--worked hard, got an education, planed for the future--we would 
make it.
    Just like me, so many people who call 211 have been caught off 
guard by their situation. My heart breaks for them and it's hard not to 
cry. I remember the mother who called me from work in tears. She had 
been making small payments in an effort to stay ahead of her water 
bill, but when the payment didn't arrive in time her water was shut 
off. Her 13-year-old daughter was at home and now the mom was going to 
have to leave work to get the water turned back on. She couldn't afford 
to pay the water bill and she couldn't afford to leave work but that 
was the reality she faced on that day.
    The next call pulls me into the world of the immigrant worker who 
isn't making enough to cover her bills but fears asking for assistance 
because she doesn't know how it will affect her employment. She fears 
that if she asks for the help she so desperately needs she may lose the 
job she so desperately needs. Sometimes I have to take a break after a 
call because the sadness and emotion is just too much. That was 
certainly the case after talking to the 70-year-old man who was 
surprised that the Social Security he has worked his entire life for 
wasn't enough to live on. He was shocked that the $700 he gets is 
barely enough to pay the rent. Now he is left begging for a hand out. 
He is too ashamed to apply for food stamps and feels guilty to ask for 
a hand out with all the mothers and children that are going hungry.
    I am raising four children of my own. I love all of my children 
dearly and they are all special in their own way. I am here to speak 
out for their future. Today I want to tell you about my son Jalean, an 
exceptional student-athlete with a promising future.
    He takes after me in many ways. He enjoys learning whether it is in 
the classroom or through life's experience. Standing six-feet-tall and 
weighing two-hundred-eighty pounds he is a heavyweight high school 
wrestler, and he is quite the eater. Even though I work full time I 
depend on SNAP to help feed my family--$13 an hour simply isn't enough 
to support a family of five. I just found out that my SNAP benefits are 
going to be cut $30 a month, now that I am making a little bit more. It 
was already hard to keep enough food in the house for Jalean and the 
rest of my children. I'm not sure how I'm going to make up for the $30 
reduction. It may not sound like a lot to someone who doesn't have to 
struggle, but for me $30 is enough to buy three or four whole chickens 
or a few cuts of meat.
    The constant worry is taking its toll on me, but what's worse is 
that I worry that it's my children who will suffer. Jalean has so much 
potential: a promising career as a wrestler or a football player and he 
excels academically. This past April Jalean took fifth place in the 
Reno Wrestling World Championships. The first year he was invited to go 
to the World Championship I had to tell him we couldn't afford to send 
him. We were able to get the money for him to go this year, his senior 
year, and now he's an all American Wrestler. That should be his ticket 
to a college education but it's not. Instead, because of cuts to 
education, and how expensive education has become, if he doesn't get a 
scholarship I worry that he won't get to go to college.
    Without a college education his prospects are limited. He is an 
intelligent kid and has maintained good grades during his 4 years of 
high school. I always told him he had to work hard and get good grades 
in order to get into college and succeed in life. Do I now tell him 
that all of his hard work was in vain? How do I explain that I can't 
afford to send him to college and that there are fewer and fewer 
scholarships for kids like him?
    It is my hope that together, as a Nation, we can set aside our 
political differences and start thinking in terms of human beings. I 
would hope that we can stop thinking about mine and start thinking 
about ours--our children, our parents, our communities, and our future. 
I dream of a future that says if one works a full time job 5 days a 
week, that on the weekend I can afford to take my family out to a 
movie, and that at the very least I can afford groceries for the month. 
I am working very hard and I simply cannot make ends meet. Let's invest 
in regular families like mine so that we all can hope for a better 
future. Thanks so much for listening.
                                 ______
                                 
                     PREPARED STATEMENT OF JOHN COX
   Newberg, Oregon, Subject of Documentary Movie ``American Winter''
                              June 6, 2013

    My name is John Cox from Newberg, OR. I want to thank everyone for 
the opportunity to speak on behalf of the deteriorating middle class. 
I'm sure you will understand that I'm just a humble representative of 
the millions of families that have been placed in dire straits since 
the recession.
    I was raised from childhood to pursue the ``American Dream,'' and 
to believe that the United States of America was the greatest Nation on 
earth. My father, grandparents, school, church, and community instilled 
this American Dream mantra in me.
    ``Work hard,'' they'd say.
    ``Get a college education so that your family can live more 
comfortably!''
    ``Save money for the future!''
    ``Volunteer and give time to your community.'' And helping my 
neighbors isn't simply a slogan to me.
    And my father's famous words, ``Take care of your job and the job 
will take care of you.''
    I knew the rules and tried to live by the rules as they were laid 
out to me. I took seriously the expectations that were placed on me by 
my Government, my community, and my family.
    Working hard was not exactly a choice. I was raised for most of my 
childhood on a cattle ranch. Winters required getting up at 4 a.m. to 
feed our cows before school and feed again before our head hit the 
pillow in the evening. Spring wasn't easy either as we would take 
shifts during the night checking on the cows during calving season. My 
brother and I not only fought over whose turn it was to wash the dishes 
but whose turn it was to milk the family milk cow.
    My father was college educated. It wasn't an option but almost 
mandatory for me to go to college. I paid my way through college by 
working full-time jobs, commercial fishing in Alaska, and even sweeping 
Mt. St. Helens volcanic ash out of parking lots. There were times that 
I was working two jobs while still attending school. Through hard work 
and discipline I managed to get my way through school without any 
financial assistance from my Government or family. Something I was 
proud of at the time.
    Since the time I was 12 years old in 1972, until October 2008, I 
was never without a job. ``Work hard . . . .'' ``Take care of your job 
and your job will take care of you . . . .''
    I played by the rules. I followed the advice of family, financial 
advisors, and the Government. I lived within my means in pursuit of the 
American Dream.
    Twelve years ago I invested in a house that was supposed to be the 
home for my family. I saved for retirement in programs like the 401(k) 
that was partially set up by our U.S. Government. I made sure I had a 
6-month emergency fund in case something catastrophic occurred to my 
family. My credit rating was somewhere between very good and excellent. 
I paid my Government taxes with the confidence that it was not only 
going to be used for the social fabric of all of the U.S. citizens, but 
that it was also to provide a safety net for catastrophic situations.
    Then the economy tanked--and I was laid off from a $60,000 a year 
Cost Accountant position in October 2008. I wasn't too concerned 
because I hadn't gone more than a week without a job in over 30 years. 
I had over $35,000 in my emergency fund to supplement any bills that I 
owed while looking for my next job. Why worry.
    I stayed positive when a month passed without employment. I gritted 
my teeth but still smiled when 6 months passed.
    When my $35,000 emergency fund was exhausted, I cashed in my 
401(k), which, after early withdrawal penalties, netted me nearly 
another $35,000. It was important for me to continue to pay my mortgage 
and my bills.
    I finally succumbed to the realization that I needed help from the 
U.S. Government and applied for unemployment benefits around March of 
2010. Mortgage and monthly bills were no longer being paid as I had to 
transition to survival mode.
    I've been out of work for over 3 years now. Companies aren't 
anxious to hire someone my age. And Wells Fargo bank is in the process 
of foreclosing on my house that I've invested 12 years into, as well as 
a significant downpayment. This house isn't so much a home for me but 
it's an investment to support my Down's syndrome boy, Geral, during his 
adult life.
    I feel guilty because debts have gone unpaid. I know there are 
other families that are being affected by me not being able to honor my 
debts. They might be faceless but I know they are out there.
    Still, I haven't given up and I don't sit on my hands. I continue 
to apply for jobs with the hope that I can again be a contributing part 
of American society. I have found, however, that jobs similar to my 
Cost Accounting profession are now only paying $35,000 a year instead 
of the $60,000 a year salary of 4 years ago. Still, I would gladly 
accept the lower salary.
    I have even applied for minimum wage jobs. The hours have to be 
conducive to being able to work while my boy is in school. Minimum wage 
does not pencil out for the breadwinner of the family. How can the 
Government expect me to earn minimum wage, pay day care for my Down's 
syndrome boy, and put food on the table?
    Until fair wage jobs reappear, I need to put food on the table and 
keep a roof over our heads. But the policies that are being handed down 
and, more importantly, the lack of action on the part of our 
Government, makes it impossible to do so. I feel that it is time for 
our Government to live up to their end of the social contract. That was 
the bargain that millions of suffering people around the United States 
expect.
    I understand that funding cuts for the SNAP food stamp program are 
being debated. How can this even be a possibility when people are going 
hungry due to no fault of their own?
    I know first hand that help for homeowners facing foreclosure is 
seriously lacking. The Federal Government bailed out all the banks and 
then the banks simply pocketed the money without any penalty, and 
without helping folks like me all across this country.
    Due to no fault of our own, people like myself are drowning without 
a life preserver being thrown our way. What happened to that ship that 
we call the ``American Dream''?
    Please help.
                                 ______
                                 
                 PREPARED STATEMENT OF PAMELA THATCHER
   Tualatin, Oregon, Subject of Documentary Movie ``American Winter''
                              June 6, 2013

    Chairman Merkley, Ranking Member Heller, and Members of the 
Subcommittee: Thank you for inviting me to testify before your 
Committee to share my experience and perspective on the future of 
middle class families. I never would have imagined that I would fly to 
Washington, DC, to testify before a U.S. Senate committee. I also never 
imagined I would go to a charity desperate for diapers for my two 
children, or need to get food stamps, but that's exactly what I found 
myself doing in the fall of 2011 after my husband Brandon lost his job 
and all of our savings were gone.
    The decision to reach out for help was incredibly difficult for my 
husband and I, but at that point we had no choice. I was a mom in 
survival mode and I knew I would do anything to take care of my two 
babies, even if that meant accepting assistance. You see, it wasn't 
supposed to ever come to that. Brandon and I took our time planning our 
family and our future.
    Before starting a family I taught preschool for 9 years. It was a 
great job. I loved working with the children and being part of the 
community. The money I earned from that job helped us build a small 
nest egg and make the transition to a one-income household once we 
started our family. The prospect of solely relying on Brandon's income 
wasn't scary because he had a good paying job and he had never been 
without work. Being unable to pay our bills just wasn't a reality we 
contemplated.
    Three months after our second child was born Brandon was without an 
income for the first time in his life. At first we weren't too worried. 
It was a setback but he had a strong work history and good connections 
in the community, so we expected he would find work within a week or 
so. Unfortunately this was in the midst of the great recession and 
weeks without work or a paycheck soon turned into months.
    We did what anyone would do in our situation--we cut back on every 
possible extra expense and carefully used our savings to pay for the 
basics like rent, food and diapers for our two little boys. It wasn't 
long before cutting corners was no longer enough and we were faced with 
the grim prospect of going without or turning to social services and 
Government assistance for help. Thank goodness there was help when we 
needed it.
    To be honest, I used to think it was easy for people who depended 
on Government programs. No work and free food. I had compassion and 
volunteered, but I thought the public benefit system bred abuse. Now I 
know there is a different story. The public benefit programs like SNAP, 
WIC, TANF, and Oregon Health Plan help keep families like me just 
barely above water. This experience has given me a new understanding 
and appreciation for what these social safety net programs mean for 
millions of middle class families that are only a few steps away from 
poverty, and the real possibility of homelessness.
    Being in ``American Winter'' opened my eyes to how many people are 
living on the financial edge. I've had strangers say thank you because 
they recognize me from the film. One woman with children in tow came up 
to me in the grocery store parking lot to give me a hug. She explained 
that she was in the same situation and felt so alone and afraid. The 
stress of not knowing how you are going to pay rent takes a tremendous 
toll on you and so many people hide their financial struggle out of 
shame. For her it was comforting to know that she wasn't alone. I've 
heard the same from my friends after I posted about ``American Winter'' 
on Facebook. People I thought were doing fine are in the same situation 
as Brandon and I and they are grateful to finally be able to talk about 
it.
    I feel that families across this country are in crisis. Something 
has gone wrong when hardworking people are worried about how to feed 
their families. Something has gone wrong when it feels like there is no 
longer any hope for middle class families, and instead of investing in 
programs that will help families get back on their feet, our elected 
officials are making cuts. When you cut funding for SNAP, TANF, or WIC 
you are making the decision to take away what little support people 
have to keep the lights on, or food on the table. I hope you will 
consider this and the stories shared in ``American Winter'' as you're 
making decisions about how to spend and what to cut. My husband 
eventually was able to find another job, although he is making far less 
than what he used to make. Now, even with full time work, we still 
struggle to make ends meet. My experience has taught me that when a 
family member loses a job, the assistance we received is a true 
lifeline, and the difference between sinking and having the chance to 
get back on our feet again.
    Thank you again for taking time to hear from me and consider what 
it's like for formerly middle class families who just need to know 
there is some hope.
                                 ______
                                 
                    PREPARED STATEMENT OF ATIF MIAN
     Professor of Economics and Public Policy, Princeton University
                              June 6, 2013

    I thank the Senate Subcommittee on Economic Policy for inviting me 
to talk about the role of financial markets on the macro economy and 
middle class. My discussion on this topic is based on my research over 
the years with Amir Sufi of University of Chicago Booth School of 
Business.
    Well-functioning financial markets are extremely important both for 
a healthy economy and a strong middle class. The U.S. in many ways is 
the envy of the world in terms of having the most sophisticated 
financial market. We need to protect and strengthen this advantage, and 
correct any flaws that remain. The 2007-09 financial crisis revealed a 
fundamental weakness in this regard that needs to be addressed.
    The key weakness of our financial architecture today is the 
inability of standard mortgage contracts to adjust to a changing macro 
environment. I describe how this characteristic of mortgage debt 
devastated the U.S. economy in general, and the American middle class 
in particular in Section I of my testimony. I explain how mortgage debt 
weakened the middle class and the economy via three distinct channels. 
(A) The concentration of wealth losses on the indebted homeowners. (B) 
The amplification of wealth losses through foreclosure externalities. 
(C) The translation of wealth losses into weak aggregate demand and 
high unemployment through the aggregate demand externality.
    Section II presents a specific proposal: Shared Responsibility 
Mortgages (SRMs). SRMs are aimed at removing the basic flaw in existing 
mortgage contracts. I discuss how SRMs work and how they provide 
significant macro and social benefits--particularly to the middle 
class. I also discuss some of the ways in which the Government can help 
facilitate their introduction.
Section I: House Price Collapse, Mortgage Debt, and the U.S. Economy
    It is clear in hindsight that market participants had become over-
exuberant with respect to housing during the 2000s. However, why was 
the correction in house prices--starting in 2007--so destructive for 
the overall economy? I discuss the three channels driven by the role 
played by mortgage debt.
A. Housing Crisis and the Destruction of Middle Class Wealth
    For many Americans, home equity is their only source of wealth. If 
house prices decline, then their wealth position becomes seriously 
impaired. They may be counting on their home equity for retirement, or 
even to help pay for a child's college education. And a dramatic 
decline in house prices is just as unexpected as a tornado barreling 
down on a small town in Kansas.
    But when it comes to the risk associated with a collapse in house 
prices, the financial system's reliance on mortgage debt means that 
homeowners have no insurance against the financial calamity they face. 
Understanding how debt concentrates house price risk on homeowners is 
the first step in understanding why debt leads to severe economic 
downturns.
    Debt plays such a common role in the economy that we often forget 
that it is an extremely harsh form of financing--especially in terms of 
its distributional consequences in the event of a downturn. The 
fundamental feature of debt is that the borrower must bear the first 
losses associated with a decline in asset prices. Thus, if a homeowner 
buys a home worth $100,000 using an $80,000 mortgage, then the 
homeowner's equity in the home is $20,000. If house prices drop 20 
percent, the homeowner loses $20,000--their full investment--while the 
mortgage lender escapes unscathed.
    The middle class tend to be the typical homeowner with a mortgage. 
In the example above, the middle class homeowner loses 100 percent of 
their net wealth, while the lender--typically wealthier--does not lose 
anything. This is the fundamental feature of debt--it concentrates the 
losses on the junior claim.
    Now let's take a step back and consider the entire economy of 
borrowers and savers. When house prices in the aggregate collapse by 20 
percent, the losses associated with that collapse are concentrated on 
borrowers in the economy. Given that borrowers tend to be individuals 
that already had low net worth before the crash (which is why they 
needed to borrow in the first place to buy their home), the 
concentration of losses on borrowers devastates their financial 
condition. They already had very little in terms of net worth, and now 
they have even less.
    In contrast, the savers, which are typically high net worth 
individuals with a large amount of financial assets and little mortgage 
debt, experience a much less severe decline in their net worth when 
house prices collapse. This is because they ultimately own--through 
their deposits, bonds, and equity holdings--the senior claim on houses 
in the economy. House prices may collapse so far that even the senior 
claim experiences losses, but the losses will be much less severe than 
the devastation to the borrowers' net worth.
    As this example makes clear, the concentration of losses on debtors 
is inextricably linked to wealth inequality. When house prices collapse 
in an economy with high debt levels, the collapse amplifies wealth 
inequality because low net worth individuals experience the lion's 
share of the losses.
    During the Great Recession, house values collapsed by $5.5 
trillion: an enormous decline relative to the annual economic output of 
the U.S. economy of $14 trillion. Given such a massive hit to house 
prices, the net worth position of the U.S. household sector obviously 
suffered. But what is less obvious was the distribution of those 
losses: who actually lost wealth when housing collapsed?
    Let's start with an examination of the net worth distribution in 
the United States as of 2007. A household's net worth is composed of 
two main types of assets: financial assets and housing assets. 
Financial assets include stocks, bonds, checking and saving deposits, 
and other business interests the household owns, while housing is 
typically the value of the home the household owns. Net worth is 
defined to be financial assets plus housing assets minus any debt the 
household has. Mortgages and home equity debt are by far the most 
important components of household debt, making up 80 percent of all 
household debt as of 2006.
    As of 2007, there were dramatic differences in leverage and the 
composition of net worth across U.S. households. Homeowners in the 
bottom 20 percent of the net worth distribution--the poorest 
homeowners--were highly levered. Their leverage ratio, or the ratio of 
total debt to total assets, was near 80 percent. Continuing the example 
at the beginning of the chapter, if the household had a home worth $100 
thousand and a mortgage worth $80 thousand and no other assets, the 
households would have a leverage ratio of 80 percent.
    Moreover, the poorest 20 percent of homeowners relied almost 
exclusively on home equity in their net worth. Their ratio of home 
equity to total assets was 18 percent, while the ratio of other net 
worth to total assets was only 4 percent. Or in other words, about $4 
out of every $5 of net worth was in home equity. In a nutshell, poor 
homeowners had almost no financial assets coming into the recession. 
They had only home equity, and that home equity was highly levered.
    The rich were different in two important ways. First, they were far 
less levered coming into the recession. The richest 20 percent of 
homeowners had a leverage ratio of only 7 percent, compared to the 80 
percent leverage ratio of the poorest homeowners. Second, their net 
worth was overwhelmingly concentrated in nonhousing assets. While the 
poor had $4 of home equity for every $1 of other assets, the rich were 
exactly the opposite with $4 of other assets for every $1 of home 
equity. Most of their wealth was in financial assets such as money 
market funds, stocks, and bonds.
    Chart 1 shows these facts graphically. It splits homeowners in the 
United States as of 2007 into five quintiles based on net worth, with 
the poorest households on the left side of the chart, and the richest 
households on the right side. The chart shows the fraction of total 
assets each of the five quintiles has in debt, home equity, and 
financial wealth. There is a very striking pattern. Poor homeowners, 
those with low net worth, are much more levered and rely exclusively on 
home equity in their wealth. As we move to the right of the chart, 
leverage declines and financial wealth increases.



    This pattern isn't surprising. Remember, a poor man's debt is a 
rich man's asset. When a poor homeowner gets a mortgage, we tend to 
think that a bank is lending to the homeowner. But the bank must get 
the money from somewhere! Ultimately, the rich own the bank. They own 
the bank through their financial asset holdings, which include the 
stocks, bonds, and deposits of the banking sector. As a result, as we 
move from poor homeowners to rich homeowners, debt declines and 
financial assets rise. This captures how the rich, through the 
financial system, are ultimately lending to the poor. As I mentioned 
above, the use of debt and wealth inequality are closely linked.
    Now that we understand the net worth position of homeowners as of 
2007, we can assess who was affected the most by the collapse in asset 
prices during the Great Recession. House prices for the Nation as a 
whole fell 30 percent from 2006 to 2009. Further, they stayed low, only 
barely recovering toward the end of 2012. While stock prices fell 
dramatically during 2008 and early 2009 they eventually rebounded 
strongly afterward, and bond prices actually rose dramatically 
throughout the recession. Thus household holding financial assets--
stocks and bonds--were protected from the brunt of the crisis, while 
households exposed to housing and debt suffered large losses.
    So which homeowners were hit hardest by the Great Recession? Chart 
2 puts these facts together and shows one of the most important 
patterns of the Great Recession. It shows the evolution of household 
net worth for the bottom quintile, the middle quintile, and the highest 
quintile of the homeowner wealth distribution.



    The net worth of poor homeowners was absolutely hammered during the 
Great Recession. From 2007 to 2010, net worth collapsed from $30K to 
almost $0K. The decline in net worth during the Great Recession 
completely erased all of the gains from 1992 to 2007. This is exactly 
what we would predict given the reliance on home equity and their large 
amount of debt. The financial system's reliance on debt concentrated 
losses directly on the poorest households.
    In contrast, rich homeowners were hardly touched. Their average net 
worth declined from $3.2M to $2.9M. While the dollar amount of losses 
were considerable, the percentage decline was negligible. Further, the 
decline wasn't even large enough to offset any of the gains from 1992 
to 2004. The rich made out well because they held financial assets that 
performed much better during the recession than housing. They also made 
out well because many of the financial assets were senior claims on 
houses. House prices hammered poor households because they were 
indebted; house prices affected the rich by far less because they 
ultimately held the senior claim on homes.
    Wealth inequality was already severe in the United States before 
the recession. As of 2007, the top 10 percent of the net worth 
distribution had 71 percent of the wealth in the economy. This was up 
from 66 percent in 1992. In 2010, the share of the top 10 percent 
jumped to 74 percent, which is consistent with the patterns shown 
above. The rich maintained their wealth while the poor got poorer.
    Many have discussed the trends in income and wealth inequality. But 
an often over-looked aspect of this issue is the role of debt. As I 
have shown here, a financial system that relies excessively on debt 
will amplify wealth inequality when asset prices collapse. Debt and 
wealth inequality are closely linked.
B. The Foreclosure Externality
    For many households during the Great Recession, the value of a home 
dropped by more than the value of the homeowner's equity. The homeowner 
then became ``underwater'' or ``upside-down'' on his mortgage. As of 
2011, 11 million properties with a mortgage--or 1 in 4 homeowners with 
a mortgage--had negative equity.
    Not only was a homeowners equity stake completely wiped out, but if 
he chose to sell the home, he would have had to pay the difference 
between the mortgage and the sale price to the bank. Faced with this 
dire circumstance, many homeowners decided to walk away from the home, 
allowing the bank to foreclose.
    Economists have long appreciated that debt affects everyone when 
asset prices collapse, not just the indebted. The fire sale of assets 
at steeply discounted prices is the most common example. A fire sale 
refers to a situation in which a debtor or creditor is willing to sell 
an asset for a price far below fundamental market value. In the context 
of housing, a fire sale typically occurs after foreclosure. When a bank 
takes the property from a delinquent homeowner, they sell the property 
at a steeply discounted price.
    When the sale occurs, the fire sale price, which is typically far 
below market value, is used by home buyers and appraisers to estimate 
the price of all other homes in the area. As a result, all of the homes 
in the area suffer a decline in price. Even homeowners with no debt at 
all see the value of their homes decline. Consequently, financially 
healthy homeowners may be unable to refinance their mortgages or sell 
their home at a fair price. Over the last few years, many homeowners in 
the United States have been shocked by a very low appraisal of their 
home during a refinancing. This low appraisal was typically the direct 
result of an appraiser using a fire sale foreclosure price to estimate 
the value of all homes in the neighborhood.
    Foreclosure externalities are among the most insidious effects of 
debt financing. A negative externality occurs whenever there are 
negative effects of a private transaction between two parties that are 
not fully borne by the two parties. In a foreclosure, a bank selling 
the property does not internalize the negative effects of the fire sale 
on the net worth of all the other homeowners in the area. As a result, 
the bank is willing to sell at the lower price, even though society as 
a whole would not want the bank to do so.
    Research demonstrates that foreclosures significantly exacerbated 
the housing downturn during the Great Recession. In 2009 and 2010, 
foreclosures reached historically unprecedented levels. The previous 
peak before the Great Recession was in 2001 when about 1.5 percent of 
all mortgages were in foreclosure. During the Great Recession, 
foreclosures tripled relative to their prior peak: Almost 5 percent of 
all mortgages outstanding were in foreclosure in 2009. Daniel Hartley 
at the Federal Reserve Bank of Cleveland has estimated that between 30 
and 40 percent of all home sales in 2009 and 2010 were foreclosures or 
short sales.
    In research with Amir Sufi and Francesco Trebbi, we estimated the 
negative effects of foreclosures on house prices and household 
spending. We used the fact that some States have much more lenient 
foreclosure policies than others. In some States, the lender must go 
through the courts to evict a delinquent borrower from the home. In 
other States, no such court action is required. Foreclosures are much 
faster in States that require no court action. As a result, there were 
far more foreclosures in some States than others during the Great 
Recession, and this difference can be used to estimate the effects of 
foreclosure on the local economy.
    Using these differences across States, we found large negative 
effects of foreclosure during the Great Recession. Given the nationwide 
decline in house prices of 30 percent, our research suggests that house 
prices would have only fallen by 22.5 percent from 2007 to 2009 if 
States had implemented more lenient policies toward foreclosing. 
Further, by pulling down house prices, foreclosures dampened 
consumption and home building. We found that one-fifth of the decline 
in both spending on autos and residential construction was the direct 
result of foreclosures.
    When the housing bubble burst, there was no doubt a need for 
reallocation of resources in the economy. Too many renters had become 
homeowners. Too many homeowners had moved into homes they could not 
afford. Too many homes had been built. But when the crash occurred, the 
debt-ridden economy was unable to reallocate resources in an efficient 
manner. Instead, debt led to fire sales of properties which only 
exacerbated the destruction of net worth. Debt was the crucial problem.
C. The Aggregate Demand Externality
    The large loss in wealth of indebted households forces them to cut 
back on their overall spending for two reasons: they feel the need to 
save given loss to wealth, and they have poorer access to credit 
markets due to the loss of housing collateral. The contraction in 
spending is particularly severe because wealth losses tend to 
disproportionately fall on indebted households and households with low 
levels of net wealth.
    In my work with Amir Sufi, we show that the propensity to cut back 
spending in the face of wealth losses is three times as large for 
poorer households and households with high levels of leverage. Thus in 
terms of spending, the rich and less levered have more capacity to 
absorb losses. However, as I have already explained, the unique 
characteristics of a mortgage debt contract impose losses on the 
indebted and the less wealthy. This is inefficient from an aggregate 
demand management perspective.
    When debtors sharply pull back on household spending, the economy 
tries to boost demand from elsewhere. One possible channel is to 
convince creditors to consume more by lowering the interest rate. 
However, if this is not possible even at zero interest rates, then the 
economy is stuck in a ``liquidity trap'' with below-capacity aggregate 
demand.
    The decline in aggregate demand due to wealth loss for the indebted 
soon becomes a problem for everyone in the economy--whether someone 
borrowed initially or not. The reason is that one person's demand is 
another person's job. In a paper with Amir Sufi, we show that the 
decline in spending by households suffering the loss in wealth led to 
sharp decline in employment everywhere in the economy. In fact we can 
quantitatively show that majority of the job losses during the 2006-
2009 period were driven by this particular aggregate demand 
externality.
    An important lesson from this example is that we are in this mess 
together. Even households in the economy that stayed away from toxic 
debt during the boom suffer the consequences of the collapse in 
household spending during the bust. For example, many auto plants in 
the United States are located in areas of the country that completely 
avoided the housing boom and bust: Indiana, Ohio, and Kentucky. Yet 
auto workers in these States suffered during the Great Recession 
because highly levered household in other parts of the country stopped 
buying cars.
Section II: Shared Responsibility Mortgages (SRMs)--A Policy Proposal
    I have highlighted three aspects of mortgage debt that devastated 
middle class wealth, lowed aggregate demand and massively increased job 
losses in the U.S. economy during the 2007-09 financial crisis. Can 
these outcomes be prevented while still maintaining a healthy mortgage 
market? Yes, I believe that is possible. I outline my proposal (again a 
result of joint work with Amir Sufi) below and discuss how SRMs would 
have protected both the American middle class and the overall economy.
A. Shared Responsibility Mortgages (SRMs)
    Consider an $80,000, 30-year fixed rate mortgage loan at 5 percent 
interest rate, for a house bought for $100,000. The homeowner puts 20 
percent downpayment for her house and starts paying an annual mortgage 
payment of $5,204 to the lender.
    An SRM works in exactly the same way as the fixed rate mortgage 
described above with a couple of important differences. First, there is 
downside protection for the homeowner based on her local house price 
index. A number of market participants produce local house price 
indices (e.g., at the level of the zip code). The Government can 
monitor and certify the production of such a house price index on which 
the downside protection of an SRM can be contracted.
    Say the local house price index were 100 when the mortgage was 
originated. Then if at the end of any year during the life of the 
mortgage, the local house price index drops below 100 by X percent, the 
mortgage payment due the following year will also decline by X percent. 
For example, if the local house price declined by 10 percent after the 
first year to 90, mortgage payment in the second year will decline by 
$520.4 while maintaining the original amortization schedule for 
principal. If house price index goes above 100 in subsequent years, 
mortgage payment will also go back up to its original $5,204.
    Such a contract is very easy to implement. All we need is a local 
house price index which is already available. The provision of downside 
protection to the homeowner comes at the expense of the lender and will 
therefore increase the up-front cost of the mortgage in practice. How 
large is this cost, and can we somehow compensate the lender 
sufficiently for bearing this cost?
    The cost of providing downside protection depends on expected 
annual house price growth and volatility. Historically, house prices in 
the U.S. have grown at an annual rate of 3.7 percent with a standard 
deviation of 8.3 percent. Using mortgage pricing formulas, one can show 
that the cost of providing downside protection will be around 1.4 
percentage points. This is a substantial increase in cost of financing. 
However, we can completely eliminate this up-front cost by introducing 
a second innovation in our SRM contract.
    The second important feature of an SRM contract is a 5 percent 
capital gain sharing provision. The capital gain provision implies that 
whenever the home owner sells the house--or refinances the mortgage--
the lender collects 5 percent of net capital gain on the house. Since 
capital gain on owner-occupied housing is tax-exempt anyways, 
homeowners still gets to keep 95 percent of any gain in home value. 
Moreover, since the lender can securitize a large number of mortgages 
together, he can completely diversify the uncertainty of when a 
particular homeowners sells his or her property. On average the lender 
will receive a fairly stable flow of 5 percent capital gains from his 
pool of mortgages.
    Is the 5 percent capital gain provision sufficient to eliminate the 
1.4 percent up front cost added due to the downside protection offered 
by the lender? We can once again turn to mortgage pricing formulas for 
help. Given historical house price growth in the U.S., it turns out 
that a small 5 percent capital gain share is more than sufficient to 
compensate the lender. In fact, with a 5 percent capital gain rule, the 
lender comes out ahead by 81 basis points.
B. The Benefits of SRMs for Middle Class and the Macro Economy
    Suppose instead of traditional mortgage contracts, all mortgages 
were SRMs in 2007. What would have been the impact on the middle class 
and the overall U.S. economy? The research cited in Section I of my 
testimony gives us the answers.
    First, the wealth of the middle class would have been naturally 
protected. Suppose a homeowner has 20 percent equity in his home. A 20 
percent fall in house prices would have translated into a 20 percent 
reduction in his net wealth with SRMs, instead of the 100 percent 
reduction in net wealth with traditional mortgage. We would thus not 
have had the devastating increase in wealth inequality that we saw in 
Section I.
    Second, everyone would have benefited in the case of SRMs since we 
would have completely avoided the foreclosure mess. The costs 
associated with foreclosure externality discussed in Section I were all 
driven by forced sale of distressed homes. However, with SRMs, no one 
is underwater as mortgage payments naturally and automatically adjust 
to lower debt burden and keep homeowners in their home. Foreclosure 
prevention helps everyone by stabilizing house prices quickly and 
reducing overall wealth loss.
    Third, everyone benefits due to the large reduction in aggregate 
demand externality discussed in Section I. The reduction in aggregate 
demand externality is driven by three channels: (i) Foreclosure 
avoidance raises house prices, thus boosting spending. (ii) Wealth 
losses are now more equitably shared between lenders and borrowers. 
Since borrowers have significantly higher marginal propensity to 
consume than lenders, a more equitable distribution of losses raises 
aggregate spending. (iii) The increase in spending due to these two 
reasons lead to smaller job losses, which further help support a higher 
level of aggregate demand.
    The macro benefits of SRMs can also be understood by our own 
calculations that show that most of the job losses and reduction in 
aggregate GDP could have been avoided if SRMs were in place.
    SRMs should be attractive for a number of additional reasons as 
well. Our proposed mechanism is entirely market-based. There is no 
subsidy from the tax payers involved--ever. In fact, in a way the SRMs 
help reduce budget deficits in the long run. A significant share of the 
recent increase in U.S. Government debt has been driven by 
countercyclical fiscal deficits. The need for such fiscal deficits is 
greatly reduced due to the positive macro benefits of SRMs. Of course 
as always we need a sound banking system with sufficient capital, and 
all efforts to boost bank capital need to be encouraged.
    Another advantage of SRMs is that they give the lender a direct 
interest in worrying about potential bubbles. In particular, if many of 
the lenders fear that the market might be in a bubble, they will raise 
the interest rate for new mortgages since these mortgages are more 
likely to require downside protection. There is thus automatic and 
market-based ``leaning against the wind''. Not only do SRMs reduce the 
negative effects of a bursting bubble, but they also reduce the 
likelihood of those bubbles appearing in the first place.
    What can the Government do to promote SRMs? There is a vigorous 
debate regarding the interest deductibility of mortgage interest. Given 
the reliance of the housing market on this particular deduction, it is 
safe to assume that this deduction will largely remain in place. 
However, given the macro benefits of SRMs, I believe there is a strong 
social case to be made that the tax deductibility of interest should 
only be given to SRMs. If the Government made such a switch, the market 
would naturally move towards SRMs. Both the middle class and the U.S. 
economy would be better protected as a result.
Bibliography
Mian, Atif R., and Amir Sufi, 2009. ``The Consequences of Mortgage 
    Credit Expansion: Evidence From the U.S. Mortgage Default Crisis'', 
    Quarterly Journal of Economics 124: 1449-1496.
Mian, Atif R., and Amir Sufi, 2011a. ``House Prices, Home Equity-Based 
    Borrowing, and the U.S. Household Leverage Crisis'', American 
    Economic Review, August.
Mian, Atif R., and Amir Sufi, 2011b. ``Consumers and the Economy, Part 
    II: Household Debt and the Weak U.S. Recovery'', FRBSF Economic 
    Letter, January 18, 2011.
Mian, Atif R., and Amir Sufi, 2011c. ``What Explains High Unemployment? 
    The Deleveraging-Aggregate Demand Hypothesis'', Working Paper.
Mian, Atif R., Kamalesh Rao, and Amir Sufi, 2011. ``Deleveraging, 
    Consumption, and the Economic Slump'', conditionally accepted, 
    Quarterly Journal of Economics.
Mian, Atif R., Amir Sufi, and Francesco Trebbi, 2011. ``Foreclosures, 
    House Prices and the Real Economy'', NBER Working Paper #16685.
                                 ______
                                 
                    PREPARED STATEMENT OF AMY TRAUB
                      Senior Policy Analyst, Demos
                              June 6, 2013





















































































                   PREPARED STATEMENT OF NICK HANAUER
                         Second Avenue Partners
                              June 6, 2013
    For 30 years, Americans on the right and left have accepted a 
particular explanation for the origins of prosperity in capitalist 
economies. It is--that rich business people like me are ``Job 
Creators''--that if taxes go up, on us or our companies, we will create 
fewer jobs. And that the lower our taxes are, the more jobs we will 
create and the more general prosperity we'll have.
    Most Americans, and many of you in this room are certain that these 
claims are true.
    But sometimes the ideas that we know to be true are dead wrong. For 
thousands of years people were certain, positive, that earth was at the 
center of the universe. It's not, and anyone who doesn't know that 
would have a very hard time doing astronomy.
    My argument today is this: In the same way that it's a fact that 
the sun, not earth is the center of the solar system, it's also a fact 
that the middle class, not rich business people like me are the center 
of America's economy. I'll argue here that prosperity in capitalist 
economies never trickles down from the top. Prosperity is built from 
the middle out.
    As an entrepreneur and investor, I have started or helped start, 
dozens of businesses and initially hired lots of people. But if no one 
could have afforded to buy what we had to sell, all my businesses would 
have failed and all those jobs would have evaporated.
    That's why I am so sure that rich business people don't create 
jobs, nor do businesses, large or small. What does lead to more 
employment is a ``circle of life'' like feedback loop between customers 
and businesses. And only consumers can set in motion this virtuous 
cycle of increasing demand and hiring.
    That's why the real job creators in America are middle-class 
consumers. The more money they have, and the more they can buy, the 
more people like me have to hire to meet demand.
    So when businesspeople like me take credit for creating jobs, it's 
a little like squirrels taking credit for creating evolution. In fact, 
it's the other way around.
    Anyone who's ever run a business knows that hiring more people is a 
capitalists course of last resort, something we do if and only if 
increasing customer demand requires it. Further, that the goal of every 
business--profit--is largely a measure of our relative ability to not 
create jobs compared to our competitors. In this sense, calling 
ourselves job creators isn't just inaccurate, it's disingenuous.
    That's why our current policies are so upside down. When you have a 
tax system in which most of the exemptions and the lowest rates benefit 
the richest, all in the name of job creation, all that happens is that 
the rich get richer.
    Since 1980 the share of income for the richest 1 percent of 
Americans has tripled while our effective tax rates have fallen by 
approximately 50 percent.
    If it were true that lower tax rates and more wealth for the 
wealthy would lead to more job creation, then today we would be 
drowning in jobs.
    If it was true that more profit for corporations or lower tax rates 
for corporations lead to more job creation--then it could not also be 
true that both corporate profits and unemployment are at 50 year highs.
    There can never be enough super rich Americans like me to power a 
great economy. I earn 1,000 times the median wage, but I do not buy 
1,000 times as much stuff. My family owns three cars, not 3,000. I buy 
a few pairs of pants and a few shirts a year, just like most American 
men. Like everyone else, we go out to eat with friends and family only 
occasionally.
    I can't buy enough of anything to make up for the fact that 
millions of unemployed and underemployed Americans can't buy any new 
clothes or cars or enjoy any meals out. Or to make up for the 
decreasing consumption of the vast majority of American families that 
are barely squeaking by, buried by spiraling costs and trapped by 
stagnant or declining wages.
    This is why the fast increasing inequality in our society is 
killing our economy. When most of the money in the economy ends up in 
just a few hands, it strangles consumption and creates a death spiral 
of falling demand.
    Significant privileges have come to capitalists like me for being 
perceived as ``job creators'' at the center of the economic universe, 
and the language and metaphors we use to defend the fairness of the 
current social and economic arrangements is telling. For instance, it 
is a small step from ``job creator'' to ``The Creator.'' When someone 
like me calls themselves a job creator, it sounds like we are 
describing how the economy works. What we are actually doing is making 
a claim on status, power, and privileges.
    The extraordinary differential between the 15-20 percent tax rate 
on capital gains, dividends, and carried interest for capitalists, and 
the 39 percent top marginal rate on work for ordinary Americans is just 
one of those privileges.
    We've had it backward for the last 30 years. Rich businesspeople 
like me don't create jobs. Rather, jobs are a consequence of an eco-
systemic feedback loop animated by middle-class consumers, and when 
they thrive, businesses grow and hire, and owners profit--in a virtuous 
cycle of increasing returns that benefits everyone.
    I'd like to finish with a quick story.
    About 500 years ago, Copernicus and his pal Galileo came along and 
proved that the earth wasn't the center of the solar system. A great 
achievement, but extremely unpopular with the political leaders of the 
time.
    Remember that Galileo invented the telescope, so one could see, 
with ones own eyes, the fact that he was right. You may recall however, 
that the leaders of the time didn't much care, because if earth wasn't 
the center of the universe, then earth was diminished--and if earth was 
diminished, so were they. And that fact--their status and power--was 
the only fact they really cared about. So they told Galileo to stick 
his telescope where the sun didn't shine--and put him in jail for the 
rest of his life. And by so doing, put themselves on the wrong side of 
the facts, and history, forever.
    500 years later, we are arguing about what or whom is at the center 
of the economic universe. A few rich guys like me, or the American 
Middle class.
    But as sure as the sun is the center of our solar system, the 
middle class is the center of our economy. If we care about building a 
fast growing economy that provides opportunity for every American, then 
me must enact policies that build it from the middle out, not the top 
down.
    Lets not forget the fundamental law of capitalism. When workers 
have no money, businesses have no customers.
    Tax the wealthy and corporations--as we once did in this country--
and invest that money in the middle class--as we once did in this 
country. Raise the minimum wage--to $15.00. Those polices won't just be 
great for the middle class, they'll be great for the poor, for 
businesses large and small, and the rich.
                                 ______
                                 
                  PREPARED STATEMENT OF STEVEN D. HILL
       Director, Nevada Governor's Office of Economic Development
                              June 6, 2013

    Chairman Merkley, Ranking Member Heller, and Members of the 
Committee, after nearly two decades of Nation-leading growth and 
prosperity, followed by a recession of equal or greater magnitude, 
Nevada and its people are recovering.
    Nevada's focus is on an economy that is both vibrant and 
sustainable, anchored by our world-class tourism, gaming, and mining 
industries, but supported by emerging economic clusters offering good 
jobs across a diversified and forward-looking set of industries. Nevada 
was hit particularly hard when the housing bubble burst, and had to 
think differently in order to recover. With the leadership of our 
Governor and the legislature, and in partnership with the private 
sector, education, and other partners we have done so, and the results 
have started to show.
    Nevada has historically been a State in which the middle class not 
only could find a job, but could also ``get ahead.'' The State's major 
industries were growing and offered employment across a wide spectrum 
of professions. Many good-paying jobs, and a growing number of jobs, 
were available for candidates with modest education requirements. Job 
growth from 1990 through 2006 averaged nearly 5 percent, primarily 
driven by the gaming and construction industries. Unemployment was low, 
and demand for workers drove inflation adjusted wages up nearly 14 
percent between 2000 and 2006.
    But by 2007, Nevada was at the center of the housing crisis--a 
crisis not only for homeowners throughout the State, but also for the 
100,000 people in the construction industry who lost their jobs. While 
the State has turned the corner, again leading the Nation in home price 
appreciation over the past 12 months, and leading the Nation in 
unemployment reduction, per capita foreclosures remain the country's 
highest, more than 50 percent of middle class families remain 
underwater in their mortgages, and unemployment is 9.6 percent. Real 
progress has been made, but much work remains.
    Moving forward, Nevada's economy will be different. While tourism 
and gaming is recovering, major expansion in that industry will not, in 
and of itself, drive growth in the State. Construction will achieve 
equilibrium, but many of the jobs lost in that industry will not 
return. In order to offer our middle class that same opportunity to 
``get ahead,'' Nevada is intentionally embarking on a different 
economic trajectory. Emphasis is being placed on emerging sectors that 
can provide diverse, sustainable, and high-paying jobs--jobs in 
technology, advanced manufacturing and healthcare, jobs that innovate, 
jobs that export.
    The middle class needs resolution to the housing crisis that 
continues to affect so many, and they need opportunity for a good job. 
Much is left to do, but Nevada is on a positive trajectory.
1993-2007
    From 1993 through 2007, Nevada led the Nation in job growth, with 
the number of jobs in the State growing from 650,000 in 1993 to 
1,300,000 at its peak at the end of 2007, a nearly 5 percent compounded 
annual growth rate.
    Some key statistics:

    Median home price rose from $125,000 in 1995 to $320,000 in 
        2006

    Residential raw land cost rose from $40,000 in 1995 to 
        $560,000 in 2006

    Residential building permits rose from 20,000 in 1993 to 
        46,000 in 2006

    Household earnings rose from $37,000 in 1993 to $62,000 in 
        2007

    During this same period, construction employment grew from 45,000 
to 146,000, moving from approximately 6.5 percent of total employment 
to 11.5 percent at its peak in mid-2006, compared with a relatively 
stable national average of 5 percent. In other words, Nevada had 85,000 
more construction workers employed than the national average would 
predict.
    While in retrospect, the bubble was obviously building, Nevada's 
most reliable historical leading indicator--new hotel room 
construction--was pointing to even more growth. With 40,000 new rooms 
to be built, demand for an additional 130,000 jobs, 100,000 homes, and 
all of the required infrastructure such as schools, streets, and 
utilities, as well as the follow-on commercial space would be needed. 
With good reason, Nevada's focus in 2005 was how to deal with an 
accelerating rate of growth.
2008-2010
    But growth and prosperity--even a sense of security--came to an 
abrupt halt as 2007 ended and 2008 began. The housing bubble burst, 
construction fell precipitously, the recession hit the gaming and 
tourism industry, and Nevadans lost jobs in record numbers.
    Key statistics for the period:

    Median home prices fell from $320,000 to $125,000

    Residential building permits fell from 46,000 to 5,000

    Construction employment fell from 146,000 to 50,000--a loss 
        of 96,000 jobs

    Total employment fell from a high of 1,286,000 to 
        1,111,000--a loss of 175,000 jobs

    Unemployment rose from a low of 4.2 percent in December of 
        2006 to a high of 14.0 percent in September 2010

    Throughout this period, Nevada led the Nation in both unemployment 
and foreclosures--a 1-2 punch that put the middle class on the mat. The 
lack of job opportunities, while being anchored to underwater 
mortgages, caused many to seek work where they could find it--often at 
lower pay and with fewer hours. The uncertain national and global 
economic outlook only served to exacerbate the situation.
A Focus on Economic Development
    Entering 2011, there was urgency throughout Nevada to bring jobs to 
the State, help existing industries recover and grow a more diverse 
economy. Following his election in 2010, Governor Sandoval worked with 
the 2011 Legislature to restructure, refocus, and reenergize the 
State's economic development effort.
    Following the direction laid out by the Governor and the 
legislature, Nevada has embarked on a parallel path--doing everything 
possible to get Nevadans back to work quickly while working to build on 
its strengths to grow future economic sectors that provide good-paying, 
stable jobs.
    To create the best job-creation environment possible, the 
Governor's first action in office was an executive order freezing 
regulations and ordering all State agencies to review existing 
regulations to determine which could be eliminated or streamlined. This 
effort resulted in over 600 regulations being eliminated and the reform 
of over 1,000. But regulatory reform is not just about eliminating 
regulations. Clarity, consistency, and response speed are equally 
important. Nevada's focus on assisting job creation includes a focus on 
finding a way to say ``yes'' and doing so quickly, while upholding 
standards necessary for the safety and health of our workers and 
citizens.
    Immediate attention was also directed to the nearly 100,000 
construction workers and 50,000 hospitality and gaming employees who 
were out of work. Many of these would need to find employment in 
different industries and could not wait years to be retrained in order 
to do so. Manufacturing, logistics and distribution, mining, and back 
office services were all identified as areas where the skills of out of 
work Nevadans could be utilized. Expanding companies have recognized 
this and are moving to the State.
    Shorter-term training programs, aligned with near-term employment 
opportunities, were also given high priority. Certificate programs in 
information technology, health care, and manufacturing have been 
emphasized. Community colleges have become adept at designing short-
term programs for businesses that need workforce training to meet a 
particular need--training that can be done on campus or at the 
business.
    Over the coming 3 to 5 years, Nevada looks to develop and grow 
regional industry clusters, capitalizing on the State's strengths, and 
focusing on exporting, innovation and the commercialization of 
research, and advanced manufacturing. Some of the key initiatives 
include:

    The only statewide response to the Federal Aviation 
        Administration's Screening Information Request to be designated 
        at one of six test sites for unmanned aircraft systems. Nevada 
        offers the Nation's best airspace for safe and private testing, 
        vast experience in the field, and a welcoming environment 
        evidenced by letters of support from our entire congressional 
        delegation, the Governor and legislature, and a host of 
        counties and cities across the State. The industry has very 
        high growth potential and can bring thousands of good-paying 
        jobs to Nevada.

    Early this year, partnering with IBM, Nevada launched a 
        water Center of Excellence. The COE aims to combine expertise 
        from higher education, including the Desert Research Institute, 
        globally recognized for its work in the water and energy field, 
        and the Southern Nevada Water Authority, with data analytics to 
        develop cutting-edge products, services, and methods to address 
        water needs in the State and around the world.

    The 2013 legislature passed the Nation's first online 
        gaming legislation, allowing intrastate play to be governed by 
        the world's most respected regulatory framework. The 
        legislation also permitted compacts to be developed with other 
        States. Building on Nevada's position as the global leader in 
        gaming, the new industry can bring large numbers of jobs to the 
        State in a broad variety of fields including digital media, 
        information technology and cyber security, and professional 
        services.

    The 2013 legislature provided funding for the Knowledge 
        Fund, a joint effort between the Governor's Office of Economic 
        Development and the research institutions within the Nevada 
        System of Higher Education. The Knowledge Fund is designed to 
        fund specific projects to advance the highest opportunity 
        research and commercialization projects within the university 
        system, with a focus on product, service, and job creation, and 
        company spin-offs.

    In addition to water technology and efficiency, Nevada is 
        advancing its sustainability position in both energy and 
        agriculture. Recently passed legislation will replace coal with 
        cleaner energy sources including an additional commitment to 
        renewable energy. Nevada possesses abundant geothermal and 
        solar resources, offering not only the opportunity for clean 
        energy and energy security to the State and the region, but 
        also a host of good jobs. The State sponsored an Indoor 
        Agriculture conference, drawing attendance from around the 
        State and the world.

    Nevada also looks to further capitalize on its connection 
        to the world and its proximity to the nearly 60 million 
        potential customers in the western U.S. The State's geographic 
        position, Las Vegas' attraction around the globe, and the 
        State's business environment make Nevada an ideal location for 
        manufacturing, assembly, and distribution, an industry that is 
        already an important sector in the State. Construction of I-11 
        connecting Las Vegas and Phoenix, the two largest cities in the 
        country without an interstate highway connection, and an 
        important component in the CANAMEX Corridor, will be key to 
        expanding this industry.

    Nevada also has strong and growing Hispanic and Asian 
        populations with established businesses connections in Latin 
        America and Asia, providing a platform for growth. The Governor 
        recently led trade missions to China and Korea, and will lead a 
        mission to Mexico in July. Companies that export are typically 
        more stable and pay higher wages, and these trade missions 
        facilitate new business relationships and strengthen existing 
        ones.

    Sector Councils in each of 9 industries have been formed, 
        bringing together leaders in business, education, labor, and 
        Government to determine current and future workforce needs. 
        These Councils identify both labor and skill gaps, help direct 
        resources, and bring alignment to the process of training for 
        real, available jobs.
Recovery: 2011-2013
    Beginning in late 2010, Nevada started to recover. The pace of 
recovery was somewhat slow and uneven in 2011 and led primarily by the 
tourism and gaming industry, but began to accelerate in 2012 and into 
2013. During the last 12 months companies such as Apple, Solar City, 
Take Two Interactive, and IBM have invested in the State. Just last 
week Berkshire Hathaway's MidAmerican Energy agreed to purchase the 
State's largest electric utility, NV Energy. Nevada now leads the 
Nation in both the rate of unemployment decline and home price 
appreciation.
    Key statistics for the period:

    Median home price has increased from $125,000 to $150,000

    Land for new home construction is now $400,000 per acre

    51,000 jobs have been added from the September 2010 low, 
        30,000 jobs in 2012 alone

    Construction employment has increased slightly but is just 
        4.5 percent of total employment

    Unemployment has decreased from 14.0 percent to 9.6 
        percent, and the size of the workforce has started to increase

    Additional signs of growth can be seen. The gaming industry, which 
led the State out of the recession by adding 20,000 employees during 
2011 and 2012, is strengthening. Projects totaling nearly $10 billion 
have been announced with the last 3 months along the Las Vegas Strip, 
including an expansion of the Las Vegas Convention Center, a major new 
hotel casino, the reopening of the Sahara Hotel, and an arena. A number 
of exciting projects across a broad spectrum of industries are on the 
horizon.
    During the coming 3 to 5 years. And with continued focus on 
innovation, advanced manufacturing, exporting, and improved workforce 
development, job opportunities in the State will not only grow in 
number, but the diversity and quality of jobs will improve, allowing 
the middle class to grow in number and once again, get ahead.
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