[Senate Hearing 113-536]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 113-536

 
WHO IS THE ECONOMY WORKING FOR? THE IMPACT OF RISING INEQUALITY ON THE 
                            AMERICAN ECONOMY

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                            ECONOMIC POLICY

                                 of the

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

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                                   ON

 EXPLORING THE STATE AND TRENDS OF INEQUALITY AND WEALTH CONCENTRATION 
IN THE UNITED STATES AND ITS IMPACT ON THE MIDDLE CLASS AND THE ECONOMY 
                                OVERALL

                               __________

                           SEPTEMBER 17, 2014

                               __________

  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

                       Troy Cornell, 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

                              ----------                              

                     WEDNESDAY, SEPTEMBER 17, 2014

                                                                   Page

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

                               WITNESSES

Heather C. McGhee, President, Demos..............................     3
    Prepared statement...........................................    26
Amir Sufi, Ph.D., Chicago Board of Trade Professor of Finance, 
  University of Chicago Booth School of Business.................     5
    Prepared statement...........................................    83
Claudia Viek, CEO, CAMEO--California Association for Micro 
  Enterprise Opportunity.........................................     7
    Prepared statement...........................................    87
Adam S. Hersh, Ph.D., Senior Economist, Center for American 
  Progress.......................................................     9
    Prepared statement...........................................    89

              Additional Material Supplied for the Record

Letter from the National Asian American Coalition................    93
Letter from the Los Angeles Latino Chamber of Commerce...........    95
Letter from Reverend Mark E. Whitlock, II, Senior Minister, COR 
  AME Church, and Chairman of Corporate Partnerships, 5,000 
  African Methodist Episcopal Churches...........................    97
Letter from the Albina Opportunities Corporation.................    99

                                 (iii)


WHO IS THE ECONOMY WORKING FOR? THE IMPACT OF RISING INEQUALITY ON THE 
                            AMERICAN ECONOMY

                              ----------                              


                     WEDNESDAY, SEPTEMBER 17, 2014

      U.S. Senate, Subcommittee on Economic Policy,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 2:32 p.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Jeff Merkley, Chairman of the 
Subcommittee, presiding.

           OPENING STATEMENT OF CHAIRMAN JEFF MERKLEY

    Senator Merkley. I call this hearing of the Economic Policy 
Subcommittee of the Committee on Banking, Housing, and Urban 
Affairs to order.
    This hearing is titled ``Who Is the Economy Working For? 
The Impact of Rising Inequality on the American Economy.'' And 
put in simple terms, it is a chance to look at how inequality 
is driving the results of the economy, and whether it is 
driving further inequality, and how this reverberates back 
through our political system in terms of additional drivers of 
economic policy decisions.
    So I am delighted to have our four folks here today to 
testify. I will make some opening comments, and then if any of 
my colleagues arrive, we will see if they have opening 
comments, and we will jump right into your testimony.
    Back home in my State of Oregon, I live in the same 
working-class neighborhood that I grew up in since the third 
grade. Families are struggling to stay afloat, and there is 
growing fear that income inequality is undermining the 
foundations of our economy for working families. We are seeing 
more and more of the living-wage jobs lost during the Great 
Recession, replaced with lower-wage jobs that pay minimum wage 
or near minimum wage. Indeed, 60 percent of the jobs lost in 
the Great Recession were living-wage jobs, and only 40 percent 
of the jobs that we are gaining back fall into the same 
category of living-wage or good-paying jobs. More and more 
families are chasing part-time jobs, low to no benefits, and 
near to minimum wage, which is not a foundation for a family to 
thrive.
    This trend of increasing inequality is diminishing not only 
our economic strength but also our working families' trust in 
our political system and the ability of policymakers to make 
smart decisions on economic policy in regard to restructuring 
the results to enable families to thrive.
    Growing inequality has rightfully gained national interest 
in recent years. A report from the Congressional Budget Office 
found that from 1979 to 2007 income growth was concentrated 
among the highest earners, with the average after-tax household 
income for the top 1 percent rising 275 percent. And for the 
rest of the top 20, it still did well but rose only 65 percent. 
But for the bottom 20 percent over that time period, 1979 
through 2007, it rose just 18 percent. A very small rise 
compared to that 275 percent for the top 1 percent.
    A separate report from the Economic Policy Institute 
asserts the income losses during the Great Recession were 
similarly unequal, with the bottom fifth experiencing an 
average income loss of 2.7 percent per year while the top fifth 
dropped an average of 0.4 percent per year.
    This difference is particularly pronounced when we look at 
the cumulative change in real annual wages. Between 1979 and 
2012, the cumulative change in wage growth was 34.8 percent. 
The wage growth for the bottom 90 percent of the people was 
less than half that, at 17 percent. Thus, profound impacts on 
the families and across the economy.
    Today there is evidence that unequal concentrations of 
wealth are affecting our policymaking in ways that could make 
it more difficult for our Nation to create a stronger middle 
class and reignite the middle-out economic growth. Every day 
thousands of lobbyists come onto the Hill and seek to influence 
policy debates, usually in favor of the interests of more 
affluent citizens. We must make sure that the voices of 
millions of Americans with low and middle incomes are not 
drowned out by those with far more resources. It is not a leap 
to suggest that recent decisions like that of Citizens United 
has further concentrated such influence.
    It is critical that policymakers work to better understand 
these trends and ensure that we are doing everything possible 
to support policies that broadly benefit families across 
America, policies that work for working Americans, and not 
simply working well for the best-off.
    We have with us today a panel of experts who will discuss 
the trends and economic impacts of inequality in the United 
States. Thank you, all of you, for your participation today, 
and I am going to go ahead and proceed with the introductions 
and then invite your testimony.
    Heather McGhee is President of Demos, a public policy 
organization working for ``an America where we all have an 
equal say in our democracy and an equal chance in our 
economy.'' Before taking over as President in March 2014, Ms. 
McGhee served as Vice President of policy and outreach at 
Demos. She is a frequent contributor on MSNBC, and her 
opinions, writing, and research have appeared in numerous 
outlets, including the Wall Street Journal, USA Today, National 
Public Radio, the Washington Post, and the New York Times. Ms. 
McGhee holds a B.A. in American studies from Yale and a J.D. 
from the University of California at Berkeley's Boalt School of 
Law.
    Dr. Amir Sufi is the Chicago Board of Trade Professor of 
Finance at the University of Chicago Booth School of Business. 
He graduated with honors from the Walsh School of Foreign 
Service at Georgetown University with a bachelor's degree in 
economics and has earned a Ph.D. in economics from the 
Massachusetts Institute of Technology. He is co-author of the 
book ``House of Debt,'' which was published just earlier this 
year.
    Claudia Viek is CEO of California Association for Micro 
Enterprise Opportunity, a Statewide network of organizations 
that promotes economic opportunity through entrepreneurial 
training and micro loans. She has been a pioneer in both the 
micro enterprise and business incubation fields for over 25 
years, including serving as executive director of the 
Renaissance Entrepreneurship Center and founding the Pacific 
Network of Business Incubators from Baja to Alaska. She is the 
past President of the San Francisco Bay Area chapter of the 
National Association of Women Business Owners.
    And Dr. Adam Hersh is a Senior Economist at the Center for 
American Progress, focused on economic growth and inequality in 
the United States, China, and the global economy. He has co-
authored a report, ``The American Middle Class, Income 
Inequality, and the Strength of Our Economy: New Evidence in 
Economics.'' He publishes and is cited regularly in both 
academic and popular venues and appears regularly on media 
outlets such as NPR, CNBC, and BBC. He earned a Ph.D. in 
economics from the University of Massachusetts, Amherst, and a 
B.A. in international political economy at the University of 
Puget Sound.
    Before we begin, I will just ask if my colleague Senator 
Warren has any introductory comments she would like to make.
    Senator Warren. No, Senator Merkley. The only thing I want 
to say is thank you very much for having this hearing, for 
pulling together such an illustrious panel. This is a topic we 
need to talk about--we need to do more than talk about; we need 
to do some things about. And I just appreciate your terrific 
leadership on this, and I want us to get straight to their 
testimony and our questions.
    Thank you.
    Senator Merkley. Great. Before I begin, I would like to 
request unanimous consent to insert into the record letters 
from the National Asian American Coalition, the Los Angeles 
Latino Chamber of Commerce, the AME Corporate Partnerships, and 
Albina Opportunities Corporation of Portland, Oregon.
    Senator Merkley. Let me also ask that the record remain 
open for 1 week for additional statements and questions from 
Members.
    With that, we will begin with our 5-minute statements. Ms. 
McGhee, thank you for coming.

        STATEMENT OF HEATHER C. McGHEE, PRESIDENT, DEMOS

    Ms. McGhee. Thank you, Chairman Merkley and Senator Warren 
and Members of the Subcommittee, for this opportunity to 
testify. My name is Heather McGhee, and I am the President of 
Demos, a nonprofit public policy organization.
    As requested, Demos' testimony lays out the experience of 
inequality at the household level. Of course, it is actually a 
story of divergent experiences among our fellow Americans, of 
rapid wealth accumulation for the already wealthy at a time 
when half of Americans could not pay a $400 bill without going 
into debt or selling something.
    The testimony includes the tight monthly budget of Patricia 
Locks, who has worked at the same company for 11 years, and we 
compare her experience with that of her company's majority 
owners, the six richest Walton family heirs, whose net worth is 
higher than the combined assets of at least 41 percent of 
American households.
    We also describe the state of public higher education, 
formerly the great equalizer, where cuts to taxes and spending 
have made the new price of entry into the middle class so 
expensive that a student from a low-income family would have to 
pay 95 percent of her family's income to go to college for a 
year, and that is after financial aid.
    We also analyze the major structural drivers of inequality 
from globalization to financialization, and the good news is 
that these megatrends have not made this degree of inequality 
inevitable. Policy choices have brought us here, and different 
ones can lead us out.
    So why have our elected representatives not taken urgent 
national action when the lights are dimming on the American 
dream?
    Today a cashier who earns just $7.25 an hour can only buy 
$7.25 an hour worth of food for her family. She can only buy 
$7.25 an hour worth of education for her children. But she also 
only seems to merit $7.25 worth of esteem in our political 
culture, and most dangerously, only $7.25 worth of voice in our 
democracy.
    And I would like to spend the remainder of my time on the 
topic of our democracy, as the data now reveal that economic 
inequality and political inequality are mutually reinforcing.
    In a more than $8 billion election cycle, less than 1 
percent of Americans gave over $200 to a Federal candidate in 
2012, and it took just 32 super PAC donors to outspend the 
millions of small donors to Governor Romney and President Obama 
combined.
    So why does that matter? Demos has been working with a 
group of leading political scientists who are now able to 
quantify the compound effects of the distortions in our 
democracy on the very subject matter of this Subcommittee--on 
our economic policies.
    The conclusion? When the policy preferences of the donor 
class diverge from those of the working and middle classes, 
Congress votes with the donor class. The policy divergence is 
most pronounced on economic issues. Significant differences 
between the wealthy and the general public are evident in such 
areas as taxes and deficits, trade and globalization, 
regulation of business, labor protections, the social safety 
net, and the overall role of Government. The general public is 
more open than the wealthy to a variety of policy measures 
designed to reduce inequality and expand economic opportunity.
    Take the minimum wage. Over 70 percent of Americans, 
including over 50 percent of Republican voters, want it to be 
high enough so that a full-time worker can keep his or her 
family out of poverty. But when asked, members of the donor 
class, only 40 percent of them agree with that proposition. So 
add to the donor class' disapproval that 80 different corporate 
interests that lobbied against a wage increase in recent years, 
and the will of the majority gets drowned out.
    Or take higher education: 78 percent of the general public 
believes that the Federal Government ought to do everything in 
its power to make sure that everyone who wants to go to college 
can do so. But only 28 percent of the wealthy are in favor.
    Fortunately, there are solutions to political inequality. 
Reforms like the public financing system and the Fair Elections 
Now Act would allow more officials more time with their 
constituents and less time on call time with wealthy donors. 
And the good news is that money and politics reforms are 
extremely popular with the American public across the 
ideological spectrum. In fact, support for solutions from 
public financing to a constitutional amendment do not fall 
below 7 out of 10 from libertarians to progressives. Demos, 
when analyzing this bipartisan opinion data, actually ended up 
calling the report ``Citizens Actually United.''
    Finally, I just will want to conclude with this: We cannot 
strengthen our democracy and, therefore, our economy without 
remembering the urgency of addressing the root word of the word 
``democracy,'' which is the ``demos,'' the people of a Nation. 
Ours is the world's great experiment in democracy. The 
ancestral strangers who have come here with ties from every 
community on the globe have been met here with the promise that 
out of many, we could become one.
    But forging a sense of common purpose amidst that great 
diversity is not easy, and it takes leadership. No other Nation 
has done it on the scale that we are currently endeavoring to 
do it, and certainly no Nation for whom racial hierarchy was 
the economic policy for most of our history.
    I offer that it is no coincidence that the rules have 
changed to make it harder for the average American to get by 
over the same decades when the face of the average American has 
changed and when social distance has increased between regular 
citizens and the nearly all-white wealthy donor class which has 
such outsized influence on our policymaking.
    At Demos we believe that if there is such a thing as 
American exceptionalism, our great diversity is its source. In 
the 20th century, America placed a bet on the children of 
immigrants and the descendants of slaves, and those public 
investments spurred on an economic force that changed the 
world.
    Today the most diverse generation in American history is 
ready for that same commitment, for that commitment to the 
human capacity that lies within all of us, and to that very 
American idea that we all deserve an equal say and an equal 
chance.
    Thank you.
    Senator Merkley. Thank you very much, Ms. McGhee.
    Dr. Sufi.

STATEMENT OF AMIR SUFI, Ph.D., CHICAGO BOARD OF TRADE PROFESSOR 
   OF FINANCE, UNIVERSITY OF CHICAGO BOOTH SCHOOL OF BUSINESS

    Mr. Sufi. Chairman Merkley, Senator Warren, Members of the 
Subcommittee, thank you very much for the opportunity to 
testify. My name is Amir Sufi. I am the Chicago Board of Trade 
Professor of Finance at the University of Chicago Booth School 
of Business. My research area is macroeconomics and finance, 
and I would like to give you some thoughts on the current U.S. 
economic situation.
    As Senator Merkley noted, it is not good. There is 
something very wrong with the U.S. economy. We all know that 
the Great Recession was the most severe economic downturn since 
the Great Depression. What is perhaps less well understood is 
that the recovery since 2009 has been dismal. From the end of 
recession through 2014, real economic growth has averaged 2.1 
percent per year, far lower than the 3.5 percent average annual 
growth that the U.S. economy generated from 1947 to 2007. The 
decline in the unemployment rate over the past 2 years should 
not be a cause for celebration. It is driven primarily by 
households leaving the labor force. There are currently 4 
million fewer Americans aged 25 to 54 working today compared to 
2006.
    How did we get into this mess? And why is it taking so long 
to recover?
    My research with Atif Mian at Princeton University suggests 
that the culprit is the devastation of wealth suffered by 
middle- and lower-income American households during the Great 
Recession. The weak recovery is due to the lack of any rebound 
in wealth among these households since the end of the 
recession.
    The numbers are simply startling. Americans below the top 
25th percentile of the wealth distribution have lower net worth 
in real terms today than they did 15 years ago. For Americans 
below the median of the wealth distribution, it is even worse. 
For example, those in the lower-middle quartile of the wealth 
distribution have seen their net worth plummet from $65,000 in 
2007 to $40,000 in 2010, with a further decline to $38,000 in 
2013. That puts their wealth in 2013 below their 1989 level. 
The Great Recession has wiped out 25 years of wealth 
accumulation.
    The disproportionate negative impact of the Great Recession 
on the net worth of lower-wealth Americans may at first seem 
surprising, but it makes perfect sense with an understanding of 
how the financial system operates. Richer Americans save a much 
higher fraction of their income, ultimately holding most of the 
financial assets in the economy: stocks, bonds, money market 
funds, and deposits. These savings are lent ultimately by banks 
to middle- and lower-income Americans, primarily through 
mortgages.
    There is nothing sinister about the rich financing the home 
purchases of the poor. But it is crucial to note that the 
borrowing takes the form of debt contracts which leave the 
borrower with the first losses in case house prices fall. The 
use of mortgage debt within the financial system gives the 
holders of financial assets protection against a fall in house 
prices. But it provides this insurance by concentrating the 
brunt of the economic downturns on borrowers. The standard 
mortgage contract is inflexible. The same amount is owed even 
if house prices and the economy collapse. Given that 85 percent 
of the financial assets in the U.S. economy are held by the top 
20 percent of the wealth distribution, the financial system's 
reliance on inflexible debt contracts means it insures the rich 
while placing an inordinate amount of risk on middle- and 
lower-net-worth households.
    As we illustrate in our research, it was the massive 
pullback in spending by indebted households that triggered the 
Great Recession. The financial system concentrated the collapse 
in home values on exactly the households that were prone to 
cutting spending most dramatically in response. Further, the 
lack of any increase in the net worth of lower- and middle-
income Americans helps explain why the recovery in household 
spending has been so weak.
    Going forward, there are two important lessons from the 
framework we outline in our research.
    First, encouraging borrowing by lower- and middle-income 
Americans may temporarily boost spending, but it is not a path 
to sustainable economic growth. We witnessed this in the 
subprime mortgage market during the housing boom, and we are 
seeing an aggressive expansion of auto loans currently to lower 
credit score individuals. Credit card originations are 
following a similar pattern, albeit to a lesser degree. The 
problem is that these lower credit score borrowers are not 
seeing any improvement in real income growth. Credit growth 
without income growth is a recipe for disaster. We desperately 
need higher income growth for low- and middle-income Americans, 
and policymakers should tackle this problem directly rather 
than encouraging the extension of credit. Two suggestions I 
would make for product would be the expansion of the earned 
income tax credit and public infrastructure projects that can 
boost productivity while putting Americans to work.
    Second, the financial system in its present form 
concentrates risk on lower-wealth households who are least able 
to bear it. The current policy and regulatory framework 
encourages such a system, even though it has disastrous effects 
for the economy. We must encourage the financial system to 
share risk with lower- and middle-income Americans instead of 
making them bear all the risk themselves.
    I am happy to talk more about student debt, which is 
another market where I see this lesson having a lot of power.
    I am happy to expand on these proposals in my remaining 
time, and thank you for the time.
    Senator Merkley. Thank you very much.
    Ms. Viek.

 STATEMENT OF CLAUDIA VIEK, CEO, CAMEO--CALIFORNIA ASSOCIATION 
                FOR MICRO ENTERPRISE OPPORTUNITY

    Ms. Viek. Thank you, Chairman Merkley, and thank you also, 
Senator Warren, for attending today, and for this opportunity 
to submit testimony, and I am really going to be talking about 
the impact on small business and also the opportunities 
offered.
    So let me start out first, though, with a brief story. 
Johneric Concordia is a young man who was laid off as a baggage 
handler at United Airlines about 3 years ago. He loved to 
barbecue in his neighborhood in Filipinotown in Los Angeles. He 
and his uncles would compete to see who made the best sauce. So 
when he lost his job, he sought business counseling to realize 
his dream to start his own barbecue catering business. He 
raised $8,000 off of his Facebook wall friends and family, and 
then he bought a truck-mounted barbecue rig. Just about a year 
later, he opened his first restaurant called Parks Finest in 
Echo Park neighborhood. He has now hired nine of his homies, 
his friends, to work for him, and he is ready for a larger loan 
from a local nonprofit lender.
    Now, Parks Finest is not a one-off. I have many, many 
similar stories from my members like the American 
Sustainability Business Council, the National Asian American 
Coalition, and from the 85 CAMEO members who serve 
entrepreneurs with small-dollar loans and coaching. Johneric 
and many other people share the desire and ability to 
contribute to our economy by being their own boss, and then 
they can go on to employ others. They are exactly the kind of 
people we should be investing in.
    If we are serious about addressing income inequality, then 
we need to support entrepreneurship across a spectrum, that 
this is a real pathway to closing the wealth gap and generating 
new jobs.
    There are 26 million small businesses in the United States, 
and most of them are self-employed people. Just imagine, if one 
in three created one job, we could have full employment.
    I want to point out that a minimum of a million new jobs a 
year could be created through bank investment in lending and 
technical assistance programs to startup business. And my 
friend the Reverend Mark Whitlock, who is chair of corporate 
relations for the 5,000-member National AME Church, told me 
recently that these new jobs would address the 50 percent 
unemployment rate among black and Latino youth.
    The Congressional Budget Office found that the richest 
among us own businesses. So to solve inequality, instead of 
handouts and promises of trickle-down job creation, let us help 
people create their own businesses and have them close the 
income inequality gap themselves.
    I am going to refer to something Dr. Sufi is aware of: 88 
percent of minority business owners finance their small 
businesses from home equity compared to about 25 percent 
overall. So the loss of home equity disproportionately affects 
minority-owned businesses.
    In California, almost 2 million homeowners are still 
underwater--also true of Nevada, even though Senator Heller is 
not here. I wanted to say that, too. And from this fact we can 
assume that minority-owned businesses have not been able to 
fully recover from the downturn.
    Business ownership is an effective strategy to reduce 
income inequality. The median net worth of business owners 
overall is 2.5 times that of nonbusiness owners, and the median 
net work for African American business owners is 8 times higher 
than nonbusiness owners.
    The Association for Enterprise Opportunities' recent report 
showed that households headed by women who own a micro business 
generate up to $13,000 more in annual household income than 
similar households without a micro business owner. Now, this 
may not sound like a lot of money, but it can be the difference 
between sending one's child to college or buying a home. And 
the same report showed that the children in families with a 
micro business owner do better in terms of education and social 
mobility. So self-employment, business ownership, and 
entrepreneur, again, across the spectrum are key ways for 
lower-income people to become middle-income.
    We know from the Aspen Institute studies and I know from my 
personal experience of 25 years in this field that when 
businesses get training and coaching help, 90 percent are still 
in business after 5 years as compared to 50 percent of those 
that did not get such help. Also, businesses that received 
capital and services from a nonprofit organization have a 
median annual revenue growth 30 percent higher than those that 
do not get help. And when micro businesses succeed, they create 
on average another two jobs.
    Currently, our bank regulators are proposing giving extra 
Community Reinvestment Act credit to banks that provide small 
dollar micro loans in low- and moderate-income communities. 
This policy could have a major impact on new self-employment 
and job growth in communities that have not recovered from the 
recession.
    So if there is one thing that you remember from my 
testimony today, let it be how small business creation and 
entrepreneurship can reduce income inequality, and they can 
bring hope to our communities that have so much untapped 
entrepreneurial potential. Thank you.
    Senator Merkley. Thank you very much for your testimony.
    Dr. Hersh.

STATEMENT OF ADAM S. HERSH, Ph.D., SENIOR ECONOMIST, CENTER FOR 
                       AMERICAN PROGRESS

    Mr. Hersh. Chairman Merkley, Senator Warren, thank you so 
much for inviting me to testify today. My name is Adam Hersh. I 
am a Senior Economist at the Center for American Progress. I 
was asked to focus more narrowly on the role of trade in this 
story of U.S. inequality and economic growth.
    International trade and investment are critical parts of 
the U.S. economy. They always have been, and they always will 
be. But trade raises complicated policy issues because it is 
simultaneously a cause of inequality and of the innovation and 
investment that leads to our growth.
    Trade globalization is one factor among several responsible 
for the staggering rise of U.S. income and wealth inequality 
since the late 1970s. Declining unionization and the real value 
of the minimum wage, decreasing tax progressivity, increased 
business short-termism, and focus on financial profits, and 
shifting technologies all have played roles. But economists do 
not really debate whether trade has distributional impacts; we 
debate how big those impacts are. And estimates that range from 
about 10 percent to 52 percent of the overall increase in U.S. 
wage inequality is attributable to increased trade.
    Trade's impact on inequality happens both directly through 
job and income losses when businesses shrink, close, or move 
overseas, and they happen indirectly through the spillover 
effects that can saddle entire regional economies in localized 
states of depression. The combined effects weigh not just on 
those families and businesses impacted by trade, but they also 
pass through to our public budgets with lower tax revenues 
collected and increased expenditures on social insurance.
    To be clear, there are many positive economic benefits from 
trading. Opportunities for bigger markets and specialization 
create incentives for innovation that propel overall growth. 
Access to a broader variety of stuff at lower prices raises our 
living standards. But the trend of runaway inequality over the 
past generation already takes into account this effect of lower 
consumer prices when we measure incomes, wages, and wealth 
adjusted for inflation.
    More trade does not automatically equal more people getting 
ahead. Two new realities face lawmakers in approaching these 
issues of trade and inequality. First, the gravitational center 
of the world economy is shifting to the east and to the south, 
that is, to developing countries, where wages, regulatory 
standards, and norms of rule of law and transparent commercial 
exchanges are far from the level that they are in the United 
States, Europe, or other advanced economies. Already half of 
world growth is coming from the developing world, and that 
share is set to rise going forward in the future.
    The second new reality is the transnationalization of 
businesses through offshoring. Trade used to be mainly an 
arm's-length affair, trading between countries. But today fully 
half of U.S. imports are transactions between related corporate 
entities. A substantial additional share of imports are also 
offshore trade through unrelated business parties.
    Transnationalization makes it easier for companies to take 
advantage of opportunities for labor and regulatory and tax 
arbitrage. That creates a race to the bottom for economic 
development and undermines the social contracts underlying our 
economy and those of our trading partners.
    This brave new world requires us to rethink the means by 
which the United States encourages economic growth beyond just 
trade policy, as well as rethinking what success means, not 
being measured just in increases in trade and GDP.
    The questions before lawmakers are: How should the United 
States engage trading partners in an increasingly open and 
competitive world in order to grow our economy? And what should 
the United States do to make sure that workers and businesses 
in the United States can thrive in this environment?
    First, in order to have a strong trading economy, we need a 
strong overall economy, and there is increasingly broad 
consensus among professional economists that high inequality is 
extremely detrimental not only to current economic growth but 
to future growth as well. This is the case because when we talk 
about the economy, we are talking about what is happening to 
people and how people are faring in their lives. An economy 
delivering equitable growth creates the financially secure 
families who can invest in human capital, the health and 
education that creates a productive, innovative, workforce. 
Families can provide a stable, strong consumer demand that 
entices business investment. And strong families can provide 
would-be entrepreneurs with the financial security to take the 
risk on starting a new business.
    Economies with lower inequality and stronger middle classes 
also have more stable financial systems, better investment in 
public goods, better quality of governance in public and 
private institutions, lower crime, and less political 
polarization. Taken as a whole, lower inequality is the central 
thread that runs through essentially all the factors economists 
identify as being important for growth. In other words, a 
vibrant U.S. economy does not trickle down from the super rich 
but, rather, it springs forth from the well of a thriving 
middle class. And over the past generation, America's middle-
class well seems to be running dry.
    Congress should commit to investments that build the 
foundations for strong growth with a broad middle class in 
order to have a strong overall economy and a strong trading 
economy. This means more investments in making broadly 
available quality education, modernizing our infrastructure, 
investing in scientific research and development, replacing 
outdated trade adjustment assistance programs with a more 
universal dislocated worker program, and upholding standards 
for workplace rights and protections, including by extending 
paid sick/family leave and pay equity.
    Second, Congress should focus on trade policy as well to 
grow the economy from the middle out. To do so, Congress should 
press U.S. trade negotiators to establish strong, enforceable 
standards for open and fair competition in the global economy. 
This would include going beyond the May 10th agreement on labor 
and environmental rights to include things like currency 
manipulation, ensuring public policy space for 
nondiscriminatory regulation, enforcing competitive neutrality 
with State-invested commercial enterprises, and more.
    These rules alone mean little if we do not have the ability 
and resources to enforce the rules to ensure that we are 
receiving these gains from trade. Therefore, Congress should 
also increase the resources available for U.S. trade enforcers, 
doubling the funding to ITEC, the Interagency Trade Enforcement 
Center, and creating incentives for trade enforcement 
authorities to take more at-bats, bringing more trade cases to 
prosecution.
    Thank you, and I look forward to your questions.
    Senator Merkley. Thank you all very much for your 
testimony, and I believe for three of our witnesses, this is 
your first testimony in Congress, House or Senate, the first 
three, and for you, Dr. Hersh, you have testified on the House 
side but not on the Senate side before. So for all of you, 
welcome to the Senate, and thank you for bringing your 
expertise and your insights.
    We will take 5 minutes apiece and go back and forth.
    Senator Warren. Thank you very much, Mr. Chairman. I 
appreciate it, and I appreciate your letting me go first. I am 
going to apologize in advance. I have got another commitment, 
and so I can only stay for one round here.
    This is a terrific panel, and you all--just great topics 
that you have hit on and brought some new parts to the 
conversation. But since I am only going to get to do this once 
around this discussion, I wanted to raise another issue that 
layers into this and ask for your thoughts on it.
    There is a new report out. I hope you have seen it. It is 
from Harvard Business School professor Michael Porter and Jan 
Rivkin, and the report is called ``An Economy Doing Half Its 
Job.''
    Now, here is what the researchers find, and I just want to 
quote it to make sure we get this exactly right. They find that 
``corporate profits in America are at an all-time, and the Dow 
Jones Industrial Average continues to hit new records.'' But 
living standards for the average American have fallen over the 
last 15 years.
    Porter and Rivkin from the Harvard Business School note 
that this ``recent divergence of outcomes, with firms, 
(especially larger firms) thriving and workers struggling, is 
unusual in the United States'' because ``American companies and 
citizens have tended either to thrive together . . . or to 
suffer together . . . '' But no more.
    Now, there is a pretty simple explanation for this recent 
divergence. Corporations no longer share their prosperity with 
their workers. They share their prosperity only with their 
shareholders. According to research by Professor William 
Lazonick of the University of Massachusetts at Lowell, back in 
the early 1980s, large corporations dedicated less than half 
their earnings to their shareholders. The rest went to 
investment in their equipment and in their employees. But from 
2003 to 2012, those big companies dedicated 91 percent of their 
earnings to their shareholders, either in the form of stock 
buybacks or dividend payments.
    Now, why have companies shifted their priorities so 
dramatically in such a short period of time? Well, because CEOs 
are now compensated almost entirely based on the company's 
share price. As a result, CEOs love buybacks and dividend 
payments because they boost share prices, even if they come at 
the expense of long-term investments in the company and in its 
workers.
    So here is my question: If we cannot count on CEOs and 
senior management to reinvest at least some of the corporate 
profits in their workers like they used to, what steps should 
the Government take to fill that void? And I would like to hear 
from all of you. Ms. McGhee, would you like to start?
    Ms. McGhee. Thank you, Senator Warren. That is an excellent 
question, and it really goes to the heart of what our economy 
is for. Demos has been doing some investigation into these 
issues of how much increasingly large, low-wage employers that 
are extremely profitable are financializing, essentially, and 
concentrating the effort, the result of the production of their 
workers. My colleague Katherine Roishlin actually wrote a 
report on our country's largest private employer, Walmart, who 
spent $6.6 billion just last year buying back its own stock in 
the market. And she calculated that if that money were instead 
invested in the human capital of the workers who make that 
wealth, it could give the lowest paid workers, those who make 
under $12.25 an hour, which is almost a million Walmart 
workers, a raise of over $5 an hour just from what they spend 
buying back their own shares. So this has a very, very real 
effect on the working lives of workers and families.
    So some of the things that Government can do----
    Senator Warren. I am sorry. I have to say, and to think 
about what it would mean if that million workers made $5 more 
an hour in terms of what they could buy elsewhere in the 
economy.
    Ms. McGhee. Exactly.
    Senator Warren. And the overall growth in the economy and 
growth in jobs. Growth in demand, growth in jobs.
    Ms. McGhee. Exactly.
    Senator Warren. Sorry, Ms. McGhee. I did not mean----
    Ms. McGhee. No, no. Absolutely, because low-paid workers 
are the job creators who are waiting to have more money in 
their pockets to spend in our economy.
    I will just say a few things that could be done. One, 
Congress could stop giving preferential treatment to this kind 
of income, to wealth income--stocks and dividends--over work. 
It is important to remember that less than half of Americans 
own any stock at all, so when we give this preferential 
treatment, we have to remember to whom it is going.
    The part of the picture of that declining ability for the 
people who are actually doing the work to get a bigger slice of 
the pie that they spend all day baking is the decline in 
unionization, which has also been as a result of policy 
choices. So Congress could pass, for example, the Employee Free 
Choice Act and make sure that there is more collective 
bargaining power in our economy and in our enterprises.
    Thinking about all of that money that unfortunately is not 
going to the public good in many, many cases, you have to look 
at the effective corporate tax rate. The Institute for Policy 
Studies shows that 26 of our biggest corporations spent more--
paid their CEOs more than they paid to the Government in taxes. 
So we should be closing tax loopholes and havens and ensuring 
that corporations, which are at an all-time high in 
profitability, are sharing some of that revenue and we can make 
a new commitment to the quality of life of all Americans.
    Senator Warren. Thank you very much. You may have covered a 
lot here.
    Dr. Sufi, we are over, but would you like to add something 
to that.
    Mr. Sufi. Yes, that is a great question. I think another 
way of saying the same facts that Professor Porter and his co-
author are saying is that the capital share of income, the 
amount of income that is going to the owners of capital, has 
gone up dramatically over the last 15 years. And in just 
thinking about the reasons for that, one reason I think is that 
capital markets have become quite ruthless in the sense that 
they want profits and they want them in the short term. And I 
think, Senator Warren, you are exactly right that we may 
worry--and I think there is research to back this up--that it 
excessively leads managers to focus on short-term gains rather 
than more longer-term investments such as job training, such as 
trying to boost the productivity of their workers, which I 
think is the best way ultimately to try to get wages and income 
up.
    So I think going forward, as I mentioned before, I think 
expansion of the earned income tax credit, I think public 
infrastructure projects--it is amazing to me the consensus 
among people, economists, even economists at the University of 
Chicago who I sit down at lunch with, who we would all consider 
quite right-leaning, say, look, interest rates are zero, 
basically, and there may be very good infrastructure projects 
to do, it may help with this labor share problem. And it seems 
like that consensus is not here on Capitol Hill, but you 
definitely see it among economists. I think those are the 
solutions I would point to.
    Senator Warren. Thank you.
    Ms. Viek, would you like to add to it?
    Ms. Viek. I am not the economist in the room, but I would 
like to just repeat or sort of say certainly closing the tax 
loopholes and reinvesting in human capital, small business 
entrepreneurs, it is human capital, and that is what 
communities need today.
    I think also looking at perhaps--and this does not quite 
address what you are saying, but there are funds that could be 
used to help deal with this home equity issue, which has a huge 
impact, and then also reducing student debt.
    Again, if you close tax loopholes and you have more income, 
let us invest in young people so that they do not have to 
increase their debt to go to a university.
    Senator Warren. Thank you, Ms. Viek.
    Dr. Hersh?
    Mr. Hersh. I would reiterate and agree with most of what 
has been said here on the panel so far, and I think that there 
is a very simple answer to your question of if the private 
sector is not willing to invest, even though the corporate 
sector is holding more than $2 trillion in cash reserves, even 
though they can borrow billions at essentially zero interest 
rates right now and are sitting on this cash rather than doing 
something productive with it, if they are not willing to 
invest, then the public sector has a role to step up and 
invest. There is no shortage of public goods and public 
services investments that will increase the productive capacity 
of the U.S. economy and create jobs that will lead to rising 
incomes and aggregate demand that will then crowd in investment 
from businesses. When they see a growing market, the investment 
will come to serve that market.
    And while we are in this time of high unemployment, high 
excess capacity in the productive economy, this is really the 
way that we are going to get out of this spot.
    Senator Warren. Well, thank you very much. Those are very, 
very thoughtful answers, and I very much appreciate it.
    You know, my Republican colleagues like to say a rising 
tide lifts all boats, and what they are saying is if we create 
the environment where corporations and investors thrive, then 
working families will thrive, too. We now have two decades of 
hard evidence disproving that theory. Corporations may be 
turning their backs on their workers, but that does not mean 
that the American Government should do the same. We can do 
better than this, and you have given us some great ideas to 
work with. Thank you.
    Thank you, Mr. Chairman.
    Senator Merkley. Thank you very much, Senator Warren, and I 
am sorry you cannot be here for a little while longer to 
participate in this, but I know this is the conversation that 
you are engaged in every day, and we appreciate that you are.
    Senator Warren. Yes, you are. Thank you.
    Senator Merkley. I wanted to just reflect for a moment on 
the kind of different visions of how you build a successful 
economy for working America.
    On the one hand, we have the post-World War II model in 
which workers earned more. They bought more products. The 
products were made in the United States so U.S. employers hired 
more people to make more things to sell to those folks. And you 
had kind of an upward cycle that was very powerful over a 
couple decades.
    And then we have the current situation where we have 
essentially less and less equality, more concentration of 
wealth, and, therefore, diminishment of purchasing power by the 
middle class. And in this situation, if they can buy less, 
employers are going to make less. And between automation and 
decreased demand, that hurts.
    But you have the argument--and Senator Warren was making 
reference to this. You have this argument among a great number 
of folks, but wait, the best-off are the job creators, so if we 
concentrate wealth with the job creators, we will have more 
jobs. Is there any validity at all left in this theory after 
the results of the last decade?
    Mr. Sufi. So I can take a shot at trying to answer that. 
One of the things I think the economics profession understands 
quite well now is that one of the main macroeconomic problems 
with the U.S. economy is evident in very low real interest 
rates. So we have seen real interest rates pinned at basically 
0 percent on the short end. People say it is all the Fed, but 
it is not. It shows you that there is in some sense an 
excessive demand for savings, especially in risk-free assets. 
And where does that come from? That comes from in large part 
inequality, because obviously the people at the very top end of 
the income distribution, the more and more of aggregate wealth 
they get, the more they are going to put it into savings and 
not into buying goods.
    So I think we have come to a consensus in large part in the 
last 6 years--maybe not a consensus but at least a large swath 
of the economics profession does believe that excessive 
savings, which I think is a product of inequality, is becoming 
an issue, that we need people to actually go out and spend 
more. And that is something that I think, you know, inequality 
actually inhibits and that we do need more income growth, wage 
growth among the middle class to help try to spur demand. And I 
think that is something that we all kind of agree with in terms 
of one of the main frictions facing the economy over the last 6 
or 7 years.
    Senator Merkley. Any other quick comments before I move on? 
Yes, Dr. Hersh.
    Mr. Hersh. I would say that no, there is really no evidence 
that the trickle-down theory of economics has worked. In fact, 
we have now more than three decades of evidence that it has not 
worked. The trickle-down theory said that if we made capital 
readily available to people who are going to invest it at a low 
cost, they would make those investments, grow the economy, and 
create the jobs, and the benefits would trickle down.
    Well, we have made the capital available, we have moved the 
capital into their hands through tax policies, through policies 
within companies about how income will be distributed between 
the owners and the workers. We have made those changes, and 
what we have seen actually is slowing economic growth and more 
people struggling to maintain their financial security in the 
American economy.
    Senator Merkley. So if we are caught in a set of policies 
right now that are accentuating inequality, we must still 
recognize that we are here in a democracy where people can vote 
for changes, and there are a lot more folks outside the top 20 
percent than inside the top 20 percent. So why is it that those 
dynamics are not resulting in election-driven policy changes 
that revert to strategies that more successfully produce growth 
in income for middle-class families? Ms. McGhee.
    Ms. McGhee. That is an excellent question. I think there 
are a lot of different aspects to it, and I tend to want to go 
to the structural. I think it is important that we recognize 
that there are two big pieces of our democracy that are not 
functioning well right now. One is actually our voting system. 
One in four eligible citizens is not even registered to vote. 
That means they are invisible citizens to the political 
process. They do not get the door knocks. They do not get the 
campaign materials. Some of us would like not to get that, but 
at least we are then engaged in the political process.
    There are a lot of reforms that we can do to cut the red 
tape that needlessly catches one in four, 51 million Americans, 
who should be able to vote and register and are not currently. 
And that red tape actually traps people in a differential way 
based on age, race, and income. There is a gap, almost 30 
percentage points, in voting between higher- and low-income 
households. So it is important to note that the electorate is 
skewed older, less diverse, and more wealthy.
    And then, of course, my comments before about the makeup of 
the donor class. Some of the amazing political scientists who 
have been doing this work--Martin Gilens, Larry Bartels, 
Benjamin Page--have recently calculated that the affluent, the 
donor class has 15 times more policy influence than the average 
American.
    Senator Merkley. Yes, Ms. Viek?
    Ms. Viek. I would like to jump in here. I think there is 
actually a little ray of hope, and it was in the New York Times 
yesterday, the front page where, in Kansas, there is now kind 
of a pushback against Mr. Brownback for all these years of 
disinvestment in the State. And I think that it does end up 
trickling down eventually where people say, ``My God, I cannot 
send my kid to college. My God, I cannot even buy a car.'' I 
mean, just sort of basic stuff: ``I cannot pay my electrical 
bill.'' And things that we used to take for granted in our 
culture are not there.
    So I think that this--I mentioned investment in human 
capital. Investment in small business is the same as investment 
in human capital. I think that we are starting to see some 
recognition of that, and I always like to take hope wherever I 
can. So, anyway, that is my 2 cents.
    Senator Merkley. Well, so what you are describing in 
Kansas--and I gather it is a close race there, so the outcome 
is not clear. But you might think of it a microcosm of the 
Great Depression in which coming out of the failure of that 
economy, there were many strategies that people collectively 
supported to strengthen the economy working for families. But 
in the absence of such a horrendous debacle, how does this turn 
around?
    Let me ask just one example of this. In my community, my 
blue-collar community, many parents are starting to ask the 
question about whether or not it is smart for their kids to go 
to college, and the reason they are asking this question is 
because they see students coming out of college with debts the 
size of a home loan and not having jobs that can make the 
monthly payments, or at least not enough to create some 
separation so that you have some money left over after the 
monthly payment. And they feel like, well, do we want our 
children to have this millstone around their neck for years or 
decades to come?
    And when I hear this conversation, I realize this is not 
some myth or some unjustifiable fear, because the statistics 
show that tons of our students are coming out of college and 
having trouble paying their loans or having the money to live 
after paying their loans.
    And so we see kind of a collapse of the aspirational vision 
that was so important when I was young. My father, a mechanic, 
was able to say to me, ``Son, if you go through the doors of 
that schoolhouse and you work hard, you can do just about 
anything here in America.'' And he said, ``Mom and I are saving 
a little bit of money so that you will have a chance to go to 
college, and we hope you go.''
    And I think about how the cost of college has risen 
compared to a working wage. That then has not been compensated 
for by Pell grants. That drives more debt and more debt, and 
that debt is creating a sense that there is not a pathway for 
every child to thrive.
    So why isn't it in a democracy and with so much of the 
workers across this country realizing that the path of 
opportunity is being choked off by the high cost of college, 
how come there has not been a political pushback to vastly 
increase Pell grants, control the galloping inflation in 
tuition, and make student loans a lot less expensive?
    Mr. Sufi. Well, let me completely agree with you, Senator. 
I think one of the issues that we talk a lot about in our 
research and in thinking about the way debt works, student debt 
is an exact example of how awful the financial system works for 
lower- and middle-income Americans. As you mentioned, when 
someone entered college in 2005, they took on some debt 
thinking, like you were saying, they were going to get a good 
job and going to get high wages. Of course, they, like no one 
else, foresaw the worst economic downturn in U.S. history since 
the Great Depression. And what happened to those debt contracts 
when, through no fault of their own--I like to say that in some 
sense the only fault it was for the class of 2009 was being 
born in 1987, 22 years before this horrible recession. And yet 
we impose that risk because the debt does not change. The 
principal balance is the same. The interest payments are the 
same. That makes no economic sense. There is nobody that would 
design a financial system that would place such a huge amount 
of risk on students, and they are responding, just as you said. 
They now understand the risk that is being imposed upon them, 
and a lot of them are saying, look, college might not be worth 
it--which, of course, in the long run is the worst possible 
outcome.
    So one of the policy ideas we have advocated, in addition 
to expanding Pell grants and trying to lower the cost of 
education, is just even in retrospect looking back and 
forgiving student debt for people who graduated in 2008 or 2009 
or 2010. I saw some young faces in the crowd. There may be 
members of that class right here today. Through no fault of 
their own, this group of individuals was hit so hard by this 
recession, and in some sense given that the Government is the 
main lender, it is a policy that could be implemented 
potentially quite easily.
    In the long run, I completely agree. Expanding Pell grants, 
expanding access to higher education is a huge part of reducing 
inequality because ultimately we need to boost productivity of 
workers in order for them to get higher wages that are 
sustainable. And I think we really need to rethink the way the 
financial system works to try to accomplish that.
    Ms. McGhee. I would just like to add that I do think that 
this issue of the lack of affordability of higher education 
should be a signature one for all leaders, because it really 
goes to the heart of the American dream, the idea that you can 
succeed in a way that your parents did not. And we are seeing a 
generation over generation economic decline in this country, 
and a very big part of that is the fact that we traded away the 
blue-collar working-class jobs that did not require a college 
degree, and at the same time started to close the doors to the 
college degree that then became the most important thing you 
could do to secure a middle-class life, although not 
guaranteed.
    So Demos has been working on this issue for a long time. We 
wanted to actually model out. People say, yes, it is true, 
student debt, it is getting to be $25,000 from public schools, 
but it is good debt. We wanted to actually test that question, 
because, in fact, what we found is that $25,000 in student loan 
debt would actually end up costing the average borrower over 
the course of their lifetime 4 times that amount in lost 
wealth, mostly home equity and retirement savings. And so you 
are saying to two similarly situated students, one who could 
afford to go to college without having to take on debt and one 
who could not, that afterwards, 35 years out, the one that 
started out needing to borrow money should have a lower wealth 
net worth just because of that fact.
    We know that this country can afford to do for this 
generation and subsequent generations what it did to create the 
greatest middle class the world has ever known: Make college a 
public good again. This cost shift that has happened, 26 cents 
on the dollar just in the past 20 years in terms of States' 
cutting back support for public higher education, it is no way 
to run a country in a globalized competitive economy.
    Senator Merkley. So let me capture your point there. I 
believe you said that the college debt leads to other economic 
decisions that decrease lifetime success, and that one of those 
is home ownership or equity from home ownership. And that can 
occur in a variety of ways: a delay in the time that you 
purchase your home, which has a huge effect due to the 
compounding of value; certainly the size of house you might be 
and the equity you might acquire in it; or lower downpayments 
that result in more money going out on the interest side.
    And so when you think about the fact that home ownership 
has been the major source of savings for middle-class America 
and that students with--well, students 25 through 30 graduating 
from college with student debt, their home ownership rates have 
dropped dramatically, so they are buying later, and these are 
the effects you looked at to see a lifetime impact on wealth 
and that it is very significant.
    Ms. McGhee. Exactly. That is exactly right.
    Senator Merkley. Yes. And I think that is a great point, 
and I think it was the New York Fed that came out with studies 
recently looking at, proportionally, as your college debt goes 
up, how your home ownership goes down. Yes?
    Mr. Sufi. And could I just interject one other distortion 
that student debt has on individuals, which is really quite 
problematic? It can reduce the incentive to work because at the 
end of the day, if you think most of your wages are going to go 
toward interest payments that ultimately you are never going to 
be able to retire the debt, that if you have these crushing 
debt burdens, many people may decide, look, it is not worth it 
for me to even work. So you may actually even have a labor 
supply effect which would be very detrimental.
    So I agree completely. The evidence coming out of the 
Federal Reserve Bank of New York is quite compelling about 
student debt burdens having reduced car ownership and home 
ownership, and I think there is also this knock-on effect and, 
in fact, there is research that shows more debt forgiveness 
actually increases labor supply, that people are more willing 
to work once they have had their debt forgiven because now they 
know they actually get the returns to their work rather than 
handing it over to a bank.
    Senator Merkley. So one idea we have been pursuing--and 
Senator Warren has been in the forefront of this--is enabling 
folks to refinance their higher-interest loans to a lower 
interest. They would still have the same amount of debt, but 
their payments would be smaller. They would be more able to 
purchase houses, cars, invest in the economy in other ways--in 
essence, stimulating the economy in ways that benefit all of 
us.
    Yet another idea and one that has been pursued by a group 
of students in Oregon called Pay It Forward is essentially a 
version of a future income-adjusted repayment structure or 
income-adjusted loan payments. And there are multiple versions 
of that, but essentially a sense that if your future pay is 
lower, you pay a maximum proportion of that income so that you 
will not be trapped between wages that are here and monthly 
payments on your loan that are at or near--so that you have 
some gap to live on, if you will. Any thoughts on those two 
approaches?
    Mr. Sufi. Well, I am in very strong support of both. 
Allowing students to refinance into a lower interest rate to me 
is a no-brainer. I mean, I think it is something that we allow 
people to do with mortgages, to prepay and refinance into lower 
interest rates. I think it would provide a huge boost to the 
economy overall, not only because it would probably boost 
spending by these former students who are carrying the debt, 
but also I do think it might actually affect labor supply 
decisions and get people to more actively look for jobs if they 
know they are going to actually get the returns to those jobs.
    Our proposal is very similar to the income adjustment, and 
that is to make student debt contingent on what the 
unemployment rate is for recent college graduates. If it goes 
up above 10 percent, you would get automatic debt forgiveness, 
automatic low interest payments. So very similar to the idea 
that you were speaking about from Oregon.
    Overall, we want to make debt more flexible. We want 
students to have lower interest payments if the economy 
collapses, and given that interest rates typically fall during 
recessions, allowing students to refinance into lower rates 
would be one way of doing it.
    Senator Merkley. Anyone else on this?
    Mr. Hersh. I have to agree with Dr. Sufi that refinancing 
student debt should be a no-brainer. This is the only segment 
of our credit market that really has not been able to benefit 
from the lower interest rates we have seen coming out of the 
Great Recession. But just lowering the interest payments on 
really exorbitant principals of debt that students are paying 
with the escalating costs of higher education is really not 
going to be enough to solve the problem of high debt and low 
prospects for incomes for these recent college graduates. So 
unless we can go further toward the kind of proposals that Dr. 
Sufi is discussing to remediate the principals on these debts 
when unemployment is so high, when the income prospects of 
newly employed college graduates is not as strong as it needs 
to be, this is really what is going to impact these people's 
lives and their ability to contribute to the economy.
    Ms. Viek. I would just like to jump in. You know I am a big 
proponent for entrepreneurship, but an unintended consequence 
of the student debt is that, as you were mentioning earlier, 
people do not fully participate in the economy. And so what we 
see is more and more people in the informal economy, so they 
are not even contributing to a tax base that would then help 
offset some of these other issues. And so I think we need to 
think about that fact, too, that people are sheltering--I 
definitely know people are sheltering their income, and that 
has consequences for our States.
    Senator Merkley. So I want to go back to this issue of the 
daunting prospect of the pathway through higher education, 
because Ms. McGhee noted the impact on home ownership and how 
that decreased as well. But has anyone got a handle on how the 
message to our working-class high school students that there 
may not be a pathway for you to thrive might affect, if you 
will, the way they pursue their high school studies? In other 
words, why work hard in high school if there is not a pathway 
in which those grades matter to be able to go to college? Are 
we seeing kind of reverberations back into high school in terms 
of the motivation of our students? And this, of course, would 
be very--may be a much harder issue to quantify, but it is kind 
of a huge impact on the future success of the next generation.
    Ms. McGhee. There is good news there and there is bad news. 
First, the good news is that young people today are more 
determined to go to college than ever. They know how important 
it is to a middle-class life, and the vast majority of young 
people who graduate from high school do go on to some sort of 
college.
    The bad news is that there are at least 100,000 young 
people who graduate from college who are well qualified--I am 
sorry, graduate from high school who are well qualified to go 
to college who do not go, who do not apply to school because 
simply of the cost.
    More often what happens, though, is that young people do go 
on to college. They work 20 hours a week while they are in 
school. There is a lot of unmet costs for transportation and 
housing and in many cases child care. They end up having to 
take classes at community colleges where, because community 
college spending has actually been declining because of those 
State college investment cuts, they are actually trying to work 
very hard to get enough credits to finish, and they drop out of 
college. And the number one reason cited for dropping out of 
college is financial pressures. And we know that, according to 
a recent Economic Policy Institute study, nearly half of low-
wage workers have some college.
    So it is not that people are being dispirited. They are 
going to college in record numbers. It is that we as the 
American people have given up the sense that this is a public 
good and that it should be a shared contract. I think it is 
important, very important, to deal with the existing over $1 
trillion in student loan debt, refinance it, open back up the 
doors to bankruptcy for a second chance for people with private 
student loans, and I would even say Federal loans. But most 
importantly, I think we should start with the assumption that 
the greatest middle class the world has ever known was made 
with debt-free college, and we should have to justify why this 
large, diverse generation should have to go into any debt at 
all from working in middle class to be--to get a higher 
education.
    Senator Merkley. So here we are in a world knowledge 
economy where America's ability to thrive is going to depend on 
education, and we are making it far more expensive to get that 
education.
    Ms. Viek, I wanted to turn to your thoughts about micro 
enterprise. One of the tools that some States have used--and 
there is some national policy around it--are individual 
development accounts. And these essentially are matching grant 
programs. A low-income family saves money, and they can earn 
matching grants to either buy a house, go to school, or to 
start a small business. And the reason for those three things 
is that those three things are the biggest levers or pathways 
for movement from poverty into the middle class. And so that 
third area, to start a business, is a tool of micro enterprise, 
if you will. I am just wondering if that is a tool that you 
have run into and have any particular thoughts about.
    Ms. Viek. Yes, thanks for asking, because actually at the 
same time that we are meeting is the Corporation for Enterprise 
Development Asset and Opportunities Conference I just came 
from, and one of the tax policies that is being promoted is 
that we should start savings at birth. And it relates to what 
you all were saying earlier about the lack of wealth and the 
lack of assets. So it is not just labor income; it is actually 
the lowering of assets.
    So we need to address the issue of inequality when it comes 
to assets, and starting savings accounts for every child at 
birth is working in a pilot in Oklahoma. And as a result of 
those years of showing that it can work, it is now being picked 
up by Maine and other States.
    So I wanted to bring that to your attention, and I think 
that this is something, again, that will contribute to college 
costs, buying a home, or starting a small business. And more 
and more--it is interesting. The two cohorts that are starting 
businesses or becoming self-employed: one are the over-55's, 
which you and I fall into----
    Senator Merkley. Yes, we do.
    Ms. Viek. I am assuming.
    Senator Merkley. Thank you for reminding me.
    [Laughter.]
    Ms. Viek. You are on the young side, though. And the other 
is the millennials starting businesses at a faster rate.
    So, yes, there is an interesting new report out by CFED 
called ``From Upside Down to Right Side Up,'' and it really 
does deal with tax policies as they apply to savings accounts.
    Senator Merkley. Thank you.
    Another piece of the small business puzzle is access to 
traditional credit, and we have a story--I have a story that 
was sent to me by Albina Opportunities Corporation. It is a 
nonprofit small business lender in Portland who lends only to 
folks who cannot access traditional bank loans. And this is 
from a statement that we have now entered into the record, but 
Albina describes a typical client.
    In 2010, an African American man who owns a trucking 
company for earth-moving purposes approached them to obtain a 
line of credit to expend his 10-person business, but a previous 
bankruptcy prevented a loan from a conventional lender. The 
Albina Opportunities Corporation underwrote a $100,000 loan, 
and he used it to hire more drivers, obtain larger contracts, 
and by 2013, the company now employs 26, the revenues have 
grown sixfold to $4.75 million, and is now a preferred 
subcontractor to major general contractors.
    Now, the thing I really want to emphasize is Albina is a 
nonprofit community development organization that lends only 
when someone else will not. And in 6 years of operation, they 
have not lost a dollar of principal. And the point that they 
are making is our traditional banking does not seem to be 
reaching out in the same way that perhaps community banks might 
have done in the past, and that there is this gap of access to 
traditional credit that is constraining the entrepreneurial 
track from poverty into the middle class.
    Any thoughts about that piece of the puzzle?
    Mr. Sufi. Well, as you were telling your story, I was 
recalling one time--I teach MBA students, and I was telling 
them the foundational theories of banking involve a bank that 
goes in and carefully screens and monitors and tries to figure 
out whether this business person is credible, whether they have 
a good business plan. And one of them came up to me after class 
and said, ``Banks do not do that.'' And I said, ``What do you 
mean banks do not do that?'' He said, ``Maybe banks used to do 
that 20 years ago, but now banks just basically do trading. 
They try to make some profits, and if they run into problems 
with a borrower, they quickly try to get rid of the loan.''
    So there is some way in which banks are no longer doing the 
kind of small business lending that would be profitable for 
them, I think, and that could be because banks have become so 
big that they are just out of this market. It could be for a 
lot of reasons. But I would agree that there probably--it is 
telling that there are nonprofit institutions coming in and 
able to do such great lending in this segment of the market. We 
have a supposedly thriving private sector of banks that should 
be doing these loans, but they are not. And I think that tells 
you that there is something wrong with the banking system as it 
is operating today.
    Senator Merkley. Anyone else?
    Ms. Viek. Yes. We have roughly 28 community development 
financial institutions like Albina Corporation in our 
membership, and while I am heartened by the use of technology 
and the growth, very fast growth in this segment, because the 
banks have basically ceded the under $200,000 loans to the 
nonprofit sector. But what we are really seeing, though--and it 
needs to be addressed--is the online lenders and some of the 
cash advance lenders that are not regulated. Some of them are 
transparent. Some of them are doing--like Lenders Club, but you 
have to have perfect credit to qualify for that. But it is 
addressing the market, and now the financial institutions are 
actually investing in Lending Club.
    So I think that is a whole other hearing that we should 
have on the phenomenon, the emerging phenomenon of online 
lenders. I think it would be appropriate for the Banking 
Committee to take that on. It is something we are watching very 
carefully in California. We are concerned about it. But we also 
see some real hope for access to capital amongst those folks 
that have not had access.
    Senator Merkley. So were you referring specifically to cash 
advance, payday loan-style online lending? Or were you speaking 
more broadly?
    Ms. Viek. The whole spectrum, from the cash advance, some 
of which are predatory, to there are some good cash advance 
groups. I mean, PayPal, Square, they are very transparent, low 
interest rates. But then we have others that end up layering on 
top. And then you have ones that have--are really working with 
the cream of the crop of the top credit scores.
    Senator Merkley. When I was Speaker of the House in Oregon, 
we passed a law that limited the payday loan interest rates 
down to about 36 percent, which sounds like a lot, but they 
were charging well in excess of 500 percent. And I was struck a 
year later to visit a food bank and have the first thing that 
the director of the food bank said was, ``We had a stream of 
families coming to us who had been bankrupted by payday 
loans,'' because they started with a 2-week plan, and you end 
up--by the time you have rolled over a few times, the equity 
grew--at 500 percent, the loan multiplies fivefold in a year, 
25 in 2 years, and pretty soon people are in a vortex of debt 
they cannot escape from. And she was noting how dramatically 
that source of bankruptcy had disappeared and how positive that 
was by passing that law in Oregon. Then she noted how the 
recession of 2008 had unfortunately knocked far more people off 
their economic foundation, and so that the demand on the food 
bank still had gone up.
    But what we are seeing in Oregon are online payday lenders 
who are violating the State law because State law does not 
allow them to engage in these types of contracts, but they 
engage in them anyway, but they are operating from overseas or 
other places that cannot be reached, and they utilize the 
account number to simply reach in and pull money out of 
people's accounts.
    So this is a very huge predatory practice that as a society 
you would think that we would be able to get control over, but 
we do not have control over it yet.
    Ms. Viek. Well, you can see there is this huge market for 
these payday or faster forms of money. I mean, how do people--
people have used them for generations for that reason.
    I think there are alternatives, and I had mentioned in my 
testimony the fact that our regulators, the OCC, are looking at 
a small-dollar loan--promoting small-dollar loans in banks and 
giving banks extra CRA credit. I do not know how much of an 
incentive that will be, and we need to look at that. So I would 
just like to note that as something you may want to take a look 
at in a few months perhaps as it evolves down the line, because 
that could be another alternative, although I am not quite sure 
how the banks are going to deliver that because it is not 
exactly cost-effective to do it through the branches. It is 
going to have to be an online product.
    Ms. McGhee. There is also something else that the Senate 
and the Banking Committee in particular can do. I commend you 
and the State of Oregon for making that reform to essentially 
eliminate the high-interest payday loan model. But the Senate 
Banking Committee--actually, I am sorry. It was not the Banking 
Committee, importantly. It was, I believe, the Armed Services 
Committee did pass a similar law for military families. I 
believe it was called the Military Readiness Act, I think, in 
2006, if I recall correctly.
    We could do that for the entire country. We could protect 
every single member of the American public from triple-digit 
interest rates on short payday loans whose model is repeating 
borrowing. And I think really the only reason that we do not do 
that and that that kind of reform cannot come through the 
Senate at this moment is the money in politics problem. I am 
sure you experience this in Oregon, but it happens, I think, 
every single day there is a very well organized payday loan 
lobby across the country that makes a lot of particularly 
State-level legislative campaign donations, and it becomes 
very, very difficult to regulate an industry that is financing 
so much of the campaigns at the State level.
    Senator Merkley. Your point is absolutely right. This is a 
very good example of that type of economic clout, that 
influence, if you will.
    I was very struck in Oregon how the industry's core 
argument was that clearly there is a demand for these loans; 
therefore, we should simply leave the system as it is and allow 
these 500-percent loans.
    What we knew from other States, though, and from the 
military communities due to the 2006 law, was that ready 
equivalence did not disappear. The interest rates just came 
down dramatically. So you still had access to short-term 
lending, but you had it at a far lower rate.
    Now, there should be a lot of doctorate theses exploring 
why it is competition did not have the effect of bringing this 
down. But it did not. It did not.
    And so I can tell you there is absolutely no impulse in 
Oregon to restore us to where we were before we capped these 
loans. And we did it across the spectrum of consumer loans 
because we saw the migration in other States from payday loans 
to title loans to general consumer unsecured loans and so 
forth. And so it is only the folks who are online violating the 
law that are really the problem at this point.
    But a major argument that we made was from the military 
community, because we had generals and admirals who were coming 
to Congress and saying these payday loans are destroying our 
military families and that is unacceptable. Why should it be 
acceptable for any family or community to be destroyed, not 
just our military families and our military communities, but 
any community to be destroyed? And, unfortunately, we have not 
completed the vision that was so well laid out through that 
2006 Act.
    Well, obviously there is a lot going on here, how we change 
the role of influence from money to shape policies that restore 
strategies that strengthen the middle class. What is absolutely 
clear is we are desperately off track right now in a rapidly 
changing world. And all of you are contributing significantly 
to the effort to illuminate strategies and possibilities for 
putting this back on track. And so I thank you very much for 
your participation and particularly for your ongoing work in 
your respective fields, and I look forward to learning 
additional insights from your work in the time ahead.
    I will invite anyone who would like to submit any other 
information for the record to do so. We will be holding it open 
for a week, and that goes for my colleagues on the Committee 
who might want to submit questions. And if you get questions, 
certainly we look forward to your answers.
    With that, we are going to conclude this hearing of the 
Subcommittee. Thank you.
    [Whereupon, at 3:55 p.m., the hearing was adjourned.]
    [Prepared statements and additional material supplied for 
the record follow:]

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                 PREPARED STATEMENT OF AMIR SUFI, Ph.D.
              Chicago Board of Trade Professor of Finance
             University of Chicago Booth School of Business
                           September 17, 2014
    There is something wrong with the U.S. economy. We all know that 
the Great Recession was the most severe economic downturn since the 
Great Depression of the 1930s. What is perhaps less well understood is 
that the recovery since 2009 has been dismal. From the end of recession 
through 2014, real economic growth has been 2.1 percent per year, much 
lower than the 3.5 percent average annual growth the U.S. economy 
generated from 1947 to 2007. The decline in the unemployment rate over 
the past 2 years should not be a cause for celebration--it is driven 
primarily by households leaving the labor force. Only 76 percent of 
Americans aged 25 to 54 currently have jobs, compared to 80 percent in 
2006 and 82 percent in 1999. Put differently, there are currently 4 
million fewer Americans aged 25-54 working today compared to 2006.\1\
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    \1\ This is based on active population of United States aged 25 to 
54 of 101 million as of 2013, and a 4 percentage point difference 
between the employment to population ratio in 2006 versus 2013.
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    How did we get into this mess? And why is it taking so long to 
recover? My research with Atif Mian at Princeton University suggests 
that the culprit is the devastation of wealth suffered by middle and 
lower-income American households during the Great Recession.\2\ The 
weak recovery is due in part to the lack of any rebound in wealth among 
these households since the end of the recession.
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    \2\ This research, published in economics and finance academic 
journals, is summarized in my book with Atif Mian: House of Debt: How 
They (and You) Caused the Great Recession and How We Can Prevent It 
From Happening Again, University of Chicago Press: Chicago, 2014.
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    Americans below the top 25th percentile of the wealth distribution 
have lower net worth in real terms in 2013 than they did 15 years ago. 
For Americans below the median of the wealth distribution, it has been 
a disaster. For example, those in the lower-middle quartile of the 
wealth distribution have seen their net worth plummet from $65 thousand 
in 2007 to $40 thousand in 2010, with a further decline to $38 thousand 
in 2013. This puts their wealth in 2013 below the 1989 level--the Great 
Recession wiped out 25 years of wealth accumulation. The chart below 
shows how bad the Great Recession was for the bottom 75 percent of the 
wealth distribution.


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    The disproportionate negative impact of the Great Recession on the 
net worth of lower wealth Americans may at first seem surprising, but 
it makes perfect sense with an understanding of how the financial 
system operates. Richer Americans save a much higher fraction of their 
income, ultimately holding most of the financial assets in the economy: 
stocks, bonds, money-market funds, and deposits. These savings are lent 
by banks to middle and lower-income Americans, primarily through 
mortgages.
    There is nothing sinister about the rich financing the home 
purchases of the poor. But it is crucial to note that the borrowing 
takes the form of debt contracts which leave the borrower with the 
first losses in case house prices fall. Here is a simple example to 
illustrate. Imagine a homeowner in 2007 who had a $100 thousand home, a 
$60 thousand mortgage, and therefore $40 thousand of home equity. When 
house prices fell by 40 percent from 2007 to 2010, the house plummeted 
in value to $60 thousand. The mortgage in 2010 was still worth $60 
thousand, but the $40 thousand of home equity vanished. The homeowner 
lost 100 percent of their home equity, even though house prices fell 
only 40 percent.
    This is the effect of debt. The use of mortgage debt within the 
financial system gives the holders of financial assets protection 
against a fall in house prices. In the example above, the mortgage did 
not decline in value.\3\ But it provides this insurance by 
concentrating the brunt of economic downturns on borrowers. The 
standard mortgage contract is inflexible--the same amount is owed even 
if house prices and the economy collapse. Given that 85 percent of the 
financial assets in the U.S. economy are held by the top 20 percent of 
the wealth distribution, the financial system's reliance on inflexible 
debt contracts means it insures the rich while placing an inordinate 
amount of risk on middle and lower net worth households.
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    \3\ Of course if the home value declines by even more, it will also 
reduce the value of the mortgage, which is what happened during the 
Great Recession. But the losses will be more severe on home equity 
because by definition the mortgage only falls in value after the equity 
is wiped out.
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    As we illustrate in our research, it was the massive pullback in 
spending by indebted households that triggered the Great Recession. The 
financial system concentrated the collapse in home values on exactly 
the households that were prone to cutting spending most dramatically in 
response. Further, the lack of any increase in the net worth of lower- 
and middle-income Americans helps explain why the recovery in household 
spending has been so weak.
    Going forward, there are two important lessons from the framework 
we outline in our research. First, encouraging borrowing by lower- and 
middle-income Americans may temporarily boost spending, but it is not a 
path to sustainable economic growth. Instead, stronger income growth 
for the lower and middle part of the income distribution is necessary 
for a balanced growth path. Second, the financial system in its present 
form concentrates risk on lower wealth households who are least able to 
bear it. The current policy and regulatory framework encourages such a 
system, even though it has disastrous effects for the economy. We must 
re-think how the financial system allocates risk. I explain these two 
lessons in more detail below.
Credit Growth Without Income Growth: A Recipe for Disaster
    A tempting solution to our current troubles is to encourage even 
more borrowing by lower- and middle-income Americans. This group of 
Americans is likely to spend out of additional credit, which would 
provide a temporary boost to consumption. But unless borrowing is 
predicated on higher-income growth, we risk falling into the same trap 
that led to economic catastrophe.
    In the past 3 years, there has been an aggressive expansion in 
credit to lower credit score borrowers. While credit scores and income 
are not the same, they are closely related; lower-income Americans tend 
to have lower credit scores. More data are available that track 
consumers by credit score, and so the statistics I show below focus on 
credit scores.
    In contrast to the expansion of subprime mortgage credit during the 
2002 to 2006 housing boom, the current expansion has been concentrated 
in auto lending and to a lesser degree credit card lending. For 
example, from 2009 to the first quarter of 2014, auto loan originations 
grew by 300 percent among consumers with a credit score below 620, 
which is deep subprime territory.\4\ The growth has been much smaller 
among prime consumers with a credit score above 700: less than 50 
percent. The chart below shows this pattern. The tremendous growth in 
auto loans to subprime borrowers may help explain why auto spending has 
been a bright spot for retail spending since the end of the Great 
Recession. Credit card lending to low credit score consumers has also 
accelerated, but the increase has been more modest and more recent. 
From 2011 to 2013, credit card originations grew by 30 percent among 
consumers with a credit score below 620, compared to 3 percent for 
consumers with a credit score above 700.
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    \4\ A credit score below 660 is considered subprime.
    
    
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    Such rapid growth in credit to lower credit score households may 
not be a cause for alarm--after all, credit to lower credit score 
households all but disappeared during the recession, and we would 
therefore expect some growth from 2009 to 2014. But the key question is 
whether income growth among lower credit score individuals justifies 
the expansion in auto lending. Are lenders willing to lend more because 
they believe borrowers have better income prospects?
    The answer to this question is worrisome: income growth among lower 
credit score and lower-income Americans has been flat or even negative 
during this same timeframe. A variety of data sets show this pattern. 
Analysis by the Economic Policy Institute based on Current Population 
Survey data shows that real income was between 2 and 3 percent lower in 
2012 than in 2007 for the bottom 60 percent of the income 
distribution.\5\ The grand majority of Americans have not seen real 
income growth from 2007 to 2012. The recently released 2013 Survey of 
Consumer Finances of the Federal Reserve shows the same result from 
2010 to 2013.\6\ During these 3 years, income has fallen for all but 
the top 10 percent of the income distribution.
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    \5\ Gould, Elise, 2014. ``Why America's Workers Need Faster Wage 
Growth--and What We Can Do About It,'' EPI Briefing Paper, August 27th.
    \6\ See Bricker, Jesse, Lisa Dettling, Alice Henriques, Joanne Hsu, 
Kevin Moore, John Sabelhous, Jeffrey Thomson, and Richard Windle, 2014. 
``Changed in U.S. Family Finances from 2010 to 2013: Evidence from the 
Survey of Consumer Finances,'' Federal Reserve Bulletin, 100:4, 
September.
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    The evidence from the 2013 SCF is especially alarming, and worth 
discussing in more detail. From 2010 to 2013, real income fell by 4 to 
7 percent for households in the bottom 60 percent of the income 
distribution. These losses were registered after the Great Recession. 
For the 60th to 90th percentile of the income distribution, real income 
fell by 2 to 3 percent. Real income grew by 2 percent for the top 10 
percent of the population. These statistics contradict the notion of a 
recovery since 2010 for the grand majority of American households.
    Different data sets tell one consistent story: as in the subprime 
mortgage credit boom, credit is once again expanding to households that 
have declining real incomes. The magnitude of the credit expansion is 
smaller given that auto and credit card debt are smaller markets than 
mortgages. But something has to give. Income growth needs to improve, 
or lenders will eventually shut off the credit spigot.
    Relying on lender willingness to provide credit is not a 
sustainable way of generating economic growth. We desperately need 
higher-income growth for middle and lower-income Americans. The best 
way of generating income growth in the long run is by improving the 
productivity of workers. Better education and strong life skill 
development at a young age can help achieve higher productivity. 
Unfortunately, such a boost in worker productivity takes time.
    In the short run, policymakers should investigate whether there are 
policies that can boost wage and income growth among lower- and middle-
income Americans without reducing economic efficiency. Some potential 
policies include expanding the Earned Income Tax Credit, or identifying 
public works projects that can boost aggregate productivity. Such 
public investment could potentially pay for itself in the longer run 
while boosting earnings in the short run. I do not know for certain 
whether such policies would help. But I know for certain that 
stagnating income growth for the majority of American households is a 
serious economic threat.
Financial Reform: Making the Financial System Work for Americans
    Another pressing matter is reform of the financial system, which as 
currently constructed does not work for the majority of Americans. 
Let's start with a basic indisputable point: the economy is a risky 
place. House prices go up and down, as do the returns to business 
capital. Human capital is risky--the wages one earns could potentially 
collapse if the economy falls into recession.
    This risk must be borne by someone, and the financial system should 
help Americans share this risk with one another. Those that bear the 
most risk should be those who have the capacity to bear losses in case 
the economy crashes. In general those with a large amount of wealth 
have exactly such capacity. And of course, those that bear the most 
risk should be compensated for bearing that risk--earning high returns 
when the economy is strong. Investors should look to the financial 
system to take risk and earn a return as a result.
    But how does the financial system currently operate? Does it 
encourage those with wealth to bear risk by compensating them for it? 
The answer is no. Instead, the financial system relies almost 
exclusively on inflexible debt contracts, which force borrowers to bear 
risk instead of investors.
    Student debt offers a simple example. When the college class of 
2009 entered college in 2005, many of them took on debt to pay tuition. 
This was a sensible decision--the income premium to a college degree is 
high, and students were willing to borrow in the short-run to get the 
benefit of higher wages in the future. But of course, no one in the 
college class of 2009 understood in 2005 that the U.S. economy was 
about to get whacked with the worst recession since the Great 
Depression. The unemployment rate for recent college graduates 
skyrocketed from 9 percent to 18 percent from 2007 to 2009. Further, 
wages for those that were able to find jobs collapsed. The consequences 
for the class of 2009 will likely persist into the future: Research 
shows that there are long-run, persistent negative effects of 
graduating from college in the midst of a severe recession.\7\
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    \7\ Kahn, Lisa, 2010. ``The long-term Labor Market Consequences of 
Graduating from College in a Bad Economy.'' Labour Economics, 17:2, 
303-316.
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    Did the financial system help share the risk borne by the college 
class of 2009? No. In fact, the student debt burden and interest 
payments remained exactly the same for the students, even though their 
employment prospects collapsed. The financial system, with its reliance 
on inflexible student debt contracts, forced young Americans to bear 
risk that they were poorly equipped to bear. They are young with almost 
no assets--why should they bear the costs of an economic downturn?
    A more sensible financial system would share the risk by having the 
principal and interest payments on student debt automatically adjust 
downward when recessions hit. The lenders should share some of the 
downside risk, and they should be compensated if the economy ends up 
being stronger than expected. A simple adjustment would be a debt 
contract with a higher average interest payment if the unemployment 
rate facing recent college graduates remained low, but automatic debt 
forgiveness if the unemployment rate facing college graduates increased 
substantially. In this way lenders would be paid a higher interest 
payment if the job market were strong, but would have to accept lower 
payments if the job market ends up being very weak.
    This example applies more broadly to financial contracts in the 
economy. The reliance on inflexible debt contracts forces lower-income 
and younger Americans to bear too much economic risk. Debt contracts 
require the same payment regardless of what happens in the economy. As 
mentioned above, there is risk in the economy. That is unavoidable. But 
the current bias of the current financial system is to force the most 
vulnerable to bear the risk.
    We need policies that would help move the financial system away 
from its current reliance on inflexible debt contracts. One such policy 
the Government could implement in the short-run would be to lower 
student debt owed to the Government for those who graduated in the 
midst of the Great Recession. The college class of 2009 should not be 
forced to bear the costs of the downturn with no assistance: it is not 
their fault they were born in 1987, 22 years before the worst recession 
in 80 years. This could be done with outright debt forgiveness, or by 
allowing borrowers to refinance into current market interest rates. 
Going forward, student debt provided by the Government could be indexed 
to the unemployment rate facing college students, so that debt burdens 
are automatically reduced if the economy enters another recession.
    More broadly, the current bias of policy encourages the financial 
system to use inflexible debt contracts, even though they have 
potentially disastrous effects for the economy. We tolerate the 
issuance of fragile short-term debt by financial institutions that 
enjoy some level of Government backing, and we allow them to do so 
while holding very little capital. Banks then either choose or are told 
by regulators to take very little risk on the asset side of their 
balance sheets, which results in borrowers bearing the risk. We force 
insurance companies to hold highly rated assets, which can only be 
produced by debt contracts to borrowers. We encourage inflexible 
mortgage contracts by declaring them as ``conforming'' mortgages that 
the Government-sponsored entities can buy and securitize. More equity-
like mortgages where the principal adjusts downward if house prices 
fall do not qualify, and the private sector therefore has little 
incentive to provide them. Further, we give a mortgage interest 
deduction for inflexible debt contracts, which encourages households to 
use them.
    Removing the strong policy bias toward inflexible debt contracts 
will not be easy, and it cannot be done overnight. However, I want to 
encourage policymakers to think in a big-picture manner about the 
current financial system, what it is supposed to do, and what 
Government can do to make it work better for Americans. We have a 
tendency to accept the financial system as it is, and make minor 
changes to help insulate it from risk. But the risk is not going away--
it must be borne by somebody. A properly functioning financial system 
would encourage those with wealth--that is, those with risk-bearing 
capacity--to bear risk and earn a return for doing so. It would help 
those with little wealth attend college or buy a home without bearing 
an inordinate amount of economic risk. It may take time, but moving 
toward such a financial system would improve the welfare of all 
Americans.
                                 ______
                                 
                   PREPARED STATEMENT OF CLAUDIA VIEK
  CEO, CAMEO--California Association for Micro Enterprise Opportunity
                           September 17, 2014
    Chairman Jeff Merkley, Ranking Member Dean Heller, and Members of 
the Committee, thank you for the opportunity to submit testimony about 
an issue of crucial importance to the American business community and 
economy.
    CAMEO's mission is to grow a healthy, vibrant, thriving environment 
for all entrepreneurs and startup businesses in California. We are the 
largest Statewide network of nonprofits that provided training, 
coaching and loans to 18,000 businesses last year, businesses that 
created 32,000 jobs. We are also a member of the American Sustainable 
Business Council, which collectively represents over 250,000 
businesses, many of which are small businesses that create jobs across 
the country.
    Let me illustrate with a brief story: Johneric Concordia is a young 
man who was laid off as a baggage handler for United Airlines. He loved 
to barbeque in his neighborhood in Filipinotown in Los Angeles. He and 
his uncles would compete to see who made the best sauce. When he lost 
his job, he sought business counseling from the Asian Pacific Islander 
Small Business Program to start his own barbeque catering business. He 
raised $8,000 for a truck-mounted barbeque rig through Facebook, and a 
year later opened Parks Finest restaurant in Echo Park. He has hired 
nine of his friends to work for him and is ready for a larger loan from 
a local nonprofit lender.
    Parks Finest is not a one-off--I have many, many similar stories 
from members like the National Asian American Coalition, the Los 
Angeles Latino Chamber, and the other 85 CAMEO members who serve 
entrepreneurs with small dollar loans and coaching. Johneric and others 
have the desire and ability to contribute to our economy by being their 
own boss, and go on to employ others--they are exactly the kind of 
people we should invest in!
    If we are serious about addressing income inequality, then we need 
to support entrepreneurship and starting a business as a real pathway 
to closing the wealth gap and generating new jobs.
    There are 26 million small businesses in the United States, most of 
which are self-employed. If just 1 in 3 such businesses created one 
job, we could have full employment! ``This would address the 50 percent 
unemployment rate among black and Latino youth,'' said Reverend Mark 
Whitlock, Corporate Relations Chair for the 5,000 member national AME 
Church.
    For example, a minimum of a million new jobs a year could be 
created through bank investment in lending and technical assistance 
programs.
    Why business ownership? The Congressional Budget Office found that 
the cause of the rise in income inequality between 1979 and 2007 
derives mostly from disparities in business income. If we get to the 
heart of the problem of inequality, the answer can be simple. Instead 
of handouts and promises of trickle-down job creation, help people 
create their own businesses and have them close the income inequality 
gap themselves.
    The wealth gap in the United States is large and growing: the 
median net worth of Caucasians was $110,500 compared to $7,683 for 
Latinos and $6,314 for African Americans. The wealth gap hinders their 
ability to create, maintain and grow their small firms, which impacts 
all of us.
    Eighty-eight percent of minority business owners finance their 
small businesses from home equity, compared to about a quarter overall. 
Thus, the loss of home equity disproportionately affects minority-owned 
businesses. In California, almost 2 million homeowners are still under 
water; also true in Nevada, Senator Heller's State. We can assume that 
minority-owned businesses have not been able to recover fully from the 
downturn.
    Business ownership is an effective strategy to reduce income 
inequality: the median net worth of business owners is two and a half 
times greater than for all nonbusiness owners, and for African 
Americans the difference is eight times higher for business owners 
compared to nonbusiness owners.
    Households headed by women who own a microbusiness generate up to 
$13,000 more in annual household income than similar households without 
a microbusiness owner. This may not sound like much, but this amount 
can be the difference that sends one's child to college or buys a home. 
And, research shows that the children in families with a microbusiness 
owner do better in terms of education and social mobility (Source: AEO 
Report, ``Bigger than You Think'', 2014).
    Self-employment, business ownership and entrepreneurship are key 
ways for lower-income people to become middle income. Therefore, 
Government should increase support to programs that help start and grow 
small and microbusinesses. Instead we have seen a 40 percent drop in 
funding over past 3 years and fewer businesses benefiting.
    This is the case within the U.S. Small Business Administration 
(SBA), U.S. Department of Agriculture (USDA), and Housing of Urban 
Development (HUD), all of which fund microbusiness development. 
Furthermore, women are starting businesses at three times the rate of 
men and African American women at four times the rate, but women 
receive $1 of capital for every $23 men receive. We are fortunate that 
Maria Contreras-Sweet, SBA's new Administrator, is addressing this 
inequity, as is the proposed Women's Equity Bill introduced last month 
by Senator Maria Cantwell.
    Self-employment is the labor market trend--by 2017, 50 percent of 
our workforce will be, or have been, self-employed! Research on the 
independent workforce reveals that young millennials and those over 55 
are the most likely to choose self-employment.
    We know that when businesses get training and coaching help, 80 
percent are in business after 5 years, compared to 50 percent of those 
that did not get such help. (Source: Aspen Institute, FIELD). Also, 
businesses that received capital and services from a nonprofit 
organization have 30 percent higher median annual revenue growth than 
those that did not. And when microbusinesses succeed, they create on 
average another two jobs. (Source: AEO Report, ``Bigger than You 
Think'', 2014.)
    These statistics are borne out by my personal experience of more 
than 25 years running entrepreneurship training and business incubation 
programs. Again, small business ownership will help close the income 
inequality and wealth gap and bring low-income families into the middle 
class. So why don't we invest more in them?
    For example, the U.S. Department of Labor (DOL) could recognize 
self-employment as a job. DOL does not provide funding or have 
performance measures for self-employment. This keeps many young, lower 
income, and people of color from starting their own businesses because 
local Workforce boards will not allow them to pursue entrepreneurship 
training, but will pay for training in expensive institutions that 
don't place them in a job. And the SBA only budgets $12 million 
nationwide for helping women business owners, most of whom are low or 
moderate income.
    Currently our bank regulators are proposing giving extra Community 
Reinvestment Act credit to banks that provide small dollar microloans 
in low- and moderate-income communities. This policy could have a major 
impact on new self-employment and job growth in communities that have 
not recovered from the Great Recession.
    So, I urge you to target our economic policies to very small 
businesses in and around low- and moderate-income communities, those 
that have not recovered from the downturn, that have not regained 
equity in their homes and businesses. In this way we can create more 
opportunities everyone, especially for young, unemployed people of 
color.
    If there is one thing you remember from my testimony, let it be how 
small business creation and entrepreneurship can reduce income 
inequality and bring hope to our communities with so much untapped 
entrepreneurial potential. Thank you for this opportunity to address 
the Committee.
                                 ______
                                 
               PREPARED STATEMENT OF ADAM S. HERSH, Ph.D.
             Senior Economist, Center for American Progress
                           September 17, 2014
    Thank you Chairman Merkley, Ranking Member Heller, for inviting me 
to testify today. My name is Adam Hersh and I'm a Senior Economist at 
the Center for American Progress Action Fund.
    There is an increasingly broad consensus among professional 
economists that high levels of inequality are extremely detrimental not 
only to current economic growth, but to future growth as well. This is 
the case because when we talk about the economy, we are talking about 
what's happening to people and how people are faring in their lives. An 
economy with broadly shared income gains creates the financially secure 
families who can:

    Invest in the human capital--health and education--that 
        creates a productive, innovative labor force

    Provide stable, strong consumer demand that entices 
        business investment

    Provide a fertile environment for entrepreneurship to 
        develop

    Research also indicates that economies with lower inequality and 
stronger middle classes have more stable financial systems, higher 
investments in public goods, better quality of governance and public 
institutions, broader civic participation, lower crime, and less 
political polarization.\1\
---------------------------------------------------------------------------
    \1\ Heather Boushey and Adam Hersh, ``The American Middle Class, 
Income Inequality, and the Strength of Our Economy: New Evidence in 
Economics,'' (Washington, DC: Center for American Progress, 2012), 
available at http://cdn.americanprogress.org/wp-content/uploads/issues/
2012/05/pdf/middleclass_growth.pdf.
---------------------------------------------------------------------------
    Taken as a whole, inequality is the central thread that runs 
through essentially all the factors that economists identify as 
important for economic growth. In other words, a vibrant U.S. economy 
does not trickle down from the super wealthy, but rather springs forth 
from a thriving middle class.
    International trade and investment are critical parts of the U.S. 
economy--they always have been and always will be--but they create 
complicated economic policy issues because trade is simultaneously a 
cause of inequality and of the innovation and investment that leads to 
growth.
    Trade is one among several factors that have contributed to the 
rise in U.S. income and wealth inequality since the late 1970s--
declines in unionization and the real minimum wage, decreasing tax 
progressivity, increased short-termism and focus on financial profits 
over real investments in the business sector, and shifting technologies 
have all played roles. But economists don't really debate whether trade 
has distributional impacts on incomes and wealth; we debate how big is 
the impact of trade, among the multiple causes. And across a variety of 
studies, economists estimate that increased trade accounts for between 
10 percent to 52 percent of the overall increase in U.S. wage 
inequality since the 1980s.\2\
---------------------------------------------------------------------------
    \2\ Paul Krugman, ``Trade and Wages Reconsidered,'' Brookings 
Papers on Economic Activity, available at http://www.brookings.edu//
media/Projects/BPEA/Spring%202008/2008a_
bpea_krugman.pdf.
---------------------------------------------------------------------------
    Trade also has positive effects on living standards in the United 
States by incentivizing innovation and providing access to a broader 
variety of goods and services at lower prices. While certainly yielding 
substantial gains from cheap imports, we account for this when 
measuring inflation--adjusted real wages and family incomes, which, 
respectively, have stagnated and declined. Median family income, for 
example, today is more than $5,400 below its level in 2000 and back 
down to its levels before the 1990s economic boom.\3\
---------------------------------------------------------------------------
    \3\ Author's analysis of U.S. Census ``Family Income: Table F-7. 
Type of Family, All Races by Median and Mean Income: 1947 to 2012,'' 
available at http://www.census.gov/hhes/www/income/data/historical/
families/.
---------------------------------------------------------------------------
    Trade's impact on inequality comes both through direct channels--
the dislocation of workers when domestic production shrinks or moves 
overseas--as well as from indirect effects that can saddle regions in 
localized economic depressions. The losses to local economies render 
large swathes of capital stock--factories, office buildings, 
infrastructure--unproductive. It is equivalent to having a Hurricane 
Katrina or Hurricane Sandy, but that capacity won't be rebuilt.
    Economist Andrew B. Bernard and co-authors found that the more 
manufacturing plants were exposed to low-wage-country imports, the 
slower they grew and the more likely they were to exit the market--
close their doors.\4\ Similarly, economist Avi Ebenstein and co-authors 
find that wages grow more slowly in occupations more exposed to import 
penetration and to U.S. multinational companies ability to move 
production offshore.\5\
---------------------------------------------------------------------------
    \4\ Bernard, Jensen, Redding, and Schott, ``Firms in International 
Trade,'' Journal of Economic Perspectives, Vol. 21, no. 3, pp. 105-130.
    \5\ Avi Ebenstein, et al., ``Estimating the Impact of Trade and 
Offshoring on American Workers Using the Current Population Surveys,'' 
Review of Economics and Statistics, available at http://
pluto.huji.ac.il/ebenstein/
Ebenstein_Harrison_McMillan_Phillips_August2012.pdf.
---------------------------------------------------------------------------
    Recent research from economists at the Federal Reserve Bank of San 
Francisco shows that these dislocation and wage impacts are 
concentrated in industries most exposed to offshore competition--
primarily manufacturing industries, and rising increasingly up the 
advanced technology ladder. Their analysis shows it is precisely here 
where the impact on the distribution of wages and capital income within 
firms have been felt most strongly.\6\
---------------------------------------------------------------------------
    \6\ Michael Elsby, Bart Hobjin, and Aysegul Sahin, ``The Decline of 
the U.S. Labor Share,'' Brookings Papers on Economic Activity, 2013, 
available at http://www.frbsf.org/economic-research/files/wp2013-
27.pdf.
---------------------------------------------------------------------------
    Other recent research, from MIT economist David Autor and co-
authors show that the economic impacts of trade competition and 
dislocation are not limited just to affected factories or companies.\7\ 
The spillover effects can essentially create regional economic 
depressions, with broadly elevated unemployment rates, public safety 
net expenditures for things like unemployment, disability, and Medicaid 
benefits--even while the total U.S. economy steams ahead.
---------------------------------------------------------------------------
    \7\ David Autor, David Dorn, and Gordon Hanson, ``The China 
Syndrome: Local Labor Market Effects of Import Competition in the 
United States,'' American Economic Review, Vol. 103, no. 6, pp. 2121-
68.
---------------------------------------------------------------------------
    Much has and still is changing in the global competitive 
environment facing U.S. workers and businesses--and binding together 
their futures with those of people and businesses around the world. 
Whereas most of the postwar period saw global trade concentrated among 
the United States, Europe, and latecomers like Japan, the gravity of 
economic growth and international trade in the world is shifting to the 
East, and to the South--that is, to developing countries in Asia, Latin 
America, and elsewhere that now account for half of global economic 
growth, a share that is likely to continue rising for the foreseeable 
future. Not only will U.S. businesses compete increasingly with 
businesses based in these countries in United States and world markets, 
but U.S. workers at all skill levels will increasingly compete for a 
share of the work across a growing range of industries and occupations.
    In the past, trade tended to occur at arms-length between 
independent firms, but today globally integrated production and 
corporate governance systems comprise the core of international trade. 
In 2013, fully half of U.S. imported goods were traded by companies 
within the same corporate families--what the Census Bureau calls 
related-party trade.\8\ This means that a foreign affiliate of a U.S.-
based company transacted with another related affiliate or the parent 
company in the United States.
---------------------------------------------------------------------------
    \8\ Adam Hersh, ``Offshoring Work is Taking a Toll on the U.S. 
Economy,'' (Washington, DC: Center for American Progress, 2014), 
available at http://www.americanprogress.org/issues/economy/news/2014/
07/30/94864/offshoring-work-is-taking-a-toll-on-the-u-s-economy/.
---------------------------------------------------------------------------
    This practice of offshoring, moving production to foreign locales 
while continuing to sell goods to the U.S. market, is now a deeply 
entrenched and a pervasive feature of the U.S. economy impacting 
inequality and growth in several ways. The work that would otherwise be 
conducted in the United States would go elsewhere, causing direct 
disemployment, with expected multiplier effects on output and 
employment.
    Adjustment to these trade shocks need not be too disruptive if 
displaced workers and capital investments can be smoothly segued into 
other productive uses, and if the shock to aggregate demand can be 
offset by growth elsewhere in the economy. However, because of the 
widespread trend toward such global production arrangements, and the 
sharp fiscal contraction we've seen in the past 4 years, the quality 
and quantity of jobs being created in the United States. Three-fifths 
of the jobs lost in the United States since the start of the Great 
Recession earned middle class incomes, but three-fifths of the jobs 
created since the labor market recovery began in 2010 are in low-wage 
industries and occupations. The pace of growth is not adequate to move 
us back toward full employment--a critical factor for growing market 
wages--or to create jobs that generate opportunities to secure a rising 
middle class standard of living.\9\
---------------------------------------------------------------------------
    \9\ Adam Hersh, ``New Jobs Growth Underscore Stable Recovery 
Although Wages Have Yet to Budge,'' (Washington, DC: Center for 
American Progress, 2014), available at http://www.americanprogress.org/
issues/economy/news/2014/08/01/95027/new-jobs-data-underscore-stable-
recovery-although-wages-have-yet-to-budge/.
---------------------------------------------------------------------------
    The questions before lawmakers are:

  (1)  How should the United States engage trading partners in an 
        increasingly open and competitive world in order to grow the 
        economy from the middle out?

  (2)  What should the United States do to make sure that workers and 
        businesses in the United States can thrive in this environment?

    The United States and its trading partners across the globe need to 
find a way to set a high road path to trade in an increasingly open and 
competitive world. Our national strength, and indeed our mutual social 
and environmental future depend on this. And doing so will require us 
to rethink our approach to the means and goals of economic growth well 
beyond just trade policy.
    Though the global competitive landscape has evolved much faster 
than U.S. economic policies and institutions, there are clear steps we 
can take to set this high road path toward sustained, broadly inclusive 
economic growth.
    First, the U.S. trade negotiators must be pressed to establish 
strong, enforceable standards for fair and open competition in the 
global economy. Capitalizing on U.S. economic potential for trade and 
getting better outcomes for people in the United States and in trading 
partner countries begins with negotiating better international 
agreements. Unfortunately, many rules of the international trading 
system that the United States has painstakingly built through the post-
WWII era are still lacking in key respects and need to evolve to keep 
pace with a changing world economy.
    Currency manipulation for trade advantage is prohibited both by IMF 
and WTO Articles of Agreement and should be dealt with in conjunction 
with other trade issues in bilateral and multilateral trade 
agreements--not through separate dialogs--and I believe that 
legislation to treat currency manipulation as a countervailable duty 
would strengthen that position.\10\ A week's worth of appreciation of 
an undervalued exchange rate would do more to expand U.S. manufacturing 
and agriculture exports than years of Trans-Pacific Partnership 
negotiations.
---------------------------------------------------------------------------
    \10\ IMF Articles of Agreement, Article VIII, Section 2(a), 
available at http://www.imf.org/External/Pubs/FT/AA/#a8s2; WTO Articles 
of Agreement, Article XV available at http://www.wto.org/english/res_e/
booksp_e/gatt_ai_e/art15_e.pdf.
---------------------------------------------------------------------------
    Setting a high enforceable standard of conduct also applies to the 
areas of labor rights and conditions at work, incentivizing responsible 
stewardship of environmental assets in our economies, and ensuring an 
environment of open competition in international commerce.\11\ The May 
10th agreement on labor and environmental standards are a start, but 
fall far short of what is needed: policies with real teeth to sanction 
real, egregious labor practices and conditions that make all workers 
around the world worse off. National labor markets are not segmented 
along export and domestic lines, and therefore labor standards should 
apply economy-wide. Requiring countries to sign on to a handful of 
multilateral environmental agreements is a win, but does little to 
address the costs of environmental externalities built into current 
consumer-driven global supply chain--both due to lax pollution controls 
abroad and the environmental footprint from physically trading goods.
---------------------------------------------------------------------------
    \11\ Adam Hersh and Jennifer Erickson, ``Progressive Pro-Growth 
Principles for Trade and Competitiveness,'' (Washington, DC: Center for 
American Progress, 2014), available at http://www.americanprogress.org/
issues/economy/report/2014/03/11/85639/progressive-pro-growth-
principles-for-trade-and-competitiveness/.
---------------------------------------------------------------------------
    And though trading partners should be free to choose their path to 
development, the United States should insist on establishing 
international norms of transparency and corporate to ensure competitive 
neutrality where developing countries pursue initiatives to build their 
global economic niches through State ownership. It is imperative that 
we establish through our international trade relations standards for 
financial reporting disclosures and independent third-party auditing 
that can establish companies compete with out the undue and 
impermissible forms of State support and privilege--public bodies 
operating in the commercial sphere should conform to the OECD 
Guidelines on Corporate Governance of SOEs or face withdrawal of 
reciprocal trade preferences.
    High standard agreements should also set a high standard for public 
health and safety. Intellectual property rights aspects of trade 
agreements, particularly where they pertain to life-saving drugs and 
medical devices must strike a balance between the social welfare and 
private incentives to innovate. Granting ``ever-greening'' patent 
protections creates a monopoly rent, not an incentive to innovate. Nor 
should high standard agreements impede public health policies from 
using their purchasing power to negotiate fiscally responsible 
procurement for health care goods and services.
    Second, Congress should increase commitments to enforce the hard-
fought rules of trade agreements. Trade agreements aren't worth the 
paper they are printed on if agreed upon rules are routinely flaunted. 
Making sure rules aren't violated takes resources to monitor, 
investigate, and enforce. Our Interagency Trade Enforcement Center, or 
ITEC, is basically an under-resourced public defenders office. As a 
start, Congress should double funding to ITEC to $50 million per year. 
Congress can also instruct the USTR to increase transparency, 
accountability, and action of trade enforcement by instituting a more 
effective National Trade Barriers Report, a new National Trade 
Compliance Data base, and expanded statistical reporting to better 
identify where trade violations are occurring and what we're doing 
about them.\12\
---------------------------------------------------------------------------
    \12\ Adam Hersh and Jennifer Erickson, ``Progressive Pro-Growth 
Principles for Trade and Competitiveness,'' (Washington, DC: Center for 
American Progress, 2014), available at http://www.americanprogress.org/
issues/economy/report/2014/03/11/85639/progressive-pro-growth-
principles-for-trade-and-competitiveness/.
---------------------------------------------------------------------------
    Third, the most important things the United States can do to 
improve America's trade competitiveness is to substantially expand 
investments in the sources of U.S. competitiveness in:

    broadly available quality education to build a workforce 
        that can compete and fuel innovation as well as the family 
        friendly workplace environment that allow parents to build a 
        career while raising their kids;

    modernized infrastructure that can move people, goods, and 
        ideas around more efficiently, lowering costs and making people 
        and businesses more productive;

    scientific research and development, and supporting the 
        innovation ecosystems that link together research with 
        workforce development and commercialization;

    replacing outdated trade adjustment assistance programs, or 
        TAA, with a new universal dislocated worker program that 
        integrates public and private efforts to help workers knocked 
        down by the shock of job dislocation--anywhere in the economy, 
        not just in the tradable sector--by helping them climb the next 
        rung on their job ladder in finding new work and helping smooth 
        aggregate demand for the overall economy.

    Trade is an essential part of the U.S. economy, and it is essential 
that the United States get its trade and economic policies on the right 
track so that we can set a high road path for the global economy.

              Additional Material Supplied for the Record
              
              
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