[Congressional Record (Bound Edition), Volume 149 (2003), Part 2]
[House]
[Pages 1762-1764]
[From the U.S. Government Publishing Office, www.gpo.gov]




               FACING THE CHALLENGES OF A STALLED ECONOMY

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Kentucky (Mr. Whitfield) is recognized for 5 minutes.
  Mr. WHITFIELD. Madam Speaker, as the 108th Congress begins, all of us 
recognize that we face many serious issues, both on the domestic front 
and on the international front. On the domestic front, obviously health 
care will be a key issue that we must work with, as well as others. But 
in order to do that, we must, first, focus on strengthening the economy 
of our country. Nothing is more important than that at this time.
  Recently, I had the opportunity to read a speech given by Mr. Fred 
Smith, the chairman and chief executive officer of Federal Express. I 
would remind everyone that he started a company, and, with his 
associates, from scratch built a Fortune 500 company, operating today 
in 211 countries. It employs over 200,000 people and produced revenues 
in excess of $21 billion last year.
  In this speech, he sets out what he believes are necessary steps to 
be taken to jump-start a stalled economy. I just want to touch on a few 
of the things that he points out.
  First of all, he refers on page 6 to how he agrees with the legendary 
economist of the early 19th century, Jean-Baptiste Say, who said 
essentially that supply creates demand. Simply put, the technological 
and process innovations by scores of inventors, engineers, scientists 
and entrepreneurs that have marked the history of the industrialized 
world lie at the heart of economic prosperity.
  Then he goes on and talks about why that has not occurred in recent 
years, why we have not had that type of action, and he talks about how 
innovations and inventions do continue to pour out of the labs and the 
R&D centers, but he says that business is not investing because of 
increased risk. He says that the risk today is unprecedented in modern 
times. He goes through and he talks about the problems in our legal 
system, for example, and how on the asbestos claims alone it has cost 
industry over $54 billion.
  Then he talks about the necessary steps that must be taken to shorten 
tax depreciation regimes, reduce capital gains, and to remove the 
double taxation of dividends.
  I want to place this speech in the Record because I think it is an 
important speech that sets out very clearly and succinctly steps that 
must be taken if we are going to strengthen our economy, expand our 
economy and to create more jobs.

                     Jumpstarting a Stalled Economy

      U.S. Chamber of Commerce, Washington, DC, November 13, 2002

       Thanks very much for the kind introduction and for inviting 
     me to speak to the Board of the Chamber of Commerce.
       I am a big fan of the Chamber and the outstanding work 
     being done by Tom Donohue. He and his team have made the 
     Chamber once again a significant voice for business in the 
     Washington political debates. We at FedEx very much 
     appreciate Tom's leadership, energy, and commitment as well 
     as the work of the Chamber on many issues of great importance 
     to us.
       I am concerned, as I'm sure most of you are, about the 
     state of the U.S. economy. Following the dotcom and telcom 
     meltdown, our economy has simply not gained enough traction 
     to improve the American standard of living and to continue 
     producing the capital stock necessary for the prosperity of 
     future generations.
       Sometimes I think I am the Forrest Gump of the American 
     economic scene over the last 30 years. Like him, I've seen it 
     all and many times have been in the middle of the fray, 
     economically speaking.
       I founded and ran a small company, and today am CEO of that 
     same company, which has grown to be one of the world's 
     largest--operating in 211 countries, employing over 200,000 
     people and producing $21 billion in total revenues last 
     fiscal year. I've also had the pleasure of serving on five 
     other New York Stock Exchange boards. And I participate in 
     several organizations that serve the needs of large 
     businesses such as the Business Roundtable, the Business 
     Council, and various transport industry associations. It is 
     important to recall that the last 1960's also saw the 
     bursting of a technological bubble that had put at risk the 
     fundamental principles of venture capital investing.
       After FedEx went public in the late 1970s, the welcome 
     profits we produced for our venture capital investors helped 
     reinvigorate that important sector of the financial markets. 
     In early 80s, given the significant success of FedEx as a 
     start-up and its importance to the venture capital industry, 
     I, alone with the National Venture Capital Association and 
     the American Electronics Association, worked hard to lower 
     the capital gains tax by testifying before Congress on 
     several occasions. And, in fact, Congress did lower the 
     capital gains tax rate in 1983 from 28% to 20%. That same 
     year, capital gains tax revenues increased by 45%. More 
     important, tax revenues continued to grow every year 
     thereafter through 1986. Then, in 1987, the capital gains tax 
     rate was taken back up to 28%. Capital gains tax revenues 
     fell in that year and three of the following four years.
       Now many of my views about the American economy have also 
     been influenced by

[[Page 1763]]

     some 30 years' involvement with various administrations and 
     Congress. In this regard, FedEx was a leader in efforts to 
     deregulate transpiration in the United States (and more 
     recently on a global basis), and we are constantly involved 
     with various governmental issues.
       Due to this experience, I believe I have a reasonable 
     understanding of the political processes that now greatly 
     influence virtually all economic activity today. Because of 
     this, I know that any business tax proposal must meet the 
     test of the ``politically possible'' regarding near-term tax 
     receipts.
       On the business front, I have watched with great interest 
     the cyclical changes in the economy and the give-and-take 
     between the so-called ``symbol economy'' of Wall Street and 
     the financial markets, and the ``real economy'' of hard 
     assets and industrial corporate operations. Clearly, in the 
     late 1990's, the symbol economy was the great driver of 
     economic activity as opposed to the real economy. As a 
     result, the fantastic valuations given various companies by 
     the financial markets led all to often to excesses and in 
     some cases criminal activities. The bursting of the bubble 
     was an inevitable consequence.
       But perhaps the most important lesson I have learned 
     watching the economic froth over the years is that the modern 
     economy is extremely complex. Since the beginning of the 
     Industrial Age, great economists have argued that ``chicken-
     or-egg'' question--Is it supply that drives economic growth 
     or is it demand?
       For decades, Keynesians have debated the disciples of the 
     so-called Austrian school. Its progeny, ``the Chicago boys,'' 
     have had a remarkable influence over many economic decisions 
     here and abroad. A recent cover of The Economist plotted 
     business cycles since the beginning of the Industrial 
     Revolution. Remarkably, it showed that the extremes of these 
     historical highs and lows have steadily decreased over time. 
     Clearly, the advent of the Federal Reserve System and its 
     international counterparts, and the influence of the great 
     monetarists like Milton Friedman have helped domesticate if 
     not fully tame the economic beast. In addition, one would 
     certainly have to mention the Kennedy tax cutters and the 
     Reagan ``supply-siders'' in any pantheon of key economic 
     architects of the late 20th century.
       We have lived through ``stagflation'' in the 1970's, the 
     ``greed is good'' LBO mania of the 1980's, and of course the 
     incredible bubble of the late 1990's--an event perhaps 
     matched only by the 1920s stock market crash brought on by 
     that decade's ``irrational exuberance'' (to borrow a famous 
     recent quote).
       During this 30-year time period, there have been many 
     societal and governmental changes that have helped improve 
     economic performance. Of particular importance to FedEx was 
     the series of deregulatory changes that freed up 
     transportation and logistics industries. These began in 1977 
     with air cargo deregulation and concluded in 1994 with 
     federal pre-emption of the last vestiges of state regulation.
       As a direct result of these new laws, total logistics 
     costs, meaning the interest expense of carrying inventory, 
     warehousing costs, and transportation, have declined from a 
     little over 16% of GDP in 1980 to about 10% today. This 
     remarkable improvement in national productivity has made 
     dramatic improvements in the national well-being.
       Equally important, transport deregulation permitted 
     significant business innovations such as the now legendary 
     Wal-Mart just-in-time distribution system, the Dell made-to-
     order computer revolution, and FedEx itself.
       Government has also helped economic growth by funding a 
     significant amount of research and development that led to 
     such innovations as the Internet, communications satellites, 
     swept-wing jet aircraft, and many others. Private capital 
     subsequently invested to exploit these government-funded 
     innovations has spawned significant economic growth.
       Finally, both Democratic and Republican administrations 
     since World War II have been committed to opening global 
     markets so that today over 25% of all U.S. economic activity 
     is related to imports and exports. Increased trade has been 
     an enormous overall boon to U.S. GDP, particularly since 
     1970, when trade was only 10% of the economy.
       Having observed all these various economic phenomena over 
     the years, and having studied the various macro-economic 
     theories to the extent this poor brain can absorb them, I 
     have come to agree with that legendary economist of the early 
     19th century, Jean-Baptiste Say. He said, essentially, that 
     ``supply creates demand.''
       Simply put, the technological and process innovations by 
     scores of inventors, engineers, scientists and entrepreneurs 
     that have marked the history of the industrialized world lie 
     at the heart of economic prosperity.
       I believe economic theorists and politicians greatly 
     underestimate the importance of the ``animal spirits'' as 
     John Maynard Keynes called entrepreneurial endeavor.
       Moreover, I also believe economists are often too concerned 
     about the investment rates in historical or mature businesses 
     which, as all economic theories agree, move constantly 
     towards commoditization, absent innovation and change.
       A good example of Say's law is the RF key chain in my 
     pocket. A decade ago I simply did not know that I needed this 
     tiny device that allows me to lock and unlock my car from a 
     distance. More recent versions allow me to remotely turn the 
     lights on or off and even open the trunk.
       This invention has been an incremental but important 
     convenience for millions of people and has, on occasion, even 
     saved lives. The idea sprang from the mind of an inventor, 
     and some entrepreneur inside or outside of a corporation 
     championed its production. The rest is history. This 
     invention came from scientific innovation in fields seemingly 
     unrelated to the traditional automobile--radio frequencies 
     and miniature batteries. And the final product created its 
     own demand, just as Say predicted some two centuries ago.
       Naturally, all of us can think of scores of products or 
     processes that have improved our well-being, enhanced 
     productivity, and created economic activity and wealth. The 
     Lipitor I take for my heart is a Godsend; Satellite weather 
     imaging technology has improved all sorts of human 
     activities; and The plethora of entertainment options today 
     can satisfy virtually any taste in leisure activities.
       Clearly, the fundamental driving forces of our economy are 
     continued invention and innovation, exploited by capital 
     investment. After all, the fundamental difference between 
     well-paid FedEx drivers and pilots versus a third-world 
     person moving commodities slowly over a dirt road is the 
     investment in the airplane and the truck; in the ATC system 
     and the highway; and in the education and training afforded 
     our employees.
       Today U.S. business is not investing at a level necessary 
     to create adequate GDP growth, despite the fact that interest 
     rates are lower than they have been in years. Innovations and 
     inventions continue to pour out of the labs and R&D centers, 
     as reflected by the increasing number of patent applications. 
     What then is the problem? Why are we not investing more 
     robustly? In my opinion, the issue can be summed up in two 
     words--increased risk.
       About 3,000 companies make 70% plus of all capital 
     investments in our economy. The leaders of these companies 
     today perceive a level of risk unprecedented in modern times. 
     Our legal system has become a minefield for those who aspire 
     to develop something new or unproven. All economic activity 
     today is subject to after-the-fact scrutiny that may ascribe 
     completely different motives and beliefs than were originally 
     intended. The development of the class-action lawsuit, itself 
     a process innovation, has clearly wobbled out of control. So 
     has the ability of juries to assign appropriate damages and 
     ``punishments.''
       Now, I have good friends who are plaintiff attorneys. They 
     tell me outrageous awards and abuses of the legal process are 
     the exception rather than the rule. But unfortunately 
     (perhaps because of profile media coverage of the extreme 
     cases) that is not the perception in boardrooms across 
     America. And I am not speaking about the new regulations 
     required by Sarbanes-Oxley or the New York Stock Exchange. I 
     am confident these new requirements are of little concern to 
     the vast majority of honestly run businesses in this country. 
     A bit more bureaucracy will be created and more money spent 
     on various control activities. But if this makes our public 
     business activities more transparent and improves the 
     confidence level of the investing public, they are welcome 
     changes.
       The litigation landscape in the United States, however, has 
     now become a significant drag on economic activity and 
     particularly the all-important activity of invention, 
     innovation and investment required to produce economic 
     wealth. For example, asbestos-related suits alone have cost 
     businesses more than $54 billion and now threaten companies 
     representing 85% of the economy. (from 11-5-02 WSJ article by 
     George Melloan) Our litigation system simply MUST be reformed 
     if we are to regain appropriate levels of these core economic 
     activities. And I applaud Tom Donohue, the Chamber of 
     Commerce and the Bush administration for making the reform of 
     the U.S. litigation system a top legislative priority.
       In a related vein, the Congress must also solve the issue 
     of terrorism insurance. The U.S. air transportation industry 
     simply could not function today were it not for Congress 
     having passed emergency legislation to provide terrorism 
     insurance through the Department of Transportation. This 
     temporary fix must be made permanent not just for 
     transportation, but for all industries. We live in an age 
     when shadowy enemies can strike innocent targets in a variety 
     of devious ways. The commercial insurance marketplace simply 
     cannot provide affordable and adequate coverage necessary to 
     sustain an appropriate level of economic activity without 
     Federal government's willingness to be the ``insurer of last 
     resort'' or to cap private liabilities for acts of war.
       In addition to the fear of litigation and the lack of 
     adequate insurance against terrorist attacks, businesses 
     today face an equally unprecedented array of new risks due to 
     rapidly changing markets, international competition, and 
     accelerated technological change.

[[Page 1764]]

       Let me give an example from the aviation industry. Airlines 
     that invested in domestic wide-body aircraft in the early 
     1970's found that the market fundamentally changed in the 
     80s. Why? Because passengers preferred smaller aircraft 
     flying more frequent flights. Thus, the original book 
     depreciation estimates of 20-25 years for the wide bodies 
     were wildly out of step with reality. The same thing has 
     happened in industry after industry, as rapidly changing 
     markets, new technologies, or new competitors with 
     revolutionary business models have appeared.
       The concept of depreciation was developed as an accounting 
     discipline to reflect the expected useful life of a capital 
     asset. Yet, over the years, tax depreciation schedules and 
     book depreciation schedules have diverged, and they have each 
     become a less accurate reflection of reality. In fact, most 
     of the time, companies that make capital investments simply 
     cannot accurately predict the economic life of the asset 
     being acquired. With FedEx having invested over $20 billion 
     over the last 10 years, I am keenly aware of the role tax 
     policies have on investment decisions.
       In my opinion, the most important stimulus for increased 
     capital investment would be simpler, shorter tax depreciation 
     regimes applied to capital in this country. To this end, I 
     suggest moving to a simple, three-category tax depreciation 
     system as follows: First, a one-year depreciation schedule 
     for all high-technology investments and low-value software 
     purchases; Next, a three-year depreciation schedule (perhaps 
     40%, 30%, and 30%) for all equipment and major software 
     purchases or developments; and Third, a five- year tax 
     depreciation schedule, 20% per year, for buildings.
       I would also recommend that the book life of any asset be 
     restricted to no longer than five times the tax life. For 
     instance, an aircraft with a tax life of three years would be 
     limited to a book life of 15 years. All too often, I have 
     seen managements reluctant to invest in new, improved 
     equipment because of the impact to the reported P&L of a 
     premature write-off of already obsolete equipment.
       I believe the second change that's needed to re-ignite our 
     economy is to reward patient equity investment through a 
     graduated reduction of capital gains taxes over the years the 
     investment is held. Lowering the capital gains tax, 
     preferably to zero over several years, would allow the 
     resumption of the all important start-up and mezzanine 
     financing of new businesses. Such a tax schedule would unlock 
     shares of stock long-held by a company founder, a 
     circumstance that applies to me, by the way. I am confident 
     that the release of such stock would be a net plus to the 
     Treasury and the markets. A new capital gains tax schedule of 
     the current 20% for securities held for one year, then 
     dropping 5% a year to zero after a five-year holding period, 
     would be a real stimulus to our equity markets for companies 
     of all sizes. Such a capital gains regime would dampen the 
     speculative churning of securities that was a big factor in 
     the late 1990s bubble.
       Lastly, the phase-out of the double taxation of dividends 
     would restore the balance between the ``symbol'' economy and 
     the ``real'' economy. Companies that need to make investments 
     would have the option of doing so with equity capital versus 
     debt. Dividends, like interest, would be fully deductible at 
     the corporate level. The same impulses that drove the 
     excesses of the 1980's LBO mania occur now on a smaller scale 
     in American boardrooms everyday. The decision to invest or 
     not is often made and financed based on the deductibility of 
     interest and the punitive taxation of dividends. Having 
     dividends and equity treated the same as interest and debt 
     respectively would offer business managers an alternative 
     model for economic growth. Investors claims on cash flows 
     would be a powerful discipline to invest in only the most 
     productive and wealth-creating projects for society.
       If you objectively review the various fads and cycles of 
     the last 30 years, you will see that the unintended 
     consequences of our business tax structure in terms of 
     depreciation schedules, capital gains taxes, and dividends 
     taxation are at the heart of many of our economic cycles and 
     disappointments. While there are many excellent ideas as to 
     how to reform the business tax system, the vast majority are 
     politically infeasible. Valued-added taxes, and so forth all 
     founder on the revenue stream requirements of the U.S. 
     Treasury or the vested interests of powerful political 
     lobbies.
       The advantage of the three changes I have suggested is that 
     they will increase federal tax revenues in short order. In 
     the case of depreciation acceleration, I am confident that 
     tax receipts would grow almost immediately due to the rapid 
     increase in transactions and additional economic growth. With 
     respect to a graduated capital gains tax, as I mentioned 
     earlier, figures show that tax revenues rose in the years of, 
     and following the 1983 introduction of the 20% capital gins 
     rate, and fell again when the rate was taken back up to 28% 
     in 1987. A similar phenomenon occurred after the rate was 
     again reduced to 20% in 1997. In fact, according to the CBO, 
     the actual tax revenue increases for the years 1997 through 
     1999 exceeded initial projected revenues gains by 40 to 50%. 
     We can expect the same kind of impact from a graduated 
     capital gains tax rate. I believe this is true in the case of 
     the deductibility of dividends as well, although there are 
     conflicting studies as to the timing of the overall benefit. 
     In any case, the reform of dividend taxation could be phased 
     in over several years to lessen the immediate reduction in 
     federal taxes. The new ability of members of Congress to 
     request a dynamic scoring of the effects of tax policy 
     proposals should be able to demonstrate the positive effects 
     of these tax reforms or reforms similar to them.
       Most people today are surprised to learn that in fiscal 
     '01, business income taxes only produced about $170 billion 
     or 8.5% of total federal revenues of slightly over $2 
     trillion that year. The vast majority of U.S. tax revenues 
     come from personal income taxes and FICA taxes. This split in 
     revenues reflects the transition over many years to a 
     wealthy, consumer-driven economy, nourished by substantial 
     private investment. The relatively low percentage of federal 
     revenue coming from the current corporate tax system means 
     that such fundamental business tax reform as I've suggested 
     is, in fact, possible, In other words, such a stimulus 
     package for business investment has great upside and 
     manageable downside risks in terms of increasing the near-
     term deficit.
       In conclusion, we must reinvigorate business investment. 
     This engine of future prosperity must now be re-tuned if we 
     are to achieve adequate levels of economic growth and 
     improved productivity to meet the income aspirations and 
     needs of our citizenry. To these ends, the five reforms I've 
     outlined should be the centerpiece of an immediate 
     economic stimulus initiative by the President and 
     Congress.
       I'm confident our political leaders have the best interests 
     of the future generations in mind. Being an optimist, I think 
     we can muster the will to get this done. The alternative is 
     so grave that I cannot contemplate our not doing so.
       Thank you so very much for your kind attention.

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