[House Hearing, 109 Congress] [From the U.S. Government Publishing Office] SHARPENING OUR EDGE--STAYING COMPETITIVE IN THE 21ST CENTURY MARKETPLACE ======================================================================= HEARING before the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED NINTH CONGRESS SECOND SESSION __________ FEBRUARY 9, 2006 __________ Serial No. 109-122 __________ Printed for the use of the Committee on Government Reform Available via the World Wide Web: http://www.gpoaccess.gov/congress/ index.html http://www.house.gov/reform _____ U.S. GOVERNMENT PRINTING OFFICE 24-166 WASHINGTON : 2006 _________________________________________________________________ For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 COMMITTEE ON GOVERNMENT REFORM TOM DAVIS, Virginia, Chairman CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California DAN BURTON, Indiana TOM LANTOS, California ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois CHRIS CANNON, Utah WM. LACY CLAY, Missouri JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland DARRELL E. ISSA, California LINDA T. SANCHEZ, California JON C. PORTER, Nevada C.A. DUTCH RUPPERSBERGER, Maryland KENNY MARCHANT, Texas BRIAN HIGGINS, New York LYNN A. WESTMORELAND, Georgia ELEANOR HOLMES NORTON, District of PATRICK T. McHENRY, North Carolina Columbia CHARLES W. DENT, Pennsylvania ------ VIRGINIA FOXX, North Carolina BERNARD SANDERS, Vermont JEAN SCHMIDT, Ohio (Independent) ------ ------ David Marin, Staff Director Rob Borden, Parliamentarian Teresa Austin, Chief Clerk Phil Barnett, Minority Chief of Staff/Chief Counsel C O N T E N T S ---------- Page Hearing held on February 9, 2006................................. 1 Statement of: Gutierrez, Carlos M., Secretary, U.S. Department of Commerce. 19 Ruiz, Hector de J., Ph.D., president and chief executive officer, Advanced Micro Devices; M. Brian O'Shaughnessy, president and chief executive officer, Revere Copper Products; Richard S. Garnick, president, North American Services, Keane, Inc.; Deborah Wince-Smith, president, Council on Competitiveness; and Dave McCurdy, president, Electronic Industries Alliance............................. 57 Garnick, Richard S....................................... 77 McCurdy, Dave............................................ 103 Ruiz, Hector de J........................................ 57 O'Shaughnessy, M. Brian.................................. 70 Wince-Smith, Deborah..................................... 89 Letters, statements, etc., submitted for the record by: Cummings, Hon. Elijah E., a Representative in Congress from the State of Maryland, prepared statement of............... 124 Davis, Chairman Tom, a Representative in Congress from the State of Virginia, prepared statement of................... 16 Garnick, Richard S., president, North American Services, Keane, Inc., prepared statement of......................... 82 Gutierrez, Carlos M., Secretary, U.S. Department of Commerce, prepared statement of...................................... 22 McCurdy, Dave, president, Electronic Industries Alliance, prepared statement of...................................... 106 Mica, Hon. John L., a Representative in Congress from the State of Florida, information concerning various charts.... 6 O'Shaughnessy, M. Brian, president and chief executive officer, Revere Copper Products, prepared statement of..... 73 Ruiz, Hector de J., Ph.D., president and chief executive officer, Advanced Micro Devices, prepared statement of..... 60 Turner, Hon. Michael R., a Representative in Congress from the State of Ohio, prepared statement of................... 46 Wince-Smith, Deborah, president, Council on Competitiveness, prepared statement of...................................... 93 SHARPENING OUR EDGE--STAYING COMPETITIVE IN THE 21ST CENTURY MARKETPLACE ---------- THURSDAY, FEBRUARY 9, 2006 House of Representatives, Committee on Government Reform, Washington, DC. The committee met, pursuant to notice, at 9:09 a.m., in room 2154, Rayburn House Office Building, Hon. Tom Davis (chairman of the committee) presiding. Present: Representatives Tom Davis, Ros-Lehtinen, Mica, Gutknecht, Miller, Turner, Issa, McHenry, Foxx, Cummings, Van Hollen, Ruppersberger, and Norton. Staff present: David Marin, staff director; Ellen Brown, legislative director and senior policy counsel; John Hunter and Jim Moore, counsels; Rob White, press secretary; Drew Crockett, deputy director of communications; Brien Beattie, professional staff member; Teresa Austin, chief clerk; Sarah D'Orsie, deputy clerk; Leneal Scott and J.R. Deng, computer systems managers; Krista Boyd, minority counsel; Adam Bordes, minority professional staff member; Earley Green, minority chief clerk; and Jean Gosa, minority assistant clerk. Ms. Ros-Lehtinen [presiding]. The committee will come to order. We thank the Secretary of Commerce Carlos Gutierrez for appearing before us this morning. Congressman Davis is on his way. I apologize for my casual attire, but we have a retreat in Maryland. The buses leave in just a few moments. Some of the Members are going to stay around, Mr. Secretary, to hear your testimony as well as to hear from our private panel as well. And they will be going to meet us in a little bit. But I wanted to open up the meeting and give Members an opportunity to make opening statements, and I would just like to say what a delight it is for me to be with you, Mr. Secretary, because certainly our economy is in great shape, and I think that has a lot to do with the steady hand with which you have dealt with your department to stimulate the economy, to diversify our workforce and to make sure that we can do all we can to have all of the economies of the world be free. And I notice that you refer to that freedom quotient in your testimony from the Heritage Foundation, and I thank you for that. You have a compelling personal story that in my congressional district is well known, and I think it speaks to the many opportunities that are available here in the United States of America for any immigrant, for any refugee who wants to come here, study, work hard, play by the rules and become an America success story. And that, Mr. Secretary, you truly are. You're a role model for all of us, and we take great pride in my congressional district especially to see you sitting here being the Secretary of Commerce. It's always a pleasure. With that, I'd like to turn to Congressman John Mica, my Florida colleague, for opening statements, for the beginning of them. Mr. Mica. Thank you, Madam Chairwoman, and good morning. I am pleased to have Secretary Gutierrez with us this morning and two other distinguished panels. I too will be joining my colleagues on the majority side of the aisle as we convene to plan our agenda for the balance of the year, and actually one of the most important questions that we could consider is staying competitive in the 21st century marketplace and sharpening our edge, which is the title of this morning's hearing. I think it's particularly important, I have been on Government Reform with Ileana Ros-Lehtinen I think for 14 years. I don't know that we've really spent much time focusing on this. We did look at a trade and business commerce reorganization back in the 90's. But I think this is extremely important. I commend the President on looking at how we focus on a workforce for the future, and I think some of the elements that have been proposed as far as increasing our capability with science, math, education and job training are absolutely essential elements and will strongly support the administration's proposal. I think that--actually, I read all of the testimony last night, and it was very enlightening. You have a great array of expert witnesses who actually deal in business and commerce and some of the cutting edge of where the opportunities are for the future. And they have also identified tax policy, health care and a number of other challenges that we face in the global marketplace to keep up with some very good expertise witnesses. What I wanted to do is just take a few minutes though and talk about one thing that isn't here. It's one of my favorite subjects. As we all know, we have a $700 billion trade deficit. We are projecting this year about a $400 billion budget deficit. I am more concerned about the trade deficit than I am the budget deficit. We'll work our way through that. In the Reagan era, when we dealt with the challenge of international communism, we had to spend money to protect and defend and also keep us secure. We are doing the same thing now in the war on terrorism. But a $700 billion trade deficit should really be of concern, and some of the proposals the President put forth are longer term. Now, one of the things I think we need to do and I want to focus just a second, I think we have the Secretary--I thought we had somebody, too, from the Department of State was on this before, but they--I don't see them now but we'll get a copy of this because they both play an important role in international trade as far as the government is concerned. How do we increase trade and deal with this deficit? It's pretty simple. You deal with trade assistance, trade promotion, trade finance and trade negotiation on the international scene. Unfortunately, I still maintain--and some have heard this song and dance before--that the way the United States conducts international trade, business and commerce is somewhat dysfunctional. I have a chart that's up there, and you can see it. It hasn't changed much. We have put a little bit of lipstick on the pig, but it is still a rather dysfunctional array of activities where negotiation is out here; finance out here. Commerce has something; State has something, and a host of other agencies that we see. We try to coordinate it, but we don't always get the best results. One of the additional problems that we have in addition to having a dysfunctional trade organization is that our competition, China, the European Union, have actually come together, are more organized for trade, for trade finance. You can't tell where business, government, finance and trade negotiation begins and ends. And that is the competition that we face, and we don't have a structure to deal with that in the 21st century. I want to talk a little bit about trade assistance and promotion and one of the challenges we face right now. I have another chart. If you look at really what we spend on trade assistance--international trade administration accounts for 4 percent of the Department of Commerce budget. If we look at the 40,000 people we have in the Department of Commerce, you might say that 1,200 directly deal with business and trade. So the Department of Commerce is somewhat a misnomer. It's sort of a weather department, and also NOAA, Bureau of Census, take up 65 percent of the resources, very little with trade. What is even worse is that the amount of money that we are spending, the net amount of money--if you could put chart 4 up--because of some of the things Congress has done--you can't see that very well--but trade administration started out in 2005 with $403 million, went down to $398 in 2006. This wouldn't be bad enough, that we're reducing the amount of resources dedicated to promoting trade, business assistance and the activities to sell overseas, but we also have a capital cost sharing requirement, and that means that they are being charged against their budget for security and improvements that are usually wherever this foreign commercial service operation is located overseas. So actually you have a net reduction in the amount of money that's spent. And, actually, I have heard of offices, potential offices being closed. So these are on the front line of doing business overseas, and we're decreasing our resources, not the Secretary's fault. It's the Congress' fault, OMB and others who deal with these issues. I wanted to also say that, in addition to a net reduction in our resources to assisting business, most of this is not directed to the Ford's or to the--well, God knows, Ford has its problem and the large U.S. corporations, because most of them can deal overseas, but to medium and small business, which have the most difficulty in competing overseas, then the structure that we have as far as foreign commercial service operations--I have a chart, foreign commercial service operations by region. And we have a total of 79 foreign commercial service operations. And in some countries, we have them where we probably don't need them. We have about 80-some countries where we have no foreign commercial service operation. Now that wouldn't be bad enough if those who have the responsibility--we don't have a foreign commercial service operation; we have the responsibility given to the Department of State. The Department of State has--I queried the Department of State, and I think we have 290 foreign commercial service officers under the Secretary located overseas. The bulk of the positions overseas that deal with the economic assistance and promoting U.S. business and aid to business overseas, we have 497 officers who are economic officers under the Department of State. If this doesn't have you confused, I'll totally confuse you in a minute. We have a total of 1,319 economic officers, foreign service officers. That's within the Department of State. So they're not located overseas, so most of those are probably in Washington or wherever. So 497. Then we asked, what do they do? And this is the response and the way they said it: The difference is accounted for by the fact that many economic officers are entry level officers who in their first one or two tours in the foreign service fill rotational or counselor positions. So that's what we're sending in the areas where we have no foreign commercial service officers, sort of our rookies to assist business. So the structure is dysfunctional, the resources are being cut back, and then we send rookies in to do the job. When you want to promote business, assist business, you have to have people who know what they're doing, and we send in sometimes the least capable. We do have the same problem in Congress. Nobody is responsible specifically for putting together a comprehensive trade and business package. We have the same jurisdictional problems Department of Commerce has with dealing with State and the myriad other agencies we saw. Just, in conclusion, for example, in the Baltic areas, Lithuania, Estonia, Latvia, I think we have one foreign commercial service officer for three of the biggest emerging markets, and we're about to lose that person. Some years ago, through some political wheeling and dealing, I got a foreign commercial service officer assigned to the Slovak Republic. When we did that--you can see the figure when he first came in was $225,000; this is with one position-- up to a quarter of a billion dollars of U.S. business. In addition to what you see here and not accounting for are about six Boeing aircraft worth more than $1 billion. That's in a short period with one person. So in most countries, again, we have no foreign commercial service officer or rookies. In the emerging markets, we have very limited resources. And to do business--put back up the embassy. Having been in international trade for 7 years in the private sector--where is the picture of one of the embassies? I defy you to try to conduct business as an American businessman or someone overseas--this is one of our embassies-- and penetrate from that gate to get into the foreign service commercial offices. Most of the assistance is located within the embassy. This isn't the Citadel that most of them are, but it was difficult as me as a former chief of staff in the U.S. Senate with sort of credentials to even penetrate into this and talk to anybody, again, with my standing. So this is the system that we have in place now for assisting U.S. trade and business. Mostly the small guys. On top of that, we have a system of penalizing them. We charge them a fee. Most countries do not charge a fee. Some underwrite their international trade and business efforts, not to mention research and development and all the other things that are done. So not many people are familiar with this structure. I raise this as something continually that we need to pay attention to. I thank you for allowing me the time, Mr. Chairman. We filled a little with your coming in. What we're talking about here today is very important. I support the initiatives proposed. I think we need to even look beyond that. Thank you. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] 26331.001 [GRAPHIC] [TIFF OMITTED] 26331.002 [GRAPHIC] [TIFF OMITTED] 26331.003 [GRAPHIC] [TIFF OMITTED] 26331.004 [GRAPHIC] [TIFF OMITTED] 26331.005 [GRAPHIC] [TIFF OMITTED] 26331.006 [GRAPHIC] [TIFF OMITTED] 26331.007 [GRAPHIC] [TIFF OMITTED] 26331.008 [GRAPHIC] [TIFF OMITTED] 26331.009 Chairman Tom Davis [presiding]. Mr. Secretary, you have limited time here; is that correct? You have a limited period of time. Secretary Gutierrez. Yes. Chairman Tom Davis. Let me ask Members if we can hear from the Secretary and do questions, and then I'll put my statement in the record. [The prepared statement of Chairman Tom Davis follows:] [GRAPHIC] [TIFF OMITTED] 26331.010 [GRAPHIC] [TIFF OMITTED] 26331.011 [GRAPHIC] [TIFF OMITTED] 26331.012 Chairman Tom Davis. So why don't you proceed at this point. It's our policy we swear you in before you testify, so raise your right hand. [Witness sworn.] Chairman Tom Davis. We very much appreciate you being here. This is an important hearing. This not only fits into what the President mentions in the State of the Union but something a lot of us have been talking about for a long time, a changing world economically and America's being ready to compete in that world. Go ahead. Thank you. STATEMENT OF CARLOS M. GUTIERREZ, SECRETARY, U.S. DEPARTMENT OF COMMERCE Secretary Gutierrez. Thank you, Mr. Chairman. I appreciate the opportunity to be here. Members of the committee, I am very pleased to have this opportunity to discuss American competitiveness, and with your permission, Mr. Chairman, I'd like to make a brief opening statement and submit my written testimony for the record. Let me say at the outset that American companies and American workers are the most competitive and innovative in the world. And I would like to just repeat that because it's often good to remind ourselves again and again that we are the most competitive economy on the face of the Earth. Our GDP per capita is among the highest in the world. Over the past 4 years, the United States has experienced faster growth in real GDP than any other major industrialized nation. Our 2005 GDP per capita is higher than that of Japan, the UK, Germany, France, Italy and Canada. So therefore we have the highest GDP per capita of any other G7 nation. Just to give you an idea, the U.S. economy is growing well over twice as fast as the European Union, so the European Union being a very large economy in the worldwide context, our economy is growing twice as fast as that of the European Union. Our unemployment rate is 4.7 percent. This is lower than the unemployment rate in Canada, in Italy, in Germany and in France, and in many of those countries the range there is anywhere from 6.5 all the way up to 9 percent. The United States is the world's leading exporter of goods and services. U.S. productivity has had one of the fastest 5- year periods of growth in almost 40 years. We have created over 4.8 million jobs since April 2003. An estimated 72 percent of the world's total venture capital spending is invested in U.S. companies. So America's willingness and ability to compete has made our Nation's the most powerful economy, and the great thing is that we have the numbers and we have the results and we have the facts to show it. The challenge of course is, how do we maintain our leadership role as the most competitive economy in the world? How do we keep it going? And how do we step it up even more in light of the fact that the world is getting more and more competitive? In his State of the Union address, President Bush announced an ambitious American competitiveness initiative. The centerpiece is the President's commitment to doubling funding for Federal research and development in the physical sciences and engineering over the next 10 years. To maintain our economic leadership, we need to generate new technologies. We need to continue to invent the future the way we have been doing so for decades and decades. The American Competitiveness Initiative calls for a 24 percent increase in funding for our world class laboratories at the National Institute of Standards and Technology. This funding will allow scientists there who have won three Nobel Prizes to advance research in such promising fields as nanotechnology, hydrogen and quantum information. This could lead to new cancer therapies, fuel cells to power pollution- free cars and unbreakable codes to protect electronic financial transactions, among many other innovations. Research on nanotechnology data alone is crucial to the private sector success in a market that could reach $1 trillion over the next decade. The second major component is investing in human capital. President Bush is proposing investing $380 million in fiscal 2007 to improve math and science skills in K through 12 schools. His plan also provides for job training, supporting universities that offer world class education and research opportunities, and attracting and retaining the best and brightest high skilled workers from around the world by supporting comprehensive immigration reform. In addition to the American Competitiveness Initiative, the President is committed to fostering a business environment that encourages entrepreneurship and risk taking, and we know what it takes to have an environment that is innovation friendly. We need to continue to keep taxes low, and we need to make the President's tax cuts and the Congress's tax cuts permanent, and we need to recognize that not making them permanent is the same as taking a tax increase, and the last thing our economy needs today is a tax increase. We need a regulatory climate that is responsible and reasonable. We need to ensure that entrepreneurs who are creating a business and trying to create new products and creating jobs aren't sabotaged by frivolous lawsuits. We need a health care system that is efficient, affordable and portable. We need to protect innovation through intellectual property rights, and we need an economy that is open to the global marketplace. Compared to other countries, America has a powerful business environment, and that is why we are leading the world, and that is why there is no other industrialized Nation that comes close. But we are not complacent, and we know we still have work to do. When we open our markets to 3 billion new consumers, we also open up to 3 billion new competitors. To thrive in an open world, economies like ours compete on the basis of innovation, on the basis of talent and on the basis of the business environment that we create. Mr. Chairman, the President, the Commerce Department, and this administration are committed to maintaining America's leadership and competitiveness in today's dynamic global economy. I want to thank you and the members of this committee for your support. I want to recognize your foresight, Mr. Chairman, in calling these hearings, and I would welcome your comments and suggestions, and I'd be pleased to take your questions. [The prepared statement of Secretary Gutierrez follows:] [GRAPHIC] [TIFF OMITTED] 26331.013 [GRAPHIC] [TIFF OMITTED] 26331.014 [GRAPHIC] [TIFF OMITTED] 26331.015 [GRAPHIC] [TIFF OMITTED] 26331.016 [GRAPHIC] [TIFF OMITTED] 26331.017 [GRAPHIC] [TIFF OMITTED] 26331.018 [GRAPHIC] [TIFF OMITTED] 26331.019 [GRAPHIC] [TIFF OMITTED] 26331.020 [GRAPHIC] [TIFF OMITTED] 26331.021 [GRAPHIC] [TIFF OMITTED] 26331.022 [GRAPHIC] [TIFF OMITTED] 26331.023 [GRAPHIC] [TIFF OMITTED] 26331.024 [GRAPHIC] [TIFF OMITTED] 26331.025 [GRAPHIC] [TIFF OMITTED] 26331.026 Chairman Tom Davis. Thank you very much. I think you noted accurately that, compared to Europe and the Western Hemisphere, we're doing very well economically, but a lot of new competition we're seeing now is from the other direction, from the Pacific Rim. In terms of the production of engineers, scientists, computer scientists and the like, basically, we see jobs migrating to those areas. The one thing we seem to have, as I talk to technology leaders in my district and around the country, is a lot of the innovation is still coming from the United States. You can put it in a box and give it to engineers in China and India and somewhere else, and they can solve the problem but the innovation really is coming from here because that's part of our culture, that's part of our economic system, and it's not just something they have grown into at the same rate. But there is a problem when I talk to my tech leaders about getting qualified leaders in some of these high end areas. We're producing fewer engineers than we did a generation ago. A majority of the graduate students in engineering, the physical scientists and computer scientists in American universities are foreign born, and it's going to take some integration of immigration policy and a change in education to try to keep us holding the edge that we have in some of those areas. Because there the test is not just Europe, as you noted, but also from the Pacific Rim. Any thoughts on that? Secretary Gutierrez. Sure. Today we have--and I think what you're saying is exactly why we have the best economy in the world and why we are determined to keep it that way is because we are never satisfied; we are never complacent. I think many countries around the world would marvel at this conversation that we're having, given the state of our economy. What is becoming very clear in this day and age is that the business environment that countries create can have a big role in how much innovation is done in that country. We know that innovators prefer to do innovation in the United States because the tax laws are transparent, because the rule of law is transparent, because they're not going to get hit with frivolous regulations, because their intellectual property will be protected. We know in many countries around the world that isn't happening. So that's another advantage that we have. We have 5 percent of the world's population. We have one- third of the world's engineers and scientists. The key thing is we have to keep it going, and that's exactly why the President has issued not just an initiative but what I would call a national calling to get behind math and sciences, to get behind education, to get behind our business environment; that every company ask the question, what can we do to become more competitive? That's what the President is calling for at this point in time so that we can continue to be the greatest and most competitive economy on Earth. Chairman Tom Davis. If you go back 100 years, a visionary in 1900 might have seen that oil would in fact be a dominant force in economic growth in the 20th century. And it was the companies and individuals and countries who had the oil, who could get it out of the ground, refine it, get it to markets that dominated much of the economy. But you fast forward 100 years, the oil of the 21st century is information. And it is indeed those countries, those companies, those individuals who are able to get that information, collate it, transfer it across lines that are in fact the fastest growing companies. The fastest growing economy in the Middle East is Jordan, with no oil, surrounded by Syria, Palestine and Iraq. A tough neighborhood. But they get it. Where our concern, is these areas continue to grow. Every company is an IT company now. Burger King is an IT company. Their product component is burgers but in terms of getting it and being productive and so on. Our question is, we are going to need to continue to produce people not just at the innovative level--that's our niche--but also below. What suggestions do we have really for getting more of these engineers either through immigration or, more importantly, educating through our own system that's producing fewer engineers than 20 years ago? Secretary Gutierrez. That's a great question, and if we go back to the President's No Child Left Behind Act, which that's really where it started, the recognition that we need to do a better job from K through 12. We know that our students at the fourth grade level are doing great versus other countries and somehow as we head toward the senior year of high school, we slip. So the President is saying, let's raise standards, let's ensure that all students have the benefit of our confidence that they can achieve higher standards. We are already beginning to see results. Chairman Tom Davis. Our problem is getting qualified science and math teachers into some of these areas. Secretary Gutierrez. That's correct. Chairman Tom Davis. I don't know if we need to look at special incentives for that or whatever. If you're good in math and you're good in science, you can make a lot more money doing something other than teaching. Secretary Gutierrez. What the American Competitiveness Initiative calls for is 70,000 new qualified math and science teachers. The other thing we'd like to pursue which we believe is part of this national calling is to get retired executives, engineers, folks who have been in the actual practice of engineering, in the math and sciences to dedicate time and volunteer and come out to the schools and teach our children. So it's not just the teachers we hire but also to tap into the great talent that we have throughout the country who want to contribute to this calling that the President has asked for which we call the American Competitiveness Initiative. So it starts in K through 12. We need to start at the pipeline level. And we believe that math and science is an important starting point, as well as what you say, which is computer sciences. We shouldn't forget that because, you are right, Burger King is an information company, and every manufacturing company has a huge component of services, and very often it's down to information. Chairman Tom Davis. Thank you very much. Mr. Van Hollen. Mr. Van Hollen. Thank you. Thank you, Mr. Chairman, and thank you for holding this hearing on this very important issue. Welcome, Mr. Secretary. Thank you for your testimony. I would like to commend the President for his initiative in the State of the Union address on the American Competitiveness Initiative. It is an issue that many of us here in the Congress, as the chairman said, have been concerned about for some time. There are a number of pieces of legislation that have already been introduced that would implement parts of what the President is calling his American Competitiveness program. A number of us unveiled something called the innovation agenda. I think there is bipartisan support in the country for moving forward on this. Of course the whole question of globalization has been popularized in many ways by one of my constituents books, Tom Friedman's book, the World is Flat, where he makes the important observation that Beijing, Bangor and Bethesda, MD, in my congressional district, are all really neighbors now in the good sense of being able to share information, but also in the sense we're now major competitors, and we want to make sure that competition works to the benefit of everybody instead of having big winners and losers. And if we're not in front of this issue, we are going to be losing out. And I would just quote from what I think was a very important report put together by a group that was assembled by the National Academies of Sciences and Engineering, chaired by Norm Augustine, former chairman and CEO of Lockheed Martin, where they, last October, came out with a report which I think was really sounding the alarm on a range of issues, and they made a number of recommendations. But just let me read from the report because it underscores the seriousness of the issue. This was a bipartisan group of experts in our country, and they said: ``It's the unanimous view of our committee that America today faces a serious and intensifying challenge with regard to its future competitiveness and standard of living. Further, we appear to be on a losing path.'' They go on to say: ``One need only examine the principle ingredients of competitiveness to discern that not only is the world flat, but, in fact, it may be tipping against us.'' And then they go through a number of criteria and measurements to make their case, including what the chairman alluded to. For example, about two-thirds of the students studying chemistry and physics in U.S. high schools are taught by teachers with no major or certificate in the subject. In the case of math taught in grades 5 through 12, the fraction is one-half. Many students are being taught math by graduates in physical education. They also go on to point out that the number of graduates in our universities are more than well over half of them or close to half are foreign born and that those students are more and more thinking about returning to their home countries because there are greater opportunities there than there were before in countries like India and China and many others. So I think we're agreed on the problem, and the question is, what are we going to do with it? And I think the President's initiative was good as far as it goes, but when the budget came down the next day, I must say, I'm not sure whether the reality of the budget met the rhetoric of the State of the Union speech. About 75 percent of the investment the President's proposing to make in this area is simply a 1-year extension of the R&D tax credit. I'm a supporter of that, but if you look elsewhere in the budget, what you're finding in many areas is taking money out of one pocket, even in the education area, and putting into another. For example, in the math and science area, we're talking about $380 million for that initiative; $115 million comes out of a program called Even Start, which is intended to give youngsters a good start in life, which I think any scientist, including neuro scientists, will tell you is an important time to make that kind of investment. I also, while I applaud the increase in NIST, I think that is a very important investment, and the increase in physical sciences, which I do think have been neglected in terms of basic R&D, I think it's a mistake to essentially have a decrease in real terms in our investment in the biological sciences. If you look at the NIH budget, 18 of the 19 institutes see a cut in funding, and I think that if we're going to be competitive in those areas going forward, that's a mistake. So I would like to ask you, Mr. Secretary, with respect to the investment in education, which I really do believe is an investment in the sense that it provides a national return, and one of the things that Norm Augustine and his panel pointed out is, what other countries are doing now is sort of learning the lessons of the United States. Investments we have made in the past in science engineering and math are a big reason for why we are doing well today, and if we don't continue to make those investments, we will not be ahead in the future. So I'd ask you really two questions. One is the No Child Left Behind funding, because I agree No Child Left Behind has been a positive initiative in our country, but if we want to make sure that we have our local school systems in a position to hire the teachers who are qualified in math and sciences and engineering, who have many other opportunities, they are going to have to be in a position to pay those teachers a decent salary. My question to you is, the Congress passed the No Child Left Behind legislation and set forth a marker as to what we thought would be necessary funding. The Education and Work Force Committee which I serve on had an authorized level. The Senate passed it. The President signed the bill. Shouldn't we as a Nation fully fund the amounts that were authorized for the No Child Left Behind in order to meet the goals that we all agree we need to meet for our Nation's competitiveness? Secretary Gutierrez. I appreciate the question, and, respectfully, Congressman, I believe your question is better answered by the Secretary of Education. I will say that the American Competitiveness Initiative adds $380 million to the area of education and is very targeted at math and sciences, K through 12, and really building on the No Child Left Behind. There's an important component on community colleges, which is also part of our competitiveness; worker retraining. So the subject of education is very, very much part of this initiative. And I would be very glad to take up the specific question about funding for No Child Left Behind. Mr. Van Hollen. If I may, Mr. Chairman, this is the Secretary of the Department of Commerce, and your role in the competitiveness issue, would you not agree that it makes sense for the Congress and the President to fund the No Child Left Behind initiative at the levels that were set out in the authorization bill? Secretary Gutierrez. I believe that the passion that the President and Secretary Spellings have for this project and for this initiative and the recognition of the importance of it, that if they have put a number to it and they believe that is what it takes, I am fully supportive of that. Mr. Van Hollen. I guess you're supportive of it being $15 billion less a year than what the Congress authorized and $55 billion short since the bill was signed. I think we need to be honest with the American people. Chairman Tom Davis. Thank you. Mrs. Miller. Mrs. Miller. Thank you, Mr. Chairman. And, Mr. Secretary, I certainly am delighted to see you here today. We share the same background coming from Michigan, so I'm so happy to see you here, and we miss you in Michigan, but we're delighted to share you with the rest of the country here. You're doing a remarkable job certainly for the country. In Michigan, of course, we have some rather unique dynamics in our economy right now; most of them negative, quite frankly, in a very frightening way. We're going through a transformational economy, what's happening to the automobile industry. We have the highest unemployment in the Nation, lowest personal income growth in the Nation. Bond rating obviously is bad in the State. A number of different things that have happened to us in a relatively short period of time and yet we look to the Federal Government to provide the environment so businesses can do what they do best, which is to incentivize for job creation and investment and those kinds of things. I do think that the President's economic growth package has been, and some economists have said it, has been historically the best-timed package to really stimulate the economy, and so we see that happening. The best economy of any of the industrialized nations, etc., but obviously, in Michigan, we have, as I said, some rather unique dynamics that have our total attention at this particular time. One of the things that I think hampers--I look at the automobile industry--but in so many different businesses is the very onerous burden of regulatory kinds of things that the government places on our businesses; their ability to compete and their ability to be competitive in a global marketplace. The old saying, I'm from the government, I'm here to help you; I think the businesses dive under the desk when they hear that, but when you look at the National Manufacturers Association, I know we're going to, on the second panel, have some representatives from them, doing a study that shows that our structural costs for American manufactured goods are 22 to 23 points higher than foreign competitors, Canada, Mexico, wherever, and small business looking at $7,000 to $8,000 per employee just to comply with the regulatory burden. My question, I guess, would go to, how closely does your Department interact with the other agencies that are promulgating some of these regulations? And I give you just one example that I'm aware of, hexavalent chromium, which is maybe not the most interesting subject in the world unless you're involved in aerospace or metal finishing or these kinds of things. Our government, the EPA is currently promulgating a rule that will take the standard that was 50 points per billion--I believe is how they measure it--from 50 to zero. There will be thousands of jobs that we are going to lose as a result of that. I have a lot of consternation about that. The smaller mom and pop shops, I have a lot of those in my district. Many of them have said they're going to close up because of that. I'm wondering, how closely does the Commerce Department work with some of these other agencies? We need to have regulations, of course, but they need to be reasonable. Secretary Gutierrez. I totally agree with what you're saying. We do get involved in impact assessments of regulations, and I can't talk specifically about the impact assessment of that regulation, but we're all tied to the President's direction, and that is that if we have new regulations, they should add value. And regulations should not be put in place that simply create an obstacle to doing business and that we should recognize that what drives this economy and what drives our country, what drives our growth is private sector risk taking, entrepreneurship and people wanting to go out and make a difference. To the extent that regulations get in the way of that, we're not following that lead. So the President has been very clear on that, and it's being followed throughout the administration. Mrs. Miller. I appreciate that. I do think there always has to be a cost-benefit analysis of some of these things being done, and I sort of think if some of the other agencies, particularly your agency, could be a little more interactive, because it does impact commerce, obviously. My final question would be, and I appreciate it in your opening statement when you were talking about hydrogen fuel research. Again, being from Michigan, we light up when we see that. I think it is so important. I absolutely believe that understanding security equals economic security actually equals national security. They are all interrelated. It is so important. So I was delighted to hear the President say openly we are a Nation addicted to oil, and we have to get off this dependence on foreign sources of oil. You see what's happening around the Nation. I'll conclude here. Ethanol and biodiesels and some of these other kinds of sources of energy are so important for us to continue to advance. So I am very appreciative that you are picking up the mantel as the President has requested you to do so. Secretary Gutierrez. If I may say, I think that's one of the boldest statements that was said that evening during the State of the Union, a lot of bold statements, but a very very bold statement is to say that through technology we are going to reduce our dependence on oil. And we are going to look back 20, 30 years from now and realize that statement and that determination set us on a course that will do just that. He said we're going to do it through technology, and part of that is why we are investing more in the Department of Energy. And you can see it throughout the country. I see it in manufacturing plants. I was at the Ford plant in Kansas City. They are already producing hybrid cars. I believe you are going to see a wave of investments and interest in this area as part of the President's calling. I appreciate that. Chairman Tom Davis. Thank you very much. Mr. McHenry. Mr. McHenry. Thank you, Mr. Chairman. Thank you for calling this important hearing. Secretary Gutierrez, thank you so much for taking the time to be here, and I appreciate your leadership in the Department of Commerce. It's been very good working with you. I think you are one of the outstanding Bush administration appointees, and I certainly appreciate your hard work and dedication. Thank you. The initiative we're talking about today, the Competitiveness Initiative is very important. My district in North Carolina, western North Carolina, is going through a time of immense change. Overall unemployment nationally is somewhere around 5 percent. That's wonderful. Historic lows. In North Carolina, we are facing nearly full employment. In some cases, some economists would call it beyond full employment. Unemployment around 4.7 percent. My district, however, is facing a time of change. We have been traditionally relying on textile and furniture industry jobs, manufacturing jobs. I have two counties that led the State in unemployment. One faced last year for a few months an unemployment rate of around 13 percent. Another country faced an unemployment rate of around 11 percent at its height. That's mainly due to loss of furniture industry jobs. Now certainly there are trade issues that we are dealing with, competitiveness issues with China, the fact that China won't float their currency. That's a question I'll leave up to Secretary Snow at the Department of Treasury. I will not burden you with those questions. The focus that I have tried to place in my district is on getting the skills and the training necessary to compete going forward. We can't be reliant on yesterday's jobs, we have to train for tomorrow's jobs and today's jobs. As a district, representing a district that is termed in the Almanac for American Politics as the most blue collar district in America, we are certainly going through change. I wanted to ask you, what would you propose for a district like mine? What can I go home and tell my people that we should be doing? Secretary Gutierrez. I recall we talked about this when we traveled together to North Carolina, and at that time, you were talking about a national education coordinating council, which I believe is the sort of initiative that you need throughout the country but especially in communities, as you said, where there is change that's happening because what ultimately will help our people is to upgrade their skills, adjust their skills, but enable them to move forward with the economy and enable them to move to jobs of higher paying wage but give them the ability to constantly be training and retraining. So I would just say that your foresight on that and your vision on that is absolutely right to the extent that we can help to execute that vision, that will--that should help. Because that's what we've seen in communities that have made the transition. It has been about getting---- Chairman Tom Davis. Can you pull that mic closer? Secretary Gutierrez. Getting the right programs in community colleges that are tied to the jobs that are available, and that's the sort of execution that needs to take place locally. On textile, as you know, we just signed an agreement with China for 3 years. Hopefully that will give, and it's intended to give, both retailers and manufacturers transparency and predictability as to what's going to happen over the next 3 years to enable them to do what needs to be done to become more competitive. So I hope that has been helpful, but I would urge you to stay on this coordinating council, and I think it's the right focus. Mr. McHenry. I appreciate that. I did enjoy speaking with you. We had about 2 or 3 hours that day to talk on that trip, and I appreciated that opportunity. Is there any expertise in the Department of Commerce you could point to that folks, my folks at home, could reach out and get help with? Secretary Gutierrez. Depending on the specific area, but I would point to the ITA area where we do have an office for textiles, specifically focused on textiles. And I would also lead you toward Economic Development Administration [EDA], because their role is about economic development and helping communities create jobs, becoming more attractive to private sector investment. So I would start there, and I think those two areas could be very helpful. Mr. McHenry. My predecessor had the foresight to actually work with the Department of Commerce to get a Regional Economic Development survey done to point us in the right direction, so we're very much appreciative, through an issue we call Future Forward for my region. A final question for you, where do we need to go in terms of changing the Tax Code to be competitive internationally, around the world. There are a number of different initiatives. A previous statement pointed to the fact that we are held back by regulation and taxation in this country and lawsuit abuse that actually hampers our ability to sell products around the world because the added expense and cost of that. Secretary Gutierrez. I would say two things there; one is just the recognition that the tax cuts that Congress and the President enacted have worked, and there is no question that the basic principle of putting more money in the hands of business and putting more money in the hands of consumers and that they will be able to allocate that money better than a centralized body is working. The challenge now is to make those tax cuts permanent and to recognize that, if we don't make them permanent, we're raising taxes. Because that will also incentivize investors to bring more capital to the country. And then on the innovation front, we have the R&D tax credit. We believe there's work that can be done to simplify it. It is a little bit complex. It's subject to some interpretations, and we believe we can make it more effective so that it yields more innovation. Those are two things I would do to work on tax policy. Mr. McHenry. Thank you, Mr. Secretary. And thank you, Mr. Chairman. Chairman Tom Davis. Thank you. Mr. Turner. Mr. Turner. Thank you, Mr. Chairman. Thank you for having this important hearing on an issue that is on the minds of many Americans. As they look to our economic recovery, many people are concerned about how our ability to sustain economic growth, specifically in the manufacturing area, will be faced in the future. Mr. Secretary, I want to thank you for being here and for your dedication to probably what is the most important function that we can do as a government, and that is encourage an environment for job creation. I want to encourage you in your support of both General Motors and Adelphi and the automotive industry as they look at their transition. I know that you are aware that those jobs are very important not only to families throughout our country, but they provide opportunities for economic mobility. They are important for the innovation culture that we have. Many of the innovations that we have arise out of the automobile industry, its engineering and its manufacturing. It's important for our defense industry, as we look to our manufacturing capability. My community has a very large presence of General Motors and Adelphi. In fact, Adelphi, as you know, is the former Delco. The D in Delco is from Dayton, OH; it is from Dayton with the Dayton Electronics Corporation. So our community is very tied to the future of the automobile industry, and your attention there would be very much appreciated. I also want to thank you and your staff for assistance in another industry sector that is important to my community, and that is the aerospace industry. Eric Stewart of your staff and others have been very supportive of an international air and space trade show that we are looking at trying to promote our aerospace industry. One of the components, of course, for our success in international markets is our ability to market ourselves. The many industry sectors that have trade shows have those trade shows outside of the United States, which does not permit second- and third-tier suppliers to effectively market their goods in international markets. Our ability to encourage those types of trade shows where we can show off innovation, technology that is here in companies that are smaller companies, that can't necessarily participate in the large international shows off our shores, is important, and your support and the support of your staff, as we look to how we might support the aerospace industry. I want to put one footnote on this. I am on the Armed Services Committee, and a stunning response to a question, General Jumper was before the Armed Services Committee, and they asked him what one of the greatest threats was to our ability to maintain a preeminent Air Force. Many people thought it might be some issue of technology, some emerging country that was our threat. His answer was the ability of the U.S. aerospace industry to continue to support the Air Force in leading technology and in production. So it's so important not only for jobs, families and economic mobility, but also, as you know, our defense that we maintain our manufacturing base. So I want to thank you. I would love to hear your thoughts on both the automobile industry and the aerospace industry. [The prepared statement of Hon. Michael R. Turner follows:] [GRAPHIC] [TIFF OMITTED] 26331.027 [GRAPHIC] [TIFF OMITTED] 26331.028 Secretary Gutierrez. Well, we have all been very close to the automobile industry, and I can tell you that any time we read about layoffs or jobs lost that it hurts, and these are great companies. These are industries that not only are large from an economic standpoint, but they are also large symbolically. We have, and I can tell you I believe, that they are going to pull it through. They are going through a lot of tough choices. This is a very tough time for them, but they are focused on innovation. They are focused on getting their costs down. They are focused on getting the right types of products on to the marketplace. I believe they will be able to do that, because these are great companies, these are great workers, these are great people, and they are going through a rough time. But we need to continue to give them the environment and create the environment that allows them to pull their companies through. They don't need a tax increase. They don't need regulations that simply create an obstacle. At this point they need a playing field where they can innovate, create new products, and focus on the future and unfortunately get through this very tough period they are going through. Chairman Tom Davis. Thank you very much. Ms. Norton, any questions? Ms. Norton. No, thank you. Chairman Tom Davis. Mr. Ruppersberger. Mr. Ruppersberger. I am sorry, I just came here late. The issue of regulation, I think, is very important, I think. To have a good business attitude, partnerships between business and government are extremely important. I do want to get into the issue, though, if you are going to talk about tax cuts, you have to talk about deficit, and the impact of the deficit--I think one of the last things that Greenspan--the issue--one of the issues he raised is that if we don't deal with the deficit, and the interest rates go up, that is going to be less investment in business, and that we have to deal with that issue. How would you compare the tax cuts to the deficit, and what would you do to resolve that issue as it relates to what we are talking about here today? Secretary Gutierrez. Sure. I would think about the deficit as the short-term deficit from now to the year 2009, and then the longer-term deficit that we have to face. We are on track to cut the deficit in half by 2009. Last year our deficit came in about $100 billion better than what we had expected, because tax receipts are coming in so much better than we had expected. So it's quite an irony that after we reduce taxes, we are getting more revenues from taxes. And last year we had record levels of tax revenues. So we are confident that we can manage through the next several years and cut the deficit in half. We will see some fluctuations in the short term. We have had to deal with the gulf coast spending, and that will have an impact next year. But we are headed down the track of cutting the deficit in half by 2009, and that would put us at a position where the deficit is--as a percent of GDP is actually below our historical average. Where we should be concerned is the deficit 15, 20, 30, 40 years from now, with programs such as Social Security, where we are going to have more retirees than what the current system can support. That's not going to happen over the next 4 years, it's not going to impact us over the next 4 years, but it will impact us over the next 20, 30 and 40 years. I am confident that we can manage our way through cutting the deficit in half by 2009. I would just say what we should be concerned about is longer term, 20, 30, 40 years from now, sir. Mr. Ruppersberger. How are you going to deal with the issue of cost as it relates to health care then? My concern is if you have to cut taxes, you have to stop spending. One has to go with another, or it's not going to work. With all of the obligations of the war, Katrina, we haven't really gotten into the health care issue yet. It is something we need to look at. But let's get back to the issue of where we are, and we are all concerned about that. We are all concerned about China graduating more physicists, mathematicians and engineers. You know, if we don't invest in our future, if we don't invest in education, it's going to start to impact on our national security, it's going to impact on what we do in business, and it already has. I think the way we turn that around is through education. To give you an example, Allison Transmission, which is in the district I represent, one of the most modern manufacturing plants in the United States. What happened, how that developed, is that there was an older plant in Baltimore that was closed down, but the workers at the older plant were retrained on how to operate and to work in a plant that deals with robotics and technology. As a result of that, that allows Allison, and Allison Transmission, to be able to compete worldwide, which is what we have to do with respect to technology and training. My concern--I don't see a program out there yet that really is focused on educating, giving incentives to the--our younger generation to get into the area of engineering, math, science, physics, things of that nature. I think we have a lot more to do. We need to roll up our sleeves in a bipartisan way to do it. To cut right now, if we are going to cut, cutting priorities, to cut in the area of scholarships, it's not going to work unless we reinvest. Do you have any comment on that? Secretary Gutierrez. Well, I totally agree that this is the focus, and this is the focus of the education piece of the American Competitiveness Initiative. I think you are absolutely right. It has to be done in a bipartisan way. Sometimes a savings in the budget, or a reallocation to make the money work harder, can be perceived as a cut, but not all reductions are just sheer cuts of activity. I would look at some areas where it looks like a cut, but it's actually a savings. We are doing things more efficiently, we are doing things more effectively. We are reallocating the money to areas where we get more bang for the buck. I think those are the types of things that we will have to do to address your concern of how do we deal with the deficit and at the same time not raise taxes. So it's always a matter of choices. And every day there are tough choices, and that is the challenge of managing through our current budget. I believe we can do it, and I believe we can do it in a way that increases our competitiveness the way the President has called for. Mr. Ruppersberger. So far we haven't been able to do it. I hope we can do it for the benefit of our country as far as the spending side is concerned. But, again, I think everyone wants a tax cut, and I don't disagree with you that it can help the economy, but sometimes you can't afford--and the issue that we have with respect to the war, with respect to Katrina, some of these costs, and then there's some things that aren't getting done, like what we are talking with today, doesn't mean that we maybe--we might even want to consider a postponement. What, in your opinion, would a postponement of a tax cut do until we are able to take care of our existing expenses and take care of our priorities now? Do you have any opinion of a year or two after a tax cut? Secretary Gutierrez. Well, what the President proposes is just to make the cuts that have been made permanent. It's not really a further cut, but let's just make the cuts permanent. And if we don't do that, what we are saying is we are increasing our taxes. Part of the issue here--and I saw this managing a smaller company, obviously not a company the size of the Federal Government, but very often a tax cut brings in more money, and that money will be spent, and it may--it may give us the impression that we have a lot of money coming in, and, therefore, the challenge is to spend more, not to cut more. One of the advantages of having our taxes where they are is that it will force us to be more efficient. It will force us to do better things with taxpayers' money. I believe that's the big challenge, it's the big management challenge. Every company in the country has that challenge, and there's no reason to believe that we in the Federal Government don't have the same facts. Mr. Ruppersberger. But the facts are that hasn't happened yet. That's my concern. Is the discipline there with the administration to be able to do that? One more question, then I will stop. It's my understanding that we have one of the largest deficits in the history of our country, and that 50 percent of that deficit is based on the tax cut, the revenue not coming in. Is that your understanding? Do you have a comment on that? Am I correct in my assumption? Secretary Gutierrez. I haven't seen those numbers, sir. As I mentioned before, the tax revenue in absolute dollars last year were an all-time record. So what we are finding is that when we cut taxes, the economy grows faster, and that yields more revenues. Mr. Ruppersberger. Again, it's my understanding--I think we will relook at the numbers, I am sure, because this issue will be before us again in the next couple of weeks, that 50 percent of the deficit is based on the tax cut, the revenues that would normally come in that would not. The issue that I raise with you is if, in fact, the tax deficits will continue to have interest rates move up, that lack--because of that, there will be a lack of capital investment in our business, which, in the end, will negatively impact on what we are trying to do here today. Do you care to comment? Secretary Gutierrez. Again, I am not familiar with that 50 percent cut, but in terms of businesses, the way to continue to motivate business is to invest in our country, is to keep the tax rate low, to make the R&D tax incentives permanent. You know, we have renewed the R&D tax incentive 12 times. The problem with that is it doesn't give business the certainty that they like, because an R&D investment, as you know, is a 10-year investment, but they don't know if they are going to have that tax incentive for 10 years. We give it to them one chunk at a time, 1 year at a time, a couple years at a time. We should make it permanent and let them know that we are committed to a long-term incentive that will really take our country in the future with a long-term continuous plan and not a stop-and-start plan which doesn't really do the job. So I would just---- Mr. Ruppersberger. That's a good point. Chairman Tom Davis. Thank you. I think one of the problems, though, is that you could look at these; if the tax level were at this point, we could expect X number of revenues, but that doesn't take into account the economic activity because of the tax cuts. One of the problems in scoring at CBO and at the Office of Management and Budget is that they don't have dynamic scoring models for that. So if you were to raise the taxes, that doesn't mean that you halve the deficit, because you get decreased economic activity? I think that's the question. Secretary Gutierrez. That's exactly right. That's exactly right. It's a little bit like do you sell more if you raise prices? Not always. Chairman Tom Davis. Mr. Gutknecht. Mr. Gutknecht. Mr. Chairman, as a former member of the Budget Committee, I just want to clarify. I think under the Congressional Budget Office's static scoring, they estimate that only about 20 percent of the current deficit is related directly to the tax cuts. The rest has been a change in economic activity or, I must say, more spending. I think that's something that Congress needs to do more about. I want to thank you for coming today, because I think--I actually, believe it or not, just finished the Earth is Flat, and I think it does raise some pretty tough questions about policy in the United States. I think there are factors within the economy that can't be accounted for in just the terms that the author outlined. I think there is an issue, though, that I would like to have you talk about a little bit, and that is this whole issue of affordability. In some respects, and we have heard you talk a little bit--well, we have to spend more on education. I think that's always something we all say. But I think at some point we have to ask ourselves, OK, how much does it cost, in some of these other countries, to educate a Ph.D. in physics or even to educate a high school student? I think one of the things that the Commerce Department could really provide for us that would be beneficial would be an honest and objective comparison of what it is costing to educate people in the United States versus Europe, versus India, versus China, versus Japan. I think what we would find is--the reason I say this--we have gotten a lot of criticism recently about student loans. Well, there was an article in the Minneapolis paper last week that said over the last 5 years, the cost of higher education to students in the State of Minnesota has gone up 60 percent. That's an average of over 11 percent per year. Now, that's even faster than the cost of health care has gone up. So at some point I think we have to have an objective measure in terms of how much we pay and what ultimately we get in return. I think we have to put some pressure on the folks in that part of our economy to find efficiencies as well. The other issue of affordability, I think this is important, and I think we can do something about this, that is the cost of energy. It was mentioned by Mrs. Miller from Michigan. I understand right now, for example, on the equivalent basis, we are paying about $13 or $14 per million cubic feet for natural gas. People in China and India and other parts of the world are buying it for as little as $5. That's a big difference, particularly if you are in the petrochemical business. As a result, we are losing a share of that. Finally, in terms of these ideas, I would like to have you bounce them off--in terms of energy, I would like to have you come out to Minnesota sometime. We will show you some plants where we are producing today ethanol for $0.95 a gallon. I am told--and the refineries are a little bit slow to give us the information--but the real cost of producing a gallon of unleaded gasoline today is north of $1.50 a gallon. Even on a BTU-basis-to-BTU-basis, right now ethanol is cheaper than gasoline. That's a story that almost no one knows. It is better for the environment, it is better for the economy, and, by the way, it is cheaper. We need to get that story told. People say, well, if it is cheaper, why aren't we using more of it? Well, the answer is, I think, because the oil companies currently have 98 percent of the market, and they are not going to give up market share voluntarily. I think we have to have not only a goal, but a specific matrix to measure how well we are getting to that goal, because we have had a goal of energy independence since 1974, and we are in worse shape today than we were then. Finally, the last point, and this was raised by a union leader in my State, but it's a very good point and one I think we have to at least think about and discuss. He said one of the problems with dealing with countries like India and China is they haven't learned the Henry Ford principle. The Henry Ford principle--and I think this is a great one. He said that people in factories have to be paid enough that they can afford to buy what they make. Until those countries begin to learn the Henry Ford principle, it strikes me that we are always going to be way behind the eight ball. I wonder if you could just react to a couple of those points, and I would appreciate it. Thank you. Secretary Gutierrez. And these are great questions, and hope to add a little bit of value to what you have already stated. But, yes, on the education piece, the one thing I would say is that qualitatively, we have the best advanced education system in the world. That's why students from all over the world want to come to the United States to study. What the President has proposed and what he talked about in the American Competitiveness Initiative is that we should be keeping some of those students, the best and the brightest, to work in our country instead of training them in the best universities money can buy, and then sending them home to compete with us. So there is a qualitative aspect to our education system that I would just add to the comments that you made. Natural gas is an interesting one. You mentioned that we have had a goal of energy independence since 1974. We have not built a natural gas terminal since the 1970's. We have not built a refinery since the 1970's. As you well know, this requires decisions, and it requires a commitment to energy independence. The President laid out a plan 5 years ago, and it was deemed to be a little bit too long-term in nature, but here we are 5 years later, and I wish we would are have had it in place 5 years ago. So when price--when oil prices are up, we would like a solution immediately; when oil prices were down, the only one talking about a long-term energy plan was the President. But it is interesting, 1974, we said energy independence, we haven't built a natural gas terminal since the 1970's, and we haven't built a refinery since the 1970's. I don't have the answer. I would just ask, as a challenge to all of us in the Federal Government, what do we need to do to change that? Mr. Gutknecht. Mr. Secretary, let me correct you though. We have built 93 refineries in the last 5 years. They are called ethanol plants. We can build a lot more. The truth is there's not a city or a town or a county in a State in the United States that wouldn't welcome more ethanol plants. They are refineries. They do exactly the same thing. Secretary Gutierrez. You are absolutely right. If you recall, the President mentioned ethanol in his State of the Union Address, and this is part of the drive to get us off the addiction of oil. Part of the challenge that we have today is cars that take ethanol and consumers don't know it; then consumers who know it but can't find ethanol. So we do need to have enough communication, and an education to ensure that we take advantage of things like ethanol, and the President is right there. He talked about it in his State of the Union Address. It's a huge opportunity. It's one of those leaps that we can make beyond oil. Mr. Gutknecht. Mr. Secretary, a goal is a dream with a deadline. It strikes me that I appreciate what the President said, and I appreciate what you are saying, but we have to set a specific goal. Then we have to measure our progress. I would submit we tonight have to spend a lot more money. With oil at $60 a barrel, right now there is plenty of money in the energy pipeline to encourage people to produce alternate forms of energy. What they need is access to the market. The oil companies are never going to do this voluntarily. They want to solve the energy problem when they have sold the last quart. If you really want to get at this problem, you have to begin to specifically require certain percentages of our fuel supply, as the State of Minnesota is doing right now, and you will be amazed at how many people will invest in alternate energy if they know that there is an access to market. I yield back. Mr. Gutknecht. If I may add, I think that when the President of the United States says that we are going to wean ourselves off the addiction to oil, I think we will also be surprised at the impact that will have. Mr. Issa [presiding]. Thank you, Mr. Secretary, and certainly I share with the President the view that weaning ourselves off or at least percentage-wise cutting back on that specific fossil fuel also encourages, Mr. Gutknecht, I am sure, would agree, competition where there isn't competition for alternative for oil. I am proud to say that every Indy car that goes around the track at the Indianapolis 500 doesn't use a drop of gasoline. So there are a few notable places. Like Mr. Gutknecht, I just finished the World is Flat. But maybe a little differently, because I come from a business background, I may have gotten different interpretations, in some cases, of what action we should take. I am reminded that when I first started in business, one of my first salesmen, when describing my product versus the competition, said, you know--his first meeting, he said, well, you know, it is just like the product I was selling last week, except now I am representing this guy. It is basically the same thing, it has only got two differences. It's a little bit better and more reliable, and it's just a little bit cheaper, but other than that, it's the same thing. As you travel and I travel, and we have often bumped into each other around the world, that really is the difference of whether or not we succeed versus any European or any other competitor is are we just a little bit better? We don't have to be a lot better. Bringing together what some of our colleagues to my left and right both asked about, which was sort of this education and skilled workforce, and particularly your last comment related to people that we educate here, that we recruit from around the world, the best and the brightest, but then they go home to help their home countries compete, because we don't allow them to stay here. I know immigration policy is a hot button. It's a hot button on this side of the dais, and certainly it's a hot button for the administration. But what are your views as the Secretary of Commerce, looking at our competitiveness of how we should restructure our immigration policy vis-a-vis the half million that come here illegally every year, the half million or so that are allowed to immigrate here legally, the makeup of those people--and I think in fairness, disproportionately at the bottom of the economic rung, education rung, historic opportunity rung--versus the kind of people that you just talked about that you noted that we should try to retain or potentially attract? How big a shift is that if, let's say, a half million people a year were suddenly the best and the brightest people, already with education and drive, versus such a disproportionate amount of family unification or basic workers? Secretary Gutierrez. There are two aspects to immigration. There is the high-skilled and then the lower-skilled workers that I believe you are talking about. I would say two things, Congressman. One is we need to be more aggressive about enforcement, and I think that's just a very logical position that we should know who is coming into our country, who is working, especially at a time when national security is such an important factor. So that is one aspect of the immigration dilemma. The other aspect is we have jobs that are available that are necessary and that Americans don't want. I think it says a lot about our economy that we have moved on, we are seeking for other jobs, we are seeking higher-paying jobs, but these jobs are available. Therefore, why not recognize that reality, recognize that it says a lot about our economy, and give these workers a guest worker's program, and not--because there is demand for the job, not force them to be coming in the dark of night and then hiding and having to be subject to people smugglers and all that is happening that we can get rid of by enforcing our borders and recognizing the economic reality that we have. Mr. Issa. I appreciate that. I certainly share with the President the need to enforce the borders and find a long-term solution for the labor force. But, if you will--and I know this is a conjecture, but, obviously, you are the Secretary for the next generation. What you do today will mostly be felt a decade from now. As we consider immigration reform, if we were to fundamentally change the ratio and, let's say, reduce by 100,000 a nondescript group of legal immigrants and replace it with 100,000 designated best-of-class hires, what would be the impact to the economy of 100,000 or 200,000 net increases in, if you will, preferential hiring, for people who come with classically the H1B-type skill sets, the best, the brightest, those either with education or those who have been educated here that would otherwise return home? Secretary Gutierrez. Well, specifically on the numbers--and I don't know what 100,000 more would do or 100,000 less. I think conceptually what we have seen throughout our history is that students will come to our country. They fall in love with the freedom, with society, with the tolerance. They decide to apply their skills here, they contribute to our society, they have a family. Their children become first generations, and they become as American as any of us. That has been our history, and they add energy, they add ideas, they add a sense of hope, and they see that there is more promise here than maybe back home, and, therefore, they try as hard as they can to contribute. And I don't think I am saying anything new; I think I am simply just reciting the history of our country. Mr. Issa. Well, in closing, would you say then even if you can't quantify it, that a little bit like that salesman that taught me the business, we would be just a little bit better if we had that change? Secretary Gutierrez. I think that new ideas, attracting the best and the brightest, making this the country that people yearn to live in is very good for us. It has been very good for us in the past. It's been very good for us in the future. I do believe that in this day and age we have a national security component that we didn't have in the past, so we have to be more diligent. We have to be more deliberate about it. Mr. Issa. Thank you, Mr. Secretary. Chairman Tom Davis [presiding]. Thank you very much. We talked about the deficit. I think my friend over here talked about the all-time highest deficit, but as the economy grows, the deficit in absolute numbers grows, but as a percentage of GDP, I think we are historically in line with where we have been. Isn't that correct? Secretary Gutierrez. That's correct. That's correct. Chairman Tom Davis. Doesn't mean we don't want to get it down, or we shouldn't strive to get it down. Let me just ask, although this may be a little bit outside your expertise, there's always a concern that with the size of the deficit, which is compared to some of our European competitors, and this is like not out of whack, but that there comes a tipping point where foreign investors in American dollars may take their money somewhere else. I don't know where they will take it at this point. The euro obviously has problems, but that is one concern about the deficit. Do you have any thoughts on that at all, or would you refer that to the Treasury Secretary? Secretary Gutierrez. Well, I would refer any questions about currency to the Treasury Secretary. I would just say that we have--as you were saying, Mr. Chairman, where else--the question is, is there a better place in the world in which to invest than the United States? What we are trying to do with the American Competitiveness Initiative is to continue to make the answer to that question no. The more we can do that, the better off we will be. Chairman Tom Davis. Well, I want to thank you very much. Secretary Gutierrez. Thank you. Chairman Tom Davis. We are going to let you go. We are going to convene the second part of our hearing. I am going to try to move our second and third panels together, so we can move it in one set of questions. We will take about a 3-minute recess to get that ready. I will be back. I think Mr. Issa will reconvene in about 3, and I will be back in about 5 altogether. [Recess.] Mr. Issa [presiding]. Ladies and gentlemen, I appreciate your all being here so that we could do a combined panel. I must apologize, because there's no votes on the floor today, the Members will be going in and out as they prepare for, on one side of the aisle, a retreat, and on the other side of the aisle, I suspect, a retreat back to their districts. But I am pleased today to welcome all of you. Dr. Hector de J. Ruiz, I hope I did that somewhat right, president and CEO of Advanced Micro Devices; Brian O'Shaughnessy, who will be joining us, who has joined us, perfect timing, president and CEO of Revere Copper Products; Mr. Richard S. Garnick, president of North American Services for Keane, Inc.; Ms. Deborah Wince-Smith, president of the Council on Competitiveness. I will do this one without reading--and former Congressman Dave McCurdy, presently president and CEO of the Electronic Industries Alliance, which includes the vast majority of divisions involved in consumer, industrial defense. Dave, good to see you. I have to confess, I was a member of his board for a number of years, so we go back--I don't go back to Congress when he was here, but I do go back to the industry when he joined us. As is the requirement of this committee, I would ask that you all rise to take the oath. [Witnesses sworn.] Mr. Issa. Dr. Ruiz, we would be honored if you would lead off this panel. STATEMENTS OF HECTOR DE J. RUIZ, Ph.D., PRESIDENT AND CHIEF EXECUTIVE OFFICER, ADVANCED MICRO DEVICES; M. BRIAN O'SHAUGHNESSY, PRESIDENT AND CHIEF EXECUTIVE OFFICER, REVERE COPPER PRODUCTS; RICHARD S. GARNICK, PRESIDENT, NORTH AMERICAN SERVICES, KEANE, INC.; DEBORAH WINCE-SMITH, PRESIDENT, COUNCIL ON COMPETITIVENESS; AND DAVE McCURDY, PRESIDENT, ELECTRONIC INDUSTRIES ALLIANCE STATEMENT OF HECTOR DE J. RUIZ Dr. Ruiz. Thank you, Mr. Chairman, members of this committee. Thank you for the opportunity to be here before you today. As chairman and CEO of Advanced Micro Devices, the question of competitiveness is of particular interest to us, and to the semiconductor industry as a whole. AMD is a Silicon Valley company--and just a brief description of what we do. Every segment of the economy of any country is now based on the information technology, from agriculture, to the health industry, to transportation, and, of course, to computers. We are one of the two companies that make microprocessors in the world. The other one is Intel. So we view ourselves as being at the heart of every segment of the economy, of every single part around the world. For we are also aware that the world is changing, because we witnessed it firsthand, and we know that past performance is no guarantee of success in the future. And we know that America's ability to compete in the 21st century economy hinges on one factor more than anything else, and that is our ability to innovate. Those of us in the semiconductor industry understand that better than anyone. The products that we make are the fuel that power the technology- driven economy. We understand that leadership and innovation requires innovative leadership. AMD applauds President Bush's new American Competitiveness Initiative, and we believe that recent proposals by Members of Congress are similar steps in the right direction. We also applaud Mr. Chairman Davis' leadership in this particular arena. AMD fully supports these important efforts, and we urge all the makers to enact them. We must increase Federal support for basic research. We must make permanent the R&D tax credit, and we must improve the quality of education, particularly in our K-12 schools. We must create a regulatory environment that is streamlined, effective and responsive to business, and we must enhance our public policy infrastructure to encourage and support innovation in both the public and the private sector. But there is more. To this end I want to focus today on three critical points that I believe to be the three keys to enhancing American competitiveness in this increasingly flat world. First, you cannot have competitiveness without competition. Second, government procurement is competitiveness policy in action; and, third and finally, investing in education is building competitiveness for the future. Let me explain. First, you cannot have competitiveness without competition. All of the investment, research, specialized education in the world will not amount to a growing, dynamic economy without competition. We know that America's abilities to compete and lead in the 21st century economy and enhance the standard of living of citizens depends upon our ability to innovate. Companies that fail to embrace innovation as a core business value will fail, as global competitors will do. Innovation is how we can take and maintain the lead, and competition is the heart and soul of innovation, because innovation happens when we feel like we have no choice but to think and act in different ways. Competition drives us to push past all limits, to extend our vision beyond what we believe to be possible. It pushes us to achieve something greater, and it is competition that turns innovation into the real advantages that allows us to compete on a global scale. We need competition to drive us to think outside the box. Fair and open competition is a necessity for our share of success, and we have a responsibility to ensure that no one is sheltered from competition. Everyone, every company and every nation deserves an equal chance to compete and succeed on the merits of the innovation that they offer to the world. Enforcement of antitrust laws and standards of market conduct are critical to a competitive society, and the United States must serve as an example for the rest of the world in promoting free trade and protecting fair and open competition. At the same time, our public sector must serve as an example for our private sector. That brings me to the second key. Government procurement is competitiveness policy in action. AMD recently commissioned a study, the results of which were released yesterday, showing that the Federal Government, and U.S. taxpayers, would have saved between $281 million and $563 million by adopting performance-based procurement standards for microprocessors. At a time when we face budgetary belt-tightening across the board, government contracts should favor the best technology at the best price, not a single company or a best-known brand. The final key to ensuring U.S. competitiveness is one which is of great personal importance to me: investing in the improvement of our K-12 education system. Too often we think of competitiveness policy only in terms of graduate and specialized education, but I know from my own experience that our entire educational system is critical to our competitive business. It begins with making a considerable investment in improving our K-12 education system across all subject areas. But I believe we must go even further. We have to plant the seeds for future economic growth. In this respect the private sector has a responsibility to lead. With that in mind, AMD has begun to form partnerships with leaders around the world. We invested a great deal in our 50x15 Initiative, a commitment to empower 50 percent of the world's population with affordable Internet access by the year 2015. Today that number is less than 15 percent, so we currently have a great deal of work to do in the next decade, but I believe we can accomplish this goal, and, perhaps more important, to maintain U.S. competitiveness in this century, I am saying that we must achieve that goal. We are developing new technologies and solutions that will make Internet access and computing affordable and accessible in places that are far removed from this promise. The first step has been the development of a personal Internet communicator, which provides Internet access to first-time technology uses, and this is a sophisticated device that sells for around $200. Without having any familiarity with computers, people in lower- income and remote locations can, within minutes, access endless amount of information and stay in touch with family members and search the Web. In Brazil, Russia, China, India and my native Mexico, our goal is to connect billions of people with a chance to-- Internet providers to learn about the world, communicate with others, and become part of the growing economy. We are bringing hope and possibility to places that have not simply been left behind, but have been completely left out. It may sound like charity, but it is not. It is central to our business strategy for the future, because while we are connecting people in the developing world to a greater opportunity, we are also building long-term relationships with infrastructure providers, government institutions and consumers themselves that are going to reap the benefits for many years to come. In closing, let me leave you with one final thought, an explanation of why this issue is so important to me. I grew up in a small village in Mexico, and, to me, America beckoned as the land of opportunity. Each day I walked across the border to attend high school in Eagle Pass, TX, knowing that I was on the path to a better future. Education in the United States was my opportunity, the key to unlocking my potential. But far too many of today's children don't have that opportunity that I was granted. With a public education system that consistently falls behind the rest of the world, the United States is failing our children right here at home in the most fundamental of ways. We have a responsibility to them and to future generations to ensure that America remains the land of greatest opportunity. Indeed, America is still a Nation where opportunity not only exists, but a balance. The key to competitiveness in this century lies in giving our citizens the tools that will allow them to capitalize on that opportunity, the tools that will allow them to innovate, to compete and to lead. Thank you, Mr. Chairman. Mr. Issa. Thank you, Dr. Ruiz. [The prepared statement of Dr. Ruiz follows:] [GRAPHIC] [TIFF OMITTED] 26331.029 [GRAPHIC] [TIFF OMITTED] 26331.030 [GRAPHIC] [TIFF OMITTED] 26331.031 [GRAPHIC] [TIFF OMITTED] 26331.032 [GRAPHIC] [TIFF OMITTED] 26331.033 [GRAPHIC] [TIFF OMITTED] 26331.034 [GRAPHIC] [TIFF OMITTED] 26331.035 [GRAPHIC] [TIFF OMITTED] 26331.036 [GRAPHIC] [TIFF OMITTED] 26331.037 [GRAPHIC] [TIFF OMITTED] 26331.038 Mr. Issa. Mr. O'Shaughnessy. STATEMENT OF M. BRIAN O'SHAUGHNESSY Mr. O'Shaughnessy. Good morning, members of the committee. My company, Revere Copper Products, was founded in 1801 by Paul Revere. We believe we are the oldest manufacturing company in the United States. We don't make pots and pans anymore. That was sold to Corning about 20 years ago. So for about 75 years, we made them. The rest of the 205 we made sheet, strip and coil products of copper and brass. Think about an aluminum rolling mill and those big coils that you see. We do the same thing, but we make them out of copper and brass. We do that in Rome. We have a small plate mill over in New Bedford, MA, not far from the original plant built by Paul so long ago. Now, you are thinking, here is an old-line manufacturing company, right? Let me explain something. Eighteen years ago, when I acquired the company--I am somewhat of an entrepreneur-- we had a payroll of about 750 people. Three had degrees in engineering and computer science. Within 3 years, our payroll was 550, and we had 55 people who had degrees in engineering and computer science. We are not a low-tech company, we are a high-tech company. When you look at our rolling mills, you will see a lot of electronics on those rolling mills. We are customers for those PCs and other chip devices to run our machines. When you look behind our machines up on the wall, you will see a glass window, and behind that window you will see $3, $4, $5 million worth of computers to run that one machine, that one mill. Now I want to talk about why are we losing manufacturing jobs to the rest of the world? The numbers are about to come out. I think it will be somewhere around $200 billion deficit with China on manufactured goods in the United States. The EU is going to probably come out $150 million. I am just rounding off to the nearest $50 million there, because I don't know---- Mr. Issa. Please, stay with the billion, I get confused. Mr. O'Shaughnessy. I am sorry, did I say million? Mr. Issa. It happens here all the time. Mr. O'Shaughnessy. All right. First of all, let's talk about what it is not. A local furniture company up in Booneville, NY, shut down, and they consolidated their operations down into the Carolinas somewhere. They had five plants; they went down to three. They announced they were consolidating and doing all of this. Their press release didn't say that they were now buying furniture from China and shipping it in. My point here isn't about outsourcing. I think outsourcing is a phony issue. I think it has--it's an effect, not a cause of our problems. The point I am trying to make is that the press release the company put out didn't mention that we are not making those products here now because the costs are too high and this and that; we are going to make them in China. Similarly, a lock set manufacturer in California, and in this case I will mention the company's name, Schlage Locks--do you know what lock sets are? Those are on doors where you get the door handle, the brass plate, the whole mechanism. That is all called a lock set. Well, they said they were moving closer to the market, and so they and every other lock set manufacturer in the United States left the country. Nobody has left to serve this market. But that isn't true. You walk into any big box store, you walk into Wal-Mart, Kmart, Ace, and pick up anything that is made of brass, and you will see it is made in China. So again my point is the press release doesn't tell you the story. I don't think America knows the full story of what is going on in manufacturing and what is causing this big deficit. So, if it's not us--and I will answer questions on that later if you like. It is certainly not the tax policies, the dividend cuts, the death tax cuts, the income tax reduction. No. Those are all good things, and those are things that need to continue. Several years ago I started walking down a path that led me to understand better what was going on in manufacturing and the competitive situation of the United States. Our plant in New Bedford was facing very strong competition from a plant in the U.K. We were competing with them in the Middle East, in Japan and South Korea, and in the United States. But the owners of that plant were having a tough time because we were outperforming them insofar as productivity. The owner decided he had enough, and he wanted to sell. So we looked at his books. What we discovered were, to our chagrin, to our amazement, was that his tax load was much smaller than ours. We couldn't believe this. It just happens that the VP and general manager of my plant in New Bedford is British. So he said, well, Brian, look at it, here is the situation. In that country, they have a VAT tax structure that takes up part of the costs of manufacturing. When they export to the United States, we have to face them here, they get that back, and they do everywhere else. So I started looking around and discovered this huge discrepancy that has to do with VAT taxes, and that we are the only major industrial country that does not have a VAT tax system. Now, what I would like to do is to put into the record my view of what a good VAT tax structure is. But, I want to make a very strong cautionary note here. It's very easy to make things worse. Here is what you can do. You can put a VAT tax in and leave the existing system and use VAT taxes to try to close some deficit. You will make it worse for manufacturing. That would be a horrible, horrible approach to take. If you are interested in reviewing this document, you can also go to reverecopper.com and just click on VAT USA. I quickly want to go into another couple of major points on energy. The sad truth about windmills is, you know, when they first came out, everyone was concerned about environmentalism. We wanted them to work. We wanted them to be effective. But the windmills, if we increased our number of windmills 10 percent a year for 20 years, the effective addition to our Nation's capacity would amount to 1 percent. Windmills are one of those incredible things where 1 and 1 doesn't make 2, because if the windmill is operating, the standby plant shuts down. When a windmill doesn't operate, the standby plant comes up; 1 and 1 doesn't make 2, it actually makes about 1.08. Now, some States have pushed that up to 12 percent, even 20 percent. I suspect some of those people are the ones that did the calculations on the dam in New Orleans. Finally, on currency. China's Government recognizes the great truth that an entity that provides or creates skilled jobs is a precious thing. It is not something to be taxed, sued and regulated to death. The challenge, the impact of the regulated currency on the United States and the rest of the world is astonishing, and the world is sleeping. So I will just ask you one question. If Paul Revere rode into this room today, what do you think he would say? The Chinese are coming. Unfortunately, they are already here, and they are taking our jobs. Thank you. Chairman Tom Davis [presiding]. Thank you very much. [The prepared statement of Mr. O'Shaughnessy follows:] [GRAPHIC] [TIFF OMITTED] 26331.039 [GRAPHIC] [TIFF OMITTED] 26331.040 [GRAPHIC] [TIFF OMITTED] 26331.041 [GRAPHIC] [TIFF OMITTED] 26331.042 Chairman Tom Davis. Mr. Garnick. STATEMENT OF RICHARD S. GARNICK Mr. Garnick. Thank you very much, Mr. Davis and members of the committee. Thank you very much for holding this important hearing. I applaud you and your committee for your leadership in the area of concern of American business and family. The United States economic competitiveness and technology in the years ahead is at stake. I am president of Keane, Inc., a Boston-based information technology and business process servicing organization. As to my performance in the context of my comments, I would like you to know that prior to joining Keane late last year, I spent 4-plus years as a senior executive for one of the leading IT services firms based in India, serving as the only American on the management board of any major Indian IT services firms. Thus, I think I have a unique perspective of the global landscape and the competitive threat to U.S. providers. Many of the comments of the World is Flat I have lived over the last decade. I am also here today in another capacity, and that is as a board member of the Information Technology Association [ITAA], which represents over 325 member companies in the information technology industry. These are the companies that are the enablers of the information technology economy that Dr. Ruiz spoke about. These range from startups to some of the largest corporations in North America, and they serve companies on a truly global basis. We are united by our concern that if the United States is to remain at the forefront of global high tech economy, we must take practical, prudent steps to preserve our competitiveness today and tomorrow. I would like to begin my remarks by stating that I truly believe the way forward is clear. Without disciplined, purposeful action, the Nation's high tech future and therefore its economic future is at risk. To remain globally competitive, America must at least double the number of science, technology, engineering and math--or I will use the term ``STEM''-- graduates over the next 10 years, from approximately current levels of 430,000 to 860,000. If we don't create a more equitable platform for global competition and a larger, better equipped technology workforce, we will surely lose much of the economic edge we have enjoyed for the past 50 years. Consider, global environments where global collaboration enabled by powerful high speed networks level the traditional barriers to domain expertise and professional interaction. A burgeoning appetite for white collar employment pits country against country in a race to perform services in competitive bidding heretofore unimaginable, target national investments in science education, develop a large cadre of STEM workers to pursue those global opportunities and in the process rewrite the rules of global economic engagement. The big question in front of us is can a high standard of living country like the United States compete in this transformed business environment? Unequivocally in my opinion, the answer is yes. But innovation and creative scientific engineering and technical disciplines may be the last line of defense against an otherwise uncomfortable future. In the past, scientific discovery could yield practical knowledge in commercial products capable of sustaining an entire community for years. Scientific innovation has produced roughly half of all U.S. economic growth in the last 50 years. Foreign suppliers certainly contributed to the value chain during this time, but they did not supplant it. The road to the future, STEM. In the early days of the Republic, the Nation's manifest destiny lay on the trails and canals running West. Pioneers used these difficult avenues to pursue a still more difficult American dream of individual freedom and national strength. Today and into the foreseeable future, the road to global competitiveness, and therefore America's destiny, runs through education and the STEM fields. We fundamentally need more trailblazers from our entire diversified community of Americans, and they will be needed because the more we have, the more trails we can blaze. The power of computers, software communication is enormous today, but will be dwarfed by computational resources available to typical users 10 years from now, again due to the thanks of the semiconductor industry and all the providers of technology platforms like Dr. Ruiz's company. This computational power sets the stage for enormous discoveries in virtually all aspects of human endeavor, ranging from preventing diseases to modeling behavior of markets. Advances in technologies like data mining, data storage, high speed networks, etc., will launch a new information revolution and endow these societies able to harness this power with global economic leadership. STEM graduates will channel this force and allow the United States to realize its fullest potential. As Brian spoke about earlier, he lowered his number of total workforce but increased the high quality of his workforce and improved productivity of his business. But there are warning signs out there. U.S. self- sufficiency in math and science is at issue. We spoke about it through earlier sessions, but American universities granted 50 percent of the doctorate degrees in computer science to foreign born students working in industry. The percentage of doctoral degrees in engineering is even higher; 22 percent of our science and engineering jobs in the United States are now held by the foreign born. While the Nation may be able to meet short-term labor shortages by relying on this talent pool, such workers may ultimately decide to repatriate, taking with them their advanced degrees and American industry experience. The number of undergraduate degrees awarded to science and engineering students is falling. Between 1985 and 2000, bachelor degrees awarded to engineering and math and computer science, etc., had fallen by 18.6 percent. Roughly one-third of the students declaring an engineering major switch prior to graduation. The number of newly declared computer science undergraduates has dropped 33 percent, and computer science master's degree candidates have declined 25 percent since only 2002. In addition, tighter customs and immigration controls in response to homeland security concerns are dissuading foreign students from study in the United States. A 2004 survey by the Council of Graduate Schools found that a number of foreign students in U.S. science and engineering programs is down 24 percent in terms of the former and 20 percent in terms of the latter. Moreover, foreign students who are electing to study hard science disciplines may face a harder time with visa screenings and the entire processes. So this brings us to the question: How do we sharpen America's competitiveness and edge in the 21st century? From my perspective, it means that we need to begin by focusing on three things: Education, government policies and industry efforts in partnership. Education. The STEM workforce. The key is expanding this. Again, we have to at a minimum double the workforce over the next 10 years. This seemingly monumental goal will still put us at a competitive disadvantage in the way of pure numbers to the STEM workers in India, where I spend so much time, China, where I spend a lot of time, as we continue to lose ground due to demographics and emphasis of their overall economy. In 2004, the Academy of Natural Sciences reported that 350,000 students from China graduated with bachelor of science degrees, compared to only 140,000 in the United States. Last, India is graduating over 300,000 engineers in 1 year alone and that is expected to continue to grow to over half a million. And that compares to our graduating of less than 75,000 engineers a year. Competition is a numbers game, and at a minimum doubling the number of STEM graduates is necessary to best position the United States for economic prosperity. Government policies. How can the government step up and lead? You can help by helping facilitate the doubling of the STEM workforce. Doubling this will pull adequate student enrollments from groups that are currently underrepresented in the math and science professions. We have a major disconnect. Women are one dramatically underrepresented group. The percent of women in the IT workforce declined from a high of 41 percent in 1996 to 32.4 percent in 2004, while the total number of women getting college degrees has grown. Just 3 percent of 12th grade African Americans and 4 percent of Hispanic Americans are proficient in science, a situation that doubtlessly limits the number of minority students in the STEM college programs and the STEM workforce over all. The actions I have described today will play out over many years. There are, however, practical steps that can be taken in the near term to hone the Nation's competitive advantage. One such step is in the area of increased access to foreign born talent. Congress should move to make the current limits on business, immigration programs reflect real world conditions. In the real world, the 65,000 visa cap placed on the issuance of H1B visas in 2006 was reached 2 months prior to the start of the fiscal year. Other important policy steps to double the number of STEM graduates: Extending training and assistance to workers in services industries, to workers when they are displaced through other means of economic transformation, controlling health care costs. In addition, there are other fundamental policies that need to be evaluated, policies that support free but fair trade. We need economic policies that support an equitable platform for stimulating investment for enterprises. Companies out of India, software services companies, pay zero taxes on revenues and profits for the services that they render. That creates a disequilibrium in their ability to invest back into their businesses. Our industry is a national agenda item for many countries or regions of the world, including China, India, Eastern Europe, South America, just to name a few, because our industry is truly transforming their economies. I would like to correct the record earlier today. One of the Congressmen spoke about the Henry Ford principle. One of the things that our industry is doing in India is creating a stronger middle class that is creating potential markets for free trade, so Dr. Ruiz can sell chips to the PC manufacturers that sell PCs to companies like I that put them on the desktops for companies and the employees that are over in India and for the computers that they build on their own. However, there is a competitive disadvantage due to some tax burdens and other factors that the government has put in place. Industry. What role do we have? In addition to the action by government, the industry can play a role through community involvement, scholarships, mentorships, internships. The STEM workforce will grow only to the extent that young people see a future in career opportunities. U.S. high tech companies must help the newcomers see the potential of careers, interesting work and interesting opportunities. One of the things I have done since joining Keane is we are going to be initiating programs to ensure that we attract the best talents and give opportunities to the best and brightest out of colleges and universities here in North America. We are investing programs to recruit and train college graduates for positions throughout North America and help in the next generation of managing teams globally, and truly making global work work. So in conclusion, true leadership requires reasoned responses to present evidence. Despite its many comparative advantages--a democratic tradition, a system of laws, access to education for all, protections for intellectual property and a culture which nurtures and rewards entrepreneurship--the United States has entered an era of unprecedented global competition. At the same time American students are turning away from math and science programs that would equip them to compete for the future. The Nation's best response to the new competitive reality posed by these nations is to apply American ingenuity and innovation across the spectrum of human endeavor. As a businessman who has been involved deeply in the international high tech marketplace, I can tell you that the global race has not only started but that countries, including China and India, are pulling ahead in many areas. They are making the investment in education. They are producing world class research and development, and they have the will to win. And so must we. I would like to thank the committee for this opportunity and I look forward to working with you on legislative proposals to eliminate our disparities in education and workforce development. Chairman Tom Davis. Thank you very much. [The prepared statement of Mr. Garnick follows:] [GRAPHIC] [TIFF OMITTED] 26331.043 [GRAPHIC] [TIFF OMITTED] 26331.044 [GRAPHIC] [TIFF OMITTED] 26331.045 [GRAPHIC] [TIFF OMITTED] 26331.046 [GRAPHIC] [TIFF OMITTED] 26331.047 [GRAPHIC] [TIFF OMITTED] 26331.048 [GRAPHIC] [TIFF OMITTED] 26331.049 Chairman Tom Davis. Ms. Wince-Smith. STATEMENT OF DEBORAH WINCE-SMITH Ms. Wince-Smith. Chairman Davis and members of the committee, thank you for this opportunity to present testimony on the competitiveness of U.S. businesses and the pivotal role that government can play in supporting America's business success at home and successful competition in a fiercely global economy. I would like to thank Secretary Gutierrez for his leadership because he truly is a champion of economic competitiveness, as is the Deputy Secretary. They are indeed forceful advocates for the innovation imperative that will drive our productivity and ensure prosperity for all Americans. I would also like to commend my colleague and friend Dave McCurdy, and he serves on the leadership council of our National Innovation Initiative. But I want to also recall his leadership back as a Congressman when he was one of the sponsors of the 1988 National Super Conductivity Competitiveness Act. And I was working in the Reagan White House at the time. And it was a fabulous example of bipartisan moving forward, which really signals today where we are with the bipartisan legislation, with the Innovate America Act and the new PACE legislation. So really we are at a threshold, or a tipping point, for national awareness, commitment, and bipartisan action. In the State of the Union address last week, in the President's unveiling of his American Competitiveness Initiative, he really clearly set forth a policy and an investment platform for students, for workers, for entrepreneurs and our global business, and the Council on Competitiveness commends the President and his administration for this groundbreaking initiative. The Council, by the way, is entering its 20th anniversary, and our CEO, University Presidents and labor leaders are all committed to developing an action agenda to drive competitiveness and productivity. Indeed, it is our enduring mission and the reason we were created by John Young over 20 years ago. In January, we welcomed our new chairman, Chad Holliday, the president and CEO of DuPont, who succeeded Duane Ackerman, the chairman of BellSouth. And I can't help but mention that from its inception DuPont's business has been innovation driven. And indeed, some of the talk this morning about the transformation in energy renewables, sustainability, moving away from petroleum based products is already underway at DuPont, and we are going to see that really permeate our business in the years ahead. The National Innovation Initiative is a flagship work of the Council and it is entering its third year and we are very proud. It is led by Craig Barrett, the chairman of Intel and Bill Brody, the president of Johns Hopkins. These are leaders that have taken forward the work that we launched back in 2004 under the leadership of Sam Palmisano of IBM and Wayne Clough of Georgia Tech. But this is an initiative that galvanized over 500 leaders across the country to probe the changing nature of 21st innovation and then construct a policy agenda for America. Now when it comes to competitiveness, I think Americans tend to veer between complacency and hysteria. On the one hand many Americans find it hard to conceive of a world where we are not the world innovation leader, but others recognize that our leadership is being challenged by other nations who are taking our model to heart. Indeed, if current trends continue--and we have heard many of these trends and statistics this morning--our economic prowess and national security will be seriously compromised. The United States is still the global leader and benchmark for competitiveness. As the Secretary described this morning, our economy continues to deliver unprecedented productivity growth while productivity growth in the rest of the world is relatively stagnant. And we have low unemployment and our creativity and entrepreneurship and business models and business innovation is indeed the envy of the world. Yet we know that the waters we must navigate in the future 21st century that we are in today are not those that propelled us to a safe harbor in the 20th century. The pace of technological change, its rapid deployment across the globe, the emergence of new competitors, fueled by a demand driven economy with powerful consumers in charge, means that the policies of the past cannot be the policies of the future. Low wage nations around the world are developing high skilled, high performing workforces, investing in their talent, in their R&D and in their infrastructure and creating optimal business climates and tax incentives to indeed propel their innovation. They are hungry for the world's work. And let's accept the reality. Every day it is easier to ship that work around the globe in bits and bytes. Indeed, at the Council we believe and know that if work is routine, rule based, digitized and reliably codified, there will be a source of labor somewhere in the world to compete for that investment and that job. So we cannot compete on standardized services, commodity products, only on innovation. And let me define innovation, because I think we all talk about it but what is it really? At the Council we say it is 1 to the fifth power. It is the intersection between ideas, imagination, insight, invention and implementation, and it is ultimately about new value creation. We have to have an innovation ecosystem with a highly skilled, creative and flexible workforce, the investment in the long-term basic research at the frontiers, and this infrastructure of regulations as well as the physical and digital world that enables our people and businesses to harness their knowledge and new ideas and technology to indeed be competitive globally. The recommendations in our NII agenda reflect this, and indeed we look at the whole system as a very dynamic innovation ecosystem. But we are not stopping still. While we will continue to push on the legislation and the President's initiative, we are already undertaking what we refer to as the over horizon innovation challenges, with new initiatives to propel America into the leadership role in 21st century manufacturing. There is indeed a renaissance in manufacturing. It is in transformation, with the power of desktop fabrication, T to T sensing, the use of supercomputing in design and the power of logistic supply chain control. We are also focused on how to have the users and the demand side of the energy equation drive our independence and sustainability. In implementing our NII recommendations, we also are focusing on what is going on in the United States in our regional innovation capacity. Working with the Department of Commerce's Economic Development Agency and the Department of Labor, Secretary Chao rolled out right after the State of the Union a fantastic new initiative called WIRED, regional economic development for workforce innovation, and we believe that this is going to catalyze and trigger across our country the emergence of innovation hotspots consistent with the public-private partnerships that we are talking about today. And I might say that every week at the Council we are having requests from all over the world to talk about innovation hotspots and why in the United States we really have a lot of the ingredients and road map for that. But of course the government also has a very, very important role across the continuum of talent investment and infrastructure. The government has to ensure that in the United States we have this optimal, high performing, innovation friendly climate for our enterprises to develop and compete at home and abroad. And this deals with the whole issues of the balance between risk and reward, our regulatory system to protect our citizens but not hurt our companies. We really need to get the R&D tax credit permanent. It's been on the book for years and years and years. It is kind of time to put that, I think, behind us. And of course the protection of intellectual property, ensuring the rule of law and transparency globally, all of these things the government has a strong responsibility for. And let me say that with our commitment for STEM education and ensuring that our children have the skills, the analytical capability, and the creativity to go forward, we have to increase this investment in the frontiers of knowledge through NSF, the Office of Science mission, and our DOD world. But I want us not to forget that we should draw on our culture of creativity. I believe that America is indeed a place that has a mix of creativity that is unsurpassed in the world. And so as one of our members said, we need artists who can think like engineers and engineers who can think like artists. And finally, let me share with you, it was not--I think it was very powerful that the President mentioned two areas in his speech, nanotechnology and supercomputing. We are leading in nanotechnology. Are we going to capture the value here in the United States or will it be in China and other parts of the world? Our manufacturing prowess depends on that. And clearly supercomputing and enabling that down to the level of our small suppliers and entrepreneurs will give us a huge competitive advantage. And again we are on a renaissance in that world. Let me conclude by sharing with you a comment from one of our members, Roger Enrico, the former CEO of Pepsi and now the CEO of Dreamworks Animation. He recently talked about the importance of making big changes to big things, and change in progress, he explained, will never come if we don't free ourselves from the tyranny of incrementalism. Dramatic results do not come from undramatic action, and innovation is a race with no beginning and no end. And it is time for all of us to get started and ensure that we create a legacy for our children that takes the power of innovation to the next level. And I would be happy to answer any questions and look forward to working with this committee. Chairman Tom Davis. Thank you very much. [The prepared statement of Ms. Wince-Smith follows:] [GRAPHIC] [TIFF OMITTED] 26331.050 [GRAPHIC] [TIFF OMITTED] 26331.051 [GRAPHIC] [TIFF OMITTED] 26331.052 [GRAPHIC] [TIFF OMITTED] 26331.053 [GRAPHIC] [TIFF OMITTED] 26331.054 [GRAPHIC] [TIFF OMITTED] 26331.055 [GRAPHIC] [TIFF OMITTED] 26331.056 [GRAPHIC] [TIFF OMITTED] 26331.057 [GRAPHIC] [TIFF OMITTED] 26331.058 [GRAPHIC] [TIFF OMITTED] 26331.059 Chairman Tom Davis. David, welcome back. STATEMENT OF DAVE McCURDY Mr. McCurdy. Thank you, Mr. Chairman. I want to specifically thank you for your leadership. It feels like old home week when I come to testify before you and Darrell Issa. I don't know of two Members of the House that have more experience in high technology and bring business acumen to this process and only wish half the other Members had as much experience and your dedication to technology. I know time is short. I guess I am the cleanup batter here, so I am not going to take the whole bucket of balls here. I just ask that my statement can be admitted into the record. Chairman Tom Davis. Without objection. Mr. McCurdy. I would like to just make a couple of quick points. As you know, EIA has been deeply involved in the issue of innovation. As a matter of fact, since we do represent such a wide range of the technology in this country and high tech, we frame all of our initiatives within the context of innovation and global competitiveness because that is where our industries succeed. We have a foundation. You know, everyone talks about math and science education. In 1981, actually my first legislative victory and disappointment was to have an amendment attached to the Higher Education Act. Carl Perkins was the Chair, and it became authorized to provide scholarships to math and science teachers and summer internship programs with industry in order to supplement their income and provide some real-world experience. Unfortunately, in this place, you not only have to worry about authorization, you have to get the appropriations, and it was not appropriated, and I think we have missed some opportunities. So as much as we have this momentum, and I think there is good momentum for innovation in the innovation agenda, we have to be very diligent and continue to keep an eye on where this actually ends up. Our foundation at EIA called NSTEP, National Science Technology Education Partnership, has been working; and Darrell Issa has contributed and others not only financially but to provide mentorship for young Americans to understand math and science and how it affects them in their daily lives. TIA, our communications sector, has an incredible research division. Meredith Singer is here, and they have a CTO Council which has provided in incredible detail about the decline of research and development in the communication side and where we need to provide some emphasis. Last, I just want to mention just a quick commercial. Over 2\1/2\ years ago, we published this document based on a prosperity game that we played with CEOs and academics and industry leaders and members of government that came up with a series of 40 recommendations to improve innovation; and even though I am an absolute passionate advocate of innovation, I think we have to be very, very careful about our rhetoric and the hyperbole. I think most of us agree--and Deborah and I have worked on this issue a long, long time. She has provided incredible leadership. But we are really not at a crisis yet. We are really at a crossroads, and I think now is the time for the leadership of our country to step up and say we do have some tough choices to make. We need to make the investments now. That is why I agree with everyone that has appeared before this panel today, the Secretary of Commerce and my association colleagues, when we say that the Secretary is right, the President was right. We are pleased that he raised the level of attention in this State of the Union for innovation. But there is a very important movement here on the Hill, in the Senate. We see extremely strong leadership with Senator Ensign and Senator Lieberman with their bill. After the Augustine report, we see very broad-based legislation from Senators Alexander and Bingaman and others, with over 60 cosponsors in the Senate, bipartisan. I know the Democratic leadership in the House has advocated an innovation agenda, and I understand that the Speaker and Mr. Goodlatte will be unveiling the Republican leadership proposal on innovation perhaps today. My only hope is that from past experience and one who admires this Institution is that we do our best to make this a bipartisan effort. This should not be a partisan issue. Quickly, in just one quick insertion on a thought, as much as we want this legislation to pass and the budgets can be an improvement and we want to see the prioritization and the emphasis, I would certainly urge your leadership in strong support for reducing the number of congressional earmarks when it comes to research and development in science, which I think really does hamper the ability to have an effective U.S. leadership. I mentioned R&D. We all support making permanent the R&D tax credit. It is costly. But I think it is one of the best investments we as a Nation can make. I will mention again there are a number of very good proposals not only with the President's outline but also in these key bills. But I want to give one example of an area when it comes to business climate, and this is the one point I will finish with. That is innovation, and the key to innovation is having IT diffused throughout the economy. That is why we have an advantage over other countries. But they are reading our blueprints on our success, and they are going to try to copy it. They have had these--Europe has their six framework, China has a 5-year plan, Japan had a 5-year plan. They all have these plans, and the United States is yet to really step forward with a clear vision for innovation, and that is why we encourage you to provide leadership on. But the one area, an example, is from the semiconductor space, and Dr. Ruiz talked about the need for competition. But it is a simple fact that when the cost of a new fab production capability for semiconductors costs $1 billion more in the United States to build and operate than it does in China, Israel, Ireland, parts of Asia--two-thirds of the No. 30 millimeter fabs are being built in Asia--but when there is such a discrepancy in the cost, it is no longer a question of are you protecting American jobs or are you a patriot--and we heard those arguments, those fallacious arguments in the past about the Benedict Arnold CEOs. That is wrong. That is not the case. They are real business decisions when you are talking about that kind of investment and that kind of change. So those differentials are important. I know this is not the Ways and Means Committee, but I do think we need to look at some of the proposals of where these incentives are being laid out, why the United States has a 35 percent corporate tax rate and in Ireland it is 12.5 percent. China provides a fab 5-year tax holiday and then, after that holiday, half the normal rate of taxes for the next 5 years. Israel has a 20 percent capital grant. A new fab going up in Israel. An example I heard the other day, a real-life example, the State of Arizona is having a new fab built in the State that provided up to $20 million in incentives. It is good. It is positive. Same plant in Israel has a $700 million set of incentives. So, at some point, the shareholders themselves start to say, how can you disregard the economics? So I think there is a very important point. And, last, we don't want to forget about small business. They live and the startups live and die by the sword of innovation, and we shouldn't just ignore their capabilities as well. Mr. Chairman, thank you; and I will be glad to answer any questions. Chairman Tom Davis. Thank you very much. [The prepared statement of Mr. McCurdy follows:] [GRAPHIC] [TIFF OMITTED] 26331.060 [GRAPHIC] [TIFF OMITTED] 26331.061 [GRAPHIC] [TIFF OMITTED] 26331.062 [GRAPHIC] [TIFF OMITTED] 26331.063 [GRAPHIC] [TIFF OMITTED] 26331.064 [GRAPHIC] [TIFF OMITTED] 26331.065 [GRAPHIC] [TIFF OMITTED] 26331.066 [GRAPHIC] [TIFF OMITTED] 26331.067 Chairman Tom Davis. Let me just start. You ended your comments on small business. Sometimes the only way a small business can get into the marketplace is with a congressional earmark. I just met with a company yesterday out of Syracuse, NY, that is doing work on IEDs. They have a breakthrough technology that we think has proven far more effective. They couldn't go through the Defense Department and get any kind of traction, so they had to go through the Appropriations Committee who brought them to front. The difficulty with earmarks is there are good ones and bad ones. Many times we use the earmark process for a full employment process for Members' districts, and that is not good. On the other hand, we have a responsibility to kind of bring new technologies to the fore that if they work their way through the established chains in the bureaucracy get shut down. So I don't know what the right balance is. But I would hate to throw the baby out with the bath water when we talk about Congress' ability to intervene. It helps when some of these emerging technologies that may not be able to get their way through the minimal process. Mr. McCurdy. Mr. Chairman, can I make one quick comment on that? I agree there are many times--I was on the R&D Subcommittee of the Armed Services. I was on the Science and Space Committee. I chaired the Intelligence Committee. It is important for Congress to raise the level of awareness on many types of technology, but I do hope that we can work with-- something is wrong when the Department of Defense and these other agencies are not recognizing that their acquisition policies are biased against some of these new capabilities. In fact, we also are constantly talking to some of our large multinational corporations to don't forget the R&D and some of the real innovation that is coming out of the small business. Chairman Tom Davis. Absolutely, and any time we do the Trade Agreements Act and Buy America, it cuts down our ability to get out there. Yet there is a strong urging with some Members that we ought to be buying America, not recognizing that when we do that other countries set up barriers in retaliation; and, No. 2, that means we may not get the best body armor for our troops if it is not American made, if we don't do the best in everything in this day and world, and our taxpayers deserve to get the best product for their tax dollars. I agree. I want to go to this idea of innovative friendly climate, because there has been a thread throughout the testimony today in both panels that America is still the innovators, that they can produce the scientists and engineers abroad, but we are the innovators because we have a political culture and economic culture that is different from other countries, and I guess to some extent that is true. But Mr. Garnick, let me start with you. Other countries-- although we have had 200 years in the free enterprise experience and in the democratic experience and some of these other countries are getting it in a kind of hopscotch fashion, just because we have been successful as innovators doesn't mean that we will stay that way. Can you talk a little bit about your experience as you go around the globe with that? Mr. Garnick. Sure. I don't think it is an entitlement that we dominate the innovation and continue the self-fulfilling prophecy that we will always dominate it. I think it comes down to economics and an environment where it is a game of numbers. In India, for example, it is recognized clearly they have made tremendous progress since they opened up their economy in only 1991. It has only been 16 years since they really started liberalizing their economy. The rate of change of their infrastructure is so fast and with so much investment and resources available, just human resources, that they are capable of I think over the next couple decades of displacing or at least inhibiting our career leadership in that area. Is that a bad thing for America? I don't think it is necessarily a bad thing. It is just a changed environment that we need to deal with. Competition, as Dr. Ruiz said, is critical to continue to raise the bar for our own economy and our own companies serving that economy. However, it should be recognized that these countries recognize that innovation is critical. They have created an environment where they are extremely bright, motivated individuals that aspire not to be viewed as back- office engineers just doing coding or body shopping as often relayed or doing just work that is redundant and repeatable, that is digitized and moved over. The workforce is motivated to changing their environment and changing their environment in such a way that they are reading our blueprint. That again is something we should be proud about but recognize the reality that is what we are facing. You know my own old organization, we had an organization of 45,000 people that worked for me. We had the ability to dedicate over 1,000 engineers almost to the innovation segment of the business that in my current company, with 10,000 employees and a different economic model, I am not capable of matching that 1,000 people head count in innovation. Over time, that will inhibit or create a different economic value proposition. The company I was with in the past is about a $2 billion company on a trajectory of rapid growth. Today, this current company I am with, Keane, is a $1 billion company. We are accelerating the growth, but our ability to invest, because of the economic platform that is in front of us, is different. We have to think through different ways of solving the problem; and it is both technological, it is business model, and it is economic. But we will get there. But I think we have to recognize that we do not own a patent on innovation in the world. Chairman Tom Davis. Anyone else want to comment? Ms. Wince-Smith, I like your comment about artists thinking like engineers and engineers thinking like artists, because that is really what innovation is, as opposed to just the drudgery of performing the work. Our tax system, to some extent, as we see from some of the testimony is not helpful in this area. We have a Tax Code that was designed for a different time in a different era. In the chip business we are seeing the chip business in America just migrating over to Korea and to Japan and other areas. And if China will ever get their intellectual property rights together, the chip business, they dominate that and we see us losing in those areas as well. What is the future for American manufacturing as we stand today? Anybody want to comment on that? Mr. O'Shaughnessy? Mr. O'Shaughnessy. I would, because Revere Copper prospered from Revere and Son to Revere Cooper Products over 200 years because the country had low-cost energy. And one of the solutions that we need is, in my opinion, nuclear energy. France uses--80 percent of it is nuclear; Sweden is about 35; South Korea, I was told the other evening by a South Korean businessmen, is about 40 percent. China is building 20 new nuclear plants in the next 20 years. We need to do the same. What we ought to do is the Federal Government ought to pre- certify site selections. Pick out five sites and then use a BRAC-type process to get it done. Because nobody wants any kind of a facility in their backyard, nuclear or otherwise. I mean, there are cows, citizens opposed to windmills. So I think the Federal Government has to step in with site selection, get energy right, make it cheap. The fundamental way you raise a country up is to provide it with good, low-cost energy; and we can do it. Chairman Tom Davis. We get a crowd out in Fairfax to oppose cell towers going up. You get better cell phone service, so I can talk to my kids on the bullet train in Japan faster than I can driving through Bethesda or Vienna. Mr. Van Hollen. Mr. Van Hollen. Thank you, Mr. Chairman. Let me thank all of you for your testimony and just really pick up where Chairman Davis left off. We, in this country, have been able to keep ahead in many ways because of our technological edge, our innovation. Despite the fact that other countries have been able to produce products at lower wages, we have been able to keep that edge through productivity gains and other issues. Now, Mr. McCurdy referred in his testimony to the fact that there comes a point where simply the cost of manufacturing a product overseas is cheaper. And as you have these others--you know, we don't have a monopoly on innovation. We have been a leader, and we need to invest to keep ahead, but we don't have a monopoly. As you know, the population in India and China and others sort of adopt our model and invest in education. That is why we are here today, is to talk about that loss of edge, which means that the actual cost of economics is obviously a big issue. You mentioned different corporate tax rates. Another big issue we well know is the question of health care. We haven't talked about it a lot this morning, but we all know and we have heard the figures. When GM rolls a car off the plant, the first $1,500 whatever goes to provide health care. We recently saw that IBM decided to discontinue some of its pension benefits. We, for historical reasons, have had a system where we have an employer-based health care, and yet at the same time we spend more as a percentage of GDP on health care than any other country in the world. And at the same time we have 40 million Americans unemployed. How do we deal with this issue going forward? It seems to me that many of our competitors, as the employers, don't have to pay that cost to health care; and yet, at the same time, I think we all agree that one of the things we want to do in this country is to provide health care universally as possible that is our goal. How do we deal with this very important issue as a Nation? Dr. Ruiz. If I could, you know, I am the farthest thing from an expert on the health care, but I do understand the cost of health care in our business. And the one thing that seems apparent to me in not only health care but many other issues similar to that is that we have not put technology to its fullest use to solve those issues. I happen to know, for example, Mr. Paul O'Neill, who used to be in the government here, a Secretary, who has done some research and found that--and I have seen the work--he is very compelling that through the use of IT technology as we know it today, without making any improvements to the technology, that health care costs could be reduced by 40 percent. And I think one of the things perhaps we could find a way to collectively encourage and embrace is the use of technology to solve these issues. IT, information technology, is very powerful; and I believe that it could go a long way to address health care rather rapidly. But it would take a very concerted effort between industry, government and just the population at large. Mr. McCurdy. Mr. Van Hollen, I spent a good deal of my career working on health care issues. I am married to a physician. I have a daughter in medical school, and my wife sometimes wonders why my daughter wants to go into medical school, considering the changing nature of health care and litigation and some of the costs. It is an interesting fact that we in the United States pay more on litigation than China spends on R&D as a nation. I would love to sometime talk about just China, because there is a great deal of reaction to what China is doing. I think the thing that we need to realize is with China physics it is really not the mass right now that is the issue. It is the velocity of their growth. It is the velocity of growth, pace of change which is so dramatic. They have mass with the potential for this huge market and the labor force. But we have some advantages, but I am not sure we are maximizing that advantage. In America, we are going to grow--we have grown rich before we are growing old as a Nation, but our baby boom generation is approaching the older age, and we have this savings mismatch in the world. There is a world imbalance with regard to national savings. We are the richest nation in the world, and yet we have negative savings. And you go to China, one of the poorer nations of the world, believe it or not, and they have a huge savings rate. Why? Because they haven't had the institutions of Social Security, Medicare and others. They are going to hit a wall there, and I will tell you this is not going to be 10 percent annualized growth indefinitely. I had a CEO tell me the other day that he believes that right after the Olympics you are going to see some really major problems. Experts have told me in 6 to 8 years you are going to see huge roadblocks in China's development. Now there are international implications of that and potential nationalism and all the rest, but I think we have to be very mindful of what is happening there. We have to look at--and someone earlier in the committee talked about the trade deficit meaning more than the national deficit. Much of my background is in international economics; and, quite frankly, I would reverse that and say the way you start dealing with trade deficits is you get the national savings rate and the deficits here under control, because that has a huge impact on the cost of money and the potential cost of money over time. So, actually, I spend most of my time dealing with China; and I would like to get on that at some point. But I think the point you raised about the cost of health care, our industry is not going to remain competitive if they are strapped with this huge cost. The question is where they shift it to. If the Federal Government is where we see it currently--and I don't care about halving the deficit. I am talking about the need to have true savings and the ability, flexibility to deal with this burgeoning crisis which--it doesn't effect just individual consumers and the elderly. These businesses cannot compete. Our industry cannot remain the best if all of a sudden they become a pension manager, an insurer of last resort and the provider of health care. Ms. Wince-Smith. I'd just like to take the Chinese analogy a little bit and carry it into health care, because it's ironic that our system is really like a Chinese rice bowl. If the rice bowl is broken, you don't have health care. So the whole portability issue I think is absolutely critical. And, this is one of a few sectors in our economy that is not consumer driven. It's almost an inverse relationship between--as more innovation comes, the costs go up, and there is a specter of rationing and quality. So clearly when we think of innovation, we need a lot of innovation in the design of this health care system to meet some of the realities that we're talking about and really bring it back to a patient-controlled system, which it is not right now. And the other link into manufacturing with this is that there are very advanced sectors of manufacturing where nobody can beat us in the world. And when you look at those, there are a number of reasons why. I mean, Proctor & Gamble, they are producing what you would think of as low-value consumer products, toothpaste, potato chips, diapers. Here in the United States, competitive throughout the world, they're using high performance computing to completely change the cycle, and the value of a lot of their manufacturing is in the design; it's in the logistics supply chain. And also we have to factor in what's going on in labor. Timkin has, I'm told, I have not seen it, one of the most advanced facilities in North Carolina for this T to T sense manufacturing where within minutes or hours they can move from very, very complex fabrication. And then we have the other situation in Ohio with the real hostile relationship between business and labor. So there are a lot of things going on in manufacturing. But if Brazilian companies can be competitive in the United States, owning steel mini-mills, there's some things that are going on here. But back to the health care, I think looking at this sector and the productivity that will come from some innovative design I think we have to really do, and that's a big, big challenge. Chairman Tom Davis. Mr. Issa. Mr. Issa. Thank you, Mr. Chairman. Dave, a little bit like Europe, not using the whole bucket of balls. I notice I'm last over on this side of the dais. I'd like to wrap up a couple of things I heard here today and make sure that we are all as unified as I think this panel has been. I would like to congratulate you. Often we have an A-B panel in which one side is saying one side and the other side is talking completely past, and that doesn't seem to be the case today. I think I have heard far more similarities. Matter of fact, I haven't heard any real differences in any subjects, which is good. Of course it also isn't very bright. It's kind of gloomy, all your predictions, but at least we're on the same sheet of music. Mr. O'Shaughnessy, I don't have a question for you, but I do have a comment. I really believe that when the trademark dispute that was--had your company in bankruptcy for so many years, hoping to be able to preserve the identity, the unique identity of your--formally your copper clad product, I wish that had been decided in the opposite way in which Revere Wear's unique look would have been recognized by the courts. Having said that though, the question I have is, do you think if they had, if you were still in that business, or let me rephrase, if whoever was still in it had that protection, intellectual property protection, do you think those pans and pots would be made here in the United States or would they have gone to China regardless? Mr. O'Shaughnessy. First, when I acquired the company, Revere Wear had already been sold, and they had the use of that logo, and I could use it for our type of products but not for cookwear for 5 years. So we could have gone into cookwear. What happened is Corning bought the company, and after producing the cookwear in the United States for an additional 5 or 7 years, they moved the facilities to, I believe, Thailand, and then they sold them. In their case--I think you make a good point in general, and I agree with it, but in their case, in that particular product line, technology passed them by. Copper is still the best conductor of heat that there is, but all of those beautiful ceramic dishes and new cookwear, that's what did them in. Mr. Issa. I see. I always wanted to because I still believe it's a fine product. Mr. O'Shaughnessy. Thank you. Mr. Issa. And, besides, I thought it was the best example of a secondary meaning; when you said Revere Wear, it really meant a particular product. Dr. Ruiz, I asked the Secretary, and this question is open to all of you, but I asked the Secretary earlier if a change in immigration policy--and I think your testimony is very on point, you were among the best and the brightest and most ambitious to cross the border each day to seek out an education and relentlessly try to better yourself, and today you're at the pinnacle of the corporate ladder. However, our immigration policy today, I'm talking about legal immigration, is a business, a family reunification. It does not in any way, except for the H1B and some other limited areas, it does not promote a best of X type competition. If you have a Ph.D., or even a lesser degree, but if you are incredibly skilled through whatever process, including a U.S. education, you're not at a particular advantage in getting that 500,000 or so opportunities to become an American on a permanent basis. In your opinion, particularly with a technology company like this, if we were, during our debate on immigration reform, to provide either new, significantly new, several hundred thousand, large quantity, or take a different approach to the existing amount and increase a net, let's say 200,000 highly skilled, highly educated as a preferential class in immigration in this country, what would that do to your business and to your ability to recruit and succeed against global competition? Dr. Ruiz. Well, we have a near-term problem, in industry, particularly in high tech, is we are short of talent in this country. Any immigration reform that allows us to fill that stop gap problem or stop gap the challenge that we have would be very helpful to high tech and I believe that, without a doubt, would have a very positive impact on industries such as ours. There's no question about that. One of the reasons, whether you call it an H1 visa or whatever, there is a method by which you can get a Ph.D. from India or China or Germany to come work in this country in our industry, that would be a welcome immigration reform that would certainly help our industry. However, I would like to emphasize that our whole industry is also strongly encouraging the fact that while that may be a short-term solution, that the long- term view of this problem, which is we still have minorities and women in this country not being able to go to get the kind of education that they need, that we could make a huge impact in the shortage of the people that we need over the long run if we just could address our own deficiencies in our education system. Mr. Issa. I certainly agree with the latter, but I asked my question narrowly, recognizing even half a million immigrants with high skills would pale in comparison to a shift in U.S. education. But because immigration reform is at the top of the President's agenda and it's high on the agenda of the House, I was hoping to get a comment from each of you. Go right down the line. Mr. O'Shaughnessy. I absolutely agree with you. Revere has taken immigrants and run them through the process to get electrical engineers and so on. I'm Canadian originally; maybe you're aware, with the experience Canada did out of Hong Kong. Mr. Issa. I actually--my suppliers from Hong Kong are now some of the Vancouver residents. Mr. O'Shaughnessy. I totally agree with you. It's so logical. Mr. Garnick. For our business, it's paramount. I think it's critical we create ease of access to find talented people. I fully support that endeavor, but I would reiterate Dr. Ruiz's comment about long term. We've got to build a foundation to tap into our vast untapped community that needs to migrate to a technology community. It's interesting from a standpoint of what we do graduate here in North America. We promote an environment that is rewarding areas of industry and other facets that are just not producing long-term productivity results to the economy, including litigation. We produce more lawyers than many other countries in their entirety. Nothing negative about lawyers, but we need to repartition a large portion of that population seeking that career into the technology community to improve the outlook long term. Ms. Wince-Smith. I would support what my colleagues have said but I would add to that one of the very powerful pieces of our network for retraining our workers as these jobs change, which we should not ignore investing in, are our community colleges. We know people are going to have many jobs and many skills over their life. It's hard to think of someone who's 50 or 55 in a displaced manufacturing environment moving into one of these, but we certainly should be targeting our young people in their 20's and 30's. One of our proposals at the council that was a little extreme, but we had a lot of support for it, even inside the administration in talking with people, was when we invest in the education and our colleges and universities, the best and brightest from all over the world, we are investing in these people as taxpayers. And when they receive their degrees, we think they should be given an automatic green card. And everything that's done on the security checks should be done up front when they apply. And so when they come in, it's as if a business person, you invest in an asset, and you're ready now to reap the reward, and you say that's gone. So I think that would be something that would really kind of be very, very transformational, and, again, it's a bold thing to address a bold need. Mr. Issa. Only in this body could someone be forced to say something was extreme when it was clearly common sense. Dave. Mr. McCurdy. I want to commend and associate myself with Deborah's statement with regard to the green card. There is an interesting statistic, though, and this is where you all have jurisdiction and probably could help some, too. We cannot find a Federal agency that can tell you how many and where the students are in graduate schools around the country, especially in the areas of math, science, physics and others. The one person who has that is at Oak Ridge National Labs, and there is a group there, and the statistic is that 58 percent of foreign born postgraduate students remain in the United States. Now that's still a fairly significant number, and so that's a good investment because that is the best and brightest from around the world, but we should be able to raise that number, notwithstanding all the other issues, long term, improving our own supply here. Another interesting fact is that a lot of these H1B caps are used by family members of the person with the special skills, and they should not be counting against--why have a family of four count for really the one person who is the Ph.D. That needs to be the attracted person here. We don't want to be separating families. Mr. Issa. If I can, just one small followup. Dave, with your intelligence background and following up on the chairman's statement, you know the predator system was an earmark. And I would certainly say that we need to find a way to make sure that those of us who look at so many more projects do preserve certain rights to look for innovative products in some well thought out way even if it's not 14,000 well thought out ways a year--for good earmarks and against bad earmarks. Mr. McCurdy. You need to change the term earmarks. I think there is a misperception about the ability of committees to do its constitutional right in the Armed Services Committee or wherever, and Predator was one. Let me just put one bug in your ear before we wrap up for perhaps a future hearing. I keep coming back to this because this is my favorite topic, but with regard to China, the single biggest issue that the technology industry faces vis-a-vis China is intellectual property. And we as an association--and our industry is working and will soon release similar to this play book we did on innovation, which was broadly embraced by Congress and many people, we're doing one on intellectual property protection and working with some experts that have great experience in the trade world and China. And I think that at some point it would be worthwhile for this committee perhaps to spend some specific time on that issue because I think it has great leverage for us. Chairman Tom Davis. Let me just say, Tom Friedman has been a leader in writing about observing what globalization has done, but if you go back a generation to when I was in college, Toffler wrote about the third wave and basically talked about how this would be similar to the Industrial Revolution, that every major institution would end up changing. And from hearing you today, our tax system has to be overhauled to keep us competitive, immigration system, educational system. That's where we're going. The sooner we do it, probably the better. Because they get closer and closer and closer. These aren't ifs, it's whens. And, hopefully, the parties can come together on this. We've had some arguments over trade that were needless, in my opinion, but we had them. But on some of these other areas, we need to work together as Americans or the American economy as we know it is going to be running third or fourth place. Mr. Garnick. If I could just add a comment on that. We see, as we consult with many companies on IT and business processes, there's a fundamental shift with many companies transforming themselves. And I think much to your point, the government and our systems need a full transformation to compete on this new global landscape. Not to throw, as somebody said, the baby out with the bath water. We're doing so many good things. But you can't wait until, in a business or an economy in a country, we can't wait until the problem is beyond us and we'd have to do it in a period of weakness. It's better to transform in a period of strength. And we recommend corporations that we help transform to take decisive action to recognize the facts, to not stick your head in the sand and deal with the issues on a fact-based environment, and transform in a period of strength versus waiting until you're in a period of weakness. So think through that and if we can as an organization, as a corporation and as an association help the process, we would be glad to participate in any way we can. Chairman Tom Davis. Let me just add, I mean from my own experience, January 1, 1992, I took over as the head of the county government in Fairfax County, VA, which is across the river. We were in desperate shape. We didn't have enough money in the bank to make our payroll the next month. Our commercial tax base had dropped over 30 percent in 1 year. We had, from a real estate perspective, a depression. The thing I asked in every decision we made, are these decisions going to attract capital or chase capital away from the county? When Tony Williams took over as a mayor, I said, you need to ask that fundamental question. You have all these issues coming at you that are unrelated; social issues, justice issues. But fundamentally, you have to ask these questions, either attract capital or chase it away? We just can't be making decisions as a government that's going to chase it somewhere else. Because once it migrates there, it stays there and gets a hold, and those are just fundamental issues we ought to ask. We can disagree on social issues or we can disagree on some other issues, but on those issues, we need a competitive policy that is going to continue to attract capital, keep our dollar where it is and everything else. I think this has been very helpful toward that. I would just add, in Fairfax now I think our economy is the envy of the world. Succeeding boards have continued to ask those kind of questions. It doesn't mean no regulation or no taxes, because you have to invest. We've asked intelligent questions, and ultimately, we asked, is this going to attract capital? That's what we need to continue ask here because our competitors are doing that around the globe. They're doing some innovative things we wouldn't even think of doing. Mr. Ruiz, as you said, competition is good. We're going to get better as a result of this. But competition isn't just among companies; it's among nations. And we need to stay on top. And this has been very, very helpful, and I appreciate everybody being here today. The hearing is adjourned. [Whereupon, at 12:10 p.m., the committee was adjourned.] [The prepared statement of Hon. Elijah E. 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