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M ANUFACTURING JO B LOSSES AND THE FUTURE O f M A N U FACTURING EMPLOYMENT IN THE UNITED STATES HEARING BEFORE THE JOINT ECONOMIC COMMITTEE CONGRESS O f THE UNITED STATES ONE HUNDRED THIRD CONGRESS FIRST SESSION O ctober 5 ,1 9 9 3 Printed for tbe use of tbe Joint Economic Committee U.S. GOVERNMENT PRINTING OFFICE 82-284 WASHINGTON: 1994 For sale by the U.S. Government Printing O ffice Superintendent o f Documents, Congressional Sales O ffice, W ashington, D C 20402 ISBN 0-16-044792-5 JO IN T ECONOM IC COMMITTEE [Created pursuant to Sec. 5(a) o f Public Law 304,79th Congress] HOUSE OF REPRESENTATIVES SENATE DAVID R. OBEY, Wisconsin, PAUL S. SARBANES, Maryland, Vice Chairman Chairman EDWARD M. KENNEDY, Massachusetts JEFF BINGAMAN, New Mexico CHARLES S. ROBB, Virginia BYRON L. DORGAN, North Dakota BARBARA BOXER, California WILLIAM V. ROTH, JR., Delaware CONNIE MACK, Florida LARRY E. CRAIG, Idaho ROBERT F. BENNETT, Utah LEE H. HAMILTON, Indiana FORTNEY PETE STARK, California KWEISI MFUME, Maryland RON WYDEN, Oregon MICHAEL A. ANDREWS, Texas RICHARD K. ARMEY, Texas JIM SAXTON, New Jersey CHRISTOPHER COX, California JIM RAMSTAD, Minnesota RICHARD McGAHEY, Executive Director LAWRENCE A. HUNTER, Minority Staff Director (ii) CONTENTS WITNESSES AND STATEMENTS FOR THE RECORD T u esday, O c to b e r 5,1993 PAGE Hamilton, Hon. Lee H. Hamilton, Member, Joint Economic Com mittee: Opening statement Braverman, Philip, Chief Economist and Senior Vice President, DKB Securities Corporation Carvevale, Anthony P., Chair, National Commission for Employ ment Policy; and Chief Economist, American Society for Training and Development Gorte, Julie Fox, Senior Associate, Office o f Technology Assess ment 1 2 7 10 SUBMISSIONS TOR THE RECORD Mr. Braverman: Prepared statement Article entitled " Growth Recession" Article entitled "The New-Age Economy" Ms. Gorte: Prepared statement Representative Ramstad: Written opening statement (in) 30 39 44 50 56 MANUFACTURING JOB LOSSES AND THE FUTURE OF MANUFACTURING EMPLOYMENT IN THE UNITED STATES T u e s d a y , October 5 ,1 9 9 3 C o n g r e s s o f t h e U n i t e d S ta t e s , J o i n t E c o n o m ic C o m m itte e , Washington, DC. The Committee met, pursuant to notice, at 10:00 a.m., in room 2359, Rayburn House Office Building, Honorable Lee H. Hamilton (Member o f the Committee) presiding. Present: Representative Hamilton. Also present: William Buechner, Chad Stone, Steve Baldwin, Susan Lepper, Stephen Rose, Chris Frenze, Caleb Marshall, professional staff members. OPENING STATEMENT OF REPRESENTATIVE HAMILTON, MEMBER R e p re s e n ta tiv e H a m ilt o n . Good morning. The session o f the Joint Economic Committee will come to order. The meeting is to examine the future of manufacturing and manu facturing jobs in the United States. The focus of our concern today is the loss o f one-tenth o f our manufacturing jobs during the past fourand-a-half years and what, if anything, to do about it. Since January 1989, employment in manufacturing has fallen by almost 1.8 million, or an average o f almost 32,000 jobs per month. To put this in perspective, the average Fortune 500 firm employs 23,600 workers, so we have been losing the equivalent o f almost one-and-ahalf Fortune 500 firms each month for more than four-and-a-half years. This is not the first time the U.S. economy has lost manufacturing jobs. There have been ups and downs throughout the postwar period, but the job loss in the past has almost always been related to reces sions, and then the jobs came back when the economy started to re cover again. During this recovery, however, we have continued to lose manufacturing jobs, 780,000 since the recession officially ended in March 1991, which, in fact, is more manufacturing jobs than were lost during the recession itself. Unfortunately, this trend does not seem to be coming to an end. Troubled companies are eliminating jobs by tens o f thousands and even (1) 2 profitable companies with booming sales are shedding jobs. Week after week, there are stories in the newspapers o f big firms announcing new cuts in jobs. Many people wonder whether they will be able to keep or find good jobs in the face o f all the changes that are taking place in the economy, and there is a lot o f anxiety about whether the U.S. economy can deliver jobs with reasonable pay in this competitive world economy. Today’s hearing will focus on several questions: What has been happening in U.S. manufacturing industries to explain the loss o f 1.8 million jobs since January 1989? Is U.S. manufacturing able to compete effectively in the world economy? Has the recent decline in manufac turing jobs been the consequence o f competition in the world economy or because o f domestic economic problems and policies? How essential is manufacturing to a modern economy? What are the consequences for the American economy and the American workers o f the decline in manufacturing and manufacturing jobs? If it is important to strengthen manufacturing and reverse the jot) loss, should the government adopt specific measures to strengthen individual industries, or should it rely on general macroeconomic policies that focus on the economy as a whole? The Joint Economic Committee is pleased to welcome three wit nesses this morning, Mr. Anthony P. Carnevale, Chair, National Com mission for Employment Policy, and Vice President and Chief Economist, American Society for Training and Development; Ms. Julie Fox Gorte, Senior Associate, Office o f Technology Assessment; and Mr. Philip Braverman, Chief Economist and Senior Vice President, DKB Securities Corporation. You all have statements. They are very good statements. They will be entered into the record in full, and what I would like you to do is to begin now with just a summary of those statements, hitting the high lights for us, if you could, so that we could have time for questions and dialogue. Mr. Braverman, we will start with you and just go across the table— unless there is some other order you prefer. It doesn’t make any differ ence to me. Is it all right to proceed that way? I believe the lady at the last says that is still okay. Is that right? Let’s go ahead. Mr. Braverman, please proceed. STATEMENTS O f PHILIP BRAVERMAN, CHIEF ECONOMIST AND SENIOR VICE PRESIDENT, DKB SECURITIES CORPORATION M r. B raverm an . It is very nice to be with you today and thank you for inviting me. I would like to start by indicating that the situation we are in is unique or unusual for modern times. We have left what appeared to be a somewhat normal recession and the hope was that we would move into a somewhat normal recovery, but that is not essentially what is happening. W e are in a long period o f stagnation. W e are, in effect, in a disguised depression. 3 Now, the term "depression” I don’t use lightly. It is a long period o f adjustment to fundamental problems that will continue for an ex tended period and require a recognition o f those problems in order to deal effectively with them. The reason that the recession was somewhat shallow, but more important, the recovery stagnant and disappointing, is that the U.S. economy has not resolved the problems that brought us the recession and this long period of stagnation. So I think it is impor tant to sketch out some or those problems that we are dealing with. W e have, as a result o f a long period o f inflation, put in place policies and adjustments that, in effect, have guided us for two decaaes. We have put in place huge increases in labor because o f an inflationary bias, an inflationary environment that is assumed to continue. But we do not have an inflationary environment any longer. We have the begin nings o f a deflationary environment, in effect, a period in which com panies are competing very strenuously to reduce costs, to reduce prices to maintain a share of market. W e have also a huge problem with a credit crunch, partly due to excesses o f borrowing in the last two decades. That borrowing put in place a huge debt burden on individuals, businesses and governments, and we are trying to deal with that debt. Unfortunately, the investments that were financed by that debt were imprudent. They were literally squandered in empty office space and inflated values or LBOs— lever aged buyouts. The end result is that GDP did not rise commensurately, as it normally does with the debt, and we are still struggling to deal with the excesses o f that debt. W e have an intense credit crunch. There is very little borrowing taking place in this country. The private-sector borrowing is increasing at about 3 percent annually. That is roughly half the rate o f growth normal in a recession and one-third the rate o f growth typical in a recovery Now, I could go on and talk about some of these problems, but I think that what we have here is a recognition error. It is not merely a sluggish recovery. It is a long period o f stagnation that needs to be addressed. W e are acting as if inflation is still a major threat, as if the problem is merely one o f inadequate confidence, when the reality is that we have an adjustment process that we must get through. And that needs the assistance o f the Federal Government, the cooperation o f businesses and the consumer, in a global sense, to deal with it effec tively. As a result, I think I would like to turn to some of the solutions that I see that are appropriate. We are acting as if, as I said, we are con fronted with an inflationary environment. That has caused the Fed to be ultra cautious in its easing. Now, I do not believe that the Fed has adopted an easy credit policy. The Fed has been very tight fisted. I draw this conclusion not because they have not reduced interest rates. They have. But that doesn’t mean a thing. The proof o f the pudding, so to speak, is in the eating. If there was credit growth, then we would 4 have a basis for adjusting the economy, but there is no credit growth to speak of. The Fed is not taking the appropriate steps necessary to stimulate borrowing. Banking, in particular, is not making the loans necessary. Businesses depend very heavily, particularly small- and medium-sized businesses, on banks. This is at the forefront o f the expansion in manu facturing: creating jobs and investment in a recovery. Those businesses are not getting credit. Over the last few years, bank lending to business has declined. That should not be taking place in this kind o f an environment. So as a result, I think that the Federal Reserve, in its regulatory responsibility, is falling far short of what is necessary. I recommend that there be a moratorium on the increase in capital requirements on banks, or better still, a rollback. That would help the banks expand their lending. There should be a lessening in the strin gency o f tank examination. It is my view that the bank examiners are overly vigilant in order to prove that they were vigilant in the mid-1980s when they were not. This is literally locking trie barn door after the horse has been stolen. It is an inappropriate stringency in a period when the economy is struggling to make loans. The bank examiners tend to be evaluated on the basis o f whether or not they have ferreted out fraud, found lending that is suspiciously speculative. Instead, the examiners should be encouraged to see that tne banks make loans that service their community. Their orientation is completely perverse, and that, I think, has hurt business. I think that there ought to be further reductions in the federal funds rate. There should be further reductions in the discount rate. There should be a moratorium on the BIS capital requirements on banks to move now to 10 percent for a good bank; there should be an encour agement o f banks to make loans to small- and medium-sized business, not just to buy the loans from the Resolution Trust Corporation. That will not resolve the problem. I think there needs to be more leadership in Washington along the lines o f proposals that have already been made to encourage exports, to encourage manufacturing to move toward high-tech industries, to provide some industrial policy guidance, as the Japanese have done under MITI, to allow cooperation among major corporations that might now be considered in violation o f antitrust legislation. We need to have pilot projects, much as the program to develop an environmentally sound car. We need to have the cooperation and lead ership o f industry. I believe that this is a time when leaders, in particu lar tnose in technologically oriented fields, should be invited to Washington, sort o f as dollar-a-year men, to lead symposiums o f their colleagues to discover which are the most viable high-tech approaches for expansion and how we go about cooperating, not competing, but cooperating to develop inroads moving toward industry viable for the next century. 5 We need to establish widely agreed upon goals that we work to wards, whether they are super computers, or improved transportation systems, or the transportation o f energy long distances, but I am not a specialist in these areas. I believe that there ought to be an opportunity given to industry to make its contribution to the guidance o f industry in cooperation with government. We need to have an aggressive export policy. We have begun to move in that direction. I am all for that. We need to have the cooperation and the guidance and the leadership o f government to help businesses see where those opportunities are, to help them finance it, to help them make the contacts overseas, and to have the coordination that is necessary, particularly for small- and medium-sized businesses that are not adequately export oriented. I am afraid that most business in the United States is not adequately export oriented, and thus far, our government has not been either. We ought to consider changes in tax policy, such as a shift to a valueadded tax, that can be utilized as a method o f expanding exports. This tax can be rebated on exports and it can be added on imports to allow us to compete on a more level playing field with other countries that have such taxes. I am also in favor of a role for government in stimulating capital investment, which is crucial. Capital investment, I think, needs and would benefit from the stimulus o f a tax relief that would be geared particularly for high-tech capital investment, investment tax credit, niring credit, things o f this nature, I think, would be moves in the right direction and make us a more vigorous competitor internationally. Unfortunately, businessmen currently are stymied. What we are seeing is a significant plunge in business optimism, and, in fact, in recent weeks we have seen virtually every survey o f business sentiment take a nose dive. We have seen a decline in business intentions to hire and to invest. The latest survey shows that a significant increase in the number and proportion o f businesses that intend to reduce their capi tal investment in the fourth quarter. For example, capital investment year-over-year is now forecast to be up only 2 percent; whereas, last quarter for the third quarter, it is expected to be up over 11 percent year-over-year. Thirty percent o f manufacturers expect to reduce capital investment, whereas a year ago, only 22 expected to reduce it. So I think that something is going on, and what is going on is a tremendous degree o f uncertainty. That uncertainty for planning and for investment stems from a large number o f changes that are taking place in our environment. W e are in the midst o f a major decline in defense spending. We know that. There are going to be bases closed. We know that. That is causing consumer confidence to decline or remain at recessionary levels. It is also causing businesses to be uncertain as to what the future holds. 6 W e have raised taxes. We have cut spending. W e have instituted various other proposals for various other reasons, but the consequences o f these are uncertain. We have a high degree o f variability in the exchange rate. The dollar has come down sharply relative to the yen and the mark, but we have not yet seen, nor will we, in my view, a significant increase in exports as a result o f that. But that creates uncertainty. Businesses can’t plan for a dollar yen at $1.05 if they think it might go to $1.80, so I would recommend that we take some steps to alleviate the uncertainty. One step with regard to the exchange rate would be a move toward a fixed exchange rate system. Now, I think it is time to consider institu tionalizing the improvement that has taken place in the exchange rate relationships that have been established, and while I do not consider myself an expert in this particular area, those whom I do respect have recommended that we consider moving toward reestablishing links to gold. And I can see the benefits o f that. W e ought to take other steps to alleviate the uncertainty that remains in businesses’ minds as to which bases will be closed, what defense contracts will be reduced, so we can plan more assiduously for both near term and long term. I think this is a rather far flung set of proposals, but I want to leave you with what I believe is the essential thought, that we are not strug gling here with declines in manufacturing because the recession was a little deeper or a little longer and it is a temporary phenomenon. This is a very long-range problem, very deep seated and requires a change in our thinking, a change in attitude, a recognition that we are dealing with major problems that need major long run solutions. Those solu tions must recognize the major problems that stem from deflation, from the cutback in defense spending, and from the huge debt burdens and the reduction in borrowing. All of these problems need to be ad dressed, recognized and dealt with. I would iust like to spend one moment in amplifying the deflation argument, because I think that it is too often viewed as a positive de velopment. W e have spent much of our lives worrying about inflation and we are very relieved that inflation has come down very significantly, and as a consequence, over the last year, inflation o f 3 percent seems very wel come. In fact, over the last lour months, inflation is up only one-and-ahalf percent in the CPI, but within that there is an element o f decline in manufacturing prices in particular, not only in the U.S., but globally, and this is a process that is frightening. It is not a welcome develop ment. What is happening is that the increases in costs that have taken place, whether they are increases in taxes, increases in wages, or in creases in health care costs, can normally be shifted forward to the consumer in terms o f higher prices. But in a period when demand is 7 weak— and now I would say demand is not weak— it is deficient, it is not possible for those price increases to take place to relieve the manu facturer o f those cost increases. So, as a result, the costs are shifted backwards, shifted to the cost o f production. In effect, the employee bears those costs. The employee gets laid off; he is replaced by lower cost workers; he loses fringe bene fits; the jobs shift to lower cost areas o f production; and these are the elements o f deflation that make this prospect frightening. They suggest that what has happened in the United States has not improved the employment situation or the profitability o f business. What has happened is that we have set in motion a deflationary environment that has now shifted overseas, so corporations overseas are now about to go through a period o f cutbacks, a period o f reduc tions in employment, a period or cuts in their costs, downsizing, layoffs, and that will create a full circle where those pressures will come back again. In fact, they already are. The rate o f layoffs in this country is now running 20 percent ahead of where it was in 1991, which was a reces sion year. And the latest survey suggests that there will be a continuing pickup in layoffs over the next six months. So we are seeing an ever widening effect o f this deflationary environment, which is like a whirl pool pulling down demands for labor and wages, and putting further downward pressures on costs. Businesses attempt to cut prices or maintain them in the face o f wage and other cost increases in order to maintain their share o f market. But they can’t do that because there is a deficiency o f demand relative to the capacity to produce. What will happen? Some of the participants will have to leave the competition. They will go bankrupt. The end result is that this process will continue unless something positive changes. This was the situation in the 1930s. What was necessary then is necessary now. Government alone can make a change. Fiscal stimulus can change the economic environment for the better, not fiscal restraint. We have a deficiency o f demand that needs to be addressed. Thank you very much, Mr. Chairman. [The prepared statement of Mr. Braverman, together with attach ments, starts on p. 30 o f Submissions for the Record:] R ep resen ta tiv e H a m ilto n . Thank you, sir. Mr. Carnevale, please proceed. STATEMENT O f ANTHONY P CARNEVALE, CHAIR, . NATIONAL COMMISSION fOR EMPLOYMENT POLICY; AND CHIEf ECONOMIST, AMERICAN SOCIETY ffOR TRAINING AND DEVELOPMENT M r . C a r n e v a le . I am afraid that I am not going to bring much more sunshine to the conversation. I am reminded o f a meeting that I went to just a few days ago for medical practitioners. I was introduced as a doctor, and somebody asked my specialty, and the person who intro- duced me said, no, he is not the kind o f doctor that helps people; he is an economist. Let me take a perspective from manufacturing itself, from industry, and that is that there seems to be two fundamental causes to the loss o f jobs in manufacturing— one inevitable, the other essentially healthy but problematic, in the snort term, between now and the end o f this cen tury. The first is, as a result of inflation in the 1970s, there was not very much pressure on American manufacturers to let people go in response to competitive changes. That is, we had an environment in which peo ple's wages and paychecks were being devalued rather rapidly by defla tion, and there wasn’t much pressure to let people go, fire people, or down-size institutions. There wasn’t much pressure to shed labor until finally we defeated inflation in the early 1980s. Then, during the 1980s, much o f the attention was focused on manufacturing institutions buy ing each other, or other assets outside manufacturing, as a competitive strategy. As a result, it wasn't until relatively recently that American manufacturers began to focus on restructuring their own organizations in response to competitive pressures, and in these times they are play ing with real dollars now and real labor cost; that is, they are trying to reduce costs as aggressively as they can. And so, to some extent, I think the loss of jobs in manufacturing reflects passive wage restraint in the 1970s and the fact that American manufacturers haven't focused seriously on wage costs until the last seven or eight years. And, second, a more profound and important process seems to be at work in manufacturing organizations, and that is a basic restructuring o f the industry itself, in response to real competitive pressures. By restructuring, I mean a shift from a mass production set o f institutions and technologies to a more complex competitive environment in which institutions compete not only on the basis of prices, but on the basis of their ability to produce quality and variety and customized products, and provide good customer service and an acceleration in the process o f innovation. In order to meet their new competitive requirements, institutions installed new flexible technology, built more flexible organ izational formats, so-called high-performance work systems. In the end, manufacturers substituted fewer but more highly skilled workers in combination with more powerful and flexible technology, in combina tion with more flexible organizational formats to produce higher levels o f output and meet quality standards with fewer people. And that process, I suggest, will go on for some time. The further difficulty we face is that both these sets o f pressures on hiring in manufacturing occur, as has been explained already, in an environment o f constrained demand, and the difficulty is that restruc turing in an environment o f restrained demand results in job losses in an economy that isn't producing enough new jobs. The usual, more optimistic scenario that people point toward is that, hopefully, this restructuring process will move tnrough a series o f gears. That is, in 9 first gear, there is almost always radical downsizing and the substitution o f more highly skilled labor, working in combination with new flexible technology and flexible work formats, for a greater quantity o f lesser skilled labor. In second gear, one hopes for stability in the overall emloyment level, and then the fond hope is that at some point there will e a third gear in this process, where we will start to add jobs in manu facturing as a result o f the improved performance that restructuring brings. In the meantime, we continue to suffer job losses in spite of the fact that manufacturing output improves over time and in spite o f the fact, I think, in many cases, we can point to the competitiveness o f Ameri can manufacturing measured along these variety o f competitive stan dards, from quality to basic efficiency. The policy implication in all this is, it seems to me, twofold. One is that if we can find a way to improve the demand environment, it be comes the balm that heals all wounds in this restructuring process. Arguably, a variety o f economists have argued that a lot o f the churning and change that we see in manufacturing now is not a whole lot more changing and churning than we saw in the 1950s and early 1960s. The difference between then and now is that we operated then in a period o f robust and expanding demand. Clearly, it seems to me, to some extent, that we don’t have much choice. The process of modernizing American manufacturing is one that we must go through in response to competitive pressures, and the strategy for doing that is generally agreed to, I think. It is a strategy that attempts through tax policy and more specific policies like technology policy and industrial extension to modernize manufacturing systems. It is a policy that attempts, where it can, to create additional demand, especially in response to declining demand from the loss o f defense production. But we should keep in mind that policies that promote this modernization process, that allow manufacturers to install new technology and new kinds o f flexible work processes and use fewer but more highly skilled workers, unless demana is much more robust than I think any o f us can foresee in the near-future, given restraints in spend ing and restraints in growth, this process will continue to result in a general reduction in overall manufacturing employment. It seems to me that the process itself will probably last several years, and at some point we will come out of it. What we do in the meantime to affect demand seems to me, given the current restraint on federal spending and the current constrained demand on the global economy, has to be fairly targeted. I would focus on export and, to the extent possible, on building some more targeted policies as a substitute for the decline in defense production that will drive manufacturing by spending in the federal budget. [Mr. Carnevale did not submit a written statement:] R ep re se n ta tiv e H a m ilto n . Thank you Mr. Carnevale. Ms. Gorte, please proceed. E 10 STATEMENT OF JULIE FOX GORTE, SENIOR ASSOCIATE, OFFICE OF TECHNOLOGY ASSESSMENT Ms. G o r t e . So far as we know, manufacturing is absolutely essential to a healthy developed economy, even though in the United States it employs only about one in six workers directly. There is no advanced nation on earth that doesn’t depend on a healthy manufacturing sector, and when that manufacturing sector gets less healthy, the nation be comes less advanced. In the 1970s and the 1980s, and in some cases throughout the post war period, the competitiveness o f American manufacturing sectors declined and that took a toll on American economic growth and stan dards o f living. We started to see manifestations o f that in the 1970s and 1980s with stagnating growth in standards o f living for about 80 or 90 percent o f Americans. Most o f the reason for our loss o f competitiveness in manufacturing can be attributed to the resurgence o f the economies o f Europe ana Asia that were devastated during the war, and I think there are some lessons we can learn from those economies. Since the late 1980s, a few sectors have staged modest comebacks and part o f that was due to government policy. Most of it was due to redoubled efforts on the part o f the private sector to improve competitiveness. It may well not be sustainable because, as the other two witnesses have pointed out, we don’t have in place a full set of policies that would permit the kind o f expansion ana investment that we need to engage in to really keep the ball rolling. Manufacturing is important to the economy for several reasons. You put your finger on one of them, employment. In general, manufactur ing jobs pay better and have superior benefits to jobs in other sectors, and people who lose manufacturing jobs are typically able to find new ones only at lower pay, lesser benefits, or both. For that reason alone, shrinking employment is a cause for concern. Manufacturing also affects our standards o f payments through our balance o f payments in international trade accounts. Goods trade still accounts for the majority o f trade around the world, mostly because most goods can be stored and shipped and a lot o f services can’t. Starting in the 1970s and really accelerating in the 1980s, we started to accumulate really chronic and large trade deficits, even with signifi cant diminution in the dollar’s value in the latter half o f the 1980s. As long as we produce less than we consume, our international debt burden grows and the pressure is on the dollar to shrink in value com pared with other currencies. That means that imports that we are con suming more o f are more expensive aftd exporters get less for the products that they export per unit o f volume. Both of those means some belt tightening. Falling competitiveness is also a really important reason behind the drop in manufacturing employment, which peaked in 1979. Things came to a head for a lot o f sectors in the recessions o f the early 1980s, 11 in 1980 and 1982, and many of the jobs that were sacrificed, where manufacturers began the downsizing process and cut costs, have never been replaced. The streamlining ana cost cutting that accompanied the recovery o f the 1980s were important steps for U.S. manufacturers. That process is not complete. It did cost jobs, it did help in some cases to improve performance, but it is not enough. Cost cutting is not enough. We have to assure competitiveness in manufacturing over the longer term through more than cost cutting, out-sourcing ana downsiz ing. Other sources of falling manufacturing employment in the last few years, as the other witnesses have pointed out, include the recession, the end o f the Cold War and the accompanying cuts in defense, and finally, increased productivity in manufacturing, combined with the recession and the sluggish recovery in the United States; continuing recessions in Europe and Japan have also contributed to shrinking manufacturing employment. One o f the best examples that I can think o f comes from the semi conductor industry. There were people who were actually pronouncing it semi-dead in 1986, 1987. We formed Sematech. The industry got a lot o f its act together, and there have been some real important im provements in that industry. They have improved their yields, their productivity and their products. Intel is now the biggest maker o f semi conductors in the world, and there has been a real resurgence in that industry. Now, that may not be sustainable either, but so rar it seems to be continuing fairly well. Yet, between the worst year for the industry in 1988 and its best year, we have shed over 20,000 jobs. The employment totaled 247,000 work ers in the industry in 1988 and only 213,000 in 1993, and that is with a lot o f improvement in all the standards by which you would measure competitiveness in the industry. Now, those workers are better paid than most others in the economy and even better paid than most others in manufacturing, so there are benefits and they do diffuse throughout the economy, but they may not show up in terms o f more workers. That is true generally o f whatever policies we put in place to improve manufacturing. It may not increase employment, especially in this atmosphere of fiscal restraint and defi cient demand. Policies that improve competitiveness must aim at technology devel opment, diffusion and improved productivity. These, in turn, require that manufacturers have four things: Access to reasonably priced pa tient capital that allow them the flexibility to make needed investments in workers and technology; second, we need a national effort, not just a company-by-company effort, to improve the quality and proficiency o f the work force. We also need a national commitment to diffusion o f new technologies, particularly to small- and medium-sized enterprises. And finally, something that we are trying in a new way now, and have done for many decades in the past, is the government can share with the private sector the costs and the risks o f research and development 12 in sectors that make a particularly large contribution to national well being, to technology intensity and so on that have downstream spillover benefits in other industries. I will just mention a couple options in each o f these four areas. Some measures that could help to reduce the cost and increase the patience o f capital might include instituting a graduated schedule or capital gains taxes to reward longer holding o f stocks and if you did that, it would have to be extended to pension funds, which accounted for, at least in the 1980s, the greatest turnover. Continuing progress in reducing the budget deficit would also be helpful, but I suspect I am preaching to the choir when I say that. It is also, o f course, impossible to do that and provide fiscal stimulus to the economy. More specific measures that could help, however, would also include instituting or reinstituting an investment tax credit and revisiting the R&D tax credit to make its coverage broader. There are a few indus tries that are particularly high-tech right now that don't take advantage o f the R&D tax credit because of the way it is calculated. Measures to improve the work force include training and education to mitigate three kinds of skills deficits: Basic skills deficits in things like reading, writing and simple arithmetic; job or task specific skills; and problem solving and group work. All o f these things are needed increasingly by workers as businesses reorganize to compete globally. W e tend to think of technology diffusion in this country as being very rapid and in fact it is, but it is too rapid for a lot o f small- and medium-sized enterprises to keep up with. Even learning about new technologies is difficult, not to mention the problems they have adopt ing and implementing them. In recent years, we have instituted a few technology extension pro grams, like the technology reinvestment program that was authorized last year, and that has helped, but there is a lot o f room for expansion. W e reach very few small businesses in this country with any kind o f assistance and information. And finally, the strategic technology policy is the term that we have loosely coined to describe government sharing the cost and the risk of developing new technologies in critical sectors. We have done this for a long time. It got caricatured in the 1980s as picking winners and losers and that made it unpopular, but we have done it for decades. W e owe some o f our dominance— for example, in commercial avia tion, medical equipment, pharmaceuticals and agriculture— to decades o f government involvement of just that type, through things like NIH, NASA, USDA and NSF. Recently, we have embarked on a couple o f new programs, including the advanced technology program and the expanded use o f the na tional labs for civilian technology development through cooperative research and development agreements, ana these are also very promis ing. They are small, but they are promising. 13 The clean-car program, which the Administration just announced, is an example o f turning the attention o f the national labs to problems that confront the civilian economy as they turn their attention away from developing nuclear weapons. Thank you. [The prepared statement o f Ms. Gorte starts on p. 50 o f Submis sions for the Record:] R ep rese n ta tiv e H a m ilto n . Thank you very much, Ms. Gorte. Let's focus for a few minutes on the basic questions that we set out earlier, just what is happening here in the manufacturing industries. Let me list a number o f factors and ask you to identify what you think the key factors are: Why are we losing all these manufacturing jobs? You have addressed that, but I want to try to sharpen the answers a little bit. Is it because o f a lack o f adequate education and training o f our workers that we are losing to foreign competitors? Is it because our firms are cutting permanent work forces, moving more to temporaries, moving more to part-time, in order to get rid o f fringe benefits? Is it the reduction in defense spending? Is labor productivity rising so fast that these firms can produce more output with fewer people? Or is it simply the economy is growing too slowly? There are a lot o f reasons out here. How do you evaluate all of these reasons? What really is important for us to focus on, in terms o f the reasons why we are losing these jobs? M r. B raverm an. Well, I would say that the first and foremost is the economic situation. R e p re s e n ta tiv e H a m ilto n . What does that mean? M r. B raverm an. I mean, the fact that we are in what, to my way of thinking, is essentially a stagnant economy. R epresentative H am ilto n . S o it is just n o t grow in g fast e n o u g h ? M r. B raverm an. That is correct. R e p re s e n ta tiv e H a m ilt o n . That is the fundamental reason, in your view? M r . B raverm an. Yes. R epresentative H am ilto n . D o the rest o f y ou agree w ith that? M r. C a r n e v a le . I agree to an extent, but I would point toward what I think is probably an equally important factor— what you characterize as labor productivity; that is, a basic restructuring o f the way we pro duce. I think that is more important than originally supposed. It has shown up over and over again in the past decade. R ep re se n ta tiv e H a m ilto n . We are getting better at producing? M r . C a rn e v a le . Yes. M r . B raverm an. I would like to digress a little from that or disagree. I think that some of the improvement in productivity is not meaningful. What it reflects is the layoff of large numbers of workers that were put in place in the 1980s as an insurance policy in case workers were pi rated away. So we put in place a lot o f extra people who seemed appro- 82-284 0 - 9 4 - 2 14 priate in an inflationary environment in order to protect the firm in case someone superior was laid off or pirated away, more likely. Then there was an understudy who would step into that role. So, in the effort to become more cost efficient and more competitive in an environment in which we are experiencing deflation, these are the people who can be dispensed with. They are not producing anything. They are not affecting the output. So productivity appears to improve because the number o f hours worked obviously changes downward, but the output doesn't. So, yes, the productivity gains are partly due to the purchase o f equipment, but it is partly due— and it is difficult for me to assess how much— to the loss o f workers who were put in place for an insurance policy in the 1980s, which is no longer appropriate. Ms. G o r t e . Manufacturing employment peaked in 1979, and we never got back to the level o f the 1970s in the 1980s. There was a lot of worker shedding going on in the 1980s. For manufacturing, even the recovery from the 1982 recession was a relatively abnormal one, from the standpoint o f manufacturing and its work force. This time, we are going to have a blood bath there, starting with production workers and so on. So, yes, there was a lot o f cutting of some o f that redundant labor throughout the 1980s, and it continues into the 1990s. I think some of that is real. Some of the productivity increases that we got as a result are real increases in productivity. W e have seen a lot o f investment in new methods o f making things in some important sectors, like semiconductors and automobiles. You can go in and look at it from the point of view o f how many hours does it take to build a car o f this type, and that has improved quite a bit. There is now a very, very small margin between the best American producers and the best Japanese producers in automobiles, for example, and semiconductors. So there have been some real improvements in productivity, and combined with stagnant demand, not just here, but in Europe and in Japan and in Canada where we export a lot o f stuff, that made it very difficult. W e still have competitiveness problems too, and we shouldn't forget that. When I said there are a few sectors that have staged a modest comeback, few and modest are the key words in that. There are some sectors that still face some o f the reorganization that they need in order to become more competitive with international rivals. R e p re s e n ta tiv e H a m ilt o n . Let's assume that you don’t have much o f a change in government fiscal or monetary policy, for a moment, over the next few years. Let's assume the government doesn't do anything with regard to industrial policy. In other words, you have a continuation o f current policies. The outlook is pretty bleak for manufacturing jobs, isn't it? M r . B raverm an. Yes. Ms. G o r t e . Yes, I think so. 15 R e p re s e n ta tiv e H a m ilt o n . Really bleak, right? In other words, we have a real crunch here. We have to make some changes if we are going to create good manufacturing jobs, and you have been identifying those changes for us, but all three of you agree with respect to that? M r . C a r n e v a le . One somewhat minor footnote to that, and that is, manufacturers are hiring. We should keep that in mind. Although overall volumes o f hiring are down, there are substitutions occurring, and where the hiring occurs, what one tends to see on the factory floor is the substitution o f technicians for the factory flow work team. The materials handler, the machine operator, the skill trades workers, the electrician, and so on, are being substituted for, I think, in old line manufacturing, about one for three by technicians. In new start ups, you can do one to four or one to five, frankly. R e p re s e n ta tiv e H a m ilt o n . Let's talk a little bit about the competitive aspect o f it. Now, is U.S. manufacturing able to effectively compete in the world today? Ms. G o r t e . Some sectors compete effectively in the world today, but today doesn't necessarily mean tomorrow. We are still not investing as much as Japanese rivals, and let's face it, it is my opinion that the Japa nese are far and away our most formidable competitors in the world in most sectors, in terms o f capital equipment, in terms o f worker train ing, and in some cases, in terms o f R&D as well. R&D has been stagnant in real terms in the United States since 1988. We are living off a legacy of past R&D just in terms o f volume, and also it has become more short-term focused. So, at some point, we are going to start seeing deficiencies in tech nologies that are ready for implementation in, say, five years. W e are concentrating evermore on things that can be deployed in two years. So, yes, today, there are some sectors where manufacturers are compet ing much better than they were five years ago. Autos and semiconduc tors are examples. R epresentative H a m il to n . I s the d e clin e o f m an u factu rin g jo b s, in you r view , m o re related to foreign c o m p e titio n o r to d o m e s tic e c o n o m ic p rob lem s and p o licie s? Ms. G o r t e . I d o n 't think I c o u ld untangle that plate o f spaghetti. I think they are in tertw ined in ways that are organically inseparable. R epresentative H a m il to n . Y ou w o u ld n 't w eigh o n e m o r e than the o th er? Ms. G o r t e . That is right. M r . C a r n e v a le . I would say that American manufacturing is com petitive to the extent that it does install new flexible technology, new flexible work formats and restructures work forces so that they use fewer but more highly skilled workers, and that process is largely driven by foreign competition, especially technological change forced by inter national competition. 16 R e p re s e n ta tiv e H a m ilt o n . If you talk to workers out here, the thing they blame the loss of their jobs on is the fact that we are losing jobs to foreign workers who are working for less wages. Ms. G o r t e . That is true. R epresentative H am ilto n . D o they have it figured right o r w ro n g ? Ms. G o r t e . Some o f them have it figured absolutely right. R ep re se n ta tiv e H a m ilto n . Depends on the industry? Ms. G o r t e . That is right, exactly. The Japanese auto worker is not paid less than the American auto worker. In fact, it now costs more to produce a car in Japan than it does in the United States. We are losing jobs to them because they do it better and they design better cars, or we did. However, in things like textiles and apparel, parts of things, some times in aircraft, yes, we are definitely losing jobs to workers that are paid less. R epresentative H am ilto n . G o ahead. M r . B raverm an. I think one thing should be mentioned, that nothing is static. In Japan, they have lost industries. R ep resen ta tiv e H a m ilto n . Are they losing manufacturing jobs? M r . B raverm an. Yes, in low-tech industries. They had a shipbuilding industry and they decided that it wasn't efficient. That moved to Korea. Low-tech or industries where they are not able to compete, they lose jobs as well. We obviously are going to be losing jobs if we manufacture things that can be manufactured far more cheaply in countries that have lower wage standards, that are able to pollute, where the health standards are not as high. So we are not playing on a level playing field because the whole world does not share our standards of living. That is obvious. So we cannot in any way, shape or form, hold back that change. What we can do is identify those areas where we could compete far better, where we could have innate advantages. Those are the areas where there are opportunities for the future, and I think they are essen tially high-tech areas, areas of fashion— whether they are in the enter tainment field or in services— that cannot be duplicated elsewhere. R epresentative H a m il to n . D o y ou feel generally that o u r e d u ca tio n system is failing to p ro v id e the basic skills n e e d e d fo r m any m a n u fa c turing jo b s ? M r . B raverm an. Definitely. R ep re se n ta tiv e H a m ilto n . All of you feel that way? M r. B raverm an. I think one area that we can learn from— there are many areas, but one in particular, and this is relevant here— is that the Japanese try to create manufacturing by team efforts, that individuals must have the flexibility to do a number of different jobs on the manu facturing floor. R epresentative H a m il t o n . S o it is n ot just a m atter o f b a sic e d u c a tion ; it is, w e d o n ’t train ou r w ork ers en o u g h ; is that also the ca se? 17 M r . B raverm an. Yes. It is clear that at lower levels o f education, the fundamentals, the estimates are that up to perhaps 50 percent o f our potential labor force is functionally illiterate. R e p re s e n ta tiv e H a m ilt o n . Why do you think the American manufac turer tends to invest too little to upgrade skills? M r . C a r n e v a le . It depends on the industry and size— technology intensive industries don't underinvest and large companies, generally, don't either, I would argue. R epresentative H am ilto n . D o n o t? M r . C a r n e v a le . D o not. That is, large companies in America invest, in total, about $30 billion a year in skill training. More than half o f that goes to the technical training of nonsupervisory workers. Where one sees difficulty here is in mid-sized and small manufactur ers, o f which there are about 360,000 under 500 employees. There the roblem is, first o f all, pirating; that is, you train, I will raise wages and ire who you train; ana second, the inability to achieve the advantages o f scale that will allow them to afford ana operate training programs efficiently. R e p re s e n ta tiv e H a m ilt o n . I am not clear on your testimony. You said that the big companies are doing enough skill training? M r . C a r n e v a le . Yes. R e p re s e n ta tiv e H a m ilt o n . They are doing it across the board among their employees, not just the executives? M r . C a r n e v a le . Yes. The most highly trained worker in companies that do have training systems is the technician, or the skilled trades worker, in terms o f the overall proportions. R e p re s e n ta tiv e H a m ilt o n . But the smaller companies tend not to train their people enough; is that right? M r . C a r n e v a le . And in manufacturing, that set o f smaller institu tions is growing in number and in the proportion o f output they com prise and certainly in the number o f workers they hire. That is, we are shifting towards mid-sized manufacturers as the core o f our manufac turing industry now. R e p re s e n ta tiv e H a m ilt o n . H o w about the problem o f regulation? I think you may have mentioned this, Mr. Braverman, in your comments. Is the fact that American manufacturing has too many regulations on health and safety and environment ana all o f that, and it cuts their productivity and jobs in the end; is that the case? M r . B raverm an. Yes, I would think so. It becomes burdensome and onerous. R e p re s e n ta tiv e H a m ilt o n . Y o u sure hear that from the manufactur ers today. They complain a lot about regulations. You agree with that? Ms. G o r t e . I think I would make it a little more complex than just, yes, more regulation means higher costs. There are also very highly regulated industries in Europe and Japan that do quite well competi tively. E 18 What you tend to see there is that you see government programs that enable manufacturers to know what the regulations are and to comply, and sometimes to get lower, no interest loans in order to afford the compliance equipment and the training that is needed. What we need is a less adversarial system of regulation, not necessar ily less regulation. R e p re s e n ta tiv e H a m ilt o n . That is interesting. Their regulations are just as tough as ours, but they subsidize the workers more in some way, is that it? Ms. G o r t e . Yes. I don’t think I could make an across the board, yes, their regulations are tougher, but there are some industries where they are and some where they are not, and some o f the industries where they have to have regulations, they are quite competitive. R e p re s e n ta tiv e H a m ilt o n . What is the impact in all o f this— manu facturing jobs— o f the public infrastructure? D o you think that the major reason we are not doing as well in keeping manufacturing jobs is that we have not kept up the public infrastructure? M r . B raverm an. I think that is an element, yes. M r . C a r n e v a le . If one looks toward the industries o f the future, one supposes that the public infrastructure necessary to sustain them and encourage demand for the manufacturing products that they would make— ror example, high density TV— is generally not available here and more available elsewhere. One also hopes that they are the indus tries that we will substitute for defense production over time. Really, one hopes that those are the industries that will provide the kind o f volume o f employment that we got from rubber and steel and auto in the old manufacturing world. R e p re s e n ta tiv e H a m ilt o n . H o w serious are the transportation prob lems in the question o f productivity? Come into Washington and the Southwest Freeway any morning, you are stacked up for a long time. You sit on the runway ror an hour, not unusual to those o f us who fly a lot. You sit in the traffic line for an-hour-and-a-half to get to work, when it should take you 15 or 20 minutes. I mean, are these matters that are serious or not? Ms. G o r t e . I think that is of a secondary importance. R e p re s e n ta tiv e H a m ilt o n . It doesn’t matter i f all those people are sitting out there on the highway? Ms. G o r t e . O f course it matters. I don’t like sitting there anymore than you do on the Southwest Freeway. I was thinking o f all the other things that I could do with my time this morning. But comparatively speaking, our airports function about 500,000 percent better than Narita in Japan. There are road problems and phone problems and so forth in Mexico, and yet some manufacturers have learned to do just fine coping with a very inferior infrastructure down there. 19 It is important. If we improve those things, it would help. Is it o f first order o f importance? No. R epresentative H a m il t o n . Y ou d o n ’t put it at first o rd e r o f im p o r ta n ce? Ms. G o r t e . No, I don't. R e p re s e n ta tiv e H a m ilt o n . Let me just go back to a question about the importance of manufacturing jobs in the American economy. How do you express that? Ms. Gorte, you had some things on that in your testimony. I mean, is this really something we ought to worry about, the loss o f manufacturing jobs? Ms. G o r t e . There is no such thing as an industrialized country that sustains healthy living standards and doesn’t have a healthy manufac turing sector. R epresentative H a m il t o n . S o it is a very, very im p ortan t m atter to fo c u s o n ? Ms. G o r t e . That is right. If I were doing the policymaking— which I am not, so I can preach all I want— I would focus not on increasing jobs, but on increasing productivity, quality and efficiency. And if you do that, you might not have more jobs, but the jobs you do have will be better paid, better skilled, and the benefits will diffuse widely through out the economy. If you just focus on increasing jobs, I think you might end up with some------R e p re s e n ta tiv e H a m ilt o n . Y o u really get the reverse o f that when you talk to a lot o f people. I notice this again and again. They think the best thing to do is to protect the jobs— you know, they are very worried about this— even if it means that you are not moving to the highest technology and the highest productivity; protect the jobs is the main thing. It is the reverse o f what you said. Ms. G o r t e . I think, if it were my job and I lived in the middle o f America, that is what I would want too. R e p re s e n ta tiv e H a m ilt o n . H o w about if you lived on the East Coast? Same thing, isn't it? Ms. G o r t e . It is one thing when you are talking for yourself person ally. It is quite another when you are trying to figure out what to do, what the best thing for the Nation is. R e p re s e n ta tiv e H a m ilt o n . Let’s pick up that idea. D o you agree with that? In other words, you don’t focus on creating manufacturing jobs; you focus on productivity and so forth. M r. C a r n e v a le . I think the bottom line is that manufacturing lever ages everything else. Some people say one job for four. In most cases, two o f those jobs, even three, are outside manufacturing. And so the bottom line is that manufacturing output and market share creates jobs both in manufacturing and elsewhere. 20 Having said that, it seems to me that we don’t want to become apologists for this modernization process which will inevitably, I think, reduce jobs relative to output in manufacturing itself. R e p re s e n ta tiv e H a m ilt o n . If you take the total number o f jobs in America today, what percentage of them are manufacturing? M r . C a r n e v a le . Seventeen percent. Ms. G o r t e . About 15 percent. R ep rese n ta tiv e H a m ilto n . Historically, how would that run? Ms. G o r t e . It used to be up above 20 percent. Most advanced in dustrial nations have had shrinkages in terms o f their share. R ep rese n ta tiv e H a m ilto n . We have about 15 percent? Ms. G o r t e . We have about 15 percent; Japan has 20 something; Germany has 20 something. R epresentative H a m il t o n . S o w e are a little low er than the o th e r industrial cou n tries? Ms. G o r t e . That is right. R e p re s e n ta tiv e H a m ilt o n . These are the best paying jobs in the country, as a rule, in terms o f the workers? Ms. G o r t e . A s a generalization, yes. There are a few service sectors where wages are actually higher than manufacturing average, but not many, and they tend to be really small. R e p re s e n ta tiv e H a m ilt o n . In general, services pays less than manu facturing? Ms. G o r t e . That is right, and they tend to have more part-time workers and fewer benefits. R e p re s e n ta tiv e H a m ilt o n . Okay, let's get into what we ought to do about it now. Most o f you seemed to be fairly receptive to the idea o f industrial policy broadly defined, right? M r . B raverm an. Yes. R e p re s e n ta tiv e H a m ilt o n . And it is even necessary to get us out of this stagnation or, as you said, disguised depression, I think was the word you used, Mr. Braverman. I would like to get your quick reaction to the announcements made the other day on export strategy, the automobile program, the export controls on computers, the shipbuilding program and so forth. Those are, I guess, fairly modest steps taken one-by-one, but they do suggest some kind o f a shift in economic policy. How did you react to afl of that? M r. B raverm an. I reacted very favorably. It seemed to me that we are taking some steps to deal effectively with areas where we have lost some ground or there are opportunities. We were taking some leader ship, and perhaps some would accuse us o f being a little aggressive, but I think in a competitive world environment it helps us in our negotia tions. 21 R epresentative H am il to n . D o you think w e ou g h t to b e h e lp in g the a u to m o b ile com p a n ie s fin d m o re energy efficie n t a u to m o b ile ? M r . C a r n e v a le . Yes. R e p re s e n ta tiv e H a m ilt o n . Why pick the automobile business? I mean, why not pick 150 other industries to help? Ms. G o r t e . That is the $64,000 question, how you prioritize among the sectors. At this point, it is just kind o f throwing darts. People are looking out there and saying, hey, this has a lot o f value added------R e p re s e n ta tiv e H a m ilt o n . It is more than that. It is political clout, isn’t it? Ms. G o r t e . Well, I am being polite. But, yes. I mean, we need a more effective system for choosing. R e p re s e n ta tiv e H a m ilt o n . Automobiles are a pretty big symbol, aren’t they, o f the whole manufacturing, business? Ms. G o r t e . It is not just symbolic and it is not just political. There are a lot o f workers involved. It is still one o f the biggest manufacturing sectors in the United States, and it tends to drive a lot o f other up stream industries, like the developers o f batteries and electronics and materials and so forth that go into autos, and are among the highest tech o f the small and medium-sized enterprises in America. R e p re s e n ta tiv e H a m ilt o n . Take the shipbuilding industry now. We can pump an awful lot of money into shipbuilding and not be competi tive, right? Ms. G o r t e . Right. R e p re s e n ta tiv e H a m ilto n . Should we do it? Ms. G o r t e . I doubt it. M r . C a r n e v a le . I would offer a somewhat subtle, but I think impor tant, distinction between industrial policy and technology-based poli cies. That is, to the extent we are trying to build a new car, we are engaged in technology policy as much as industrial policy. What is nice about technology policies is that one hopes they attach to the industries o f the future, and they are the devices by which one modernizes current industry without giving as much access in political terms to special pleaders and more organized industries. R epresentative H a m il to n . Y ou w o u ld like to see th e g ov ern m en t particip ation m o re o n the higher tech e n d o f things; is that right? M r. C a r n e v a le . Technology, in general, I think, becomes an agent o f modernization in existing industry, and it would point towards, albeit in a gambler's way, to industries o f the future. R e p re s e n ta tiv e H a m ilt o n . Y o u talked about exports being very important, so the move to relax some of the restrictions on the sale or computers and super computers meets with your approval, I presume; is that right? M r . C a r n e v a le . Yes. R e p re s e n ta tiv e H a m ilto n . That is a step in the right direction? 22 M r . B raverm an. Yes. In my testimony, I emphasize the importance of high technology as well. I think that is where tne future lies, not only in terms o f the jobs, but in the products and in the forefront o f research, it is important to remain a participant. I think that is where the growth and the good jobs will be. In dealing with the automobile industry, the emphasis is a little more far-reaching. I think, when there are consequences for the economy in general, we want to move in that direction. If we become less energy dependent on overseas sources o f energy because our cars get more miles to the gallon, that is certainly an ad vantage, not only in terms o f jobs, but in terms o f the extent to which we import oil. If we were to focus, for example, on energy savings, we could reduce almost half o f the energy consumed through household electricity used by refrigerators in the United States. If we were able to focus on some thing as mundane as that to get a little more efficient-----R ep re se n ta tiv e H a m ilto n . H a lf o f the energy? M r . B raverm an. Close to half the electricity is consumed by refrig erators. If we were able to develop a more energy efficient refrigerator, now, that may sound like it is not a particularly important area for growing manufacturing jobs, but there are consequences for that. R epresentative H a m il to n . Y ou think the g ov ern m en t ou g h t to get in to that? M r. B raverm an. I think there should be a partnership between gov ernment and private enterprise to see what tne restrictions or barriers are to promoting research and development, and that is where the partnership lies. If you want to do something in this instance, it may not be an advan tage for manufacturing jobs, but it may be in a broader sense an im provement in the economy o f the United States. R e p re s e n ta tiv e H a m ilt o n . N o w , your first recommendation, as I recall from your testimony, was to have the Fed ease up, and I want to be clear about that. Easing by the Fed would be the most important, or among the most important, steps that could be taken by tne govern ment to help create manufacturing jobs; is that your view? M r . B raverm an. Yes, I believe that, but not merely in terms o f lower ing interest rates— which I am in favor of—but promoting a growth o f credit and growth o f credit to small and medium-sized businesses so that they can use it for expansion. R e p re s e n ta tiv e H a m ilt o n . M s. Gorte, Mr. Carnevale, you agree with that? Is that among the most important thing to be done? M r . C a r n e v a le . It is, but again, with the proviso that, to the extent we provide credit, to the extent we expand demand, we accelerate modernization, and modernization sheds low skilled labor. That is the rider that comes with all of this. R epresentative H am ilto n . S o you w o u ld d o it anyway? 23 M r. C a rn e v a le . Yes. Ms. G o r t e . I put the fo u r things as b e in g equal. I d o n ’t think th ere is o n e thing that is a silver bullet. I d o n ’t think just an ex p a n sio n o f cred it w o u ld b e -------R e p re s e n ta tiv e H a m ilt o n . I understand that. Other things have to be part o f it, yes. What are the other things? Ms. G o r t e . Besides providing capital, you mean? R e p re s e n ta tiv e H a m ilt o n . Let’s stay with the macroeconomic policy. The Fed has to loosen, but how about on the fiscal side o f policy? D o you think that you need to take any steps where you have these big deficits, o f course? I mean, does that bother you? How does fiscal policy play into the question o f manufacturing jobs? M r . C a r n e v a le . It is the distribution o f the spending in the end that matters there. Without much wiggle room in terms o f the overall level o f spending— to pull that lever and expand, it seems to me that the one thing you can do is to target the spending somewhat. One thing you can do that is very cheap in that regard, which we are doing to some extent, is to provide some sort o f industrial extension and modernization service to those 360,000 mid-sized manufacturing firms. It is relatively cheap and gives a fair amount o f bang for the buck. But in terms o f stimulating overall demand, absent defense and increased spending in other technology and manufacturing intensive line items in the budget, that is about all you can do. R e p re s e n ta tiv e H a m ilt o n . H o w much are you going to tell Mr. Greenspan to loosen up on the Fed? Got any measures for me? M r . B raverm an. Well, it seems to me that we ought to be getting credit growth, at a minimum, what we have experienced in past reces sions. In other words, 3 percent private-sector growth in credit is half the 6 percent that we normally get in* recession, and one-third the 9 percent rate o f private-sector credit growth that we get in a recovery. I think one can attribute a good deal of the slowdown in the U.S. poten tial growth to this deficiency in credit expansion. As far as interest rates are concerned, I think there is plenty o f room for the Fed to lower rates, just as there was plenty o f room in Japan to lower rates beyond the levels that they had previously moved. R ep re se n ta tiv e H a m ilto n . Without inflationary consequences? M r. B raverm an. Without inflationary consequences. R epresentative H a m il to n . Y ou are n o t m u ch w o rrie d a b o u t in fla tio n ? M r . B raverman . N o , n o t in this en viron m en t. R ep re se n ta tiv e H a m ilto n . What is the inflation rate today? M r . B raverm an. In the last four months, it was 1.5 percent. R e p re s e n ta tiv e H a m ilto n . Give me an annual figure. M r . B raverm an. It was in the area of 2.8 percent, but I would point out that Governor Lindsay, in a recent speech, indicated that an inter- 24 nal Fed study had discovered that between 1 and 1.5 percent o f the inflation rate was inaccurate due to quality changes that had not been taken out o f the CPI. R epresentative H am ilto n . S o it is even less than 2 .8 percen t. M r . B raverm an. It is really in the neighborhood o f probably half that. R e p re s e n ta tiv e H a m ilt o n . Y o u don't worry about inflation, Ms. Gorte, Mr. Carnevale? Ms. G o r t e . Not at this point I don't, no. R e p re s e n ta tiv e H a m ilt o n . Okay, let me ask whether businesses are substituting temporary for permanent workers. Is that happening? Is that a major trend that is going on now? On an anecdotal basis, you get the sense that this is happening. When I talk with my constituents, I hear this complaint constantly. Ms. G o r t e . Yes, that is happening. It has been happening for a dec ade. There has been part-time for full-time substitution, and there has been some temporary for permanent substitution as businesses find ways o f cutting fixed costs, much o f which happened in the 1980s. It is still happening, and you also see some spinning off of things that used to be integral to manufacturing. A lot of them are relying on out side business services providers to do things like payroll, finance, some o f the finance and so forth that they used to do internally. So you are seeing some growth in service sectors as a consequence o f spin-offs from manufacturers. R e p re s e n ta tiv e H a m ilt o n . You have a growing number o f part-time workers, but it is also true, isn't it, that the percentage o f the working age population with a full-time job is higher today than it was in the 1960s and 1970s; is that correct? M r . C a r n e v a le . Yes, and these forces are less important, I would argue, in manufacturing than they are elsewhere. That is, in manufac turing, what one sees more of is what M s. Gorte referred to, and that is, using smaller external institutions where, labor tends to be cheaper, using suppliers and external service suppliers rather than using parttime workers. R e p re s e n ta tiv e H a m ilt o n . Y o u have rapid growth o f employment in the personnel supply services industry. That is the category we are talking about here, I guess, from an economist's standpoint, right? And that has had a rapid growth. Should we worry about that? Ms. G o r t e . Part-time and temporary workers tend to have less bene fits. I think it is one of the things that is probably driving up health care costs and making a lot of Americans that can't afford it at all less healthy or less protected. So, yes, just from a social standpoint alone. R ep re se n ta tiv e H a m ilto n . Part of the cost shifting that goes on? Ms. G o r t e . Sure. M r . B raverm an. I think this is a process that business is engaging in in order to minimize or reduce its costs. So, by shifting to part-time 25 workers, temporary workers, contract workers, self-employed individu als, they are trying to shift away from the expenses, the fringe benefits o f health care, and turn to less expensive workers, and that, I think, is part o f the entire process deflation that I had addressed. R e p re s e n ta tiv e H a m ilt o n . When we talk about solutions to strengthen manufacturing and to make the United States more com petitive, we usually talk, as we have done this morning, about improv ing education, improving training, better job training, more research and development, and all of those things. All of that costs a lot o f money, ana are those really realistic recommendations today, given the kind o f a fiscal climate we have? M r . C a r n e v a le . Let me just offer one view, and that is, to the extent this modernization process occurs and to the extent it creates techni cian level jobs in manufacturing and more jobs in professional and service functions in manufacturing, which it seems to do, individuals as well as state governments, apart from the Federal Government, seem iite willing to come forward when the jobs are available to pay their are o f the education and training cost. That is, the demand is gener ally the issue. If you are a governor and you have a plant that locates and needs 300 to 400 technicians, you are more than willing to step up, as are junior colleges and vo-tech systems, to provide those people. The usual issue is for the governor to get the plant to locate there in the first place. I think, with demand in place, both individuals and other governments— state governments principally— are perfectly will ing to pay a lot of the human resources costs. I don’t think we have a huge shortfall in resources for education and training, in terms of our ability to produce the technical work force that is required in manufacturing. The issue is the extent o f demand and matching the growth in demand for technical workers against the sup ply. The supply institutions, including employers, are more than willing to see demand increase for their product and to respond to that. M s. G o r t e . All o f the stuff that we are talking about costs money. Not all o f it is government money. Some o f it is something that you can oblige or incentivize, if I can use that word, which I hate, the private sector to do, but it is, in a sense, not an option. If we lay the foundations for improved competitiveness and per formance in the future, we will get ourselves on a path o f becoming richer. If we say, we don’t have any money, we can’t afford to do all this stuff, and we don’t make those investments in new equipment, in workers, in human beings, and in technology diffusion ana so forth, then we are going to stay on this path of stagnation, as far as I can tell, for just about forever. So, yes, it is going to be belt tightening in the short run, but poor nations have gotten themselves onto faster growth paths in the past by being willing to forego some current consumption in order to make investments in future productivity. S 26 M r . B raverm an. It is my view that when a patient is in the intensive care ward, it is not the time to complain that he is overweight and ought to go on a diet and have physical exercise. As far as the economy is concerned, we are now in the intensive care ward, and this is not the time, in my view, for fiscal restraint. It is the time for fiscal stimulus. There will be time in the future when the econ omy is in better health when we can address the budget deficit. Japan, for example, is utilizing fiscal stimulus, and indirectly so is Germany, as well as monetary stimulus. They are dealing with the problems that they have. W e are not in much better shape than they, if at all, and it seems to me that the prob lems we are confronted with require similar initiatives. If they are costly, presumably that cost will be more than offset by the improve ment in the U.S. economy and that will raise revenues. Raising taxes will not get you the revenues. We are, in effect, dealing with a problem that is a long-term problem, the budget deficit, which we cannot address merely by attempting to raise taxes that will only attempt effectively to reduce the economic performance o f the country. R ep re se n ta tiv e H a m ilto n . Should w e cut taxes? M r . B raverm an. Yes, definitely. This is a time to be pursuing a stimu lative policy o f raising spending. R e p re s e n ta tiv e H a m ilt o n . Raise spending, cut taxes, let it rip on the deficit? M r . B raverm an. For a period o f time until the economy improves. If we have a commitment to deal with the budget deficit at that time when the economy improves, that, I think, will deal effectively with the budget deficit at the appropriate time. R epresentative H a m il to n . T hat sou n d s a lot like w hat w e d id in the 1980s, d o e s n ’t it? M r. B raverm an. N o, because in the 1980s, as soon as the economy showed strength, we cut taxes at a time when it was not appropriate. We have used the wrong methods and the wrong solutions for the times. The economy was in fine shape through most of the 1980s. R e p re s e n ta tiv e H a m ilt o n . Mr. Carnevale, you agree with that, cut taxes, increase spending? M r . C a r n e v a le . I think we are committed to a path of deficit reduc tion and I think we ought to be. I think the issue is------R e p re s e n ta tiv e H a m ilto n . Why, if you need more demand? M r . C a r n e v a le . There is the rub. I think, in the end, what we can do, the best we can do, in the short haul, is to try and target what spending we do commit to in fiscal policy. TTiat is, to the extent that we let the deficit rip, my guess is that most o f the money that was spent would be consumed, not invested. R e p re s e n ta tiv e H a m ilto n . On the consumption side. M r . C a r n e v a le . On the consumption side, and to the extent we are going to add spending, I would be fairly aggressive in recommending to 27 you that the spending be investment oriented, and frankly, my bias would be that that investment spending be targeted both on technol ogy and the human resources. R e p re s e n ta tiv e H a m ilt o n . Human resources means training, educa tion, health care? M r . C a r n e v a le . For me, more training and education than health care, because I think a fairly substantial portion o f health care is con sumed, although spending in health care drives an industry that is very technology intensive, and produces high-skill, high-wage jobs. To some extent, our commitment to spend on health care is a fairly sound competitive instinct. The manufacturing component in health care consumption is also fairly substantial. But my bias would be to focus the spending on technology and to focus it on education and training. R ep re se n ta tiv e H a m ilto n . H o w about your bias, Ms. Gorte? Ms. G o r t e . Y o u are getting m e ou t o f the area o f m y expertise, b u t sp eak in g as a som ew h at w ell in fo rm e d citizen -------R ep resen ta tiv e H a m ilto n . Don’t worry about that. Ms. G o r t e . ------ 1 am not really inclined to cut taxes, no. I don’t think I would let the deficit rip to that extent, and I know there is not enough room in the spending cutting to finance all these things that we are talking about. W e are talking about tens o f billions, maybe even one hundred or more billion dollars, if we reinstituted a broad investment tax credit in terms o f a drain on revenue alone, and that is just one program. So, no, I am not quite sure that I would be that careless o f the defi cit rearing its ugly head again. R e p re s e n ta tiv e H a m ilt o n . Let me ask you a question. It comes from an area that I represent. We have a lot of manufacturing in rural areas, and my general impression is that the manufacturing in rural areas tends to be smaller in size and less technological, perhaps, in its proc esses. Now, they are under a lot o f pressure, I guess, from the kinds of testimony you have given here today. They are doing the kind of manufacturing that you think is not going to have a bright future, I presume, in general. Ms. G o r t e . There is always going to be a role for suppliers to large manufacturers. In the heart o f the Mid-West, people that supply the parts for cars and airplanes and refrigerators and so forth, I don’t see that disappearing. Their future can be as bright as we want to make it. They need ac cess to technology. They need access to the means to implement that technology. They need access to the means to invest in workers. Most o f the people who own those businesses are more than willing to make those investments if they can get decent information on what they are and what their options are, and if they have some help in making the investment. Right now, they are getting nothing. They are getting noth- 28 ing from banks, they are not getting very much from government, and not very much from extensions. R e p re s e n ta tiv e H a m ilt o n . The best kind of thing, when you talk about getting help, what do you have in your mind? Ms. G o r t e . Credit and access to really well-informed assistance in terms o f making the choices, like industrial extension services. You authorized one last year. Part of the technology reinvestment program is to help small- and medium-sized manufacturers to upgrade their operations and switch lines o f businesses. That kind o f information is absolutely invaluable. M r. C a r n e v a le . I would hope that the smaller manufacturers in your state are going to get either a manufacturing technology center or a manufacturing outreach center, a smaller version o f the MTC to help them. One o f the things to keep in mind is that what one sees in those modernization processes among small manufacturers is that the fiveperson machine shop ends up disappearing in favor o f smaller supplier institutions at around 25 employees per operation, so there is a process o f recombination that occurs among the smaller institutions as well. R e p re s e n ta tiv e H a m ilt o n . N o w , let me ask you the question, this loss o f manufacturing jobs, it is not just a U.S. concern, is it? It is a concern across the industrialized world? M s. G o r te . G o to Europe and listen to them sometime. R e p re s e n ta tiv e H a m ilt o n . The President has a meeting coming up with the G-7 countries. Anything you think can come out o f that? M r. C a r n e v a le . Sure. R e p re s e n ta tiv e H a m ilto n . What? M r. C a r n e v a le . It seems to me that when we play this checkers game about how we are going to expand demand, the corner we end up in is exports. That is the way we can expand demand, at least politi cally and in terms o f the set o f current policies. And if there is a way for us in those meetings to leverage American exports and at the same time increase global demand by coordinating economic policies, that seems to me to be the ideal outcome o f a meeting o f that kind. R e p re s e n ta tiv e H a m ilt o n . Okay. Congressman Ramstad wanted to submit an opening statement for the record, and that will be done without objection. [The written opening statement of Representative Ramstad starts on p. 56 o f Submissions for the Record:] R e p re s e n ta tiv e H a m ilt o n . D o you have any further comments that you want to make before we conclude? I thank you very much for your testimony. You don't exactly fill me with optimism, but you have given us some good suggestions. 29 W e appreciate your time and the testimony has been good. Thank you, we stand adjourned. [Whereupon, at 11:30 a.m., the Committee adjourned, subject to the call o f the Chair.] 30 SUBMISSIONS f O R THE RECORD PREPARED STATEMENT Of PHILIP BRAVERMAN Mr. Chairman, it is a privilege to be here today to present my views on the future of manufacturing and manufacturing jobs in the United States. The purpose established for these hearings is to examine the causes and consequences of the decline in manufacturing and consider possible policy options. O f the four main issues to be addressed, I would like to deal first with the questions of what explains the 1.8 million loss of manufacturing jobs since January 1989. Is U.S. manufacturing able to compete effectively in the world economy? And has the decline in manufacturing jobs been due to competition or domestic economic problems and policies? What is currently happening to manufacturing is to a considerable extent a reflection of what is happening to the broader U.S. and global economies. These problems were largely created and exacerbated by perverse governmen tal, regulatory and central bank policies. The credit crunch is a major depressant on the U.S. and global economy. The rates of credit growth in nominal and real terms have been closely associ ated with GDP growth this century. But debt growth has been decelerating rapidly from the late 1980's on. Wnether we look at total nonfinancial debt, including Federal government debt, or private debt which excludes Federal debt, the rates of debt growth have recently been the slowest ever recorded. In the first quarter this year, for example, total nonfinancial debt grew at a 4.6% seasonally adjusted annual rate (about in line with growth rates since the fourth quarter of 1990), but one-third the pace in 1985. Private sector borrowing grew at a 3% seasonally adjusted annual rate in the first quarter (similarly in fine with the growth rates since the fourth quarter of 1990). But this is only about half the typical borrowing and lending pace in recession, and roughly one-third the pace typical of past recoveries. It is especially significant that bank lending to business remains dead-inthe-water. Over the past year, business loans at large weekly reporting banks are down 3% from the beginning of September a year ago and down 5% from the beginning of December 1992. Indeed, while there had been a flickering appearance of a pickup in bank lending to business this spring, since mid-year borrowing is again down, and at a 5% seasonally adjusted annual rate. This deficiency in bank lending is a critical cause or economic weakness. While major firms typically have direct access to the credit markets (even including junk bond financing for poor credits), small and medium sized firms rely prin cipally on banks for their credit. Though some very small businesses have been able to finance themselves through home equity loans, that is not a sufficient source of capital growth. Because these firms are the fastest growing, their need for business credit is crucial to their expansion. And their expansion is crucial to the.economy's growth because that is where the bulk of added in vestment and hiring usually comes from in the early stages of recovery. This is a large part of the reason why economic prospects are so grim. The absence of faster credit growth is not merely a reflection of a history of bad lending practices of the past or an insufficiency of the demand for new credit. The U.S. is experiencing a major credit crunch appropriate for a period of intense inflation, not for a period of disinflation with growing elements of deflation. Even more significant, the severity of this credit crunch is a direct 31 consequence of the cyclically perverse policies of the regulatory authorities. These perverse policies include excessive examiner vigilance ana oversight of bank lending practices, to the point of stifling lending initiative. Also cyclically perverse is the increase in bank capital requirements under the BIS rules, which also act to constrain bank lending. The absence of any meaningful bank lending to business, and the slowest private sector credit growth ever recorded, makes a mockery of the Federal Reserve’s pretensions to have engineered an accommodative money and credit policy. Judging by results, the Fed’s policy has been tight fisted and restrictive, certainly not accommodative and stimulative as it pretends to be, or as it should now be. Low interest rates are not stimulative if the credit is not avail able. Indeed, low interest rates are in themselves restrictive. Unless offset by the stimulative effect of increased spending and investment, low interest rates reduce consumer interest earnings, which are now threatening to decline below consumer interest payments. In the year immediately ahead there are additional uncertainties confront ing U.S. business and manufacturing. Uncertainty hinders business decision making and long-term planning. And there is tremendous uncertainty currently over the consequences of recent and coming governmental initiatives. These sources of uncertainty include the budget deficit reduction package of tax increases and spending cuts, the defense cutbacks, the military base closings, NAFTA, the health care proposals and the funding of underfunded corporate pension obligations. Business recognizes all too well that tax increases and spending reductions are examples of fiscal restraint not fiscal stimulus. Gyrat ing foreign exchange rates and fast moving developments in Eastern Europe are also major obstacles to decision making and long-term planning. The con sequent heightening of business uncertainty is already taking its toll on busi ness confidence, capital investment and hiring intentions. The recent deterioration in business confidence and increasing business caution (that stems from fiscal restraint, the threat of new tax and other uncer tain governmental initiatives) is evident in a broad spectrum of business sur veys. The Cahners Economics survey joins a Conference Board survey, one by management consultant A.T. Kearney Incorporated, as well as recent surveys by the American Management Association and National Federation of Inde pendent Business in pointing to declining business confidence and declining hiring intentions, even among small business. O f the chief executives polled in the Conference Board’s late third quarter survey, only 29% expect an economic pickup 6-months from now, versus 50% with an optimistic view at the end of the second quarter. The Conference Board executives reported 30% were revising their capital spending plans downward, a significant worsening from the 22% who reported plans to reduce capital investment in the survey con ducted a year ago. Even mor,e ominous, the Kearney survey indicated that year-over-year increases in capital investment spending would be 2% in the fourth quarter, a precipitous cutback from the 11% year-over-year increase reported for the third quarter. The prospect of renewed weakness in capital investment has adverse impli cations for manufacturing employment, research and development and U.S. manufacturing's future competitive position. Non-residential fixed investment, including both structures and producer’s durable equipment, topped out in 1989 and declined in the 1990-91 recession years. Investment in producers' durable equipment topped out in 1990 and declined in only 1991. Through the second quarter, fixed investment in producers' durable equipment was 32 rising vigorously, reaching $41.6 billion, up a striking $49.9 billion or 12.7% from the second quarter of 1992. However, three-firths of this increase over the last four quarters was in two questionable categories. The first was a $14.2 billion increase in investment in computers and other information processing equipment (boosted partly due to distress sales). The second category is a $15.1 billion increase in transportation and related equipment, much of which reflects the investment of automobile manufacturing leasing companies in cars leased to consumers as a means of bolstering car sales. This latter category, in particular, is not the investment in productive capital equipment, such as ma chine tools or in more efficient processes or research development that holds the promise of limiting the erosion in U.S. manufacturing. The United States and the industrialized world are in the midst of an ex tended period of stagnant economic growth which is accelerating the down trend in U.S. manufacturing employment. Much of the rest of the world is currently in the grip of a protractea recession (which undercuts the demand for exports). The United States is in the midst of an exceedingly sluggish re covery that, at best, is likely to persist through next year. But at worst, the United States could fall back into recession next year. Even if a recession is avoided next year, the outlook is for frequent extended periods of economic stagnation for most or all of the rest of this decade. This reality suggests that the downtrend of manufacturing employment will persist and perhaps acceler ate, unless appropriate governmental action is taken. But other forces are at work that darken the U.S. manufacturing employment picture still further. Most economic observers view this current period as just another typical business cycle that just happens to be more sluggish than its predecessors. However, this is not just another business cycle. The difference between past cycles and the current situation goes far beyond merely a matter of slower tnan typical rates of economic growth. The U.S. and global economy are confronted by an extraordinary combination of structural economic depressants of long term duration that make it difficult if not impossible to acnieve, or even ap proach, our potential long-term growth or full employment. The implementa tion of adroit policies would help, while other governmental initiatives are exacerbating the problems. The current period has close parallels in terms of causes and pattern with the 1930s and other long-term periods of stagnation and depression in the previous century (such as that following the civil war). Though the recent recession and sluggish recovery were deceptively mild compared to those previ ous events, or even some previous recessions, that seeming moderation is attributable to the various safety nets now in operation to soften the adjust ment process. These include deposit insurance, the RTC, unemployment insur ance, welfare, social security and the corporate practice o f granting early retirement benefits and severance payments to discharged workers. But the effectiveness of these arrangements should not obscure the severity of the long-term structural problems confronting the United States and the global community. Many observers have not fully grasped the implications of the fundamental changes that have occurred. Basic long-term trends of past decades are now in reverse. As a consequence, the policies and strategies of businesses, individuals and governments developed to deal appropriately with the problems of an era of inflation, rapid credit expansion, ana the cold war are no longer appropriate in an era of disinflation ana deflation, credit crunch and slow debt growth, and contracting military and defense expenditures. These are monumental changes, 33 with monumental consequences, made even worse because we are still strug gling under the burdens accepted in an earlier period. Companies, individuals and governments are still saddled with the conse quences of the expenditures they made in the past inflationary era. As a result of that period, companies adopted strategies that left them with bloated staff, excess capacity, ana equipment geared to rising costs and the ability to push price increases through to customers. All of that is outdated. Now companies need to gear themselves to the risks and reality of price resistant customers, intense global competition, price cutting, deflation, declining profitability, weak demand, lessened consumer product loyalty, lessened employee pirating, and slow waee growth. For example, business can no longer afford the luxury of large numbers of middle- and upper-echelon managers who function largely as understudies, in place just in case their superiors are pirated away by com petitors. These are among the most likely candidates for discharge in tne cur rent downsizing and cost cutting frenzy. There are, of course, also large numbers of workers laid off due to technology changes. But, whatever the cause, layoffs and downsizing will persist. The huge debt burdens put in place in the 1970's and 1980’s remain oner ous, despite debt restructuring and refinancing by business, individuals and governments. Total debt has soared to some 2.5 times GDP in the early 1990's, up from 1.4 times in the early 1950’s. To put this credit explosion into better perspective, this country's debt burden was only 1.7 times GDP at the end of the second World War. Not since the 1930's has the U.S. debt burden been as massive. Nonfinancial corporate debt equals three fifths of net worth. Corpo rate short-term (current) liabilities and accounts payable equal some 110% of short-term assets and accounts receivable. The real stoiy is not so much that the debt has ballooned, but that GDP did not rise in lock step as it usually does. The reason is that the investment of the funds derived from the debt explosion of the 1970's and especially the 1980's was literally squandered on inflated values of LBOs and empty office space. That is why GDP did not rise commensurately with the rise in debt. That also suggests that it is difficult, if not impossible, to both carry and make good on this debt overhang. Commer cial real estate debt is particularly vulnerable, with one out of every five square feet of this nation's office space vacant, with prices of real estate depressed and average rental earnings threatening to fall well below realistic break-even levels. The continuing and potentially worsening problems of commercial real estate are also worrisome portents for the financial institutions that hold real estate and real estate backed financial assets, including insurance companies and pension funds. Individuals, corporations and governments will continue to deal with their debt burdens not only by refinancing, but by selling off assets and cutting costs, including laying off workers and moving to lower cost centers of produc tion. The consequent spending caution and retrenchment, in combination with a similar pattern of retrenchment overseas, creates an ominous deflationary bias in the U.S. and world economy. The beginnings of a global deflationary spiral are becoming increasingly apparent. This is one of the major problems confronting the manufacturing sector, as well as the global industrial economy. It is a process that threatens to create and reinforce a downward spiral in employment, production, invest ment, profits and confidence as it engulfs industry after industry. At the mo ment, we can see but the tentative leading edge of that process in price declines (as a result of increasingly intense competition) in air fares, tobacco, 34 diapers, electronics, and computers. But it will inevitably encompass more and more industries and products. In order to understand this process better, it is important to recognize two fundamental elements in the current picture. First, business by preparing itself for an inflationary environment, and everything that implies, has contributed to worsening the deficiency of demand. Business has a tendency (bom of the last two decades of experience) to anticipate continuing strong demand for its current products, growing markets, and the ability to push cost increases through to its customers in the form of higher prices. That has contributed to excess capacity or, depending on how you view it, a deficiency o f demand for a vast array of products. Many dispute the potential or reality of deflation, pointing to continuing increases of consumer prices at a just under 3% annual rate over the past year, despite a deceleration to a 1.5% annual rate the past four months. But Federal Reserve Governor Lindsay has indicated that an internal Fed study finds that 1% to 1.5% of the annual CPI increase is due to quality changes not recog nized in the statistics. Without this component, the CPI is actually up only some 1.5% over the past year, and not far from zero over the last four months. Indeed, much of any residual consumer price inflation is due to service price increases. Deflation in manufacturing prices is certainly a realistic threat, but it might already be a reality. The second and more important fundamental element in the deflationary process is that business shifts its cost forward to its customers, if it possibly can. But, in a period of deficient or weak demand (as now) it is unable to shirt its costs to its customers without losing them. Instead, business is forced to shift these cost increases back to its employees and to other factors of produc tion. These cost increases (that will be shifted) include increases in taxes, wages, fringe benefits and other costs of production, such as the expenses of the family leave bill and other expensive regulatory requirements or potential legal vulnerability. The means of shifting these costs back on employees and suppliers are fairly obvious and unfortunately debilitating for the U.S. manu facturing sector. They are essentinally a set or taxes paid not by employers, but by employees through job layoffs and salary reductions. Business, especially in manufacturing, has been reducing the number of its employees. Where possible they have reduced their salaries and wages and reduced their fringe benefits, by shifting to part-time, temporary, or contract workers. U.S. corporations are also shifting to lower cost centers of production within the U.S. or abroad (perhaps enticed by lax regulation, lower pollution controls and lower worker safety standards). Business is also outsourcing, rather than producing in house, and putting pressure on their suppliers to reduce their prices. That downward price pressure on their suppliers reinforces the deflationary spiral as companies around the globe attempt to maintain their market share tnrough cutting prices and production costs, including a step-up in layoffs. But the American Management Association reports that these efforts are railing to produce the desired results. Even though layoffs among surveyed firms have recently been worse than at any time since the 1990-91 recession, they report that tney are not achieving an improvement in productivity and profits. O f the 870 firms surveyed, 47% laid orf an average of 10.4% of their work-force. Though this contrasts with 56% of these firms which laid off work ers in the recession, that was counterbalanced by more hiring than now. But even after these layoffs and downsizing, less than half the companies experi enced an increase in profitability and merely one third an increase in produc tivity. That promises still further efforts at cost cutting, downsizing ana layoffs, keeping the deflationary process in motion in an ever broader and deeper 35 spiral. Indeed, the American Management Association concludes that the layoff pace will continue at least as strong through mid-year 1994 as over the last 12 months. Other forces are also depressing the U.S. and global economy, taking their toll on manufacturing. One of the most pronounced is the contraction in de fense and military spending and employment that follows from the end of the cold war. The cold war, like major not wars that preceded it this century and last, provided a major boost to manufacturing ana the U.S. economy. A rever sal of that process is thus, understandably, a major depressant on the U.S. economy. And because this is a global process of defense expenditure contrac tion, it is having an impact in globally depressing manufacturing and the industrial-world economy. U.S. defense spending as a percentage of GDP declined from 6.5% (or $276.7 billion) in 1986 and 6.4% (or $295.6 billion) in 1987 to 4.9% (or $305 billion) in the second quarter this year. But the 1.6 percentage point decline we have already experienced since 1986 is smaller than the decline that probably lies ahead. By 1997 or 1998 U.S. defense spending will probably be down to between 2% and 3% of GDP, indicating an additional 1.9% to 2.9% reduction relative to GDP. That promises a further major depressant on the U.S. econ omy and manufacturing. The economic and financial dislocations that typically occur following major wars have often been responsible for depressions. It is no wonder then, given the relative contraction in military spending alone, that the U.S. is experiencing a virtually stagnant recovery that comes close to fitting the definition of a "growth recession.” There are numerous other causes of the decline in U.S. manufacturing and manufacturing jobs. Other countries are not as burdened by pollution controls, health care, pension benefits, safety standards, patent and royalty rights, or our wage levels. Our foreign competitors also exhibit certain different approaches to com petition that work to their distinct advantage. Other nations are not as short term profit oriented, but are willing to pursue market share goals for longer periods without requiring the early earnings success that is common in the U.S. as a minimum justification for continuing in operation. There is more central government guidance and support. There is a greater export orientation, both from government and business. Many nations have a value-added tax structure (in place of the corporate tax) that can be rebated for exports and imposed on imports. Other nations permit or encourage business cooperation, that in the U.S. would risk being considered illegal under antitrust or other legislation. Some foreign companies have emphasized product quality and service to a greater extent than have domestic firms. Some businesses overseas appear to nave been able to instill greater worker loyalty, cooperation and contribution to product improvement than seems typical in the U.S.. There is a greater appre ciation of micro economic analysis among foreign competitors who determine the appropriate production capacity based on the lowest point on the marginal cost curve. There also appears to be a telescoping of trie various sequential steps involved in new product development ana introduction among our more successful foreign competitors. That even allows them to be the first to bring to market products developed elsewhere. And product success is quickly fol lowed up by innovation and new product introduction with modest price in creases, a tactic that may have been originated by Alcoa as a means o f limiting freedom of entry. The decline in manufacturing employment is o f long-term duration, but the downtrend now threatens to worsen, and at a time when alternative sources o f 36 employment growth are less likely to be offsetting. The peak of manufacturing employment was reached in 1979, at 21.04 million, dipping in the 1980 and 1981-82 recessions, to reach a low of 18.4 million in 1983. Though there was some increase in manufacturing employment in subsequent years, the 19.4 million level of manufacturing in 1989 was still 1.6 million below the peak 1979 level. Had it not been for a 52% rise in national defense expenditures between 1979 and 1989, the 1.6 million manufacturing job loss between 1979 and 1989 undoubtedly would have been significantly larger. Since January 1989, manufacturing employment has again begun a sharp downtrend. But unlike the 1980's, there has been no early post-recession improvement, nor is there likely to be one any time soon with tne U.S. and global economy weak, defense declines, and deflationary forces in evidence. Indeed, there is an accel eration in major layoffs and corporate downsizing underway. Challenger, Grey and Christmas, a firm that monitors layoffs, reports that tnrough August this year, layoffs are 20% ahead of where they were through September in 1991. And the American Management Association reports in their mid-September survey that companies intend to accelerate layoffs over the next six months. Thus, there are many reasons to believe the situation of U.S. manufacturing will continue to worsen, quite probably significantly. The decline in manufacturing employment has been attributed to improv ing productivity trends. For example, manufacturing output, as measured by industrial production, continued its general uptrend since 1982, except for the 1990-91 recession. But that does not suggest that the decline in manufacturing employment is adequately explained by increased productivity, or that it is a benign development. Far from it. The current decline in manufacturing em ployment stems from more farflung and deep-seated fundamental problems. Indeed, the recent improvement in productivity is deceptive to the extent that it stems from the layoff of relatively unproductive middle managers, or perhaps of researchers, which does not meaningfully or immediately reduce output. What is still more worrisome is the likelihood that the decline in jobs is larger than reported. One suggestion of this is the 750,000 fewer employees in June reported to states in corporate tax returns than are reported employed by the Bureau of Labor Statistics. Moreover, a shift to part-time work could create double or triple counting of some employees on multiple payrolls. The conclusion that follows from all of the foregoing is that there is a dra matic downtrend in manufacturing employment in the U.S. and that it is sig nificantly exacerbated by perverse U.S. policies. The third main question is how essential is manufacturing to a modem economy? What are the consequences of a manufacturing decline on the American economy, growth, and U.S. workers? The decline in manufacturing might have been a less likely subject of these hearings if there were sufficient growth of profits, investment and offsetting good paying jobs elsewhere in the economy. But that is not the case. Meaningful high-paying job growth in other areas of the economy are not readily replacing manufacturing job losses. Though the loss of lower paying manufacturing jobs is regrettable, that is not an area of primary concern, especially if it is the result of comparative advantages elsewhere on a level playing field. However, the long run future of this country is dependant on the maintenance of our position in high technol ogy industries ana products. The primary reason is that it is very difficult to remain in the forefront of research and development of new products and technology ifyou are not involved in the leading edge of that research and technology. These concerns go far beyond potential military applications of such developments and technology. The advances in science and technology are the building blocks for further and future advances in technology and 37 science. Our hold on this area must not be allowed to slip from our grasp. Therein lies the best hope for future growth of our economy and our standard of living. For that reason the decline between 1985 and 1991 in the percent of GDP devoted to research and development spending (typically associated with high technology industries) is a worrisome development. (See Butler, Alison, "Is The United States Losing Its Dominance in High-Technology Industries?" Review, Federal Reserve Board of St. Louis November/December 1992.) The final question that we are here to address is what can be done to strengthen manufacturing, and increase manufacturing jobs and wages. In short, what are the solutions to the various problems confronting manufactur ing in the U.S. as well as in the global economy. The potential solutions to the rapid erosion of manufacturing jobs is as varied as their causes. The stagnant U.S. economy, and the risks of an extended continuation of this dismal eco nomic environment both domestic and globally, certainly calls for immediate remedial action. Following are a series of suggestions for initiatives to deal with various aspects of the proolem. The Fed should ease further, and significantly, to ensure the sustained growth of bank credit to private business. There should be an end to the credit crunch. Bank examiners should be required to consider the needs of the community in their evaluation of ques tionable loans and bank guidance. There should be a moratorium on the imlementation of the BIS agreed increase in bank capital requirements (or etter still a roll back). Because of the importance of access to credit by small business, the Small Business Administration should be encouraged to lend directly when appropri ate credit is not available from traditional sources. Consideration should be given to investment-tax credits to spur capital investment, especially for equipment to take advantage of new technology. A job-hiring credit of some form also warrants consideration. A well thought out investment tax credit would also help boost productive capital investment spending. Consideration should be given to shifting the corporate tax structure to a value added tax that can be rebated on exports ana imposed on imports to help improve the competitive position of U.S. industry. The Federal government should adopt an industrial development policy. The purpose would be to provide guidance to business, particularly small and medium sized businesses likely to benefit most from a stream of information and suggestions on where their investment dollars might be most expeditiously placed and which are the most likely avenues for productive research. The top men in various fields should be invited to hold industry wide ses sions, perhaps regionally, to plan collectively for the future. Recognized experts in various high technology disciplines could be invited to take "dollar-a-year" government positions to foster progress in their fields. There could well be pilot projects encouraged, such as the consortium of automobile manufacturers to develop an environmentally correct car. Such projects would of course in volve assurances of being free of the risk of antitrust suits. U.S. manufactured exports should be more aggresively promoted. I was delighted to see President Clinton's national export strategy, including the change in the definition of exportable computer equipment. Exports hold great promise for expansion. But U.S. businesses are unfortunately not as export oriented as they might be. The Federal government can make an impor tant contribution to export growth by further developing the expertise neces sary to help assist companies in better recognizing export market potential, C 38 securing export financing, tailoring products to foreign needs, and making appropriate contacts overseas. More emphasis should be shifted away from homogeneous products, such as agricultural, to nonagricultural products. Trade barriers should be reduced where possible, but with an eye to achiev ing a level playing field in such areas as pollution control, respect for U.S. patents and copyrights, and of course reciprocity. In order to restore confidence and improve prospects for financial stability and economic growth, the U.S. should take leadership in attempting to restore exchange rate stability by moving back to a fixed exchange rate system. While it is not my area of expertise, others whom I respect have noted that a return to a gold linkage in the international currency system would help to restore long-term business confidence and sanity in the international monetary system, trade relationships and investment decision making. Improving the level of U.S. education from preschool through advanced graduate training is a primary prerequisite to remaining competitive, especially in sectors with nigh paying jobs such as technology. Studies of the sources of economic growth concluded that investment in education bears the greatest return in terms of economic growth. (See Dennison, Edward F., Sources of Economic Growth in the United States and the Alternatives Before Us. (1962 )) The importance of education in retraining for those who have been dis placed because of changes in technology, shifts of employers to other locations, the declines in military spending and base closings suggest the need for dis placed workers educational assistance. Encouraging companies to retrain work ers, providing financial assistance through the tax system for displaced worker retraining, encouraging technical schools and schools of higher education to accept such students, perhaps in special programs, would benefit not only manufacturing but society in general. 39 ATTACHMENTS TO MR. BRAVERMAN'S PREPARED STATEMENT Reprinted from BARRON'S May 4,1992 <01992 Dow Jones & Company, Inc. All Rights Reserved. Growth Recession? Bonds Are a Great Buy, Says Crack Interest-Rate Forecaster By Gene Epstein fo r e c a s t e r P h ilip B ra v e rm a n p rid e s him self on the fact that he has accurately predicted the sex o f all seven o f his grandchildren. The odds against such success (as lo n g as the o d d s ag a in st g u e s s in g s e v e n c o n s e c u t iv e coin tosses) are m ore than 100 to 1. “ M y m eth od," he says, “ is sim ple. In each case m y kids have p icked a nam e fo r a b o y and a girl. I ch oose the name I lik e better— and g o w ith that p r e fe r e n c e . G o d s m ile s an d gives me what I preferred.“ R e c e n t ly B r a v e r m a n has done alm ost as w ell in predict ing what the Federal R eserv e w ill d o n e x t C h ie f e con om is t at New York-based D K B Secu r it ie s , B r a v e r m a n w r ite s a w eekly market letter that fo r e casts the e c o n o m y in general and interest rates in particular. The 5 9 -ye a r-o ld B raverm an has been hard at w ork writing such letters fo r various em p loy ers sin ce 1975, w h en he c o n tributed to a w eekly market let ter for Chase Manhattan (where he was originally hired by Paul V o lck e r, servin g as his assis tant). A n eco n o m ist trained at C olum bia and N ew Y ork Uni versity, B raverm an has often been out o f step with the view s o f his c o lle a g u e s — and o c c a s io n a lly w ith t h o s e o f h is em ployers. But a clo se look at his long track record shows that h e's frequently been uncannily a c c u r a t e . R ig h t n o w , he believes that interest rates are headed fo r a fall and that e c o n o m ic g r o w t h is tr e n d in g down. Braverman was on e o f very few e con om ists to predict the m ost rece n t r e d u ctio n in the F ed fu n d s ra te (t h e rate o n overnight interbank loans). In c o n o m ic E h is letter o f D e c . 2 0 , 1 9 9 1 , B r a v e rm a n f o r e c a s t fu rth er r e d u c tio n s in the fu n d s rate e v e n th o u g h it it h ad b e e n e a s e d that v e r y d a y to 4 % (fr o m 4 .5 % ). “ W h at the F ed has yet to recognize,” he wrote, “ is that far deeper cuts relative t o in fla tio n are n ecessa ry to offset the credit crunch." In vir tually every weekly market let ter thereafter, he repeated his fo r e c a s t that the F ed w o u ld ease again. A s late as March 6, h e w as still ca llin g a further reduction “ inevitable"— and on April 3, he wrote, “ The recov ery pace is slow ing, with om i nous advance indications that the econom y this spring will be weakening anew." Just six d ays later Fed eral R eserve C h a ir m a n A la n Greenspan announced what the N ew Y ork Tim es referred to as a “ s u r p r is e c u t in in te re s t rates," dropping the Fed funds rate b y another one-fourth o f a point to 3 3 /4 . N ow , Braverman says flatly, “ T h e F e d w ill e a s e fu rth er, probably by m id-year." H e m a k es that fo r e c a s t despite last Tuesday's estimate from the C o m m e r c e D ep art ment that in that first quarter, the econ om y grew at an annual rate o f 2 % , that March factory orders rose 1 .6 % , that March p e r s o n a l in c o m e in c r e a s e d 0.6 % , and that the March index o f leading indicators ed ged up 0.2% . “ The President applauds the news as p roof positive that the econ om y is now in a solid r e c o v e r y ,” B ra verm a n c o m ments. “ I wish I could join him, but the facts tell m e otherwise.” Braverman points out that in his market letter o f the previous w eek (A pril 24), he had already anticipated the news about the fir s t q u a r te r ’ s g r o w th : “ Firstquarter GDP, Tuesday, is likely to rise by som e 2 % ," he w r o te , “ up sharply fr o m the 0 .4 % fourth quarter rise." But h e a ttr ib u te d m u c h o f th e growth to on e-tim e factors that he has been writing about for m o n th s : d is to r te d s e a s o n a l adjustm en ts (d u e to the warrelated eco n o m ic free-fall last y e a r ), e x tr a o r d in a r ily w arm winter weather this year— and to these factors he characterizes as “ unsustainable" (a step-up in transfer paym ents and in tax refunds, and an “ aberrant" rise in e x p o r t s ). B r a v erm a n believes that second- and thirdquarter grow th w ill not even m atch , let a lo n e e x c e e d , the first-quarter pace. S o despite continued easing 40 o f the Fed funds rate, Braver- ! man forecasts that through the end o f this year and into next, the best w e can h op e fo r is a “ g r o w t h r e c e s s i o n " — “ an d that’ s n o t an o x y m o r o n ," he insists. “ T o m e, a growth recession m eans 2 % gro w th o r less in gross dom estic product, unem p loym en t rem aining high and p ossibly rising, capital invest ment and incom es flat, high or rising lev els o f bankruptcies, lo w in fla tion , and a ren ew ed d e c lin e in in te r e s t r a t e s ." That’ s the g o o d news, accord in g to B r a v e r m a n . O n the d ow n side, there’ s “ on e chance in f o u r ," h e a d d s , M that the e c o n o m y c o u ld s lid e in to a d e p r e s s io n w o r s e than a n y th in g w e ’ v e s e e n s in c e th e 1930s." But that kind o f scare talk has b e e n c ir c u la t in g a m o n g pro fe ssio n a l d oom sters sin ce the late ‘ S eventies. S o it hits you square in the prejudices. Is Philip Braverman ju st a anoth er stopp ed c lo c k — a J oh n n yone-note w h o sees apocalypse a rou n d the c o r n e r — y e a r in , year out? T o a n s w e r th at q u e s t io n , B raverm an o b lig in g ly sent over a wheelbanrowful o f vir tually every w eekly market let ter h e’ s published since 1975. A q u ick su rvey o f his career s h o w s that in d e e d , o v e r the y e a r s , B ra v e rm a n has b e e n glo o m y — but not consistently so. Iron ica lly, in 1979, he was p r e d ic t in g r e c o r d h ig h s in interest rates, at levels that few forecasters cou ld then imagine. In the su m m er o f *79, when the prime was at 11 1/2% , he said that rates w ou ld continue to c lim b . B y N o v e m b e r the p r im e w a s at 15 3 /4 % . B y D ecem b er, w ith the p rim e at 1 5, B r a v e r m a n w r o t e that “ upw ard pressure o n interest rates w ill exten d in to 1 9 8 0 ." His em ployer. Chase Manhat tan, was unhappy. T he bank's m an agem en t said , “ W h y are you telling our customers rates will g o up when w e ’ re telling them to bu y b o n d s ? " B raver m an r e p lie d , “ W h y are you t e llin g th em to b u y b o n d s w h e n I ’ m te llin g th e m that rates are go in g u p ? " In A pril, the prime hit 20 % . (S om eh ow , slow d ow n ," when in fact 1988 G N P g r o w th w as a h ea lth y 4 .5 % ." In 1989, he was m ore on the Htatarss of OsWas a M sfflpit of 80P m ark, fo r e c a s tin g e c o n o m ic g r o w th o f s o m e w h a t b e tte r than 2 .5 % in m id-January— and in f a c t 2 .5 % was the num ber that cam e in. Then, in July 1 9 8 9 , B ra v e rm a n b e g a n to sound early warnings o f som e thing w orse to com e: Sluggish grow th m ight be m ovin g the e c o n o m y to the “ b rin k o f a full-fledged recession.” A n e x h a u s tiv e re a d in g o f Braverm an’ s market new slet ters o v e r these years is, well, 8.44 exhausting. T hey show a mind 8.49 that’ s intense to the p oint o f obsession about getting things $36 r ig h t Braverm an admits that through m ost o f this p e rio d , after finishing his market letter 5.2» on Friday, sealing i t stamping r-8-24 i t and sending it out into the w orld — he w ou ld nonetheless b rin g his fin al version h om e over the w eekend and continue to edit and re -e d it sharpening and honing after the fa c t “ N ot Private Debt/GDP the m ost productive practice," he com m ents, “ though it prob ably im proved m e for the next week. But a few years ago, one o f m y sons kidded m e so much about it that I finally quit the h a b it" In January ‘ 9 0 Braverm an 75 w a s p r e d i c t in g 1% annual Banw» / B«n* o * * Armiyxt growth fo r the com ing year, it tu rned o u t to b e 1 % . In the was predicting a “ dramatically em p loyers are never grateful months that follow ed , Braver strengthening e c o n o m y ,” and when y ou ’ re right and they’ re m an r e le n t le s s ly r a is e d the rem ained bullish through *83 w r o n g . In m id - 1 9 8 3 , C h a se u n w e lc o m e specter o f re ce s and *84.) k ille d his n ew sletter and he sion, writing in August 1990: W h a t's r e m a r k a b le is n ot m oved on to a small primary “ It is most likely that the U.S. that he w a s c h e e r fu l— m o s t b o n d d e a le r that w a s s o o n econ om y w ill m ove into reces fo r e c a s t e r s w e r e e b u llie n t acquired b y Irving T ru st) sion ov er the quarters ahead, i f through m u ch o f the ‘ E ig h t N ow Braverm an's interestit is n o t a lr e a d y in a r e c e s ies— but that he p roved almost rate gloom has reversed direc s i o n ." O n c e th e n u m b e r s as a ccu rate a b u ll as he had t io n — a n d , in s o d o in g , b e ca m e a v a ila b le, July 1990 been a bear. In January 1985, red u ced him to puny sin glew a s in f a c t p r o c la im e d the B raverm an an ticip a ted “ real digit forecasts: B y next year, m o n th w h e n the d o w n tu rn G N P growth o f 3 -4 % .” Actual he says, a sluggish e co n o m y o fficia lly began. result* 3.4% . In late Decem ber “ sh ou ld push the p rim e to 5 During these years, Braver 1 9 8 5 , he c a ll e d f o r 1 9 8 6 1/2% (from 6 1/2)." m an w a s a c o n tr a r ia n . T h e grow th o f 3 % . A ctu a l result: But w hile Braverm an w as, c o n s e n s u s v i e w p o i n t w as 2 .7 % . In early February 1987, in his ow n w ay, as pessimistic sum m ed up in what m ight be b e e x p e c te d G N P g row th o f in *80 as he is tod a y, in the d e scrib e d as the forecasters’ “ under 2 % ." This time he fum d o z e n y ea rs b e t w e e n , h is fo r e c a s t e r : R o b e r t E g g e r t’ s b le d — the e c o n o m y actu a lly w e e k ly m arket letters h ave B lu e C h ip E c o n o m ic In dica grew 3.4% . often been reasonably sunny. to rs , a S e d o n a , A r iz .-b a s e d Braverman was beginning to B y the m id -’ Eighties, Braver n e w s letter that avera g es the turn bearish. A gain, his direc man was downright optimistic. forecasts o f 50 prominent busi tio n w as r ig h t, an d h e w as (H e acknowledges he was a lit ness and academ ic economists. ahead o f the pack, but he was t le la te in c a t c h in g 1 9 8 3 ’ s In August o f 1990 that publi premature. B y early 1988, he rebound from the 1982 reces c a tio n a n ticip a ted that 1990 a n tic ip a te d “ an e c o n o m i c sion, but by mid-July o f *83 he An Ominous Burden R h«:' : E hU ft.« 82 J hu 1 2 Uu 41 w ou ld c o m e in at 1.3% — but that b y 19 91 , g ro w th w o u ld p ick up to 1.7% . (A ctu al pre liminary estimate:—-0 .7 % .) B y e arly N o v e m b e r 1990, B raverm an w as p r e d ic tin g a “ w o r s e n in g r e c e s s i o n . ” A t about that tim e, Fed Chairman Greenspan was still predicting “ r e c e s s io n -fr e e g r o w t h ,” according to statements report ed in The W all Street Journal on D e c. 2 6 , 1990. Braverman stuck to his bearish p osition : Even with the successful reso lution o f the G u lf war, Braver man p redicted o n ly an “ e c o n om ic bou n ce” in M arch ‘ 91, b elievin g that the e c o n o m y ’ s problem s were far from over. F o u r th -q u a r te r e c o n o m ic growth cam e in essentially flat at 0 .4% . S o i f th a t’ s w e r e w e ’ v e been, where are w e goin g? "T h e e c o n o m y ,” Braverman c om m en ts, “ is lik e a subm a rine that’ s ju s t re c e n tly sur faced. N o w m ost econ om ists, in c lu d in g C h a irm a n Greenspan, are saying that it’ s going to turn into a low -flyin g airplane.” (The B lue C hip con sensus puts e c o n o m ic grow th in 1993 at 3.1 % ) B raverm an d isagrees. “ M y b est h o p e is that d u rin g this year and next the boat w ill stay on the surface. M y w orst fear is it will sink again.” T o e x p la in h is o u t lo o k , Braverman look s at the e con o m y from virtually every angle, offerin g a series o f snapshots that focu s on : p u blic and pri v a te d e b t in r e la tio n s h ip to G D P , con su m er d eb t in rela tionship to real in com e, hous ing starts and exports. Finally, he turns to his specialty, inter est rates, w h ich he sa ys w ill trend d o w n . M e a n w h ile , the banking, thrift, insurance and com m ercial-real-estate indus tries, h e sa y s , w ill co n tin u e their slide. Braverman begins with prí vate and p u b lic d e b t. W h ile m o s t e c o n o m is t s p in the malaise o f the ‘ Nineties on the e x c e s s iv e b o r r o w in g o f the 'E ighties, Braverm an laments not that so many dollars were b o r r o w e d , bu t that s o little return w as obtain ed from the m o n e y le n t a n d s p e n t. H e p oin ts to the ra tio o f p u b lic and p r iv a t e - s e c t o r d e b t to The C redit Crunch 6 2 « 4 « 6 6 * 70 72 74 7€ 78 8 § 8 2 M 8 6 » » t 2 Charts DjwJLMj torB*rron'$/8*nk CrtOrtAnttyst G D P , o b s e r v in g that it has approached its highest levels since 1932. “ If all that borrow ing had produced real growth, the debt/GDP ratio would have remained stable, and the bust never w ould have happened,” he declares. “ But the debt was wasted, the way a com pulsive gambler throws away his fami ly ’ s m oney on a sure thing that doesn’ t com e in.” S o the in c r e a s e in the d ebt/G D P ratio is, to Braver man, the sorrowful emblem o f past errors— and future p rob lems for everyone from c om m e r cia l-re a l-e s ta te firm s to corporations laden with L B O debt, to states, localities and households burdened with the fruits o f unproductive borrow ing. An increased percentage o f the debt went to real estate— w h ic h h elp ed crea te m o n u ments to waste in the form o f empty o ffice buildings, hotels and shopping malls. “ Right now, the federal g o v ernm ent is running d e fic its , and w hat’ s im portant is that they involve the wrong kind o f spending— spending that can’ t stimulate the e con om y ,” says Braverman. “ Expenditures are up to s o fte n the bu rd en o f increasing poverty and unem ployment—-and to bail out the banks and thrifts. T h e thrift and bank bailout is like putting a load o f d in into a sinkhole. It d o e s n 't bu ild anything— it’ s lik e trying to g et to g rou n d level before you put in a foun dation by preventing the loss o f d e p o s its b y in d iv id u a ls , businesses and governm ent S o at b e s t the bailout has a neu tral effect on the econ om y.” N o surprise, then, that the credit splurge o f the ‘ Eighties has g iv e n w a y to the c re d it crun ch o f the ‘ N in eties. But once open-handed thrifts, c o m m e r c ia l b a n k s , in v e s tm e n t banks, insurance c om p a n ies and pension funds are b ecom ing tightfisted, notes Braver man, not on ly in response to the losses they’ ve already real iz ed (o r a n ticip a te ) on past lending, but in response to the worsening financial condition o f p oten tia l b o r ro w e rs . T h e C atch 2 2 : T h o s e b o r r o w e r s w ill becom e m ore cred itw or thy only if the recovery grow s s tron ger, and any sustained econom ic recovery depends on a rapid acceleration in credit (see chart). As for states and localities. Braverman notes that many are caught in a vicious circle:. “ If they borrow more, their credit rating will be downgraded— so their c o s t o f b o rr o w in g w ill rise. But if they d on ’ t borrow m ore and try to p ay o f f the debt, they’d have to increase taxes. But i f th ey in crea s ed taxes, business will leave, cut ting next year's tax revenues.” M oreover, B ra v erm a n stresses, the debt problem has h it th e c o n s u m e r , m a k in g a consum er-led recovery unlike ly. W ith growth in real dispos a b le in c o m e f l a t h o u s e h o ld d ebt and interest paid on debt s t ill bu rd en som e, ta x e s increasing and consum er co n fidence still at recession levels, he c«li< the potential fo r signif ic a n tly in c r e a s e d c o n s u m e r spending “ dim .” R ig h t n o w , o n e area o f potential light is housing starts. “ The cardinal principle behind the optim ism o f the Fed is that housing is in safe harbor,” says B raverm an . “ But anyone should be leery o f placing con fid en ce in a sustainable hous in g r e co v e r y . W e ’ ve already begu n to see a declin e in the n u m b e r o f p erm its fo r n ew construction ” — d ow n 6 .5 % in M arch ” — and in M arch there was a decline in single-fam ily h o m e starts, n ew h om e sales a n d m o r tg a g e a p p lic a tio n s . M u lti-fa m ily hom e starts are u p , b u t s o are ap artm en t vacancy rates. S o the brightest s p o t in the e c o n o m ic firm a m ent m ay b e c o m e o n e m ore delusion.” A s f o r th e c h a n c e s o f an e x p o rt-le d re c o v e r y , B raver man points to the intensifying g lo b a l recession — led b y the b e h e m o th s , Japan an d G e r m any. “ I f, as exp ected , those e c o n o m ie s ca tch c o ld , other e c o n o m ie s s h o u ld c o n tr a c t pneu m onia. S o w h ile healthy exports were on e o f the bright spots in the U .S . econ om y o f 1991, they’ re likely to flicker out in ‘ 92.” A s i f a ll th is w e re n ot en ou gh , Braverm an points to th e d o w n tr e n d in d e fe n s e spending and the level o f inter est rates, which are historically high com pared with inflation: “ T o p u ll out o f a r e ce s sio n , y o u g e n e r a lly n eed interest rates to g o below the level o f inflation,” he notes. “ The only exception was when w e pulled out o f the ‘ 8 1 -'8 2 recession. But that upturn was fueled by the substantial Keynesian $100 billion-plus tax cuts.” A t this p o in t interest rates are running w ell above infla t io n — as m e a s u re d b y last year’ s 3 % rise in the consumer p r ice in d e x . “ T rea su ry-b on d y i e ld s o f 8 % , ” B ra verm a n points o u t “ are 5% above the 42 rate o f mflarinn. A n d business c a n ’ t b o r r o w o n a su stain ed basis at rates that are h igher than th e ir a b ilit y t o r a is e prices.” For this reason, B n v e rm a n b e li e v e s th at C h a ir m a n G reen spa n w ill b e f o r c e d to c o n t in u e e a s in g in o r d e r to bring the Fed funds rale dow n to o r b e lo w the rate o f in fla tion. But even then, he points to the afo re m e n tio n e d list o f weak spots in everything from exports to dom estic consum er debt, and he remains doubtful o f a n y th in g b e t t e r than a growth recession. A s f o r th e p r o s p e c t o f a r e c e s s i o n s o s e v e r e that it c o u ld b r in g b a c k that sc a ry w ord depression, Braverm an’ s concern is that there are storm c lo u d s every w h ere— bad e n o u g h f o r b a n k r u p tc ie s to skyrock et and fo r u n e m p loy ment to soar into d ou ble digits. “ T h is is a d e b t - d e f l a t io n recession ,” he says som berly, “ and it’ s far m ore dan gerous than th e t y p ic a l in v e n t o r y recession. Inventory recessions c o m e to an e n d o n c e the excess is w orked o ff. S o what y o u ge t is a re la tiv e ly q u ick solution to a tem porary p rob le m . B u t a d e b t - d e f l a t io n recession requires a prolonged a d ju s tm e n t that c a n b e fa r m ore severe." Bravennan even dares to use th e w o r d d e p r e s s io n in d e scrib in g the cu rren t situa tion. “ A ctu a lly," he observes, “ this recession is already a dis gu ise d d e p r e s s io n , s in c e the real loan losses o f banks and thrifts are every bit as large as in the 1930s, w hen m easured against the size o f the e c o n o my. The difference n ow is that you have the FD IC to bail out depositors.” But even that safety net no lo n g e r fe e ls as s e c u r e as it on ce did. “ For the fust time in th e h is t o r y o f th e F D I C , C o n g r e s s p a sse d le g is la tio n late last year that amounts to a possible repudiation o f the ‘ too b ig to f a i l ’ d o c t r in e . U p to n ow , the FD IC has bailed out deposits that e xce e d the tech n ica l lim it o f $ 1 0 0 ,0 0 0 . But the legislation specifically bars this practice as o f 199S unless the F D IC an d the P re sid en t agree that there w ill b e m ajor d istress in the fin an cial sys tem ." A n d at a tim e w hen banks s eem to b e c o m in g b a c k to l i f e — w ith p o s t e d e a r n in g s lo o k in g healthy— Bravennan quotes a M arch 10 statement from FDIC Chairman W illiam The Big Borrower RtaHMai» Uam/TaW Uum? Taylor. “ A significant portion o f the industry is n ot d o in g w ell at all. T o put it another w ay, the winners are winning b ig , and the losers are losing b ig ." “ T a y lo r," Bravennan co m ments, “ knows better than any o f us which banks are which— and that’ s the key question. All that the rest o f us know is that betw een Sept. 30, 1991, and Jan. 3 1 ,1 9 9 2 , there was a 26% rise— to $613 billion— in d ol lar assets on the F D IC ’ s secret Problem Bank and Thrift L is t W e a ls o k n o w that n o b a n k should b e judged healthy i f its profits are up because o f a fire s a le o f s o m e o f its m a jo r assets. That kind o f profitabili ty can’ t last." S o the $64 billion-plus ques tion is: Precisely w h o are the “ l o s e r s " th a t, in T a y l o r ’ s w o r d s , a re “ l o s in g b i g " ? T h a t’ s the m y s te r y . “ T h e re m ay b e m a jo r c h a r g e - o f f s ," B ravennan su rm ises, “ m a jor lo s s s u r p rise s in area s that have yet to b e recogn ized ." But for B ravennan, the main area o f unappreciated risk is the insurance industry. “ Som e insurance com p anies are very h e a v ily in v ested in p ro b le m real estate and junk bon d s. I f these investments g o sour and there is s till a risk that they will— there is n o FD IC to bail these institutions out." The ramifications o f failures a m on g insurance co m p a n ie s are frig h ten in g . P e o p le w h o have cla im s o n them— in the fo r m o f a n n u itie s , l i f e an d health insurance— c o u ld fin d the m oney drying up. “ In s o m e c a s e s th e re are insurance com panies that have h a lf their assets in real estate and in junk,” says Braverman. I f the com p anies w ere fo rced to sell their depreciated assets at distress prices, that cou ld be a further m ajor depressant on a lready depressed real-estate p rices— and ju n k -b on d p rices w o u ld p lu n g e . T h e n o th e r in s titu tio n s that h o ld s u c h assets— in clu din g investm ent b an ks, p en sion fu n d s, thrifts and c om m ercia l banks-w ou ld get hit. “ A c co rd in g to the National A ssociation o f Insurance C om m is s io n e r s ," B ra v e r m a n relates, “ there is a long list o f c o m p a n ie s that alread y have risky assets substantially larger th an ‘ a d ju s te d s u r p lu s ’ — w h ich is their financial cush ion. I f som e o f the m ajor c om p anies fa il, they co u ld take a p a r t o f th e e c o n o m y w ith them.” Put the p ieces together, says B ravennan, and the w hole p ic tu r e is s u m m e d up b y the increase in debt in relation to G D P. “ W h a t I fin d r e a ll y o m i n o u s ,” h e o b s e r v e s , “ is the interest burden. A t the onset o f this recession, it was about 9 % o f G N P , w h ic h w a s h ig h e r than the last peak o f 8 % in the 1930s. A n d that 8 % w as due m ore to collapsin g G N P than to the rise in interest payments. Just as troubling is the level o f c o r p o r a t e n et in te r e s t p a y m ents. T o o m any com p a n ies h a ve m ore interest paym ents and other short-term liabilities than c a s h f l o w a n d liq u id assets. Such firms are obvious bankruptcy candidates. “ Just w h o w ill fail— w hich L B O s , real-estate firm s, pen sion funds o r insurance c o m panies— is hard to say, just as i t ’ s h a rd to s a y w h e re and w hen. But the risk is there in s o m any individual cases that it seem s all but inevitable that Real In terest R ates: S till Too High 8armnt /Ban* CmMAntrm 43 at least som e w ill g o under.” S ta n d in g in th e m id s t o f what he describes as an e c o nom ic morass, predicting that interest rates will decline fur ther, just where d oes B raverman recom m end putting your m oney— in a mattress? “ N o ,” he says, “ I ’ d d o the o b v io u s thing and b u y non ca lla b le, long-term Treasury and federal agency bonds. In this environment, the Federal R eserve w ill have n o ch o ic e but to ease further, probably by m idyear. I exp ect the Fed funds rate target, which is now 3.75% , to decline to 3% by the end o f the year. That assumes e c o n o m ic grow th o f l% -2 % . S o lo n g b on d s y ie ld in g 8% o f f e r e x tr e m e ly a ttra c tiv e yields." W hat if h e ’ s w ron g about the econom y? “ W h a t’ s interesting,” says Braverman, “ is that even if the e c o n o m y is in a s u sta in ed r e c o v e r y , in terest rates are likely to decline anyway.” He explains that the cyclical low s in interest rates typically o c c u r “ n ot in re c e s s io n , but after recession, and not im m e diately after, either. For exam ple, the low s in interest rates fo llo w in g the 1981-82 reces s io n o c c u r r e d in 19 8 6 . T h e low s in interest rates follow in g th e 1 9 7 3 -7 5 re ce s sio n occu rred at the end o f 1976, and the interest rate low s from the 1 9 6 9 -7 0 r e ce s sio n o c cu rr e d in 1 972. S o eith er w a y , in te re s t ra tes s h o u ld co m e d o w n .” B u t as h is r e c o r d s h o w s , he’ s not a constitutional p es sim ist."! hope there is a sus tained reco v e ry ,” Braverm an con fesses. “ T h e lives o f m il lions o f p eople” — n ot to men tion th ose s ev en g r a n d c h il dren— “ are a lot m ore im p or tant than m y fo r e c a s t in g record. But I d o n ’ t e x p ect i t In a rare burst o f candor, Fed C h a irm a n A la n G r e e n s p a n said in D e c e m b e r that the econ om y is heading into 5 0 m ile-an -h ou r head w in d s. I f even M r. G reenspan is w o r ried, so am I.” The New-Age Economy Our Panel Debates Where It’s Taking Us Carson: In the fint quarter, the sur fE sluggish rate of growth m grots domestic product through the first prise was the sharp fail-ofT in defense spending. I expected u to be down for half of this vear has raised fears that the recovery from the VO-VI recession is the year, but not ail concentrated in one stailmg once again. Consumer confi quarter. That subtracted two points off the growth rate. So. despite the very dence remauu gloomy — and manufac turing as of August contracted for the harsh weather that hit the East Coast thud month in a row. in late February and March, the private To get a better fix on the economic sector still performed reasonably well, outlook. Barron's recently held a Round but less than expected. table discussion with three Wail Street As for the very tow second-quarter economists: Jason Benderlv of Benderly growth. I’m a little puzzled, because Economic Associates. Philip Broverman, some of the benchmarks we use to measure growth, like federal tax re chief' economist at DKB Securities, and Joseph G. Carson, chief economist at ceipts. suggest the second quarter was a Dean Water Reynolds Inc lot stronger ih»n what the published To find out how each news the GDP statistics suggest. outlook tor economic growth, tmpio > Q: Then how do yon expitdn it? ment. inflation and interests rates, read Canon: If there is ooe factor that — Oene Epstein stood out in the first half that took a v i) from growth, it was the announcement of the Clinton lax package The way I GARROS'S: Joe Canon, growth ui gross domestic product in the first look at il economic growth is tied to risk-taking, and I think the uncertain!) half o f this Vtw ran at an arumahied and apprehension about that tax pack 1.3%. which w sn t much to wntt m age torced a lot of Deople and busi J home about. Wat that below vour ‘ j experMMNU* nesses to postpone their purcnases and investment decisions And as bad as U C*r*on: Yes. the first hall was iess that oackage is. in stupe and size, me 'I robust than i had projected uncertainty was more damaging to the economy than the tax bill itscU r Q: What's yom ontiook for the second M r Canon: I think we still have the potential to hit 3to%-4<% in the second half. You may get something in the <hird quarter of around 3%. and in the fourth quarter, a little bit above 4%. So oo balance 1 still think 3Vi%-4% for the second half Q: Jason, what do yon make o f the growth patent m the first half? D initily What happened in the first half was somewhat below what I had expected, but not much below, since I had been looking for a pretty sharp slowdown. And I think it was a consequence of what happened in the second half of 1992. Consumption ran ahead of income in the second half of '92. And so long as income growth was going to be sluggish in the first half o f '93. there were good reasons to expect consumption to slow, which it subse quently did. Housing had responded prettv strongly bv ihe end of 1992 to the decline in interest rates that occurred in mid-‘92. and there were reasons to expect ai least a pause ui housing dunng the first half of '93 And third, production was verv strong at the end of 1992 ana earlv '93. and it created an imbalance where production moved ahead of final sales bv the early part of *93. And unless demand kicked in very sharply at some point in early '93. it meant production was going to have to weaken to bring it back in line with final sales. \ j j | i j Q: And looking ahead? Beaderty. 1expect another penod of j relatively disappointing growth in the I third quarter, somewhere around 1'*%• 2%. But by the fourth quarter. I , think the stage is now set to get an other redound, another sutxrvcie of growth, starting in the fourth quarter, where GDP could go back up to the 3Vi% rate — not permanently, but for several quarters Q: Aside from vour tower estimate for third-quarter growth, how do you dis agree with Joe? Benderly; 1 agree with Joe that some rebound is coming. But 1would emonasize these swings in growth that we have had from 4‘^‘r m me second half of '92 to 1.3“ in the first half o f '93. back * uo to mavbe S'r or 4% bv the end o f '93 Those are suocvcies around a trend that is somewhere in the 2< * range r-3I 45 I year I thought that whoever was President, there would be a significant cut in defense spending and that GDP growth in the first half would probably be in the area of 1' -Sc or so. We have had a defense cut. “ at a more rapid pace, more concen trated than 1expected. The 1.3% growth in me first half was a bit weaker than 1 anticipated, but not by much. Q: And vour omiook? Brarennan: It is my view that the economy will not be able to sustain more than 2% in the second half o f this year and next. And growth will most probably be in the area of tW%-2% or less. Q: How come? Brarennan: I agree with Joe that defense was a cnucal factor in dragging down the first quarter. But the weak ness m the area of defense is a plague to itm economy through <hn year, through next year, through the year after and out. While it is difficult to anticipate specific quarters in which it will be most pronounced, it is a major depres sant on the growth o f the economy. 1 agree with Jason that a reversal o f the over-optimism on the part of manu facturers was evident in the first half. The point here is that yes, the first half was weaker than it would have been without the special factors. But I think there was a degree of optimism on the pan of the consumer as well that helped boost spending in the first half, which I think is now in the process of go on around whatever the tread rate oi growth is. We had growth in the second half o f '92 and 1.3^ in the fmi half o f ’93. That’s an average of close to 2.9°i. If we go back to what I think will be about 3W“ growth for a couple % of quaners. it will keep the vear-to-vear growth rate of real GDP somewhere between 2% and 3a which is what l_ c. think the trend is. Brarennan: What 1 am trying to convey is that in the fourth quarter we had a perception that the economy grew at a rapid pace. That perception. 1 believe, was inflated by a lot o f special factors: the shiA of income from first quarter '93 to fourth quarter '92 to avoid the Clinton tax increase, the boost to the economy from the aftermath of Humcane Andrew, the concerted effort by President Bush to prime the eco nomic pump and the misplaced eupho- process of dissipating. Consumer confi dence is beginning to wane. U is still at recessionary levels and it has weakened And in addition, business sentiment is plunging, as one would expect. And on top of this ficuon of gTeat strength m the economv or at least the potential, there s the additional burden of the lax increases and spending cuts, with an other tax increase for health care and the burdens on business that health care will bring. So 1 believe there's a sea change in perception that’s in process. And that process is m the early stages. Canon: Phil talks of a sea change. I see it happening, too. but of a very different kind. Thu has been an invest ment-led recovery. In fact, this is a decade that is going to be one in which the productive side of the economy grows much faster than the demand Q: Gomg even further forward, then, what estimates do im gentlemen make for the trend rate o f growth in grott domestic product from the middle o f VJ to mid-VS? Canon: 1 would sav that our trend rate of growth is probably 3ct-3,- ci r Carson: Yes Brarennan: 1 would put the trend rate of growth at 14-2% at best over the two-year penod. Benderly: I take the middle ground of 2%-3‘% . i I | i I Q: Joe, what ties at the core o f yottr long-term optimism? Carson: Well, as 1 said, this is an investment-led recovery—and more so than is generally recognized. Take the big story of the past few years — the | boom in computer software. Company after company and industry after indus try are investing heavilv in computer software to improve labor productivity Yet. because computer software is not pan of our capital stock, today u is not included in the investment statistics. That is whv you see growth being understated and productivity being reported at low levels. But in the future, the Commerce Department will put the computer software into our capiiai-sioca statistics. And vou wui see upward revisions of growth rates, in vestment rates and productive Q: How important is computer software when you put it uuo the numbers? Carson: If the investment in com puter software over ihe past two vears is growing m tandem with just the rise ui information-processing equipment. then GDP growth has bv almost l'r-I^ S over penod. It is an amazing Q: How do you tee profit] faring? I I I I Carton: > es We are empiovme more capital tnan labor but one mtns we are doing flere is Building a stronger base to grow faster in future vears It is going io oe dnven aomesticallv as comoames onng production oac* home, ana as multinational companies I around the glooe move proaucuon to 1 the United States to take advantage of the better growth prospects and the lower costs of operation. Those trends are in place todav and that s whv I am opumisuc on the U.S. growtn path, going forward. Q- When vou tay trend rate, you mean average rate o f n ot GDP growth that washes away the quarter-to-4fuarter fluc tuations that Jason refers to? Brarennan: Many others. The global recession, which if anything is getting worse in much o f Europe and is still a problem m Japan. And we have seen, more recently, the weakness showing up in exports. And that's probably going to be a further depres sant on the economy. We have seen some indications of consumers' ability to finance expenditures with borrow ings. But without good job prospects— and I don't think there are any — that is already beginning to wane. For the sec ond half, we will see less growth in con sumption. particularly in purchases of durable goods, than we saw in the fust half. Business, while it is not going to make the same mistake of overdoing a buildup of production that is not justi fied by sales, is going to be restraining itself both on the production side and on capital u Brarennan; Profits are likelv to look increasingly less favorable than they have been. To the extent that there is some forward movement on profits, it is going to come from continuing layoffs, continuing contraction in manufactur ing on the pan of companies that are downsizing in order to compete. I see mat process continuing into next year, as well. So. again. 1 see an economv next year like this vear with problems concentrated m individual quaners. making it appear that it is due to a special factor here and a special factor there Beodeitr I agree with Phil that there s no reason to completelv dismiss the weakness we had in the first half o f '93 But I think he ignores the fact mat mere are suocvcies of growth that employment growth? Joseph (i. Carson Philip Hravcrman na on the pan of consumers that the Clinton Presidency would see jobs, jobs and more jobs. All of that created a perception that the economy was solidly based in recov ery. And it is that perception which has psychologically earned some of the elements of strength that we sec in the first half. But 1 believe that s in the Jason Benilerly side. If you look at the first rwo years of this recovery, nonresidential invest ment spending is growing almost as fast as the recoveries of ’75 and ’83. de spite the fact that overall GDP growth is growing at mavbe less than half of those recoveries We have to keep thai in mind because we are tocusing on me consumer so much. Carson: Yes. Right now thev ireai computer software as an expense ratner than as investment The piece that tfies are missing is ihe business ourcaase of computer software mat vou see being put m piace throughout the U S How big is that inaustrv1 I don't know How fast is it growing'11think it is growing as last as the oersonal-compuier market. It has revolutionized the computer inaus trv it is realiv helping companies remain competitive here and around me globe Thai is whv I think we nave a verv strong investment cvcle develop- i | > | i i i > I | , ( 46 L ominuea from Pate '• Bra«crman: That is of fset bv me tact tint prices are going down. So we actually have de flation in this area of computers. And because of the wav in which the GOP accounts are handled, reported investment is inflated. So there is at least a wash, and 1 suspect a negative Canon: But they are trying to say that the machine pur chased today, although it costs less than a machine purchased yesterday, has twice as much capability. And the way you do that is through real purchasing power. Bcaderiy: My problem with Joe s point about computers is that it may simply mean we have excess capacity in computers be cause people don’t use the ca pacity they have. 1 am not sure that computers should really ac count for as much of an increase in the quantity of investment as the GDP accounts calculate. Q: Phil would you comment on Joe j view that Out is « invest ment-led recovery! Brarennar: When you look around it is hard to identify anytlung that is growing other than housing and investment. If not for these sectors, we would have nothing that is even passiblv called a recovery. We are not focusing on the factors that brought the recession and that literally are producing a reces sionary-type recovery. And this is a process that is going to continue for yean to come. As a result, when I say growth can be 2% or less in the next two yean, that is my optimistic Q: What. : My te pi* depressants could I vere that it is possible that we slip back into recession. Or at the very least, to the verge o f reces sion. My concern is that the pick-up that we saw over the recent quarters are in themselves special factors. Q: And what art the generai fac tors! BravenaaK We still have a defense sector that is in dramatic contraction. And that is going to persist. We still have corpora tions attempting their potential to cutting costs, cutting prices, downsizing. Laying off workers. Exports don’t rise because for eign companies are exactly in the same boat. And they reduce their pnces. They downsize. So there is an inadequate umbrella of foreign price increases to al low U.S. firms to raise pnces and profits. These and other factors are involved in keeping the U.S. economy’ s growth very limited. Dendarty: But unemploy ment is down from where it was one vear ago. I don't know any wav to dismiss that as an aberra tion. 1 think it is true that real GDP growth over the past four quarters was somewhere be tween 2.5% and 3%. probably closer to 3*% vear-to-vear Re . jecting that, unemployment is down. 1 think we nave had real growth since toe recession ended in tne fust quarter of 1V9I. But it has oeen subpar. 1 don't think n JCQNOMY growth, just subpar. Q: Whm art tkt elements that make a subpar’ Bendertr In terms of invest ment-led. housing-led. what ever, part of what we should do is try and put them into the context of what the norms are for growth. And m that context, the growth rate of business fixed investment that we have had in ’92 and the fust half of ‘93 is pretty much exactly in line with what the historical norms are for early recovery periods. So we have gotten just as much busi ness investment as we normally get. We haven't gotten as much consumption. We haven’t gotten as much housing. And we have gotten no boosts from inventory restocking. Those are really the missing pieces in this recovery. We have not had fiscal stimulus at this point, either. r- Well, we are past that period o f a recovery where it makes any sense to go back and pick out norms. When you fust come out o f recession, you can get a number o f things all coinciding and pushing growth up to historically what was about a 7% real GDP growth rate. That didn’t always start at exactly the fint quarter o f recov ery. But somewhere within the fint 1^ yean o f recovery there was a four-quarter period of roughly 7% growth. And the range is 6%-8% It is very nar row. That took everything com ing together at exactly the same time and giving you that boost The norm for the second year or the year after that historically, is 3% growth. It is normal for recoveries to go from 7% to 3%. gage refinancing. You have to look at the cvcle of net exports because t£at can suppress growth: it can also boost growtn And u does so in tagged fashion. The strength of the economy m the second half o f ’92 pushed up unpons m the first half o f '93. The weaker growth in the first half of '93 should push down imports in the second half of '93 and give us a little help during the second half of the year, probably by the fourth quarter So 1think right now we have to look at the pieces and we have to add them up. And it is only bv doing that that we can come out with what we think the trend of the economy is. Is it 3%-3.5V Is it 1.5%-2%? Or is it somewhere Q: Andyou httievt it's r. Yes. c I tl look at what businesses arc do ing. ycu would see signs today that you haven't seen in a num ber o f yean. For example, if you go back to the early 'Eighties. U.S. companies were uncompe titive domestically and globally. They moved production off shore. You see more and more signs that U.S. companies are moving production back home. Two. e ol tt Three were going to add a new taciiuv in the United States, vou would have been laughed at Well, not only has Ford an nounced. GM has announced thev are building a new ptant. and Chrvsler is considering add ing to capacity within the next few vean. Couple that with the Europeans moving production here in 94-’95. Couple that with the fact that Ford and GM are now going to be producing more pans and supplies for Toyota and Mazda and other companies. Couple that with Honda increasing its local con tent here and shipping products back to Japan. :L\ea investment lea cn pr.’ uucer auraoie eauioment Ana m\ contention is mat it is not an reing capturea Benderh: The expon side has oeen a support. And me exoon side has oeen steadier tnan the import side, if you loot, at the fluctuations in net exporu. which Boosted me economv in ’.he second half of '92 and men subtracted from growth m the first half of ’93. More of this has oeen on the import side. And that is in lagged response to wnat is going on with domestic demand and with our own in ventory cycle, because both im ports and exports are very sensi tive in the shon run to fluctua tions m final sales and inven tory fluciuauons. Abstracting as oest you can from those things, the trend of real exports is somewnere around 6% or 7<V —which, in the face of the weak growtn that we have had abroad, is a statement as to how competitive U.S. goods are. Q: How muck significance do you place oh those trtms! C an oe 1 think those are all signs that the production side of our economy is going to grow faster in this decade. And I think we are a low-cost producer. 1 think the global trade agree ments. the regional trade agree ments. will make for an even faster growth rate over the next two or three vean. Q: Do vt trade » ' exports will evenaiailv exceed our imports.* Beoderly. I don't expect a positive balance of trade, but I do think by the end of this year, or early next year, expon growth should be exceeding import growth once again. which will provide a boost to the econ- Q: But yom would sriMcad this a look at the fint two vean o f this recovery, it has been subpar in terms of growth. But within the overall picture, you see some amanng accomplishments. Ex ports running ahead of past Bravermaii: This is a diffi cult objective, but what I am trying to convey is that this recession and this recovery is abnormal. It u abnormal not just in the fact that the recovery is sluggish and we didn’t get the very rapid growth that Jason correctly points to in the fint year. There u something unique, extraordinary, important, signif icant about this penod. It is not just another recession and re covery like other recessions, other recoveries. There is a liule bit of difference here, there is a little bit of difference there. This sector is a little stronger. Other sectors are a little weaker. That is not what is going on here There is a watershed, a sea change, a major development and a set of developments at work that we will look back on not only yean, but decades, from now and point to as verv significant nm Q: And ia the year after thmt Dtadarty. In the year after that, there really is no norm. Sometimes growth speeds up, depending on what the Fed does, what fiscal policy does, what net exporu do. And some times growth goes the other way. So the norms are when you first come out of recession, you can get a bunt. And historically we always did — an average 7%. The norm then is for growth to slow and slow very consistently tn every one of our recoveries. And then after that there is no norm. You have to look at the trees because that is what makes up the forest at the current time. And you have to look at defense spending as a suppressant. I think that is absolutely true. Q: What other factors matter support Declining rates also provide extra income via mon- Q: Ami what are those? . f j i Bravermaa: We have gone through an extraordinary infla tionary era. A large pan of that era has to do with the build-up of defense spending. Defense spending m effect throughout the post-World War II penod was quite high for a non-war penod. It was a major element of strength tn the U.S. economv. and in manv other economies The Cold War was another form of warfare, at least in terms of the economv And we had some 6.5% of our GDP devoted to defense. We have aireadv come down to about 5%. and we w iLl be coming down to between 2^ | and 3% over the next tour to five Coiuuuiea on Hate - ¡ 47 HR O ARS Continued from fa te 2 '■ vears That is a monuments cnange. Thai runs the run. along wun other factors, of losing some million jobs a year, on average In addition, we went through a monumental debt expansion, a debt explosion, where corpora tion alter corporation, individ ual alter individual, government after government — state, local and federal, all had a ballooning of their debt burdens And we had an LBO explosion, we had a real-estate explosion inflating values beyond reason. Debt-toGDP grew astronomically, and we can't pay the freight. Corpo rations are downsizing Q: But hasn't the decline in interest rates permitted the re pair o f balance sheets ? Bravennan: True, interest rates have come down. It has allowed corporations and gov ernments to refinance. It has lessened the burden. It has les sened the burden on some indi viduals who are overburdened with debt as well. But that is a palliative. We have not yet had the retrenchment that is a neces sary process for all these major burdens. Thu u only pan of why we went through the recession, which did not resolve these problems. They remain depres sants. Normally when we go through a recession you resolve the problems that brought the recession, you go into a recovery made whole. But we are not doing lhaL The process is one of trying to remedy the damage done through the ’Seventies and 'Eighties. And this is a long-term process. Canon: You are right, that this was a different recession. It was a financial recession. We have all talked about how inter est payments as a percent of disposable income and cash flows went to heights not seen in decades. But if you look at the repair that has been done to the balance sheets, the interest pay ments are now down to ievets mat were in place in the early 'Eighties Corporations, cash flows and interest payments have dramatically unproved And if there was one difference in this cycle so far that separates it from past cycles, it is the fact that we did not have the fiscal stimulus. We have had fiscal drag. That is a major change There is no question about that. Q: What about Pkil i point re garding declines in the defense sector.’ Canon: I think if you look at the present budget, most of tne detense cutback is behind us So I don't think it is going to giv e us the dramatic cutbacks in em ployment or hurt the econorm as much as Phil suggest* Bravennan: The Defense Department s own estimate is that it is moving to 3.2^ from 5'~ bv ! W . relative to GDP Canon: But bow mat ratio comes about is very importin'. Does it come about oecause detense bolds steady and me economy grows, or because me detense spending falls further That ratio could be very mis leading 1 think it is coming aoout because the econorm grows and defense stavs rock steadv at about S2S0 billionS260 billion a vear Bravennan: Their own esti mate is that I V million detense and military empiovees will be laid off in this period Not counting the multiplier effect of job loss among people who serv ice the defense establishment and job loss in the communities where they are located. So it is a major depressant. And 1 don't thmjc until now we have begun to address it adequately Beoderhr It is easy to look at the layoff side of the emplovment picture because it is visible and it is big companies. And it is more difficult to see the job-creation side of it because it is more small companies than big companies. But 1 want to make two points about the years be fore and since this recovery that make it look relatively normal. Productivity growth follows a cyclical pattern where, when GDP growth moves above what it has recently been, you get about two-thirds o f that out of extra productivity. Then when the economy slows, whatever are the reasons for that slowing, so that the current GDP growth is below what it has recently been, productivity growth tends to go below its trend. exDand rapidiv for a sustained penod until we have verv ver. strong growtn around tne res: ,■ business sector that mere is no need lor employment growth long as productivity growth is going to be IS or 1.5««. Ail of those things are constraints. And mere are some things holding us up. Unless you want to sa> statistics for GDP growth are wrong, me economv has shown me abilitv to grow in me face of these constraints 1 think me stage is now set for a rebound which will show me economv's ability to grow at a moderate rate rather than collapsing into recession or near-recession '95 or '96 °C U ’f Cr Bravennan: i come to a . slower growth path tnan Jason does because 1 can extend mlitany of problems I add few other sectors such as me inability of small and medium size businesses to get full accesto the credit they need It addition, there are tne uncer taimies about tax increases ano health care Q: Joe, could you focus on where you duagrte with Jason’ Canon: I think the mator difference ties in what 1 see happening offshore. There is no question mat the European economies have been a disar pointment and wili continue u be. probably through the rest e; this vear We do see a recover, starting in Japan later this vear and in Europe next year Bu; what 1 see unfolding in the nex: five years is a major change lr. global spending and savings pat terns. If vou go from 'S'1 to ’91 the Pacific Rim nations ex-Ja pan had cunent-accouni sur pluses in excesses of S100 bil lion — mat s a cumulative num ber. Whereas the G7 countries had current-account deficits, led by the U.S.. of over S350 bi.lion. Over me next five or 1C years those Pacific Rim countnes are going to be me spenders m me world. I think mat is important to note because you see U.S. companies looking more and more to me Pacific Rim for expon and investment opponumties. Benderiy: The second thing is that when 1 look at credit growth. 1 am hard pressed to find that the pans o f the econ omy that tend to generate credit demand are behaving any differ ently in recent years than they used to. So if you look at the credit-generating process as sup porting the expenditures that tend to be bought with credit, durable goods on the part of consumers, business investment and inventories on the pan of businesses, when you look at private credit growth and what generates it. and then look at the generation of that credit relative to the economy itself. 1can't find that those relationships are terri bly amiss right now. So I think I take issue with the idea that this cycle is different because of credit growth. Q: Let's shift from GDP to employment and unemployment. Jason, where do you think em ployment and unemployment are going in the next six to H months' Benderly: Let me stan with the unemployment rate, or average, over me nex: ¡: months: I think it will be down slightly from where it is toaas Not down by much, but down some, because me economs * . average growth will be slighth in excess of potential over tha: penod. So. not a big decline, but a small one Q: But it is different. Q: To what level? Beoderty: it's different for other reasons, fiscal policy being one, overbuilt commercial real estate being another Benderly: I’d put it ai ln terms of employment growtr there is a need to distinguish between me shon term and th: 12-month growth rate oecause c the behavior of productivity Or average over me next vear. err plovment should increase n. about IVIV;1 "- Q. Phil' Bravennan: To sun with, it is my belief that debt growth is a determinant oi economic activ ity. So one of the reasons why the economy grew rapidiv in the 'Eighties was because of the massive growth in credit. Unfor tunately. that went to finance a lot of poor, injudicious invest ments that literally should not have been made in the first place The reason whv GDP did not grow m step with the debt, even though it often does, and 31 ^ Q: Phil? whv we had this soar in the debt-to-GDP ratio, is because we squandered the funds in im prudent investments that had little or no’ real growth content So. because there was an in adequate return on that invest ment. the debt burdens became onerous. And one wav to correct for that was to try and shift from debt to equity financing That is Q: But in what wavs do you a way of remedying past inju part company with Joe s forecast ries. 1 am not sure what the for long-term GDP growth.’ appropriate analogy is. But if one does nothing but dnnk Benderly: 1 guess in terms of around the clock and as a result me sustainability of growth has trembles, and then one goes above 3%. And that stems pri on a diet of eggs and milk and is marily from the fact that you do ofT the alcohol, you shouldn't have to take into account me necessarily conclude that all is drag from defense spending. I well. The economy sull deserves think me trend of real disposable to be in the intensive care income growth won’t break out of me 2%-3% range. It has ward. Benderly: This is balancing been roughly 2Vi% and I don't pluses and minuses. There have see that it will break above 3%. been, and still are, constraints on Thirdly, me housing recovery to growth in the U.S.. defense date has already brought starts spending being a major one. above me demographically deAnd a still-overbuilt commer termined levels. I think how cial real-estate sector being the much further housing goes up is second one. And 1guess there s a Limited for that reason. And perception on the pan o f the lastly, I think, net exports won't Q: Translate that uuo tob± s & ; » i i Benderh- Sav 100.000-1?. 000 a month But in tne ver near term, as me business sect. corrects for me decline in m ducttvttv that we had in the nrhalf of me vear. mere is a ns>. mat employment growth » lli ^ 48 Continued from Pate somewoai slower man mat i me near tern: seives are one thing, the realit\ mat underlines it is something enurelv different Q: So vou weren't surprised b \ the 39.000-fob decline ui Aufusi’ Q: Joe? Bender h- Month-io-monih pavroll numbers are noisv wmen t5 whai makes mem n c»v wortnv — so i was surprised like evervone else. Bui if you average the last tnree monUu, vou get a '2.000 per month increase whicb is about what I would expect, as companies attempt to restore productivity following a wean economy in the first half of me year Q: Phil' B n x n u n : Well, i have problems witn emplovment sta tistics and the labor force, h is like trying to forecast shifting sand, because the labor force in me past decade has grown at an average of 140.000 a month and over the past year at only 83.000 And we were a much smaller society a decade ago. And 1don t think demographics are the en tire explanation for it. So much of the seeming improvement m me unemployment rate reflects a mucb slower than normal growth in the labor force, which more than offsets the sluggish growth in employment Q: Can von put a number on your projection for empiovment and unemployment? Bratennan: Yes. although 1 don't think n would be very meaningful. The official unem ployment rate may stay in the range, and monthly pay rolls may grow at an average of 100.000 or so jobs per month. But that includes part-time jobs and the plug factor Carson. J go back to mv opening statement that this is an investment-led recovery, so vou are not going to get job growth in this recovery that comes even Close to what you had in the 'Seventies or early Eighties. Companies are em ploying more capital than labor However. I've predicted that we would be able to generate, on average, roughly 200.000 jobs a month. We have fallen maybe 30.000 jobs short in the first eight months of this year. Going for ward. 1 think you will see a little bit faster job growth than what we had in recent months. I think the composition will change, you will start to see more goods producing jobs than you had in past months because of the re bound in manufacturing that Jason mentioned, as well as con struction. So I think it is going to be a better balance Canon: I think it will be beaded down to 6!iS by the end of the year. Q: Do you see any drag from further downsizing? Canon: The layoff an nouncements have gone in three phases, and I have followed these religiously over the past three or four years. The first stage occurred m '89-'90 as the economy weakened dramatically and there were large lay- Q: Eipiaui tbe ping factor. Brarcnnmn; That's the num ber of jobs the Bureau of Labor Statistics attributes to sun-up businesses they don't sample. If the plug factor is largelv or peraaps even entirely fictitious. employment gain Q: Can vou propel the num ber of fuU-nme todl that will be created at distinct from panBrarennan: There I would get down to guesswork. Mv con tention' Is that more than we want are part-ume jobs More than we want are self-employment. And we don't know how much of the self-emplovment ts fictitious. We don't know how much of it is part ume We don t know how much of even the full time are underemployed in terms of their skills The proppeoole who were unemployed were largely Une workers woo looked at their unemployment a* a temporary phenomenon Now a disproportionate snare have been middle managers Tnev are forced to look eisewnere than unemployment Ben efits to mane ends meet and as a cooseauence nave haa to take wnat amounts to underemploy ment So tne statistic1 tnerr , already at 6S. My guess i' we are going back to rates tha: we have seen in earlier eras. So we are going to see interest rates well under 6Soffs by major companies in the U.S. The second pnasc shifted from outright lavolTs to more early retirements and attri tion. An4 now we are in the final stage, and 11 you read the reports and not just the headlines, most o f lhe recent layoff announce ments. like for PAG and IBM. are more offshore than onshore And that's another reason why 1 am very optimistic on U.S. growth prospects, because we have this operational adjust ment behind us. Q: Jmerest rates. Phil what do you think long term am d short-term rates art gomg to be? Braverman: Lower in both cases. As far as I am concerned, the economy is weak enough to keep inflation under wraps. And that is among the key determi nants for lower interest rates. 1 think m real terms interest rates are still high. Q: That's not whet Federal Re serve Chairman Alan Greenspan has said. BraTcrman: Yes. but why should I be any different and agree with him now when I have disagreed with him since *hn recession began — or even be fore? To me. historically, rates in nominal terms are sull very high, even though the yield on the 30-year Treasury bond is Q: How far under? Brarennan: My guess is that we will decline to 5S-5WS on the 30-vear T reasurv-bond rate Q: And on the short end’ Canon: On tne snort enc 1still think me next move tor ifit Fed is to tignten Q: How come? Brarenaan: We already have evidence o f fiscal drag, due to the tax increase that Chairman Greenspan promised he would deal with if it emerged. Inflation is moving below the 3% trend rate that we saw. and how low it gets is unclear. It should be 2 or under over the course of the year ahead. And that will allow not only long rates to come down, but short rates to come down as well. Canon: 1 think what we m . see going forward is a creep\ move up in inflation, which me Fed will respond to There arc five lactors mat argue that inflj non as measured bv the cor. sumer price index should in crease at a somewhat taster raie for the rest of me vear. Fooo prices, which declined in exce" of IS over the last tew monms. are not going to go down again Energy pnees. gasoline prices particularly, which declined sharply in the last three months, are gomg up. if for no other reason than that the excise u_ t will rise. Auto prices are gome up I think you will see a dra matic increase in auto pnees in August. September and October The reason for that is that dealers don't have any oid models to discount right now. So they're not going to provide inc vear-end rebates that typical)' occur this ume of year. And me price increases on new mode;' are pretty heftv. both on th; domestic and import side. ir. October. 1 think the housing component of the CPI will move up after showing little or nr change in the last few monte; And I think apparel pnees are headed higher Q: The Fed funds rate is cur realty at 3%. How far do you see it falling? Q: Given all that, where do vou prefect inflation for the rest of this calendar year and next? Q: By when? Braverman: I will chicken out and sav before midvear '94 Within the next few months, there may be some backup ui yields, as the market takes profits and reacts to the possibil ity of another false inflation threat. Q: And what do you expect the Fed to do next? Brarennan: The economy is weak enough to suggest to me that the next move on the part of the Fed could well be an eas ing. Q: That’s contrary to the con sensus new. How come? Brarennan: To 2W%. Q: How does vour projection ofS%-5H% on the long bond look in the light o f history ? BrafcnuuL It is worth not ing that over most o f the finan cial history o f the U.S.. the bond yield on the premier credit had ranged between 2% and 6'%—not higher. So moving below 6^ doesn’t say that rates are low. It would still be at the top end of the historic norm Spreads are still extraordi narily wide from short to long And I think that spreads will narrow. So 1 see more opportu nity for gain in the long end than 1 do in the short end. even though I think it is possible for the Fed to ease further. And 1 don't necessarily guarantee that 5S is the low 1 am simply saying that is a credible objec tive. near term. Q. Joe? Canon: Let’s start with the long end. Mv economic growth outlook determines my mierestrate outlook to a large extent. I think the 10-year note will go back up to around 6%. That's because, since 1980. the yield on the 10-vear note has alwavs ex ceeded the year-to-vear change | m nominal GDP And if the economy docs pick up. as I expect it wilL the 30-year bond vield will rise as well. Probablv not as fast as the 10-vear. So there will sull be some flattening in the vield curve Carson: The CPI for this year should come in at 3'/«^3'/!% and next year at 3W%-3J Ar< There is another important point here on the outlook for interest rates and financial asseu in gen eraL I think the Clinton tax bill hits a specific group of the popu lation — small in number, bu: very large m terms of wealth and income I think what vou are gomg to see happen gomg for ward is a portfolio reshuffling awav from financial assei«parucularlv taxable bonds —ne cause the tax chance dramati callv reduces the after-tax retun to those individuals For in stance. the tax climate favor investment in real estate over financial assets. Q: You sigh. PhiL Is that an on-the-record sigh? Brarennan: Unfortunate:, there is an element ot truth ir. what Joe is saying And frightens me. Because there l indeed an anxiety on the pan o: many individuals and business« to shift awav from what I per ceive are better investments t obtain capital gains, which arc taxed more lighuv than ir.-: stream of income, which is taxeii more heaviiv. So commerna real estate has seen renewe. interest even inougn vacanc rates remain extraordinary high There is an anxietv • move into junk bonos. or iunuebonds All of these are nstieContinuea on Hatt 49 Durdens of the Iasi decade We still have burdensome attempt merely 10 enhance vieid or reduce lax exrwsure Vnc while mere is an element e:' truth in u m terms 01 identitvini: wnat is likeiv 10 Happen, u is siii. a scarv deveioomem. which sot; oi narks back, a lime bn u wnat happened in ihe laie I920-. and 19811* < : Jason? J Beoderly: First. with respec: to inflation. the core CPI — which excludes iood and en ergy—on a ve»r-io-vear basis in Juiv is down slightlv trom what it was last vear. It was 3 4S- ir. December. And it nas dropped to 3.2cc in July 1 think there is and '95 And ihereiore 1 think tne total inflation rate — which includes iood ano energy — will oe flat to down Q: Why' Beoderlv: Because the unempiovment rate will decline oniv slightly There has been a pattern of inflation both in tabor and the product markets, both price inflation and wage infla tion. to kick up iniuallv when recovery first begins and when the unemployment rate first fails. There has also been a tendency that if the unemploy ment rate doesn’t quickly fall iCONOMY back to its full-etnplovmem level, which 1 would deline a» somewhere around 5rc-S.5rc to day. theje is a tendency then lor disinflation to resume after this initial kick up in inllation. And we had some of that m the first half of 1993. both in the labor and the product markets. So basically. 1 think inflations trend is still down, but down very gradually in ’94 and '95 Q: How about kmg-term rates? I don't think any thing verv dramatic is going to happen. 1 do think that one of the major sources o f the bondmarket rally through recent weeks has been the weak econ omy. And that's about to end. But if this is nothing more than a subcycle, nothing more than one more fluctuation around a 2.3% trend rate, and if growth slows again by mid-’94. I think the bond rally will resume again at some point in 1994 governments, federal govern ment and individuals If it were not tor these burdens, we proba bly would have dealt with thi' recession more appropriately through fiscal stimulus But our unwillingness to do that na' created a maior tax increase and spending reduction. It raa' not be quite as large as adver tised. But it is still in the wronc direction, and u is major And on top of that, there are going to be health-care costs and ta\ increases to finance them, which will be especially burdensome on small business. So we have an array of major burdens on an economy that is barely moving Much of what is happening also happened at the end of every major war. In that kind of period, there are financial dislo cations. economic dislocations, employment dislocations, un certainties that may create within them changes m how we view things. To me it is not just a matter of a difference of degree. It is far more than mere ly what differences in our ir tne manutactunr.i: sect.’ were doutne mat oi japan ar.c 60S-higher than oermans \ 7. da% our manufacturing cosu arbelow mat of Japar.. and u r mans is oO~ nigner man our And 1 think »hat vou are seein; todav are changes in proauaior (lows that are the reverse of me earlv 'Eighties We\e movec production offshore because w; couldn t compete V*e are lower-cost producer Now vol. see the adiustments occurring ir tne European and Japanese manufacturers More ano more of our companies are moving production back home, and i think it is because we have better growth prospects than thev do and also because it cheaper to produce here mar. over there Also, the average age of me capital stock is the highest in 4i are going to have to rebuild our industrial infrastructure. 1 : is going to be helped by foreign direct investment, but that s i plus. The other thing that I think is very important is that the market value of financia assets to the replacement vaiue What*» Ahead? Potted about the prospects tor the 12 months andmg June 30 1994 Carson is tne most oDiimisnc about economic growth, while Braverman is the most optimistic about interest rates ana infiaticr Bentferly tails between the two — — M fc h m c r 1.5%- 2% (at best)__________ 2% - 3%______________ 3% -4 % 100.(XXVmonth 100.000-150.000/month 200.000/momn 6.5% - 7% (on average) 6.5% (by 6/30/94) 6 5% (by 6/30/94) iiT w M H m « moving lower steaoy moving nigner V m U m M m tm tm moving lower steady-to-uo moving mgner much tower tower higne- Q: W t about ikon-term rates? hm B— drrtv: Short-term rates should remain at their current levels, with no change in Fed policy Q: Amy mmmmg up? Braverman: My concern is that the U.S. economy is now experiencing a sea change, a dramatic turnabout from infla tion to disinflation with signifii cant elements of deflation, which is a very dangerous aspect of the global economic scene , There is intense international . competition to maintain market share. That means that the pres sures to cut cost* everywhere are intense. And these cost pressures are depressing business senti ment, depressing consumer sen timent, creating vulnerability for different sectors. We have a major contraction in defense and the military, globally We have a problem that I think goes beyond na tional borders, of downsizing, in pan to deal with the credit growth forecasts would suggest Policy makers are still viewing the current situation as if it was just a replay o f some other recovery. It isn’t. Q: Joe. Carson: 1 would say that we are in a sea change, as well. But 1 would characterize it this way We are in a transition relying less on old-age industries like defense and more on new-age industries like micro-elecirotucs. computers and software, and capital goods We re relying less on domestic markets and more on foreign markets for our growth. And this decade is going to be one of investment growth, not consumption growth B \ that I mean that investment will probably grow by a factor of two or three times overall GDP growth The reason I'm optimistic on U.S. growth prospects, particu larly investment, is because the U.S. manufacturing sector is a low-cost producer, at leas: among the G~ countries If of real assets is the highest in uie postwar period It basically means it is cheaper to build new . assets today than to bus or Wall Street. Now. that's a maieplus for investment Q. Jason? Beodertv: I think I wouid like to put myself between me two sea changes. It has been very easy to confuse the factors tha' have given us these short-tenr fluctuations of growth with infactors that determine the econ omy’s trend. In the shon rue. agree with Joe that growth i most likely going back up aoov? 3% again. I think that will star in the fourth quarter. But over ^ longer penod of ume. that leve of growth will be unsustainable Growtn will average closer t and if I had to shade that, would shade it to the downside . think it is a fairly benign ou' look, since it means no inflauer or mterest-rate pressures, ol sufficient growth to keep profit in a positive uptrend Q: Thmk wu. re M irmen. ■ 50 PREPARED STATEMENT OF JULIE GORTE Manufacturing is essential to the economy of any advanced industrial na tion, although it may directly account for only a modest share of employment. Maintaining healthy productivity growth, continually improving technology, devising mechanisms for technology diffusion, and training of workforces (white and blue collar) is necessary to assure the vitality of manufacturing, and if these are done, the payoffs will diffuse widely throughout the economy. If they are not, and manufacturing competitiveness suffers, the negative conse quences also diffuse broadly. It is an oversimplification to say that over the past two decades, manufacturing competitiveness has fallen; a few sectors that were in deep trouble in the late 1980s have staged modest comebacks, and a few have remained dominant. But overall, increasing competitiveness on the part of foreign manufacturers has taken a toll; for example, it is probably a signifi cant cause of the stagnant or falling standards of living that the majority of Americans suffered in the late 1970s and 1980s. Manufacturing is important to the economy for several reasons. One is employment, as the Committee's concern indicates. In 1993, more than 18 million people worked in manufacturing (15 percent of the total employed population of the United States). Generally, manufacturing jobs pay better and have superior benefits than the average for production and nonsupervisory workers. People who lose manufacturing jobs typically find replacements only with either lower pay, fewer benefits, or both. For that reason alone, dwindling manufacturing employment is a concern. Another reason for concern has to do with our balance of payments and the value of the dollar. Generally speaking, goods are more tradeable than services (with some exceptions); the majority or international trade is in goods, even with the rapid increase in trade in services over the past decade or two. In 1991, for example, U.S. goods exports were 2.5 times higher than services exports, and goods imports were 4 times higher than imports of services. As a large, rich nation, America is a prodigious consumer of goods; over the postwar period, manufactured goods consumption has accounted for roughly a quarter of GDP— in todav's terms, about $1.5 trillion.1 Most of the goods consumed here are produced here, but over the postwar period, imports have grown as a proportion of our consumption. Exports have grown too, but not as much as imports; trade deficits, which began to appear in the 1970s, became en trenched in the 1980s and 1990s, even with significant reductions in the value of the dollar. What all this means is that goods trade remains an important determinant of the value of the dollar, and the dollar's value, in turn, is an increasingly important determinant of our standard of living. The lower the dollar's value, the higher the prices consumers pay for imported goods, and the lower the revenues exporters get for their overseas sales. Both mean belttightening, all other things remaining the same. While it was inevitable that American merchandise trade surpluses of the early postwar years would decline as the nations of Europe and Asia rebuilt their economies, the sustained deficits of the 1980s signaled something else: falling competitiveness. Beginning as early as the 1950s in a few, relatively low-technology sectors like textiles and apparel, American manufacturers began to experience increasing difficulty making sales abroad and even holding on to domestic customers as less expensive goods began coming in from 1 Other goods include agricultural goods and fuels. Because of our dependency on fossil fuels, the U.S. currently runs large trade deficits in fuels, and that is expected to remain the case for the forseeable future. Surpluses in trade in agricultural goods have fluctuated with the value of the dollar; currently, our agricultural trade surplus offsets about two-thirds of our petroleum imports. 51 abroad. By the late 1970s, it was plain that some of the imports were compet ing not just on the basis of lower prices (often attributed, at the time at least, mostly to lower labor costs) but that competition based on predictably higher quality and better technology had also begun. By the early 1980s, for example, automobiles, consumer electronics and steel were being produced more effi ciently and with better quality in Japan and a few other Asian nations and to some extent in Europe tnan in the United States. By the mid-1980s, competi tion based on better technology and higher quality extended into the highest technology sectors of the economy— semiconductors and computers, telecom munications equipment, and commercial aircraft. A few sectors— shipbuilding, several parts of consumer electronics, subcompact automobiles, certain types of semiconductors— disappeared almost entirely; others faced stiffer competi tion, lower revenues, and increasing difficulty in mobilizing to meet the new challenges. Following the recessions of the early 1980s, manufacturers began to place increasing emphasis on cutting costs and (to a lesser extent, at least initially) improving technology and product quality. Cost-cutting measures included cutting down on employment, beginning with heavy cuts in the ranks of blue collar workers and later extending to middle management. Benefits came under increasing pressure as well. Cost cutting was an important step, but not effective at improving produc tivity or competitiveness. And productivity and quality improvement, in the long run, are much more sustainable sources of national well-being than cost reduction. A recent report on the effects on the United States to the proposed North American Free Trade Agreement, NAFTA, pointed out that tne nation could follow variants of two development paths in response to the agreement. 2 One, a low-wage, low-productivity growth path, would seek lower costs pri marily through measures like large economies of scale, oursourcing to lowwage locales, weak labor representation, minimal worker training, and limited advancement. Strategies like these have all been pursued by U.S. manufactur ers in responding to foreign competition, and while they can be effective for a time, the net result is a general deskilling and impoverishment of the U.S. workforce, which in turn makes productivity growth and growing living stan dards harder to sustain throughout the economy. The other path is one of high wages and productivity growth, and it entails improving the quality of prod ucts, developing and diffusing technology, and upgrading the quality and rep resentation of the workforce. Declining employment in the late 1980s and early 1990s is a consequence of several things. One obvious cause is the recession. The domestic recession took a toll on manufacturing employment in 1991 and 1992, as recessions always do; the recessions in Japan and Europe are also partly to blame for the continuing sluggishness of the domestic economic recovery and depression in the labor market. Defense cutbacks, made possible by the end of the Cold War in the late 1980s, began to affect manufacturing employment in the late 1980s, and those effects are expected to continue for a few more years. Finally, con tinuing competitive challenges also put pressure on manufacturers to increase productivity and cut costs, both of which have a negative effect on employ ment. If productivity is improved enough, of course, the net employment result can still oe positive as a result of increased sales; so far, however, tne economic doldrums persist in most nations to which the U.S. economy is most closely tied, and sales and revenues remain slow. This is true even in industries whose competitiveness and productivity has improved. In semiconductors, for exam2 U.S. Congress, Office of Technology Assessment, U.S.-Mexico Trade: Pulling Together or Pulling Apart?, ITA-ITE-545 (Washington, D.C.: U.S. Government Printing Office, October 1992). 52 pie, the U.S. industry has staged a comeback in the last five years or so, in creasing its share of world markets compared with Japanese competitors (by far the most formidable of the competition) in semiconductors as well as semi conductor production equipment. Improvement in market share is partly a consequence of the fact that the Japanese market (which is particularly diffi cult for U.S. manufacturers to penetrate) has been more depressed than oth ers. However, other indicators show that the increasing market share resulted from improvements in productivity and quality. Yet employment continues to fall in semiconductors, dropping from over 247,000 workers in 1988 (the worst year in terms of the industry's performance) to less than 213,000 in 1993. Workers in the industry are better-paid than most others, which reflects the improvements in productivity, but nonetheless there are fewer of them. What responses can government make? First, it is probably inappropriate to select as a goal increasing manufacturing employment. More appropriate goals include helping to improve workers, productivity and quality. Employ ment may increase as a result of these improvements and economic conditions here and elsewhere, but even if it does not, the benefits of increased produc tivity will diffuse widely in the form of higher living standards and greater competitiveness. Yet the measures that are taken by nations whose overarching goal is to maintain or increase sectoral employment frequently result in perni cious effects on other parts of the economy, and in the end may not even meet the original objective. Several OTA reports3 have outlined options for intervention. The 1990 OTA report Making Things Better outlined four general categories of involve ment, three of which are economywide: (1) reducing the cost and increasing the patience of capital, (2) improving the workforce, and (3) diffusing technol ogy. The fourth, strategic technology partnerships between industry and gov ernments aimed at developing new technologies in sectors that make disproportionately large contributions to national well-being, have a more specific focus. Competing Economies, and a new OTA report, Multinationals and the National Interest (released last month), added attention to interna tional trade and investment policies as measures that could also affect com petitiveness. The most important measures in each of these categories are outlined briefly below. Measures to Reduce the Cost and Increase the Patience of Capital Particularly in the 1970s and 1980s (and to some extent still), American manufacturers were faced with higher-cost or less patient capital than manu facturers in nations like Japan, Korea, and Germany that have mounted effec tive competition. Governments in these nations have taken many steps in the past to assure that manufacturers in general, or any enterprise in sectors con sidered critical to national well-being, had special access to capital on lowercost terms, while lenders (sometimes in government, and sometimes reassured by government policies) were often more willing to wait for returns, or even refinance when borrowers ran into trouble. Government intervention in finan cial markets to arrange amenable terms for favored sectors has been waning in Japan and Germany, but manufacturers there still enjoy greater access to and cozier relationships with capital providers than is the case in the United States, where the pressure for short-term returns is still intense. Partly as a result of such pressures, big U.S. corporations have put off or foregone investments in ? These include Making Things Better: Competing in Manufacturing, released in 1990; Com peting Economies: America, Europe, and the Pacific Rim, released in 1991, U.S.-Mexico Trade: Pulling Together or Pulling Apart?, released in 1992, and Worker Training: Competing in the New International Economy, released in 1990. 53 capital equipment or worker training and education, and increasingly prefer financing the research and development most likely to yield bottom-line re turns in one to three years to R&D with a longer term or more uncertain pay off. Recession and higher capital costs have taken similar tolls in Japan and Germany, but capital investment rates and R&D growth remain higher in Japan than in the United States, and there are likely to be tougher times ahead as a result. Government can help to improve the capital cost situation for American manufacturers through economywide measures such as reducing the federal deficit and implementing a declining schedule of capital gains taxation on assets held for longer periods. More specific measures that would ease invest ment in new equipment and R&D could include implementing an investment tax credit and revision of the R&D tax credit to include a greater proportion of R&D expenditures. Currently, an issue facing many smaller manufacturers in particular is lack of access to bank financing; even though the recession is officially over, many (especially smaller enterprises) are having a tough time getting loans. This situation developed after OTA’s work on competitiveness was delivered, so our reports suggest no options to remedy it; however, the issue needs addressing. Measures to Improve the Workforce4 The U.S. workforce suffers from three kinds of skills deficits: basic skills deficits (e.g., in reading, writing, or simple arithmetic); in job- or task-specific technical skills (for example, operating a particular piece of equipment); and in problem solving whether individually or as part of working effectively in groups). Workers at all levels need more and better training to remedy these, especially the last. Implementing new forms of work organization, an essential part of productivity improvement, relies heavily on workers possessing problem solving and social skills. Reorganizing work is becoming an essential part of competing in global markets. Increasingly, enterprises depend on a wide range of organizational innovations and technologies, such as continuous improvement, kanban (justin-time production), statistical process control, and various forms of employee involvement to improve output and throughput. All of these technologies require that workers take on more responsibility for cost control and produc tivity enhancement, quality improvement, and rapid response to customers than was true in older, mass-production environments. Companies that per form better at tapping the skills and problem solving abilities of blue collar workers, in addition to stimulating white-collar innovation, are likely to do better in international competition. Measures to Increase Technology Diffusion The pace of technological change is often faster than enterprise managers can cope with. This is particularly true of small and medium sized enterprises, which often have trouble learning about and understanding new production machinery and techniques, or soft production technologies such as continuous improvement and statistical process control. Even when they are aware that new technologies are available, it is difficult for smaller enterprises to afford the investments involved in adopting them. Japan and Germany both have 4 This section is drawn from John A. Alic, Senior Associate, Office of Technology Assessment, "Making the Future Work: Technology, Workers, and the Workplace," Statement for the Record for the Committee on Labor and Human Resources, U.S. Senate, July 7, 1993. 5 See, e.g., U.S.-Mexico Trade: Pulling Together or Pulling Apart? OTA-ITE-545 (Washington, DC: U.S. Government Printing Office, October 1992) discussions of the Xerox Corporation and the Saturn division of General Motors. 54 well-developed networks to inform small manufacturers of what technological improvements (hard and soft) they could make, and Japan, Korea, and other nations have extensive public subsidies for loans that enable small enterprises to adopt new technologies. In the United States, such systems of technological extension and information service are much more rudimentary, particularly at the federal level; a few States have well-developed manufacturing extension services, but they are typically much smaller than the potential demand for their services. At current levels, they can reach only a few percent of all small enterprises. Over the past 5 years or so, many promising approaches have been started, including parts of the recently authorized Technology Reinvestment Program. Over the next several years, learning from and expanding on the most promising of these new technology extension efforts is warranted. Strategic Technology Policy Some sectors, or industries, make disproportionately large contributions to national well-being, often because their products enhance productivity as they diffuse downstream, or influence those upstream to improve. Some create exceptionally well-paid jobs or make disproportionate contributions to knowl edge and technology. Where nations have successfully targeted such industries for faster development, economic development is generally more rapid than otherwise— barring, of course, exceptionally poor governmental performance in other areas. One approach that has paid off in many nations (including the United States) is government sharing the costs of technology development in critical industries where costs or risks are particularly high. While there have been failures (e.g., synfuels; Japan's attempt to promote civilian aircraft assem bly), the successful uses of technology development partnerships have paid off in cases like American agriculture and aeronautics; Japanese microelectronics, machine tools, and computers; and European aeronautics. The U.S. Govern ment has long been a partner with the private sector in developing technolo gies, but until recently, the rationale for most of the government's investment was for public goods like national defense and health care (civilian aircraft is an exception). In the past few years, some small programs of public cost-sharing in civilian technology development have been started. One example is the Advanced Technology Program (ATP) of NIST, which in the few years of its operation has gained a reputation for sensible management and promising investment. Early evaluations of the program show that it continues to look promising. The Administration plans a significant expansion of the ATP, with funding targeted for $750 million in 1998. Another approach is to turn the attention or the nation's federal laboratories more firmly toward developing commercial tech nologies together with private firms and universities, using mechanisms like Cooperative Research and Development Agreements (which, in the case of the Department of Energy, need improvement),6 Space Act Agreements, Super conductivity Pilot Center Agreements, and the like. Trade and Investment Policies National policies regarding international trade and direct investment among developed countries have, although nominally governed by consistent sets of rules or conventions like the GAIT and OECD policies, significant inconsistencies. The inconsistencies often arise more in the way national trade 6 See U.S. Congress, Office of Technology Assessment, Defense Conversion: Redirecting R&D, OTA-ITE-552 (Washington, D.C.: U.S. Government Printing Office, May 1993), and U.S. Con gress, Office of Technology Assessment, Contributions of the DOE Weapons Laboratories and NIST to Semiconductor Technology, forthcoming, for a discussion of CRADAs and other partner ship arrangements with national laboratories. 55 laws or conventions are implemented rather than the rules themselves. Even with decades of effort devoted to leveling the international trade and invest ment playing fields, these inconsistencies not only persist, but some analysts maintain that they are growing more important. Many nations, the United States included, have attempted to use the blunt instruments provided by laws aimed at assuring fair and free trade to boost the fortunes of a particular indus try, and while the effects usually distort trade, the effects on competitiveness are uncertain. Two strategies could be followed (or many variants on these). The one the United States has consistently opted for throughout the postwar period is to e^and and strengthen international rules and conventions govern ing free and fair trade, possibly through the creation of an international en forcement authority that could provide the discipline that the GATT is often perceived as lacking. Another path is to pursue the first alternative with a smaller group of nations truly interested in free trade, and adopt a more proac tive approach toward trade and investment with nations that opt for promotion of national industries more often than pursuing the principles of free trade and nationality-blind investment. The latter approach might include measures such as reciprocity clauses governing foreign-owned firms’ participation in U.S. Government-sponsored technology programs and numerical targets for market share in nations where more traditional measures have failed. 56 WRITTEN OPENING STATEMENT OF REPRESENTATIVE RAMSTAD Mr. Chairman, I am pleased to welcome our distinguished panelists here this morning to discuss one of the most critical issues facing our nation. I must say that I am extremely concerned that today’s tax and regulatory environment makes it increasingly difficult for the m anufacturing companies in this country to continue to innovate and compete. And President Clint's tax bill— the largest tax increase in history—will only exacerbate the current situation. You sijpfy cannot stimulate economic growth and job creation by taking hundreds of billions of dollars worth of capital out of the productive private sector to finance further government expansion. Minnesota's "Medical Alley" is a concentration of hundreds of biomedical technology companies in my Congressional district. It is clear to me that one of our industrial sectors that offers the most potential growth for job creation is technology. But the "technology policy" I support diners dramatically from the Clinton Administration's proposal to put the government in charge of innova tion. It's proposal simply does not address the fundamental problem facing our high-tech companies. Government doesn't innovate and doesn't creat jobs— small businesses do. We all know that small businesses provide 85% of all new jobs in this country. But according to the SBA, small businesses also provide about 2.4 times as many innovations per employee as large firms. Instad of increasing the government's control of the high-tech manufactur ing industries in our economy, we must reduce governmental obstacles— taxes and regulations— to private sector initiative. Lowering taxes to reduce the cost of capital is an essential component of promoting a strong technological base. I refer you to a column, which I inserted in the record at an earlier hearing of this Committee, published in the Wall Street ]oum.al in April. It was written by entrepreneur T.J. Rodgers, who built Cypress Semiconductor from a one-c omputer company to a corporation that has, in its 10-year history* generated over a billion dollars in cumulative revenue, made more than $160 million profits— on which it paid $60 million in taxes— created 1,500 jobs and paid cumulative salaries or nearly $500 million, on which employees paid taxes of $150 million. Rodgers' column, entitled "What Silicon Valley Needs from Clinton," rejects the President's call for subsidizing high-tech companies. Instead, he urges the President to imporve th financial infrastructure by increasing the supply of capital by reducing federal spending and decreasing the capital gains tax— not by creating government-funded research programs. Murrya Weidenbaum of the Center for the Study of American Business urged similar action on "technology policy" in the Harvard Business Review a year ago. he wrote, "The availability of capital to develop technology is another crucial element. During the 1970s and the early 1980s, venture cpaital fueled entire new industries, such as semiconductors and biotechnology. Over the past five years, venture funding has steadily decline." We all know the capital gains tax rate was reduced in 1978 and raised again in 1986. There should be no question about the correlation between the availability of capital and the taxes imposed on capital gains. The other main issue facing manufacturers is excessive government regula tions. A perfect example of overregulation involves several of the Medical Alleg companies located in my district or the Twin Cities area of Minnesota. 57 One of these companies, Medtronic, developed the first wearable external cardiac pacemaker in 1957 and manufactured the first reliable implantable pacing system in 1960. Since then, Medtronic has been the world’s leading producer of pacing technology. Earl Bakken, the founder of Medtronic, has often said he could not start Medtronic in today's regulatory environment. Other biomedical companies in my district have told me chilling stories about the bureaucratic hoops that they are made to jump through to get ap proval form the FDA for their products. I hear regularly about instances where the FDA was supposed to review proposals within 90 days, but after 300 days, companies are still waiting for an answer. Government regulations tha tmake it difficult for companies to predict when they might take a product to market literally make it impossible to attract investors and sustain the innovative, job-creating enterprises that should serve as a the foundaiton of our nation's economy in the next century. When government agencies adopt such an adversarial stance, companies are literally* regulated out of business—and the American public suffers. Loss of innovation through overregulation will have a direct impact on the health of our economy and our citizens. Mr. Chairman, I am very much looking forward to today's testimony. 8 2- 2 84 (64)