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5 ,1 9 9 3

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DAVID R. OBEY, Wisconsin,


Vice Chairman


EDWARD M. KENNEDY, Massachusetts
BYRON L. DORGAN, North Dakota
WILLIAM V. ROTH, JR., Delaware

JIM SAXTON, New Jersey
JIM RAMSTAD, Minnesota

RICHARD McGAHEY, Executive Director
LAWRENCE A. HUNTER, Minority Staff Director



T u esday, O c to b e r


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






Mr. Braverman: Prepared statement
Article entitled " Growth Recession"
Article entitled "The New-Age Economy"
Ms. Gorte: Prepared statement
Representative Ramstad: Written opening statement




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
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


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
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
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.

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.


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
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
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


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.


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.


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
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
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


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.
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
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


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
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.



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,

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
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

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
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,
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.


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

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


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
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.


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.


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
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?


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
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
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



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
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.


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.

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
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
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

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?

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?


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
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-


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

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


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.



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
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


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
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
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-


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
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.


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.]



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
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


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
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


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
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,


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,


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


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


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


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
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,



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.



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
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


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
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


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
“ 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 , Mthat 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
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
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 Msfflpit 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,
exhausting. T hey show a mind
8.49 that’ s intense to the p oint o f
obsession about getting things
r ig h t Braverm an admits that
through m ost o f this p e rio d ,
after finishing his market letter
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
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 :








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
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
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


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
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
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
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


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
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
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 wmsn t much to wntt
age torced a lot of Deople and busi­
home about. Wat that below vour
‘ j experMMNU*
nesses to postpone their purcnases and
investment decisions And as bad as
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


Q: What's yom ontiook for the second


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.


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<r-3I* range


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
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 3ac. which is what l_
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 3crt-3,- ci

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‘%.


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
then GDP growth has
bv almost l'r-I^ S over
penod. It is an amazing

Q: How do you tee profit] faring?


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
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-



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
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
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


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

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.

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


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?


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 wiLl
be coming down to between 2^
| and 3% over the next tour to five
Coiuuuiea on Hate


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
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
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
Q: What about Pkil i point re­
garding declines in the defense
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

°CCUr ’f

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

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
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
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±

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 ^


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 amd
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
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
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%-3JAr<
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


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*
<J: Jason?
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

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 %



6.5% - 7% (on average)

6.5% (by 6/30/94)

6 5% (by 6/30/94)

iiT w M H m «

moving lower


moving nigner

V m U m M m tm tm

moving lower


moving mgner

much tower



Q: Whmt about ikon-term rates?
B— drrtv: Short-term rates
should remain at their current
levels, with no change in Fed
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
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.



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.


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.
2One, 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


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.


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.


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.


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.


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 ] 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.


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.

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