<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:24249.wais]
THE COMMERCE AND CONSUMER PROTECTION IMPLICATIONS OF HURRICANE KATRINA
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
COMMERCE, TRADE, AND CONSUMER PROTECTION
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 22, 2005
__________
Serial No. 109-74
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
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24-249PDF WASHINGTON : 2005
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------------------------------
COMMITTEE ON ENERGY AND COMMERCE
JOE BARTON, Texas, Chairman
RALPH M. HALL, Texas JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida Ranking Member
Vice Chairman HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia BART GORDON, Tennessee
BARBARA CUBIN, Wyoming BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
HEATHER WILSON, New Mexico BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING, ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman GENE GREEN, Texas
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania JIM DAVIS, Florida
MARY BONO, California JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon HILDA L. SOLIS, California
LEE TERRY, Nebraska CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey JAY INSLEE, Washington
MIKE ROGERS, Michigan TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee
Bud Albright, Staff Director
David Cavicke, Deputy Staff Director and General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Commerce, Trade, and Consumer Protection
CLIFF STEARNS, Florida, Chairman
FRED UPTON, Michigan JAN SCHAKOWSKY, Illinois
NATHAN DEAL, Georgia Ranking Member
BARBARA CUBIN, Wyoming MIKE ROSS, Arkansas
GEORGE RADANOVICH, California EDWARD J. MARKEY, Massachusetts
CHARLES F. BASS, New Hampshire EDOLPHUS TOWNS, New York
JOSEPH R. PITTS, Pennsylvania SHERROD BROWN, Ohio
MARY BONO, California BOBBY L. RUSH, Illinois
LEE TERRY, Nebraska GENE GREEN, Texas
MIKE FERGUSON, New Jersey TED STRICKLAND, Ohio
MIKE ROGERS, Michigan DIANA DeGETTE, Colorado
C.L. ``BUTCH'' OTTER, Idaho JIM DAVIS, Florida
SUE MYRICK, North Carolina CHARLES A. GONZALEZ, Texas
TIM MURPHY, Pennsylvania TAMMY BALDWIN, Wisconsin
MARSHA BLACKBURN, Tennessee JOHN D. DINGELL, Michigan,
JOE BARTON, Texas, (Ex Officio)
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Dow, Roger J., President and CEO, Travel Industry Association 29
Hall, Keith, Chief Economist, U.S. Department of Commerce.... 21
Huether, David M., Chief Economist, National Association of
Manufacturers.............................................. 24
Niskanen, William A., Chairman, CATO Institute............... 34
Seesel, John H., Associate General Counsel for Energy,
Federal Trade Commission................................... 10
(iii)
THE COMMERCE AND CONSUMER PROTECTION IMPLICATIONS OF HURRICANE KATRINA
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THURSDAY, SEPTEMBER 22, 2005
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Commerce, Trade,
and Consumer Protection,
Washington, DC.
The subcommittee met, pursuant to notice, at 11:10 a.m., in
room 2322 of the Rayburn House Office Building, Hon. Cliff
Stearns (chairman) presiding.
Members present: Representatives Stearns, Radanovich, Bass,
Otter, Barton (ex officio), Schakowsky, and Ross.
Staff present: David Cavicke, general counsel; Chris Leahy,
policy coordinator; Shannon Jacquot, majority counsel; Will
Carty, professional staff; Brian McCullough, professional
staff; Lisa Miller, deputy communications director; Kevin
Schweers, communications director; David Nelson, senior
minority investigator; Jonathan Brater, staff assistant; and
Billy Harvard, clerk.
Mr. Stearns. The subcommittee will come to order.
As the country begins to come to terms with the scope of
the devastation caused by Hurricane Katrina and its
immeasurable human toll, our fellow Americans on the Gulf Coast
are again facing another potential natural disaster as we
speak. We can only hope that our fellow citizens in the path of
Hurricane Rita will be spared disaster this time. All of the
people so horribly affected by Katrina, as well as those who
are working hard to lead the country through this challenging
time, remain in our thoughts and, of course, in our prayers.
The devastation caused by Hurricane Katrina and, for that
matter, any natural disaster on this scale, is hard to
comprehend for most of us. My home State of Florida has been
through some terrible hurricanes, and mainly as a function of
its geography, will continue to be very vulnerable. I have seen
firsthand how deeply these catastrophic events affect people,
families, and the local and regional economies. I also know how
important it is to do what it takes to understand the economic
consequences of these disasters, so we can better protect those
affected and get them back on their feet again in the wake of
such storms.
To help us understand in more detail the broader
macroeconomic impact of Katrina, the subcommittee has an
opportunity today to hear from several sectors that have been
particularly hard hit by the direct and indirect effect of
Katrina, including manufacturing, travel, and tourism, and
import-export trade activity. According to Hank McKinnell,
chairman of the Business Roundtable, and chief executive of
Pfizer, Inc., the storm will have ``a catastrophic regional
effect, a significant but not catastrophic national effect.''
My colleagues, it is my hope that today's hearing will initiate
a closer examination of the longer term consequences of the
economic disruption caused by the hurricane, where the most
significant vulnerabilities are in each sector and region, and
how the Congress can help better protect these sectors in the
event of future hurricanes and natural phenomena in the region.
In addition to Katrina's economic impact, the subcommittee
will examine today's issues related directly to the human cost
of Katrina. We will consider both the immediate victims in the
Gulf region, as well as the average consumer who feels the
pinch at the pump, or who may fall prey to the fraudsters
hoping to capitalize on this tragedy by exploiting the American
spirit to help others. These vulnerabilities, though economic,
are also part of what we see as the human toll. And regardless
of context, any attempt to victimize folks when they are most
vulnerable is abhorrent, and deserves swift justice and strong
sanctions. Today, we will learn what is the arsenal to
prosecute these acts, and what we may need on a national level
to make that prosecution work. Fraudulent and predatory
activity, like price gouging and fraud, whether at the pump, in
the store, or online marketplace, not only creates additional
financial burdens to the customer, but it also stresses the
health of the service economy's businesses and industries that
help support our greater community.
Specifically regarding gas prices, of course I do not think
taking advantage of consumers in times of crisis is
reprehensible, but I would hope that an efficient market, not
price controls, would quickly beat down the bad actors. Prices
are indicators to consumers to buy, or modify their behavior,
or go elsewhere for a product. However, if that is not the case
or is not possible, the inquiry should then focus on factors
like collusion in the marketplace. I commend the Federal Trade
Commission for initiating an investigation into gasoline price
gouging, and I look forward to hearing more about that as well,
as more detail about its recent report on gas price collusion.
Americans are raising very justified questions about the prices
at the pump, and these questions, my colleagues, demand
answers. I also would suggest that we look at the prices of
other goods and services. Again, we must determine if current
law, including antifraud and contract law, provides adequate
consumer protection in a crisis, all in addition to the
positive effects of a free market's natural tendency toward
efficiency.
My colleagues, it is also imperative that we better protect
consumers from fraudulent and other egregious behavior designed
to steal from those who want to give aid and comfort to the
victims of these tragedies. Charity fraud is one of the things
that belongs with the lowest of the low, and should be dealt
with in harsh terms in this life and thereafter. The FBI
recently reported there were 4,000 Katrina-related charity
websites, a large number of which are suspected to be
fraudulent. Reports also suggest that fraudulent telephone
solicitation remains a very serious problem. I am very
interested to hear more about what we can do, and the Federal
Trade Commission's approach to secure the charitable giving
network, both on and offline from these criminals. I would like
to commend my colleague Mr. Bass' great work in his area, and
look forward to learning more about his bill, H.R. 3675, the
``American Spirit Fraud Prevention Act.'' A very large part of
our national relief effort comes from the hearts of our fellow
Americans, who are willing to help, to care, and to comfort.
Charity fraud undermines an American tradition of giving to
those most in need, and must be met with severe penalties.
I would like to thank our distinguished panel of witnesses
for joining us this morning, and I look forward to their
testimony, and I thank you. And with that, I ask the ranking
member, Ms. Schakowsky, for her opening statement.
Ms. Schakowsky. Thank you, Mr. Chairman, for convening
today's hearing on Hurricane Katrina's effect on commerce and
consumers. I appreciate the panel that is assembled before us,
and look forward to their testimony.
The immediate impact on consumers is obvious, given that
adequate food, shelter, water, and fuel are still lacking for
many of the residents of the Gulf Coast. Gas prices are
projected to reach as high as $5 per gallon, and heating prices
are projected to be as high as an additional 71 percent this
winter, meaning families across the country, not just those
evacuated, are going to be breaking the bank just to get to
work and heat their homes this winter.
With Hurricane Rita ready to ravage that region once again,
those natural disasters, compounded with the shaky fiscal state
of our country, could turn into one of the greatest consumer,
human, and economic catastrophes our country has seen. The
response, to the average American, to Katrina is as
overwhelming as the efforts of the Administration have been
underwhelming. We all have watched with shock and shame, not
shock and awe, as the Federal Government failed in its primary
mission: providing for the safety and security of the public.
As American consumers open their hearts, their homes, and
their pocketbooks, this Administration stayed the course of
giving tax cuts to the rich, and providing unlimited and
unsupervised Federal dollars to big contractors. The same
companies that have so profited handsomely--that have profited
so handsomely from the war in Iraq are poised to gouge the
American taxpayer once more in the rebuilding of the Gulf Coast
with the Administration's help.
Don't misunderstand me. As a country, we must move swiftly,
with great compassion, to stabilize and rebuild the area. We
must protect and nurture the families devastated by this
disaster. However, we cannot pretend that this is business as
usual, and that we can give more tax cuts to the wealthy, when
the break of the levees revealed the unmet need, both old and
new, in our country. As faulty as the logic was that we should
cut taxes for millionaires while fighting a war that costs
hundreds of billions of dollars, it is morally irresponsible to
cut them even further, when we are facing the rebuilding of one
of our vital coastal regions.
Once again, everyone except for millionaires are being
asked to sacrifice. The raids on the Treasury to swell the
coffers of Halliburton and other large contractors in Iraq are
bad enough, but what the Administration has done in this crisis
is to further fatten those firms, and that is even worse. If we
are going to talk about cutting pork, trimming the fat should
start with them. Instead, what we get from a large portion of
the Republican majority, the Republican study committee, is the
cruelest document I have ever seen, that will most heavily take
from the poor once again, and prevent them from long-term, even
short-term recovery.
Instead, the first response of the Administration was to
spend Davis-Bacon and cut the wages of workers that face the
dangers of cleaning up toxins. Reducing wages does not
guarantee lower costs of rebuilding, only higher profits for
contractors. Now, we are told that those contractors should
have no liability if they fail to adequately engineer and
construct the infrastructure they are being paid enormous sums
to rebuild. Who is responsible if they cut corners to pad their
pockets? Will they charge double for materials, like they did
with oil in Iraq?
On energy. We have already seen gas prices soar, as energy
profits rise, and as this committee and this Congress passed an
Energy Bill that will only provide Big Oil with more subsidies,
the loss of refinery and offshore production capacity has
increased the burden on American consumers eve more. Heating
bills this winter may truly break the backs of many of our
constituents. If the refineries off the Texas coast are hit, as
it looks inevitable, and six have already closed as a
precaution, my constituents will have a nearly impossible feat
of surviving the heating costs of a Chicago winter. After
Katrina, People's Gas in Chicago estimated that families would
have to pay $1,475 for heating this winter. That is a 39
percent increase.
Again, the U.S. Energy Information Administration predicts
that we could see increases of 71 percent. What is it going to
be after Rita? We saw in the California electricity crisis how
these energy firms express their patriotism by soaking
consumers to increase profits and bonuses. We must assure that
this disaster does not provide coverage for another Enron-like
bilking of the American people that would result in serious
harm to consumers and damage to our economy.
I ask the Administration, where are your protections for
American consumers? Why do we hear nothing of emergency
measures to control heating prices this winter? Where are the
proposals to repeal tax cuts for millionaires, to help our
country to respond to a crisis, as it should? Why aren't we
expanding the powers of the FTC to pursue price gouging by Big
Oil? Why aren't we considering Mr. Waxman's bill to create an
independent antifraud commission to present waste, fraud, and
abuse in relief and recovery contracts? Where is the
announcement that the Justice Department is sending a
meaningful task force to Louisiana and its sister States to
provide assistance to the local authorities in keeping down
gouging, insurance company reneging, and all manner of fraud as
the Federal dollars are dispensed?
Do we need pictures of suffering and death from the lack of
heat to add to the pictures of flooding before this
Administration will act as responsible and moral leaders? I
fear that if the Administration does not soon realize that
there is a serious consumer and energy crisis on our hands,
that the welfare of all Americans must be their primary
concern, and we will all feel the effects of a devastated
economy. It is up to us in this subcommittee, in this
committee, and in this Congress to respond to this crying need.
Thank you, Mr. Chairman.
Mr. Stearns. I thank the gentlelady, and for my colleagues,
we can see why the gentlelady from Illinois is such a great
consumer advocate, from her opening statement.
I would remind all my colleagues, as--that a lot of tax
cuts went for the poorest people, helping out with their IRAs
and Roth accounts. They don't have penalty withdrawal, and of
course, the bill we just passed yesterday was particularly
helpful and concentrated for tax reduction for those who are
poorest.
But the Federal Trade Commission can take note that the
gentlelady is giving you a full plate here, to add to your
already long list of things you could do, and so we appreciate
her comments.
Is there anything wishing to--opening--yes. Mr. Ross.
Mr. Ross. Thank you, Mr. Chairman, and Ranking Member
Schakowsky, for holding this important hearing today to discuss
the economic implications of Hurricane Katrina, and what is
needed to protect consumers from deception and fraud during
this time.
The devastation from Hurricane Katrina, and the impact it
has had on lives was unprecedented, and will take a collective
effort from both the government and the private sector to
repair. My home State of Arkansas has received the highest
number of evacuees from the affected areas outside of Texas,
and we are doing all we can to help those in need.
We received some 5,000 additional evacuees from Louisiana,
who were being housed in Houston just this week, as Texas
prepares for Hurricane Rita. This may not be the place, but
every place I go, I am sharing this, until we finally get
someone's attention. You know, we come to Washington, and we
approve all this money to help our hurricane victims, and then
I go home to a shelter, and constituents from New Orleans, who
were at the Superdome, who are now at a shelter in my district,
share with me a letter from FEMA.
This is one of many. This one is addressed to Ms. Debra L.
Bowers, #1 Convention Center Plaza, in care of the shelter,
Pine Bluff, Arkansas, like someone lives in a convention
center. And it starts off: ``Based on the information you
provided during the application process, you are not currently
eligible for assistance under FEMA's Individuals and Households
Program.''
They write the letter to Ms. Bowers in care of the shelter
at the convention center, and then go on to tell her she
doesn't qualify for any help, and then, they have the nerve to
go on to say next sentence: ``You may make an application to
the Small Business Administration for a loan.'' Ms. Bowers does
not need a loan. Ms. Bowers does not have anything except the
clothes on her back. She is from New Orleans. She was at the
Superdome. She has lived now for a month at the convention
center in Pine Bluff.
Ms. Schakowsky. Will the gentleman yield?
Mr. Ross. Sure.
Ms. Schakowsky. Could I ask unanimous consent that that
letter be submitted as part of the record?
Mr. Stearns. By unanimous consent, so ordered.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T4249.001
Mr. Ross. Additionally, the economic impact is being felt
throughout the nation. As we continue to address the needs of
those affected, we must examine the hurricane's effect on our
overall economy, and what policies or initiatives are needed to
restore it. One of the areas I am particularly concerned about
is the disruption in shipping that has resulted from the damage
to the Port of New Orleans and other ports that commerce
depends upon along the Mississippi River, and I hope the
Federal Trade Commission representatives who are here, as well
as the U.S. Department of Commerce representatives who are
here, will listen to what I am about to say.
I was in a meeting just a few days ago with my colleagues.
The Port of New Orleans and its neighbors just upriver, the
Port of South Louisiana and the Port of Baton Rouge, are
unique, because they connect with the Nation's most extensive
and heavily used inland waterway system for the transport of
bulk materials, including those in Arkansas. Due to the
disruption in operations at these ports, primary products that
are transferred between ships and barges have been halted, and
have created a backup of barges from Illinois to Louisiana.
Significant losses in agriculture products, our shipping costs
and transport capacity shortages have occurred as a result.
Grain bins from Illinois south are all full. Barges are full
and parked up and down the Mississippi River. Most towns have
as many as 50 barges parked in full.
And just this week in Arkansas, we were forced to dump
200,000 bushels of corn on the ground. Export markets are vital
to America's agriculture, and the Mississippi River transports
the vast majority of these products. Therefore, it is--let me
repeat that. The Mississippi River transports the vast majority
of these products, therefore, it is the lifeline to all those
who depend on it for their survival, and for those who depend
on us for their food and fibers. So I hope that the
representatives here today from the Department of Commerce, or
the Federal Trade Commission, will share with anyone they can
get to listen. I talked to Karl Rove about this yesterday. I
mean, anyone that will listen, I am talking to about it,
because our farmers are at a critical juncture, as we try to
deal with getting the Port of New Orleans back up and running.
And with that, Mr. Chairman, I know I have gone over my
time. I thank you for allowing me to do that, and I yield back
the minute and 35 seconds I no longer have.
Mr. Stearns. Thank you. I thank the gentleman. The
gentleman from New Hampshire, Mr. Bass.
Mr. Bass. Thank you very much, Mr. Chairman, and this is a
timely and important subject to be talking about.
Unfortunately, perhaps, a little bit too timely.
I note that the coverage on television of Rita crossing the
Gulf of Mexico has been quite different from that of Katrina,
in that they talked a lot, during the Katrina process, of
where--whether it would be--what--how strong it would be, where
its track was going to be. But now, they--and what was going on
with evacuations and so forth, but not so much--now, the
discussion is primarily about what is going to happen to oil
refineries, what is going to happen to drilling platforms, how
effective the evacuation is going, and it really--the lessons
that have been learned from Katrina really are being applied
now, and this hearing just couldn't be a better opportunity to
explore some of those issues.
Now, unfortunately, a lot of what has gone on the last 2
weeks is reminiscent of what happened after, I guess I should
say fortunately, after 9/11, in that every town and city and
community and church and so forth have opened up their hearts
and their wallets and everything to help, and it really makes
us feel good about being Americans. But there is, always, this
underlying problem of fraud and deception. Even in my home
State of New Hampshire, the Attorney General has issued a
number of warnings to New Hampshire's citizens about fraudulent
schemes to raise money over the telephone. Every good--sounds
good, but the money disappears.
Now, after 9/11, I introduced legislation, the American
Spirit Fraud Protection Act, which gave the FTC enhanced fining
capabilities and other things, in order to prevent the kind of
fraud that is always potentially--may occur, as a result of a
national disaster such as this. I am hopeful that we can move
this legislation. It, by the way, passed the House in the last
Congress. It did not pass the Senate. We are working on a plan
to get this legislation through the Senate, should this
committee see fit to send this legislation to the floor again,
and pass it. I think it is, again, either fortunately or
unfortunately, timely, to move this legislation, and I hope we
do so.
I am looking forward to hearing from our witnesses today,
and I want to thank the chairman for holding this hearing. I
yield back.
Mr. Stearns. And I thank the gentleman for his good work on
that bill, and I had mentioned earlier, in my opening
statement, your efforts in that regard, and thank you for it.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress
from the State of Wyoming
Thank you, Mr. Chairman.
We meet today to address the aftereffects of perhaps the most
devastating natural disaster our nation has seen. I am sure all of us
have witnessed in various ways the untold suffering and heartbreak
caused by Hurricane Katrina.
As our panel today will point out, the storm also left a regional
economy in shambles, causing residential and business damages amounting
to tens of billions of dollars. This destruction of capital is
compounded by the storm's negative impact on energy production, massive
displacement of nowunemployed individuals, and disruption of commerce
in the nation's busiest inland waterway.
The nation as a whole will feel the less dramatic but meaningful
effects of higher gasoline prices and slowed economic growth.
As if the sheer destruction of the storm were not enough, there are
also those who would take advantage of the vulnerable in times of
turmoil. We saw it on the streets of New Orleans immediately following
the storm. I fear we will continue to experience it now in the form of
fraudulent business activities like price gouging and phony charitable
organizations seeking to take advantage of the generosity of the
American people.
As the committee of jurisdiction over commerce and consumer
protection, we are in a unique position to assess Katrina's economic
effects as well as investigate opportunities for fraud in the wake of
the disaster.
I am sure our panel today will shed light on the nature and extent
of Katrina's economic damage, as well as the role of the federal
government in fostering economic recovery.
Mr. Chairman, I yield back the balance of my time.
Prepared Statement of Hon. Tim Murphy, a Representative in Congress
from the State of Pennsylvania
Thank you Mr. Chairman for scheduling this important hearing on the
economic and consumer implications of Hurricane Katrina. After a
thorough 8-hour Full Committee hearing two weeks ago, it is now
important for this Committee to exercise its jurisdiction and examine
at the subcommittee level the various aspects of this catastrophe. The
Subcommittee on Health held a hearing this morning and I note that next
week the Subcommittees on Environment and Hazardous Materials and
Telecommunications and the Internet will also examine the implications
of this storm from their subcommittees' perspective.
I look forward to hearing from our witnesses today. The economy of
Louisiana and Mississippi will clearly suffer devastating effects from
this storm for some time. We already know about the havoc wreaked on
the energy industry, but there are many other large and small
manufacturers, distributors, suppliers, retailers, restaurants and
other businesses that were wiped out and may or may not recover in
their previous form. We will hear today from the travel and tourism
industry, a leading sector of the economy in New Orleans and the
Mississippi coast. The trickle down effect to all levels of the economy
from the destruction of businesses and jobs is frightening. This
economic slow down will be helped by the boost to the economy from
rebuilding, but we must ensure that those jobs and dollars are
distributed appropriately. I am also very interested on the effect of
this storm on the national economy.
Damage to the Port of New Orleans and to ports along the
Mississippi will also be costly. I hope that we will examine today the
cost to the economy of shipping disruptions.
From a consumer standpoint, we all suspect that price gouging has
taken place after the storm, at the gas pump. There is no federal price
gouging law, however, so I look forward to hearing what our government
is doing to address this issue. We also face the issue that Mr. Bass
has worked to reduce, that of charity fraud. It is a sorry truth that
there are always going to be some people who will attempt to profit
from the misfortune of others. If someone gives their hard earned
dollars to help Katrina victims, they should be assured that this is
where the money is going. The penalties for this practice must be
greatly increased.
Other consumer issues are bound to pop up as the area rebuilds,
such as the concern that flood-damaged vehicles could be superficially
refurbished and passed off to unwitting consumers. These vehicles can
be a threat to the safety of the new owners. Or a possible influx of
dishonest contractors taking people's money for work that will not be
performed, or performed in a shoddy manner.
Thank you again, Mr. Chairman, for scheduling this hearing. I look
forward to hearing from all of the witnesses today.
Mr. Stearns. We have our first and only panel. Our
witnesses: Mr. John Seesel, who is the Associate General
Counsel for Energy at the Federal Trade Commission; Dr. Keith
Hall, Chief Economist, U.S. Department of Commerce; and Mr.
David Huether, Chief Economist, National Association of
Manufacturers; Mr. Roger Dow, President and CEO of Travel
Industry Association; and Dr. William Niskanen, Chairman of the
Cato Institute.
We probably could start on these. We have a vote shortly,
and I believe just--if we have a few moments, we will just
continue forward, and have a 15-minute vote, so I will have you
start with your opening statement.
STATEMENTS OF JOHN H. SEESEL, ASSOCIATE GENERAL COUNSEL FOR
ENERGY, FEDERAL TRADE COMMISSION; KEITH HALL, CHIEF ECONOMIST,
U.S. DEPARTMENT OF COMMERCE; DAVID M. HUETHER, CHIEF ECONOMIST,
NATIONAL ASSOCIATION OF MANUFACTURERS; ROGER J. DOW, PRESIDENT
AND CEO, TRAVEL INDUSTRY ASSOCIATION; AND WILLIAM A. NISKANEN,
CHAIRMAN, CATO INSTITUTE
Mr. Seesel. Good morning, Mr. Chairman and members of the
subcommittee. I am John Seesel, the Associate General Counsel
for Energy of the Federal Trade Commission, and I am pleased to
have this opportunity to describe for you the many actions that
the FTC has taken to protect consumers in the aftermath of
Hurricane Katrina.
I want to reemphasize what I told the House Energy and
Commerce Committee 2 weeks ago and the Senate Commerce
Committee yesterday. The FTC fully shares in the terrible shock
and sadness that the Nation has experienced since Hurricane
Katrina wrought such tragic devastation on the Gulf Coast
region, and we all know that the affected areas face a long
road to recovery.
The FTC applauds this subcommittee for taking the
opportunity to address Katrina's impact on commerce and
consumers. I can assure you that the FTC is acutely aware of
the pain that consumers have suffered, not only from the high
gasoline prices that we have all experienced recently, but also
from the potential for a disaster such as Katrina to spawn a
host of efforts to commit fraud upon the victims of the
devastation. The FTC has taken numerous actions to protect and
educate consumers in the wake of the hurricane, and will
proceed aggressively against any violations of the consumer
protection and antitrust laws that it enforces.
As detailed in the FTC's written testimony, the agency
moved forward quickly after the hurricane hit, when it was
clear that many victims of the storm would need assistance and
protection from fraud and deception. Our Office of Consumer and
Business Education responded immediately to deal with a number
of pressing consumer issues, including the financial challenges
the displaced Katrina victims would face due to separation from
their financial records, the heightened risk of identity theft,
and the need to be alert for scams.
Not only have educational materials addressing these
problems, now both in English and in Spanish, been on the FTC's
website for more than 2 weeks, but we have asked the Postal
Service, FEMA, and the Red Cross to help distribute these
materials to places where displaced persons will see them. We
have also sent scripts of public service announcements to radio
stations in the Gulf Coast region to alert consumers to
possible home repair scams in the wake of Katrina.
The FTC is working actively as a member of the Hurricane
Katrina Fraud Taskforce, which also includes the U.S.
Department of Justice, the FBI, the Postal Inspector's Office,
and the Executive Office for U.S. Attorneys. Under Attorney
General Gonzalez's direction, this taskforce is expected to
move swiftly and effectively against cases of fraud perpetrated
upon the victims of Katrina. The FTC's huge Consumer Sentinel
data base of fraud and identity theft complaints will play an
instrumental role in the taskforce's work.
As you may know, Consumer Sentinel is an online, fully
searchable fraud complaint data base used by over 1,400 local,
State, and Federal law enforcement partners, and already
populated with complaints about possible Katrina frauds. To
make it easy for our partners to find the complaints, we have
created reports breaking down Katrina-related complaints. The
reports that I am showing you on the screen to your right are
models toward which we are working. All Katrina-related
complaints are available to law enforcers through the reports
currently on Consumer Sentinel. The reports show Katrina-
related complaints in different formats. We are showing you the
actual interface and reports, but because the data are
confidential, you are seeing the reports in encrypted form.
For example, on the subject State report, law enforcers can
see complaints about companies and individuals who are located
in their State. If law enforcement--enforcers want to see
complaints from consumers in their States, they can click on
consumer state. Clicking on top subject shows a list of the
entities about which we received the most Katrina-related
complaints. This is an easy one stop shop for law enforcers who
want to immediately investigate frauds exploiting the victims
of public--or public concern in the aftermath of this disaster.
In addition to participating in the taskforce, we are
adding referrals that we receive from Better Business Bureau
offices, the FBI, and other sources, to our Consumer Sentinel
tracking system for post-Katrina frauds. Anyone accessing
Sentinel will have access to our complete data base of Katrina-
related complaints, easing their use of the system, and
ensuring that users see all relevant information. Moreover, FTC
attorneys and investigators are analyzing complaint data every
day, and are prepared to file civil law enforcement actions to
shut scams down or, in appropriate circumstances, to refer
cases to criminal enforcement authorities for prosecution.
I should add that we at the FTC, like the whole country,
are hoping and praying that Hurricane Rita will not be a repeat
of Katrina, but in the event that Rita results in similar
consumer problems, we will redouble our efforts to deal with
them.
Beyond these varied actions to protect consumers following
Katrina, the other focus of the consumers' written testimony
today is the FTC's commitment to maintaining competitive
markets in refined petroleum products. The FTC has pursued a
three-pronged approach to the petroleum industry, consisting of
vigorous law enforcement against anticompetitive business
conduct and mergers, careful study of various developments with
competitive implications for the petroleum industry, and an
ongoing project to monitor gasoline and diesel prices to detect
unusual price movements.
Before I continue, I want to address briefly a topic that
has loomed large in the public consciousness and in the minds
of many in Congress in recent weeks, the subject of gasoline
price manipulation and gasoline price gouging. The FTC already
has launched an investigation, pursuant to Section 1809 of the
recently enacted Energy Policy Act, to search for evidence of
gasoline price manipulation and expeditiously prepare a report
to Congress on its findings. Despite the complexities of
dealing with the concept of price gouging discussed in the
FTC's written testimony, there should be no doubt that the
agency will take aggressive enforcement action against any
conduct unearthed in its Section 1809 investigation that
violates the Federal antitrust laws.
In aid of its extensive law enforcement work, the FTC also
conducts careful research on key competitive issues in the
petroleum industry. I especially commend our recent report on
gasoline price changes to the subcommittee's attention. The
report sets forth in detail the numerous supply, demand, and
competitive factors that influence gasoline prices or cause
gasoline price spikes. Another aspect of our approach is a
continuous effort by our staff to identify unusual gasoline and
diesel price movements. Our economists monitor daily pricing
data from 20 wholesale regions, and nearly 360 retail areas
across the Nation. If the statistical model that they apply
detects any unusual price movement that cannot be explained by
a refinery outage, a pipeline break, or another business-
related cause, the FTC staff, in consultation with other
Federal and State officials, will examine whether a law
violation has been committed.
In view of the escalating prices that consumers have been
paying for gasoline and other energy products, we will examine
the information that we receive about pricing to determine
whether there is a basis for legal action under the anti-
collusion and antimonopoly laws that the FTC enforces. For
those complaints that do not set forth a violation of Federal
law, State attorneys general appear to be going forward----
Mr. Stearns. Just have you sum up.
Mr. Seesel. [continuing] with multi-state--pardon me, Mr.--
--
Mr. Stearns. Just have you sum up, if you could.
Mr. Seesel. Yes, thank you, Mr. Chairman.
The energy industry has been a centerpiece of FTC
enforcement for decades, and the Commission will give--and the
Commission intends to make this a continuing centerpiece of our
work, and I thank the subcommittee for this opportunity.
[The prepared statement of John H. Seesel follows:]
Prepared Statement of John H. Seesel, Associate General Counsel for
Energy, Federal Trade Commission
I. INTRODUCTION
Mr. Chairman and members of the Subcommittee, I am John Seesel, the
Federal Trade Commission's Associate General Counsel for Energy. I am
pleased to appear before you to present the Commission's testimony on
FTC initiatives to protect consumers in the aftermath of Hurricane
Katrina.<SUP>1</SUP> Because rising prices have been one of the most
visible effects of the interruption of gasoline supply caused by
Katrina, I will also comment on our efforts to protect competitive
markets in the production, distribution, and sale of gasoline.
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\1\ This written statement represents the views of the Federal
Trade Commission. My oral presentation and responses to questions are
my own and do not necessarily represent the views of the Commission or
any Commissioner.
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Our hearts go out to those who have been harmed or dislocated by
Katrina. It taxes everyone's credulity that, even in the midst of
tragedy, some people will try to take advantage of their fellow
citizens for pecuniary gain. People whose houses have been destroyed or
rendered uninhabitable, whose paychecks have been interrupted, or who
have lost access to bank accounts are especially vulnerable to fraud
and deception designed to separate them from what little they may have
left. The Commission has moved aggressively, on its own as well as in
cooperation with state and other federal law enforcement authorities,
to help victims avoid fraudulent and deceptive activities, and to
rebuild their financial futures.
Katrina is expected to have widespread effects throughout the
economy. The Congressional Budget Office tentatively estimated that
Katrina could reduce real gross domestic product growth in the second
half of this year by one-half to one percentage point and could reduce
employment by about 400,000 through the end of the year.<SUP>2</SUP>
Higher energy prices will be a burden on other sectors of the economy
and will affect consumers not only directly in the gasoline and other
energy products that they purchase, but also indirectly in raising
prices of inputs into other goods and services. In addition, Katrina
damaged many other industries and businesses on the Gulf Coast, and
some of those impacts--such as the damage to port facilities--may
significantly impede the flow of raw materials or finished goods to
producers and distributors in many industries.
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\2\ Letter and attachment from Douglas Holtz-Eakin, Director of the
Congressional Budget Office, to Honorable William H. Frist, M.D. (Sept.
6, 2005), available at http:///www.cbo.gov/ftpdocs/66xx/doc6627/09-06-
ImpactKatrina.pdf.
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The Commission's testimony today addresses the Subcommittee's
inquiries in three parts. First, it reviews the actions that the
Commission has taken to protect consumers made more vulnerable by the
hurricane's impact. Under the leadership of the Department of Justice,
the Commission is participating with other federal agencies in a
Katrina-related fraud task force designed to find and prosecute those
who would use the chaos of disaster to take advantage of the victims.
As part of this effort, the Commission is acting as a central
repository for fraud complaint data for all levels of law enforcement.
The Commission has also used its website to collect and disseminate
important information necessary for consumers to regain their financial
stability. Beyond the immediate need to prevent fraud and deception,
consumers need to rebuild their financial lives. The Commission is
offering consumer education to assist victims in this process and to
help them avoid frauds and scams.
The second part of today's testimony highlights the Commission's
gasoline monitoring project. Through this activity, the Commission
receives data on retail and wholesale gasoline prices across the
country. Those data are starting points for FTC investigations,
research, and consultations with state attorneys general designed to
identify any anticompetitive activity that may result in higher prices.
Finally, the testimony briefly discusses the basic tools that the
Commission uses to promote competition in the petroleum industry--
namely, aggressively investigating possibly anticompetitive conduct in
the industry and commencing enforcement actions as appropriate and
challenging potentially anticompetitive mergers and acquisitions in the
industry. This review of the Commission's petroleum industry agenda
highlights the FTC's contributions to promoting and maintaining
competition in the industry on an ongoing basis. It also notes the
Commission's current activities to identify anticompetitive conduct
during the short-term gasoline product shortage.
II. FTC INITIATIVES TO PROTECT CONSUMERS FROM FRAUD AND DECEPTION
Those displaced by Hurricane Katrina have suffered significant
harm, yet they remain vulnerable to even more financial devastation.
With no access to their homes, financial documents, or computers, and
sometimes lacking any proof of identification, the displaced must
rebuild their financial lives. Scam artists will seek to prey on the
vulnerability of the already victimized, and Americans responding
generously may find their donations going to line the pockets of the
unscrupulous. The Commission, therefore, has committed its expertise
and resources to assist victims of Katrina to regain control of their
financial lives and avoid scams, and to ensure that Americans' generous
charitable donations are not siphoned off by bogus fundraisers.
A central mission of the Commission is to educate consumers so that
they can make informed choices in the marketplace. The FTC's Office of
Consumer and Business Education (``OCBE'') also serves as the first
line of defense against fraud and deception. For example, through OCBE,
the Commission launches a comprehensive education campaign with each
major consumer protection campaign and provides consumer education in
response to new scams, such as ``phishing'' and ``spyware.'' OCBE
provides consumers with straightforward descriptions of, and practical
advice about, their rights under important consumer regulations--such
as the recent Fair Credit Reporting Act rules and the Gramm-Leach-
Bliley Act privacy and data security regulations--and also provides
businesses with clear written guidance on how to comply with those
regulations. Finally, OCBE acts quickly to educate consumers about the
specific risks posed by significant one-time events, such as Katrina.
When the hurricane hit, OCBE quickly prepared new materials to
address: (1) the many financial challenges faced by those who had been
displaced by the storm and separated from their financial and other
records; (2) the heightened risk of identity theft; and (3) the need to
be on alert for scams. The materials provide practical and easily
understood steps that consumers can take to protect themselves. The
introduction provides the following summary:
1. Communication is more important than ever. Call your creditors. Many
are putting programs in place to defer your loan payments,
waive late fees, or raise your credit limit temporarily while
you get back on your feet. If you've lost your records and need
help identifying your creditors, get your credit report. It's
free from www.annualcreditreport.com or 1-877-322-8228.
2. Many people will be asking you for your personal information. Ask
them for appropriate identification before you give it out.
Government officials will not ask you for money in exchange for
your information or the promise of a check.
3. Be on the alert for scams. Advance-fee credit arrangements, where
you are required to pay a fee for a credit card or some other
line of credit before you receive it, are illegal.
Once the immediate hazards of a natural disaster are over, it's
inevitable that other problems surface. Among these are scams, frauds,
and other consumer protection issues.
The FTC first posted these new educational materials on a special
website for consumers and businesses affected by Hurricane Katrina on
September 7.<SUP>3</SUP> They are now also available in Spanish. Of
course, the Commission recognizes that information posted on a website
may have no value to people who have little more than the clothes on
their backs, let alone reliable Internet access. Therefore, we are
actively reaching out to the U.S. Postal Service, the Federal Emergency
Management Agency (``FEMA''), and the Red Cross to arrange to have
printed copies of these materials, in English and Spanish, placed in
locations where persons displaced by Katrina will see them, such as
shelters operated by the Red Cross and FEMA outposts.<SUP>4</SUP> OCBE
has sent scripts of public service announcements to radio stations in
Louisiana, Mississippi, and Alabama, alerting consumers to possible
home repair scams in the wake of the hurricane. OCBE also sent public
service announcement scripts to radio stations throughout the nation
urging consumers to be cautious when making donations to help the
victims of the disaster. Announcers often read these scripts on the air
as public service messages from the FTC and the radio station.
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\3\ That website is http://www.ftc.gov/bcp/cponline/events/katrina/
index.html. The consumer information section of the website also lists
specific consumer education materials on topics related to other
possible problems and frauds that victims may face, such as ``Debris
Removal Scams,'' ``Fake Disaster Officials,'' ``Home Ownership
Issues,'' ``Job Scams,'' ``Rental Listing Scams,'' and ``Water
Treatment or Purification Devices.''
\4\ Copies of these materials are attached to this testimony.
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The FTC also is participating in the Hurricane Katrina Fraud Task
Force, which includes members from the Department of Justice, the FBI,
the Postal Inspector's Office, and the Executive Office for United
States Attorneys, among others. The Attorney General has directed the
Task Force to track referrals of potential cases and complaints,
coordinate with law enforcement agencies to initiate investigations,
match referrals with the appropriate U.S. Attorney's offices, and
ensure timely and effective prosecution of Katrina fraud cases. A
critical element of the Task Force's work is the consumer complaint
data collected, maintained, and analyzed by the FTC in its Consumer
Sentinel database. The Consumer Sentinel system is a web-based network
that links more than 1,400 law enforcement agencies throughout the
United States, Canada, and Australia to over two million fraud and
identity theft complaints. These agencies have direct access to
complaints that enable them to develop cases, locate witnesses, and
seek enhanced sentences for criminal prosecutions. Membership in the
Sentinel network ranges from local police departments to every state
attorney general and every major federal investigative agency. In
addition to their use by law enforcement agencies in developing and
pursuing investigations, the Sentinel data provide a window into
consumer fraud and identity theft, which we track year-by-year for
statistical analysis.
The Commission receives complaints through its toll-free hotline
and online complaint form, as well as from external database
contributors, such as local offices of the Better Business Bureau, the
FBI's Internet Crime Complaint Center, and others. The FTC staff has
developed a code for Katrina-related complaints in Consumer Sentinel to
make it easy for FTC staff, Task Force members, and other Sentinel
users to identify these post-hurricane fraud data. The staff is
creating weekly reports on post-hurricane charity scams, identity
theft, advance fee credit scams, and other post-disaster frauds, and is
posting them directly on Consumer Sentinel. With these reports,
Sentinel users will be directed to the complete list of Katrina-related
complaints, easing their use of the system and ensuring that the users
see all relevant data. These reports also can be sorted to identify
complaints by state, so that the appropriate U.S. Attorney's office, as
well as state and local law enforcement, can focus their enforcement
efforts on local targets.
Finally, experienced FTC attorneys and investigators are analyzing
complaint data daily and are prepared to file civil law enforcement
actions to shut down scams as they are identified. The FTC has
extensive experience bringing quick and effective actions to stop
fraud, obtain strong injunctive relief, and recover redress for
defrauded consumers. The appropriate resources have been redirected to
this effort. For example, senior litigation attorneys in the
Commission's Northwest Regional Office, who have long led the FTC's
efforts against bogus charities, are poring over charity fraud
complaint data. An Assistant Director in the Division of Marketing
Practices is coordinating our law enforcement resources and attending
Task Force meetings, and the FTC has lent staff assistance to a multi-
agency call center that is fielding telephone calls about Katrina-
related problems. At the same time, the Commission recognizes that
civil remedies are likely insufficient punishment for scam artists who
seek to benefit from this great national tragedy. Therefore, the Chief
of the FTC's Criminal Liaison Unit, which was established two years ago
to facilitate the referral of egregious frauds to criminal prosecutors,
is directly participating in the Task Force and is seeking input from
all staff regarding potential Katrina-related criminal referrals.
III. GASOLINE AND DIESEL PRICE MONITORING PROJECT
In addition to litigation against fraud, deception, and
anticompetitive practices, the Commission has undertaken aggressive
measures to protect consumers through other initiatives. As part of its
mission to protect competition and consumers in all markets, the
Commission has mobilized significant resources to respond to issues
raised by higher gasoline prices since Katrina. The petroleum industry
plays a crucial role in our economy. Not only do changes in gasoline
prices affect consumers directly, but the price and availability of
gasoline also influence many other economic sectors. No other
industry's performance is more deeply felt, and no other industry is
more carefully scrutinized by the FTC.
For example, in a program unique to the petroleum industry, the FTC
actively and continuously monitors retail and wholesale prices of
gasoline and diesel fuel.<SUP>5</SUP> Three years ago, the agency
launched this initiative to monitor gasoline and diesel prices to
identify ``unusual'' price movements <SUP>6</SUP> and then examine
whether any such movements might result from anticompetitive conduct
that violates Section 5 of the Federal Trade Commission Act. FTC
economists developed a statistical model for identifying such
movements. These economists scrutinize regularly price movements in 20
wholesale regions and approximately 360 retail areas across the
country. Again, in no other industry does the Commission so closely
monitor prices.
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\5\ See FTC, Oil and Gas Industry Initiatives, at http://
www.ftc.gov/ftc/oilgas/index.html.
\6\ An ``unusual'' price movement in a given area is a price that
is significantly out of line with the historical relationship between
the price of gasoline in that area and the gasoline prices prevailing
in other areas.
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The staff reviews daily data from the Oil Price Information
Service, a private data collection agency, and receives information
weekly from the public gasoline price hotline maintained by the U.S.
Department of Energy (``DOE''). The staff monitoring team uses an
econometric model to determine whether current retail and wholesale
prices are anomalous in comparison to the historical price
relationships among cities. When there are unusual changes in gasoline
or diesel prices, the project alerts the staff to those anomalies so
that we can make further inquiries.
This gasoline and diesel monitoring and investigation initiative,
which focuses on the timely identification of unusual movements in
prices (compared to historical trends), is one of the tools that the
FTC uses to determine whether a law enforcement investigation is
warranted. If the FTC staff detects unusual price movements in an area,
it researches the possible causes, including, where appropriate,
through consultation with the state attorneys general, state energy
agencies, and DOE's Energy Information Administration. In addition to
monitoring DOE's gasoline price hotline complaints, this project
includes scrutiny of gasoline price complaints received by the
Commission's Consumer Response Center and of similar information
provided to the FTC by state and local officials. If the staff
concludes that an unusual price movement likely results from a
business-related cause (i.e., a cause unrelated to anticompetitive
conduct), it continues to monitor but--absent indications of
potentially anticompetitive conduct--it does not investigate
further.<SUP>7</SUP> The staff investigates unusual price movements
that do not appear to be explained by business-related causes to
determine whether anticompetitive conduct may underlie the pricing
anomaly. Cooperation with state law enforcement officials is an
important element of such investigations. The Commission's experience
from its past investigations and from the current monitoring initiative
indicates that unusual movements in gasoline prices often have a
business-related cause.
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\7\ Business-related causes include movements in crude oil prices,
supply outages (e.g., from refinery fires or pipeline disruptions), or
changes in and/or transitions to new fuel requirements imposed by air
quality standards.
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IV. FTC ACTIVITIES TO MAINTAIN AND PROMOTE COMPETITION IN THE PETROLEUM
INDUSTRY
Prior to Hurricane Katrina, increasing crude oil prices had
resulted in rising gasoline prices during much of this year. Despite
these rising prices, the demand for gasoline during this past summer
was strong and exceeded summer demand in 2004. In the recent weeks
since Hurricane Katrina, gasoline prices rose sharply to $3.00 per
gallon or more in most markets. In part because of the soaring prices
associated with Katrina, gasoline demand has decreased somewhat.
National gasoline inventories remain at the lower end of the average
range.
On top of an already tight market, Katrina has temporarily
disrupted an important source of crude oil and gasoline supply. At one
point, over 95 percent of Gulf Coast crude oil production was shut in,
and numerous refineries and pipelines were either damaged or without
electricity.<SUP>8</SUP> As of one week ago, 56.1 percent of Gulf Coast
production remained shut in.<SUP>9</SUP> Because of this massive supply
disruption, substantial price relief has been and will be delayed.
Although it is heartening to see that much Gulf Coast production is
back online, full-scale production in that region has yet to resume.
Our past studies suggest that as gasoline supplies return to pre-
Katrina levels, prices should recede from recent high levels. Indeed,
retail prices in nearly all areas have fallen in recent days, and
accompanying declines in wholesale prices presage further price
declines at retail. It is important to remember, however, that Katrina
damaged important parts of the energy infrastructure in the Gulf Coast
region, including oil and gas production and refining and processing
facilities. Some adverse effect on energy prices may persist until the
infrastructure recovers fully--a process that could take months.
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\8\ See Minerals Mgmt. Serv., U.S. Dep't of the Interior, Release
No. 3328, Hurricane Katrina Evacuation and Production Shut-in
Statistics Report as of Tuesday, August 30, 2005, at http://
www.mms.gov/ooc/pres/2005/press0830.htm.
\9\ See Minerals Mgmt. Serv., U.S. Dep't of the Interior, Release
No. 3347, Hurricane Katrina Evacuation and Production Shut-in
Statistics Report as of Thursday, September 15, 2005, at http://
www.mms.gov/ooc/pres/2005/press0913.htm.
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The Commission is very conscious of the swift and severe price
spikes that occurred immediately before and after Katrina made
landfall. There have been numerous calls for investigations of ``price
gouging,'' particularly at the retail gasoline level. Legislation that
would require the Commission to study this issue recently passed the
Senate.<SUP>10</SUP> In addition, Section 1809 of the recently enacted
Energy Policy Act <SUP>11</SUP> mandates an FTC investigation ``to
determine if the price of gasoline is being artificially manipulated by
reducing refinery capacity or by any other form of market manipulation
or price gouging practices.'' The Commission staff already has launched
an investigation to scrutinize whether unlawful conduct affecting
refinery capacity or other forms of illegal behavior have provided a
foundation for price manipulation. A determination that unlawful
conduct has occurred will result in aggressive law enforcement activity
by the FTC.
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\10\ On September 15, 2005, the Senate passed the Fiscal Year 2006
Commerce-Justice-Science Appropriations bill, which included funding
for the FTC. An amendment to this bill introduced by Senator Mark Pryor
requires the FTC to conduct an investigation into gasoline prices in
the aftermath of Hurricane Katrina.
\11\ Energy Policy Act of 2005, Pub. L. No. 109-58 1809, ----
Stat. ---- (2005).
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The FTC has initiated this inquiry with a keen understanding of its
importance to the American consumer and intends faithfully to fulfill
its obligation to search for and stop illegal conduct. We recognize, of
course, that our investigation will not be a simple one. As many have
already pointed out, ``price gouging'' is not prohibited by federal
law. Consumers justifiably are upset when they face dramatic price
increases within very short periods of time, especially during a
disaster. Some prices increases, however, benefit consumers in the long
run. In our economy, prices play a critical role: they signal producers
to increase or decrease supply, and they also signal consumers to
increase or decrease demand. In a period of shortage--particularly with
a fungible product, like gasoline, that can be sold anywhere in the
world--higher prices create incentives for suppliers to send more
product into the market, while also creating incentives for consumers
to use less of the product. Higher prices ultimately help make the
shortage shorter-lived than it otherwise would have been. There may be
situations where sellers go beyond the necessary market-induced price
increase, taking advantage of a crisis to ``gouge'' consumers. However,
it can be very difficult to determine the extent to which any price
increases are greater than necessary. Furthermore, even these
``gouging'' types of price increases do not fit well under longstanding
principles of antitrust law. Under the antitrust laws, a seller with
lawfully acquired market power--including market power arising from an
act of God--can charge any price the market will bear, so long as this
seller does not join with others to set prices or restrict supply.
Finally, many states have statutes that address short-term price
spikes in the aftermath of a disaster, and we understand that a number
of them have opened investigations of gasoline price gouging. At the
retail level, state officials--because of their proximity to local
retail outlets--can react more expeditiously than a federal agency
could to the many complaints that consumers have filed about local
gasoline prices. Nevertheless, these issues will not deter the FTC from
investigating and responding to any manipulation of gasoline prices we
are able to uncover that violates federal antitrust law.
In addition to commencing its investigation pursuant to Section
1809 of the Energy Policy Act and dealing with the short-term market
dislocations caused by Katrina, the FTC has been and remains vigilant
regarding anticompetitive conduct in the energy industry in the long
run. Recent FTC activity in the gasoline industry includes the
acceptance on June 10, 2005, of two consent orders that resolved the
competitive concerns relating to Chevron's acquisition of Union Oil
Company of California (``Unocal'') and settled the Commission's 2003
monopolization complaint against Unocal. The Unocal settlement alone
has the potential to save billions of dollars for California consumers
in future years.
Moreover, in early July 2005, the Commission published its study
explaining the competitive dynamics of gasoline pricing and price
changes.<SUP>12</SUP> This study grew out of conferences of industry,
consumer, academic, and government participants held by the Commission
over the past four years, as well as years of research and experience,
and sheds light on how gasoline prices are set.
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\12\ Federal Trade Commission, Gasoline Price Changes: The Dynamic
of Supply, Demand, and Competition (2005), available at http://
www.ftc.gov/reports/gasprices05/050705gaspricesrpt.pdf.
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In 2004, the FTC staff published a study reviewing the petroleum
industry's mergers and structural changes as well as the antitrust
enforcement actions that the agency has taken over the past 20
years.<SUP>13</SUP> Commission enforcement statistics show that the FTC
has challenged proposed mergers in this industry at lower concentration
levels than in other industries. Since 1981, the FTC has filed
complaints against 19 large petroleum mergers. In 13 of these cases,
the FTC obtained significant divestitures. Of the six other matters,
the parties in four cases abandoned the transactions altogether after
agency antitrust challenges; one case resulted in a remedy requiring
the acquiring firm to provide the Commission with advance notice of its
intent to acquire or merge with another entity; and the sixth case was
resolved recently with the execution by the parties of a 20-year
throughput agreement that will preserve competition allegedly
threatened by the acquisition.<SUP>14</SUP>
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\13\ Bureau of Economics, Federal Trade Commission, The Petroleum
Industry: Mergers, Structural Change, and Antitrust Enforcement (2004),
available at http://ftc.gov/os/2004/08/040813mergersinpetrolberpt.pdf.
\14\ See http://ftc.gov/opa/2005/09/alohapetrol.htm.
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The Commission has gained much of its antitrust enforcement
experience in the petroleum industry by analyzing proposed mergers and
challenging transactions that likely would reduce competition, thus
resulting in higher prices.<SUP>15</SUP> In 2004, the Commission
released data on all horizontal merger investigations and enforcement
actions from 1996 to 2003.<SUP>16</SUP> These data show that the
Commission has brought more merger cases at lower levels of
concentration in the petroleum industry than in other industries.
Unlike in other industries, the Commission has obtained merger relief
in moderately concentrated petroleum markets.
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\15\ Section 7 of the Clayton Act prohibits acquisitions that may
have anticompetitive effects ``in any line of commerce or in any
activity affecting commerce in any section of the country.'' 15 U.S.C.
18.
\16\ Federal Trade Commission Horizontal Merger Investigation Data,
Fiscal Years 1996-2003 (Feb. 2, 2004), Table 3.1, et seq.; FTC
Horizontal Merger Investigations Post-Merger HHI and Change in HHI for
Oil Markets, FY 1996 through FY 2003 (May 27, 2004), available at
http://ftc.gov/opa/2004/05/040527petrolactionsHHIdeltachart.pdf.
---------------------------------------------------------------------------
The aforementioned case involving Chevron's acquisition of Unocal
illustrates our approach to protecting competition in the petroleum
industry. When the merger investigation began, the Commission was in
the middle of an ongoing monopolization case against Unocal that would
have been affected by the merger. As detailed below, the Commission
settled both the merger and the monopolization matters with separate
consent orders that preserved competition in all relevant merger
markets and obtained complete relief on the monopolization
claim.<SUP>17</SUP>
---------------------------------------------------------------------------
\17\ Chevron Corp., FTC Docket No. C-4144 (July 27, 2005) (consent
order), at http://ftc.gov/os/caselist/0510125/050802do0510125.pdf;
Union Oil Co. of California, FTC Docket No. 9305 (July 27, 2005)
(consent order), at http://ftc.gov/os/adjpro/d9305/050802do.pdf.
---------------------------------------------------------------------------
On March 4, 2003, the Commission issued its monopolization
complaint against Unocal, alleging that it had reason to believe that
Unocal had violated Section 5 of the FTC Act.<SUP>18</SUP> The
complaint charged that Unocal deceived the California Air Resources
Board (``CARB'') in connection with regulatory proceedings to develop
the reformulated gasoline (``RFG'') standards that CARB adopted. Unocal
allegedly misrepresented that certain technology was non-proprietary
and in the public domain, while at the same time it pursued patents
that would enable it to charge substantial royalties if CARB mandated
the use of Unocal's technology in the refining of CARB-compliant
summertime RFG. The Commission alleged that, as a result of these
activities, Unocal illegally acquired monopoly power in the technology
market for producing the new CARB-compliant summertime RFG, thus
undermining competition and harming consumers in the downstream product
market for CARB-compliant summertime RFG in California. The Commission
estimated that Unocal's enforcement of its patents could potentially
result in additional consumer costs of up to 6 cents for every gallon
of gasoline pumped in the State of California, which amounts to over
$500 million of additional consumer costs per year.
---------------------------------------------------------------------------
\18\ Union Oil Co. of California, FTC Docket No. 9305 (Mar. 4,
2003) (complaint), at http://ftc.gov/os/2003/03/unocalcmp.htm.
---------------------------------------------------------------------------
The proposed merger between Chevron and Unocal raised additional
concerns. Unocal had claimed the right to collect patent royalties from
companies with refining and retailing assets (including Chevron). Had
Chevron unconditionally inherited these patents by acquisition, it
would have been in a position to obtain sensitive information and to
claim royalties from its own downstream competitors. The Commission
alleged that Chevron could have used this information and this power to
facilitate coordinated interaction and detect any deviations.
The key element in the consent orders by which the Commission
resolved both the Chevron/Unocal merger investigation and the
monopolization case against Unocal is Chevron's agreement not to
enforce the Unocal patents.<SUP>19</SUP> The FTC's settlement of these
two matters is a substantial victory for California consumers. The
Commission's monopolization case against Unocal was complex and, with
possible appeals, could have taken years to resolve, with substantial
royalties to Unocal--and higher consumer prices--in the interim. The
settlement provides the full relief sought in the monopolization case
and also resolves the only competitive issue raised by the merger. With
the settlement, consumers will benefit immediately from the elimination
of royalty payments on the Unocal patents, and potential merger
efficiencies could result in additional savings at the pump.
---------------------------------------------------------------------------
\19\ Chevron Corp., supra note 17.
---------------------------------------------------------------------------
V. CONCLUSION
The Federal Trade Commission has instituted aggressive initiatives
to protect consumers in the aftermath of Hurricane Katrina. The
Commission has taken action whenever fraud, deception, anticompetitive
conduct, or a potentially illegal merger has threatened the welfare of
consumers or competition in the petroleum (or any other) industry. The
Commission continues to take whatever action is warranted to protect
consumers and preserve competition. In the petroleum industry in
particular, the Commission continues to seek out and challenge illegal
conduct, to monitor retail and wholesale gasoline and diesel prices,
and to study and report on the industry in detail.
Thank you for this opportunity to present the FTC's views on this
important topic. I would be glad to answer any questions that the
Subcommittee may have.
Mr. Stearns. I thank the gentleman. We are going to break
to vote, but the full committee chairman, Mr. Barton, is here,
and since we are getting ready to break, it might be
appropriate, if he has any comments, before we come back with a
further witness, opening statement.
Mr. Chairman.
Chairman Barton. Mr. Chairman, I am going to put my
statement in the record. I just want to thank--this is--thank
this panel. This is a very distinguished panel. Some of you I
know personally, all of you I know by reputation.
The issues that this subcommittee is looking at are not as
sexy as the health issue and environmental issue, but in terms
of the economic consequences, you are very, very important, and
I want to thank each of you for coming today. Substantively,
this is a very, very significant hearing, and I appreciate your
personal attendance today.
And I would yield back.
Mr. Stearns. And I thank the full committee chairman, and
it is by unanimous consent his opening statement be part of the
record.
[The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy
and Commerce
Thank you Mr. Chairman for holding this hearing today. Two weeks
ago we held a Full Committee hearing on issues related to Hurricane
Katrina. This is the first of the follow up hearings. As we continue on
our efforts toward recovery, we are increasingly aware of the scope and
the scale of the need. Our thoughts are still with those affected by
the disaster and we will work in an earnest manner to meet the needs of
our fellow citizens. This hearing will focus on the commerce and
consumer protection issues related to the recovery effort.
On the consumer protection front, the Committee is taking a close
look at a number of issues. One of those is charity-related fraud.
Americans respond with great generosity in the wake of disaster.
Unfortunately, fraudsters know this and use national emergencies to pad
their own pockets. The FBI recently reported more than 4000 suspected
fraudulent sites related to hurricane Katrina donations. We saw a
similar rise in charity-related fraud after the terrorist attacks on
September 11, which is when Representative Bass first introduced the
``American Spirit Fraud Prevention Act.'' That legislation provides for
increased penalties for fraudsters that prey on others' generosity
during national emergencies. The legislation has passed the House
twice. We will work to see it through the House again and urge our
Senate colleagues to move it through that body.
Another consumer protection issue relates to flood damaged
vehicles. Many cars that are deemed ``totaled'' by insurance companies
are sold at auctions for salvaged parts. But unscrupulous dealers can
buy these cars, clean them up, re-title them and sell them to
consumers. These cars can be a threat to the safety of the new owners.
We will take a closer look at this issue and ways in which we can
discourage this practice.
A third consumer protection issue we intend to examine is price
gouging. Many states have laws that limit price increases of certain
consumer goods and services after a national emergency. Those laws
cover products and services such as gasoline, hotel rooms, lumber,
food, generator services, home repair services, and tree removal
services. There is currently no Federal law against so-called price
gouging, though in the aftermath of Hurricane Katrina there have been a
number of calls for such a federal law. ``Price gouging'' can be very
difficult to define, particularly in terms of greatly reduced supply. I
welcome comments from witnesses on that and other issues, but I believe
price caps are rarely appropriate for all products and services and
usually backfire, hurting consumers. I would also like to learn the
efficacy of temporary reductions in taxes on specific products--such as
gasoline taxes--in times of emergency.
On the Commerce front, we have much work to do. Though incredibly
resilient, the U.S. economy has experienced disruption following
Katrina and that disruption may impact areas of the economy beyond the
ability to rebuild the areas devastated by the hurricane. There are the
obvious needs of opening ports, roads, and rail routes and
reconstructing supply chain infrastructure for the rebuilding efforts
in the South. Energy and labor are also important variables in the
rebuilding efforts, both to move goods down to the region and to do the
actual work of rebuilding. Meeting the needs of the South in its
efforts to care for affected individuals and for rebuilding is clearly
the highest priority. I look forward to witness testimony on these
issues as well as the broader impact on the U.S. economy.
I thank the witnesses for their participation today. I yield back
the balance of my time.
Mr. Stearns. And so we are going to vote, and we will be
right back after the vote, and I appreciate your patience.
[Brief recess.]
Mr. Stearns. Continue, Dr. Hall, with your opening
statement, if you don't mind, we will just continue on, and
members will come in. We have finished our votes for about an
hour, hour and a half. So I think we are all set.
Dr. Hall.
STATEMENT OF KEITH HALL
Mr. Hall. Chairman Stearns, Ranking Member Schakowsky,
members of the subcommittee, my name is Keith Hall. I am the
Chief Economist for the U.S. Department of Commerce. I would
like to summarize my written testimony, and would ask that it
be submitted into the record.
Mr. Stearns. Unanimous consent, so ordered.
Mr. Hall. Thank you for the opportunity to talk to you
today about our national economy and the effect of Hurricane
Katrina.
Clearly, the effects to the Gulf Coast have been
devastating to residents there. Those of us--oh, great. Sorry.
Those of us who have not been through such overwhelming loss
cannot imagine it, much less assign it a number. However, the
statistical agencies in Commerce and other Federal departments
are working quickly to estimate Hurricane Katrina's effects on
the overall economy, as well as the regional, State, and even
some local economies. Using the range of existing economic
surveys and data collections, we can also examine the effects
of Hurricane Katrina on the population, using the American
Community Survey and other population surveys. We are seeing
some Katrina-related shifts in the data already, and can expect
to see more in the future. All of the economic consequences are
not known, and the full effects of the hurricane may never be
completely revealed in economic data, because the upheaval in
the Gulf Coast will be diluted in the macroeconomic data by
continued strong economic growth elsewhere in the country.
I am, in fact, optimistic about the continued strength and
strong performance of the U.S. economy, despite the devastating
effects of Hurricane Katrina. In 2004, the U.S. economy
generated nearly $12 trillion in Gross Domestic Product.
Louisiana, Alabama, and Mississippi together, combined for
about 3.1 percent of this GDP. And for comparison, GDP last
year grew 4.2 percent over the previous year. Employment and
production in the region are quite diversified. However, the
affected area counts for an unusually large portion of U.S.
employment in certain industries. These include shipbuilding
and repairing, petroleum refining and many types of chemical
manufacturing, and tourism, including casinos. The ports
damaged by Katrina accounted for 4.5 percent of total exports
of goods from the United States last year, and 5.4 percent of
total imports. Importantly, 19 percent of all crude petroleum
imports into the U.S. entered the country in the New Orleans
Customs District.
For the most part, economic data released in the past 2
weeks have measured economic activity prior to the impact of
the hurricane. The Bureau of Labor Statistics employment
released on October 7 will give us the first monthly to
estimate the full impact of the storm. We do have a little
information this morning from the Department of Labor. They
have estimated that over the past 3 weeks, 214,000 people have
filed new claims for unemployment insurance as a result of the
hurricane. What makes the employment disruptions different now
is that we have an unusually high displacement of workers and
economic activity for an as yet unknown period of time.
Please understand that it may be impossible in some cases
to even fully differentiate Katrina's impact from other changes
in economic activity that were occurring at the time. At both
the national and regional levels, the precise impact of a
natural disaster on GDP and other data cannot be separately
measured, because our statistical system is designed to
estimate what actually occurred, rather than what might have
happened in the absence of a disaster.
The broadest summary measure of our economy is Gross
Domestic Product. The most important thing to understand when
thinking about the impact of Katrina is that GDP measures new
things being produced. Storms and flood damage are old things
that were produced in the past. The loss of those old things
does not figure into GDP, and the fact that workers--but the
fact that workers and factories are not producing anything,
because they are closed, underwater, or damaged will reduce
future GDP. But mitigating that somewhat is the economic
activity related to replacing all the old things that were
damaged, to rebuild houses, factories, and infrastructure, and
this will eventually show up as increased economic activity
later on.
We can see how this worked during last year's hurricane
season. Third quarter GDP growth was a strong 4 percent at an
annual rate, despite a heavy hurricane season, which included
four hurricanes in Florida. Their effect on activity and
employment which, granted, was much smaller than Katrina's, was
overwhelmed by the fundamental forces that underpin the
Nation's strong economic growth, and was also offset by the
immediate rise in construction activity as the structures
damaged by those hurricanes were rebuilt.
Katrina is also unusual because of its impact on the
economy's energy sector. For some time now, we have been
concerned about the potential effects of rising energy prices
on the economy. The direct effects from Katrina are expected to
be significant, but still modest, relative to the overall
economy. Last year, consumers spent $230 billion for gasoline.
At about $3 per gallon, recent gasoline prices were 50 percent
above levels 1 year ago. If consumers wish to purchase the same
amount of gasoline this year, they would spend an extra $115
billion, which would leave $115 billion less for spending on
other goods and services, all other things equal. By
comparison, total consumer spending grew about $500 billion
last year. Thus, the higher energy bill will have a significant
impact, but there is no reason that real consumer spending on
other goods and services cannot continue to grow at a healthy
rate, despite the higher energy bill.
Substantial pre-Katrina energy price increases have not yet
led to inflation or pricing pressures elsewhere in the economy.
Core inflation, a measure of the underlying inflation pressure
in the economy, has remained low, even as energy prices have
risen to unusual levels. The Consumer Price Index for core
goods and services increased at a modest 1.3 percent annual
rate over the past 5 months, and this is actually a step down
from the previous 12 months, which is--where prices grew at 2.4
percent.
Mr. Chairman, my team at Commerce will continue to monitor
these economic data for evidence of the storm's impacts, and I
would be happy to update you on our analysis of the hurricane
and its consequences. I would also be pleased to take your
questions later.
[The prepared statement of Keith Hall follows:]
Prepared Statement of Keith Hall, Chief Economist, U.S. Commerce
Department
Chairman Stearns, Ranking Member Schakowsky, Members of the
Subcommittee. My name is Keith Hall. I am the Chief Economist at the
U.S. Department of Commerce.
I would like to summarize my written testimony and would ask that
it be submitted for the record.
Thank you for the opportunity to talk with you today about our
economy and the effect of Hurricane Katrina.
Clearly the effects to the Gulf Coast have been devastating to
residents there. Those of us who have not been through such
overwhelming loss cannot imagine it, much less assign it a number.
However, the statistical agencies in Commerce and other Federal
departments are working quickly to estimate Hurricane Katrina's effects
on the overall economy as well as the regional, state, and even some
local economies, using the range of existing economic surveys and data
collections. We can also examine the effects of Hurricane Katrina on
the population, using the American Community Survey and other
population surveys.
We are seeing some Katrina-related shifts in the data already and
can expect to see more in the future. All of the economic consequences
are not known and the full effects of the hurricane may never be
completely revealed in economic data because the upheaval in the Gulf
Coast will be diluted in macroeconomic data by continued strong
economic growth elsewhere in the country.
I can discuss with you today some of the data released so far and
how Katrina is similar to and different from other storms.
In 2004, the resilient U.S. economy generated approximately $11.7
trillion in Gross Domestic Product. Louisiana's economy was $152
billion last year. Alabama's economy measured $139 billion and
Mississippi's economy was $76 billion in 2004. Together the three
states therefore accounted for about 3.1% of U.S. GDP.
Employment and production in the region are quite diversified.
However, the affected area accounts for an unusually large portion of
U.S. employment in certain industries. These include shipbuilding and
repairing, petroleum refining and many types of chemical manufacturing,
and tourism, including casinos.
The ports damaged by Katrina accounted for 4.5% of total exports of
goods from the United States last year, and 5.4% of total U.S. imports.
Importantly, 19% of all crude petroleum imports into the U.S. entered
the country in the New Orleans customs district.
For the most part, economic data released in the past two weeks
have measured economic activity prior to the impact of the hurricane.
They do not, therefore, answer the question posed at this hearing. The
Bureau of Labor Statistics' employment release on October 7 will give
us the first monthly data to estimate the effects of the storm. These
data regularly show absences of work due to bad weather, with regular
spikes in the summer and fall months of hurricane season. In the past
decade, the east coast blizzard of 1996 caused the largest work
stoppage of any single episode--but that may be challenged by the
Katrina-related disruptions.
We do have some limited weekly data about unemployment insurance.
For the week ending September 10, initial claims for unemployment
insurance shot up 71,000 from the previous week. This was the largest
jump since the 1996 blizzard. The Department of Labor estimates that
68,000 of that increase was hurricane related.
What makes the employment disruptions different now is that we have
an unusually high displacement of workers and economic activity for an
as-yet-unknown period of time. Many of the affected workers must wait
for the water to be pumped out of New Orleans and for very significant
cleanup and infrastructure repair to be completed before they can
return to their homes and their jobs. Will these workers return to New
Orleans to advance the rebuilding or will they stay in Houston or Baton
Rouge or Atlanta? And if they do not return to New Orleans, how long
will it take for them to find jobs?
The devastation in the affected area is already reflected in lower
industrial production. While industrial production was up in the most
recent report for August, the Federal Reserve estimates Katrina-related
declines in several industries reduced overall growth by 0.3 percentage
points' even though Katrina only affected production for the last few
days of the August reference period.
At the same time, Katrina's impact on August retail sales and
construction activity seems to have been very small. Of course, those
releases only cover the first few days of Katrina's effect. We will
only be able to begin to gauge the broader impact of the storm when the
Census Bureau releases estimates for September.
Please understand that it may be impossible, in some cases, to ever
fully differentiate Katrina's impact from other changes in economic
activity that were occurring at the same time. At both the national and
regional levels, the precise impact of a natural disaster on GDP and
other data cannot be separately measured because our statistical system
is designed to estimate what actually occurred rather than what might
have happened in the absence of the disaster.
The broadest summary measure of our economy is Gross Domestic
Product (GDP). The most important thing to understand when thinking
about the impact of Katrina is that GDP measures new things being
produced. Storms and floods damage old things that were produced in the
past. The loss of those old things does not figure into GDP--although
it does figure into the Bureau of Economic Analysis's estimate of
depreciation (the amount of capital expended during a given period).
Thus, the destruction of capital itself will not affect current GDP--
although the fact that workers and factories are not producing anything
because they are closed, underwater, or damaged will reduce future GDP.
In the coming quarters, however, the economic activity required to
replace all those old things--to rebuild houses, factories and
infrastructure--will eventually show up as increased economic activity.
We can see how this worked during last year's hurricane season.
Third quarter 2004 growth was a strong 4% despite a heavy hurricane
season--including four hurricanes in Florida. The hurricanes' effect on
activity and employment (much smaller than Katrina--s, admittedly) was
overwhelmed by the fundamental forces that underpinned the nation's
strong economic growth, and was also offset by the immediate rise in
construction activity as the structures damaged by those hurricanes
were rebuilt.
Katrina is unusual because of its impact on the economy's energy
sector. For some time now, economists have been concerned about the
potential effects of rising energy prices on the economy. The direct
effects from Katrina are expected to be significant but still modest
relative to the overall economy. Last year, consumers spent $230
billion for gasoline. At about $3 per gallon, recent gasoline prices
were 50% above levels one year ago. If consumers wish to purchase the
same amount of gasoline, they would spend ($115 billion) less on other
goods and services, all other things being equal. Gasoline prices have
already declined from peak levels and are expected to continue to
decline. Price increases in other energy products--mainly natural gas
and fuel oil--will add to the burden. But consumers spend considerably
less on these products than on gasoline.
By comparison, total consumer spending grew about $500 billion in
2004. Thus the higher energy bill will have a significant impact--but
there is no reason that real consumer spending on other goods and
services cannot continue to grow at a healthy rate despite the higher
energy bill.
Substantial pre-Katrina energy price increases did not appear to
lead to inflation or pricing pressure elsewhere in the economy. Core
inflation--a measure of the underlying inflation pressure in the
economy--has remained low even as energy prices rose to unusual levels
The consumer price index for core goods and services increased at a
modest 1.3-percent annual rate during the past five months (from March
to August, 0.1 percent per month), a step-down from the 2.4-percent
pace over the prior 12 months (March 2004 to March 2005).
Mr. Chairman, my team at the Department of Commerce will continue
to monitor these economic data for evidence of the storm's impacts. I
would be happy to update you on our analysis of the hurricane and its
consequences. I would also be pleased to take your questions.
Mr. Stearns. Thank the gentleman. Mr. Huether.
STATEMENT OF DAVID M. HUETHER
Mr. Huether. Good morning Chairman Stearns, Ranking Member
Schakowsky, and members of the subcommittee. Thank you for
giving me the opportunity to discuss the economic effects of
Hurricane Katrina on manufacturing and the economy.
My name is David Huether. I am the national--I am the Chief
Economist of the National Association of Manufacturers, the
Nation's largest industry trade association, representing small
and large manufacturers in every industrial sector in all 50
States.
By far, Hurricane Katrina is the biggest natural disaster
to hit our country in recent memory, and the economic effects
of Katrina will not be lost in the rounding, as has occurred
with some past national disasters.
Collectively, the economies of Alabama, Louisiana, and
Mississippi account for 3 percent of the U.S. economy, roughly
the size of Michigan, and 3.4 percent of manufacturing output.
The New Orleans Customs District is the gateway to the global
economy for much of our country. Fully a quarter of U.S.
agricultural exports travel through this region to markets all
around the world. At the same time, about 5 percent of U.S.
manufacture trade goes through these ports. In addition, the
Gulf of Mexico accounts for 29 percent of our Nation's oil
products, and 19 percent of natural gas production.
Prior to Hurricane Katrina, the U.S. economy had grown by a
solid 3.6 percent over the last four quarters, and had created
2.2 million jobs, pushing the unemployment rate down to a 4-
year low of 4.9 percent. At the same time, manufacturing output
increased by a similar 3.3 percent. Looking forward, the
economy was on track to grow by 4.3 percent in the third
quarter, according to our estimates, and manufacturing
production was expected to accelerate to 5 percent growth by
the fourth quarter. Hurricane Katrina, however, along with
future reconstruction efforts, will have a significant impact
on the economy over the next year.
The direct impact of Hurricane Katrina displaced upwards of
300,000 workers, and destroyed an estimated $70 billion worth
of capital. In the area of energy, though progress has been
made, over half of the oil production, and a third of natural
gas production in the Gulf remain shut in by--in mid-September,
and four refineries remain offline. Currently, estimate are
that it will take between 3 and 6 months to make repairs.
In the weeks following Hurricane Katrina, the NAM surveyed
its membership to see what the effects of the storm would be on
manufacturers. The survey found that 10 percent of the
respondents had production facilities that were directly
affected by Hurricane Katrina. The positive side here is that 8
percent expect to restore production in a matter of weeks; 36
percent have experienced supply disruptions from Hurricane
Katrina; 28 percent say these supply disruptions have affected
production; and 25 percent, a full quarter, say the supply
disruptions have caused shortages and higher prices, both in
energy and in materials.
These results indicate that a sizable portion of the
manufacturing has been impacted by Hurricane Katrina. Looking
forward, Hurricane Katrina is expected to slow economic growth
in the third quarter from 4.3 percent, as I previously stated,
to 3.2 percent. This is a 26 percent decline in the pace of
economic growth. This pace will continue, I think, in the
fourth quarter as well. At the same time, a quarter of a
million fewer jobs will be created in the second half of the
year, due to the effects of Katrina.
Inflation, as measured by the CPI, will likely increase by
close to 6 percent in the third quarter, as a result of higher
energy prices. However, as supply comes back online,
inflation--the inflation rate is expected to be cut in half in
the fourth quarter. Much of the slowdown in the third quarter
will come from a 19 percent reduction in the growth rate of
consumer spending. The displacement of hundreds of thousands of
residents in the Gulf Coast, as well as higher energy prices,
which lowers disposable income, will cut deeply into consumer
spending in September, and later in the fourth quarter, when
consumer spending is expected to increase by just 2.4 percent.
In addition, the pace of capital spending is expected to
slow by 50 percent in the third quarter, and increase by just
3.9 percent. This will be the slowest increase in capital
spending since the first quarter of 2003. Later, in the fourth
quarter, the pace of business investment will accelerate, as
reconstruction efforts pick up steam. From the slowdown in both
consumer spending and business investment, manufacturing output
will likely increase by just 3.1 percent in the second half of
this year. This is 40 percent slower than the 5.1 percent
increase in the pre-Katrina baseline.
Anticipating efforts in the first half of 2006,
particularly in the first quarter, and moderating energy
prices, will create a seesaw effect for the U.S. economy and
manufacturing. GDP is expected to increase by 4.1 percent in
the first half of 2006. This is 28 percent faster than the pre-
Katrina baseline. At the same time, manufacturing production
will increase from 3 percent growth to 6 percent growth in the
first half of next year, as reconstruction efforts accelerate.
In summary, while job dislocations and damaged production
capacity will significantly reduce economic growth and job
creation in the months ahead, the slowdown in the macroeconomy
overall will likely be temporary.
Thank you.
[The prepared statement of David M. Huether follows:]
Prepared Statement of David M. Huether, Chief Economist, National
Association of Manufacturers on behalf of the National Association of
Manufacturers
Good morning Chairman Stearns, Ranking Member Schakowsky, and
members of the Subcommittee. Thank you for the opportunity to discuss
the economic effects of Hurricane Katrina on manufacturing and the
economy.
My name is David Huether and I am the Chief Economist at the
National Association of Manufacturers (NAM), the nation's largest
industry trade association, representing small and large manufacturers
in every industrial sector and in all 50 states.
By far, Hurricane Katrina is the biggest natural disaster in the
U.S. in recent memory. In addition to the terrible loss of life,
Hurricane Katrina hit the Gulf Coast at a time when energy prices were
already surging. Katrina's impact on the energy-intensive region
created an additional energy-price shock to the nation. As a result,
the economic effects of Katrina will not be ``lost in the rounding'',
as has occurred with some past natural disasters.
IMPORTANCE OF THE GULF COAST TO THE ECONOMY
Collectively, the economies of Alabama, Louisiana, and Mississippi
(the states hardest hit by Hurricane Katrina) totaled $367 billion in
2004 <SUP>1</SUP>, roughly the size of Michigan, or about 3.1 percent
of the overall U.S. economy, and 3.4 percent of our nation's overall
manufacturing output. Manufacturing is the largest private sector in
Mississippi and Alabama, where it accounts for 16% of the economy in
both sates, and the second-largest industry in Louisiana, where
manufacturing accounts for 11 percent of the state economy.
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\1\ U.S. Department of Commerce, Bureau of Economic Analysis
---------------------------------------------------------------------------
The New Orleans Customs District is the gateway to the global
economy for much of the middle of the country. Much of this
international trade comprises of commodity and agricultural products.
Fully a quarter of U.S. agricultural exports, including 62 percent of
corn and soybean exports, travel through this region to markets around
the world. At the same time, more than 20 percent of iron & steel,
fertilizer and ore imports enter our economy through the ports of the
Gulf Coast.
Overall, 5 percent of U.S. manufactured exports to the world are
channeled through the New Orleans Customs District; while close to 4
percent of manufactured imports enter our economy through these ports.
Most of the Gulf Coast ports escaped the hurricane with minimal
damage. Based on assessments by the Louisiana Department of
Transportation and Development, two of the six deepwater ports located
in Louisiana suffered extensive damage: St. Bernard and Plaquemines.
The Port of South Louisiana, the nation's largest port by tonnage and
essential to the nation's agricultural trade, suffered only minor
damage. All of the state's 21 inland and shallow water river ports
remain fully operational. Elsewhere along the gulf coast, while the
ports of Gulfport, and Bayou La Batre, remain closed, most of the
others are operational. While further work needs to be done to replace
damaged equipment and restore electricity, the overall effect on
international trade flows from Hurricane Katrina will likely be modest
and temporary.
Perhaps the largest macroeconomic effect from Hurricane Katrina has
been the storm's impact the nation's energy infrastructure. The Gulf of
Mexico supplies 29 percent of our nation's domestic oil production and
19 percent of the domestic gas production.<SUP>2</SUP>
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\2\ Minerals Management Service, Department of the Interior
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In total, Hurricane Katrina destroyed 37 energy platforms,
representing 1 percent of oil and gas production. In addition, 50
platforms were damaged extensively, 4 of which account for 10 percent
U.S. production. Current estimates are that it will take between three
and six months to make repairs. In addition, four refineries remain
shut down, and expectations are that these refineries, which represent
about 5 percent of total U.S. refining capacity, could remain idle for
an extended period. In summary, while progress has been made over the
past few weeks, downstream effects from reduced refining and production
capacity will be felt for months.
THE ECONOMIC SITUATION PRE-KATRINA
Prior to Hurricane Katrina making landfall on August 29, 2005 as an
extremely dangerous Category 4 storm, the U.S. economy and the
manufacturing sector were growing at a solid pace. Supported by 3.8
percent growth in consumer spending; 9.1 percent growth in business
investment; and export growth (8.3%) outpacing import growth (5.9%),
the U.S. economy has grown by a solid 3.6 percent in the past
year.<SUP>3</SUP> Manufacturing output increased by a similar 3.3
percent. At the same time, the economy created 2.2 million jobs, and
the unemployment rate fell to 4.9 percent--the lowest level in four
years.
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\3\ Second quarter of 2004 to the second quarter of 2005. Source:
U.S. Department of Commerce
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Despite a pre-Katrina increase in energy prices, core consumer
inflation, which excludes food and energy, edged up just 1.9 percent
over the prior 4 quarters.<SUP>4</SUP>
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\4\ PCE price index excluding food and energy. Bureau of Economic
Analysis. U.S. Department of Commerce.
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More recently, core (non-motor vehicles) retail sales remained
solid in July and August, while manufacturing production was beginning
to accelerate from a ``soft'' second quarter. Overall, the economy was
on track to grow by 4.3 percent in the third quarter and manufacturing
production was expected to accelerate to 5 percent growth by the fourth
quarter.
KATRINA'S IMPACT ON MANUFACTURERS
Hurricane Katrina took a staggering human toll and will also leave
a deep, though not permanent impression on the nation's economy as
well. In the weeks following Hurricane Katrina, the NAM surveyed its
membership to gauge the impact of the storm and its aftermath on
manufacturing. While the survey did not likely get through to many
companies in the areas most affected by the storm, the responses
nevertheless provide a preliminary estimate of the impact of Hurricane
Katrina on the broader manufacturing sector. The results are listed
below:
16 percent of survey respondents have operations in the areas
directly impacted by Katrina. 8 percent have facilities that sustained
damage while 10 percent have had production capacity reduced. Of these,
8 percent expect to have production back in a matter of weeks while
just 2 percent report that it will take months to resume production.
36 percent have experienced supply disruptions from Hurricane
Katrina. 12 percent have experienced just energy supply disruptions and
24 percent have experienced both energy and material input supply
disruptions.
28 percent say supply disruptions have affected production. 23
percent have reduced production operations and 5 percent have had to
stop production operations due to supply disruptions.
25 percent responded that supply disruptions have caused shortages
that have lead to higher prices. 7 percent report energy shortages and
18 percent report shortages in energy and material inputs.
32 percent responded that damage caused by Hurricane Katrina has
affected their company's ability to ship products to customers. 26
percent report that shipments have been partially halted, while 6
percent have had shipments completely halted.
84 percent responded that their companies' employees have not been
affected (relocated) due to Hurricane Katrina.
92 percent responded that they will not have to reduce employment
due to disruptions from Hurricane Katrina.
Over three quarters (79%) are providing relief assistance. 46
percent are offering a direct money gift; 34 percent have set up an
employee matching gift program and 31 percent are donating in-kind
relief supplies.
These results indicate that a sizable minority of manufacturing
output was directly impacted by Hurricane Katrina's destructive force
either directly (10%) or through supply disruptions (28%). However,
these impacts appear to be short term. The same will likely go for the
quarter of respondents who reported higher prices, depending on how
quickly energy production and port operations are reconstituted.
Therefore, there will likely be a significant slowdown in manufacturing
production in the third quarter along with acceleration in producer
prices.
Separately, conversations with businesses in both Mississippi and
Louisiana highlighted other concerns not covered in the NAM survey. In
addition to damage to plant and equipment, an equally significant
problem for manufacturers is the state of their workforce. Hurricane
Katrina displaced thousands of workers and also temporarily cut off
services such as day care that are used extensively in today's economy.
This is making it difficult in some cases for companies to bring
production back on line. In addition, because electricity remains out
in some rural areas, some employers and employees are having a
difficult time communicating. While this is likely a temporary problem,
it nonetheless will delay industrial output in some of the harder hit
counties and parishes.
ECONOMIC EFFECTS OF HURRICANE KATRINA
While not expected to reduce the economy's long-run growth path,
Hurricane Katrina, along with the recovery efforts, will have a
significant impact on the economy over the next year.
Though the economic effects of Katrina have devastated the Gulf
Coast, the overall impact on the U.S. economy is expected to be a
significant (26%) slowdown in the pace of economic growth in third
quarter and a more-modest negative effect in the fourth quarter,
followed by an acceleration in economic growth in the first half of
2006 compared to pre-Katrina outlook as reconstruction efforts begin in
earnest. (See Table 1 below.)
Preliminary Estimates of Economic Damage from Hurricane Katrina.
Based on preliminary analysis, the extent of damage to residential and
business capital stock totaled $71 billion, 70 percent of which was
residential housing and personal property. Much of the remaining loss
was oil and natural gas production facilities and refining capacity.
Expected futures prices of gasoline for September rose 36 percent,
based on fears that a significant amount of damaged energy plants and
equipment would remain off-line for a long time. However, significant
progress had already been made.
At the peak of the hurricane on August 30th, 95 percent of daily
oil production in the gulf and 88 percent of daily gas production was
``shut in''. These numbers have been drastically reduced. By September
16th, just over half (56%) of oil production remained shut in (most due
to problems with onshore infrastructure) and just a third of natural
gas production remained off-line. While tight energy supplies will
continue going forward, concerns that energy prices, particularly oil
and gasoline, will remain at their immediate post-Katrina levels have
thankfully not proved to be accurate, evidenced by the fact that
futures prices for gasoline have fallen by 22 percent since late August
and prices at the pump have also begun to moderate.
Still, the loss of energy production has been significant.
Moreover, the rise in energy prices in the wake of the hurricane will
have a sizable impact on consumer spending, since gasoline purchases
alone account for close to 3 percent of consumer purchases.
The loss of production in other areas of the economy from displaced
workers, estimated at over 300,000, will further cut into economic
growth in the second half of the year.
While the destruction caused by Hurricane Katrina will slow GDP
growth significantly in the second half of this year (see detail
below), the recovery efforts, some of which are underway but most of
which are still being conceptualized, will have a positive effect on
the economy. For example, rebuilding residential capital destroyed by
the hurricane could require upwards of 50,000 single family starts and
10,000 multifamily starts by mid-year 2006.
Economic Outlook Post-Katrina. Hurricane Katrina is expected to
slow economic growth by more than a percentage point to 3.2 percent
growth in the third quarter. This is 26 percent slower than the 4.3
percent pace assumed in the pre-Katrina scenario (see Table 1.)
<SUP>5</SUP> Similarly modest (3.3%) economic growth is expected in the
fourth quarter as well.
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\5\ SAAR (Seasonally Adjusted Annual Rate). Based on NAM
projections using the Washington University Macro Model.
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Much of the slowdown comes from a 19 percent reduction in the
growth rate for consumer spending which accounts for 70 percent of the
economy. The displacement of hundreds of thousands of residents of Gulf
Coast states as well as higher energy prices (which lowers consumers'
disposable incomes) will cut deeply into consumer spending in September
(the last month of the third quarter) and later in the fourth quarter.
Instead of rising by 4.3 percent, consumer spending will increase by
3.5 percent in the third quarter. While this sounds optimistic, it must
be put in the context that consumer spending increased by close to a 9
percent annual rate in July. In the fourth quarter, consumer spending
is expected to increase by just 2.4 percent.
Growth in capital spending by businesses is expected to slow by 50
percent in the third quarter and increase by just 3.9 percent, the
slowest pace since the first quarter of 2003. Later in the fourth
quarter, the pace of business investment will accelerate and grow by
6.6 percent as the rebuilding of damaged infrastructure begins.
From the slowdown in both consumer spending and business
investment, manufacturing output will increase by just 3.1 percent in
the second half -- 40 percent slower than the 5.1 percent pre-Katrina
baseline.
The CPI will likely increase by close to 6 percent in the third
quarter as result of higher energy prices. However, as supply comes
back on line, the inflation rate is expected to slow to 2.7 percent in
the 4th quarter and rise just 2 percent in 2006.
Anticipated reconstruction efforts in the fist half of 2006
(particularly in the first quarter) and moderating energy prices will
create a see-saw effect for the economy and for manufacturing, both of
which will not only accelerate, but grow faster than in the pre-Katrina
scenario.
GDP is expected to increase by 4.1 percent in the first half of
2006, or 28 percent faster than the pre-Katrina baseline. At the same
time, manufacturing production will increase by close to 6 percent
during the first six months of next year before slowing to more modest
growth later in the year. In summary, while job dislocations and
damaged production capacity will steer the economy into troubled waters
in the months ahead, faster quickening growth and job creation will
make for smoother sailing next year.
Mr. Stearns. Thank the gentleman. Mr. Dow, welcome.
STATEMENT OF ROGER J. DOW
Mr. Dow. Thank you, Chairman Stearns and Ranking Member
Schakowsky and members of the committee for this opportunity to
testify on the dramatic impact of Hurricane Katrina on travel
and tourism in the Gulf Coast region.
My name is Roger Dow. I am President and CEO of the Travel
Industry Association of America, known as TIA. It is a
nonprofit organization representing all segments of the travel
industry. It is a $600 billion a year industry, employing one
out of every eight jobs in the U.S. are travel-related. My
views are also part of the--our partner, strategic partner, the
good work done by the Travel Business Roundtable, known as TBR.
Together, we represent the public policy interests of the
travel and tourism industry to Congress and to the
Administration.
Hurricane Katrina had a devastating blow in three States,
as you heard from my colleagues. Many places were wiped out,
entire communities gone. The immediate and sudden shutdown of
the travel industry business occurred. I visited both Louisiana
and Mississippi 2 days ago, and that with industry and
political leaders, and television does not do any justice to
the horrible impact there. When you see it firsthand, you see
the devastation of what has happened to buildings, to lives, to
people's livelihood, but it also doesn't do justice to the
resilience and the attitude of the people that are in that
area.
As you look at what is going on, we first of all salute the
brave young men and women who have been part of the rescue
effort, but that area, I mentioned one in eight jobs
nationally, in that area of the country, one in five jobs are
travel-related, very--and--impact to the travel industry. That
is 260,000 jobs that are related to the travel industry that
are basically gone. Business travel, convention travel, leisure
travel is not occurring as of this moment in those affected
areas, and that is a loss of $50 million a day.
The travel industry has been very generous, and I think had
a very wide range of impact, and that is detailed in my written
submission, and knowing that the Red Cross charitable
organizations, the--both former President Bush and Clinton and
many efforts of companies and organizations to raise money, we
decided not to focus our efforts, of the travel industry and
Travel Business Roundtable, on raising dollars, but we decided
to focus on jobs, because that is what people need.
On September the 15th, TIA, TBR, and a travel coalition
made up of 32 associations of our business, launched a job--
free job site called www.katrinajobs.org, with the opportunity
of helping people find jobs, and it is widely being promoted in
the Southeast by the Red Cross. The men and women that are on
the frontlines, the people who have these jobs, deserve our
very best effort. This job bank not only will lift their
spirits, but as a way of hope and a way of employing their
families, and getting back on their feet in the future. The
great thing about jobs in our industry is they are portable,
and they have a very wide range of capabilities, from
maintenance people to housekeepers to customer service people
to accountants to managers.
Attached to my written testimony is a legislative relief
package presented by both TIA and TBR on behalf of the unified
travel industry; and dozens of companies and associations
worked on putting this together. The package includes several
things, detailed information on the impact, specifically, on
travel and tourism in the area of the Gulf effected. Examples
of what the industry is doing, but very specifically,
recommendations aimed at the travel industry employees and
owners who are affected in the area. I can't stress enough that
this is not a legislation recommendation or request that
focuses on our entire industry, but focuses on the area
affected, and it is very time-limited. We don't wish to use a
tragedy to advance issues that are important to our industry.
We applaud everything that is being done to quickly recover
the--all the appropriations that are being done right now. Some
of the areas that we are covering in our--in my testimony and
our recommendations are already underway in tax relief
packages. What we pledge is to help Congress, work with
Congress, side by side with the Administration and everyone, on
a nonpartisan basis, to just make this happen to improve the
lives of people.
There is three distinct impacts I think we should focus on.
First, the complete devastation of the entire travel in the
related area. The facilities are gone. They are not there in
many case. You go along Gulfport, you see the antebellum homes,
they are gone, like someone scraped them right away, and they
weren't taken away by construction. They are just gone. The
facilities are gone, destinations are gone, but more important,
the homes and livelihood of the people are gone. We grieve for
them, but we salute the people that are rescuing and working
with them day by day.
You have heard other people say the damage to our energy
production, refinement, and transmission, is only going to be
aggravated by Rita. When you look at the travel industry, we
need a reliable supply of gas, diesel, and jet fuel at
reasonable and fair prices. We say--unify--that we have to
address this energy policy and what goes on, because our
national mobility is truly at stake.
And the third thing, and less obvious, and to--maybe,
perhaps, to the public and policymakers, is the long-term
ramifications. Around the world were broadcast scenes that made
America look like a renegade State, the scenes of the looting,
the violence, and all of that were played throughout the world.
We have been focusing on a negative image that is a factor
many--caused by many factors, not just policy, but on many
factors, and we have got to address it. We couldn't let--as you
look around the world--the fear, the despair, the what looks
like lack of concern for people that people see is going to
hurt an already slumping image. We are measuring the impact on
this, as visitors begin thinking twice of whether they come to
this country or they don't for business and pleasure.
Image matters. As you look at the economy, the impact of
international travel, $100 billion a year, 1 million jobs, 50
million people coming to America and saying ``you know, they
are not like that. They are really a generous, caring people.''
We need that. That is critical to our national defense, to have
people returning home and saying I saw it firsthand. In
conclusion, what we pledge as the travel and tourism industry
is to work side by side in whatever we need to do, and to help
get those people back on their feet, help them get jobs, and
bring these areas back to their vibrancy.
Thank you. I will entertain questions when asked.
[The prepared statement of Roger J. Dow follows:]
Prepared Statement of Roger J. Dow, President and CEO, Travel Industry
Association of America
The Travel Industry Association of America (TIA), in
conjunction with the Travel Business Roundtable (TBR),
appreciates the opportunity to present this testimony regarding
the impact of Hurricane Katrina on travel and tourism in the
Gulf Coast region. Chairman Stearns, Ranking Member Schakowsky
and members of the subcommittee, TIA, on behalf of the entire
travel and tourism industry, applauds you for holding this
important hearing to more closely examine the impact of
Hurricane Katrina on various parts of our economy, including
travel and tourism, the leading industry in the Gulf Coast
area.
BACKGROUND ON TIA AND TBR
TIA is the national, non-profit organization representing
all components of the $599.2 billion U.S. travel and tourism
industry. TIA's mission is to represent the whole of the travel
industry to promote and facilitate increased travel to and
within the United States. Our 1,700 member organizations
represent every segment of the industry, and are dedicated to
helping grow the U.S. economy and provide jobs and economic
opportunity for individuals and communities all across America.
We are here today also representing our strategic partner, TBR,
a CEO-based organization of more than 75 member corporations,
associations and labor groups. TIA and TBR are formal partners,
working with Congress and the Administration to advance the
public policy interests of the U.S. travel and tourism
industry.
THE IMPACT OF HURRICANE KATRINA ON GULF COAST TOURISM
Hurricane Katrina dealt a devastating blow to the lives of
millions of individuals across the Gulf Coast region and
brought life and commerce to a sudden stop. We grieve for the
many whose lives were lost in this natural calamity. We also
want to salute the thousands of first responders and volunteers
who have saved thousands of lives and are now tending to the
physical and emotional needs of hundreds of thousands of
displaced people. These dedicated individuals make us all proud
by their acts of bravery and selflessness.
Approximately 260,000 men and women were employed in
travel-related jobs in the impacted region, and nearly all of
those jobs have been disrupted for some period of time. More
than $18 billion in travel-related spending occurs annually in
the affected counties in Louisiana, Mississippi and Alabama.
With the total absence of leisure, business and convention
travel to the region, approximately $50 million in travel-
related spending is now lost every day.
THE TRAVEL INDUSTRY RESPONSE TO KATRINA
The travel industry response to Hurricane Katrina has been
generous and wide-ranging, from American Express' $1 million
donation to the American Red Cross, to Harrah's Entertainment
extending pay to displaced employees for 90 days and
establishing a $1 million Employee Recovery Fund. Other
examples include the National Restaurant Association's upcoming
National ``Dine Around'', which should raise millions, and
Cendant Corporation providing housing and rental vehicles for
emergency response personnel.
While we knew it made little sense to launch fundraising or
humanitarian efforts that would simply duplicate the excellent
work already underway, the travel industry at the national
level wanted to weigh in and do our part to help travel and
tourism colleagues in need. Our organization, TIA, working in
conjunction with our strategic partner TBR and the Travel &
Tourism Coalition--a coalition of 37 travel-related national
associations--believes one of the best contributions we can
make to the relief effort is to help find employment for the
thousands of displaced workers in the region.
On September 15, we launched a free job bank,
www.katrinajobs.org, which is aimed at finding temporary new
employment for workers displaced by the hurricane. While the
site is focused on finding new jobs for travel industry
employees, it is not limited just to these workers. So many
workers in the Gulf Coast region were employed by our industry,
and we are working with our members nationwide to provide
employment opportunities through this job bank site. As well-
trained employees working in a variety of service jobs in
travel and tourism, we believe these men and women possess
transferable skills and could fill any number of new jobs both
within and outside of the travel industry. We are very grateful
to the American Red Cross, which has chosen to help promote our
new www.katrinajobs.org website in the southeast region.
As mentioned above, there are numerous travel-related
companies that are extending pay and benefits for their
employees, or have relocated those workers to other facilities
around the country to continue their employment. Many other
companies are providing housing and other necessary services
for these valuable travel industry associates. These quarter-
million men and women are critical to the industry since we are
service providers, and these front-line employees help provide
millions of visitors with a tremendous travel experience. They
deserve no less than our very best at this critical time.
Highlights of the industry's response are included in the
attached legislative relief package.
TRAVEL AND TOURISM INDUSTRY LEGISLATIVE RELIEF PACKAGE
We applaud the Bush Administration and this Congress for
its quick response in passing emergency appropriations packages
to speed up relief to the region. This was our nation's
greatest natural disaster to date, and as immediate and long-
term solutions are formulated, we stand ready to assist those
affected by the hurricane.
To that end, the travel and tourism industry has drafted a
legislative relief package to assist employees, employers and
owners directly impacted by Hurricane Katrina. A package of
information has been transmitted to Administration and
Congressional leaders which includes the following items: (1)
Industry Overview: Reviving the Gulf Coast and U.S. Travel and
Tourism; (2) Economic Impact of the Travel and Tourism Industry
in the Gulf Region; (3) Industry Contributions to Katrina
Relief; (4) Travel and Tourism Legislative Requests. This
document is included as an addendum to this written testimony.
In this legislative relief package, we focus first on
assistance to displaced workers, which are the heart and soul
of the U.S. travel industry. These millions of men and women
are the spirit and driving force that has made our industry so
successful. We applaud all that has been done by both the
public and private sector to help displaced workers with
housing, food and medical care. Many of the tax provisions
suggested in our package are aimed at improving the lives of
those employees directly impacted by the hurricane.
Federal tax deductions and credits, much like after the
events of September 11, 2001, can also be utilized to assist
business owners in the impacted counties to begin to rebuild
and repair. It is important that we highlight the fact that we
are seeking only emergency tax relief for the affected region
that would be both time-limited and targeted in focus. These
recommended tax provisions are detailed in the attached
document and include such items as Private Activity Bonds, Work
Opportunity Tax Credits, Leasehold Improvements, Bonus
Depreciation, Small Business Expensing, and others.
While the focus is currently on recovery, the focus will
shift to rebuilding the devastated communities in the Gulf
Coast region. Once facilities are rebuilt and it is appropriate
once again to invite visitors to enjoy the unique sights,
sounds, arts and culture and culinary pleasures of this area,
it is important that the federal government provide limited
funds to the three impacted states, as well as local travel
organizations, to promote travel to the region.
Leisure, business and convention travelers will need to
hear that the area is open for business, and be encouraged to
visit once again. We believe that limited federal funds could
help these three states, as well as local destinations, promote
effectively to recapture visitors and begin to support the
region's number one industry--travel and tourism.
HURRICANE KATRINA'S THREE DISTINCT IMPACTS ON TRAVEL
Broadly speaking, Hurricane Katrina had three distinct and
dramatic impacts on travel and tourism in the Gulf Coast region
of Louisiana, Mississippi and Alabama, and across the entire
country.
First and most importantly, Hurricane Katrina killed
hundreds, uprooted hundreds of thousands of local residents,
and destroyed entire communities. Many of these areas are
special places of welcome and hospitality for millions of
domestic and international travelers. From the world-class
cuisine and music of New Orleans to the historic mansions,
casinos, resorts and beaches in Mississippi and Alabama, these
historic and fun-filled places have been damaged or destroyed.
The work of rebuilding the physical infrastructure has
already begun, and once the cleanup is completed, hundreds of
thousands of new homes and businesses will emerge. It is our
hope and prayer that all affected communities in the Gulf Coast
region will be rebuilt and that residents will return to a
place they can call home again. And we hope those communities
will be stronger and more viable than ever, with travel and
tourism continuing as the leading industry in providing
exciting job opportunities and economic growth for the future.
The second impact of Hurricane Katrina on the travel and
tourism industry comes through the strong blow dealt to the
energy production, refinement and transmission capabilities of
the region. While some of the energy impacts are perhaps more
short-lived (e.g. pipeline supply disruptions), production of
oil and gas has been greatly reduced, and already tight
refinery operations have been disrupted.
Reliable transportation fuels provided at reasonable cost
levels are absolutely essential to the future growth and
success of the travel industry. Without ready access to
gasoline, diesel and jet fuel, this nation's ability to travel
for personal and business reasons would come to a grinding
halt. In the weeks following Hurricane Katrina, fuel shortages
(and rumors of shortages) drove up prices and stranded some
motorists. Again, we must address our nation's energy needs in
order to ensure a reliable supply of fairly priced fuels.
Nothing less than national mobility is at stake.
The third and final impact of Hurricane Katrina is much
less obvious to the American public and policymakers in
Washington, but is potentially more devastating over the long
term. Fair or not, the images viewed abroad by hundreds of
millions of international citizens of the looting, lawlessness
and human despair in New Orleans only helps to worsen the
deteriorating U.S. image abroad. Even when the media was
reporting wild rumors as fact, international audiences were
left with the distinct impression that this city's residents
were abandoned by multiple levels of government and preyed upon
by roving gangs of thugs. The news coming out of New Orleans
was in many instances misreported, but audiences around the
world viewed chaos and human despair that only served to
reinforce the most negative portrayals of the United States and
her people.
The U.S. travel industry has grown more concerned over the
past few years about America's sinking image abroad. Recent
polling demonstrates that a substantial number of prospective
visitors from Europe and Asia are now less inclined to visit
our nation for business and pleasure due to negative
perceptions about our culture and politics. Again, the scenes
from the Gulf Coast region transmitted by satellite around the
world only helped to bolster this less than flattering opinion
about the United States and may serve as a further disincentive
for international visitors to travel here. And this growing
negative perception matters significantly since international
travel to the U.S. results in nearly $100 billion in visitor
spending annually, supporting nearly 1 million U.S. jobs.
In conclusion, I want to pledge on behalf of the entire
U.S. travel industry that we will work with Congress, the
Administration and all involved charitable organizations to
help in the rebuilding and restoration of the Gulf Coast
Region. We want nothing less than a region that is even more
economically viable, more culturally vibrant and that offers
hope and opportunity to all its citizens--a place for millions
to call home once again. Hurricane Katrina has served to awaken
the hopeful spirit and generosity of the American people. In
that spirit, let us continue to move forward with the
rebuilding of lives and communities to provide a better
tomorrow for the citizens of Louisiana, Mississippi and
Alabama.
Mr. Stearns. Thank you. Mr. Niskanen, welcome.
STATEMENT OF WILLIAM A. NISKANEN
Mr. Niskanen. Thank you. We have all been concerned about
the nature and magnitude of the human tragedy caused by
Hurricane Katrina, but the recovery from this tragedy will
depend importantly on both what the Federal Government does and
what it does not do. My remarks focus on the appropriate policy
responses to Katrina.
Maybe important, do not impose any form of rationing or
price controls on food, gasoline, rents, and so forth. Price
increases following a supply shock serve two very important
functions: they allocate the available supply to those who
value it most, and they encourage those who own or produce the
goods to increase the available supply. The historical record
documents that price controls lead to other less desirable
forms of rationing, waiting lines, bribery, favoritism, the
substitution of lower quality goods and services.
In the absence of price controls, the price of oil has
roughly doubled since 2002, with little general economic cost.
In contrast, the economic effects of the oil shocks of the
1970's were more severe and lasted longer, primarily due to the
extended price controls. The specific increase in the price of
gasoline since Katrina was due to the temporary reduction of
U.S. refining capacity by about 10 percent, not due to some
antisocial action by oil companies and distributors. I doubt
whether there is a single documented incident of what is
carelessly called price gouging in the absence of a supply--
restricted supply. At the time of Katrina, I predicted that the
price of gasoline would fall quickly as electric power,
employees, and the supply of oil were restored to the
refineries, and that is what has happened. The national average
price of gasoline fell, declined, $0.17 a gallon last week, and
I expect that it will continue to do so, to decline to the pre-
Katrina average of August of $2.50 a gallon, unless supplies
are again disrupted by Rita or another hurricane.
Katrina also destroyed several hundred thousand housing
units that will take longer to replace. In the meantime, the
rents on available housing, especially on the Gulf Coast, will
increase. Governments should not respond to this condition by
imposing rent controls. Such controls misallocate the available
supply, and reduce the incentive to increase the supply.
There is a good case, however, consistent with our natural
generosity, to make ample assistance to those households who
are displaced by the Hurricane Katrina, and I contend there is
ample room within the $62.5 billion already approved for such
assistance. Such assistance, however, should be temporary, say
for a year, and should be independent of where the displaced
households choose to live. Returning to the Gulf Coast,
specifically, should not be a condition for receiving such
assistance.
Now, I recommend a package of three types of vouchers, a
housing or a rental voucher of maybe, say, $10,000 a year, that
would have a budget cost of about $6 billion. The Secretary of
Education has already approved, budgeted for $1.9 billion, to
provide school vouchers, and the voucher will be usable in
any--either a private or public school anywhere in the country.
President Bush has proposed a training and labor voucher of
$5,000 per head of household, that would probably cost about $3
billion. Such direct assistance to each displaced households
allow them to make their own choices about where the
combination of available housing, schools, and jobs best meets
their interests. The combination of--this combination of direct
assistance would be far preferable to the FEMA plan to build
massive mobile home villages on open land in the Gulf Coast,
villages with no trees, stores, schools, churches, or community
organizations that make a house a home. The total budget cost
for this package of direct assistance to displaced households,
assuming that there are no more than about 600,000 displaced
households that have no home to which to return, should be less
than $15 billion. One wonders what activities financed by the
$63.5 billion already approved should have any higher priority.
The primary additional measure to protect both the Treasury and
consumers would be to assure that the vouchers are allocated to
and used only by the households displaced by the hurricane.
A third point. All too often, I hear otherwise thoughtful
people question whether, how, or we--how--or we should rebuild
New Orleans. My response is that this is not our problem.
This--these questions should not be resolved by the Federal
Government. No one individual or group here in Washington has
either the information or the incentive to make the decisions
that best serve the interests of the Gulf Coast residents.
Nationalize the decisions would make them unusually vulnerable
to pleas by special interests for the Federal Government to
favor some post-Katrina composition of commerce that does not
necessarily serve the interests of the local residents. Most of
the key decisions about how the Gulf Coast cities should be
rebuilt, and the post-Katrina composition of commerce on the
Gulf Coast, should be made by the local property owners and the
proximate State and local governments.
The primary remaining Federal role, I contend, other than
the assistance to the displaced households described above,
should be to rebuild that part of the local infrastructure for
which the Federal Government has the historical responsibility.
It is important to avoid any increase, in the Federal response
to Katrina, relative to its prior response to natural
disasters. This would create a moral hazard problem by
increasing the expectation of local residents and governments
about the future Federal response, reducing their own
incentives to make those decisions that would either avoid or
reduce the cost of future disasters. It is especially important
for the Federal Government to avoid financing any rebuilding of
private property that was not covered by flood insurance.
Although flood insurance is heavily subsidized, many, even most
property owners in New Orleans, do not buy this insurance,
expecting the Federal Government to bail them out whether or
not they are insured. This has already led to a big decline in
the share of flood-prone properties that have flood insurance.
One potential Federal measure that deserves serious
consideration would be to require flood insurance on all
properties for which there is a mortgage from a federally
regulated or insured financial institution. But in the
meantime, the Federal Government should not make this problem
worse by financing the rebuilding of private property that is
not covered by the flood insurance.
Now, on the above three issues, Congress faces dilemma: the
commendable incentive to be generous to the victims of natural
disaster may increase the costs, both to the Treasury and to
the local residents of future disasters. As you address the
Federal responses to Hurricane Katrina, I encourage you to keep
this in mind.
Thank you.
[The prepared statement of William A. Niskanen follows:]
Prepared Statement of William A. Niskanen, Chairman, Cato Institute
Good morning. My thanks for this opportunity to testify about the
commerce and consumer protection implications of Hurricane Katrina.
We have all been concerned about the nature and magnitude of the
human tragedy caused by Hurricane Katrina, but the recovery from this
tragedy will depend importantly on both what the federal government
does and what it does not do.
1. Maybe most important, do not impose any form of rationing or
price controls on food, gasoline, rents. etc. Price increases following
a supply shock serve two important functions: they allocate the
available supply of goods to those who value it most, and they
encourage those who own or produce the goods to increase the available
supply. The historical record documents that price controls lead to
other, less desirable, forms of rationing--by waiting lines, bribery,
favoritism, and the substitution of lower quality goods and services.
In the absence of price controls, the price of oil has roughly
doubled since 2002 with little general economic cost. In contrast, the
economic effects of the oil shocks of the 1970s were more severe and
lasted longer, primarily due to the extended price controls. The
specific increase in the price of gasoline since Katrina was due to the
temporary reduction of U.S. refining capacity by around 10 percent, not
to some anti-social action by oil companies and distributors. At that
time, I predicted that the price of gasoline would fall quickly as
electric power, employees, and a supply of oil were restored to the
refineries. And that is what has happened. The national average price
of gasoline, for example, declined by 17 cents a gallon last week, and
I expect that it will continue to decline to the pre-Katrina average
price in August of $2.50 per gallon, unless supplies are again
disrupted by another hurricane.
Katrina also destroyed several hundred thousand housing units that
will take longer to replace. In the meantime, the rents on available
housing, especially on the Gulf Coast, will increase. Governments
should not respond to this condition by imposing rent controls. Such
controls, as with price controls on gasoline, misallocate the available
supply and reduce the incentive to increase the supply. In addition,
there is no reason to place the burden of providing housing for the
displaced households on the owners of existing housing.
2. There is a good case, consistent with our natural generosity, to
make ample assistance to those households displaced by Hurricane
Katrina, and there is ample funding within the $62.5 billion already
approved for such assistance. Such assistance, however, should be
temporary, say for a year, and should be independent of where the
displaced households choose to live. Returning to the Gulf Coast,
specifically, should not be a condition for receiving such assistance.
The federal budget cost of a rent voucher for displaced households,
say of $10,000, would be around $6 billion, and the voucher should be
usable anywhere in the country. The budget cost of a school voucher for
all displaced school children would be about the same, and the voucher
should be usable at either a public or private school anywhere in the
country. President Bush's proposal for a training and labor voucher of
$5,000 per head of household would cost about half this amount. Such
direct assistance to each displaced households allow them to make their
own choices about where the combination of available housing, schools,
and jobs best meets their interests. This combination of direct
assistance would be far preferable to the FEMA plan to build massive
mobile home villages on open land on the Gulf Coast--villages with no
trees, stores, schools, churches, or community organizations that make
a house a home. The total budget cost for this package of direct
assistance, assuming there are no more than 600,000 displaced
households that have no home to which to return, should be less than
$20 billion. One wonders what activities financed by the $63.5 billion
already approved should have a higher priority. The primary additional
measure to protect both the Treasury and consumers would be to assure
that the vouchers are allocated to and used only by the households
displaced by Hurricane Katrina.
3. All too often, I hear otherwise thoughtful people question
whether and how ``we'' should rebuild New Orleans. My response has been
that these questions should not be resolved by the federal government;
no one individual or group here in Washington has either the
information or the incentive to make the decisions that best serve the
interests of the Gulf Coast residents. Nationalizing these decisions
would make them unusually vulnerable to pleas by special interests for
the federal government to favor some post-Katrina composition of
commerce that does not best serve the interests of the local residents.
Most of the key decisions about how the Gulf Coast cities should be
rebuilt and the post-Katrina composition of commerce on the Gulf Coast
should be made by the local property owners and by the proximate state
and local governments.
The primary remaining federal role, other than the assistance to
the displaced households recommended above, should be to rebuild that
part of the local infrastructure for which the federal government has
had the historical responsibility. It is important to avoid any
increase in the federal response to Katrina relative to its prior
response to natural disasters. This would create a ``moral hazard''
problem by increasing the expectation of local residents and
governments about the future federal response. This would reduce their
own incentives to make those decisions that would avoid or reduce the
cost of future natural disasters. It is especially important for the
federal government to avoid financing any rebuilding of private
property that was not covered by flood insurance. Although flood
insurance is heavily subsidized, many property owners do not buy this
insurance, expecting the federal government to bail them out whether or
not they are insured; this has already led to a decline in the share of
flood-prone properties that have flood insurance. One potential federal
measure that deserves serious consideration would be to require flood
insurance on all properties on which there is a mortgage from a
federally regulated and insured financial institution. But in the
meantime, the federal government should not make this problem worse by
financing the rebuilding of private property that was not covered by
flood insurance.
On the three above issues, Congress faces a dilemma: the
commendable incentive to be generous to the victims of a natural
disaster may increase the costs of future disasters, both to the local
residents and to the U.S. Treasury. As you address the federal
responses to Hurricane Katrina, I encourage you to keep this in mind.
Mr. Stearns. I thank the witnesses. I will start out with
the questioning. In my mind's eye, listening to you, the first
question I have is what should be the Federal role here, how
much to press the Federal Trade Commission, in terms of
identifying collusion or dealing with a number of things,
whether there is or is not price gouging, and then also,
talking about any fraudulent activity.
But at the same time, we have passed $61 billion, and most
of us don't realize where that is going, and as so often
happens, that the desire to help out is exceeded by the desire
to investigate and bring accountability, and that is where I
think a lot of us are concerned.
I will start with my first question for you, Mr. Seesel. Do
you have the tools, in your opinion, to deal with fraud that
might occur, fraudulent activity? Is there something that you
think Congress should do that we haven't done to give you more
power dealing with collusion or, perhaps, even identifying
price gouging at your agency?
Mr. Seesel. Mr. Chairman, to begin with, on the consumer
protection side, on the situations involving fraud and scams
and so forth, I think I have described this morning a fairly
full panoply of tools and weapons the FTC has to deal with
consumer problems like deception and fraud.
On the antitrust side, dealing with collusion and other
antitrust violations, I think the Commission has a full
arsenal, also. I think we have----
Mr. Stearns. You don't need any help from us.
Mr. Seesel. Well, certainly, Congressman, Mr. Chairman----
Mr. Stearns. Just more funding.
Mr. Seesel. As far as funding concern, I----
Mr. Stearns. I understand that, but I mean in terms of
legislative tools to help you to work this problem.
Mr. Seesel. Well, we have some new tools we are working
with now already. As you know, we are conducting an
investigation under Section 1809 of the Energy Policy Act, and
so that will give the Commission a chance to look at issues of
gasoline price manipulation, and prepare a report for Congress
after the conclusion of that investigation. But----
Mr. Stearns. Okay.
Mr. Seesel. I am sorry.
Mr. Stearns. But there is no Federal legislation dealing
with price gouging.
Mr. Seesel. That is correct, Chairman.
Mr. Stearns. And at this point, you have collusion. Do you
feel that you can identify what price gouging is? Do you have a
definition of it?
Mr. Seesel. I don't think that we have a definition of it
at the Commission, and the definitions I have seen have been
quite diverse and quite diffuse, and both at the State and
Federal level, I think, it has been hard for people to come to
a consensus about what that term means.
Mr. Stearns. There is some concern about flood-damaged
vehicles specifically being restored, re-titled, and sold to
unsuspecting consumers. Do you--what is your authority to
prevent that?
Mr. Seesel. I think, Mr. Chairman, that the FTC generally
has the view, again, I don't know what the official Commission
position is, but in our experience, State motor vehicle
divisions and consumer protection authorities are probably in
the best position to monitor issues about flood-damaged
vehicles being resold in a fraudulent manner.
I don't know that the FTC's current authority doesn't cover
that, but I certainly think that--our experiences have been
State and local officials deal with that quite actively, and
are best suited to do that.
Mr. Stearns. So you are pretty much equipped to handle it,
then. You feel pretty comfortable.
Mr. Seesel. I think we are.
Mr. Stearns. Okay.
Now, Mr. Huether, how can Congress reduce the stress on
logistic issues from manufacturers that are created by port
disruptions and other infrastructure failures. I don't know if
you saw the front page of the Washington Times. It shows, in
Texas, particularly in the Galveston and Houston, Victoria,
Corpus Christi, all the oil and natural gas platforms, as well
as the oil refineries, and this huge number, and if this ever--
if this Hurricane Rita hits as we expect, I assume all of this
there is going to huge damage, so that there will be even more
logistic issues for manufacturers and ports and things.
Mr. Huether. I thought you--someone was going to ask a
question like that, and one of the things I did was I called a
number of manufacturers, Mississippi, and Alabama, and
Louisiana, and I asked them what are your biggest problems
right now? What are your biggest concerns? Where are the
bottlenecks?
And they all responded, and they gave me exactly the same
answer, and they said the biggest problem right now is the
human bottleneck. It is getting employees, trying to locate and
find their employees.
Mr. Stearns. Because they have no names, and they have no--
--
Mr. Huether. And the issue isn't just that they don't have
homes, but where they are right now could be between 4 and 5
hours away from the company, and so there are employees who are
traveling great distances every day just to go to work. There
have been some manufacturers who have actually bought a large
number of trailer homes and put them in their plant to house
the workers and their families there.
That is one significant issue. The other significant issue
is, that is connected with that, is that a lot of the social
infrastructure that the--that modern workers use today, such as
daycare, are gone, and so even if some workers may be only an
hour or an hour and a half away, a lot of the social
infrastructure is gone, so if they have, you know, small
children, there is really no way they can get to work, and you
know, from a number of manufacturers that I have talked to,
that right now is their No. 1 concern, in addition to some
supply bottlenecks, in terms of ores, steel, where the
Mississippi River is a significant conduit for that. And that
has broader implications for areas, you know, country, but just
in terms of the areas, specifically, that are most damaged, it
is really the human element that is the biggest problem right
now.
Mr. Stearns. Mr. Niskanen talked about these manufactured
homes that the government supposedly is going to buy, and he is
strongly against that. How do you feel about what he feels, in
giving the voucher, instead of the government temporarily
buying these or renting?
Mr. Huether. Well, I think you would probably have to
figure out what was going to be the most efficient way to get
workers in a safe location near their base of employment.
Mr. Stearns. I mean, how can you go it quickly?
Mr. Huether. And if this is--and it is basically a short-
term phenomenon to begin with.
Mr. Stearns. Yeah.
Mr. Huether. I think that is probably the biggest problem
with getting production up right now in some areas, is just
making sure that companies and workers can get together, and I
think that, on a short-term basis, whatever can be done to try
to foster that would probably be--we would probably reduce the
downturn in manufacturing output over the next few months.
Mr. Stearns. You know, I will just follow up. My time has
expired. We are going to go around for a second round of
questioning, but maybe the solution is not necessarily a
voucher, like Mr. Niskanen mentioned, but maybe give some
incentive for employers to go out and buy or rent facilities
quickly, and then the government doesn't have the obligation
for these mobile home, manufactured home, and they are not on
the hook for some kind of voucher program, but the employers
would take the response. They have the best means of executing
this through their business strategy, and just set up whole new
areas for them, rent out whole new areas, and things like that,
or let them take the responsibility for finding the
manufactured home, and give them tax credits or something.
What do you think of that idea?
Mr. Huether. I think that is something that should be
considered, because I know this is the primary concern of a lot
of companies in these areas, is just making sure that their
employees, they can get their employees to work, and their
employees have a place, a safe place to stay that is somewhere
close to the location of business.
Mr. Stearns. Because the institutional memory for a lot of
these employees, you can't get off the street right now, so you
have got to get Tom Jones or Bob Smith or Linda Smith, you got
to get her to come back, so I would say Linda, I have got you a
place to live. I have got a daycare center for you. We are
setting up a corporate daycare center. You just come to work.
We will take care of all your needs here, because you are so
valuable, we can't--we are going to lose our revenue here.
So anyway, my time has expired. The ranking member.
Ms. Schakowsky. Thank you, Mr. Chairman.
I think Americans watching what happened became aware of a
couple of things. One is that the Federal Government does, in
fact, have an important role to play, particularly in its basic
function of protecting the safety and security of Americans.
But the other thing people saw was a face of poverty in that
region, but also, suddenly, the lifting of the veil of poverty
that exists in all of our cities. And when we can talk--when we
talk about the economy and how we work to restore it in the
face of Hurricane Katrina and now Hurricane Rita--and by the
way, in that regard, Mr. Chairman, let us be thinking about all
of those people in the path, including our colleague, Gene
Green, who went home. He is not here right now, because he went
home to help his constituents, and close his house, which is in
the direct path of Hurricane Rita right now. That is where he
is.
When Mr. Niskanen--am I saying that right? Your executive
vice president, David Boaz, said something in an article
called, on September 19, ``Catastrophe in Big Easy demonstrates
big government's failure,'' that I think is a problem with the
whole perspective on how we even begin to address this problem.
And I want to quote from that article. ``The suffering visible
in the poorest parts of the city, New Orleans, is a perfect
example of the failure of the non-ownership society. People had
become trapped in dependency, with neither financial nor moral
assets to rely on.'' Does--are you saying, and that is the way
I read it, that somehow, poverty is representative of a lack of
morals? I mean, we would all agree that financial assets are
lacking among the poor. That is the definition of poverty. But
a lack of moral assets? And if we begin with that perspective,
of course we would result in the answer that government doesn't
have a role in helping to control the prices that these poor
people face, or the housing that these poor people need, and
that we don't have a role to play.
Mr. Niskanen. The primary point of David's article was that
one important lesson from Katrina is that government failed at
every level.
Ms. Schakowsky. No, I want to know about moral assets. Are
the poor lacking in moral assets?
Mr. Niskanen. I am not going to pass judgment on that. I
think it is quite clear that poverty----
Ms. Schakowsky. So could be.
Mr. Niskanen. I said that it is quite clear that poverty,
in many cases, is the consequence of failure to get a job, of
having children out of wedlock. These are very strong
correlates of poverty. If you regard that as a moral response,
a moral problem, I think that I would probably agree with you.
Now, that is not necessarily all poverty. I have often been
asked the most important decision in my life, and I say
choosing the right parents. We are all a product of our parents
and our upbringing, and the people who--many of the people in
poverty are second, third generation poverty. And I think to
some extent, the--to some extent, I think it is appropriate to
say that poverty is the consequence of a moral problem.
One thing that we have found, for example, since the 1996
Welfare Reform Act is that the number of welfare recipients has
been cut in half, the number of single mothers----
Ms. Schakowsky. The poverty level has not been cut in half,
has it, Mr. Niskanen?
Mr. Niskanen. Of those people who are no longer welfare
recipients, they are--and they have a higher income now than
they did before, with welfare, because of the earned income tax
credit. They have a job. We have transformed welfare from a
payment for not working to a payment to supplement the earnings
of low skilled people. And I think that was an entirely
appropriate action. We are not going to eliminate poverty,
however, until ultimately, the primary correlates of poverty
are changed.
Huge proportions of children born to single mothers, for
example, is probably the single most--the strongest correlate
of poverty. Now, this was----
Ms. Schakowsky. You know, I need to--I think you have
sufficiently answered my question, and quite frankly, I am so
pained by your answer that--you, I think, are among the
minority of Americans who may have been watching those people
crying for help in the Convention Center, at the stadium, and
thought that these are people who must be there because of some
moral lacking. I am just shocked at that, but I am glad it is
on the record.
And speaking of these individuals, one of the things, Mr.
Hall, that has been done is that the prevailing wage in New
Orleans for construction workers right now, is $9.55 an hour;
mason tenders get $7 an hour, some of the lowest prevailing
wages in the country. I am trying to understand how contracts
have been issued, no-bid contracts, I understand, cost plus
contracts, I think, for companies like Halliburton, and yet,
for the workers, we are going to say that the prevailing wage
rule, Davis-Bacon, will be lifted, and I am wondering if you
think that it is important to our economy, or to the economy of
these individual families, that workers could be paid as little
as $5.15 an hour, which is the minimum wage, and if those
families could support themselves on those low wages, or pay
for healthcare, and might they need government help, and be
entitled to government help, to support them? In other words, a
further subsidy for those companies who have gotten the no-bid
contracts.
Mr. Hall. Well, I hate to not answer your question, but
that is getting pretty far out of my expertise, since my focus
is on the economic data, and what we are likely to see, in term
of the national data. So I am not sure I have an----
Ms. Schakowsky. So abandoning the prevailing wage, and
allowing wages to decline is not in your area of concern?
Mr. Hall. Well, no. Certainly, I am concerned with the
performance of the economy overall, the performance of the
economy in that area. I know they are going to have great
hardship. We--I would like to see them, obviously, recover
quickly, not only through construction, but taking care of
people in the meantime. But it is just, the Department of
Commerce, the part of commerce that I deal with, we just--that
is not a policy issue I deal with. I am sorry.
Mr. Stearns. The gentleman from California, Mr. Radanovich.
Mr. Radanovich. No questions.
Mr. Stearns. No questions. I will start with the second
round then.
Mr. Dow, you testified that approximately $50 million in
travel-related spending is being lost every day.
Mr. Dow. Correct.
Mr. Stearns. But from my business experience, if I was
going to take a vacation in New Orleans, and I saw that, I
would go somewhere else, and so much of the travel that
occurred in the Gulf Coast region, wouldn't that be diverted to
other areas of the country? And they might go to Las Vegas.
They might go to San Francisco. They might go somewhere, other
places, and I would think that that would sort of change that
$50 million number. Wouldn't that be true?
Mr. Dow. My statement was that $50 million lost daily to
that area, you are correct----
Mr. Stearns. Every day.
Mr. Dow [continuing]. That a portion of the travel would go
to other areas, but there is a great deal of travel that goes
to that area, that is business related, to doing business in
that area, will not occur. Immediately after Katrina, we asked
one of our members, Expedia, to take a look at what their
reservations were, coming from the United States, and 2 weeks
before Katrina, the travel to the U.S. from outside of the U.S.
was up 5 percent, but 2 weeks following, it was down 10
percent. So that is travel that did not occur.
You are correct. Some of the travel will move to other
areas, but there is a lot of travel that would just be
canceled. The trip, the convention, New Orleans, for example,
hosts conventions of 5,000 to 10,000 people. You cannot find
anywhere in the U.S., Las Vegas, Chicago, New York, that can
house 5,000 people on a month's notice. These cities are full,
so that business totally goes away, and doesn't happen, except
for a year from now.
Mr. Stearns. Okay. Would staff give Mr. Hall this picture
from the Washington Times, which shows all the oil and natural
gas platforms, oil refinery, from Corpus Christi, Galveston,
all the way up to New Orleans? I just want you to look at this.
This is--will show you the enormous depth of our capacity for
digging and refining oil, and I guess my question to you, Dr.
Hall, I am not asking you to be very specific, but you gave
pretty good figures dealing with GDP from these three, Alabama,
Mississippi, and Louisiana, and the effect that Katrina had.
Considering you have a hurricane, maybe 4 level, heading
into those areas, what do you suspect the impact would be? Just
give a scenario. You have done this many times, I mean, I
assume that you could make an educated guess of what we are
looking for, in terms of we know the GDP of Texas, we know the
impact of this. I mean, are we going to look at a possibly
another huge spike in oil, and--I mean, if you can, just take
me through those scenarios as best you can. I am not going to
hold you to anything. This is all hypothetical, but I mean, it
would be helpful for Members of Congress to realize in advance
what we are, perhaps, looking at.
Mr. Hall. Well, since at Commerce, we do produce the data
that comes out, I really make an effort to not try to forecast
the data, because we really do produce it, and we really will
measure the impact of these things.
I can certainly say that the impact, possible impact on the
energy market, is certainly--would certainly be a thing that I
would be most concerned about, with the impact of Rita. I can
tell you, for example, that the top three ports for imports of
crude oil are Houston, New Orleans, and Port Arthur, and that
accounts for about 55 percent of our oil imports. So that would
be a serious concern, and then, of course, all the associated
refineries and such in the area would be a big concern.
Obviously, higher gasoline prices would be a great burden
on people that pay the higher gasoline prices. Most of what I
have tried to focus on, though, is the idea that although this
is a burden for people buying gasoline, a burden for people
with higher prices, in terms of the big picture of the economy,
that the economy is strong enough, and the growth is strong
enough, to weather these sorts of things, these sorts of
impacts. We have done it in the past, maybe not as large of an
impact as Katrina has, in many ways, but it is something that
the economy does very well with.
Mr. Stearns. Well, I can understand your trepidation here
to try and do a little forecasting. But if we are looking at
what happened with Katrina, and we see what happens to Rita,
and you see that is even much more so than New Orleans, in
terms of the oil capacity, I would suspect it is going to be
something big.
Now, the question is for many Members of Congress, if the
President or anyone comes back with another package, in
addition to the one we are talking about for New Orleans and
Louisiana, then a package for this, this is going to be another
concern of how we do this, and what the Federal role would be.
If you don't mind, I would like to go to you, Mr. Niskanen,
and ask you a little bit about--the House unanimously approved
a plan to offer tax assistance to people and businesses that
were dislocated by the hurricane. I don't know if you are
familiar with that package, that tax package, and it asks for
tax expansion for--tax breaks for charitable contributions. I
guess, given your idea on limited role of the Federal
Government, what would be Cato's opinion on that tax package we
did?
I mean, I am sort of in your camp in many ways, so I am
asking, because we are going to be looking at these tax
packages, and I am just curious what you thought, if you knew
about yesterday, what you could give me your feeling about it.
Mr. Niskanen. Well, I don't think the Federal Government
should try to shape the nature of the recovery, should try to
shape the post-Katrina composition of commerce in the area.
Mr. Stearns. It should all be done on a local level.
Mr. Niskanen. I think the decisions should be made at a
local level. Now, I went out of my way to endorse a plan of
helping the displaced households with substantial assistance
for rents, for schooling, and for jobs.
Mr. Stearns. Would that include businesses, too?
Mr. Niskanen. Pardon?
Mr. Stearns. Would that include businesses, too?
Mr. Niskanen. It would not include businesses, and I think
that we should be very careful not to reward business owners or
private property owners who have not taken out flood insurance.
The Federal Government enormously subsidizes flood insurance,
but then it bails out people whether or not they have the flood
insurance. And we have had a dismal record with the flood
insurance, in which a lot of claims of Federal insurance are
for the second or third claim on the same piece of property.
People have taken their claims from an earlier storm and
reinvested in the same place. They have made no change in their
location. And that, both the flood insurance system, I think,
has to be corrected. I think we need higher premiums in flood
insurance. I think we probably should have required flood
insurance, in much the same way that we have required auto
liability insurance, as a condition for getting mortgages from
Federal insured or regulated mortgages.
Now, the kind of enterprise zone that is being proposed for
the Gulf Coast is a grant, in effect, to restore businesses in
the Gulf Coast, rather than particularly to help the people who
were displaced by the storm. And I am much less enthusiastic
about that, because it will be--it will have the effect of
biasing the composition of business to those for whom the tax
breaks make most of the difference. That depends upon how
capital-intensive they are and other matters.
Mr. Stearns. Are you----
Mr. Niskanen. I think we should not make a Federal
commitment to restore the Gulf Coast to a pre-Katrina
situation. We should, for the most part, I think, let that
development happen by the decisions of private property owners
and local governments.
Mr. Stearns. In those areas, the people live in high risk
areas. You know, in this case, it is flooding, but in some
cases, California, it is earthquake, and some places, it is
fire. Do you think the Federal Government should adopt a policy
to discourage housing in those areas that have high risk areas,
are vulnerable to these natural disasters, by perhaps not
providing insurance? I guess, what policy would you suggest in
this case?
Mr. Niskanen. If people want to rebuild an area, I think
they should be required to take out flood insurance. If they
use a mortgage from a federally insured or regulated mortgage
financial institution.
Mr. Stearns. Subsidized by the Federal Government or not?
Mr. Niskanen. And I would raise the premiums on the flood
insurance. The premiums are too low. We have had to bail out
the Federal flood insurance system by some billions of dollars
just in recent weeks. So I think they should be--should make
their own decision, consistent with the required flood
insurance, and higher premiums for flood insurance.
Mr. Stearns. Mr. Dow, you said you had some legislation.
You talked about a proposal for tourist promotion funding. What
is the specific dollar amount that you are talking about in
your legislation?
Mr. Dow. I don't have the specific dollar amount with me
right now. What it is is we just ask for tax credits for
funding for advertising promotions. It is so critical to
promote these areas, because as the world and the Nation looks
at this, in my former life in the hotel business, when there is
trouble in, let us say, Nassau, people don't go to Bermuda. And
it is so critical to get these people back, to understand the
geography. So we are asking for tax credits for the activities
that the industry would fund. We are not asking for money,
specifically, a large amount of money.
Mr. Stearns. Okay. My time has expired. The ranking member.
Ms. Schakowsky. Mr. Hall, or Dr. Hall, excuse me. You were
talking fairly optimistically about the recovery from the
spikes in the gas prices, but--and energy prices. This is from
a report that was issued by the Congressional Research Service
on September 13, ``The Macroeconomic Effects of Hurricane
Katrina.'' And here is what they say: ``Why would higher energy
prices be a cause for broader economic concern? Eight of the
nine postwar recessions were accompanied by sharp increases in
the price of oil. The last four recessions followed this
pattern: 1973-75 recession followed the oil embargo; the double
dip recession of 1080-82 followed the second oil shock, which
was caused by the Iranian Revolution and the Iran-Iraq War;
1990-1991 recession followed the oil spike induced the Gulf
War; and the 2000 recession followed a sharp rise in oil prices
from 1999 to 2000.'' So your optimism is perplexing to me.
Mr. Hall. Well, I guess two things. One is, we have already
had--pre-Katrina, we had a pretty serious spike in energy
prices, and----
Ms. Schakowsky. True.
Mr. Hall. And it raised prices for a lot of people, but it
didn't sort of eke out into the rest of economy. Core CPI, in
fact, has gone down, over the last 5 months. That may not last,
but so far, the economy has weathered that very nicely.
The other thing I can say is, in terms of the impact of
previous spikes, we have had a significant improvement in
energy efficiency in this country. Over the past 10 years
alone, we have become 20 percent more efficient. Over the past
30 years, we are 50 percent more efficient. So I am optimistic
in that sense, that we have become more energy efficient. We
are a very large economy. While it is hardship for people, I
still do think it is something that we can----
Ms. Schakowsky. I come from the Chicago area, the Midwest
largely heats with natural gas, where the Energy Information
Agency has projected as much as a 70 plus percent increase in
natural gas prices. That was before Rita, and we don't know
what is going to happen, and now, headlines showing Rita could
equal $5 a gallon gas. It is hard for me to imagine, let alone
the individual families that are going to be affected, how it
is not going to put further strains on the economy of all those
areas as well.
Mr. Hall. You know, I don't disagree that it is difficult
for people paying those prices, it is difficult for lots of
families, especially families with lower income, where energy
spending is a higher share of their spending. That is a real
problem. But if you look at overall consumer spending, 5.5
percent of that is on energy products.
Ms. Schakowsky. And when you see an increase of 71 percent,
doesn't that increase the percentage?
Mr. Hall. Yeah, absolutely----
Ms. Schakowsky. And that would be for renters, which
doesn't necessarily show in how much goes for energy.
Mr. Hall. Well, no, actually it does, absolutely does, and
it probably will bump out some additional consumer spending on
other things. But still, my point is, though, that although it
is hardship and it is difficulty, it still----
Ms. Schakowsky. And small businesses that are going to have
to absorb those costs.
Mr. Hall. Absolutely.
Ms. Schakowsky. Okay.
Mr. Hall. Well, my focus has been on the economy overall.
Ms. Schakowsky. Yeah.
Mr. Hall. You know. The forecasts on the impact of Katrina,
we don't do the forecasting, but they top out anywhere from a
half a percentage point to somewhere over 1 percent. Well, we
had a forecast of 4 percent growth in GDP this quarter. That is
a long way from a point off GDP growth. My point is, in terms
of worrying about recessions and such, this is not--this is
hopefully not going to impact, or will not impact the rest of
the economy in----
Ms. Schakowsky. Is it Huether?
Mr. Huether. Yeah. Right.
Ms. Schakowsky. Let me ask you this. If--the construction
companies are very interested in getting some protection from
any kind of--from liability as they rebuild. How would you feel
if you are a manufacturer, and you want to rebuild your plant,
about having the inability to get relief from a construction
company that did their work in a shoddy manner, and a dangerous
manner? This is legislation that they are pushing, and will
come to the Congress and ask to support.
I just wondered what your Association might feel about
that, or----
Mr. Huether. Well, I think that we would typically want the
type of insurance protections that are typically associated
with reconstruction. And if you wouldn't mind, I would like to
kind of answer a little bit about your question to Dr. Hall.
Ms. Schakowsky. Well, answer that one, though. So you would
not be in favor of that exclusion from liability for
construction companies?
Mr. Huether. I don't know that the NAM has taken a position
on that right now, and it probably would be best for me to
answer you later, after this is over, because I don't know if
the NAM has----
Ms. Schakowsky. And in that regard, by the way, Mr.
Chairman, if I could submit some other questions in writing, I
would appreciate it.
Mr. Stearns. Absolutely.
Mr. Huether. But in addition, you know, one of the major
concerns that manufacturers have, and you mentioned about
natural gas is, you know, the fact that about 40 percent of
natural gas is used by industry, more than consumers. More than
retail, more than any other sector. It is manufacturers,
primarily, that use natural gas. And one of the big concerns
that manufacturers have isn't necessarily that we have had a
spike recently, but the main concern is that while there is a
world oil price, and if oil does come down, refining capacity
gets back up, then, the price of gasoline is going to moderate.
The big concern that companies have right now is that
natural gas prices aren't going to come down, mainly because
there is not a world market price for natural gas. It is
determined by local supply and demand. And I think that one
downside for the economy going forward is continued very high
natural gas prices. Now, there has been some legislation that
was passed, that is going to help increase natural gas supply,
but we have to remember putting things into context right now,
the U.S. economy has four liquid natural gas terminals in the
country. That is equal to the number that South Korea has.
Their economy is a tenth the size of ours. If you look at
Japan, they have 26 terminals. If you look at Europe, they have
anywhere between 16 and 20, and they are building more. So you
know, we all know that probably the use of natural gas, going
forward, is not going to decline, and so I think it is
important that the government, you know, help promote an
expansion of natural gas supply going forward, because it is
going to be a long term concern going forward.
Mr. Stearns. Well, I think we completed. I am just going to
ask Mr. Seesel a question, and I am asking you to answer yes or
no. This is a yes or no question for you, and I know how--your
staff is cringing right now, that I am going to ask this, so we
don't want a maybe here.
You announced yesterday that you are investigating price
gouging of gasoline. Is that correct? I think you had some kind
of press conference or something like that?
Mr. Seesel. I testified yesterday before the Senate
Commerce Committee.
Mr. Stearns. Yeah.
Mr. Seesel. The Commission is looking at gasoline price
manipulation under Section 1809.
Mr. Stearns. So you have started this investigation.
Mr. Seesel. Yes. It is underway.
Mr. Stearns. Okay. Should the Federal Government, the
question is, should the Federal Government have the explicit
authority to investigate and prosecute price gouging, just yes
or no?
Mr. Seesel. In my personal judgment?
Mr. Stearns. Well, your professional--both--you can give me
your personal, but I am more interested in your professional
opinion.
Mr. Seesel. I think my answer to that, Mr. Chairman, would
be no.
Mr. Stearns. Okay. Okay. What is your personal?
Mr. Seesel. No, that is what I meant.
Mr. Stearns. Okay. So----
Mr. Seesel. I can't speak for the Commission officially,
but----
Mr. Stearns. Okay. Okay. Well, I think we have had a pretty
good hearing. I will allow the gentlelady, the ranking member,
to also ask if she has another question, but Mr. Huether, we
had a little question on the Bacon Act, and there was some
question she brought up about the suspension of it, and
obviously, I support that. She does not support it. I mean, is
there anything you would like to add to that, because in some
cases, to expedite this, it--there might be an argument for the
suspension.
Mr. Huether. I don't like--repeat other economists, but
this really gets into an area that is kind of outside my
expertise.
Mr. Stearns. Okay.
Mr. Huether. And I would be happy to go back to the NAM and
answer the question later in writing, if that is okay----
Mr. Stearns. Mr.----
Ms. Schakowsky. We could just fight it out, Mr. Chairman.
Mr. Stearns. Fight it out. Mr.--Dr. Niskanen, would you
comment about the Bacon Act, and it being suspended? You might
want to help Mr. Huether here.
Mr. Niskanen. I think Davis-Bacon is a bad law, and I would
be pleased to see that it will at least be suspended for a
period of time. I think that it should trigger a more general
investigation of Davis-Bacon, to see whether it is really a law
that we ought to go forward with. But I think my impression----
Mr. Stearns. In the short term.
Mr. Niskanen [continuing]. Of Davis-Bacon right now is
that--do you have the authority to suspend it for a period of
time, but not to--but not indefinitely.
Mr. Stearns. Right. That is--and you support that idea.
Mr. Niskanen. And I think that it should trigger, maybe, an
investigation by this committee or some other element of
Congress to--as to whether this is appropriate labor
legislation for the future.
Mr. Stearns. Well, just for your information, there has
been legislation as long as I have been here in Congress, and
it has always failed. So the Davis-Bacon Act has succeeded in
the House floor to continue, even though it has been offered.
But if you had any suggestions, I am going to close the
hearing. If there is anything else you would like to say?
With that, I want to thank you for your patience while we
went to vote, and I think we had a very substantive hearing,
and I thank you for your time.
[Whereupon, at 1:10 p.m., the subcommittee was adjourned.]