<DOC>
[108 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:95613.wais]
S. Hrg. 108-582
NOMINATIONS OF: N. GREGORY MANKIW
STEVEN B. NESMITH, JOSE F. TERAN
JAMES BROADDUS, PAUL D. PATE
LANE CARSON, AND C. MORGAN EDWARDS
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
ON
NOMINATIONS OF:
N. GREGORY MANKIW, OF MASSACHUSETTS, TO BE A MEMBER OF
THE BOARD OF DIRECTORS OF THE COUNCIL OF ECONOMIC ADVISERS
__________
STEVEN B. NESMITH, OF PENNSYLVANIA, TO BE
ASSISTANT SECRETARY FOR CONGRESSIONAL AND INTERNATIONAL RELATIONS
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
__________
JOSE F. TERAN, OF FLORIDA, TO BE A MEMBER OF
THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES
__________
JAMES BROADDUS, OF TEXAS, TO BE A MEMBER OF
THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES
__________
PAUL D. PATE, OF IOWA, TO BE A MEMBER OF
THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES
__________
LANE CARSON, OF LOUISIANA, TO BE A MEMBER OF
THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES
__________
C. MORGAN EDWARDS, OF NORTH CAROLINA, TO BE A MEMBER OF
THE BOARD OF DIRECTORS, NATIONAL INSTITUTE OF BUILDING SCIENCES
__________
MAY 13, 2003
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island JON S. CORZINE, New Jersey
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Peggy R. Kuhn, Senior Financial Economist
Mark A. Calabria, Senior Professional Staff
Martin J. Gruenberg, Democratic Senior Counsel
Jonathan Miller, Democratic Professional Staff
Jennifer Fogel-Bublick, Democratic Counsel
Patience R. Singleton, Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
TUESDAY, JULY 22, 2003
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Specter.............................................. 2
Senator Dole................................................. 4
Senator Reed................................................. 5
Senator Allard............................................... 8
Senator Corzine.............................................. 9
Senator Carper............................................... 11
Senator Sarbanes............................................. 13
Senator Schumer.............................................. 26
Senator Santorum............................................. 34
Prepared statement....................................... 48
Senator Grassley............................................. 48
NOMINEES
N. Gregory Mankiw, of Massachusetts, to be a Member of the
Council of
Economic Advisers.............................................. 3
Biographical sketch of nominee............................... 50
Responses to written questions of Senator Johnson............ 112
Steven B. Nesmith, of Pennsylvania, to be Assistant Secretary for
Congressional and International Relations, U.S. Department of
Housing
and Urban Development......................................... 36
Biographical sketch of nominee............................... 68
Jose F. Teran, of Florida, to be a Member of the Board of
Directors
of the National Institute of Building Sciences................. 40
Biograhpical sketch of nominee............................... 74
James Broaddus, of Texas, to be a Member of the Board of
Directors
of the National Institute of Building Sciences................. 41
Biograhpical sketch of nominee............................... 85
Response to a written question of Senator Shelby............. 113
Paul D. Pate, of Iowa, to be a Member of the Board of Directors
of the National Institute of Building Sciences................. 43
Prepared statement........................................... 49
Biograhpical sketch of nominee............................... 92
Lane Carson, of Louisiana, to be a Member of the Board of
Directors
of the National Institute of Building Sciences................. 44
Biograhpical sketch of nominee............................... 98
C. Morgan Edwards, of North Carolina, to be a Member of the Board
of
Directors of the National Institute of Building Sciences....... 45
Biograhpical sketch of nominee............................... 106
(iii)
NOMINATIONS OF:
N. GREGORY MANKIW, OF MASSACHUSETTS
TO BE A MEMBER OF
THE COUNCIL OF ECONOMIC ADVISERS
STEVEN B. NESMITH, OF PENNSYLVANIA
TO BE ASSISTANT SECRETARY FOR CONGRESSIONAL
AND INTERGOVERNMENTAL RELATIONS
U.S. DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
JOSE F. TERAN, OF FLORIDA
JAMES BROADDUS, OF TEXAS
PAUL D. PATE, OF IOWA
LANE CARSON, OF LOUISIANA, AND
C. MORGAN EDWARDS, OF NORTH CAROLINA
TO BE MEMBERS OF THE BOARD OF DIRECTORS
NATIONAL INSTITUTE OF BUILDING SCIENCES
----------
TUESDAY, MAY 13, 2003
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:02 a.m., in room SD-538 of the
Dirksen Senate Office Building, Senator Richard C. Shelby,
(Chairman of the Committee), presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The Committee will come to order.
We have several nominations this morning. I appreciate the
willingness of the nominees to appear before the Committee
today. We will take them in three panels.
Our first panel will be Mr. Nicholas Gregory Mankiw,
nominated to be a Member of the President's Council of Economic
Advisers. The Council of Economic Advisers, established by the
Employment Act of 1946, provides the President with economic
analysis and advice on the development and implementation of
domestic and international policy issues.
Mr. Mankiw most recently held the Allie S. Freed
Professorship in Economics at Harvard University, where he
spent the majority of his professional career. I will note
Professor Mankiw's previous experience at the Council of
Economic Advisers. He served two decades ago as a Staff
Economist on the Council. Dr. Mankiw is also a research
associate with the National Bureau of Economic Research and
adviser to the Federal Reserve Bank of Boston and the
Congressional Budget Office. He is a graduate of Princeton
University and earned his Ph.D. from MIT.
Our second panel is Mr. Steven Nesmith, nominated to be
Assistant Secretary for Congressional and Intergovernmental
Relations at the U.S. Department of Housing and Urban
Development. Mr. Nesmith most recently served in the Office of
Congressional and Intergovernmental Affairs at the U.S.
Department of Commerce's Economic Development Administration.
Perhaps more importantly, he was recognized by the Washington,
DC Basketball Hall of Fame during his senior year at American
University.
Our third panel will include Mr. Jose Teran, Mr. James
Broaddus, Mr. Lane Carson, Mr. Morgan Edwards, and Mr. Paul
Pate. All are nominees to the Board of Directors of the
National Institute of Building Sciences. The National Institute
of Building Sciences has the mission of improving the building
regulatory environment, facilitating the introduction of new
and existing products and technology into the building process,
and disseminating nationally recognized technical and
regulatory information.
We have with us today, and I know that he has a busy
schedule, Senator Arlen Specter. Our colleague is the senior
Senator from Pennsylvania, and I want to recognize him first
and let him proceed to introduce one of the nominees.
Senator Specter.
STATEMENT OF ARLEN SPECTER
A U.S. SENATOR FROM THE STATE OF PENNSYLVANIA
Senator Specter. Thank you very much, Mr. Chairman.
It is a pleasure to be here today to introduce Steve
Nesmith, Esquire, who is nominated to be the Assistant
Secretary for Congressional and Intergovernmental Relations for
the Department of Housing and Urban Development. Mr. Nesmith is
a very impressive man, impressive in stature, and his
background and resume match that.
As the Chairman has already noted, Mr. Nesmith has achieved
celebrity status as a 4-year varsity basketball team member,
team captain, and scholarship award-winner at American
University.
After that distinguished academic and athletic career, he
returned to his native city, Philadelphia, where he was a clerk
for the Chief Justice of the Pennsylvania Supreme Court, then
was an associate with the distinguished law firm, Wolfe, Block,
and then Saul Ewing. He also served in the mayor's Office for
Community Services, was Senior Counsel of the Legislative
Strategies group, and has had quite an extensive service in
governmental matters.
He currently serves as Deputy Assistant Secretary for
Congressional and Intergovernmental Relations for the
Department of Commerce's Economic Development Administration,
and he now comes to this position, which is quite a career
advance, calling for Senate confirmation.
It is a great pleasure for me to introduce Mr. Nesmith, and
also his wife.
Chairman Shelby. Thank you. Senator Specter, I know that
you have other committees that you have to go to. We appreciate
your early appearance here and we will take this nomination up
second.
Thank you so much.
Senator Specter. Thank you very much, Mr. Chairman.
Chairman Shelby. Dr. Mankiw, would you come to the table?
First of all, would you stand and be sworn? Hold up your
right hand.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Dr. Mankiw. I do.
Chairman Shelby. Do you agree to appear and testify before
any duly-constituted committee of the Senate?
Dr. Mankiw. I do.
Chairman Shelby. Dr. Mankiw, do you want to introduce your
family?
Dr. Mankiw. Yes. I am here today with my wife and my
daughter, Catherine. I have two young sons who are at home at
school today in Massachusetts.
Chairman Shelby. We welcome you to the Committee. You have
been nominated by the President to what I believe is a very,
very important job.
I know you have an opening statement. Your written
statement will be made part of the record in its entirety.
You may proceed as you wish.
STATEMENT OF N. GREGORY MANKIW
OF MASSACHUSETTS, TO BE A MEMBER OF
THE COUNCIL OF ECONOMIC ADVISERS
Dr. Mankiw. Thank you, Mr. Chairman, and Members of the
Committee.
I am honored to be here today as the President's nominee to
chair the Council of Economic Advisers. For more than half a
century, the Council has offered Presidents professional
analysis concerning the state of the economy and the issues
facing economic policymakers. I have great respect for the
tradition and, if confirmed, I will make every effort to
maintain the Council's high standards.
The United States has long been a land of great economic
opportunity, and the story of my own family reflects that fact.
My four grandparents emigrated from Ukraine to the United
States almost a century ago, looking for a better life. None of
them had more than a fourth grade education. But the U.S.
economy was more than ready to reward their hard work and
determination. When my grandmother opened her small candy store
in Trenton, New Jersey, in the 1920's, her goal was to give her
children and grandchildren more opportunities than she had. She
had ample success.
I am one of the lucky beneficiaries of those efforts. As a
student, I attended Princeton and MIT--two of the best
universities in the world. For the past 18 years, I have been a
Professor of Economics at Harvard. My career has been dedicated
to studying the economy and teaching students about the
principles of economic policy, both in the classroom and
through the two textbooks I have written.
I am also a husband and father of three wonderful children.
My wife Deborah and daughter Catherine are here with me today.
If there is one hope I have for economic policy, it is for it
to create an environment where the children of every family
have access to the opportunities that my father has enjoyed
since my grandparents arrived in their new homeland.
The U.S. economy remains one of the most vibrant in the
world, but we have also faced some significant challenges in
recent years. The economy's production of goods and services
has grown over the past 18 months, but not fast enough to put
people back to work after the recent recession. There are
several causes of the economy's troubles. The overhang from the
high-tech bubble of the 1990's, a series of corporate-
governance scandals, and the increased uncertainties after the
September 11 terrorist attacks have all put downward pressure
on economic activity.
At the same time, monetary and fiscal policymakers have
acted vigorously to stimulate the economy. Interest rate cuts
by the Federal Reserve, and tax cuts enacted by Congress and
signed by the President, have helped offset these
contractionary forces and contributed to the recovery. I
believe that passage of the President's Jobs and Growth package
would add to this effort. It would help put people back to work
in the short-run, as well as encouraging capital accumulation
and economic growth in the long-run.
Despite these recent challenges, the future of the U.S.
economy is bright. I often point out to my students that Adam
Smith, the founding father of economics, published his great
book, ``The Wealth of Nations,'' in 1776, just as our Nation
was declaring its independence. This is no coincidence. History
teaches that economic liberty goes hand in hand with political
liberty. That lesson goes a long way toward explaining the
success the United States has enjoyed over the past two
centuries.
If confirmed, I will be honored to play some role in
helping to shape our Nation's economic policies. I know that
public service is a great opportunity and a great
responsibility. I look forward to working with you and the
other Members of Congress in the months and years to come.
Thank you.
Chairman Shelby. I am going to yield my time to Senator
Dole right now. I believe she has to go to another meeting.
Senator Dole.
STATEMENT OF SENATOR ELIZABETH DOLE
Senator Dole. Thank you so much, Mr. Chairman. I certainly
want to recognize and welcome all the nominees who are before
the panel this morning.
I was especially pleased to recognize Paul Pate and Colvin
Edwards, who are on the third panel, who are both very special
friends of mine.
Both are nominated to the Board of Directors for the
National Institute of Building Sciences, which serves as an
authoritative voice for the Nation on building and construction
issues.
They each bring an enormous amount of experience and
knowledge to their positions. Paul currently serves as Mayor of
Cedar Rapids, Iowa, and President and Owner of Pate Asphalt
Systems, P.M. Systems Corporation.
He has been named Iowa Businessman of the Year by the U.S.
Small Business Administration and a blue chip award-winner for
the U.S. Chamber of Commerce. He is also a former State
senator, Secretary of State for Iowa, and a cherished friend.
Colvin Edwards, known as Morgan to his friends, brings a
similar amount of expertise. He is a retired Navy reservist. He
served as a Division Chief within Pennsylvania's Building Code
Administration and Economic Development Director for the City
of Philadelphia, Pennsylvania.
Colvin is a native of North Carolina and served as an
Assistant Secretary at the North Carolina Department of
Transportation.
Mr. Chairman, both of these individuals have been an
enormous asset to me personally. In the time I have known each
of them, they have been very supportive and very generous with
their time.
Today, it gives me great pleasure to voice my strong
support for their nominations.
I know from experience what a great contribution each of
these men will make to the National Institute of Building
Sciences. America is lucky indeed to have their service.
I wish I could remain to hear the statements of all of the
nominees and to discuss some of the issues with them that are
before our Committee, but unfortunately, I do have other
obligations that require me to leave.
Let me just wish each of the nominees the very best and
express my support for them.
Thank you very much, Mr. Chairman.
Chairman Shelby. Senator Reed.
STATEMENT OF SENATOR JACK REED
Senator Reed. Thank you very much, Mr. Chairman, and
welcome, Dr. Mankiw.
We are in a period of economic distress which is measured
in many ways. One way is the number of unemployed Americans,
which the Economist reported that the proportion of workers who
exhaust their unemployment benefits before they find work is
the highest since the records began in the early 1970's.
There are some of us who feel that we should be
aggressively supporting the extension of the unemployment
benefits. Some of that is the result of some work in economics.
I'll quote your eminent textbook:``When the economy goes
into a recession, workers are laid off, more people apply for
unemployment insurance benefits. This automatic increase in
Government spending stimulates aggregate demand at exactly the
time when aggregate demand is insufficient to maintain full
employment.''
Would you agree that we should extend the unemployment
benefits program?
Dr. Mankiw. As you know, the President has worked with the
Congress to extent unemployment benefits in the past, and I am
sure that he will work with Congress again on this issue.
I think the general question of unemployment insurance
raises a whole set of economic issues, both long-run and short-
run.
There is no question that by putting money in people's
pockets, unemployment insurance maintains aggregate demand at a
time when the economy needs more demand for goods and services,
and that was the quote that you mentioned.
It also provides insurance, which is the ostensible goal of
helping people when times are difficult.
Another thing to keep in mind, though, is that it also has
incentive effects. There is a large literature in economics
that establishes that people with unemployment insurance search
less hard for new jobs and the existence of unemployment
insurance probably does raise the normal level of unemployment.
It is what economists call the natural rate.
You see this probably in most dramatic form in some
European countries, where unemployment insurance, or its
equivalent, goes on sometimes indefinitely and it really causes
long-run structural problems.
And so, in thinking about unemployment insurance, you have
to balance all these considerations and decide what the right
mix is.
Senator Reed. We are coming to a decision point. The
extended unemployment benefits expires May 31. To keep this
program going, we are going to have to have a decision. Would
you advise the President before May 31 to extend the benefits?
Dr. Mankiw. I am sure that this is something that the
President will be working with Congress on. As I said, I would
state to him what I just said to you, which is balancing all of
these considerations and there are pros and cons.
Senator Reed. It seems to me on the other factors, and I
will make one final point about extended unemployment benefits,
is that the economy is changing. I do not think that anyone
quite knows precisely in which direction.
But my observation is that the people who are finding it
difficult to find employment are not low-skilled individuals.
They are people who are in middle age, who work for companies
that have down-scaled significantly. So they used to be a vice
president of human resources, but there aren't any more VP
human resources positions in the local area.
They used to work for financial institutions, but they have
been displaced by computers. So they are looking for a job that
basically will be something comparable to what they had, and it
is been months and in some cases, years, and they haven't found
it. And in that context, not to extend benefits is to me wrong
and disreputable. I would hope that you bring that message back
to the President to include in the balance.
Let me ask another question, and that is, Henry Aron, who
is an eminent economist, suggested in some testimony that he
gave several weeks ago, that the most difficult challenge that
we face as a Nation, aside from the momentary issues of
recession and the business cycle and others, is providing for
the expected retirement of a huge number of Americans, the Baby
Boom generation.
Do you agree that that is the most significant challenge
that we will face in the next decade?
Dr. Mankiw. It is certainly a significant challenge. The
entitlement issue, Medicare, and Social Security, are no
question issues that the Administration and Congress will be
thinking about and should think about in the years to come.
The President has talked about wanting to modernize these
entitlement programs and to make sure that they are there for
future generations. He has talked about personal accounts in
Social Security. He has talked about moving Medicare in the
direction of more private competition.
I think there is no question that the retirement programs
are going to need to be modernized for future generations.
Senator Reed. What does modernization mean? Does that mean
that we cut the benefits of people who already assume that they
will receive these benefits? Or we increase the amount of money
that current employed individuals have to pay?
Dr. Mankiw. I do not think that anybody is proposing to cut
benefits for people who are now receiving them.
There are different approaches to modernizing these
programs. The President has talked a lot about personal
accounts. For example, in Social Security, where people would
have a stake and ownership of assets.
Senator Reed. How do you create a personal account and
still pay the beneficiaries who have earned their benefits
without either increasing taxes to put in these accounts or to
decrease the benefits that will be paid? How do you do that
mathematically?
Dr. Mankiw. There have been a variety of proposals floating
around about how to reform Social Security and Medicare and the
President said that he wants to move in the direction of more
personal accounts and more competition in Medicare.
I do not have my own personal plan to propose here for you
today, Senator.
Senator Reed. In the November 2000 Fortune article, you
wrote, ``Admittedly, some of Bush's arguments are off the mark.
When he compares the 2 percent real return a worker now gets
from Social Security with the 6 percent real return offered by
a portfolio of stocks, he neglects to mention that the Social
Security fund still owes a huge amount to those now or soon-to-
be retired. This liability, the overhang from giving earlier
generations more than they put in the system, doesn't disappear
with privatization. Whatever system Bush comes up with, it
won't give young workers a 6 percent return.''
So, if that is his modernization plan, I think you go back
to the initial question--how do you pay for it?
Dr. Mankiw. I believe in that same article, actually, I did
say that it was actually a good idea to move in the direction
of personal accounts, but I was questioning some of the
particular arguments used to support that.
I was not raising skepticism of the policy, but some of the
ways that the arguments were framed. I think there is no
question that these are big challenges. I think everybody
agrees that they are big challenges.
If you look at the President's budget, he has a chapter
called, The Real Fiscal Danger, which is precisely about the
entitlement problem looming on the horizon.
I do not think there is any disagreement over the basic
facts and the difficult choices that will have to be made in
the future.
Senator Reed. I do not think there is any disagreement
about the challenge. I think the disagreement comes when we
would be much better prepared for that challenge if we weren't
undertaking a huge tax cut at the moment that will, by any
definition, constrain our ability to make the transition, to
make the modernization. And that is the point I would like to
leave you with.
Thank you very much.
Chairman Shelby. Senator Allard.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. I have a couple of questions, one dealing
in relation to the transportation system of the country and the
other one dealing with the housing policy of this country.
As you are probably aware, we are moving forward with the
reauthorization of the highway transportation bill, and there
is discussion among the various Members of the Senate as to how
we will pay for that.
Some have suggested that we have a two-cents-per-gallon
increase on gas taxes, and others have been calling for an
increase of as high as 12 cents per gallon.
The State of Colorado, for example, has the highest, or one
of the highest gasoline taxes in the country. Would you talk a
little bit about the economics, as you see it, being impacted
by an increase in the gas tax?
Do you see the economic development in roads in highways
offsetting the negative impacts of a tax increase at various
levels; and how might the impact of those States that have a
higher gasoline tax, differ from those States with a lower
gasoline tax?
And if you can do that within the next two minutes----
[Laughter.]
--we would appreciate it. But if you can give some brief
thoughts on that, I would appreciate it.
Dr. Mankiw. That is not an issue that I have studied, so I
shouldn't say anything very specific. As with any public
project like that, you have to apply a cost/benefit test. You
have to figure out what the benefits of the public good you are
providing are and compare that to the costs of the taxes you
are raising, including any distortionary effects those taxes
have. So it is not only the direct effect, but any indirect
effects on the economy.
That is how I would approach the subject. But on the
specifics of the legislation you are talking about, I am just
not that familiar, but I am happy to get back to you with a
written answer.
Senator Allard. Are you generally of the view that building
new roads is an economic development instrument that could be
used by the Congress to stimulate the economy?
Dr. Mankiw. I think you really have to do it from a cost/
benefit standpoint. Obviously, some roads are a good thing and
not all roads are a good thing. I do not think there is a
blanket answer to whether building a new road is a good thing
or not. It really depends on the specifics and whether it
passes the cost/benefit test in that particular case.
Senator Allard. Okay. Many homeowners have been blessed in
the last few years by a marked increase in the equity in their
home. I think housing is one of the parts of our economy that
has been pretty self-sustaining as we move forward.
Not only have we been getting more families into homes--I
think we are at record levels as far as that is concerned--but
we also are seeing those homes increase in value.
Are you concerned about the increasingly common use of home
equity or second mortgages? And should our economy suffer a
more serious setback in the future, would there be consequences
of these practices for both families and the overall economy?
I wonder if you would talk about that a little bit.
Dr. Mankiw. I think there is no question that we have a
financial system that allows people access to credit in ways
that is unusual around the world and probably unusual
historically. But I think most economists think that that is
probably a good thing in the sense that most people who borrow
understand what they are doing and are doing things to smooth
over tough times.
I have a home equity line that we use sometimes and not use
other times. The instances of these financial markets benefits
most families. You are right that sometimes people may use them
unwisely. But I think, by and large, the economy is better off
and people are better off by virtue of having access to credit
markets.
Senator Allard. Mr. Chairman, I see that my time is
expiring. Thank you very much.
Chairman Shelby. Senator Corzine.
STATEMENT OF SENATOR JON S. CORZINE
Senator Corzine. Thank you, Mr. Chairman. I appreciate the
service that we can expect from Dr. Mankiw.
One of the things Senator Reed started, it is always good
to look at these words that are written in books brilliant
people put together--The Essentials of Economics--because it
always allows for raising questions about issues that one might
feel strongly about.
Let me refer to one quote from a textbook that Dr. Mankiw
talked about: ``The most basic lesson about budget deficits
follows directly from their effects on the supply and demand
for loanable funds. When the Government reduces national
savings by running a budget deficit, the interest rate rises
and investment falls.''
Is that a premise that you continue to believe in economic
analysis, and how does it relate to what appears to be a
growing period of budget deficits that are projected by almost
all economic analysts, whether in the private sector, the
public sector, CBO, and even the President's own numbers?
Dr. Mankiw. Yes, I have not changed my mind since that
edition of the book came out 2 months ago.
[Laughter.]
And I think reducing the budget deficit is one priority of
public policy, and I think the President shares that view.
If you look at another chapter in that same book that you
are holding, you will also see that tax cuts can stimulate the
demand for goods and services, raise production and employment,
and be a way of stimulating the economy with excess capacity. I
think that lesson also needs to be kept in mind.
Whenever you are thinking about fiscal policy, you are
obviously balancing a variety of concerns--effects on demand
for goods and services and supply of goods and services,
effects on the short-run, effects on the long-run.
And one of the most important priorities right now is to
put people back to work, is to get demand back up so that the
economy grows more quickly and more people become employed.
The recession is over in the sense that GDP is growing, and
that is the good news. The bad news is that it is not growing
fast enough to put people back to work.
The purpose of the President's Jobs and Growth package is
to increase aggregate demand. Certainly one of the purposes is
to increase aggregate demand and put people back to work in the
short-run, as well as encouraging capital accumulation and
economic growth in the long-run.
Senator Corzine. Do the deficits in the long-run work
against the possibility of economic expansion because of the
kinds of competition for capital that I think is implied in the
statements that you have made?
Dr. Mankiw. Other things equal, yes. Other things equal, we
would rather not have the budget deficits. And the President
has talked about spending restraint as an important part of his
program, and under the President's budget, the deficits will be
shrinking over time.
But, once again, one has to balance that against other
factors. An important part of the President's plan is
eliminating the double taxation of dividends, which is a
distortion that discourages capital accumulation and economic
growth.
Senator Corzine. Would you argue that the exemption for
dividend is of a rank ordering of elements that would stimulate
the economy, one of the highest order policy initiatives that
would actually generate short-term demand in the economy?
Dr. Mankiw. I think the tax package is put together with an
eye on both the short-run and the long-run. I think fiscal
policy always has to keep an eye on different horizons.
My own judgment is that accelerating the marginal rate cuts
is going to provide a tremendous amount of short-run stimulus,
but obviously, it is going to have very little long-run effect
because those rates cuts will go into effect anyway in the
long-run. So that is going to be explicitly temporary.
Reducing the double taxation of dividends is great tax
policy in the long-run. I have not yet talked to an economist
who thinks that a good tax code double taxes dividends.
I think it would also have some short-run stimulus effect
coming from increased wealth as equity markets respond.
That in part depends on how much equity markets respond,
and that is something that is obviously very hard to predict.
But as a matter of economic theory, if you tax dividends less,
the stock market should rise as it reflects the higher present
value of after-tax cashflows and that should make people
wealthier and that should induce them to spend more, as well as
lowering the cost of capital for businesses and inducing them
to invest more.
Senator Corzine. So you would argue that this is going to
have significant short-run stimulative impact, the dividend
exclusion?
Dr. Mankiw. Yes. If people believe that this dividend
exclusion is credibly going to be permanent, that it is not
just come and go, but it is going to be a permanent feature of
tax policy, as I certainly would think it should be, then that
should affect the value of the stock market, which in turn
should affect households' wealth and businesses' cost of
capital.
Senator Corzine. Thank you, Mr. Chairman.
Chairman Shelby. Senator Carper.
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Thanks, Mr. Chairman.
Dr. Mankiw--have I correctly pronounced your name?
Dr. Mankiw. That is correct. It rhymes with ``thank you.''
[Laughter.]
Senator Carper. Thanks for joining us today. Thanks for
your willingness to serve our country in this capacity.
Are members of your family here?
Dr. Mankiw. Yes. My wife is right here, as is my daughter,
Catherine, who is 11 years old.
Senator Carper. Catherine, welcome aboard. Thank you for
sharing your dad, and Ms. Mankiw, thank you for sharing your
husband with us. I missed those introductions. I am sure they
were made earlier.
A couple of months ago Chairman Greenspan sat in your seat
and he talked a bit about double taxation of dividends, which
he thinks is a bad thing, and he called for eliminating them.
He also called for doing it in a way that did not
exacerbate our long-term budget deficit. He talked about maybe
instead of doing it on the individual income taxpayer's side,
to think about doing it, making the change on the corporate
side, much as we allow corporations to expense debt, to
consider possibly letting them expense their dividend payments.
I have been floating an idea in the last couple of weeks
with people who are a lot smarter than me, to ask them to react
to this notion. Let me just ask you to do the same as well.
We have seen some who have suggested that what we do is we
phase out over 3 years the taxation on dividend income, and
then it comes right back again, much as our phasing out of the
estate tax is going to proceed along and then come right back
again at the end of this decade.
I thought that one of the things that businesses need to be
successful and to grow and one of the factors for a strong
economy is some certainty. And with respect to estate tax and
with respect to a dividend tax proposal like I described
earlier, not a whole lot of certainty for anyone.
Let me just run this notion by you and just ask you to
respond to it. If you think it is a bad idea, I am not
offended. But I would like to have your thoughts.
Currently, we let businesses expense, as I understand it,
about 100 percent of what they pay in debt service. We do not
let them expense the dividend income of the dividends that they
declare.
And someone said, we need some parity there. And there is
different ways to get at the parity. One of the ways is to,
over a period of time, maybe reduce somewhat the percentage of
debt service that can be expensed and to gradually increase the
amount of dividends that can be expensed, until we reach some
kind of parity. I do not know if it would be 50 percent or 75
percent. I do not know how many years it would take, but
several years at least.
Would you just respond to that notion and tell me if I have
lost my mind entirely?
Dr. Mankiw. Yes, there is different ways of eliminating the
double taxation of dividends.
In some sense, the similarity of different ways of
eliminating them is maybe more important than the differences
in the sense that all these different ways of doing that would
reduce the cost of capital and encourage capital accumulation,
which in turn would encourage productivity growth, and that is
one of the motivations behind the President's dividend
exclusion.
To do it at the corporate level is slightly different from
doing it at the personal level because it would exclude income
that is never going to be taxed.
So, for example, Harvard University doesn't pay taxes on
its dividends because it is a tax-exempt corporation. Right
now, that income is in some senses taxed once. It is taxed at
the corporate level, then not taxed at the level of Harvard
University.
If you deducted the dividends at the corporate level, which
is another way to do corporate integration, the income that is
earned that flows to Harvard University would not get taxed
once, whereas, under the President's plan, it is only income
that is taxed once already that gets excluded.
The President, I believe, was motivated by the idea that we
want to eliminate double taxation of dividends, so he wants to
reduce the tax on things that have already been taxed once. But
if things haven't been taxed once, then he wasn't going to
propose reducing that tax.
As I said, I think the most important thing is reducing the
cost of capital, and any way of lowering the tax on capital
income would have that effect and therefore, would tend to be
stimulated toward investment.
Senator Carper. We have had some focus here today on the
budget deficit, and you will hear a lot more on that, I hope,
as we go forward. I am one of those people who believes that
budget deficits do matter. And the idea of running a deficit in
the short-term is okay--wars, recessions and that kind of
thing.
The idea of having deficits for as far as the eye can see
is troubling to me, and I hope it is still troubling to you and
certainly my colleagues here.
I want us to focus on a different kind of deficit for just
a moment. That is the trade deficit. The trade deficit has
continued to grow. I think the trade deficit for this year is
put at some $400 billion. My wife came back from a business
trip to China late last year and she said, I am not sure what
we are going to be making in this country 10 to 20 years from
now because they are making just about everything.
I met recently with people in Delaware who were involved in
training people for technology jobs, jobs in information
technology. And they are starting to see a shift of those jobs
to places like India, the Philippines, and other countries.
In fact, they are setting up a training center now in the
Philippines in order to help meet that demand. So we are seeing
not just an exodus of manufacturing jobs, but software jobs,
technology jobs, that I find troubling.
A scenario has been painted for me, and I just want you to
react to the scenario, if you will. We face a growing trade
deficit. As I understand it, in order to continue to buy ever
more from the rest of the world than they buy from us, somebody
from around the world has to invest. There has to be a movement
of capital for investments in this country.
Do we reach a point where people in other countries may be
becoming less inclined to invest in the United States? If so,
what are the implications for interest rates and for monetary
policy in terms of raising interest rates to make investments
here more attractive?
How does that affect our ability to stimulate and to move
the economy forward?
Dr. Mankiw. You are absolutely right that the flip side of
the trade deficit is a capital accounts surplus, meaning that
we are importing more goods than we are exporting precisely
because people abroad are eager to buy U.S. assets, eager to
buy stocks, bonds, and foreign direct investment in the United
States.
In some sense, you can view that as a vote of confidence in
the U.S. economy, that foreigners want to be holding U.S.
assets. They want to buy our stocks and bonds. I think history
teaches that trade deficits come and go and as long as the
economy is well-run, they are not a problem in and of
themselves.
In the 1980's, we saw big trade deficits and we saw trade
deficits disappear and we saw them come up again. I am not
tremendously worried about the trade deficits. It is obviously
something to keep an eye on. But I do not see any reason why,
if our policies are right, if our economy is growing, that
foreigners would lose their appetite for U.S. assets. It is
certainly the best place in the world to invest.
Indeed, to a large extent, the reason that we have this
large trade deficit is precisely because the United States has
been growing faster than much of the rest of the world, that
even though we are not growing fast enough, we are doing better
than either Europe or Japan.
That is encouraging people to invest here rather than
abroad, and that is partly what the trade deficit reflects.
If Europe starts growing faster, I think the trade deficit
will shrink because people will start buying more of our goods.
Senator Carper. I wish I were as sanguine as you are on
this point. Maybe we will have an opportunity to discuss it at
a different day. And I hope that history will show that you are
correct.
I am not so sure.
Chairman Shelby. Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you Mr. Chairman, and thank you for
scheduling these hearings on these nominees as the Committee
continues to move ahead in discharging its responsibilities.
Mr. Mankiw, you have a very distinguished professional
record--summa graduate in economics from Princeton, Ph.D. in
economics from MIT. And of course, you have been on the Harvard
faculty since 1985, first as an assistant professor and then a
full professor.
I am very much interested in the Council of Economic
Advisers. I actually worked there for a year when Walter Heller
was the Chairman.
The Council was established by the Employment Act of 1946:
``To provide the President with objective economic analysis and
advice on the development and implementation of a wide range of
domestic and international economic policy issues.''
The Chairman has been regarded as the senior policymaking
position of the economics profession within the Federal
Government. I think it has ebbed and flowed in meeting its
professional standards. I think it actually has varied
considerably.
The first question I want to ask you is how do you envision
your role in commenting on economic issues? Do you come at it
that you have to operate within the parameters that the
President is setting by his political statements on economic
questions?
Or do you think the Chairman has the responsibility to call
the economic issues as he analyzes them on economic terms?
Dr. Mankiw. I do not have any doubt that the history of the
CEA has been a very noble one in providing very objective
advice to Presidents, both Republican and Democratic.
I certainly view my role as to analyze things as a
professional economist would and in a way that my professional
colleagues would respect and to tell the President my
unvarnished advice.
At the same time, I recognize that the President is the
economic policymaker. I am not. But it is certainly our job to
provide the back-up support and the analytic apparatus that he
needs so that he can make fully informed decisions.
Senator Sarbanes. What am I to make of the fact that much
of your writing, and I could quote it at some length. I
probably choose not to do so here this morning for the sake of
time--doesn't jibe with the current economic proposals of the
Administration.
Some of it has already been quoted to you. But what are we
to make of that?
In fact, it has provoked Stephen Moore, the President of
the Club for Growth, to say that you ought not to hold this
position.
What are we to make of all of that?
Dr. Mankiw. The particular passage that Mr. Moore referred
to is a passage where I had raised skepticism about claims that
tax cuts would generate so much economic growth as to be
completely self-financing. I remain skeptical of those claims.
That is different from saying that I am opposed to tax
cuts, which I am not. It is different from saying that tax cuts
will not partly pay for themselves, which they will.
The most extreme advocates of tax cuts I think sometimes
paint an excessively rosy picture about what they can get out
of them.
I do not think that this Administration has done that. I
think the President has called for spending restraint as part
of his package of tax cuts. And I feel completely comfortable
with a policy of cutting taxes, together with spending
restraint, in order to get the budget deficit under control.
Senator Sarbanes. Does that jibe with your National Bureau
of Economic Research paper which you and Larry Summers co-
authored, ``Are Tax Cuts Really Expansionary?''
And then in your introduction, you say: ``Existing
empirical work, therefore, provides little evidence upon which
to evaluate the standard conclusion that tax cuts are
expansionary.''
Dr. Mankiw. Yes, that was a paper written about I think 15
or 20 years ago.
Senator Sarbanes. Yes, 1984.
Dr. Mankiw. Almost 20 years ago, during a time when the Fed
was pursuing a monetary policy of targeting monetary
aggregates. And it was particularly asking the question of
holding monetary aggregates constant, would a policy of tax
cuts expand aggregate demand for goods and services, which is
the standard textbook conclusion. That is a very different
environment than we face today, where the Fed is not, by
anyone's description, targeting monetary aggregates.
Senator Sarbanes. Let me just say to you that I really hate
to see, and I hope you will keep this in mind, a highly
competent professional turn himself inside out, twisting like a
pretzel, in order to put forth economic analysis that conforms
with what I regard as essentially political proposals.
And I think if you are going to be an effective Chairman of
the CEA, you have to be very much on guard about that because
the political game is one thing, but professional standards is
another. And if you completely undercut the latter, it may
serve a short-run political purpose of others, but it is really
going to compromise your own professional standing as an
economist.
And I just forewarn you because it seems to me that given
your writings, you are going to have a lot of tension or
conflict.
Mr. Chairman, are we going to do another round to ask a
couple more questions?
Chairman Shelby. Sure. We will.
Senator Sarbanes. All right. I have some other questions I
want to ask.
Chairman Shelby. We will take another round in a few
minutes. Thank you, Senator Sarbanes.
Doctor, the risk of deflation has been talked about
recently. Last week, the Federal Reserve left its target
interest rate unchanged and expressed its concern that, ``The
probability of an unwelcome substantial fall in inflation,
though minor, exceeds that of a pick-up in inflation from its
already low level.''
This adds to the concerns that others have raised regarding
deflation. What advice would you give the President regarding
this possibility?
I am sure that that would be private.
[Laughter.]
What actions should we be taking basically to minimize the
probability of moving into a deflationary environment?
Dr. Mankiw. You are absolutely right that a deflationary
environment is something that we want to avoid. It has happened
several times in U.S. history. It happened in the late 19th
century, leading to William Jennings Bryant's famous Cross of
Gold speech, was motivated in part by deflation.
It happened in the 1930's.
Chairman Shelby. There is a huge down side to that, isn't
there?
Dr. Mankiw. Right, a huge down side. And we have seen it in
Japan recently and obviously a much milder form than in the
1930's in the United States. But there is a huge down side.
What we need to do is to increase aggregate demand,
increase spending, to get rid of the excess capacity and high
unemployment that we now have.
That is exactly why I think monetary and fiscal policy has
been acting as it has, monetary policy by cutting interest
rates, fiscal policy, by cutting taxes, both aimed at
increasing aggregate demand and both should reduce the risk of
deflation.
Chairman Shelby. As far as the tax cut, we have been
talking about that some here.
Wouldn't the President's tax cut proposal also provide some
improvement in corporate governance, something that this
Committee is very involved in, and something that is needed in
today's financial environment.
Dr. Mankiw. Absolutely. Economists have for many years
talked about how we tax capital income creates a variety of
distortions.
One of the distortions is encouraging debt over equity
finance, including discouraging firms from paying dividends and
instead encouraging retained earnings.
To the extent we can undo that and have a neutral tax
policy, firms will start paying dividends again, which is going
to change the whole structure of how the economy valuates
firms.
Right now, many firms do not pay dividends because it is so
tax-disadvantaged. And that means that we have to rely on
accounting statements.
Chairman Shelby. That would be a more traditional
evaluation.
Dr. Mankiw. That is right. Relying on accounting statements
is basically relying on opinions of professionals, but
opinions. Whereas, relying on the dividends to evaluate a firm
is relying on cashflows and, in that sense, it is less easy to
manipulate.
Chairman Shelby. What would be the overall effect from your
judgment on the tax proposals on investment in job growth?
Dr. Mankiw. The Jobs and Growth package will have positive
effects, both in the short-run and the long-run.
In the short-run, it will increase aggregate demand, both
by increasing consumption and increasing investment, by
lowering the cost of capital.
And the CEA, using a very conventional macroeconomic model,
has estimated that it will create 1.4 million jobs by the end
of 2004.
It will also increase growth in the long-run by encouraging
capital accumulation and also by allowing the existing capital
stock to be allocated more efficiently.
Right now, there is a distortion--corporate capital is
taxed more heavily than noncorporate capital, and that is an
inefficiency.
By eliminating the double taxation of dividends, that is an
inefficiency that would be undone. And whatever capital stock
we have would be allocated more efficiently and that would
raise aggregate productivity, incomes, and wages for everyone.
Chairman Shelby. Government debt in our future, just
generally. One of the topics raised in your textbooks is the
size of the Government debt and Government spending.
You cite how the aging of the population will have a
profound impact on fiscal policy and it being one of the great
challenges facing the next generation of policymakers.
Senator Reed got into that a little bit earlier.
As the population ages, government expenditures rise from
21 percent of GDP in 2000 to 43 percent in 2050. How would you
advise the President and the Congress to deal with this great
challenge? When does this issue come to a crisis situation?
Dr. Mankiw. The numbers you quoted I believe are from my
textbook, which cited the Congressional Budget Office's
forecast of that. So the CBO was the ultimate source of those
numbers.
As we discussed earlier, there is no question that the real
fiscal danger, as the President's budget put it, is in the
entitlement programs--looking forward over the next 75 years,
which I guess is the horizon that Social Security looks at.
In the next 75 years, there is a large unfunded liability,
and that has to be dealt with. There are a variety of proposals
on the table the President has endorsed--personal accounts and
Social Security. The President has endorsed a move toward
greater competition in Medicare. And I think that those are
both constructive steps.
But it is clearly a big challenge facing the country and it
is something that is going to have to be dealt with in a
bipartisan fashion because it will certainly affect all of our
children.
Chairman Shelby. In your role at the CEA, will you be
making any recommendations to the President on moving to a more
predictable framework, such as explicit inflation targeting, if
you saw the need?
Dr. Mankiw. The issue of inflation targeting is an issue
for the Federal Reserve. As you know, we have an independent
Federal Reserve and I probably shouldn't comment.
Chairman Shelby. But you do have some observations on it, I
am sure, as an advisor to the President.
Dr. Mankiw. I will probably be spending most of my time
thinking about fiscal policy.
Chairman Shelby. Okay. Thank you.
Senator Allard.
Senator Allard. Here in the Senate, we evaluate tax policy
on predominantly, static economic theory.
Some States, like my home State of Colorado, use more of a
dynamic scoring. Would you comment on the shortfalls of static
economic analysis as opposed to dynamic economic analysis, and
how that fits into your view that tax cuts, although not fully,
but at least partially offset on costs may actually lead to a
greater tax cut with the dollars that we have available in the
budget?
Dr. Mankiw. The standard scoring of tax cuts, as you said,
is called static scoring, and it is based on the assumption
that the economy, the gross domestic product does not change
with the tax code. That assumption is made, I think, only for
simplicity. I do not think any economist fundamentally believes
it. So the real question is, is it good to have a precise
answer to the wrong question or an approximate answer to the
right question?
And clearly the right question, when you think about tax
policy, is how much is revenue going to change? That is one of
the questions you want to know, as well as what economic effect
it is going to have. Dynamic scoring tries to get at the true
budgetary cost of any tax policy by looking at the feedback
effects from the tax code to real GDP and then in turn, to the
tax base.
That is a very difficult task and it is a task that
economists are wrestling with. And because of that, it is going
to be less precise than the static numbers. There is going to
be a range of estimates based on different economic models.
But there is no question that it is an important task for
economists to undertake if we are going to give policymakers
useful feedback and analysis of the proposals they are
endeavoring to do.
There have been a variety of attempts at doing dynamic
scoring and I suspect there will be more. And I suspect over
time, you will see a convergence of economists toward a
standard set of models and tools for doing that.
One of the implications I should note of dynamic scoring is
that not all tax cuts are created equal. Tax cuts that are
particularly aimed at economic growth, at lower marginal tax
rates, that encourage savings and investment, are going to
generate more growth, more GDP, and therefore, be more self-
financing than tax cuts that do not cut marginal tax rates and
generate as much growth. So it not only gives you an accurate
view of tax changes in general, but also of comparing one tax
change versus another tax change.
Senator Allard. So you would agree with the President's
policy that tax cuts, particularly when our taxes are as great
a share as they are of gross domestic product today, would in
effect create some revenue to the Federal Government?
Dr. Mankiw. Absolutely. It does it really through two
channels.
It does it in the short-run by putting people back to work,
especially in a situation where there is so much excess
capacity as we have now and so many unemployed people who are
looking for jobs. And it does so in the long-run by changing
incentives and increasing the aggregate supply of goods and
services. That is, increasing the incentive to work, increasing
the incentive to accumulate capital and start businesses and so
on.
Senator Allard. If you listen to the stock market on
``Today,'' it sounds like they had a pretty good day yesterday,
and there is a lot of optimism. The bottom line is creating
jobs.
Do you agree that the President is on the right track in
creating more jobs today for the rapid growth of our economy?
Dr. Mankiw. Absolutely. It is standard textbook economics
to say that when you cut taxes, you increase aggregate demand
and increase employment.
That you can find in virtually every economics textbook in
the country. That is part of the President's plan, is to do
precisely that, is to accelerate the marginal rate cuts, the
child care credit, and the marriage penalty and it is going to
put money in people's pockets and increase aggregate demand.
Senator Allard. So you have no problem in putting forward
your economic theories to the President and feel that he would
seriously consider what you propose to him?
Dr. Mankiw. That is correct.
Senator Allard. Thank you, Mr. Chairman.
Chairman Shelby. Senator Carper.
Senator Carper. Mr. Mankiw, I met with Dan Crippen a month
or so after he stepped down as CBO Director. We talked about
the impact of tax cuts to stimulate the economy. And we talked
about how much of a tax cut you need and what particular kind
of tax cut is most helpful in getting the economy going.
He looked ahead over the next 10 years and he said, think
of the U.S. economy as about $140 trillion GDP. And he said,
think of a tax cut that is $600 billion or $500 billion and
think of it over the next 10 years as a 50-cent or 60-cent
investment on $140 economy.
And he said, we like to think that when we make a tax cut,
it is really going to have a huge impact and it will get things
moving in the right direction. But he said, sometimes we fool
ourselves and give ourselves too much credit for the kind of
effect that we are going to have.
Would you take a minute and respond to that observation?
Dr. Mankiw. I think that it is certainly right that there
are many forces affecting the economy and fiscal policy is only
one.
So it is probably wrong to give credit or blame to fiscal
policymakers to any economic change you see because lots of
forces, domestic and from abroad, that can affect the course of
the economy.
On the other hand, fiscal policy is one important piece of
the picture. Historically, there have been some important tax
changes that have acted to stimulate the economy, the classic
case being the Kennedy tax cuts in the early 1960's to
stimulate the economy when there is excess capacity.
We are in a situation now where inflation is very low,
interest rates are very low. There is clearly excess capacity.
Look at past utilization and there is really a lot of excess
capacity there.
Unemployment is higher than most estimates of the
equilibrium level of unemployment. If there is ever a case for
cutting taxes, the situation of excess capacity and low
inflation and interest rates, very, very low, at 1\1/4\
percent, it is probably it.
Senator Carper. There are a number of proposals that are
out there on both sides of the aisle to encourage particularly
smaller businesses to make capital investments. I think they
are able to expense, I believe up to about $25,000 annually,
the investments that they make. And we are seeing a variety of
proposals.
Can you just describe for us what approach you think makes
the most sense and why?
Dr. Mankiw. There is a variety of ways to cut the cost of
capital. In some sense, you can think of a lot of different
proposals that are out there as being different mechanisms to
achieve the same aim of reducing the cost of capital for
businesses.
The President's plan of eliminating the double taxation of
dividends is I think one way to do that, and my preferred. But
there are other ways of doing it, such as expensing, bonus
depreciation, or something. There are also other mechanisms. In
some sense, achieving a similar aim, reducing the cost of
capital, stimulating investment, increasing demand for goods
and services, and increasing employment.
Senator Carper. I have seen proposals, for example, to
increase from $25,000 per year to $75,000, the amount that
could be expensed this year, maybe next year. There are some
proposals to make it permanent.
My question was which of these approaches would you think
would make the most sense? Could you describe one?
Dr. Mankiw. Well, I would have to look at the specifics of
the proposal and if you want to submit which proposals you are
referring to, I would be happy to have--if confirmed, I would
be happy to have the CEA staff look at them and provide you an
analysis.
Senator Carper. Thank you. Last, just lay out for us maybe
two or three good ideas to get the economy moving.
Set aside the tax package and the discussion on taxes. What
are some other things that you think we should do, not just the
Congress, but as a Nation. It could be Executive Branch,
Legislative Branch. It can be outside of Government as well.
Just two or three good ideas.
Dr. Mankiw. I think there are a variety of things that most
economists would agree on. Most economists are very committed
to free trade and the President has certainly moved forward on
a very, very aggressive free-trade agenda. I think that that is
something that economists of all political persuasions would
endorse.
I think you can always look at regulations and see, are
there regulations that we have in place that are standing in
the way?
Certainly monetary policy is playing an important role and
it has been very active in trying to stimulate the economy.
Fiscal policy through tax changes as well.
Senator Carper. Any thoughts on productivity and its role?
Dr. Mankiw. Productivity can at times seem like a problem
because it can look like people are getting laid off because
of, say, computerization or increasing productivity in the work
place. But there is no question that, in the long-run, it is a
good thing. The reason that we are richer today than we were a
generation ago is precisely because of productivity. And the
reason that we are richer than most countries around the world
is precisely because the United States is a very productive
economy.
So we should do absolutely everything we can to try to
increase productivity because even thought it might at times
cause temporary dislocations, there is no question that, in the
long-run, it is better for everyone.
Senator Carper. All right. Thanks very much.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Dr. Mankiw, do you think one of the
reasons that we have used a static analysis for the impact of
tax cuts or spending increases, for that matter, is really a
conservative effort to avoid the impact of charlatans and
cranks in the making of fiscal policy?
Dr. Mankiw. I think there is no question that static
scoring has the benefit of being simple and it requires
absolutely no judgment. You are going to assume a zero impact
on real GDP and zero is a number that nobody can argue with.
Zero is zero.
The problem with zero is that it is probably not correct.
That is, depending on the tax change you are considering, there
could be substantial impacts on GDP and therefore, on the tax
base.
But, certainly, those people who are worried that dynamic
scoring might give overestimates, find zero an attractive
number, and I think probably the best----
Senator Sarbanes. Well, dynamic scoring would open the door
for the charlatans and the cranks, would it not?
Dr. Mankiw. I would hope that we could open the door for
accurate analysis, the best guess, without opening the door for
charlatans and cranks as well.
Senator Sarbanes. I thought you warned us pretty
effectively about that in your book, Chapter 2, Thinking Like
an Economist. Let me just quote it:
Anyone can adopt the title, economist, and claim discovery
of some easy fix to the economy's troubles. These fads often
tempt politicians who are eager to find easy and novel
solutions to hard and persistent problems.
Some fads come from charlatans who use crazy theories to
gain the limelight and promote their own interests. Others come
from cranks who believe that their theories really are true.
An example of fad economics occurred in 1980, when a small
group of economists advised Presidential candidate Ronald
Reagan that an across-the-board cut in income tax rate would
raise tax revenue.
This is you now, not me.
They argue that if people could keep a higher fraction of
their income, people would work harder to earn more income.
Even though tax rates would be lower, income would rise by so
much, they claim, that tax revenues would rise.
Almost all professional economists, including most of those
who supported Reagan's proposal to cut taxes, viewed this
outcome as far too optimistic. Lower tax rates might encourage
people to work harder and this extra effort would offset the
direct effects of lower tax rates to some extent.
But there was no credible evidence that the work effort
would rise by enough to cause tax revenues to rise in the face
of lower tax rates.
George Bush, also a Presidential candidate in 1980, agreed
with most of the professional economists. He called this idea,
voodoo economics.
Nonetheless, the argument was appealing to Reagan. It
shaped the 1980 Presidential campaign, the economic policies of
the 1980's.
Then you go on to note:
After Reagan's election, Congress passed the cut in tax
rates that Reagan advocated, but the tax cut did not cause tax
revenue to rise. Instead, tax revenue fell, as most economists
predicted it would, and the U.S. Federal Government began a
long period of deficit spending, leading to the largest
peacetime increase in the Government debt in U.S. history.
Now if you open up the door for the cranks and charlatans,
do not you run a very high risk of an inappropriate fiscal
policy?
Dr. Mankiw. Yes, in the passages, as I mentioned earlier, I
expressed skepticism that tax cuts would generate so much
growth, as to be fully self-financing.
I am not sure that means that one has to go to the view
that, therefore, we are going to assume going forward that tax
cuts generate no growth at all.
It is certainly true that we need to guard against
excessive optimism. On the other hand, I also think that we
should guard against excessive pessimism.
What we really need is an accurate assessment of the
effects of fiscal policies. And what dynamic scoring is trying
to do is to try to come up with an accurate estimate.
Senator Sarbanes. In The Washington Post, last fall, the
following story appeared, and I'll just quote the outset of it:
``President Bush took a ride on the Laffer Curve yesterday and
espoused a tax cut theory that his father once derided as
voodoo economics.''
After meeting with his Cabinet, the President was asked
about the Federal budget deficit.
Well, we have a deficit because tax revenues are down, he
said. Make no mistake about it, the tax relief package that we
passed, that should be permanent, by the way, has helped the
economy, that the deficit would have been bigger without the
tax relief package.
That is orthodox supply side theory, the notion that tax
cuts, by stimulating the economy, actually increased the
Government's tax revenue. Such thinking, popularized by Arthur
Laffer and his Laffer Curve, was the ideological fuel for
Ronald Reagan's tax cuts.
I have a couple of right-and-now questions I want to ask
you.
Chairman Shelby. Go right ahead.
Senator Sarbanes. First of all, on unemployment insurance.
I wasn't here for your exchange with Senator Reed. But the
extension is about to run out. Many of us think we need to
further extend the unemployment insurance benefits.
What is your position on that?
Dr. Mankiw. The President, as you know, has worked with
Congress before on the unemployment insurance extension. So my
expectation is that he will do so again.
Senator Sarbanes. That doesn't tell me what your view is,
as the potential President's chief economic adviser.
Dr. Mankiw. Yes, sir. I was just going there.
Unemployment insurance has pros and cons as a policy. The
two advantages are that, obviously, it provides insurance for
people in a difficult time in their lives. And also, it
provides some stimulus to aggregate demand, sometimes called an
automatic stabilizer, by maintaining people's incomes and
spending.
Senator Sarbanes. Now that is in fact what you said in your
textbook, ``Essentials of Economics,'' when you said:
When the economy goes into a recession and workers are laid
off, more people apply for unemployment insurance benefits.
This automatic increase in Government spending stimulates
aggregate demand at exactly the time when aggregate demand is
insufficient to maintain full employment.
Correct?
Dr. Mankiw. That is correct. All right. And those are the
two advantages of the policy.
Senator Sarbanes. Yes.
Dr. Mankiw. There is also a large literature that concludes
that the existence of unemployment insurance affects the search
effort of the unemployed and tends to therefore raise the
economy's natural rate of unemployment.
We see this in the most extreme form in many European
countries where unemployment insurance or similar systems go on
sometimes indefinitely and they have much higher structural
unemployment than we have.
So in terms of thinking about unemployment insurance, you
have to weigh some positive effects against some negative
effects.
Senator Sarbanes. And do you think those negative effects
are present in the U.S. system?
Dr. Mankiw. There is a large literature that has
established that they are, that workers, the rate of job
finding jumps precipitously when UI expires.
I think that it is not a literature that I have contributed
to, but I certainly have read it.
Senator Sarbanes. How is a worker supposed to find a job in
a labor market that is contracting?
The unemployment rate last month was at 6 percent. That is
the highest it is been in about 10 years. I am a worker who got
laid off. I am drawing unemployment insurance. I am looking for
a job. I cannot find a job, and I am running out of
unemployment insurance benefits to help address the problem of
supporting my family.
I guess you are telling us, well, you should get out there
and really hustle and find a job. Then I say, well, the labor
market in which I am trying to find a job is getting worse, not
better. The unemployment rate is going up. Private employment
is down even further. This thing is tightening up. How am I
expected to find a job in that labor market context? What is
your answer to that?
Dr. Mankiw. Well, there are two sides to the labor market.
There is the supplier and demand and it is the behaviors of
both the suppliers of labor and the demanders of labor that is
going to determine the level of employment and the level of
unemployment.
And there is no question in my mind that the existence of
unemployment insurance does affect the behavior of the people
on the supply side of the market. That is, the workers looking
for jobs. There is a tremendous amount of evidence from that,
on that point.
There is also no question that it has been a labor market
that has been a difficult time for workers and that is
precisely why the President has proposed his Jobs and Growth
package, precisely to stimulate the economy, precisely to
increase the demand for labor.
Senator Sarbanes. Where are you on the extension of the
unemployment insurance? Where do you conclude?
We have lost 500,000 private-sector jobs over the last 3
months. Chairman Greenspan, when he was before this Committee
and we had a chance to ask him about his thoughts on extending
unemployment insurance benefits, and he testified, ``Extending
unemployment insurance provides a timely boost to disposable
income.''
Chairman Greenspan acknowledged that we are currently in a
period where jobs are falling and he stated, ``I have always
argued that in periods like this, that the economic restraints
on the unemployment insurance system almost surely should be
eased.''
Do you disagree with that?
Dr. Mankiw. I think that there are pros and cons. I tried
to lay out for you what I think the advantages and disadvantage
are.
Senator Sarbanes. Why are people paying into the
unemployment insurance trust fund, which has built up quite a
large balance. Employers make regular payments into the
unemployment insurance trust fund for the purpose of paying
benefits in an economic downturn.
We now have an economic downturn. We have quite a large
balance in the trust fund. Why shouldn't we be drawing on that
balance in order to meet both the human needs of the
individuals who are unemployed and also contribute toward
addressing aggregate demand in providing an economic stimulus?
What do you propose to do with that big trust fund balance?
Dr. Mankiw. I do not have any particular proposal for the
trust fund balance. People are drawing, people are applying for
unemployment insurance. The issue I believe we are talking
about extension of unemployment insurance.
And I am just saying that the unemployment insurance
system, while it does have the advantages of providing
insurance for down times, does have the advantage of propping
up aggregate demands in times of weak aggregate demand, also
has adverse incentive effects on job finding efforts and
probably raises the average level of unemployment in the long-
run.
You see this in many European countries where they have
very generous policies toward of the unemployed and the result
is much higher structural levels of unemployment.
Senator Sarbanes. I understand that argument, but it seems
to me that the economic circumstances in which we find
ourselves really negates that side of the ledger, as Greenspan
himself recognized in his testimony before this Committee.
We have a serious problem of unemployed people. They are
about to run out of their benefits. We have a large balance in
the trust fund. If these benefits stop being paid out, we are
going to have a major jolt to aggregate demand. And you are in
here telling me the con side of the argument to extend
unemployment insurance benefits at a time when the economic
circumstances, it seems to me, scream out for it to be
extended.
Dr. Mankiw. Senator, I believe I was telling you both the
pro and con side. I was trying to be on the one hand, on the
other.
Senator Sarbanes. Truman, once confronted with that, said
he wanted a one-armed economist.
Dr. Mankiw. Well, I have two.
[Laughter.]
Senator Sarbanes. They asked him why? He said, I am tired
of getting this, on the one hand, and on the other hand.
What is your recommendation to the President going to be on
extending unemployment insurance benefits?
Dr. Mankiw. I would tell the President what I told you,
that there is advantages and disadvantages and he has to weigh
those advantages and disadvantages, recognizing they are both
there and work with Congress on how to weigh those pros and
cons.
That is how the process works.
Senator Sarbanes. What would you say if the President said,
I have to go get myself a one-armed economist if this is the
line of advice I am going to get.
[Laughter.]
Dr. Mankiw. Well, it certainly will be my expectation that
whenever any policy comes up, I will give him both the pro and
con side of every policy.
Senator Sarbanes. You have all the factors. You have to
weigh them. You are a professional economist. This is what
you've spent your career doing. You are supposed to do the
analysis. You know what the current circumstances are and what
the situation is.
Where do you come down on the question of whether we need
to extend unemployment insurance benefits?
Dr. Mankiw. I come down thinking that there are pros and
cons and the both--and the first best policy is to create jobs,
not to pay people to be unemployed.
And it is the purpose of the President's Jobs and Growth
package to stimulate the economy so that those jobs will be
there, and not so we can pay people to be unemployed.
Senator Sarbanes. I will come back.
Thank you, Mr. Chairman.
Chairman Shelby. Doctor, I think you are pointing out that
in Europe, where they have continually extended unemployment
benefits and that this is a basic economy that has created no
net new jobs that we know of in a long time.
Is that correct?
Dr. Mankiw. That is exactly right.
Chairman Shelby. So there is evidence on both sides,
although we do want to help people when they are out of work.
We all do. We do want to temporarily help them.
But in the long-run, they are best to help themselves.
Isn't this true?
Dr. Mankiw. That is right.
Chairman Shelby. Now, if we want to be more like Europe, we
would just layer on and layer on and layer on these benefits.
But the bottom line is Government doesn't create jobs. At
least I do not know that they do, in the long-run. And if we
are going to have a free-market economy, the law of supply and
demand, and have it work, if the Government intervenes more and
more and layer after layer, that doesn't mean that we are not
far temporarily helping people that are out of work.
If we continue to do it, won't it have an impact on the
economy?
Dr. Mankiw. That is exactly right.
Chairman Shelby. That is the argument, right?
Dr. Mankiw. That is exactly right. It is a balancing act
between helping people who are down on their luck and at the
same time propping up aggregate demand, both without creating
adverse incentive effects, like the European labor market.
Chairman Shelby. And as Senator Sarbanes said, that fund is
created, has been created for people for unemployment benefits.
Is that correct?
Dr. Mankiw. That is correct.
Chairman Shelby. Now, you mentioned earlier that your
grandmother's candy store got your family surviving in this
country.
Dr. Mankiw. Right.
Chairman Shelby. And I assume this was a small- or medium-
sized business.
Dr. Mankiw. Very small.
Chairman Shelby. Do you see a role for the Council of
Economic Advisers in advising the President on ways to reduce
regulatory burdens on small businesses, knowing, as you do as
an economist, that a great percentage of our job creation in
this country has been and will be, the jobs will be created by
small and medium-sized businesses?
Dr. Mankiw. Absolutely. There is no question that the U.S.
economy is incredibly vibrant. It is vibrant because it is an
economy where it is very easy for an individual to start their
own business, hire a few workers, and create wealth for their
family and for others at the same time.
And what I view the role of Government is to create an
environment to facilitate that.
Chairman Shelby. And an overburdensome regulatory hang on
small businesses cripples that, doesn't it?
Dr. Mankiw. That is right. Regulations are like taxes, but
taxes where no revenue gets collected. But, obviously, each
regulation has to look at the cost-benefit. You go through a
cost-benefit calculation and say, does this make sense, taking
into account both the benefits of the regulation, as well as
the costs in terms of job creation and productivity.
Chairman Shelby. Senator Schumer.
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you, Mr. Chairman. I want to welcome
you, Professor Mankiw. I think you are a very accomplished man.
My daughter is using your textbook in economics.
She says it is a very good textbook, although it is hard.
She says it is hard.
[Laughter.]
We are glad you are here. I would like to ask you a few
questions, a few following up on the lines of Senator Sarbanes.
I intend to be supportive of your candidacy. I think you
are a good man. But I am a little concerned. I knew Steve
Friedman pretty well and he was a Concord Coalition guy and he
joined the Administration.
Your statements are pretty strong about Arthur Laffer and
all of that, and now you are joining. Yet, very few people who
are serious in this who are not ideologue seem to feel this
idea of cutting taxes and raising the deficit into oblivion is
the right thing to do.
Now I am for a tax cut--I know Alan Greenspan says we do
not need a tax cut to stimulate the economy. I would do on. So
I would like to ask you questions along that line.
The first is, could you just tell me again--I know Senator
Sarbanes went over this--but do you think that the Laffer
theory has validity?
Do you think cutting taxes stimulates growth? And do you
think that it is the number-one way to stimulate growth? And do
you think on your cost-benefit analysis at this point in time,
the down sides really do not outweigh the upsides, as most
economists seem to feel?
What do you think of Chairman Greenspan's admonition that
if we are going to cut the dividend tax, that we should find
other areas to make up for it?
He did not say that a year and a half ago. He's saying it
now.
You are a respected man. And obviously, having you in a
position of power is a good idea, probably, and I do not expect
that we are going to agree on everything. But there is some
view here that the Administration's policy is not supported by
most people, not supported by most economists, not supported by
others.
And you are going to now join and be one of the respected
voices as a trumpet for it.
So give me your views, the general views. I am not talking
about this tax cut, on the supply side. Just cut taxes and
growth goes up and everything is fine.
You know, free lunch.
Dr. Mankiw. As a matter of economic theory, the idea that
taxes could be so high as to be on what is called the wrong
side Laffer Curve is certainly right.
It is possible theoretically that cutting taxes could raise
revenue. Very few economists think that in the range the United
States is in today, that that is the case.
Senator Schumer. Do you?
Dr. Mankiw. No, I do not.
Senator Schumer. Okay.
Dr. Mankiw. That is different, on the other hand, from what
I think is believing a substantially weaker statement, which is
that taxes, tax cuts would raise growth. And because they would
raise growth, they would, to some extent, pay for themselves.
And being on the wrong side of the Laffer Curve says that
they would completely pay for themselves.
Senator Schumer. Right. But the Administration's theory
doesn't seem to be the second theory. It seems to be the first
theory, because first, their tax cut is not aimed immediately.
A huge percentage of it, particularly let's talk about the
dividend cut, which is the centerpiece, doesn't take effect
immediately. It doesn't put money in the hands of average
people.
We all know that it is in short demand.
Let me ask you this. If your goal were simply to get the
economy going quickly, given that it is soggy, in the words of
someone who will be one of your confreres, wouldn't it be
better to a 1- or 2-year payroll tax cut, to a certain extent,
than do a dividend tax cut?
If you only had a limited amount of dollars, tell me which
would be better and why.
Dr. Mankiw. When you talk about tax cuts, you have to keen
an eye on both the long-run and the short-run considerations.
Senator Schumer. No, but I limited my question. I said, if
your only goal were to get this soggy economy going right away,
would you prefer, with the same amount of money, a payroll tax
cut or a dividend tax cut?
[Pause.]
Dr. Mankiw. I would have to think about the precise numbers
and the precise proposals and the timing and so on.
The one thing to say about the dividend tax cut is, even
though some of the money is----
Senator Schumer. Could the reporter show that there was a
long pause before Professor Mankiw answered the question.
Sorry.
Dr. Mankiw. Even though the dividend tax cut is in some
sense forward-looking, some of the effects will show up today
in the cost of capital, will show up today in the value of the
stock market, and therefore, will have effects on demand today.
Part of an answer of what is the short-run effect of the
dividend tax proposal is an independent part of how the market
perceives it, whether the market perceives that the Congress is
going to credibly commit to it in the long-run, or whether this
policy will get reversed.
Senator Schumer. Most of the Wall Street economists in the
big firms say that it is not going to do much and the market
has not perceived it as well as the Administration thought it
would.
Dr. Mankiw. The CEA has actually done a survey of some of
these firms. There is a range of estimates that go from 5 to 15
percent on the value of the stock market.
If you really do get something like that, if you get a 10
percent rise in the stock market from this, that will have a
significant effect on wealth, which in turn would affect
consumption and also investment through the cost of capital.
Senator Schumer. Don't you think a carry-forward of losses
if you buy new stocks would cost less money and give you a
bigger rise in the stock, immediately in the stock market?
Dr. Mankiw. I would have to look at that proposal.
Senator Schumer. Basically, if you have previous losses,
right, you can buy new stocks. And if you make money on those
stocks, lay their profits tax-wise against the losses that you
have already had, everyone that I know says that if your sole
goal is to stimulate the stock market, and I think it is a real
guessing game whether it can or not, you would be better off
doing that kind of proposal, wouldn't you?
Dr. Mankiw. I would have to look at that proposal. But I
wanted to take exception to the assumption that the sole goal
is to stimulate the stock market.
There is a lot of benefits here beyond stimulating the
stock market. The current tax code has a bias against equity
finance in favor of debt finance as a bias against dividends in
favor of retained earnings.
Those are two inefficiencies that economists have talked
about for years having an undesirable feature of the tax code.
And one of the purposes of the President's plan is to
undo----
Senator Schumer. If you had $300 billion and you could do
tax cuts, $350, and you had your choice of tax cuts, would the
dividend tax cut be number one on your list, given the present
state of the economy?
Dr. Mankiw. It would certainly be very high.
Senator Schumer. Would it have been 6 months ago?
[Laughter.]
Dr. Mankiw. I have long thought that double taxation of
dividends is an undesirable feature of the tax code.
Senator Schumer. Let me ask you another. What about, a
number of us are trying to get local aid into this stimulus
plan, based on the theory that if the Federal Government gives
John Q. Citizen a $200 tax break or $300 tax break, but local
governments or State governments raise taxes by that amount,
there is no money in there, and a 1-year shot into the arm of
local governments, like revenue-sharing, would help create a
greater stimulative effect.
The Administration proposed something like that initially
in their budget and took it out at the last minute.
What is your view of that kind of proposal which is now
being talked about? It was talked about yesterday in Nebraska.
Dr. Mankiw. Yes. As you said, if the President did not
include the State aid as part of his proposal. But my
understanding is that he's willing to work with Congress on
that issue.
Senator Schumer. But what is your normative view as an
economist who is not yet part of the team? Is it a good idea?
Dr. Mankiw. I think probably providing the tax relief
directly to the taxpayers is probably the best idea. And you
are right, that some of that may be undone by the States. But
that is something that the States should be deciding.
Senator Schumer. Pardon? I did not hear the last part.
Dr. Mankiw. Pardon me?
Senator Schumer. I did not hear the last part.
Dr. Mankiw. I am saying, I think the best tax relief is
directly to the taxpayers. It is possible that some of that
will be undone by State tax increases. I hope that that
wouldn't happen.
But that might occur in some States' cases. And that would
undo part of the effect of the tax cut.
Senator Schumer. So wouldn't, at least from a stimulative
effect, say $40 billion to the States and localities this year,
do more to stimulate the economy than an additional $40 billion
for, say, a dividend tax cut that would take effect in 2006?
Dr. Mankiw. I am not sure I would say that.
Senator Schumer. Okay. What about Mr. Laffer's theory
again?
Again, I know that Senator Sarbanes read this. But you were
so strong when you said, when politicians rely on the advice of
charlatans and cranks, they rarely get the desired results they
anticipate. Maybe we should say, when economists rely on the
advice on politicians on how to run the economy, they rarely
get the desirable effects they anticipate.
But do you think that the Laffer view, of just cutting
taxes and growth takes off, has been pretty much discredited,
in your mind?
Dr. Mankiw. The view of Arthur Laffer is not that tax cuts
generate growth. I think that that is a view associated with
many economists.
The particular view that is associated with Arthur Laffer
is the idea that it would generate so much growth, as to raise
revenue.
Senator Schumer. Revenue, right.
Dr. Mankiw. And while certainly it is conceivable as a
matter of economic theory, it is probably not true of the level
of taxation in the United States.
Indeed, that is why when they President talks about cutting
taxes, he talks about restraint on the spending side at the
same time. Because if one really believed that cutting taxes
raised revenue, then we wouldn't need spending restraints.
Every time you had a new spending program, we would cut
taxes some more. That is obviously not the Administration's
view.
Senator Schumer. Thank you, Mr. Chairman. And I thank you,
Professor Mankiw. I glad you are--even though you are not
stating your views as fulsomely as I would like, I am glad you
are joining the Administration.
I am proud to support your nomination.
Dr. Mankiw. Thank you, Senator.
Chairman Shelby. Senator Allard.
Senator Allard. Mr. Chairman, I would like to discuss the
Laffer Curve with you.
It takes things to two extremes and says that there is an
ultimate area in between where you will maximize revenue,
depending on your level of taxation.
It says that if you tax everything 100 percent, your
revenues are going to be low. If you do not tax anything at
all, they are going to be low. And there is a bell curve that
somewhere in between there, a balance to be reached between the
level of taxation and your economy that will maximize revenues
to the Federal Government. If you step over that line, then
revenues begin to decrease. If you are on the other side, you
can in some cases actually increase taxes and increase
revenues, depending on where that balance is, and that balance
is not a set figure.
Would you agree with that?
Dr. Mankiw. That is correct.
Senator Allard. And so, in making your recommendations to
the President, what you are going to be recommending is good,
sound economic policy as to what you think would be most apt to
create jobs and that is the sole goal. And what the President
is trying to do right now, is not necessarily increase revenue
or benefits to individuals, but increase jobs.
Dr. Mankiw. That is exactly right. The President did not
propose a Jobs and Growth package in order to raise revenue for
the Government. He did it in order to create jobs and economic
growth.
Senator Allard. Thank you, Mr. Chairman.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. I have one other area that I want to
explore with Mr. Mankiw.
I do want to observe, though, I guess your textbook is
going to have to be extensively revised as I listen to your
testimony and as I anticipate your performance in this office.
I am very concerned.
This is your quote: ``When the Government reduces national
saving by running a budget deficit, the interest rate rises and
investment falls. Because investment is important for long-run
economic growth, government budget deficits reduce the
economy's growth rate. Of course, you are heading us right down
the deficit path.''
Let me ask you about foreign indebtedness. You said earlier
in response to a trade deficit question, well, trade deficits
come and trade deficits go, as I recall your answer. I think
that is essentially what you said. If I am not putting it
correctly, I invite you to correct that.
Dr. Mankiw. That is correct. We have had substantial
fluctuations in the trade deficit over time and the
macroeconomic impacts have not been huge.
Senator Sarbanes. In the last several years, the U.S.
current account deficit, and therefore, net foreign borrowing,
has reached 5 percent of GDP. Five percent.
We now have a net international liability position of about
25 percent of GDP. We had a positive international asset
position of 10 percent of GDP just 20 years ago.
So we have gone from having a positive international asset
position of 10 percent of GDP. In 20 years' time, we now have a
net liability position of 25 percent of GDP. And our trade and
current account deficits are sinking us further into debt by
roughly an additional 4 to 5 percent of GDP each year.
Do you think this position can be sustained?
Dr. Mankiw. I do not think there is any imminent crisis on
the horizon forcing it to change in the short-term. It will
very likely change over time as it did in the 1980's where we
had large current account deficits and then they shrunk back to
zero.
Partly, this is a reflection that the United States is a
great place to invest. The United States is growing fast--
despite our slow growth and growth that is not fast enough--we
are growing faster than Europe and Japan. And if you are
looking, where do you want to invest your assets, the United
States is probably the best place in the world. And that is
what the current account deficits are reflecting, that people
want to invest their assets here.
As we talked about earlier, the current account deficit is
a reflection of a capital account surplus. I expect it will
probably disappear once Europe and Japan start growing again,
and we certainly hope that is soon.
But it is hard to imagine what kind of action we would take
to address the current account deficit now that would be
desirable for the economy.
Senator Sarbanes. You know the Tennessee Williams play,
``Streetcar Named Desire''?
Dr. Mankiw. I read it many years ago in high school, yes.
Senator Sarbanes. Blanche Dubois in that play has a line
about being dependent on the kindness of strangers. Dependent
on the kindness of strangers. Isn't that where the United
States is now, given this international position? Aren't we
dependent on the kindness of strangers?
Dr. Mankiw. I wouldn't put it that way. A lot of people
work for firms where some of the capital comes from abroad. If
BMW wants to open up a plant to make cars in the United States
and employ American workers, I do not see why we should, as a
Nation, be adverse to that. That creates jobs in the United
States just as if General Motors opened up a plant.
Senator Sarbanes. Where is the inflow coming now?
Dr. Mankiw. I do not have those numbers off the top of my
head. I know it fluctuates in composition over time.
Senator Sarbanes. It is coming from foreign governments
now, isn't it, overwhelmingly? It's no longer coming from
private lenders or investors. It is now coming overwhelmingly
from foreign governments, is it not?
Dr. Mankiw. As I said, I do not have those numbers in front
of me, but I believe that share has increased.
Senator Sarbanes. Now would you perceive that as a
concerted effort on their part to prop up the dollar, to keep
the currencies from appreciating and to gain a trade advantage?
Why are the foreign governments doing that?
Dr. Mankiw. That is not an issue I have looked at. I think
the U.S. dollar-denominated assets are considered a very safe
assets for lots of institutions around the world. The dollar is
very much a standard of security.
Senator Sarbanes. Do you think that there are countries
that are seeking to manipulate the currency to gain trade
advantage?
Dr. Mankiw. I have not seen any evidence of that, sir.
Senator Sarbanes. China.
Dr. Mankiw. I have not seen any evidence of that.
Senator Sarbanes. Mr. Chairman, I have gone over.
Chairman Shelby. Thank you, Senator Sarbanes.
Senator Sarbanes. Thank you.
Chairman Shelby. Doctor, thank you very much for your
appearance here today. We will try to move your nomination
forward.
Senator Schumer. Mr. Chairman?
Chairman Shelby. Do you have another question?
Senator Schumer. Yes, I do.
Chairman Shelby. Senator Schumer.
Senator Schumer. If you do not mind, Mr. Chairman. I know
you have a lot of people to go through. I just wanted to follow
up one thing on Senator Sarbanes' question.
Is there a worry that the Euro could replace the dollar, at
least in some eyes, as the currency of choice? I mean, this
relates to the question that Senator Sarbanes--it is not a
political question. I am just interested in your view. I have
heard that from some people who are pretty smart about this
stuff.
Dr. Mankiw. It is conceivable, but I would not bet on it. I
think the U.S. economy is still in some sense the best run in
the world and it is still the most productive.
I think we have a variety of long-run institutional
advantages over any other country of the world. And I would
expect as long as the U.S. economy ran strong, the dollar would
remain the standard bearer for world financial markets.
Senator Schumer. We haven't had a competitor I guess since
Bretton Woods, right?
Dr. Mankiw. Right.
Senator Schumer. And finally, the Euro is edging back.
I do not know. I read a statistic somewhere that now, in
terms of bond trading or something, 40 percent was done in
Euros, as opposed to dollars, which is brand new.
And so, we do have the strongest economy. I worry if the
President's whole, full-fledged tax bill goes through, that it
wouldn't be seen as that strong any more.
Well, let me ask you that.
Do you think the fact that we are now heading on a path of
increasing our deficit after some years of fiscal surplus,
encourages people to drop the dollar and go to the Euro?
Dr. Mankiw. I think the most important thing is to get
growth going in this economy again.
Senator Schumer. No, I understand. But do you think that is
true, that more deficit financing, and particularly a view
among Europeans and some others, that we now lost our restraint
which we gained back throughout the 1990's, might encourage
people to drop the dollar and go to the Euro.
Dr. Mankiw. Under the President's budget, the deficits will
be shrinking over time. And according to the Congressional
Budget Office, the estimate of the Government's budget, the
debt-to-GDP ratio will not be very different 10 years from now
as it is today.
So, I do not see in those numbers any reason for concern.
Senator Schumer. They are not worried about the 5-year
where it goes up?
Dr. Mankiw. No, because it is standard textbook economics
that recession and wars are the two canonical times you should
run a budget deficit. And we are had a recent recession and we
just had a war.
Senator Schumer. Yes. But you keep jumping on both sides of
the lines, in all due respect.
If we are using war and recession, then we should be
priming the pump. And much of the President's tax plan again is
not aimed at priming the pump. Everyone agrees to that. But,
rather, a change in the overall structure.
We can debate it--reducing the taxes on unearned income,
which might make the stock market go up. That is the only
growth portion of it. There are other parts of the tax cut that
do not do that, do not get me wrong.
And so, if that is the case, given all of this and given--
why wouldn't it be better to put more dollars in the front end,
in the 2003 and 2004, and get it into the hands of people,
average people, who would spend it?
You really haven't answered that question adequately for
me. It is not a question of whether it is good to have tax cuts
or good to get rid of the double taxation of dividends.
But if your goal was to strengthen growth, to increase
growth to deal with the dual problems of war and recession, or
creating a deficit of money that we had to spend, but recession
saying prime the pump, why wouldn't it be better to do
something that puts more money directly in people's hands than
a dividend tax cut?
It is a comparison because we do not have unlimited
dollars.
Dr. Mankiw. I think the President is motivated by both
short-run and long-run considerations. He's thinking not only
to put people back to work today. He also wants to create a tax
code that is going to generate capital accumulation and long
growth a decade from now.
Senator Schumer. But doesn't that desire, which I am not
debating with you now, cut against priming the pump and getting
growth going quickly again?
In other words, if your sole goal were quick, get the
economy out of this sogginess, wouldn't you put far more
dollars into people's hands immediately, rather than the
dividend tax cut, which everyone admits only has its effect
over a long-term in terms of the money it gets in people's
hands?
Dr. Mankiw. I do not think it only has an effect on the
long-term. I think it is the part of the plan that is going to
have an effect on the long-term. But I think it also has
effects on the short-term through lowering the cost of capital
and by increasing wealth.
Senator Schumer. One other question. Do you think $750
billion of tax cut is too high?
Dr. Mankiw. Actually, I think the President's package was
well designed.
Senator Schumer. Okay. Is a billion too high?
Trillion. Sorry.
A billion is not too high, even in my book.
[Laughter.]
Is a trillion dollars too high? I mean, when do we get into
a feeding frenzy? Is a trillion too high?
Dr. Mankiw. I think it depends on the entire budget.
Senator Schumer. Now. Right now. We have to vote on the
bill in the next month. And there is a billion dollars,
increasing the deficit over the next 10 years by a trillion
dollars.
Is that too high?
Dr. Mankiw. That is in an economy that over that period of
time will have a GDP of $140 trillion.
Senator Schumer. Whatever the CBO projects or the President
projects.
Dr. Mankiw. Compared to the size of the economy and the
following 10 years, no, I do not think so.
Senator Schumer. How about $1.5 trillion? When do we get to
a point where it is crazy already? Everyone knows it is, except
the small band of people around the President. And now you are
becoming one.
I would hope that you would inject some sense into this,
even if privately. And when you get up here and you tell me,
that even double the President's plan is not too high, in terms
of our deficit, in terms of the worries about the dollar, in
terms of the worries about interest rates, in terms of the
worries about all of this--you do not strike me as an
idealogue.
I think the President's policy is ideologically driven more
than anything else. It gets its greatest support not from
business people I speak to or hear about, but from ideologue
who just hate the Federal Government, hate taxes, certain
editorial pages.
I will conclude with this because I do not want you to say
anything because I am supporting your appointment. I do not
want you to say anything to jeopardize it.
[Laughter.]
But I hope you will be a moderating voice there. I really
do. The country demands it right now.
Thank you, Mr. Chairman.
Chairman Shelby. Any other questions?
Senator Santorum. Mr. Chairman.
Chairman Shelby. Senator Santorum.
STATEMENT OF SENATOR RICK SANTORUM
Senator Santorum. Just one comment.
With support like that, huh?
[Laughter.]
Let me just say that I think you were correct in your
answers and I appreciate your answers. I think what the Doctor
was trying to say is, the amount of tax cut is always driven by
the policy and it is the short-term and long-term policy that
is the most important thing to get accomplished.
And if you can do it with 350, you do it with 350. And if
you can do it with 7, you do it with 7. If you can do it with
1.5--whatever the best policy is to accomplish your goals is
what is needed.
And I think it is very arbitrary to pick a number out, as
the President did not do, because you heard conversations
earlier this year talking about $300 billion or $500 billion
was his package. But he changed the number driven by the policy
of what he wanted to accomplish for the economy for the short-
term and the long-term.
We are fixated far too much in this Congress with numbers.
We have to look at what the policy is underlying those numbers.
Numbers are important. I am not saying they are unimportant.
They are important, but not the only thing that we need to
consider here.
And when you consider some of the other numbers that we are
looking at, which is record low inflation--in fact, one of the
reasons we are always concerned about deficits is because of
the inflationary pressure.
We do not have that inflationary pressure now. What we have
is slow growth and we need to look at ways to increase growth.
So, I appreciate your comments. I do not think that they
are ideologically driven. I think they are driven and were
appropriately driven by what is best for this country as far as
the economy is concerned.
Senator Sarbanes. But the numbers are themselves a very
important policy----
Senator Schumer. Exactly.
Senator Sarbanes. --since they bear on the deficit and the
debt and the prospects for future growth.
You cannot simply say, well, let's do a tax policy on all
the tax policy considerations, and say, that is policy, without
recognizing that the sum total of those changes that you may
want to make in terms of the aggregate number itself becomes a
very important policy in terms of the fiscal direction of the
country and its prospects for our economy.
Senator Santorum. I would agree with that. I think I made
that balance.
Senator Schumer. If my colleague would yield, you could
have a policy that says, no taxing unearned income. But it
might cost $5 trillion and you wouldn't do it.
I could have a policy--national health care for everybody.
That would cost $5 trillion and I could not do it.
The numbers in the policy have to interact.
Senator Santorum. If I could reclaim my time. I do not
think I said that we should ignore numbers. In fact, I was very
clear. But to just focus solely on numbers I thought was
inappropriate and that is all the comment I would make.
Mr. Chairman, I will yield back my time.
Chairman Shelby. Thank you.
Senator Schumer. Mr. Chairman.
Chairman Shelby. Doctor, as you would say, numbers do have
consequences. But I believe you were alluding earlier to the
size of the tax cut compared to the size of our economy, in a
sense.
Is that correct?
Dr. Mankiw. That is right. $726 billion may seem like a
large tax cut, but not compared to the economy over a 10-year
period.
Chairman Shelby. Sure. Thank you for your appearance.
Dr. Mankiw. Thank you very much.
Chairman Shelby. We will have our second panel: Mr. Steven
Nesmith. Come on up, sir.
He has been nominated to the be the Assistant Secretary for
Congressional and Intergovernmental Relations, U.S. Department
of Housing and Urban Development.
We have with us the other Senator from Pennsylvania who
will be recognized to say anything that he wants to about the
nominee.
Senator Santorum. Thank you, Mr. Chairman.
It is an honor for me to be here for Steve. I want to
welcome him and his wife Christelle, and I think his son Steven
Jr. is here, at least I thought I saw him.
There he is. I cannot see him behind the chair there.
Welcome all of you to the hearing today. It is a real
personal privilege for me to introduce Steve to the Committee.
He's been someone that I have worked with in Pennsylvania for a
number of years since I have been in the U.S. Senate. I have
worked with him both at the Department of Housing and Urban
Development and his previous--well, current position, I guess,
as well as with the Economic Development Administration.
He has been a very strong, active voice in economic
development in our State, working with EDA, and has a
distinguished resume of Government service and service outside
of Government.
He has a great resume of education. He was a clerk for our
Supreme Court Justice in Pennsylvania. The laundry list is
long. And I would like to put my full statement in the record.
Chairman Shelby. Without objection, it is so ordered.
Senator Santorum. And just say that it is a pleasure to be
here. The Secretary is going to be very-well served as having
Steve be the Assistant Secretary for Congressional and
Intergovernmental Affairs.
It is a pleasure to be here.
Chairman Shelby. Mr. Nesmith, would you stand and hold up
your right hand?
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Nesmith. I do.
Chairman Shelby. Do you agree to appear and testify before
any duly-constituted committee of the Senate?
Mr. Nesmith. I do.
Chairman Shelby. Thank you. Your written testimony will be
made part of the record in its entirety. You proceed as you
wish.
STATEMENT OF STEVEN B. NESMITH, OF PENNSYLVANIA
TO BE ASSISTANT SECRETARY FOR CONGRESSIONAL
AND INTERGOVERNMENTAL RELATIONS
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Nesmith. Chairman Shelby, Ranking Member Sarbanes, and
other Members of the Committee, I thank you for your
willingness to consider my nomination during such a busy time
in Congress.
My wife, Christelle, and son, Stevie, Jr., were already
introduced. I want to take the time, and I am happy that they
are here with me today. I also have a beautiful daughter by the
name of Alexandra. She is only 3 months old, so we thought it
was best that she not come today and disturb the proceedings.
Finally, even though my mother, Ruby Nesmith, has passed on and
she is not physically with me today, I know she is here with me
in spirit.
I would like to thank Senators Santorum and Specter for the
very generous introductions today. It has been an honor for me,
and a privilege, to work with both Senators in this
Administration on economic development issues for Pennsylvania
and, therefore, the country during my tenure at the U.S.
Commerce Department. I also want to thank the many people who
have supported me leading up to this process and helped me
prepare for this hearing. And, of course, I want to thank the
senior staff here at the Senate Banking Committee. I am most
grateful for their help.
Most importantly, I am deeply grateful to President Bush
and Secretary Martinez for according me the honor of this
nomination. If confirmed, it is with great humility that I will
discharge the duties of the position.
As someone who grew up in public housing and as a so-called
``at-risk child'' in the ghetto of Philadelphia, Pennsylvania,
I am sure that many people could never imagine that I might sit
here today before such a prestigious group of U.S. Senators as
the President's nominee for the Assistant Secretary position at
the U.S. Department of Housing and Urban Development.
I hope that my experiences, growing up in public housing
and working on economic development issues in Philadelphia's
Empowerment Zone, in addition to those as a Government
Relations Lawyer, and as Deputy Assistant Secretary of the U.S.
Department of Commerce Economic Development Administration,
will assist me in thinking through the housing issues from the
perspective of both community and economic development and the
U.S. economy.
In closing, I recognize that there will be challenges ahead
for us, whether they are a specific program at HUD or issues
facing the broader housing community. Nevertheless, I believe
that we must address these issues in a bipartisan manner in
order to find long-term solutions.
And I thank you.
Chairman Shelby. Mr. Nesmith, as Assistant Secretary for
Congressional and Intergovernmental Affairs, you would serve as
the information conduit between HUD and Capitol Hill.
What are your thoughts on improving the flow of information
between the Department and the Congress?
Mr. Nesmith. Well, I think that one of the first things
that is important and that I talked with Secretary Martinez
about is that the various program areas sometimes operate in
business silos, if you will, like individual businesses at HUD.
Instead, the program areas must come together more regularly
and the Office of Congressional and Intergovernmental Affairs
must be the leader in bringing those program areas together on
issues relating to legislation, on specific program issues.
I have talked to Secretary Martinez about this approach
and, if I am confirmed, I will take the lead in implementing
this concept.
For example, when someone says, you know, I haven't heard
that much from this other assistant secretary. I haven't heard
much from this program area. I think that the Office of
Congressional Affairs must take the leadership in making sure
that we pull everyone together and take the responsibility in
getting not only timely responses to members of your senior
staff and to the Members of this Committee directly, but also
substantive responses.
Chairman Shelby. You will also be the point of contact
between HUD and interested external parties, external to the
Department. That is a very important communication medium, too.
How are you going to handle that?
Mr. Nesmith. As a former athlete, I would like to use
athletic analogies. One of the things I have in my playbook, so
to speak, is that we convene interest groups who have the most
interest in the housing, community and economic development and
ask them to come to HUD on a regular basis.
We do not always have to go to them. Instead, bring them
into the HUD's departmental conference room, and do a better
job at briefing them about policy issues and have more of an
intimate relationship with these groups.
Chairman Shelby. Or any issues that affect them, right?
Mr. Nesmith. Yes, sir. And so, I believe that what we need
to do is bring those interest groups that have issues before
HUD, bring them in and make them part of HUD's family when we
are making decisions about the Department.
So that we can sit down together, rather than HUD staying
where it is physically located and the interest groups being
located out where they are.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Mr. Chairman, I do not have any questions
of Mr. Nesmith. I look forward to supporting his nomination and
I want to commend you for scheduling his hearing in such an
expeditious manner.
We had the opportunity to meet in advance of this hearing
and explore a number of issues. There is just one I want to put
on the public record.
A number of us on the Committee, and in fact, other Members
of Congress, both Democrats and Republicans, have had some
problems with the responsiveness of HUD to inquiries from the
Hill, requests for information, efforts to consult on the
evolution of policy and so forth.
This is not intended to be a criticism of the Congressional
Relations staff at HUD. Our perception is that they work quite
hard at staying in touch with Committee Members and Committee
staff.
But they apparently were encountering difficulties in
getting their counterparts in the program areas of the
Department to respond to concerns raised by the Committee.
I won't enumerate them, but there are a number of examples
where it took really months to get responsive answers out of
the Department. And my understanding is that the Congressional
Liaison Office was doing its very best to get their
counterparts in the policy substantive areas of the Department
to respond.
Now, obviously, there will be times when we agree or
disagree about specific policy prescriptions or legislative
proposals. But, in any event, it is our responsibility as the
Committee of jurisdiction to review policy and oversee
operations of the Department.
I, previously as Chairman, and now Chairman Shelby, have
stressed the oversight responsibilities of this Committee. To
meet that responsibility, we need more cooperation from HUD.
You seemed to understand that concern when we met and
discussed the problem. I do not know whether you want to add
anything to that at this point. But I think it is an extremely
important issue, and as you are about to undertake or embark on
these important responsibilities, I, frankly, perceive it at
the moment as a major challenge which you will confront.
Mr. Nesmith. I appreciate that comment. As you both, both
Ranking and Chairman, know, as you both were athletes, and I
know that Senator Shelby, but for some events in life, maybe he
would have been a Hall of Famer football player from Alabama,
but for an accident that occurred, physical, that is----
Senator Sarbanes. You are going to great lengths to compare
it to----
Chairman Shelby. We are going to confirm this man fast.
Senator Sarbanes. Yes.
[Laughter.]
Mr. Nesmith. And I know that Senator Sarbanes, it is my
understanding, was a good athlete in basketball, in fact, at
Oxford University. You both were athletes, you understand the
concept of leadership.
Senator Sarbanes. A shooter there at Princeton.
Mr. Nesmith. But I really see this as an issue of
leadership, Senator Sarbanes. And I think that is my
responsibility.
I think that the issue you laid out is a very important
one. So, therefore, I pledge to you to take the leadership role
in making sure that what you described never happens with the
team that I have around me.
And therefore, if you do not see a substantive improvement
on this issue, I think leadership should be called to task and
therefore, I will be willing to join you in your office.
Chairman Shelby. Thank you. And as I just told you, we are
going to move your nomination fast, Senator Sarbanes and I.
Mr. Nesmith. Thank you.
[Laughter.]
Chairman Shelby. Thank you for your appearance. Thank you
for your statement.
We looking forward to supporting you.
Mr. Nesmith. Thank you very much.
Chairman Shelby. Our third panel are nominees for Members
of the Board of Directors for the National Institute of
Building Sciences: Mr. Jose Teran, Mr. James Broaddus, Mr. Lane
Carson, Mr. Morgan Edwards, and Mr. Paul Pate.
I have also been asked on behalf of Senator Grassley that
he has a statement in support of Mr. Paul Pate of Cedar Rapids,
Iowa, and I want to make his statement as part of the record,
without objection.
I would ask that all of you stand and let me administer the
oath to you, if you would raise your right hand.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Pate. I do.
Mr. Broaddus. I do.
Mr. Edwards. I do.
Mr. Carson. I do.
Mr. Teran. I do.
Chairman Shelby. Do you agree to appear and testify before
any duly-constituted committee of the Senate?
Mr. Teran. I do.
Mr. Carson. I do.
Mr. Pate. I do.
Mr. Edwards. I do.
Mr. Broaddus. I do.
Chairman Shelby. Thank you, gentlemen. Your written
testimony will be made part of the record in its entirety.
You know that we have had a long meeting here today. You
had to endure it.
If you will sum up as quickly as you can, in a very
abbreviated manner, we would be deeply appreciative.
We will start with Mr. Teran.
STATEMENT OF JOSE F. TERAN, OF FLORIDA
TO BE A MEMBER OF THE BOARD OF DIRECTORS
NATIONAL INSTITUTE OF BUILDING SCIENCES
Mr. Teran. Mr. Chairman and Members of the Committee, I am
Jose Francisco Teran, born in Nicaragua and a citizen of the
United States of America since 1989.
I want to acknowledge the presence of my wife of 41 years,
Maria Lourdes, and two of my youngest daughters, Maria Lourdes
and Gabriela. And I am especially proud to have here also Mr.
Carlos Ulvert, who is the Ambassador of Nicaragua to the United
States, and his wife, Carmen Lucia.
Chairman Shelby. We welcome them here.
Mr. Teran. Who happens to be my wife's niece.
Chairman Shelby. Thank you. And we congratulate you, with
your family and what you have done.
Mr. Teran. Thank you. It is a great honor to have been
nominated by President George W. Bush to be a Director of the
National Institute of Building Sciences.
Today, I come before you to make a brief statement of what
I believe to be my qualifications for this position, and to
thank the Members of the Committee for your review of my
nomination and allowing me to appear before you this morning.
My story, as it relates to this nomination, starts with a
quality primary and secondary education at the Christian
Brothers and Jesuits schools in Nicaragua. It was at this time
that I laid the four pillars for my intellectual life:
Mathematics, Science, Philosophy, and Art. For this reason, I
decided to become an architect.
I had my university training as a freshman at Wilson
Teachers College, Catholic University of America, and George
Washington University. I spent 5 more years to get my Bachelor
and Master of Architecture Degrees at the University of
Michigan in Ann Arbor. I have taken the Harvard-sponsored
course in advanced management at INCAE.
Upon graduation, I was invited to join the design team of
Minoru Yamasaki in Birmingham, Michigan. I worked intensely
under the guidance of Gunnar Birkerts. At that time I was in
the teams that designed the Oberlin College Conservatory of
Music, the Wayne State University College of Education, the
first international airport in Dahran, Saudi Arabia, and the
Michigan Consolidated Gas Company Building in Detroit.
I then went back to Nicaragua and between 1960 and 1979,
formed the largest architectural, engineering, construction,
industrial, and financial group of companies. Buildings such as
the Ruben Dario National Theatre, the INCAE-Harvard campus, the
Central Bank Building, the National Light and Power Company
building, and many other office, hotel, and hospital projects
were successfully planned and constructed in the country. Over
14,000 single-family, low-cost houses were produced in model
communities with the assistance of the Agency for International
Development.
I came with my family to Houston in 1980 to work for a
small developer. Several office and commercial projects were
developed. In 1984, I founded my own company, Natex
Corporation, that has operated continuously to this day. Two
separate activities were the key targets of Natex: Real Estate
Development and Management and Architecture. One of the most
important projects was the coordination and technical direction
of the Managua Metropolitan Cathedral donated by Thomas S.
Monghan, the owner of Domino's Pizza, in 1993. The project
designed by Ricardo Legorreta of Mexico won the 1994 Award from
the American Institute of Architects.
I have been a team member all my life. I highly value the
benefits of working together with others. I have been in the
private
sector all my life, but I have had interesting interactions
with all sectors of Government, both in the United States and
abroad.
I value highly the purpose of the institution I have been
nominated to serve. The National Institute of Building
Sciences' mission to join the private and governmental sectors
to improve the regulatory environment and allow the faster and
more efficient incorporation of technology into our building
process is of utmost importance to the welfare of our people.
It is of particular importance today as the problems of
homeland security soar with the terrorist threats.
I am perserverant and like to see results. I strive for the
highest level of quality, to the best of my ability in what I
do.
Again, many thanks for your consideration. I look forward
to answering any questions that you may have.
Chairman Shelby. Thank you, Mr. Teran.
Mr. Broaddus.
STATEMENT OF JAMES BROADDUS, OF TEXAS
TO BE A MEMBER OF THE BOARD OF DIRECTORS
NATIONAL INSTITUTE OF BUILDING SCIENCES
Mr. Broaddus. Chairman Shelby, Ranking Member Sarbanes, and
distinguished Members of the Committee, I am honored to appear
here today as a nominee to become a Member of the Board of
Directors of the National Institute of Building Sciences. In
attendance with me today is my wife of 33 years, Kay, whose
love and support has enabled my presence here today. I would
also like to recognize the attendance of two very special
people, both of whom work diligently in Washington on a daily
basis: Sharon Gressle, with the Congressional Research Service
of the Library of Congress, and Jim Kuhn, my close friend and
business colleague here in Washington, who as an Assistant to
the President served as the Personal Executive Assistant to
Ronald Reagan during his second term. Three very special family
members could not attend are my son Scott Broaddus and
daughter-in-law Courtney, who remain in Texas because of their
jobs. Our youngest son also could not make it due to job-
related duties. First Lieutenant Jeffrey Broaddus is an
infantry platoon leader with the 1st Battalion 5th Marines.
After a 1,200-mile tour of southern Iraq and downtown Baghdad,
he remains in-country there, awaiting transportation back home.
I was honored and most grateful to President Bush for his
trust and confidence in me to nominate me to serve on the Board
of NIBS. I also appreciate the Senate Committee on Banking,
Housing, and Urban Affairs for considering confirmation of my
appointment for which I am awed and humbled to be considered.
For many years, I have been aware of the good work of NIBS and
its contribution to the building sciences on a national scale.
However, I never contemplated that I would be entrusted to help
set its strategy and oversee its direction. Hopefully, the
Committee will consider my background well-suited for this
appointment.
After completing my civil engineering degree at the
University of Texas, I began my working career as Navy Civil
Engineering Corps Officer and Navy Seabee where I served 20
years. From 1970 to 1990, I served in 11 different assignments
all over the world, which included project management
responsibilities from the field construction site to the
Washington level. Following my construction-oriented Navy
career, I finished my Ph.D. degree at UT Austin, and remained
there working for the Construction Industry Institute, a
national research center for the design and building industry.
My imbedded Seabee penchant for project work brought me back to
the real world of projects and in 1994, I became Director of
Facilities Planning and Construction for the 15-campus
University of Texas system. During my 4\1/2\ years there, we
completed $1.5 billion statewide in a wide variety of projects
using new and improved project management methods and
contracting strategies. In 1998, I returned to Washington, DC
to lead the Design-Build Institute of America in developing
integrated and streamlined approaches to design and
construction. In late 2000, fulfilling a dream I held on to
since my early college years of having my own professional
practice. I started Broaddus & Associates as a project
management firm to help mostly public owners manage major
complex projects from the earliest planning through design,
construction, and initial operation. Today, at Broaddus &
Associates, we are managing $300 million in projects in the
State of Texas and provide management consulting to facility
owners and throughout the United States.
As a professional, my career has focused on improving the
project process. While our industry is always in need of better
technology and materials, I know from research and practical
experience that significant inefficiencies exist in the
management of projects that ultimately cost taxpayers and
consumers alike. I look forward to working with NIBS to carry
on their highly effective efforts and to promote new high
payback programs that can materially improve one of the largest
industry sectors in our economy. NIBS was chartered to be the
public/private interface for the building industry. The private
sector has much to offer in making our public projects more
cost-effective, both in initial capital outlay and life-cycle
costs. I see the opportunity to bring private sector ideas to
the Government projects every day in the projects we manage at
Broaddus & Associates. I look forward to bringing that
perspective to the Board of NIBS.
Your approval of this nomination will be one of my highest
honors and I can also assure that I will be an active and
contributing Board Member, keeping NIBS mindful of its intended
public purpose. There is much to be done in our industry, and I
feel NIBS can play an ever-expanding role in improving
construction.
I would be pleased to answer any questions you may have.
Chairman Shelby. Thank you.
Mr. Pate.
STATEMENT OF PAUL D. PATE, OF IOWA
TO BE A MEMBER OF THE BOARD OF DIRECTORS
NATIONAL INSTITUTE OF BUILDING SCIENCES
Mr. Pate. Thank you, Mr. Chairman. Greetings, honorable
Senators and staff.
It is an honor to introduce myself to the U.S. Senate
Banking, Housing and Urban Affairs Committee. My name is Paul
D. Pate and I am the Mayor of Cedar Rapids, Iowa. I am a
nominee for the Board of Directors of the National Institute of
Building Sciences.
This personal milestone is made possible by a family
effort.
Although they could not join me today in person, I am who I am
because of the absolute support and love of my wife Jane, my
children Jennifer, Amber, and Paul III, my grandson Brandon, my
parents Paul, Sr. and Velma, and my entire family, which God
has blessed me with.
My parents provided me the strong values of working hard to
achieve dreams and giving back for the good of the community.
Serving the public through elected office and pursuing other
opportunities to reach out through business ownership are two
ways I have acted on the foundation they gave me. These two
kinds of professional experiences are the leading
qualifications I bring as a nominee to the National Institute
of Building Sciences.
I have the honor of being Mayor of Iowa's greatest and
strongest city--Cedar Rapids. Prior to serving as Mayor, I
served as Iowa's Secretary of State and a State senator,
totaling more than 11 years of executive and legislative
experience at the State and local government levels.
I am a third-generation builder with 27 years' experience
in the professional development trade. I currently own Pate
Asphalt. Thanks to the foundation of the values instilled in me
by my father and grandfather, I worked my way from the ground
up, and still work to complete the highest quality work. This
family tradition means I offer a firsthand understanding of the
perspective of builders to the National Institute of Building
Sciences.
I'm qualified to serve in this position not only because of
my private business and Government service experience, but also
because I view the position as an opportunity to do my best,
keep moving forward and help create common benefit through
effective partnerships. I listen attentively to all
perspectives offered, which allows me to be a proactive team
member on this Board of Directors.
If confirmed, I will actively engage myself in all aspects
of the Institute's public mission to improve the building
regulatory environment, facilitate technology introduction, and
disseminate information. I have already started this process in
my community.
For example, I founded the Mayor's Development and Building
Task Force in Cedar Rapids last year. The group is a successful
case study that may be replicated in other areas of the
country. The group meets to streamline the processes local
businesses must face when they are expanding their physical
footprint. This has a great impact on keeping economic
development moving forward.
In closing, I would like to thank President George W. Bush
for this nomination and appreciate the Senate's consideration
of my confirmation for this position. I look forward to
applying my passion for service if confirmed for this position.
As a leader and former President I admire, Teddy Roosevelt
once said, ``The first requisite of a good citizen in this
republic of ours is that he shall be able and willing to pull
his weight.''
If confirmed, I will carry the honor and personal
responsibility this statement implies forward, applying the
best of myself as a Member of the Board of Directors of the
National Institute of Building Sciences.
I would appreciate your support of my nomination and stand
ready to answer any questions and listen to any guidance.
Thank you.
Chairman Shelby. Thank you.
Mr. Carson.
STATEMENT OF LANE CARSON, OF LOUISIANA
TO BE A MEMBER OF THE BOARD OF DIRECTORS
NATIONAL INSTITUTE OF BUILDING SCIENCES
Mr. Carson. Chairman Shelby, Senator Sarbanes, first, my
wife Laura could not be with us today because she's getting
report cards out back in Mandeville Junior High in Louisiana,
final report cards, of course. And my son Chris is about to be
a senior at the United States Naval Academy and is in the
process of getting ready for commissioning week.
But it is an honor to be here and it is an honor to be
appointed by the President, and it certainly would be an honor
to be confirmed by you.
As a youngster, I grew up in a working community in
Louisiana. My dad is a member of Local 60, Steamfitters and
Plumbers, and my brother is also. So I had a chance to work
personally with these men and really get to know what working
people are all about.
After going to school at LSU and serving my country in
Vietnam, I went on to Tulane Law School in the vocational
rehabilitation program. And after that, I had an opportunity to
serve the handicapped community by working on the Architectural
Transportation Barriers Compliance Board in the Reagan
Administration.
Briefly working at the health department in the State, I
had an opportunity to work with the construction decisions
regarding hospitals. And after all that, finally got a
contractor's license and a broker's license and have maintained
and operated apartments and office complexes.
I guess my biggest attribute to the Board would be as an
attorney, for 18 years being in the trenches of local county
government, trying to make it work, all the issues of zoning,
land use, building codes, all the things that are important to
the people back home.
And that would be my key offering, Mr. Chairman. So with
that, I offer my candidacy and would appreciate your
confirmation.
Chairman Shelby. Thank you.
Mr. Edwards.
STATEMENT OF C. MORGAN EDWARDS, OF NORTH CAROLINA
TO BE A MEMBER OF THE BOARD OF DIRECTORS
NATIONAL INSTITUTE OF BUILDING SCIENCES
Mr. Edwards. Good afternoon, Mr. Chairman, Ranking Member
Sarbanes, ladies, and gentlemen. I first would like to thank
you for this opportunity to be here today and I especially
would like to thank Senator Dole for that kind introduction.
I would like to express my gratitude to President George W.
Bush for his confidence in nominating me as a Member of the
Board of Directors of the National Institute of Building
Sciences. If confirmed, I look forward to serving in this
important position.
A few years ago, I had a unique opportunity when I was
asked to oversee two major building laws that were enacted by
the Commonwealth of Pennsylvania. It was my job to design,
develop, and manage the regulatory programs for statewide
inspection program of mobile home and modular housing.
For 3 years, I worked to develop these programs and then
carried out the actual management for an additional 4 years.
During this time, I served on many National standard-writing
committees, including the National Fire Protection Association,
the American Society for Testing Materials, and the National
Conference of States and Building Code Standards. I was also a
Member of the original HUD Mobile Home Standards Advisory
Group.
Prior to my State code experience, I was in the U.S. Naval
Reserve, on active duty for 4 years. Following this, I served
several years in corporate America middle management, including
Campbell's Soup and Philco Ford, which is now called Ford
Aerospace.
I spent time as a Management Consultant. After returning to
North Carolina, I was appointed Assistant Secretary in the
North Carolina Department of Transportation by then-Governor
James Martin, who was also a Member of Congress.
I recently retired and I spend most of my time, or much of
my time, practicing real estate on a part-time basis.
I would like to thank you, Mr. Chairman, and Ranking Member
of the Committee for this opportunity and I am grateful for
your time and look forward to addressing any questions you may
have.
Chairman Shelby. I want to thank all of you.
An important concern of mine is seeing that the opportunity
to own a home is available to all Americans, and I am sure that
you bring a lot of collective experience there.
What role do you see for the National Institute of Building
Sciences in helping to reduce some of the regulatory burden
placed on home construction.
We will start with you, Mr. Teran, and anybody who wants to
comment. How do we reduce the regulatory burden placed on home
construction?
Mr. Teran. I think the basic problem is one of approach
mentality. Housing is a social and economic problem more than
an architectural and construction problem. We sometimes put the
architectural and construction importance that really hampers
the affordability of the home.
I believe that there is a lot that has to be done to really
go into the nitty-gritty of the regulations on housing,
particularly local housing, in our inner-cities and our decayed
neighborhoods. But also, beyond that, in our rural areas, and
make sure that those regulations are such that they will allow
a great deal of latitude to the homeowners to build their own
houses, to their communities to help in building houses, and to
make community programs where people can help each other build
their own houses.
Chairman Shelby. Mr. Broaddus, do you have any comments?
Mr. Broaddus. The only thing I can say on that, and that
would carry that message back to our board, if confirmed. But
one of the issues in any effectively delivering construction,
whether it be homes or in the commercial sector, is the length
of the process, and the length of the process ultimately costs
all of us money.
And so, there is a lot of conflicting regulation. There is
a lot of overlap. And I know one of the purposes of NIBS is to
try to standardize that and unify some of those codes. I think
that could also be a major contribution to the affordability of
housing and also the availability of it.
Chairman Shelby. Mr. Pate.
Mr. Pate. I would just encourage continuing to expand on
the role of the public-private dialogue to understand what the
impact is, to do the cost analysis of some of the actions we
are taking, both on the Federal level, as well as the local
level, because when it gets down to the local level, obviously
they are trying to interpret the Federal guidelines that are
being set.
I think that is where NIBS plays a good role in bringing
these industrial groups together to have that early dialogue.
But I also, Senator, hope that the rest of the local levels
keep their part going.
Chairman Shelby. That is very important.
Mr. Carson.
Mr. Carson. At least in Louisiana, Mr. Chairman, the
permitting process sometimes adds a lot to the cost of
construction, whether it is zoning, land use----
Chairman Shelby. Regulatory burden, isn't it?
Mr. Carson. Regulatory burden sometimes, and lots of times
wetlands issues. Areas that are dry as you could think, by
looking, walking, and observing, are ready to be built upon.
But because of a technical definition within the wetlands law,
prevents that from being used, or it is a lengthy process to
have to swab it out to put it into a nonwet area. That takes up
our time and money.
Chairman Shelby. Mr. Edwards.
Mr. Edwards. While on the Mobile Home Advisory Commission,
I guess it is called manufactured housing, I fought very hard
to maintain low cost, as I had been able to do in Pennsylvania.
In spite of that, the standard tripled the price of a mobile
homes.
I look forward to an opportunity to reintroduce that
concept and keep the price of homes down.
Chairman Shelby. I am going to ask all of you a question
for the record because time is moving here today.
What are some of the things--and I wish you would think
about it--which could be done to provide greater building
safety in tornado-prone areas? I guess a lot of the country is
tornado-prone, even in the last few days.
But that is a real tough issue. But think about this. I
would like for you to see what we can do to help you or help
people survive the tornados.
We will do that for the record.
I thank all of you for coming here. I look forward to
helping move your nominations. We appreciate your
participation.
Thank you.
Mr. Edwards. Thank you.
Mr. Carson. Thank you.
Mr. Pate. Thank you, Mr. Chairman.
Mr. Broaddus. Thank you.
Mr. Teran. Thank you, Mr. Chairman.
Chairman Shelby. The hearing is adjourned.
[Whereupon, at 12:28 p.m., the hearing was adjourned.]
[Prepared statements, biographical sketches of the
nominees, and responses to written questions supplied for the
record follow:]
PREPARED STATEMENT OF SENATOR RICK SANTORUM
Mr. Chairman, it is my great honor to introduce Steven Nesmith, the
President's nominee to be Assistant Secretary for Congressional and
Intergovernmental Affairs at the U.S. Department of Housing and Urban
Development (HUD). I also want to welcome Steve's family--his wife
Christelle, and his son Steve, Jr.
If Steve is confirmed, he will serve as the principal adviser to
the Secretary, Deputy Secretary, and senior staff with respect to
legislative affairs, Congressional relations, and policy matters
affecting Federal, State and local governments, and public and private
interest groups. This is an especially significant position to those of
us on the Committee as we interact with HUD. HUD has a set of
challenges all of its own to face, and I am confident that Steve is
prepared for this task. I am appreciative of the work he has already
done in his consultant role to HUD.
In my interactions with Steve as I have worked to bring much needed
economic development funds into Pennsylvania, I have found him to be
evenhanded, professional, and a true compassionate conservative. Steve
is from Philadelphia and spent some time in public housing while
growing up. I think this experience will give him a unique perspective
on his work at HUD. His position at the Economic Development
Administration (EDA) at the Department of Commerce as Deputy Assistant
Secretary with responsibilities over Congressional and
Intergovernmental Affairs, Public Affairs, National Technical Research
Auditing Divisions, and Executive Secretariat functions has also
prepared him well for the position for which he has been nominated.
That experience has included work on some high profile issues such
as the Trade Promotion Authority bill. He has also served as a member
of the Agency's Senior Executive Management Team and was the Agency's
principle representative with the White House, OMB, Congress, and other
Federal agencies on NYC's Post September 11 Economic Recovery Task
Force; the White House Homeland Security Economic Consequence Task
Force; and as ``lead negotiator'' for the Agency's reorganization with
the Federal employee's union.
A graduate of American University with a BA in Criminal Justice,
Steve also captained the basketball team. He continued his education at
Georgetown University Law Center. He went on to clerk for Chief Justice
of the Pennsylvania Supreme Court Robert N.C. Nix, Jr. as an opinion
writer and subsequently worked for two of Philadelphia's law firms.
Steve went on to work as Director of Operations in the Mayor's Office
of Community Services with the Philadelphia Empowerment Zone.
In 1999, he moved to Washington, DC and served as Senior Counsel at
The Legislative Strategies Group. In this work, he focused on assisting
State and local governments acquire Federal economic development
funding. This experience will also give him a good perspective of the
needs of States and localities as they look to HUD for assistance.
I am very pleased that President Bush has nominated Steve Nesmith
for this position, and I am hopeful that the Committee will act quickly
to send his nomination on to the full Senate for a vote. Steve has done
great work, and I am certain that he will continue to do so at HUD.
----------
PREPARED STATEMENT OF CHUCK GRASSLEY
A U.S. Senator from the State of Iowa
Mr. Chairman and distinguished Members of the Senate Banking
Committee, thank you for allowing me the opportunity to say a few words
about my friend and colleague, Mayor Paul Pate of Cedar Rapids. I have
worked closely with Mayor Pate for many years, and know that he a
gentleman of integrity and dedication.
Today, Paul is being nominated to the National Institute of
Building Sciences. In 1974, Congress recognized the need for a
community development organization that could serve as a link between
government and the private sector. For 19 years, the Institute has been
a working group of professionals, industries, consumers, and elected
officials that are committed to our country's housing and development
issues. I have no doubt that Mayor Pate will be a fine addition to the
Board of Directors for the National Institute of Building Sciences. He
has always worked with the community at large to solve problems, many
times before they anise.
In 2001, Paul was elected as the 55th Mayor of Cedar Rapids. Before
his mayorship, Paul Pate was a small business man, a distinguished
member of the Iowa Senate, and served as Iowa Secretary of State under
Governor Branstad.
Mayor Pate has become known for his openness and seeking the
counsel of all segments of the community, to transform the landscape of
Cedar Rapids. I am pleased to work with him to meet the city's goals.
Part of the city improvements he has been working on is revitalizing
underutilized sections of the community, including rehabilitating old
industrial buildings into multi-use structures or preparing them for
high-tech industry. For these. reasons and many others, the City of
Cedar Rapids was recently ranked number 10 in smaller metro areas in
the United States by Forbes magazine in their ``Best Places for
Business and Careers Survey.''
I support Mayor Pate and appreciate your allowing me a few minutes
today on his behalf.
----------
PREPARED STATEMENT OF PAUL D. PATE
Member-Designate, Board of Directors
National Institute of Building Sciences
May 13, 2003
It is an honor to introduce myself to the U.S. Senate Banking,
Housing and Urban Affairs Committee. My name is Paul D. Pate and I am
the Mayor of Cedar Rapids, Iowa. I am a nominee for the Board of
Directors of the National Institute of Building Sciences.
This personal milestone is made possible by a family effort.
Although they could not join me today in person, I am who I am because
of the absolute support and love of my wife Jane, my children Jennifer,
Amber and Paul III, my grandson Brandon, my parents Paul Sr. and Velma
and my entire family, which God has blessed me with.
My parents provided me the strong values of working hard to achieve
dreams and giving back for the good of the community. Serving the
public through elected office and pursuing other opportunities to reach
out through business ownership are two ways I have acted on the
foundation they gave me. These two kinds of professional experiences
are the leading qualifications I bring as a nominee to the National
Institute of Building Sciences.
I have the honor of being Mayor of Iowa's greatest and strongest
city--Cedar Rapids. Prior to serving as Mayor, I served as Iowa's
Secretary of State and a State senator, totaling more than 11 years of
executive and legislative experience at the State and local government
levels.
I am a third generation builder with 27 years' experience in the
professional development trade. I currently own Pate Asphalt/PM Systems
Corporation. Thanks to the foundation of the values instilled in me by
my father and grandfather, I worked my way from the ground up and still
work to complete the highest quality work. This family tradition means
I offer a firsthand understanding of the perspective of builders to the
National Institute of Building Sciences.
I am qualified to serve in this position not only just because of
my private business and government service experience, but also because
I view the position as an opportunity to do my best, keep moving
forward and help create common benefit through effective partnerships.
I listen attentively to all perspectives offered, which allows me to be
a proactive team member on this Board of Directors.
If confirmed, I will actively engage myself in all aspects of the
Institute's public mission to improve the building regulatory
environment, facilitate technology introduction, and disseminate
information. In fact, I have already started this process in my
community.
For example, I founded the Mayor's Development and Building Task
Force in Cedar Rapids last year. The group is a successful case study
that may be replicated in other areas of the country. The group meets
to streamline the processes local businesses must face when they are
expanding their physical footprint. I know this has a great impact on
keeping economic development moving forward.
In closing, I would like to thank President George W. Bush for this
nomination, and appreciate the Senate's consideration of my
confirmation for this position. I look forward to applying my passion
for service if confirmed for this position. As a leader and former
President I admire, Teddy Roosevelt once said, ``The first requisite of
a good citizen in this republic of ours is that he shall be able and
willing to pull his weight.''
If confirmed, I will carry the honor and personal responsibility
this statement implies forward, applying the best of myself as a Board
of Director with the National Institute of Building Sciences.
I would appreciate your support of my nomination and stand ready to
answer any questions and listen to any guidance.
Thank you.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHNSON
FROM N. GREGORY MANKIW
Q.1. Is the goal of the President's tax proposals to raise the
fraction of the economy that goes to national saving, or to
lower it?
A.1. The proposal is intended to increase employment in the
short-run by boosting aggregate demand and to increase GDP
growth in the long-run by improving economic incentives,
particularly by lowering the taxation of capital income. In the
short-run, the proposal may reduce national saving by adding to
the deficit. In the long-run, the proposal is likely to
increase national saving, as private saving is encouraged by
the removal of the double tax on corporate income and the
expansion of tax-free savings accounts. The President has said
that he also favors spending restraint, in order to reduce the
deficit and increase national saving.
Q.2. Do you believe that a tax cut worsens or improves the
budget balance?
A.2. Holding Government spending fixed, a tax cut worsens the
budget balance to some extent. However, tax cuts that improve
economic incentives also promote economic growth, which
generates additional revenue. This revenue feedback partly
offsets the direct revenue loss, so that a tax cut reduces the
budget balance by less than one-for-one. The President has said
that he believes that spending restraint is an important
counterpart to tax relief.
Q.3. Do you believe that a budget deficit raises interest rates
relative to what they would otherwise be?
A.3. Budget deficits moderately raise interest rates. The 2003
Economic Report of the President (pp. 55-58) estimated that
every $200 billion of additional Government debt causes a long-
run increase of 3 basis points in interest rates. The impact of
budget deficits on interest rates is one reason why the
President is concerned about the deficit and favors spending
restraint.
Q.4. Do you believe that an increase in the budget deficit
crowds out private investment?
A.4. In the short-run, budget deficits may actually increase
investment by stimulating aggregate demand. In the long-run,
all else being equal, budget deficits crowd out private
investment by raising interest rates (as discussed above).
However, if the budget deficit is associated with tax cuts that
encourage private investment, such as the President's proposal
to remove the double tax on corporate income, the tax cut may
provide an offsetting boost to private investment. The
President favors spending restraint to reduce the deficit and
prevent the crowding out of private investment.
Q.5. Do you believe the official projections from the Office of
Management and Budget are a realistic best-guess forecast of
the likely path of budget surpluses or deficits over the next 5
or 10 years?
A.5. Although I am not an expert on budget forecasting, I am
confident the Office of Management and Budget does a capable
and professional job, in a volatile economic environment, of
forecasting the Federal budget under different assumptions
about policy decisions. One set of OMB projections is based on
the assumption that the President's proposed policies will be
adopted and another is based on the assumption that current
policies will be maintained. Even aside from economic
uncertainties, the actual budget surplus or deficit will differ
from these projections if different policies are enacted.
RESPONSE TO A WRITTEN QUESTION OF SENATOR SHELBY
FROM JAMES A. BROADDUS
Q.1. What are some of the things which could be done to provide
greater building safety in tornado-prone areas?
A.1. Mr. Chairman, the National Institute of Building Sciences
(NIBS) is working vigorously on the issue of tornados and their
disastrous effects. HAZUS is a nationally applicable,
standardized methodology and software program for estimating
potential losses from earthquakes, floods, and wind. HAZUS is
being developed by the Federal Emergency Management Agency
(FEMA) under a cooperative agreement with the NIBS. It now has
the capability to estimate earthquake losses, and flood and
wind models are being developed. The NIBS has established a
committee of wind engineering experts to provide technical
oversight and guidance to the project.
Development of the wind model will continue after 2003, to
increase the capability of the model to allow estimating
indirect economic losses and impacts to lifelines, and to add
the capability to assess the effects of extra-tropical
cyclones, tornados, thunderstorms, and hail.
The HAZUS wind model will be an improvement over existing
loss estimation models by using a wind hazard-load-damage-loss
framework. The model will address wind pressure, wind borne
debris, surge and waves, atmospheric pressure change, duration/
fatigue, and rain.
The model will have the following features:
<bullet> A building classification system that depends on the
characteristics of the building envelope and building
frame.
<bullet> The capability to compute damages based on building
classes and the effects of rain, progressive failure.
<bullet> The capability to compute damage to contents and
building interior.
<bullet> The capability to estimate tree blowdown and structure
debris quantities.
<bullet> Loss estimates will include direct and indirect
economic loss, shelter requirements, and casualties.
<bullet> Modules will be included to facilitate future
assessment of mitigation, benefit cost, and building code
issues.
When confirmed as a Board Member, I will monitor the
progress of this program, making suggestions as necessary to
ensure its value and payback to the Nation's citizens.