[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
REMOVING THE BARRIERS TO FREE
ENTERPRISE AND ECONOMIC GROWTH
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, JUNE 1, 2012
__________
Serial No. 112-27
__________
Printed for the use of the Committee on the Budget
Available on the Internet:
www.gpo.gov/fdsys/browse/
committee.action?chamber=house&committee=budget
U.S. GOVERNMENT PRINTING OFFICE
74-370 WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
COMMITTEE ON THE BUDGET
PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho Ranking Minority Member
JOHN CAMPBELL, California ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri LLOYD DOGGETT, Texas
TOM COLE, Oklahoma EARL BLUMENAUER, Oregon
TOM PRICE, Georgia BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma TIM RYAN, Ohio
DIANE BLACK, Tennessee DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin GWEN MOORE, Wisconsin
BILL FLORES, Texas KATHY CASTOR, Florida
MICK MULVANEY, South Carolina HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas KAREN BASS, California
TODD C. YOUNG, Indiana SUZANNE BONAMICI, Oregon
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia
Professional Staff
Austin Smythe, Staff Director
Thomas S. Kahn, Minority Staff Director
C O N T E N T S
Page
Hearing held in Washington, DC, June 1, 2012..................... 1
Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
Prepared statement of.................................... 2
Hon. Chris Van Hollen, ranking member, Committee on the
Budget..................................................... 3
Prepared statement of.................................... 5
Hon. Jeb Bush, President, Bush and Associates, former
Governor, State of Florida................................. 7
Prepared statement of.................................... 9
Chris Edwards, director of tax policy studies, Cato Institute 12
Prepared statement of.................................... 14
Hon. Henry A. Waxman, ranking member, Committee on Energy and
Commerce................................................... 22
Prepared statement of.................................... 24
Hon. Kathy Castor, a Representative in Congress from the
State of Florida, submissions for the record:
Questions posed to Mr. Bush.............................. 25
Article, ``Florida Charter Schools: Big Money, Little
Oversight''............................................ 26
Article, ``A Charter to Profit''......................... 34
Article, ``Jeb Bush: Lehman's Secret Weapon''............ 35
Article, ``Florida Stands to Lose $1 Billion Because of
Lehman Brothers' Bankruptcy''.......................... 35
Hon. Marcy Kaptur, a Representative in Congress from the
State of Ohio, submissions for the record:
Questions posed to Mr. Bush.............................. 37
Article, ``Jeb Bush: Lehman's Secret Weapon''............ 72
Article, ``Barclays Buys Lehman U.S. Units for $1.75
Billion''.............................................. 72
Article, ``Lehman Brothers Bosses Could Face Court Over
Accounting `Gimmicks' ''............................... 74
Biography of Jeb Bush.................................... 75
Hon. Debbie Wasserman Schultz, a Representative in Congress
from the State of Florida, article: ``Palm Beach County OKs
Replacing Biotech Property With Sugar Cane''............... 69
REMOVING THE BARRIERS TO FREE ENTERPRISE AND ECONOMIC GROWTH
----------
FRIDAY, JUNE 1, 2012
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 9:00 a.m. in room
210, Cannon House Office Building, Hon. Paul Ryan [chairman of
the committee] presiding.
Present: Representatives Ryan of Wisconsin, Garrett, Cole,
Price, Stutzman, Lankford, Black, Ribble, Mulvaney, Huelskamp,
Amash, Rokita, Van Hollen, Kaptur, Doggett, Blumenauer,
Yarmuth, Honda, Ryan of Ohio, Wasserman Schultz, Castor, Bass,
and Bonamici.
Chairman Ryan. The committee will come to order.
I welcome all to the House Budget Committee for this
hearing on one of the key threats posed to our free enterprise
system, the growing cronyism in Washington and government-
imposed barriers to upward mobility.
While we are dealing with tough economic times, Americans
still live in the most prosperous and dynamic country in the
world. Our free enterprise system has lifted millions from the
grips of poverty, a record of success that is increasingly
challenged by the corrosive influence of Washington's misguided
policies.
Over the years, both political parties have pursued
deficit-driven spending aimed at favored companies, tax carve-
outs for the well connected, and regulatory barriers that stack
the deck against the average citizen. This creates a rigged
game where success is too often determined not by the quality
of service or products that a business provides but by their
relationships with those in power in Washington.
Both parties share in the blame. And I believe that both
parties must work together to advance solutions to get us back
on track. To that end, we passed a budget here in the House
that lifts the debt and strengthens the safety net for those
who need it and eliminates corporate welfare for those who
don't need it. Our pro-growth tax reforms ensure a level
playing field for all to prosper.
Regrettably, the President's policies take us in the wrong
direction. He has called for higher hurdles and greater
complexity in the Tax Code. He insists on wasteful spending on
his political allies and regulatory monstrosities that protect
the entrenched at the expense of the entrepreneur. We have seen
the results of this type of government-centered society in
Europe. Massive spending, high taxes, and corporate favoritism
have burdened the continent with crushing debt loads and
economies unable to grow. America is not destined to share this
kind of future if we give our people the freedom to succeed and
prosper.
Today's hearing is an effort to explore how we can advance
reforms consistent with our timeless principles and match the
magnitude of today's challenge. We can and we must restore
America's exceptional promise, ensuring all citizens are
guaranteed with the freedom to pursue their dreams and making
certain that we leave the next generation with a stronger, more
prosperous America.
I want to thank our three witnesses for joining us today.
And I will get to the third part in a second here. First of
all, we have former Governor Jeb Bush of Florida.
Thank you very much for traveling with us today. It is
great to see you here with us, Governor, here today. You have
been an outspoken advocate on restoring government's proper
role so that all Americans, especially the least among us, have
the opportunity to rise.
We also have Chris Edwards, director of tax policy studies
at the Cato Institute. Chris has been a long time advocate for
a fairer and simpler Tax Code and for his insightful criticism
of the mess of subsidies and special interests favoritism that
now pervades Washington spending and the Tax Code.
And then we will be joined with Henry Waxman. I talked to
Henry on the floor last night. He has a previous engagement. He
knows we are starting at 9:00, but he will show up hopefully by
the time our opening statements and the two witnesses are done.
As we know, Henry is the ranking member of the Energy and
Commerce Committee. He has been a strong leader for his party.
And he is the minority's witness today. So when the two
gentlemen are done, we will go with Henry, and hopefully he
will be here by then.
And with that, I would like to yield to the ranking member,
Mr. Van Hollen.
[The prepared statement of Chairman Paul Ryan follows:]
Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget
Welcome all to the House Budget Committee for this hearing on one
of the key threats posed to our free enterprise system: the growing
cronyism in Washington and government-imposed barriers to upward
mobility.
While we're dealing with tough economic times, Americans still live
in the most prosperous and dynamic country in the world.
Our free enterprise system has lifted millions from the grips of
poverty--a record of success that is increasingly challenged by the
corrosive influence of Washington's misguided policies.
Over the years, both parties have pursued deficit-driven spending
aimed directly at favored companies, tax carve outs for the well-
connected, and regulatory barriers that stack the deck against the
average citizen.
This creates a rigged game where success is too often determined
not by the quality of service or products a business provides but by
their relationships to those in power in Washington.
Both parties share in the blame, I believe both parties must work
together to advance solutions to get us back on track.
To that end, we passed a budget in the House that lifts the debt,
strengthens the safety net for those who need it, and eliminates
corporate welfare for those who don't.
Our pro-growth tax reforms ensure a level playing field for all to
prosper.
Regrettably, the President's policies take us in the wrong
direction. He has called for higher hurdles and greater complexity in
the tax code.
He insists on wasteful spending on his political allies and
regulatory monstrosities that protect the entrenched at the expense of
the entrepreneur.
We've seen the results of this type of government-centered society
in Europe. Massive spending, high taxes and corporate favoritism have
burdened the continent with crushing debt loads and economies unable to
grow.
America is not destined to this same kind of future if we give our
people the freedom to succeed and prosper.
Today's hearing is an effort to explore how we can advance reforms
consistent with our timeless principles and match the magnitude of
today's challenges.
We can--and we must--restore America's exceptional promise:
ensuring all citizens are guaranteed the freedom to pursue their
dreams, and making certain we leave the next generation with a
stronger, more prosperous America.
I want to thank our three witnesses for joining us today.
First of all, I want to thank former Governor Jeb Bush of Florida
for traveling to be here with us today. You've been an outspoken
advocate on restoring government's proper role so that all Americans--
especially the least among us--have the opportunity to rise.
Chris Edwards is the Director of Tax Policy Studies at the Cato
Institute. Chris has been a longtime advocate for a fairer and simpler
tax code, and an insightful critic on the mess of subsidies and special
interest favoritism in how Washington spends hard-earned taxpayer
dollars.
And we welcome our colleague, Congressman Henry Waxman, the Ranking
Member of the Energy & Commerce Committee. You've been a strong
legislative leader for your party, and we appreciate your taking part
in today's hearing.
Thank you all for joining us today, and we look forward to a
thoughtful discussion.
With that, I yield to the Ranking Member, Mr. Van Hollen.
Mr. Van Hollen. Well, thank you, Mr. Chairman.
I want to join the chairman in welcoming our witnesses here
today.
And let me start from a place we all agree. We all love
America. We all believe America is a unique and special place.
We all believe in American exceptionalism.
The question is, how do we keep America strong, dynamic,
and exceptional? On that, we clearly have different views and
would make different choices. We believe that our strength
springs not only from the undisputed benefits of a free people
pursuing their ambitions and dreams but also from sometimes
harnessing those talents for important national purposes.
We believe that America's greatness has resulted not only
from a collection of individuals acting alone for private
profit but also from our capacity to work together as Americans
for the common good.
We believe in constantly expanding the circle of
opportunity so all Americans have the chance to prosper.
And Mr. Chairman, I must confess, and, Governor Bush, I
must confess, I am a little surprised that you decided to be
here today to criticize the efforts made over the last 3 years
to lift the economy out of the mess that President Obama
inherited.
For 8 years, the President Bush pursued a failed ideology
of trickle-down economics based on the theory that tax cuts for
the very wealthy and an anything goes license on Wall Street
would boost our economy and lift all boats. Well, it lifted the
yachts, but the rest of the boats ran aground. The financial
crisis hit, and the economy and jobs went into free fall. By
the end of those 8 years, America experienced a net loss of
private sector jobs.
In fact, when President Bush left office, we were losing
jobs at the astounding rate of over 830,000 jobs a month.
Americans' retirement savings collapsed by one third, trillions
of dollars, between 2007 and the day President Bush left
office. Our Nation's fiscal health saw the greatest reversal in
American history, from large projected surpluses to large
projected deficits.
Now, I have searched the record, and as far as I can tell
during that 8-year period, you did not challenge the Bush
administration's handling of the economy, criticize the
excessive spending, or the rising deficits. And now, just
looking at your testimony, I am looking forward to hearing it
in full, you are here to tell us that government actions have
prevented us from the kind of, quote, snap-back economic
recovery that we have seen in other post-World War II
recoveries.
Carmen Reinhart and Kenneth Rogoff, two very distinguished
economists who are often cited by Chairman Ryan, have
demonstrated that economies hit by systemic fiscal crises
don't, quote, snap back within a year or two but take
significantly longer to recover. After all, none of the other
post-World War II recessions required the kind of extraordinary
actions taken by their Federal Reserve, as well as the huge
Wall Street bailout called for by President Bush with the
signing of TARP to stabilize the financial system and prevent
another Great Depression.
The TARP bill was, of course, a huge government
intervention in the marketplace, called for by President Bush,
supported by now-Speaker Boehner, now-Chairman Ryan, Governor
Romney, then-Senator Obama, and many of us on a bipartisan
basis as a distasteful but necessary action to prevent a total
financial meltdown with devastating consequences for the
economy.
But even with the rescue of the financial industry, Main
Street America was feeling the economic pain as millions of
Americans were losing their jobs. And we all know what the
figures were, 839,000 jobs lost per month. As I say, the
economy was headed down at a very rapidly collapsing rate of
8.9 percent negative GDP.
So when the President was sworn in, he was determined to
take action to help those Americans being hit by the economic
tsunami, and he believed that if we adopted President Bush's
proposal for government action to rescue reckless banks who
helped precipitate the crisis, surely we should be willing to
take action to help millions of Americans thrown out of work
through no fault of their own.
So President Obama and the earlier Congress passed the
Economic Recovery Act, which the nonpartisan experts at the
Congressional Budget Office concluded have created or saved up
to 3 million jobs in 2010 alone.
The President also believed that if we had rescued the
banks, surely we should prevent the U.S. auto industry from
being wiped out, an action that saved millions of jobs. This
was not about crony capitalism, as the chairman has suggested.
It wasn't about doing special favors for well-connected
friends. It was about ensuring that a critically important
industry in this country had a reasonable opportunity to
survive given the financial crisis going on around it.
Now, Governor Romney has famously suggested that we should
have let Detroit go bankrupt, that the crisis should have been
handled through the normal bankruptcy process.
Bob Lutz, a former General Motors vice chairman, who also
happens to be a Republican, took umbrage with this and said,
and I quote, ``It is once again the fiction that, ah, we didn't
need the government, and this could have been a privately run
bankruptcy with the normal Chapter 11. What these people always
deliberately forget is there was no money. Nobody had money.''
And so when the chairman and others refer to this as crony
capitalism, I think many of us take great offense. We also
passed the Wall Street reform bill to make sure that never
again would reckless gambling on Wall Street wreak havoc on
Main Street and leave taxpayers holding the bill.
I will wrap up in a minute, Mr. Chairman.
I would just like to point out, Governor, that during that
period of time, we weren't getting very much help from our
Republican colleagues. Not a single Republican House Member
voted for the recovery bill. Not a single one voted for the
Wall Street reform bill. Senator McConnell, the Senate leader
in the Senate, in a moment of candor, said, and I quote, ``The
single most important thing we want to achieve is for President
Obama to be a one-term President,'' unquote.
So we have made progress on improving the economy and jobs.
Are we where we want to be? Absolutely not. And today's job
numbers show we need to make further progress. But let's learn
the right lessons from what happened in the past, because if we
diagnose the problem wrongly, then we will have the wrong
prescription. And I do worry greatly about those that say the
way forward is to adopt a souped-up version of many of the
policies that got us into the mess to begin with.
So, as we go forward, I hope we will try to find a way
together. And I will just close with where I began on the point
of agreement, Mr. Chairman. If there is a government program
that is not achieving its intended purpose, let's amend it or
get rid of it. We agree. If there is a regulation that has
outlived its usefulness, get rid of it. I hope we would adopt
the same approach with respect to special interest tax breaks.
Chairman Ryan. Is the gentleman going to wrap up?
Mr. Van Hollen. I am, Mr. Chairman. But let's again
remember that we have made some progress, and we need to make
more. Let's not misdiagnose the problem and learn the wrong
results.
[The prepared statement of Chris Van Hollen follows:]
Prepared Statement of Hon. Chris Van Hollen, Ranking Member,
Committee on the Budget
I want to join the Chairman in welcoming our witnesses here today,
and let me start from a place where we all agree. We all love America;
we all believe America is a unique and special place. We all believe in
American exceptionalism. The question is: how do we keep America
strong, dynamic, and exceptional? On that, we clearly have different
views and would make different choices.
We believe that our strength springs not only from the undisputed
benefits of a free people pursuing their ambitions and dreams, but also
from sometimes harnessing those talents for important national
purposes. We believe that America's greatness is not only from a
collection of individuals acting alone for private profit, but also
from our capacity to work together as Americans for the common good. We
believe in constantly expanding the circle of opportunity so all
Americans have the chance to prosper.
And, Mr. Chairman, I must confess, and Governor Bush, I must
confess, I'm a little surprised that you decided to be here today to
criticize the efforts made over the last three years to lift the
economy out of the mess that President Obama inherited. For eight
years, President Bush pursued a failed ideology of trickle-down
economics based on a theory that tax cuts for the very wealthy and an
`anything goes' license on Wall Street would boost our economy and lift
all boats.
Well, it lifted the yachts but the rest of the boats ran aground.
The financial crisis hit and the economy and jobs went into free fall.
By the end of those eight years, America experienced a net loss of
private sector jobs. In fact, when President Bush left office we were
losing jobs at the astounding rate of over 830,000 jobs a month.
Americans' retirement savings collapsed by one-third--trillions of
dollars--between 2007 and the day President Bush left office. Our
nation's fiscal health saw the greatest reversal in American history,
from large projected surpluses to large projected deficits. I've
searched the record and, as far as I can tell, during that eight-year
period you did not challenge the Bush Administration's handling of the
economy, or criticize the excessive spending or the rising deficits.
Now I was looking at your testimony--I'm looking forward to hearing
it in full. You're here to tell us that government actions have
prevented us from the kind of `snap-back economic recovery that we have
seen in other post World War II recoveries.' Carmen Reinhart and
Kenneth Rogoff, two very distinguished economists who are often cited
by Chairman Ryan, have demonstrated that economies hit by systemic
fiscal crisis don't `snap-back' within a year or two, but take
significantly longer to recover. After all, none of the other post-
World War II recessions required the kind of extraordinary actions
taken by the Federal Reserve, as well as the huge Wall Street bailout
called for by President Bush with the signing of TARP to stabilize the
financial system and prevent another Great Depression.
The TARP bill was, of course, a huge government intervention in the
marketplace called for by President Bush, supported by now-Speaker
Boehner, now-Chairman Ryan, Governor Romney, then-Senator Obama, and
many of us on a bipartisan basis as a distasteful but necessary action
to prevent a total financial meltdown with devastating consequences for
the economy. But even with the rescue of the financial industry, Main
Street America was feeling the economic pain as millions of Americans
were losing their jobs. And we all know what the figures were--839,000
jobs lost per month. As I say, the economy was headed down at a very
rapidly collapsing rate of 8.9 percent negative GDP. So, when the
President was sworn in, he was determined to take action to help those
Americans being hit by the economic tsunami, and he believed that if we
adopted President Bush's proposal for government action to rescue
reckless banks who helped precipitate the crisis, surely we should be
willing to take action to help millions of Americans thrown out of work
through no fault of their own.
So President Obama and the Congress passed the economic Recovery
Act, which the nonpartisan experts at the Congressional Budget Office
concluded created or saved up to 3 million jobs in 2010 alone. The
President also believed that if we had rescued the banks, surely we
should prevent the U.S. auto industry from being wiped out, an action
that saved more than one million jobs. This was not about crony
capitalism, as the Chairman has suggested. It wasn't about doing
special favors for well connected friends. It was about ensuring that a
critically important industry in this country had a reasonable
opportunity to survive given the financial crisis going on around it.
Now, Governor Romney has famously suggested that we should have let
Detroit go bankrupt, that the crisis should have been handled through
the normal bankruptcy process. Bob Lutz, former General Motors vice
chairman, who also happens to be a Republican, took umbrage with this
and said, and I quote, ``It's once again the fiction that `Ah, we
didn't need the government and this could have been a privately run
bankruptcy with the normal Chapter 11.' '' What these people always
deliberately forget is there was no money. Nobody had any money.' So
when the Chairman and others refer to this as crony capitalism, I think
many of us take great offense.
We also passed the Wall Street reform bill to make sure that never
again would reckless gambling on Wall Street wreak havoc on Main Street
and leave taxpayers holding the bill. I will wrap up in a minute, Mr.
Chairman.
I would just like to point out, Governor, that during that period
of time we weren't getting very much help from our Republican
colleagues, not a single Republican House member voted for the Recovery
bill, not a single one voted for the Wall Street reform bill. Senator
McConnell, the [Republican] leader in the Senate, in a moment of candor
said, and I quote, ``the single most important thing we want to achieve
is for President Obama to be a one-term President.''
So, we have made progress on improving the economy and jobs. Are we
where we want to be? Absolutely not. And today's jobs numbers show we
need to make further progress. But let's learn the right lessons from
what happened in the past, because if we diagnose the problem wrongly,
then we'll have the wrong prescription. I do worry greatly about those
who say the way forward is to adopt a suped-up version of many of the
policies that got us in the mess to begin with.
As we go forward, I hope we will try to find a way together, and
I'll just close with where I began on the point of agreement, Mr.
Chairman. If there is a government program that's not achieving its
intended purpose, let's amend it or get rid of it. We agree. If there's
a regulation that's outlived its usefulness, get rid of it. I hope we
would adopt the same approach with respect to special interests tax
breaks. But, let's again remember: we've made some progress, and we
need to make more, let's not misdiagnose the problem, and learn the
wrong results.
Thank you, Mr. Chairman.
Chairman Ryan. I now know why the opening statement was so
long. Mr. Waxman just arrived. Okay. I get it now.
Henry, Congressman Waxman, welcome. Please take your seat
at the dais. We preannounced you already. Mr. Van Hollen was
just explaining how excited he is that Governor Bush is here
with us today.
We see things a little differently, I guess.
Mr. Waxman. You want to tell him how excited you are that I
am here?
Chairman Ryan. Yeah, very excited. Very excited to have
you. Some of us wanted to have brief opening statements so we
could get to the opening statements and get to the questions of
the members.
Why don't we go with Governor Bush, and then Mr. Edwards,
and then Congressman Waxman.
STATEMENTS OF HON. JEB BUSH, PRESIDENT, BUSH AND ASSOCIATES,
FORMER GOVERNOR OF FLORIDA; CHRIS EDWARDS, DIRECTOR OF TAX
POLICY STUDIES, CATO INSTITUTE; AND HON. HENRY WAXMAN, RANKING
MEMBER, COMMITTEE ON ENERGY AND COMMERCE
Chairman Ryan. Governor Bush, please, the floor is yours.
STATEMENT OF HON. JEB BUSH
Mr. Bush. Chairman Ryan, Vice Chairman Garrett, Ranking
Member Van Hollen, members of the committee, it is a joy to be
to be here.
I didn't come to criticize anybody, just for the record. I
came to share my views. I am not used to the 9 o'clock food
fight that starts bright and early around in Washington. I am
from Florida, where we don't start that way in life. But it is
great to be here.
I am here to talk a little bit about what I think is an
important subject, as we try to recover. The May job numbers
were anemic at best. No one could be satisfied with that. We do
have an L-shaped recovery, and it is the first since World War
II, where we have not had a robust recovery. There is a cloud
over our country I think that relates to this growing pessimism
that we can't restore the vitality of our economy in a way that
creates opportunities. More and more people are becoming more
and more dependent upon government at every level because of
it.
And I think it is important for this committee and for
policymakers in Washington to reflect on that and to figure out
how together, Republicans and Democrats, we can restore the
right to rise in our country and restore a sense of optimism to
begin to rebuild our country.
I don't question the intentions of people at all. I think
there is a shared belief that we need to do better. The
question is, how? And what do we need to do in this Chamber and
State capitals to improve the outlook for job creation,
business expansion, and overall prosperity should be the
dominant question across our country. And I would urge you to
look carefully at your primary responsibility, which is to
manage the budgetary affairs of the United States Government.
That is a good place to start.
At $3.8 trillion, the U.S. budget is a powerful force in
the United States economy. Its sheer size means that entire
industries, whether heavily regulated or not, operate in
constant awareness of what you all do here. When you combine
this budgetary power with the separate powers of taxation and
regulation, the Federal Government wields significant influence
over the economy, both directly and indirectly.
It is not an overstatement to say that right now, the
United States economy operates significantly at the direction
and behest of the United States Government, not the other way
around. In many cases, the government's growing size and
influence was made possible by good intentions and hopeful
policy ideas. Behind every spending program, tax incentive, and
regulation, there is an idea. It might in fact be a good idea.
But those good ideas and the not so good ones add up. And the
cost of everything you do here, every line item, every rule,
every carve out, phase out, earmark, drains activity investment
and creative effort out of the private sector of the economy.
That is why my best advice is for you to perform a
fundamental cost-benefit reconsideration of many programs of
the Federal Government and consider the unintended consequences
of your actions, the cumulative effect of your actions. Here is
one example. There are 49 different Federal job training
programs in our country today. I wonder about that number. What
do we as taxpayers get from 49 job training programs that 29 or
39 or six could accomplish? How do we know the people are
choosing the right job training programs? How do we know that
the right people are running those programs? Should all these
programs be packaged and sent down to the States to allow the
laboratories of democracies to work more effectively so that
you could benchmark success and then develop a 21st century
strategy as it relates to job training? Do these 49 job
training programs operate with any sense that they could or
should be closed if they fail? This is the daily worry of
American businesses in our country. But these programs don't
worry about being put out of business.
I also wonder whether Federal job training programs keep
someone in the private sector from building a business around
providing skills training, and whether that person might do a
better job. In short, when you try to solve one problem, you
may not only fail, but you may create several others.
Now, if you multiply that one example across the economy in
multiple industries and multiple ways, it is not hard to see
what will happen. And it has happened. So not only does the
government grow bigger through every program, it also displaces
the private economy, the innovators, the inventors, the people
who risk their own savings on a business idea, the established
businesses who could grow but don't. We see this in spending
programs, and we see it in taxing programs as well.
Tax policies that advantage certain economic activities and
are just another form, in my opinion, of government spending
and subsidy. And while they grant to some companies and
industries benefits, they also tend to disadvantage other
companies and industries. This is a matter of fairness. Why
should a company pay taxes to support government subsidies that
go to one of their competitors? I understand there may be
political support for specific industries and companies, but we
know from recent experience that the government is not good at
picking winners and losers in the economy. And fundamentally,
it is not the job of government to pick winners and losers in
the economy.
Again, I recognize why government tries to control the
marketplace by sheer power and size. I recognize it is
because--I have become clearer about this in my post-
governorship life--because I see it in the private sector as
well. There are countless examples of great companies who fail
to move with the market simply because a smaller and another
nimbler competitor arrives first with the winning solution. But
in the private sector, when a big company is beaten to the
punch it either gets lean fast and adapts, or it goes out of
business. And we should remember that, by the way, that failure
is part of the natural part of a competitive market. And when
government tries to intervene to eliminate the possibilities of
failure, they actually end up creating more of it, rather than
to allow the more innovative approach to work.
The problem with government involvement in the economy is
that it does not go through the same process of innovation, and
sometimes failure, that exists. None of us will allow
government to fail. What would occur in most private
organizations and institutions, failure followed by defunding,
simply doesn't happen here.
And I was delighted to hear Congressman Van Hollen's
approach that maybe it should begin. And that is a place where
I think there is huge common ground. If programs don't work,
defund them and allow for others to come in their place or not
exist at all.
I want to return to the rationale behind such a process.
This is simply not about making government more efficient; this
is about making government a smaller part of our economy. We
have to resist the impulse to try to solve all of the country's
problems from here in Washington, D.C. This impulse has only
made government bigger, and the problems still remain. We have
to ask ourselves whether the status quo, an expensive and
unaffordable status quo, is the best way to address the
problems that Congress has set itself up to solve. And I
believe that there are many better approaches to that. And I
thank the committee for its attention to these issues and look
forward to answering your questions.
Chairman Ryan. Thank you.
[The prepared statement of Jeb Bush follows:]
Prepared Statement of Hon. Jeb Bush, President, Bush and Associates,
Former Governor, State of Florida
Chairman Ryan, Vice Chairman Garrett and Ranking Member Van Hollen,
and Members of the Committee: Thank you for the opportunity to
participate in this hearing.
I want to thank the committee for its focus today on the state of
our economy.
It is safe to say that the weak economy is the dominant concern for
Americans today. Americans can see with their own eyes and in their own
communities that the economy is not growing like it should be. We are
nearly three years past the end of the recession, and yet few Americans
believe we have recovered from it, nor has our economy begun to grow at
a healthy and sustainable level.
The kind of snap-back we have seen in every previous post-war
recovery simply has not happened. Many people who lost jobs in the last
four years have not returned to the workforce--millions have given up
trying altogether and have withdrawn from the labor market.
Business owners who retrenched and cut costs have been very slow to
invest in the hopes of future growth. The housing market remains weak.
Commercial real estate is still weak in many areas.
What's worse: There is a strong sense in the business community
that the economy is stalling again, and growing well below its historic
potential.
I recognize that the Members of this committee share a common
awareness of the problems facing our economy. And you also share a
common resolve to do your part to bring prosperity back to America.
The only question is how.
What do we need to do in these chambers, or in state capitols, to
improve the outlook for job creation, business expansion and overall
prosperity?
I would urge you to look carefully at your primary responsibility--
to manage the budgetary affairs of the U.S. government--as the place to
start.
At $3.8 trillion, the U.S. budget is a powerful force on the U.S.
economy. Its sheer size means that entire industries--whether heavily
regulated or not--operate in constant awareness of what you do here.
When you combine this budgetary power with the separate powers of
taxation and regulation, the federal government wields significant
influence over the economy, both directly and indirectly. It is not an
overstatement to say that right now, the U.S. economy operates
significantly at the direction and behest of the U.S. government, not
the other way around.
I can think of no better example of this trend than the economic
growth of the Washington D.C. area. The district and its surrounding
area, is a picture of economic health and growth. Housing values within
the Beltway have not fallen, as they have elsewhere.
There is a simple explanation for this: The near-constant growth of
the main industry of this region--the federal government.
And while the growth of the federal government is healthy for this
area, one has to ask at what cost it occurs? Every dollar spent in this
area was taxed from somewhere else--or borrowed, and therefore not used
on some other productive activity.
Let me be clear: I do not believe in a zero-sum economy. But I do
believe that if the government gets bigger and more powerful, it
largely does so at the expense of the rest of the economy, because
government does not contribute to the economy the way the private
sector does. A dollar spent on government services is not equivalent to
a dollar of private sector investment.
Today's federal government did not emerge out of the blue three
years ago. Far from it. But there is no doubt that the growth of the
U.S. government, as a share of the U.S. economy, has risen sharply in
the past three years. Even when the economy began to grow, the
government's share was growing faster.
In many cases, the government's growing size and influence was made
possible by good intentions and hopeful policy ideas. Behind every
spending program and every tax incentive and every regulation is an
idea. It might sound good. It might in fact be a good idea.
But those good ideas, as well as the not-so-good ones, add up. And
the cost of everything you do here--every line item, every rule, every
carve-out and phase-out and earmark--drains activity and investment and
creative effort out of the private sector of the economy.
That is why my best advice to you is to perform a fundamental cost-
benefit reconsideration of many programs in the federal budget. Please
know that no matter your good intentions, the government creates
unintended consequences when it acts.
What would a cost-benefit analysis show? I read recently of the 49
different federal job training programs--and that the number of such
programs continues to grow.
I wonder about that number. What do we, as taxpayers, get from 49
job training programs that 39 or 29 or just 9 couldn't accomplish? I
wonder as well about the people who need the job training. How do they
know which one is right for them? And who runs these training
programs--are they being measured on the success with which they get
people retrained?
Do these 49 job-training programs operate with any sense that they
could--and should--be closed if they fail? This is the daily worry of
every business in America, but I would guess that not one of these
programs ever worries that they will be put out of business by any of
the other programs--or by their Congressional funders.
I wonder about what these job-training programs do, indirectly, to
programs which are effective at providing focused skills training? Are
we, by creating government programs, competing with those who actually
do this work quite well in the private sector?
In this matter, the sheer size of Congressional ambition is one
problem. But there are other problems, too. The complexity of the
programs. The failure to see whether taxpayer money is well-spent. The
likelihood is great that by setting up these programs, government may
be keeping someone else from doing the work. Someone who might do the
job better than the government can, build a business from it, hire
employees, pay taxes on profits, and so on.
In short: When you try to solve one problem, you may not only
fail--you may create several others.
Now if you multiply that one example across the economy, in
multiple industries and multiple ways, it is not hard to see what will
happen, and has happened.
The government, by growing in influence and extending itself into
all corners of the economy, makes it less likely that enterprising
business people will address social needs through some kind of business
idea or business plan. So it's not only that the government grows
bigger through every program. Through the power of taxation and
regulation, it also displaces the private economy--the innovators and
inventors, the people who risk their own savings on a business idea,
the established businesses who could grow but don't.
The losses that follow are significant.
Someone recently asked a good question: What if the federal
government tried to invent the mobile phone? What if Congress said:
``People need to talk to each other and receive information while they
are out and about, and we need to provide them that technology. So,
let's fund a bunch of research, and get people the tool they need.''
Well, you think, that didn't happen and wouldn't have happened. It
sounds like an extreme example, but in reality, the federal government
tries to invent solutions to people's problems all the time. Problems
far more complex than mobile phone technology. Many well-meaning
programs in the federal budget have this exact flaw: They try to
accomplish through government fiat what would be better done by
individuals and businesses who have a vested stake--through the profit
motive--in achieving success.
We see this in spending programs, and we see it in taxing programs
as well. Tax policies that advantage certain economic activities are
usually just another form of government spending and subsidy. And while
they grant an advantage to some companies and industries, they tend to
disadvantage other companies and industries.
There is a simple question of fairness that I pose to this
committee: Why should a company pay taxes to support government
subsidies for one of its competitors?
I understand that there may be political support for specific
industries and companies. But we know from recent experience that the
government is not good at picking winners and losers in the economy.
And fundamentally, it's not the job of government to pick winners and
losers in the economy.
Again, I recognize why government tries to control the marketplace
by sheer power and size. I recognize it because in my post-governorship
life, I see it in the private sector as well.
Big businesses often struggle at innovation because they wrap
innovation in a heavy veil of bureaucracy and groupthink. Good ideas
bubble up from time to time, but it takes a special organization to
recognize how to let it breathe, how to invest in its growth slowly,
and how to let it struggle before demanding it return a profit. There
are countless examples of great companies who fail to move with the
market, simply because a smaller and more nimble competitor arrives
first with the winning solution.
But in the private sector, when a big company is beaten to the
punch, it either learns fast or gets smaller fast. That's just how it
is. Big companies routinely fail because they don't adapt. And while we
may bemoan the loss of capital and jobs that follows, we should
remember that failure is a natural part of a competitive market.
Most successful business leaders experienced failure at some point
in their careers. And there is little shame attached to the experience,
provided one learns from it and improves after it.
The problem here is that the U.S. government will not fail. None of
us will allow the government to fail.
Because the institutional bias within the U.S. government--
especially the U.S. Congress--is not to punish policy failure, nothing
is allowed to fail. What would occur in most private organizations and
institutions--failure followed by defunding--simply doesn't happen
here.
And so I urge this committee to look carefully at all proposals to
zero out programs that do not achieve their goals. A simple
expectation--one that should not be terribly controversial. But I
realize this will be a new concept to many federal programs
I want to return to the rationale behind such a process. This is
not simply about making government more efficient. Government
efficiency and effectiveness is a worthwhile cause, and I applaud it.
I am speaking of a much more fundamental goal, which is to apply a
constant break to the size of the government. To make the government a
smaller part of the economy.
The impulse to do something here in Washington D.C., to resolve
problems that exist in the country, is perfectly natural. But this
impulse has only made government bigger, while the problems remain. We
have to ask ourselves whether the status quo--an expensive and
unaffordable status quo--is the best way to address the problems that
the Congress has set for itself to solve.
I thank the Committee for its attention to these issues, and look
forward to answering your questions.
Chairman Ryan. Mr. Edwards.
STATEMENT OF CHRIS EDWARDS
Mr. Edwards. Thank you very much, Chairman Ryan and Ranking
Member Van Hollen, for inviting me to testify today. I am going
to talk about corporate welfare, entrepreneurs, and economic
growth. I am going to discuss four reasons why corporate
welfare is bad, and then I am going to talk about the real
solution to U.S. economic growth, which is unleashing
entrepreneurship.
The first reason why corporate welfare is bad is that it
costs money. We have trillion dollar deficits right now. We
can't afford corporate welfare or business subsidies. I
estimate that business subsidies are about $100 billion a year.
That is a small part of the total budget, but it is a good
place to start cutting.
The corporate welfare is unfair. The largest corporate
welfare program is farm subsidies. Farm subsidies, in my view,
they are like a reverse Robin Hood program. They take from
average taxpayers and give to high-income farm households. Farm
households have incomes on average 25 percent above the U.S.
average. So farm subsidies and other business subsidies, in my
view, are unfair. They take from average folks to give to
higher-income folks.
Third, corporate welfare simply doesn't work. Well-meaning
policymakers, they want to support businesses because they
believe the subsidies will make them more competitive. I think
subsidies backfire. For example, on energy subsidies, we have
been subsidizing energy for four decades, and it has been
boondoggle after boondoggle. Go all the way back to the 1970s.
You had a giant project called the Clinch River Breeder
Reactor, which was a Republican boondoggle in the 1970s. It
ended up being a total failure, wasted billions of dollars.
Then you had a Democratic boondoggle, the Synthetic Fuels
Corporation, started under Jimmy Carter. Wasted billions of
dollars of taxpayer money. It was a huge boondoggle. So this is
a bipartisan problem.
Why doesn't corporate welfare work? Well, one, obviously,
political pressures often undermine sound economic decision-
making. And we saw that with Solyndra, of course. But more
importantly, I think business subsidies change the behavior of
businesses. Businesses, for example, become more spendthrift I
think when they get subsidies. And you see that with Solyndra.
Solyndra built this big fancy factory in a high-cost location
in California. A lean competitive company would not have done
that.
Another big problem is that subsidies induce companies to
invest in extremely risky projects that often blow up. That is
the story of Enron Corporation. Enron received $3.7 billion in
subsidies during the 1990s from EX-IM, from OPIC, and many
other Federal programs. That induced them to invest in all
kinds of hare-brained foreign investment projects, such as a
power plant in India. Enron would not have done all the risky
foreign investing it did without the Federal subsidies. And all
those foreign investment projects that Enron took part in came
crashing down and helped pull down the company. So subsidies
induce bad decision-making by businesses.
And finally, corporate welfare generates corruption, in my
view. Federal business subsidies have always generated
corruption. Go all the way back to the first transcontinental
railroad in the United States. That generated a huge subsidy
scandal in the 1870s. More recently, go to Ronald Reagan's
Department of Housing and Urban Development. It overflowed with
corruption, as the Secretary Sam Pierce at the time handed out
business subsidies to his friends and Republican Party donors.
Go to the 1990s. I believe President Clinton's Commerce
Department under Secretary Ron Brown also overflowed with
corruption. He handed out business subsidies in return for
campaign contributions to the Democratic Party. So this is a
bipartisan problem.
So corporate subsidies don't work. So what can we do to
spur growth? We should unleash entrepreneurs. Most of America's
economic growth historically has not come from government, and
it hasn't come from big established companies. It has come from
new businesses creating new industries. And you can go back and
look, as I have, at American economic history. The electricity
industry, internal combustion engines, automobiles, aircraft,
electronics, plastics, cell phones, personal computers,
biotechnology, those are all new industries created by upstart
entrepreneurs, not by established businesses.
So helping getting out of the way of entrepreneurs I think
is the most important thing we can do for the economy. I will
give you a couple examples. The modern telecommunications
revolution in large part is the result of MCI Corporation's
battling during the 1970s to compete against the AT&T monopoly.
Federal Express created a revolution in package delivery by
battling against government regulations in the 1970s. So I
think, you know, my policy recommendation, remove business
subsidies, tear down barriers to entrepreneurs, and I think we
will unleash more economic growth.
To give you a few quick examples, I think repealing farm
subsidies would spur innovation in the agriculture industry,
like it has in New Zealand. I think repealing the Postal
Service monopoly would spur innovation in mail delivery, like
is happening in Europe. Germany and the Netherlands have
privatized their post offices. We need to go in that direction.
Privatizing Amtrak, the air traffic control system as Canada
has done. Those sorts of reforms I think would spur innovation.
They would give entrepreneurs new industries to innovate in. We
saw just last week the success of the SpaceX space flight up to
the International Space Station. That is the example of, I
believe, the awesome sort of job entrepreneurs can do if we
give them some space.
And finally, tax reform is very important, as I know the
chairman supports lowering tax rates and eliminating loopholes.
We do need to lower the corporate tax rate and capital gains
tax rate. It is very important for business investment and
venture capital and angel investment. So I strongly support the
chairman's approach to tax reform.
And that is about all my comments. And we have got all
kinds of other policy proposals on Cato's Web site,
Downsizinggovernment.org. Thank you.
Chairman Ryan. Thank you.
[The prepared statement of Chris Edwards follows:]
Prepared Statement of Chris Edwards and Tad DeHaven, Cato Institute
Mr. Chairman and members of the committee, thank you for the
invitation to testify regarding corporate welfare, entrepreneurs, and
economic growth. This testimony will address the problems caused by
corporate welfare and discuss why spurring entrepreneurship is a better
approach for generating economic growth.
Rising spending and huge deficits are pushing the nation toward an
economic crisis. There is general agreement that policymakers need to
find wasteful and damaging programs in the federal budget to terminate.
One good place to find savings is spending on corporate welfare.
Some people claim that business subsidies are needed to help fix
market failures in the economy. But corporate welfare is just as likely
to create failures by misallocating resources and inducing businesses
to spend time on lobbying rather than on making better products.
Corporate welfare transfers wealth from average families to favored
businesses, and it creates corrupting ties between government
officials, politicians, and business leaders.
Policymakers are rightly concerned about the competitiveness of
American businesses in the global economy. But the way to address that
concern is not through subsidies, but through broad-based reforms such
as permanent reductions to capital gains and corporate income tax
rates.
the taxpayer cost of corporate welfare
A forthcoming Cato Institute study finds that federal business
subsidies total almost $100 billion annually.\1\ That is a fairly broad
measure of subsidies to small businesses, large corporations, and
industry organizations. The subsidies are handed out from programs in
many federal departments including Agriculture, Commerce, Energy, and
Housing and Urban Development.
However, there is no precise measure of ``corporate welfare.'' As
part of the national income accounts, the Bureau of Economic Analysis
calculates that the federal government handed out $57 billion in
business subsidies in 2010.\2\ A 1995 Congressional Budget Office Study
put the total at $30 billion in spending subsidies for businesses at
that time.\3\
Ending business subsidies would be one step toward reducing the
federal deficit, but there would be other benefits as well. The
following sections discuss the unfairness of corporate welfare, how it
harms the economy and generates corruption, and why entrepreneur-led
growth is a better alternative.
corporate welfare is unfair
The Constitution empowers the federal government to take steps to
ensure an open national economy. The Commerce Clause gives the
government the authority to ``regulate Commerce * * * among the several
States,'' but the purpose was to remove barriers to trade, not to
actively favor some businesses over other businesses and individuals.
People disagree on the meaning of ``fairness,'' but surely it
includes supporting the bedrock American value of equality under the
law. The government's proper role should be that of a neutral referee
in the economy facilitating the free exchange of goods and services.
Yet corporate welfare advantages certain businesses at the expense of
taxpayers, families, and other businesses, as some examples illustrate:
Farm Subsidies. Farm subsidies redistribute wealth from taxpayers
to often well-off farm businesses and landowners. ``Farm income
stabilization'' payments have recently fluctuated between about $13
billion and $33 billion annually.\4\ This is a welfare hand-out like
food stamps, yet it goes to higher-income households. In 2010, the
average income of farm households was $84,400, or 25 percent above the
$67,530 average of all U.S. households.\5\ Moreover, the great bulk of
farm subsidies go to the largest farms.\6\
Sugar Subsidies. The federal government also enriches certain
businesses in an off-budget manner, as sugar subsidies illustrate. The
government runs a Soviet-style system of price supports, quotas, and
import barriers for sugar. The effect is to push up the domestic price
of sugar to the benefit of U.S. sugar producers while imposing extra
costs on consumers.\7\ Artificially high sugar prices also hurt
American businesses that use sugar, and numerous U.S. food companies
have moved production to Canada and Mexico where sugar prices are
lower.\8\
Economic Development. The government runs many so-called economic
development programs that distribute corporate welfare. As one small
example, the Community Development Block Grant program recently handed
out $220,000 to a craft brewery in Michigan.\9\ Meanwhile the Value
Added Marketing program hands out money to selected wineries across the
country.\10\ These hand-outs are not fair to taxpayers or the
breweries, wineries, and other businesses that don't receive such
special favors.
Polls show that the public understands the unfairness of corporate
welfare, and most people want it cut. Most people are against the
federal government providing loan guarantees to small businesses; only
29 percent think that the government should help large corporations
finance their export sales; and a plurality (46 percent) think farm
subsidies should be abolished.\11\ Polls have also found strong
opposition to federal bailouts of financial institutions.\12\
corporate welfare distorts the economy
Some policymakers think that subsidies are needed to help U.S.
businesses compete in the world economy. But the more we subsidize
businesses, the more we weaken the market's profit-and-loss signals,
and the more we undermine America's traditions of entrepreneurship and
gutsy risk-taking by the private sector.
People argue that business subsidies are needed to fix market
imperfections. But subsidies usually don't work as intended, and they
often distort markets rather than fixing them. Robert Novak once said
that ``the mind-set underlying corporate welfare is that of the central
planner,'' and yet we know that central planning does not work.\13\
Consider the energy industry, which Republicans and Democrats have
been manipulating with subsidies for decades. An early subsidy effort
was the Clinch River Breeder Reactor, which was an experimental nuclear
fission power plant in Oak Ridge, Tennessee in the 1970s. This
Republican-backed boondoggle cost taxpayers $1.7 billion and produced
absolutely nothing in return.\14\
Then we had the Synthetic Fuels Corporation (SFC) approved by
President Jimmy Carter in 1980, who called it a ``keystone'' of U.S.
energy policy. The government sank $2 billion of taxpayer money into
this scheme that funded coal gasification and other technologies before
it was closed down as a failure. The SFC suffered from appalling
mismanagement, huge cost overruns on its projects, political cronyism,
and pork barrel politics in dishing out funding.\15\
Both parties have backed dubious ``clean coal'' projects for
decades. The GAO found that many of these projects have ``experienced
delays, cost overruns, bankruptcies, and performance problems.''\16\ In
a review of federal fossil fuel research, the Congressional Budget
Office concluded: ``Federal programs have had a long history of funding
fossil-fuel technologies that, although interesting technically, had
little chance of commercial implementation. As a result, much of the
federal spending has not been productive.''\17\
With the poor record of energy subsidies over the decades, it is no
surprise that the Obama administration is having trouble with its green
energy activities. The administration's failures keep piling up--
Solyndra, Raser Technologies, Ecotality, Nevada Geothermal, Beacon
Power, First Solar, Abound Solar, and Beacon Power.\18\ These subsidy
recipients have either gone bankrupt or appear to be headed in that
direction.
Why don't business subsidies work very well? One reason is that
political pressures undermine sound economic choices. The Washington
Post found that ``Obama's green-technology program was infused with
politics at every level.''\19\ The decision to approve the Solyndra
loan, for example, appears to have been rushed along by high-level
politics.
Perhaps more importantly, subsidies change the behavior of
businesses. An economist recently quipped to me: ``I don't know whether
the government is better at picking winners rather than losers, but I
do know that losers are good at picking governments.'' When the
government starts handing out money, businesses with weak ideas get in
line because the businesses with the good ideas can get private
funding. Enron, for example, was able to grab huge federal support for
its disastrous foreign investment schemes.
At recent House hearings on green energy subsidies, most witnesses
lined up in favor of Department of Energy loan programs, except for one
witness who heads a solar power firm that does not receive federal
subsidies.\20\ James Nelson of Solar3D said that subsidizing green
energy commercialization ``is a wasteful mistake because it doesn't
work.''\21\ Here are some of the problems he pointed to:
Firms that receive subsidies become spendthrift. Nelson
contrasted his firm's lean operations with Solyndra's wasteful ways,
which included building a fancy factory in a high-cost location. Nelson
noted that the ``most powerful driver in our industry is the relentless
reduction in cost.'' Yet government intervention rarely works to drive
down costs in any activity.
Subsidies aren't driven by actual market demands. Nelson
noted that U.S. adoption of solar energy lags behind several other
nations. But he said, ``this should not bother us if it means that the
other countries are investing in technology that is not economically
viable.'' In other words, if other countries are misallocating
resources, that won't hurt us. The good news, he said, is that America
is the leader in market-driven private venture capital for ``clean
tech.''
Subsidies distort business decisions. Nelson noted that
``giving companies money to set up manufacturing in the U.S. may doom
them to failure by financing them into a strategically uncompetitive
position.'' In other words, if subsidies induce U.S. firms to put more
production in the United States than is efficient, it will disadvantage
them in the marketplace.
Venture capitalists have already funded the best projects,
leaving the dogs for the government. If venture capitalists ``reject a
project, it is difficult to believe that the government could do a
better job of picking a winner,'' argues Nelson.
The House hearing included testimony from green energy firms that
had received subsidies. Their comments revealed how subsidies were
eroding their focus on the bottom line. The firms stressed how many
jobs they were creating and how their supplier chains covered many
states--and thus many congressional districts. One solar firm bragged
that it is ``creating and maintaining jobs locally and across the
nation,'' while it is ``procur(ing) from a supply chain that stretches
across 17 states.''\22\ Another solar firm bragged that it ``spent more
than $1 billion with U.S. suppliers in 35 states.''\23\
Subsidy supporters at the hearing stressed the ``nonfinancial
objectives'' of green subsidies, such as jobs.\24\ But as Nelson noted,
``businesses are not made more successful by more jobs.''\25\ If
businesses want to succeed in tough global competition, they need to
minimize their labor and supplier costs, and subsidies erode that lean
focus. Nelson concluded that success in the marketplace ``requires
brains, discipline, and grit. It is rarely aided, and often impeded by
government involvement.''\26\
Another problem with business subsidies is that they can encourage
investing in very dubious projects. That is the story of Enron's
international investments, which played an important role in the
implosion of the firm. By one estimate, Enron received $2.4 billion in
federal aid through the Export-Import Bank and the Overseas Private
Investment Company between 1992 and 2000.\27\ Another study puts total
federal government subsidies to Enron for its foreign schemes at $3.7
billion, plus Enron received subsidies from international agencies such
as the World Bank.\28\ All these subsidies made possible Enron's
excessively risky foreign investments, which came crashing down at the
same time that the firm's accounting frauds were being revealed.\29\
Suppose that the government was capable of channeling subsidies
only to well-managed companies with sensible ideas. Then the subsidies
wouldn't be needed because they would simply crowd out private
investment. That seems to be the case with much of the $7 billion in
subsidies for rural broadband in the 2009 stimulus bill, as one
detailed study in 2011 found.\30\
Or consider the Department of Energy's Advanced Technology Vehicles
Manufacturing Loan Program, which provides subsidies to companies to
develop green cars. A former executive with Tesla Motors, which
received subsidies, concluded that ``private fundraising is complicated
by investor expectations of government support.''\31\ Subsidies distort
the venture capital market, having ``a stifling effect on innovation,
as private capital chases fewer deals and companies that do not have
government backing have a harder time attracting private capital.''\32\
A final problem with corporate welfare is that it can create
broader distortions in the economy. For more than a century, the
federal Bureau of Reclamation has subsidized irrigation in the 17
western states. About four-fifths of the water supplied by the bureau
goes to farm businesses, and this water is greatly underpriced.\33\
Because farmers are receiving water at a fraction of the market price,
they are overconsuming it, which threatens to create water shortages in
many areas in the West. Subsidized irrigation also causes environmental
damage.
corporate welfare generates corruption
The creation of corporate welfare programs has spawned an expanding
web of lobby groups that demand ever more favors from policymakers. The
more that the government intervenes in the economy, the more lobbying
activity is generated, and the more new subsidy programs get created.
It's a vicious cycle.
Corporate welfare doesn't just create direct economic harm, it also
erodes support for America's free enterprise system. Businesses that
become hooked on subsidies become tools of the state. They lose their
independence, and they may focus more on gaining special benefits from
Washington than on making good products. The more special breaks that
businesses receive, the less willing they are to speak out against the
expansion of big government.
While some people think that corporations lobby to slash
government, they mainly do the opposite. Businesses often lobby in
favor of federal intervention if it will benefit them and hurt their
competitors. The major airlines, for example, were against airline
deregulation in the 1970s because existing rules protected them from
competition.\34\
Business subsidy programs attract corruption like garbage dumps
attracts rats, and that has always been the case in Washington. For
example, federal subsidies for the first transcontinental railroad, the
Union Pacific, led to the Credit Mobilier scandal of the 1870s, which
involved payoffs to dozens of members of Congress. In recent decades,
scandals stemming from corporate welfare have been a bipartisan
problem, as these examples illustrate:
HUD Subsidies under Reagan. President Ronald Reagan's Department of
Housing and Urban Development overflowed with corruption in the 1980s
under Secretary Sam Pierce.\35\ Pierce routinely dished out grants,
loans, and other sorts of subsidies to friends and business associates.
And HUD created programs that involved large subsidies to mortgage
lenders, developers, and other businesses, with Republican Party
contributors as frequent beneficiaries.
Commerce Subsidies under Clinton. President Bill Clinton's Commerce
Secretary, Ron Brown, used federal business subsidies as a fund-raising
tool for the Democratic Party in the 1990s. Corporate executives who
played the game were given access to export promotion trips and loans
from OPIC.\36\ In subsequent investigations, U.S. District Judge Royce
Lamberth found that Commerce officials concealed and destroyed
documents relating to the scandal, and he compared the officials to
``con artists'' and ``scofflaws.''\37\
Enron Subsidies under Clinton and Bush. Enron Corporation is a
poster child for the harm of business subsidies, particularly with
regard to its disastrous foreign investments. Enron lobbied government
officials to expand export subsidy programs, and it received billions
of dollars in aid for its foreign projects from the Ex-Im Bank, OPIC,
the U.S. Trade and Development Agency, the U.S. Maritime
Administration, the Commerce Department, and the U.S.-backed World
Bank. As noted, Enron received about $3.7 billion in financing through
federal government agencies.\38\ These subsidies induced Enron to make
exceptionally risky foreign investments, and the resulting losses were
an important factor in the company's implosion.\39\
During the Clinton and early Bush administrations, high-level
officials went to great lengths to aid Enron on an Indian power plant
deal.\40\ The Washington Post noted, ``President Bush's National
Security Council led a `working group' with officials from various
Cabinet agencies to resolve Enron's troubles over a power plant
venture.''\41\ We saw similar high-level involvement in the failed
Solyndra investment by the Obama administration. Top government
officials should be spending their time on policies in the general
interest of all Americans, not on helping individual companies earn
higher profits.
Green Subsidies under Obama. The Washington Post found, ``Obama's
green-technology program was infused with politics at every
level.''\42\ The $535 million loan guarantee for Solyndra, is a prime
example. The DOE approved the loan after receiving pressure from White
House officials to move ahead so that the vice president could announce
it at a groundbreaking for the company's factory.\43\ President Obama
visited Solyndra and called the firm an ``engine of economic growth''
just months before it collapsed.\44\
President Obama's green energy programs illustrate how corporate
welfare creates corrupting relationships between businesses and
politicians. The Washington Post found that ``$3.9 billion in federal
[energy] grants and financing flowed to 21 companies backed by firms
with connections to five Obama administration staffers and
advisers.''\45\ It also noted that the ``main players in the Solyndra
saga were interconnected in many ways, as investors enjoyed access to
the White House and the Energy Department.''\46\ According to the New
York Times, Solyndra ``spent nearly $1.8 million on Washington
lobbyists, employing six firms with ties to members of Congress and
officials of the Obama White House.''\47\
American businesses, of course, have a right to lobby the federal
government. But given that reality, Congress throws fuel onto the
corruption fire by creating business subsidy programs. When subsidy
money flows out the door from Washington to businesses at the same time
that money flows back from businesses to Washington for lobbying, it's
no surprise that we get influence-peddling. Corporate welfare
undermines honest and transparent governance, and Americans are sick
and tired of the inevitable scandals.
long-term growth depends on entrepreneurs
Most of America's technological and industrial advances have come
from innovative private businesses in competitive markets. Indeed, it
is probably true that most of our long-term economic growth has come
not from existing large corporations or governments, but from
entrepreneurs creating new businesses and pioneering new industries.
Such entrepreneurs have often had to overcome barriers put in place by
dominant businesses and governments.
Economic historians Nathan Rosenberg and L.E. Birdzell found that
``new enterprises, specializing in new technologies, were instrumental
in the introduction of electricity, the internal-combustion engine,
automobiles, aircraft, electronics, aluminum, petroleum, plastic
materials, and many other advances.''\48\ We can update that list to
include cell phones, personal computers, biotechnology, and all kinds
of Internet businesses.
If policymakers want to get U.S. economic growth back on track,
they should put entrepreneurs front-and-center in their thinking about
policy. Here are some of the ways that entrepreneurs generate growth:
Entrepreneurs are Radical Innovators. Their advances are usually
unexpected and disruptive to existing businesses.\49\ Personal
computers were pioneered in the 1970s by new companies such as Apple.
The opportunity was missed both by leading computer firms and by
government planning agencies such as Japan's MITI.\50\ Big corporations
were focused on mini and mainframe computers, while the U.S. government
was subsidizing supercomputers. Governments and big companies often
overlook niche products that later become revolutionary. In the 1970s,
microcomputers were an obscure hobbyist activity, and software for
microcomputers--which Bill Gates helped pioneer--was a niche within a
niche. The small-scale innovations of entrepreneurs in niches often
create huge, unforeseen changes.
Entrepreneurs Generate Competition. Another crucial role of
entrepreneurs is that they challenge dominant firms and governments.
One great story is the rise of MCI Corporation in the 1970s and 1980s.
MCI helped destroy the AT&T monopoly, which paved the way for the
modern telecommunications revolution. Another innovator was Fred Smith
of Federal Express. Today we take overnight letter delivery for
granted, but it was Smith who battled federal regulatory roadblocks in
the 1970s and provided new competition for the U.S. Postal Service by
proving that there was an untapped demand for rapid delivery.
Entrepreneurs Turn Inventions into Innovations. America's long-run
growth is often portrayed as a steady process of accumulating new
inventions. Many people seem to think that the government can simply
pump money into research and the economy will grow. But that ``science
push'' theory of growth is incorrect. Economies grow because of
innovations, which are inventions that are packaged and tested in the
marketplace by entrepreneurs.
The modern economy is steeped in uncertainty. No one can predict
the future, not even the best scientists, engineers, and economists in
big companies and the government. Many experts have made hugely off-
base prognostications about the economy.\51\ Two decades ago, many
pundits and policymakers were convinced that Japan was taking over the
global economy. Professor and pundit Robert Reich thought that
``chronic entrepreneurialism'' was undermining the U.S. economy. And
past predictions about the computer industry have been laughable, such
as this comment in 1977 by the founder of Digital Equipment
Corporation: ``There is no reason for any individual to have a computer
in his home.''
Luckily, expert predictions don't drive the economy. Rather,
successful market economies work by having swarms of entrepreneurs
freely testing new ideas. Entrepreneurs are the economy's guinea pigs.
They have the guts to act in the face of uncertainty, and they learn
from their mistakes and keep trying until they find ideas that work and
generate profits.
By contrast, government plans to stimulate the economy are often
based on ideologies and rigid ideas. Some policymakers believe that
particular energy technologies are THE solution to America's problems,
and they support ongoing subsidies year after year regardless of
marketplace realities. By contrast, in competitive and unsubsidized
markets, mistakes are usually quickly exposed and businesses cut their
losses short and change direction.
It appears that the unexpected fall in solar panel prices helped to
sink Solyndra. Perhaps businesses that are tethered to governments are
slower to make the changes needed to survive. The government tends to
work at a turtle's pace, which doesn't sync well with the fast-paced
modern economy. We saw a comparison of the government turtle with the
private-sector gazelle during the first sequencing of the human genome
in the late 1990s. The government's lavishly funded Human Genome
Project was a lengthy multi-year research project, but it was upstaged
when entrepreneur Craig Venter launched Celera Genomics to complete the
job at a fraction of the time and cost.
What are the policy lessons from America's great entrepreneurial
history? One lesson is that because markets have high levels of
uncertainty, government agencies and dominant companies cannot be
relied upon to secure our economic future. Instead, we should remove
hurdles to entrepreneurship every way we can--by tax reforms, by
repealing barriers to entry into industries, and by reducing financial
industry barriers to private risk financing.
While it has become fashionable to criticize Wall Street, the
financial industry has been crucial to funding waves of innovation in
the U.S. economy. Risk capital was integral to the railroad and
telegraph booms of the 1800s, and the radio, electricity, and
automobile booms of the early 20th century. J.P. Morgan Chase has
garnered negative headlines in recent weeks, but J.P. Morgan was the
company that provided seed capital for Thomas Edison's Edison Electric
Illuminating Company, which became General Electric.\52\
In recent decades, high-yield bonds, venture capital, and angel
investment have played key roles in growing new industries. Today, U.S.
venture capital and angel investors pump more than $50 billion annually
into young companies.\53\ Tax policy influences investment flows, and
funding for high-growth ventures is affected by the tax treatment of
capital gains in particular. One step for policymakers would be to
create investment certainty by permanently extending the 15 percent
federal capital gains tax rate. Also, the corporate tax rate should be
cut to spur greater capital investment--new capital equipment usually
embodies technological advances.
Policymakers should put aside the idea that some sort of big
intervention can permanently ``win the race'' for some particular goal,
such as energy independence, solar power dominance, or beating China.
In the recent House testimony, an energy consultant said, ``clean
energy has been targeted by our major international competitors
(including China and Germany) as a critical, and perhaps the critical,
future growth and export industry * * * whether the U.S. wins or loses
in this race matters because the outcome will have a large impact on
future U.S. employment and economic strength.''\54\ At the same
hearing, a solar company executive said that America could ``win in the
long run'' with a particular solar technology.\55\
However, those sorts of prognostications are refuted by U.S.
economic history. There is never any final ``win'' in the marketplace.
Look at how leadership in cell phones and smart phones has shifted from
firm to firm and country to country, from Nokia, to RIM Blackberry, to
Apple and others. Technologies and markets are always changing, so the
only way for America to permanently ``win'' in the struggle for
economic growth is to have the best climate for investing, innovating,
and building entrepreneurial companies.
We've mainly focused on subsidies to new industries such as green
energy. But withdrawing corporate welfare from older, established
industries could spur innovation as well. Consider farm subsidies. New
Zealand ended virtually all its farm subsidies in 1984, which was a
bold stroke because that country is much more dependent on farming than
is the United States. The changes were initially resisted, but New
Zealand farm productivity, profitability, and output have soared since
the reforms.\56\ Faced with new financial realities, New Zealand's
farmers innovated--they cut costs, diversified their land use, sought
nonfarm income, and developed new markets.
Thus rather than looking for new ways to subsidize businesses,
policymakers should be looking for places to withdraw subsidies and
deregulate in order to spur innovation. For example, just as the break-
up of the AT&T monopoly in the 1980s helped to generate growth in the
telecommunications industry, ending the U.S. Postal Service monopoly
today would spur innovation in that industry. Europe is moving in that
direction, with Germany and the Netherlands already privatizing their
postal systems.\57\
The transportation sector is another area where innovation could be
spurred by the reduction of federal subsidies. For example, Amtrak is
doomed to inefficiency as a government-run business pumped full of
subsidies and shackled with regulations. It should be privatized.\58\
Other countries are ahead of the United States in privatizing
transportation infrastructure, or at least in bringing private
investment into infrastructure.\59\
The United States subsidizes its air traffic control system, but it
doesn't need to. Canada privatized its air traffic control system in
1996, and it operates as a self-funded nonprofit corporation. It has
been a big success.\60\ Another ripe area to cut subsidies and bring
the private sector in is space flight. The recent success of the SpaceX
flight and the 2004 success of SpaceShipOne indicate that the private
sector is entirely capable of bold and risky technological ventures.
To sum up, the way to spur economic growth is not through business
subsidies, but through breaking down barriers to entrepreneurs. Let's
give entrepreneurs a crack at postal services, air traffic control,
passenger trains, and other monopoly industries. Let's pursue tax and
regulatory reforms to maximize the flow of financing to new and growing
businesses. And let's stop demonizing entrepreneurs who succeed and the
financial system that allows them to grow. If we want to exorcize some
demons, we should end the corporate welfare system that is corrupting
our government and the American economy.
Thank you for holding these important hearings.
endnotes
\1\ Tad DeHaven, ``Corporate Welfare in the Federal Budget,'' Cato
Institute, forthcoming.
\2\ Bureau of Economic Analysis, National Income and Product
Accounts, Table 3.13.
\3\ Congressional Budget Office, ``Federal Financial Support of
Business,'' July 1995.
\4\ Budget of the United States Government, Fiscal Year 2013,
Historical Tables (Washington: Government Printing Office, 2012), Table
3.2.
\5\ Farm average income from www.ers.usda.gov/Briefing/WellBeing/
farmhouseincome.htm. U.S. average income from Table A-2 in
www.census.gov/prod/2011pubs/p60-239.pdf.
\6\ Environmental Working Group, 2011 Farm Subsidy Database, http:/
/farm.ewg.org.
\7\ Chris Edwards, ``The Sugar Racket,'' Cato Institute, June 2007.
\8\ www.downsizinggovernment.org/agriculture/regulations-and-trade-
barriers.
\9\ David T. Young, ``Bell's Brewery Wins Federal Grant to Help Pay
for Expansion, Kalamazoo Gazette, April 5, 2011.
\10\ www.downsizinggovernment.org/turning-taxpayer-money-wine.
\11\ Rasmussen Reports, ``58% Want to End Small Business
Administration Loan Guarantees,'' August 16, 2011. And see Rasmussen
Reports, ``Voters See These `Corporate Welfare' Programs as a Good
Place to Cut Government Spending,'' August 16, 2011.
\12\ Pew Research Center, ``Possible Negatives For Candidates: Vote
For Bank Bailout, Palin Support,'' October 6, 2010.
\13\ Quoted in Timothy P. Carney, The Big Ripoff (New Jersey: John
Wiley and Sons, 2006), p. x.
\14\ www.downsizinggovernment.org/energy/subsidies.
\15\ www.downsizinggovernment.org/energy/subsidies.
\16\ Government Accountability Office, ``Fossil Fuel R&D: Lessons
Learned in the Clean Coal Technology Program,'' GAO-01-854T, June 12,
2001, p. 2.
\17\ Congressional Budget Office, ``Budget Options,'' March 2003,
p. 60.
\18\ Marc A. Thiessen, ``Obama's Equity Problem,'' Washington Post,
May 27, 2012.
\19\ Joe Stephens and Carol D. Leonnig, ``Solyndra: Politics
Infused Obama Energy Programs,'' Washington Post, December 25, 2011.
\20\ House Committee on Oversight and Government Reform,
Subcommittee on Regulatory Affairs, Stimulus Oversight, and Government
Spending, hearing on ``The Obama Administration's Green Energy
Gamble,'' May 16, 2012.
\21\ James Nelson, Solar3D, testimony to the House Committee on
Oversight and Government Reform, Subcommittee on Regulatory Affairs,
Stimulus Oversight, and Government Spending, May 16, 2012. Nelson was
not against federal funding of basic energy research, but rather
against subsidies to businesses for commercialization.
\22\ John Woolard, Brightsource Energy, testimony to the House
Committee on Oversight and Government Reform, Subcommittee on
Regulatory Affairs, Stimulus Oversight, and Government Spending, May
16, 2012.
\23\ Michael Ahearn, First Solar, testimony to the House Committee
on Oversight and Government Reform, Subcommittee on Regulatory Affairs,
Stimulus Oversight, and Government Spending, May 16, 2012.
\24\ Gregory Kats, Capital E, testimony to the House Committee on
Oversight and Government Reform, Subcommittee on Regulatory Affairs,
Stimulus Oversight, and Government Spending, May 16, 2012.
\25\ James Nelson, Solar3D, testimony to the House Committee on
Oversight and Government Reform, Subcommittee on Regulatory Affairs,
Stimulus Oversight, and Government Spending, May 16, 2012.
\26\ James Nelson, Solar3D, testimony to the House Committee on
Oversight and Government Reform, Subcommittee on Regulatory Affairs,
Stimulus Oversight, and Government Spending, May 16, 2012.
\27\ Dana Milbank and Paul Blustein, ``White House Aided Enron in
Dispute,'' Washington Post, January 19, 2002.
\28\ Jim Vallette and Daphne Wysham, ``Enron's Pawns,'' Institute
for Policy Studies, March 22, 2002, p. 4.
\29\ Timothy P. Carney, The Big Ripoff (New Jersey: John Wiley and
Sons, 2006), p. 209.
\30\ Jeffrey A. Eisenach and Kevin W. Caves, ``Evaluating the Cost-
Effectiveness of RUS Broadband Subsidies: Three Case Studies,''
Navigant Economics, April 13, 2011, p. 6.
\31\ Darryl Siry, ``In Role as Kingmaker, the Energy Department
Stifles Innovation,'' Wired, December 1, 2009.
\32\ Darryl Siry, ``In Role as Kingmaker, the Energy Department
Stifles Innovation,'' Wired, December 1, 2009.
\33\ www.downsizinggovernment.org/interior/cutting-bureau-
reclamation.
\34\ Timothy P. Carney, The Big Ripoff (New Jersey: John Wiley and
Sons, 2006), pp. 4, 111-118.
\35\ www.downsizinggovernment.org/hud/scandals.
\36\ For example, see Bob Hohler, ``Trade-Trip Firms Netted $5.5b
in Aid; Donated $2.3m to Democrats,'' Boston Globe, March 30, 1997.
\37\ Bill Miller, ``Judge Assails Shredding in Commerce Case,''
Washington Post, December 23, 1998, p. A4. And see Neil A. Lewis,
``After Judge's Rebuke, Commerce Secretary Widens Inquiry Into
Mishandling of Papers,'' New York Times, January 3, 1999.
\38\ Jim Vallette and Daphne Wysham, ``Enron's Pawns,'' Institute
For Policy Studies, March 22, 2002, p. 4. And see Timothy P. Carney,
The Big Ripoff (New Jersey: John Wiley and Sons, 2006).
\39\ Timothy P. Carney, The Big Ripoff (New Jersey: John Wiley and
Sons, 2006), p. 209.
\40\ Dana Milbank and Paul Blustein, ``White House Aided Enron in
Dispute,'' Washington Post, January 19, 2002. And see Timothy P.
Carney, The Big Ripoff (New Jersey: John Wiley and Sons, 2006), pp.
211, 212.
\41\ Dana Milbank and Paul Blustein, ``White House Aided Enron in
Dispute,'' Washington Post, January 19, 2002. And see Timothy P.
Carney, The Big Ripoff (New Jersey: John Wiley and Sons, 2006), pp.
211, 212.
\42\ Joe Stephens and Carol D. Leonnig, ``Solyndra: Politics
Infused Obama Energy Programs,'' Washington Post, December 25, 2011.
\43\ Joe Stephens and Carol D. Leonnig, ``Solyndra Loan: White
House Pressed on Review of Solar Company Now Under Investigation,''
Washington Post, September 13, 2011.
\44\ Carol D. Leonnig and Joe Stephens, ``Obama Was Advised Against
Visiting Solyndra after Financial Warnings,'' Washington Post, October
3, 2011.
\45\ Carol D. Leonnig and Joe Stephens, ``Federal Funds Flow to
Clean-Energy Firms with Obama Administration Ties,'' Washington Post,
February 14, 2012.
\46\ ``Greenlighting Solyndra,'' Washington Post, December 22,
2011, www.washingtonpost.com/wp-srv/special/politics/solyndra-key-
players.
\47\ Eric Lipton and John M. Broder, ``In Rush to Assist a Solar
Company, U.S. Missed Signs,'' New York Times, September 22, 2011.
\48\ Nathan Rosenberg and L.E. Birdzell, Jr., How the West Grew
Rich (New York: Basic Books, 1986), p. 277.
\49\ See the work of Clayton Christensen,
www.claytonchristensen.com.
\50\ Nathan Rosenberg and L.E. Birdzell, Jr., How the West Grew
Rich (New York: Basic Books, 1986).
\51\ These and other off-base predictions are discussed in Chris
Edwards, ``Entrepreneurs Creating the New Economy,'' Joint Economic
Committee, November 2000.
\52\ ``M&A Century: Same as It Ever Was,'' Wall Street Journal,
December 31, 1999.
\53\ Angel investment is currently about $20 billion a year and
venture investment is about $30 billion. See Jeffrey Sohl, ``The Angel
Investment Market in 2011,'' University of New Hampshire, Center for
Venture Research, April 3, 2112. The venture capital figure is from the
National Venture Capital Association at www.nvca.org.
\54\ Gregory Kats, Capital E, testimony to the House Committee on
Oversight and Government Reform, Subcommittee on Regulatory Affairs,
Stimulus Oversight, and Government Spending, May 16, 2012.
\55\ Craig Witsoe, Abound Solar, testimony to the House Committee
on Oversight and Government Reform, Subcommittee on Regulatory Affairs,
Stimulus Oversight, and Government Spending, May 16, 2012.
\56\ Vaudine England, ``Shorn of Subsidies, New Zealand Farmers
Thrive,'' International Herald Tribune, July 2, 2005.
\57\ www.downsizinggovernment.org/usps.
\58\ www.downsizinggovernment.org/transportation/amtrak/privatize.
\59\ Chris Edwards, ``Federal Infrastructure Investment,''
testimony to the Joint Economic Committee, November 16, 2011.
\60\ www.downsizinggovernment.org/transportation/airports-atc.
Chairman Ryan. Congressman Waxman.
STATEMENT OF HON. HENRY WAXMAN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF CALIFORNIA
Mr. Waxman. Thank you very much, Mr. Chairman, Mr. Van
Hollen, members of the Budget Committee. I am honored to be
among you to discuss this very important issue, which goes to
the very question of, what is the role of government? What is
the appropriate way for a capitalist economy to succeed,
because all three of us believe in the capitalist market
economy? But how do we get that economy to function best and
how do we deal with the market failures and the inequities
which have left us with a very stark contrast between the
people who have a lot and the many who have very little, as
well as the middle class, which is getting very squeezed?
We have I think a different sense about the vision for
America. Republicans will argue that government regulations are
bad for the economy, and public investments harm free
enterprise. Democrats have a more optimistic vision. We believe
that the economy works best when the government establishes the
rules of the road, adopting sensible standards, protecting the
middle class, promoting competition, and preventing corporate
abuses.
We believe that public investments in our country's future
will pay off. We believe that educating tomorrow's workers,
supporting entrepreneurs, new industries will grow our economy
faster and better. And we think history has proved our side of
the case. Our vision is the right one for America.
House Republicans seem to want to return to an America that
pre-dated the New Deal, the Fair Deal, the Great Society,
really a period of time when the robber barons ran this
country. The legislation that the Republican-controlled House
has passed would bring back a world where there are no
restraints on Wall Street banks and others enriching themselves
at the expense of everyone else. We tried that.
In the 1930s, the absence of government regulation and fair
rules for competition brought us the Great Depression. And in
2008, the same theory of government brought us the great
recession. It isn't government regulation that caused our
economic woes. I chaired hearings in 2008, when I was chairman
of the Oversight Committee, on the collapse on Wall Street. And
what we found was the absence of cops on the beat.
The heartbreaking unemployment hurting America's families
stems from a philosophy that Wall Street banks should be
allowed to operate free from regulation, even if that means
jeopardizing our economic future for their profits.
Americans cherish clean air, clean water, safe food,
protections of the environment and their health. But
Republicans in the House have voted again and again with the
oil companies and corporate polluters. This is the most anti-
environment House in the history of this country. Last year, I
asked my staff to start tracking anti-environmental votes on
the House floor. And to date, the Republican-controlled House
has voted over 200 times to weaken and eliminate protections
for human health and the environment. The House voted to repeal
the health-based standards that are part, in fact they are the
heart of the Clean Air Act, with no hearings and just 10
minutes of debate.
When it comes to health issues, the House is stunningly
anti-health. Not only do we see proposals to cut back on
preventive care and opposition to the Affordable Care Act,
which would provide 30 million Americans with health insurance,
the Republican budget adopted by the House slashes Medicaid by
over a trillion dollars. It ends the guarantee for Medicare
benefits for seniors and individuals with disabilities and
instead gives them a voucher and tells them to go shop in a
broken health insurance market.
The priorities reflected in the House budget are wrong.
That budget would make seniors pay more for their Medicare. At
the same time, they would preserve tax loopholes for oil
companies and then at the same time lower taxes for
millionaires and billionaires. Corporate subsidies are not just
government expenditures; they are government expenditures
through the Tax Code as well. And we see a lot of that going
on. So I find myself on common ground with some of what Mr.
Edwards had to say.
Ninety-eight percent of the Republican Members of the
Congress have pledged to oppose any increase of tax rates and
any reduction of tax loopholes to reduce the deficit. No wonder
the wealthiest continue to grow wealthier, as the middle class
struggles just to get by. And no wonder we are facing a fiscal
crisis.
One especially clear embodiment of the misplaced priorities
of House Republicans is their hostility to clean energy. The
International Energy Agency says that trillions of dollars are
going to be invested in new energy infrastructure over the next
20 years. Our economic growth and our national security will be
determined by whether we succeed in building these new clean
energy industries for the future. Yet House Republicans want to
defund investments in wind, solar, and other forms of clean
energy. Their budget protects the billions of dollars in
subsidies that the oil industry receives, a well established,
very profitable industry, which will crush competition if the
government doesn't stand up to allow these new enterprises to
take their place.
The House Republican position is based on science denial.
If you deny the existence of climate change, an overwhelming
Republican majority denies that science, the urgent need for
investment in clean energy may not be apparent. But if you live
in reality, you know the world cannot continue its dependence
on fossil fuels. And you know that without government
involvement, we are in danger of losing the booming clean
energy industry and millions of jobs to competitors, such as
China and Germany.
Well, we can outcompete China; we can grow a stronger and
better America with jobs and opportunities for everyone who
work hard and play by the rules. But to do so we have to reject
the defeatist, anti-science, anti-progress, anti-jobs view of
those who oppose investments in clean energy, who want to
preserve tax breaks for the wealthiest at the expense of the
middle class, who want to slash the safety net and end
Medicare's guarantee.
This is an important hearing, Mr. Chairman. Democrats and
Republicans hold starkly different views about the role of
government, and I welcome this opportunity to discuss these
differences with you today. Thank you.
[The prepared statement of Henry Waxman follows:]
Prepared Statement of Hon. Henry A. Waxman, Ranking Member,
Committee on Energy and Commerce
Today's hearing will contrast two different visions of America. The
Republicans will argue that government regulations are bad for the
economy and that public investments harm free enterprise.
Democrats have a more optimistic vision. We believe that the
economy works best when the government establishes the rules of the
road, adopting sensible standards that protect the middle class,
promote competition, and prevent corporate abuses. We believe that
public investments in our country's future pay off. We believe that
educating tomorrow's workers and supporting entrepreneurs and new
industries will grow our economy faster and better.
And we think history has repeatedly proven our vision is the right
one for America.
House Republicans seem to want to return America to the era of the
robber barons. The legislation that the Republican-controlled House has
passed would bring back a world where there are no restraints on Wall
Street banks enriching themselves at the expense of everyone else.
We tried that. In the 1930s, the absence of government regulation
and fair rules for competition brought us the Great Depression.
And in the 2008, the same theory of government brought us the Great
Recession.
It isn't government regulation that caused our economic woes. As
hearings I chaired in 2008 demonstrated, the collapse on Wall Street
was caused the absence of cops on the beat. The heartbreaking
unemployment hurting American families today stems from the Republican
philosophy that Wall Street banks should be allowed to operate free
from regulation, even if that means jeopardizing our economic future
for their profits.
Americans cherish clean air and clean water, but Republicans in the
House have voted again and again with oil companies and other corporate
polluters. This is the most anti-environment House in the history of
Congress. Last year, I asked my staff to start tracking anti-
environmental votes on the House floor. To date, this Republican-
controlled House has voted over 200 times to weaken and eliminate
protections for human health and the environment. The House voted to
repeal the health-based standards that are the heart of the Clean Air
Act with no hearings and just ten minutes of debate.
This House is also stunningly anti-health. The Republican budget
that this Committee adopted slashes Medicaid by over $1 trillion. It
ends the guarantee of Medicare for seniors and individuals with
disabilities and instead gives them a voucher to shop in a broken
health insurance market.
The priorities reflected in the Republican budget are wrong. The
Republican budget would make seniors pay more for Medicare to preserve
tax loopholes for oil companies and lower taxes on millionaires and
billionaires. Ninety-eight percent of the Republican members of
Congress have pledged to oppose any increase of tax rates and any
reduction of tax loopholes to reduce the deficit. No wonder the
wealthiest continue to grow wealthier as the middle class struggles
just to get by. And no wonder we are facing a fiscal crisis.
One especially clear embodiment of the misplaced priorities of
House Republicans is their hostility to clean energy. The International
Energy Agency says that trillions of dollars will be invested in new
energy infrastructure over the next 20 years. Our economic growth and
our national security will be determined by whether we succeed in
building these new clean energy industries of the future.
Yet House Republicans want to defund investments in wind, solar,
and other forms of clean energy. Their budget protects the billions of
dollars in subsidies the oil industry receives every year but slashes
the programs that fledgling clean energy companies need to grow.
The House Republican position is based on science denial. If you
deny the existence of climate change--as the overwhelming majority of
House Republicans do--the urgent need for investment in clean energy
may not be apparent.
But if you live in reality, you know the world cannot continue its
dependence on fossil fuels. And you know that without government
involvement, we are in danger of losing the booming clean energy
industry--and millions of jobs--to competitors such as China.
We can out-compete China. We can grow a stronger and better
America, with jobs and opportunities for everyone who works hard and
plays by the rules. But to do so, we have to reject the defeatist,
anti-science, anti-progress, anti-jobs views of those who oppose
investments in clean energy * * * who want to preserve tax breaks for
the wealthiest at the expense of the middle class * * * and who want to
slash the safety net and end Medicare's guarantee.
This is an important hearing. Democrats and Republicans hold
starkly different views about the role of government, and I welcome the
opportunity to discuss these differences with you today.
Chairman Ryan. Thank you. So much for bipartisan comity on
the issue, I guess.
Mr. Waxman. Are we not allowed to talk about our
disagreements?
Chairman Ryan. It is perfectly fine.
Mr. Waxman. Is that class warfare?
Chairman Ryan. Let me get into some housework.
I ask unanimous consent that members have five legislative
days to insert statements for the record.
Without objection.
[The statement of Ms. Castor follows:]
Prepared Statement of Hon. Kathy Castor, a Representative in Congress
From the State of Florida
I think we can all agree that we want a public education system
that outperforms and outshines the rest of the world. In order for us
to stay competitive in the global market, our young people need a high
quality education. As I said before, Governor, we have a fundamental
difference in how we go about doing that. Throwing money at for-profit
companies that run charter schools does nothing but drain traditional
public schools by diverting those tax dollars to private corporations.
We need to effectively focus education dollars at all levels of
government to improving the quality of education for our students.
Governor, you recently stated that charter schools and vouchers do
not hand over the keys of public education to any one person or entity,
but I would like to refer you to an editorial by the then St.
Petersburg Times outlining the intake of millions of federal dollars by
Charter Schools USA, one of the largest for-profit charter school
management companies in Florida. Charter Schools USA is still very
active in Florida and has pushed, along with your foundation,
legislation in the state legislature to take funds and power away from
public schools and give them to charter, private and virtual schools.
The controversial ``Parent Trigger'' bill is just one example of many
legislative attempts, supported by your foundation, to privatize public
schools as charter for profit. This bill failed because Florida parents
saw through the rhetoric and recognized that the ill-intentioned effort
to privatize public schools. You say this bill was meant to empower
parents but not a single Florida parent organization supported this
legislation. Why is there a continued push on your part for legislation
aimed at creating charter and private schools when parents are clearly
opposed to those options for their children? Who really will benefit
from this legislation? There was also an article by the Miami Herald
that points out how charter schools in Florida have become cash cows
for private corporations with little public oversight. What is the
oversight plan you have to ensure charter schools provide quality
educational outcomes for our students?
As far as education reform in the classroom, I agree that online
learning can serve as great supplement to face-to-face interaction in a
traditional classroom setting. However, your efforts to completely
replace the traditional classroom with virtual schools which would
continue to drain public schools funds and funnel them to private
corporations. These schools have no accountability as to their
effectiveness in providing quality education. I would like to refer you
to a report by The Center for Public Education, a research arm of the
National School Boards Association, that outline a lack of outcomes and
accountability that does little to suggest that ``digital classrooms''
serve as a better or comparable resource for learning than the
traditional classroom. Virtual classrooms are not required to take the
FCAT or even a national test to determine efficiency. Can you explain
your support for programs that lack the same accountability standards
that public schools have? Is there a plan to measure the effectiveness
of both voucher programs and digital classrooms?
Governor, you served as the head of our state from 1999-2007.
During that time, you served as a trustee of the State Board of
Administration (SBA) that had oversight of the state pension plan and
investments. Five months after you left the governor's mansion, you
were hired as a consultant for Lehman Brothers. According to a Tampa
Bay Times article, which I would ask request be inserted in the record,
Lehman has been an active participant over the years in managing public
investments and brokering and underwriting bond deals in Florida and
because of this, Florida lost a substantial amount of money when Lehman
failed. Local governments, schools, and state retirees and employees
lost millions because of a bad bet. I would like to detail your
involvement in these bad debt sales. Governor Bush, how long have you
had a relationship with Lehman? What was your role in advising the SBA
while you were a trustee? Did it include counseling the SBA on deals
with Lehman? Did your relationship with the SBA carry over to when you
because a consultant for Lehman Brothers? While advising Lehman, did
you have any discussions with then Executive Director of SBA, Coleman
Stipanovich, regarding the $842 million of mortgage-back securities
Lehman sold to the SBA in the summer of 2007, which defaulted within
four months of purchase and was the most failing debt sold by a bank to
the state according to Bloomberg? Additionally, how much were you paid
by Lehman? How much have you been paid by Barclays?
Lehman Brothers offloaded millions in tainted debt to Florida and
it would appear that my neighbors around Tampa Bay had no one looking
out for them at the SBA. I am hopeful that you will answer the
questions I've laid before you so Floridians can get a better
understanding of your role in this financial misfortune and assure us
there was no conflict of interest committed.
[Additional submissions of Ms. Castor follow:]
The Miami Herald
Florida Charter Schools: Big Money, Little Oversight
By Scott Hiaasen and Kathleen McGrory
Preparing for her daughter's graduation in the spring, Tuli Chediak
received a blunt message from her daughter's charter high school: Pay
us $600 or your daughter won't graduate.
She also received a harsh lesson about charter schools: Sometimes
they play by their own rules.
During the past 15 years, Florida has embarked on a dramatic shift
in public education, steering billions in taxpayer dollars from
traditional school districts to independently run charter schools. What
started as an educational movement has turned into one of the region's
fastest-growing industries, backed by real-estate developers and
promoted by politicians.
But while charter schools have grown into a $400-million-a-year
business in South Florida, receiving about $6,000 in taxpayer dollars
for every student enrolled, they continue to operate with little public
oversight. Even when charter schools have been caught violating state
laws, school districts have few tools to demand compliance.
Charter schools have become a parallel school system unto
themselves, a system controlled largely by for-profit management
companies and private landlords--one and the same, in many cases--and
rife with insider deals and potential conflicts of interest.
In many instances, the educational mission of the school clashes
with the profit-making mission of the management company, a Miami
Herald examination of South Florida's charter school industry has
found. Consider:
Some schools have ceded almost total control of their
staff and finances to for-profit management companies that decide how
the schools' money is spent. The Life Skills Center of Miami-Dade
County, for example, pays 97 percent of its income to a management
company as a ``continuing fee.'' And when the governing board of two
affiliated schools in Hollywood tried to eject its managers, the
company refused to turn over school money it held--and threatened to
press criminal charges against any school officials who attempted to
access the money.
Many management companies also control the land and
buildings used by the schools--sometimes collecting more than 25
percent of a school's revenue in lease payments, in addition to
management fees. The owners of Academica, the state's largest charter
school operator, collect almost $19 million a year in lease payments on
school properties they control in Miami-Dade and Broward counties,
audit and property records show.
Charter schools often rely on loans from management
companies or other insiders to stay afloat, making charter school
governing boards beholden to the managers they oversee. Loans to two
Pompano Beach schools were disguised as gifts in financial documents to
avoid scrutiny from the school district and make struggling schools
appear solvent, the schools' former managers said in court papers.
At some financially weak schools, tight budgets have
forced administrators to cut corners. The cash-strapped Balere Language
Academy in South Miami Heights taught its seventh-grade students in a
toolshed, records show. The Academy of Arts & Minds in Coconut Grove
went weeks without textbooks. Schools have also been accused of using
illegal tactics to bring in more money--charging students illegal fees
for standard classes, or faking attendance records to earn more tax
dollars, court records show.
Charter schools in Miami-Dade take a disproportionately
lower share of black, poor and disabled children, records show. One in
three students in Miami-Dade traditional public schools are black,
while one in five charter school students are black. School district
officials also suspect some charter schools have deliberately sought
out high-performing students--contrary to the schools' contracts.
This year, several South Florida charter schools made headlines for
violating local rules or state laws, including Arts & Minds, which was
accused of charging illegal fees to students, and Balere, which the
school district said turned into an after-hours nightclub on weekends.
The district withheld funding from both schools--before concluding that
it does not have the legal authority to do so.
That's because Florida's charter school laws--considered among the
nation's most charter school friendly--are aimed more at promoting the
schools than policing them, leaving school districts with few ways to
enforce the rules.
When school districts have taken a hard line with charter schools,
they have found their decisions second-guessed by state education
officials in Tallahassee. And as the number of charter schools has
climbed--almost 200 now operate in Miami-Dade and Broward counties
alone--state lawmakers have chipped away at local school districts'
ability to monitor them.
``It's frustrating for school district officials,'' said John
Schuster, spokesman for the Miami-Dade school district. ``The only
cases where we can really intervene are safety-to-life, severe
financial distress or poor academic performance.''
medicine for what ailed us
Bringing marketplace principles to education
Charter schools first took hold in Florida in 1996, amid worries of
overcrowded classrooms and poor student performance in urban school
districts. They were seen as a cure for many of the problems in public
schools, bringing innovative techniques and smaller classes to
populations of students struggling to keep up. Charter schools were
also designed to give parents more choices, and bring the principles of
the marketplace to public education. Competition from charter schools
was expected to force public schools to adapt and improve.
In many ways, the plan succeeded. Florida now has 519 charter
schools--from small, specialized schools tucked in strip malls and
churches to sprawling new campuses with 3,000 kids from kindergarten to
12th grade.
Some charter schools rank among the highest in the state in
academic performance. School districts in Miami-Dade, Broward and
around the state have responded to the competition by creating more
magnet schools and specialized programs.
By design, charter schools are unshackled from many of the
bureaucratic rules of traditional public schools, with independent
school governing boards making most decisions instead of the local
school district. Charter school advocates say this freedom is needed
for schools to be creative and nimble, and to encourage start-ups.
While this freewheeling system has minimized the oversight of
school districts, it has given rise to a cottage industry of
professional charter school management companies that--along with the
landlords and developers who own and build schools--control the lion's
share of charter schools' money.
In Miami-Dade and Broward, about two in three charter schools are
run by management companies, which charge fees ranging from 5 to 18
percent of a school's income. These fees can exceed $1 million a year
at a large charter school.
Some management companies handle only school finances, while others
control the budget, hiring and the curriculum.
In some cases, the managers effectively take over the schools,
using financial leverage to render the schools' governing boards
``irrelevant,'' said Pam Hackett, a retired legislative aide who has
served on the boards of five Broward County charter schools.
``They push the little guy into a corner where they can't afford to
do anything but acquiesce or go out of business,'' Hackett said.
Two years ago, Hackett sparred with the Leona Group, a Michigan-
based management company, after the company removed a popular principal
from two affiliated Hollywood charter schools on whose board she
serves--Sunshine Elementary and Paragon Academy of Technology. When the
board tried to rehire the principal, the management company objected,
saying it alone had that power.
``They basically told us: `According to the contract, we can do
whatever we want,' '' Hackett said.
The board had other complaints with Leona: The management company
refused to provide school records, including contracts and spending
documents, and failed to follow the school's education plan, school
officials said. The board canceled Leona's contract in July 2009.
When school officials later tried to access the schools' bank
accounts, Leona refused to give up the money--and its lawyer accused
them of attempting to steal it, court records show.
Leona ``is committed to criminally prosecuting those individuals
responsible for their attempted theft from the account,'' attorney
Jeffrey Wood wrote in a letter to the schools' attorney. The dispute is
now in litigation.
Leona executives did not return phone calls seeking comment.
Hackett says the schools now operate without any for-profit
managers; instead, the principals make all financial and educational
decisions. ``Overall, it's cheaper and more efficient and more
accountable,'' she said.
Many charter schools depend on management companies not just for
expertise, but for cash.
Schools often borrow money from the managers, creating an uneasy
arrangement that can stifle a governing board's independent oversight.
The Leona Group, for example, gave more than $360,000 to four
Broward charter schools--money described as gifts in the schools'
financial reports. But in court papers, the management company said the
payments were really loans disguised as gifts to make the schools
appear financially sound.
``The funds were referred to as a `one-time gift' so that the
schools would not have to show the funds on their balance sheets,'' the
management company's lawyers wrote. The schools insist the payments
were gifts, not loans.
It is not uncommon for management companies to give or lend money
to schools to get them up and running, said Jonathan Hage, president of
Charter Schools USA of Fort Lauderdale, one of the region's largest
charter school operators.
Most charter schools lose money in the first year or two as they
try to expand enrollment while paying rent, construction costs and
other start-up expenses, he said. In addition, new charter schools
often find it difficult to get financing from banks.
Hage and other charter school supporters say the state's funding
formula for charter schools is inadequate, making it difficult for
smaller schools to survive without assistance. Hage's company benefits
from scale, he said. ``Being able to spread overhead costs over many
schools and many students helps.''
Statewide, about one in four charter schools have shut down since
1996, either voluntarily or at the command of local school districts--
double the national average. Most schools close for financial rather
than academic reasons.
schools and their landlords
For property owners, it's a profitable deal
Charter schools generally receive more than 80 percent of their
income in per-student payments from the state. In addition to the
roughly $6,000 per-student allocation--slightly less than what
traditional public schools receive--charter schools also get some state
funds for facilities and maintenance.
For most charter schools, finding a location is the greatest
difficulty and expense. Most schools rent their facilities--in
churches, shopping centers, or brand-new school buildings erected by
real-estate developers. Any property used by charter schools is exempt
from property taxes.
Some schools devote less than 5 percent of their income to rent.
Others pay crippling rates.
``Rent continues to be the greatest financial impact for our
school,'' administrators at Broward Community Charter West wrote in a
report to the state Department of Education last year. The school was
$118,000 in the red that year.
Neither the state nor the local school districts have rules or
guidelines on how much a charter school lease should cost; nor are
schools required to seek independent appraisals. But Hage, of Charter
Schools USA, said a school's lease should not eat up more than 20
percent of its revenue.
A Miami Herald review found 19 schools in Miami-Dade and Broward
with rents exceeding 20 percent of their income in 2010--about one in
seven South Florida charter schools renting property that year. One
Miami Gardens school spent 43 percent of its income on rent, according
to audit reports.
Many of the highest rents are charged by landlords with ties to the
management companies running the schools, The Miami Herald found. At
least 56 charter schools in Miami-Dade and Broward counties sit on land
whose owners are tied to management companies, property records show.
For example, the Lincoln-Marti Charter School in Hialeah paid
$744,000 in rent last year--about 25 percent of the school's $3 million
budget, even after the landlord reduced the rent by $153,000.
The previous year, the school spent one-third of its income on
rent, audit records show.
Records show the landlord, D.P. Real Estate Holdings, and the
management company are run by the same man: former Miami-Dade School
Board member Demetrio Perez Jr. Perez's son, Demetrio J. Perez, works
at the management company, which operates three Lincoln-Marti charter
schools.
The Lincoln-Marti charter schools were established by three friends
of the elder Perez, who owns a string of well-known private schools and
daycare centers also called Lincoln-Marti.
The younger Perez said the school buildings are too large for the
student body: Only 364 students attend the school, though the
facilities can hold up to 1,000 kids. He said the rent, at $9.78 per
square foot, is below market rate; however, the board did not seek an
appraisal before approving the lease.
Board member Gil Beltran said the elder Perez plays no role in the
school. However, at Perez's request, the board agreed last year to
guarantee $24 million in loans for his real-estate business, records
show.
After school district officials objected, the bank released the
charter schools from the loan last month. ``We didn't see anything
inappropriate about it,'' Perez's son said.
His father's company has also agreed to give the school $350,000
before the end of the school year as a gift, the younger Perez said.
The school currently owes $250,000 in overdue rent.
School districts don't have the authority to dictate the terms of a
charter school's lease, or any other financial deals. That role falls
to a school's governing board.
But in many cases, the governing board includes members with ties
to the management company or the landlord--creating a potential
conflict.
At the Academy of Arts & Minds in Coconut Grove, the school's
founder, Manuel Alonso-Poch, acts as the school's landlord, its manager
and the food-service vendor. For the first three years the school
operated, Alonso-Poch also served on the governing board, school
records show. He stepped down at the urging of the school district in
2006.
Alonso-Poch still has close ties to the board: His cousin, Ruth
``Chuny'' Montaner, is the chairwoman of the board, which approved all
of the school's contracts with Alonso-Poch's companies--including a
lease that cost 28 percent of the school's revenue in 2010. (Montaner
did not vote on Alonso-Poch's $90,000-a-year management contract.)
Another Arts & Minds board member, Jorge Guerra Castro, was listed
as a board member for years, though he lives in Peru. Castro said he
was unaware that he was named to the board until he was told about it
by a Herald reporter--yet some school board meeting records purport to
show his attendance.
In some instances, the landlords hold significant sway with charter
schools' governing boards.
The landlord of the Charter School at Waterstone in Homestead has
the right ``to be involved'' in any decision to remove the school's
management company, under that school's lease. Last year, landlord Luis
Machado warned the school's board not to renew a contract with a
management firm that had sued the school over a contract dispute,
records of the school's Jan. 6, 2010, board meeting show. Machado told
the board he wanted to make sure the school operated ``within his
business philosophy.''
The school's board dropped the management company. Machado did not
return phone calls seeking comment.
when schools pursue profits
Strange things can happen, like $600 fees
As statewide budget cuts have hit the bottom line at all public
schools, some charters have been accused of cutting costs and boosting
revenue at the expense of children and parents.
It's a story Tuli Chediak knows well. As her daughter was preparing
to graduate from the International Studies Charter High School in Miami
earlier this year, Chediak was notified that she had failed to complete
the 120 hours of volunteer service required of all parents. Her family
was told to pay $600--$5 for each hour--or their daughter could not
graduate, Chediak said.
The mother had signed paperwork promising to complete the volunteer
service, a common requirement at private schools and some charters. But
Chediak said the school offered few opportunities to complete the
service. The contract said nothing about a fine or withholding her
daughter from graduation, she said.
Chediak refused to pay and complained to the school district, which
declined to get involved. The school ultimately allowed her daughter to
graduate, and blamed the dispute on a miscommunication. But the
experience left Chediak and other parents who were asked to pay
frustrated.
``There are people taking advantage of parents,'' she said. ``It
shouldn't be that way.''
The Balere Language Academy saved cash by teaching nine seventh-
graders in a wooden storage shed on campus, records show. One report by
the school district said students ``had difficulty putting their legs
comfortably under the desks.''
The school denied it, but district photographs show colorful
posters, a whiteboard and student papers hanging from the walls. The
shed is no longer used for classes.
Arts & Minds boosted its bank account for several years by charging
student fees for basic classes like math and reading--a violation of
state law, school district officials said. The district complained
about the practice in September, prompting Arts & Minds administrators
to return all checks received from parents this school year.
Parents at Arts & Minds, a school that has relied on loans from its
landlord and founder to stay in the black, had also complained that the
school did not have enough books for its students, and some classes had
no teachers for the first five weeks of this school year.
The complaints aren't new: Earlier this year, school administrators
were photocopying textbooks, until the school's then-principal
questioned whether this violated copyright laws, governing board
minutes show.
Insiders at the Mavericks High of South Miami-Dade, a Homestead
charter school for at-risk students, also say the school has broken
state law to bring in more money.
Kelly Shaw, a former career coordinator at the school, filed a
whistleblower suit in June accusing school administrators of defrauding
the school district by inflating student attendance and enrollment
figures, to increase the amount of money the school collected.
A former Mavericks teacher, Maria del Cristo, filed a separate suit
accusing the school of improperly charging fees to students enrolling
at the school. Through their attorney, Shaw and del Cristo declined to
comment.
Lauren Hollander, the CEO of the school's management company,
Mavericks in Education Florida, denied the allegations, and said both
women had been fired ``for cause.'' The lawsuits are still pending.
Miami-Dade school district officials said they never heard of the
allegations.
keeping tabs on public dollars
More monitoring urged, less monitoring OK'd
Many problems at charter schools go undetected until they become
debilitating--if they're discovered at all.
Charter schools are required to file financial statements with
their local school districts. The reports are among the most important
monitoring tools districts have to assess the financial health of
charter schools.
Still, the statements don't always show the complete picture. The
law does not require operators to provide details on day-to-day
spending--and governing boards can sometimes be left in the dark.
In 2007, the board of Sunshine Academy in Miramar went to police
after discovering that the school's principal, Alcira Manzano, had made
unauthorized withdrawals from the school's account--including $5,200
for a down payment on an SUV, court records show. The board closed the
school, and Manzano was arrested on theft charges.
Investigators later found that Manzano had also made loans to the
school and personally paid the rent. Broward County prosecutors dropped
the charges against Manzano in June.
``The record keeping at the school and oversight of the school by
the board of directors was virtually nonexistent,'' prosecutor Kathryn
Heaven wrote in a memo after dropping the case. ``The school appears to
have been poorly run.''
In 2008, a legislative report said the state should adopt stronger
monitoring methods to detect struggling schools before they reach the
brink of closing.
Instead, lawmakers relaxed the rules even more. Earlier this year,
Gov. Rick Scott signed a bill allowing some high-performing schools to
file financial reports quarterly, instead of monthly. The
Legislature also reduced the amount of money that high-performing
charter schools must pay to school districts to cover the costs of
oversight.
Even when school districts detect problems, their ability to assess
charter schools' conduct and demand compliance is limited.
For example, state law does not spell out clear conflict-of-
interest rules for charter schools or their governing boards--a
shortcoming highlighted by legislative analysts in 2008, but never
changed.
Nor does the law clearly define how much control a management
company should have.
Earlier this year, Miami-Dade school district auditors questioned
whether four schools--two Life Skills charter schools and two
Renaissance charter schools--were operating as mere passthroughs to
their for-profit management companies.
The Life Skills schools each paid 97 percent of their money to
White Hat Management of Ohio, which in turn paid the school's
expenses--including lease payments to another White Hat company. White
Hat officials did not return phone calls seeking comment.
The school district's audit committee considered asking the schools
to modify their contracts, but the district's attorney determined that
the district could not take action.
School districts can deny an application for a new charter school
or refuse to renew a school's charter. But the state Board of Education
has overturned those decisions 30 times since 2003, state records show.
(The state upheld 53 denials over the same time period.)
School districts can also close a school that has received
consecutive failing grades or has persistent financial problems. But
some districts, including Miami-Dade, have had that power questioned,
too.
In 2010, the Miami-Dade School Board voted to close Rise Academy in
Homestead after the school ended the year $250,000 in the red.
Questionable expenses included $8,300 at retail clothing stores; $2,800
at hotels and Orlando theme parks; and $2,145 at restaurants, according
to bank records. Meanwhile, teachers had gone unpaid and textbooks were
in short supply.
Weeks later, the decision to close Rise was overturned by the state
Board of Education. State education officials said the school, which
had boosted its state-issued grade from F to A in a single year, had
not received a fair hearing.
Rise never reopened.
Charter school advocates insist the law and state rules provide for
enough oversight.
``There is absolute accountability,'' said Lynn Norman-Teck, a
spokeswoman for the Florida Consortium of Public Charter Schools.
``Parents, if they see something wrong, will call the school, the
district, Tallahassee.''
But district officials say it is a frustrating exercise.
``School districts are limited in their authority over charter
schools,'' said Schuster, the Miami-Dade spokesman. ``They have minimal
ability to impose effective consequences.''
Searching for the reality of virtual schools--at a glance
You're probably reading this on a screen--whether a monitor, a
phone, or a tablet--providing more evidence that digital content is
ubiquitous. Likewise, its place in public education is not a matter of
debate; it is inevitable. But school leaders and education policymakers
do need to consider how to manage the influx of online learning
opportunities in order to make sure students get their full benefit and
not end up lost in cyberspace.
K-12 online learning is growing rapidly. Many players see
opportunities in this burgeoning market and are pushing states and
districts to expand their offerings of virtual courses and schools.
They include the ed tech community; major education think tanks; school
choice and home school advocates; and online learning providers,
including several major software companies.
Yet there is little solid research on the impact of online courses
or schools. In writing this paper, we found a few examples of online
learning having a positive effect, but most of what we were able to
uncover is not encouraging. At least not yet. In order to assure the
public, parents and students that online learning produces the results
we want, it's imperative for school leaders and policymakers to educate
themselves.
Main findings
Online courses and schools enroll a small fraction of the
52 million public school students, but they are rapidly gaining ground.
In 2009-10, elementary and secondary students took approximately 1.8
million courses online. In addition, about 250,000 students were
enrolled full-time in virtual schools in 2010-11, up from 200,000 the
year before.
The development, management and staffing of online courses
and schools is supported by both public and private providers. For-
profit companies K-12, Inc., and Connections Academy together enrolled
nearly half of all full-time online students in 2010-11.
Funding for online learning varies by state, and ranges
from 70 to 100 percent of state and local per pupil rates. The impact
on district funds also varies by state. In some states, districts are
billed for each student enrolled online. In addition, accounting for
the actual cost of virtual courses and schools is often lacking.
The jury is still out on the effect of online courses on
K-12 student achievement. The U.S. Department of Education reviewed
existing research and found a modest positive impact of online courses,
but cautioned that the findings were based mostly on results for post-
secondary students.
Emerging reports show a troubling overall picture of poor
performance and low graduation rates for full-time online students. Two
small-scale studies found positive effects for elementary students,
suggesting that parental supervision could be an important factor.
There needs to be a clearer accountability path for online
learning, especially in regard to monitoring student progress and
performance as well as accounting for the cost of virtual schooling.
Providers
Online learning comes from many different sources. Some examples:
For-profit companies. For-profits produce everything from out-of-
the-box courseware to a full, planned curriculum with teachers, tutors,
proctored exams--literally, a ``virtual school.''
Non-profit companies. Some non-profit organizations offer online
learning, often with different philanthropic aims in mind, such as
helping at-risk students graduate.
State departments of education. Some states offer their own
courses. For example, Florida Virtual School offers courses to both
Florida students (who do not have to pay) and others outside the state
(who do pay tuition).
Individual districts. Individual districts may buy online software
and create their own blended-learning approaches; they may also develop
online coursework of their own.
Formats
Combined with the variation in providers is a variation of formats.
The two most common formats are referred to as ``fully online'' and as
``blended learning.'' ``Fully online'' can mean that every part of the
school academic experience is provided online; alternatively, ``fully
online'' can mean that students can take single courses online, but all
interaction is done through the computer. ``Blended learning'' is a
term used to indicate a mixture of in-person and online instruction.
Most of these courses take place in an actual brick-and-mortar building
and are supervised by either a proctor or a teacher.
Enrollments
Online learning is rapidly growing at all levels, but particularly
among high school students:
55 percent of public school districts have some students
enrolled in distance education courses; of these, the vast majority (96
percent) are high school students (Watson et al., 2011).
Total K-12 course enrollments were approximately 1.8
million in 2009-10; special needs students and students from low-income
families were the least likely to participate in virtual courses
(Watson et al., 2011).
Ohio reports the highest number of full-time online
enrollments in 2010-11 at 31,142, followed by Pennsylvania (28,578) and
Colorado (15,214) (Watson et al., 2011).
Policies
States and districts have different policies regarding students in
online learning courses. The degree to which districts monitor the
performance of online students varies considerably. In many cases it is
much less than required for students taking classes in traditional
schools and should cause some alarm. For instance, while 98 percent of
districts monitored students' final grades in online education courses,
only about half tracked students' log in activity or time spent online.
Student outcomes
The one aspect of online learning that stands out is how little is
known about its effect on student outcomes, especially at the K-12
level. Several attempts to document student performance have been
thwarted by missing and incomplete data, lax monitoring rules, and a
vague picture of students dropping in and out of the online environment
and subsequently the accountability system. A few studies document
online students outperforming their non-digital peers, showing that
online learning can be a vehicle for high performance under the right
conditions. Most of the studies we found that examine test scores,
graduation or completion rates, however, tell a story of students worse
off than their classmates in brick-and-mortar schools. Reports of high
school completion rates at or under 25 percent, lower test scores, and
high dropout rates in some virtual schools raise serious concerns for
school districts, students, and parents. The contrast between two
examples should illustrate the need for serious examination:
A Stanford University study looked at eight Pennsylvania
virtual charter schools and found that every one of them performed
significantly worse in reading and math than their traditional school
counterparts in terms of student gains. The study covered the period
2007-2010.
An independent evaluation of Rocketship Education, a
national ``hybrid'' or blended learning charter school network, showed
sizable math gains among participating students at kindergarten and
grade 1 compared to their peers. The average gains were equivalent to a
5.5 increase in percentile rankings over a 16-week period.
Funding
Online schools are funded in different ways in different states. In
some, online schools are funded entirely by the state, while in others,
funding comes directly out of school districts' budgets. See the full
paper for a detailed discussion/spa of Pennsylvania, Colorado, Ohio and
Florida, four of the states involved most heavily in online learning.
In general, how much funding virtual schools receive does not
necessarily correspond to how much it actually costs to operate them.
Clear data for the true costs is hard to come by. And to make it even
more difficult, determining how many students are enrolled in virtual
schools can be a problem as well. For example, in Colorado funds are
distributed to virtual schools based on their enrollments on October
1st. However, between 30 and 50 percent of those students do not remain
in the virtual school throughout the year, meaning the virtual school
keeps the money even though the student has returned to the traditional
school.
The bottom line is that in many cases we do not know how much it
actually costs to provide a virtual education, nor how many students
the money is funding, nor exactly how the money will be spent.
Moving forward
Several things should be clear to school leaders and policymakers.
First, they should ask for more information before expanding access to
virtual programs, especially full-time online schools. The wide variety
of purposes, providers and formats, combined with the lack of data on
outcomes, accountability, and funding, means that we know little of
what is going on overall in the field. Second, some of the outcomes
studies have shown troubling results. It is possible for students--
especially struggling ones--to drop in and out of the online world,
putting them ultimately farther behind. Finally, follow the money.
Funding for online students should reflect the actual costs of
providing the instruction. In addition, there need to be clear lines to
exactly who is accountable for student progress so that parents,
students and taxpayers know that dollars are well-spent and producing
results.
Posted May 2012. Copyright 2012 Center for Public Education.
This summary is from a report by the Center for Public Education
team: Patte Barth, director; Jim Hull, senior policy analyst; and
Rebecca St. Andrie, managing editor.
A St. Pete Times Editorial
A Charter to Profit
The explosive growth of for-profit charter schools in Florida is
diverting hundreds of millions
of public dollars to businesses that pervert the program's intent.
(c) St. Petersburg Times, published September 22, 2002
The explosive growth of for-profit charter schools in Florida is
diverting hundreds of millions of public dollars to businesses that
pervert the program's intent.
Jonathan Hage, a former Heritage Foundation researcher and
political protege of Gov. Jeb Bush, has turned Florida's charter school
program into a growing for-profit business empire. Five years after
borrowing $5,000 to start up Charter Schools USA, Hage took in $40-
million last year--almost all of it from the government. And Hage is
not alone. In the past six years, the number of students approved for
publicly funded charter schools in Florida has jumped from 574 to
76,156.
At that phenomenal rate of growth, charter schools could account
for as much as $418-million of the state's education budget. But don't
bother asking the state to account for results. Gov. Bush, the
education accountability governor, is studiously avoiding comment.
In a compelling report in last Sunday's editions, St. Petersburg
Times writer Kent Fischer revealed the ugly little truth about this
enormous expansion of charter schools. These schools are not
instruments of educational innovation or community service, as the
state law intended. They are tools of profit and big business, which
the law prohibits.
Lest there be any doubt, Ron Renna of ABS, an Arizona charter
company, describes his Florida sales effort this way: ``We're out here
to make money. The more hamburgers you sell, the more money you make.
If you bring more kids into a program, it makes the financiers in
Arizona happy.''
Charters were intended to spur innovation, to give nonprofit
community groups or educators the chance to run a school freed from the
normal regulations and bureaucracy. An example is Academie Da Vinci, a
small elementary school started by a community group that felt children
needed a specialized arts school in northern Pinellas County.
The schools being run by Charter Schools USA and other corporations
are quite the opposite. They represent a big-business, standard-
curriculum approach to education and usually have little to do with the
communities in which they are located. The chairman of the foundation
that landed a contract for the North Tampa Alternative School, for
example, lives in Miami Springs. Asked how he got involved, he said:
``I was contacted by a lawyer.''
Even more disturbing, the charter businesses are now teaming up
with developers of large, and typically higher-priced, subdivisions to
build what amount to private schools on the public dime. Though the
charter law requires that such schools accept any students, their
locations make them convenient only to the homeowners or, in some
cases, to company employees. A teacher at a Charter USA school in Miami
was also unusually blunt about how discipline works: ``We have ways of
asking people not to come back. We really operate like a private
school.''
At $418-million and counting, the public policy questions here are
urgent. Is Florida giving tax money to for-profit corporations that are
using shell companies to hide their status? Are charter school dollars
being used as an amenity for developers who build subdivisions? Is the
law being used to create private schools that cater to the children of
higher-income families and business employees? How much profit is being
made off the charter school public subsidy? Are children learning in
these schools?
The governor refused to answer questions from Fischer, which is
particularly odd, given that this new charter school explosion is in
large part Bush's creation. Hage himself said as much: ``It was first
Jeb Bush's idea, not mine, to promote charters in Florida. * * * Quite
honestly, I wasn't that familiar with charter schools.''
Bush is running for re-election on his educational record, which
includes making Florida the most prolific state in the nation for
school privatization. The trouble is that his Department of Education
has shown no inclination to investigate alleged fraud in the voucher
program for disabled students, or to oversee the escalating vouchers
awarded through dollar-for-dollar state corporate tax credits. In this
case, Bush's name was actually used as a reference on charter
applications that might be contrary to state law.
Is this what the governor means by education accountability?
Wall Street Journal, August 27, 2007
Jeb Bush: Lehman's Secret Weapon
By Dana Cimilluca
In the arms race by private-equity firms to line up ever-higher
profile ``advisers,'' Lehman Brothers may have just taken the lead.
According to a small handful of reports Friday, including this one
in Investment Dealers' Digest and another in Private Equity Hub, the
investment bank has hired former Florida Governor and presidential son
and brother Jeb Bush for its in-house investing arm.
No sign of an announcement from Lehman on the hire.
Private-equity firms hire politicos and former corporate honchos
all the time to help them open doors to deals, as well as to manage
government relations and the companies in their portfolios. Carlye
Group chief David Rubenstein, in fact, discussed the increasing value
of such moves in this Q&A published in The Wall Street Journal today.
No family these days has better door-opening skills in Washington
or corporate America than the Bushes. The family of the 41st and 43rd
presidents is no stranger to Wall Street either. Jeb's father, George
H.W., used to serve as an adviser to Carlyle, and his grandfather was a
partner at Wall Street firm Brown Brothers Harriman.
It is the second corporate gig for the former Florida governor, who
stepped down after two terms in January. He already has joined the
board of Tenet Healthcare.
Published Thursday, June 4, 2009
Florida Stands to Lose $1 Billion
Because of Lehman Brothers' Bankruptcy
By Sydney P. Freedberg and Connie Humburg, Times Staff Writers
A price tag is now emerging for what last year's collapse of
investment giant Lehman Brothers could cost the state of Florida: more
than $1 billion.
The losses could make Florida and its citizens among the biggest
casualties in the biggest bankruptcy ever.
More than $440 million disappeared from the pension fund that pays
benefits for some 1 million retirees and public employees.
Counties, cities and school districts face a loss of more than $300
million for roads, sewers and schools.
The state has $290 million less to pay for everything from
hurricane claims to health care, community colleges and care for
infants with disabilities.
While the general losses have been expected, this is the first
public accounting of the magnitude of the Lehman-related public losses
for Florida.
The outlook is bleak in bankruptcy court. In years to come, the
state will be lucky to collect pennies on the dollar.
In an interview, even the ever-optimistic Gov. Charlie Crist could
not muster a sunny side: ``It is, to say the least, an unfortunate
situation.''
Lehman Brothers, which built the nation's railroads and survived
the Great Depression, filed for bankruptcy protection last September.
Its failure sank banks and stocks, but the fallout reverberated far
beyond Wall Street.
In Florida, Lehman Brothers was an icon of finance and real estate,
managing public assets, selling securities, underwriting bond deals and
handling residential and commercial mortgages.
In the last decade, Florida paid Lehman at least $27 million in
fees for managing public investments and brokering and underwriting
bond deals.
The storied bank hired former Gov. Jeb Bush as a consultant in June
2007, five months after he left office. As governor, Bush also served
as a trustee for the State Board of Administration, which invests
public money.
Lehman was the dominant Wall Street broker that sold the SBA $1.4
billion of risky, mortgage-related securities that started tanking in
August 2007.
Bush has said he had nothing to do with those sales.
``As Governor Bush has stated several times in response to your
inquiries, his role as a consultant to Lehman Brothers was in no way
related to any Florida investments,'' said his spokeswoman, Kristy
Campbell.
``It is unfortunate the St. Petersburg Times continues to
perpetuate this incorrect and baseless conjecture.''
The risky investments Lehman sold the SBA meant losses to the
budgets of almost 1,000 state and local governments.
The local governments still get principal and some interest
payments but are stuck with about $556 million in tainted securities
that they can't redeem.
The off-limit funds mean less operating cash for sewers in Port St.
Lucie and classrooms in Jefferson County.
Hillsborough, already shedding jobs and cutting services, faces a
loss of $11.3 million. ``When you're making cuts, every additional cut
is more painful than the last,'' said budget director Eric Johnson.
Pasco faces a loss of $6.6 million.
``That's a huge amount of money for us,'' said Commissioner Michael
Cox, a financial adviser. ``To put it in perspective, our whole parks
and libraries budget is $19.8 million.''
He said Florida made a costly mistake by not selling the tainted
investments long before the bankruptcy.
State officials are telling local governments that if they hold on
long enough, they just might recover their losses.
Still, the state has filed a claim in bankruptcy court in
Manhattan, seeking to recoup $675.8 million for the bad investments.
In its complaint, Florida says Lehman Brothers sold it securities
that were not registered with the Securities and Exchange Commission.
Such securities are meant only for qualified, sophisticated buyers that
understand the risks.
But documents show that SBA managers were made aware of the risks
all along. Before they bought the securities, they received
confidential memos, e-mails and investor reports from brokers and
sponsors that detailed the risks.
Florida lost more than $400 million in sales of Lehman stocks and
bonds. It also faces a loss of more than $80 million on bonds it hasn't
sold yet. That has squeezed dozens of state organizations--from the
Division of Blind Services to the Chiles tobacco endowment to a health
insurance subsidy for retirees.
The biggest casualty is Florida's giant public pension fund. It
took a $230 million hit on Lehman stocks and bonds. The pension fund
holds another $53 million in Lehman bonds that have lost most of their
value and has $323 million tied up in tarnished mortgage-related
securities purchased from Lehman. If the state sold those securities
today, the pension fund would lose about $188 million more.
Almost 1 million public employees and retirees--from teachers and
firefighters to social workers and police officers--participate in
Florida's plan.
The SBA, which manages the pension fund, downplayed the long-term
effect of the Lehman bankruptcy. Spokesman Dennis MacKee said that
benefits paid to retirees won't be affected. Government employers would
have to pay more to plug any pension funding gap. But MacKee said the
Lehman holdings were such a small part of the pension fund portfolio
that it's ``very unlikely'' the losses would result in higher costs.
Here are how some other agencies with Lehman bonds fared:
The state's hurricane catastrophe fund, which helps
insurance companies pay for storm damage, lost $81 million.
Citizens Property Insurance held $39 million of the bonds
the day of the bankruptcy. It lost $9 million and now holds bonds
originally worth $26.5 million--on the books for just $3.3 million.
The state Treasury saw more than $75 million evaporate and
holds an additional $53 million in troubled Lehman assets. That reduced
earnings for, among others, universities, housing subsidies and clean
water programs.
Lehman's failure also hurt cities and counties that invested on
their own in what they thought were top-rated Lehman securities.
Karen Rushing, comptroller of Sarasota County, told a U.S. House
committee on May 5 that the Lehman bankruptcy had a ``devastating''
impact.
The county saw $40 million disappear, Rushing said, meaning it
couldn't build a fire station, two libraries and 11 parks and also
could cost jobs.
Rushing and locals in California and Colorado and elsewhere are
lobbying the U.S. government to cover Lehman losses with federal
bailout money.
Florida ``is navigating very difficult times,'' Rushing said.
``High in job losses, high in foreclosure rate, a housing crash and an
insurance crisis * * * all affect our ability to withstand the
consequences of the collapse of Lehman Brothers.''
Bankruptcies move slowly; it could take years for Florida to
recover anything.
``Florida gets to wait in line like everyone else,'' said Andrew
Gottesman, a vice president at SecondMarket, which is a marketplace for
bankruptcy claims.
Estimates vary on how much Florida might recover, from a few cents
on the dollar to 20 cents. An average guess is about 14 cents on the
dollar.
[Prepared questions submitted by Ms. Kaptur follow:]
Questions Posed to Mr. Bush From Hon. Marcy Kaptur, a
Representative in Congress From the State of Ohio
The Guardian newspaper in Britain reported in 2010
(www.guardian.co.uk/business/2010/mar/12/lehman-brothers-gimmicks-
legal-claims that a US bankruptcy examiner concluded that grounds exist
for legal claims against top Lehman Brothers bosses and auditor Ernst &
Young for signing off misleading accounting statements in the run up to
the 2008 collapse.
The newspaper said a 2,200-page forensic report by Anton Valukas
into Lehman's collapse revealed that Barclays, which bought Lehman's US
businesses out of bankruptcy, got certain equipment and assets to which
it was not entitled.
Based on this article, the Valukas report also revealed that during
Lehman's final few hours, CEO Dick Fuld sought to convince Prime
Minister Gordon Brown to overrule Britain's Financial Services
Authority when it refused to fast-track a rescue by Barclays. The
examiner's report found evidence to support ``colorable claims''
against Fuld and three successive chief financial officers--Chris
O'Meara, Erin Callan and Ian Lowitt.
According to the Guardian, ``During the bank's final hours in
September 2008, Fuld tried desperately to strike a rescue deal with
Barclays but the FSA would not allow the British bank an exemption from
seeking time-consuming shareholder approval. The chancellor, Alistair
Darling, declined to intervene and Fuld appealed to the US treasury
secretary, Henry Paulson, to contact the prime minister.''
According to the Valukas report, ``Fuld asked Paulson to call prime
minister Gordon Brown, but Paulson said he could not do that ... Fuld
asked Paulson to ask president Bush to call Brown, but Paulson said he
was working on other ideas.''
According to the Guardian, ``In a ``brainstorming'' session, Fuld
then suggested getting the president's brother, Jeb Bush, who was a
Lehman adviser, to get the White House to lean on Downing Street.''
Governor Bush, to your knowledge, did your boss, Mr. Fuld,
in fact make such a suggestion, as the Guardian reported?
Did you in fact ever make any contact with anyone at the
White House about Lehman's travails at the time?
Did you in fact ever make any contact with anyone in
Congress about Lehman's travails at the time? If so, who did you
contact? When did you contact them? What did you discuss?
Did you in fact ever make any contact with anyone in any
federal or state regulatory agency about Lehman's travails at the time?
If so, who did you contact? When did you contact them? What did you
discuss?
The press has further reported that Barclays eventually bought the
remnants of Lehman's Wall Street operation from receivership for $1.75
billion.
Did that price accurately reflect the value of that
purchase?
Chairman Ryan. We just got the employment numbers about a
half hour ago. Only 69,000 jobs added last month. That is about
half of the 150,000 that the markets were expecting. The last 2
months job growth was revised downward by 49,000 jobs. The
unemployment rate has now gone up to 8.2 percent. The U-6
unemployment rate, which lots of us track, which is people who
are looking for a job that didn't find one, people who stopped
looking for a job, or people who are in a part-time job that
still want a full-time job, went from 14.5 percent up to 14.8
percent. It is not working. The economic policies we have today
are not working.
And I always try not to say what it is my political
adversary is in favor of. I will let him speak for himself. But
what I think what we are trying to establish here is that both
parties have messed this up. I think Mr. Edwards did a pretty
good job of going through the past about how, with good
intentions, Republicans and Democrats have believed that if
they could just put some kind of a preference in law for a
selected industry, for a selected goal, for a selected company,
that good things would result from that. And it is helpful to
us to go back and look at the track record of this bipartisan
idea that government is smarter and better at picking winners
and losers in the marketplace than the market itself is.
And what we have learned from this bipartisan approach is
that corruption does occur, cronyism does occur, and that what
ends up happening is those who are connected, those who have
established connections, those who know the ways of Washington
end up usually getting the benefits, and those who are out
there around America working hard, slaving away, creating
ideas, coming up with companies in their garages, they are not
on the inside of this. And so we end up erecting barriers to
entry that protect established businesses, connected
businesses, or sectors, or businesses, and that necessarily
comes at the expense of tomorrow's entrepreneur. That makes it
harder for people to rise and create new ideas and businesses,
which as we have learned through the economy, through economic
evidence, is the greatest chance of giving people prosperity,
of decentralizing wealth in this country, of allowing people to
rise and have social mobility.
And so what we are trying do is recognize that both parties
messed this up. Let's not sit around and point fingers at each
other. Let's recognize both parties messed it up. Let's go back
with what works. What works is entrepreneurship, small business
growth, risk taking, and yes, regulations that are fair for
all, regulations that do put the guardrails up so that we have
transparency, so that we have honest play, so that we have
rules of the road that apply equally to everybody, equality
before the law. That is what we are trying to reestablish here.
No one is suggesting that we have some sort of dog-eat-dog
society, where just the powerful and connected survive at the
expense of everybody else. No, what we are saying is the same
rules apply to everybody so that you, based on your own merit,
your own God-given talent, that determines success. So that our
goal in America is try to advance the starting line so we can
promote equal opportunity so people can make the most of their
lives instead of having people pick and choose winners in
Washington. Because what ends up happening, whether a
Republican is in the White House or a Democrat is in the White
House, or whoever is running Congress, is interest groups get
involved, and they decide how this is all done at the end of
the day. That doesn't work. We have seen our friends in Europe
try this, and now we look at the results of that.
And so Governor Bush and then Mr. Edwards, you have seen
this work. You have great experience in government. Has this
worked at the State level? State governments have to do this a
lot. The stimulus, for example, sent a lot of money to the
States. Did that work? Do these 49 different job training
programs, which clearly were created with good intentions, had
various groups advocating for this or that job training
program, does that work to actually giving people the tools
they need to go into getting skills so they can get on to a
career path that they were in an obsolete industry that is
gone?
You know, where I live, we lost four auto factories since
2008. So all my friends that I grew up in high school with, the
guys I know from my childhood, don't have a sector that they
can work in that they got their training in. And now, you know,
people are trying to go back to school to learn a new skill to
get back on their feet again. Does this approach work? Did
stimulus spending work? Do the 49 different job training
programs work?
And then, Mr. Edwards, give more examples about the
Canadian system. I think that is very intriguing. You write
about how Canada actually went after a lot of this corporate
welfare, this cronyism. Give me more anecdotes and story on
that, because I think there is something we could learn from
the Canadians on this front. Governor Bush.
Mr. Bush. Well, we had a mini stimulus package when I was
Governor in the early 2000s. And for some States, it worked,
because there were chronic budget deficits, and they filled the
gap. And they consider that stimulative rather than changing
how they do things. In the case of Florida, we actually took
that money and used it on a one-time basis to try to help
create--to invest in basic research, in essence, which I think
is a proper role of government. This is where maybe my Cato
Institute friend and I might disagree. I do think that there is
a proper role for government in things to build capacity, to
build infrastructure. And that is what we used the money for.
It wasn't stimulative in terms of an economic recovery, but we
already handled our budget because we have a balanced budget
requirement as almost every other State did. We had to make
tough choices. We had to challenge how we did things. And we
got through the budget challenges quite well.
Similarly, I think many States did the exact same thing
this last year. Florida did not raise taxes last couple years.
Florida hasn't raised taxes. In fact, Florida has cut taxes.
And they have done it, the challenge became an opportunity,
which happens in the private sector as well. When you don't
have the pressure of a balanced budget requirement, as you all
don't have here, then, you know, it doesn't really matter. But
every other jurisdiction, local and State governments have that
challenge, and they adjust.
I would say, to use the clean energy example, a better
approach would be to spend less money, but spend it on basic
research that creates the disruptive technologies that are
market-based that will be sustainable over the long haul,
rather than trying to create a wholly-owned venture capital
subsidiary inside the Department of Energy, where there is
winners and losers picked that is not going to create any
advancement of new technologies. It basically protects, and in
the cases of the failed companies, it ended up protecting
companies that didn't have the best ideas. And the market then
punished them, and the United States Government was out-of-
pocket.
So a better approach would be for the government to do what
it does best, which is to fund basic research, applied research
to be able to create the next generation of industries. But let
the market solutions be the means by which we achieve the
desired result.
Mr. Edwards. You know, I believe in the 50 States as
laboratories of democracy. I believe in federalism. I believe
we ought to get a lot of these programs out of Washington and
let the 50 States figure out whether they want do them.
Job training programs, you know, we have had them since
John F. Kennedy's administration. They have never worked very
well. The GAO has said they have never worked very well. Let's
let the States fund it and do it. Then the States can learn
from each other to see what works.
So, you know, the problem is we have over a thousand
Federal aid to State programs now. They are massively
bureaucratic. The money pours out of Washington. There are
rules and regulations with each of these programs. They put
State governments in a straitjacket, which doesn't make any
sense. And we see that now with No Child Left Behind. The
States have rebelled against that. One political scientist
said, you know, the problem now is we have got sort of a marble
cake with American federalism. Between the three layers of
government, we should have a layer cake. Each of the levels of
government should fund their own programs, do their own
programs, and the States could look at each other to see what
works.
To transition over to Canada, you know, this is one of the
things Canada did. Two decades ago, Canada was in a horrible
budget situation like we are today, massive deficits,
overspending, Wall Street was downgrading its debt. So they did
a series of 5 years of really big spending cuts. They chopped
their total Federal budget 10 percent in just 2 years, which
would be like us cutting $400 billion out of the budget in just
2 years. So what did they cut? They cut business subsidies.
They cut aid to the lower governments. They cut defense. So
they cut all kinds of stuff. And it has worked extremely well.
The Canadian economy did not go into a recession with these
government spending cuts. It boomed. The Canadian economy
boomed for 15 years, even as these spending cuts dramatically
dropped the size of their government.
So just to put a couple numbers on that, go back a couple
decades, the Federal Governments in Canada and United States
were both around 23, 24 percent of GDP. The Canadian Government
now, Federal Government, is around 15 percent of GDP. Ours is
up around 23 or 24. So they massively cut the size of their
Federal Government. They decentralized their federation, and it
has worked extremely well.
Chairman Ryan. Thank you.
Mr. Van Hollen.
Mr. Van Hollen. Thank you, Mr. Chairman.
I do believe that there is a lot of agreement. But let me
just start with what sort of got me going here. The chairman in
his opening remarks again talked about the Obama administration
and crony capitalism. They continue to refer to the auto
rescue, not as an example of an important government
intervention that helped millions of jobs, but as an example of
crony capitalism.
So I just want to ask you, Governor Bush, I believe you
supported, as did a lot of us, not all of us, on a bipartisan
basis the effort that President Bush took to help rescue the
financial sector, which in part precipitated the crisis. And
many of us believe that it was also appropriate to take the
actions that President Obama did to help rescue the auto
industry and a million jobs. Did you support that effort?
Mr. Bush. No.
Mr. Van Hollen. No. Okay.
Mr. Bush. I wasn't in office, though, at the time. So that
is easy for me to say.
Mr. Van Hollen. Do you agree with Governor Romney's
position that we should have let them go bankrupt?
Mr. Bush. They did go bankrupt. It was in a way where the
government--it was a government-induced bankrupt that allows
now, for example, tax loss carry forwards that never, under
normal bankruptcies, would exist, allows for General Motors now
not to pay taxes based on profits that otherwise they would
have to be paying taxes on. That is the form of capitalism when
the government intervenes in a very muscular kind of way. And I
don't believe that that is appropriate.
Mr. Van Hollen. All right. Well, maybe I made an
assumption. Maybe I was wrong. Did you support the rescue of
Wall Street banks?
Mr. Bush. You know, I have never been asked that either. I
was out of office. So now you are asking.
Mr. Van Hollen. Yeah.
Mr. Bush. And I think, given the circumstances of the
potential for a meltdown that would have been hard to recover,
some support was appropriate. Was, therefore, then the next
step of adding regulations on top of regulations? The
Congressman in his remarks made an interesting point, assuming
that there was no regulation on the banks or financial services
industries prior to Dodd-Frank's passage. In fact, there was
massive regulation. I would argue that maybe enforcement was
where the problem was, not the fact that we had a deregulated
financial industry.
So, for a short term solution to a problem that had global
implications, I think that was probably the right thing to do.
But then to take it and then to add on top of this challenge
that we face massive rules that will take years to implement,
that creates more uncertainty, and the probability of more
unintended consequences that will create a weakening economy
rather than a strengthening one, I think was the wrong
approach.
Mr. Van Hollen. Thank you for stating your position on the
record. I think many of us believe that the decision to help
rescue the financial industry was a bitter pill but a necessary
one. And many of us also thought it was worth taking
extraordinary action to help save over a million jobs in the
auto industry.
Let me just talk about the budget issues and some of the
government expenditures. The figure of government spending
right now is about $3.6 trillion, according to the
Congressional Budget Office. A big part of that is Social
Security, which of course came about after the Great Depression
as a way to provide retirement security for Americans. I am
assuming from your testimony you don't think that that is an
inappropriate government interference in the marketplace?
Mr. Bush. That is correct.
Mr. Van Hollen. Okay. Another major part of that $3.6
trillion is the Medicare program. Because we realized in the
1960s that the private health insurance market didn't see a lot
of profits to be made in insuring older and relatively sicker
people. So that is a major chunk. I mean, I assume, putting
aside the issue of reform, that you think that that is an
appropriate intervention in the marketplace.
Mr. Bush. Putting aside reform?
Mr. Van Hollen. The Medicare program, the idea that there
should be some government role in providing health security to
seniors.
Mr. Bush. In a dramatically different way, I could see it
happening. But I am not sure that accepting Medicare as it was
created in 1965 in 2012--I mean, that is the problem is that we
have this attitude that if you start something in the mid-20th
century, it is appropriate to keep doing it the same way 50
years later.
Mr. Van Hollen. Governor, actually, there is a difference
of opinion as to what kind of reforms we need to take in
Medicare. That is a longer discussion. But I think everybody
around this table recognizes that we need to address those
issues. We have different models. And they are efforts to
modernize the program.
The part of the budget that most of this conversation has
circled around, at least with respect to the spending side, is
the discretionary budget. It represents about 16 percent today
of our overall budget. It is a shrinking part of the budget. As
a result of the trillion dollars in cuts that we made in the
Budget Control Act last August, it will actually be reduced to
the lowest percentage of the economy since the Eisenhower
administration over the next 10 years. It is a shrinking part
of the budget. That is the part of the budget that helps the
FBI, Homeland Security, and you mentioned basic research.
NIH, I think you agree, does an incredible amount of
important research. There are lots of those investments in NIH
research that don't pan out. They don't cure cancer. They don't
necessarily--I hope you will agree with the logic that just
because some of those investments in particular research
projects don't pan out, that the solution is to get rid of
investment in NIH. You are not suggesting that, are you?
Mr. Bush. Well, there is a huge difference between
investing, or a loan guarantee for Solyndra and investing in
basic research in NIH. If you are trying to equate the two, I
would disagree. I don't think that there is--of course,
research never works out exactly. But through trial and error,
great minds develop discoveries, in cooperation with other
scientists, that yield results that improve the human
condition. So it is not a venture capital investment, it is
more related to an expenditure that I think is more than
appropriate for the Federal Government to have. And you know,
there may be cuts over a very high base, but there has been
dramatic increases in spending in NIH if you look at it over
the last 20 years.
And I am not uncomfortable with that. I do think that the
same thing that my testimony I brought out that there should
be--you should challenge every basic assumption about how this
money is spent. There should be benchmarks. If it doesn't work,
you ought to move on to other things. But a particular science
project by a particular researcher if it doesn't work out, that
is not my point.
Mr. Van Hollen. I just want to clarify. I didn't think it
was. I mean, we also have student loan programs. Not every
student loan gets repaid. I don't think that--most of us
anyway, those of us who support a student loan program, say,
well, we didn't get all the loans repaid, so we are going to
shut down the student loan program. Or Small Business
Administration makes loans. Not every small business is
successful. I don't think the solution is to shut down the
Small Business Administration.
You mentioned specifically doing more advanced sort of
cutting-edge research into energy at the Department of Energy.
I agree. I think that is a very important role. The budget that
is coming out of this House significantly cuts back in the
proposals that the President has asked for in that very area.
So I think that, you know, the chairman asked about actions
taken by Governors. I know lots of Governors, including
yourself, who took efforts in the renewable energy area. Some
of them may have been successful; some not. But I just hope we
don't, you know, take the lesson that because some of these
things don't work out, we shouldn't be making investments in
areas of basic research, and as you said, in some cases applied
research.
Let me just close with this. I agree with you--first of
all, I also agree with Mr. Edwards that we should get rid of
some of those agriculture subsidies. We put forward a proposal
recently to do exactly that in this committee.
Chairman Ryan. And our budget does as well.
Mr. Van Hollen. But I agree with you, Governor Bush, that
if we find a program that is not working, let's get rid of it,
let's reduce the deficit. I wonder if you would take that same
approach to tax expenditures that aren't serving their purpose.
In other words, would you agree that if you identify a tax
expenditure that is not serving any useful purpose, that we
just get rid of it to reduce the deficit?
Mr. Bush. You know, I would love to see common ground to
see dramatic reductions of tax expenditures, or whatever you
want to call them, and have a dollar-for-dollar reduction in
tax rates that would spur economic activity that would move us
away from an L-shaped recovery to a V-shaped recovery.
Mr. Van Hollen. So just to be clear, you disagree with the
recommendations of Simpson-Bowles and Rivlin-Domenici that says
through tax reform, we should do exactly what you say, which is
to try and make the Tax Code a little simpler, but we should
also use some of the funds generated to help reduce the
deficit. You disagree with that. You agree with essentially the
form of the Grover Norquist pledge, which is not--do you agree
with the Grover Norquist pledge?
Mr. Bush. Okay. So I ran for office three times. The pledge
was presented to me three times. I never signed the pledge. I
cut taxes every year I was Governor. I don't believe you
outsource your principles and convictions to people. I respect
Grover's political involvement. He has every right to do it.
But I never signed any pledge.
Chairman Ryan. Thank you.
Mr. Van Hollen. Thank you, Governor.
Chairman Ryan. Mr. Cole.
Mr. Cole. Thank you very much.
Governor, good to see you. Thank you for being here.
And if I may, thank you for being here not only as a
representative of a family with an extraordinarily remarkable
record of public service to this country in every way, but
being here as a person with considerable accomplishments of
your own, and certainly with the ability to speak for yourself,
not for every other member of your family. So thanks for being
here. And thanks by the way.
Mr. Bush. Mr. Congressman, can I say that my brother sends
his warm regards to Congressman Waxman?
Mr. Cole. I am sure he does, and I am sure he does it from
a great distance, too.
But I appreciate your brother's class, frankly, since he
has left office, as well, and the manner which he has handled
himself. And we saw an example of that yesterday that reflected
both very well on him and former First Lady Bush and on the
First Family today, on the President and First Lady Obama as
well. So maybe if our committee operated a little bit more like
we saw yesterday at the White House, we would get a little bit
further down the road.
We have dealt with a lot of history here. I am not exactly
sure why we are always looking back, because I think we are
trying to score political points and that. I want to ask you
about a couple of problems that we are going to be facing very
quickly. The 2001 and 2003 tax cuts all expire. The President
saw fit to extend those 2 years ago. He could have ended every
single one of them had he chosen to, but he must have thought
at least at that point those tax cuts were in the best
interests of the economy. Got a couple other things he wanted
as well, extension of unemployment and a payroll tax cut. But
we are going to, all those questions are being revisited. I
would like very much your views on whether those tax cuts ought
to be extended and then what other things within the Tax Code
you think we ought to be doing to try and achieve the
objectives you outlined in your remarks.
Mr. Bush. I think that, given the economic circumstances
that we are in, I think they should be extended. The idea that
a cut in taxes that took place 12 years ago is an extension of
a tax cut rather than what it truly is, which on December 31,
if nothing happens, a massive tax increase--something close to
3 percent of GDP, which would be a historic tax increase. The
country has never done anything of that scale--speaks to the
language of Washington. I mean, I have never understood why we
wouldn't--maybe it is because of budgeting considerations that
it is an extension of a tax cut. But basically you are talking
about a massive tax increase. And I don't think that is the
proper way to restore economic growth.
I think the objective ought to be that if we are growing at
1.5 percent per year at a time where historically, in this time
of the cycle, we should be growing at 4, 5, 6 percent and have,
say, stable growth over a sustained period of time--say, 3.5
percent instead of 1.5 percent--that 2 percent incremental
growth over a 10-year period, which is how you all look at your
budgets, that 2 percent incremental growth creates a Germany in
the tenth year. The incremental growth creates something like
$2.9 trillion of additional economic activity. And based on the
tax rate, the effective tax rate in our country today, State,
local, and Federal, that is over $1 trillion of revenues
without raising taxes.
So the focus ought to be, in my mind, how do you create
sustained economic growth? And then you restore the proper
balance of government. If we are always reacting--assuming that
we are only going to grow at 1 percent per year, then we are in
a heap of trouble. There is no way to get out of the mess we
are in, where we are spending--roughly 40 cents of every dollar
spent is financed and it is financed in increasingly shorter
durations with monetary policy that yields zero percent
interest rates.
At some point, we are not going to be slightly larger than
the smallest country in Europe, and the focus of the world's
financial institutions and investors are going to be looking at
the United States. And when that happens and we are not
prepared, because we haven't dealt with the structural
challenge we face and we are not creating a high growth
economy, then the price we pay is enormous, particularly for
the next generation. So I would say the place where you could
get the greatest sustained growth would be an energy policy
based on our own resources and based on American innovation.
I would argue--I am a little out of step with my own party
here perhaps, temporarily--I would argue for looking at
immigration as an economic solution to our problems; that we
identify aspirational people, allow them to come in to pursue
their dreams in our own country. I think a total review of the
rulemaking process and the existing regulations on our country
today to apply 21st century rules on top of our economy would
be a burst of economic activity. And then at the State and
local level, a transformation of our education system.
Those things aren't necessarily ideological. You can have
your budget fights and the tax fights. I am sure they will go
on with without me. That could, I think, help create sustained
economic growth. And then the debate might not be about the
ones we are having in Washington today. It would be about
something different.
So tax reform and those four things that I brought up, I
think would create a really interesting climate for sustained
growth.
Mr. Cole. Thank you Governor. I yield back.
Chairman Ryan. Thank you. Your immigration views sounded
good to me. Mr. Doggett.
Mr. Doggett. Well, they may sound good to me, too. Welcome,
Governor. Let me just ask you specifically whether then you
support the DREAM Act as it has currently been introduced, so
that young people who came here, through no decision of their
own as a child, have a path to citizenship if they have played
by the rules, gone to school, and are ready to contribute to
America.
Mr. Bush. I haven't seen the current form of the DREAM Act
so I can't comment on it.
Mr. Doggett. It is the same version we have offered the
last four sessions against Republican opposition. You are not
familiar with it?
Mr. Bush. I don't want to insult you, but I don't follow
everything. But I do support, I have read Senator Rubio's----
Mr. Doggett. It doesn't provide a path to citizenship.
Let me go to something you are familiar with, which was
your testimony which I think raises the right question: Why
should a company pay taxes to support government subsidies for
one of its competitors?
Mr. Edwards answered that question very specifically in
saying the place to start is to eliminate $100 billion, almost,
of business subsidies every year. Do you agree with him?
Mr. Bush. Yeah. This is a place where there seems to be
common ground. We should have a thoughtful review of all sorts
of subsidies.
Mr. Doggett. Well, I know we want to be thoughtful and I
know we want to review, but you agree with him that we should
eliminate $100 billion of business subsidies?
Mr. Bush. With all due respect, I don't know--give me the
specifics and I am happy to answer it.
Mr. Doggett. I am relying on his specifics. But I will give
you a smaller specific that I think is included, and that is $4
billion every year in preferential tax treatment to Exxon,
Chevron, and the other Big Five oil companies for drilling off
our coastlines. Do you favor eliminating those subsidies?
Mr. Bush. In return for lower tax rates, I think that is
exactly what we ought to be doing.
Mr. Doggett. Great. We have had discussions about
simplifying the Federal Tax Code. Everyone is for it. But it
has been simply impossible to get a description of any
preferential tax provisions or loopholes that ought to be
closed.
Could you identify, in addition to closing the preferential
treatment for Exxon any other tax loopholes or preferential tax
provisions, that you favor closely?
Mr. Bush. Well, first of all, I don't favor--just to be
clear because this is a ``gotcha'' kind of environment, it
seems like. I am not for specifically closing loopholes just
for Exxon. I mean let's be clear. I would say this ought to be
industry-wide in return for lower rates. Are you targeting--are
you asking me, should we target one company against other
companies?
Mr. Doggett. I am asking you, if we were to lower corporate
rates, which is actually something that I agree with you on,
whether--and we are not going to borrow from the Chinese and
the Saudis to do it--you have indicated that you would be
willing to close the loopholes for Exxon and Chevron to help
pay for that. And I am asking you if you can identify anything
else, because I can't get my colleagues to do that, to identify
any of the tax loopholes they would close. Which other ones are
you in favor of closing in order to get lower corporate tax
rates and not have to borrow from the Chinese?
Mr. Bush. I would start by doing it, like maybe you all
could come up with an idea like the BRAC Commission and start
with all of them being eliminated and build from that basis. So
I think the general approach ought to be that this crisis that
we face is an opportunity to recast who we are as a Nation. And
do we trust the American people interact amongst themselves in
ways that have historically created more prosperity than this
command-and-control approach that we----
Mr. Doggett. Well, I appreciate that. And we, of course,
have had some bipartisan commissions looking at our budget.
Senator Domenici and Alice Rivlin, the Simpson-Bowles
Commission, every one of them have said, We cannot get our
budget in balance without due revenues. In contrast, Republican
Presidential candidates, when offered the choice of $1 of new
revenue for $10 of reduced spending, said they wouldn't agree
to a bipartisan agreement like that. Would you?
Mr. Bush. Ten to one?
Mr. Doggett. Yes, sir.
Mr. Bush. This will prove I am not running for anything.
Yeah. If you could get a----
Mr. Doggett. I appreciate your candor. I mean, basically,
we cannot close the budget gap without addressing both spending
and revenue, as all of those bipartisan commissions have
recommended; wouldn't you agree?
Mr. Bush. If you could bring to me a majority of people to
say that we are going to have $10 of spending cuts for $1 of
revenue enhancement, put me in, Coach.
Chairman Ryan. The problem is the 10 never materializes.
Mr. Bush. I have never seen a $10 cut.
Chairman Ryan. Thank you for your testimony, Governor.
Mr. Bush. That would be wonderful. Let's see it. That would
be spectacular.
Chairman Ryan. Mr. Lankford.
Mr. Lankford. Thank you. Thanks, all of you, for the chance
to be here.
It is interesting when we talk about targeted tax cuts that
we always do seem to go back to the same areas, that all the
problems in America seem to reside around the energy companies.
When I went back to the Fortune 500 list, I often hear about
the top five energy companies there and how much money they
make. I rarely hear anyone talk about the top five technology
companies on the Fortune 500 list who make more than the top
five energy companies. But the conversation is always about,
what do we do to hit the oil companies? And it begs back to the
same question. It is this body trying to determine who they
like and don't like today, and then to determine tax policy to
determine that company makes too much money and I don't like
them; that company makes just as much money, but I do like them
so they will have different tax policies.
So the challenge becomes how do we handle a tax policy that
actually reforms the system and it cleans up all the
preferences that are out there on that? Mr. Edwards, you have
made multiple comments on this. I enjoyed hearing your comments
on some of the issues of how do we start the process that you
see of working through the system here; that it doesn't come
down to this body to determining I-like-you, I-don't-like-you,
type politics in tax policy.
Mr. Edwards. I think the most important tax reform we need
in the United States is to lower our corporate tax rate. We now
have the highest rate in the world, 40 percent with State taxes
included.
The chairman mentioned Canada. Canada has actually chopped
their Federal corporate tax rate to 15 percent now. And what is
astounding, if you look at the Canadian 15 percent Federal
corporate tax rate and our 35 percent Federal corporate tax
rate, in both countries the corporate tax raises about the same
percent of GDP and revenue, about 2 percent. So what is going
on here? The Canadians collect just as much as we do with a
rate that is less than half as high.
What is going on is that there has been a massive reduction
in tax avoidance in Canada. The biggest loopholes in our
corporate Tax Code are actually not the legislated loopholes,
like the ones for the energy industry and the like. They are
what I call automatic loopholes. If you have a high rate, it
pushes companies to really bend the law, to move their profits
offshore in fancy ways with fancy financial accounting. If we
lowered our rate, that money would come back to the United
States.
You mentioned the difference between tech companies and
energy companies. It is the tech companies that are probably
the best at this automatic loophole stuff. Apple and Microsoft,
for example, are great at legally moving their profits offshore
because, of course, their production, their profits, are very
mobile in the global economy. Intellectual property is very
mobile. So these companies move their intellectual property
offshore, you know, in legal ways. We can only get that money
back if we lower our corporate tax rate. And I think that is
the most important thing for us to do.
Mr. Lankford. Okay. Let me mention a couple of things. We
talked about bankruptcy as well. I am astounded at the number
of times that we are talking about the GM bailout. And as the
Governor mentioned here as well, that was a bankruptcy process.
It was just tightly controlled by the Federal Government with a
lot of new bankruptcy rules that were put into it. Many of us
fly Delta Airlines or American Airlines, who is currently going
through bankruptcy. There is this perception that if GM went
through bankruptcy, we would no longer have automobile dealers
or manufacturing because it would all go away. I will get on an
American Airlines flight later this afternoon, currently going
through bankruptcy. This is something that has been a
constitutional responsibility of this body for a very long
time.
But again, you go back to the preferences of how we pick
and choose what is our favorite group and how are we going to
help them and not help another one. There wasn't a rush to go
bail out American Airlines when they started going through
bankruptcy. It was just a rush to go to other groups.
Another one is the venture capital. There is an
entrepreneur in Oklahoma City who created an incredible
product, has made a ton of money off of it, and is spending a
lot of his time now helping companies get started in technology
areas. He sinks a lot of his time into that.
This body seems to spend a lot of time saying well, we have
access to a lot of money; maybe we should do the same things.
This entrepreneur loves to do that kind of stuff, but it is his
money so it is a different animal. How would you suppose we
process through some of those areas of a startup, when we move
from the difference of research to actually implementation?
Mr. Edwards. Well, I mean with venture capital and angel
investment, tax rates which I have written about, are extremely
important. Capital gains tax rates are of course important
because these often wealthy people and serial entrepreneurs, as
they call them, they build up a lot of money, they invest in
new companies. What is their return for investing in new
companies? They pump $50,000 or $100,000 into a new company.
They have to patiently wait a few years to see if the company
makes it into profitability. And if it does, they get a capital
gain as a return. So the capital gains tax is a direct tax on
them. It is a direct disincentive for them to invest. Ordinary
income tax rates are very important I think also because a lot
of people in the very top income group are small business
people and are angel investors. There are about 300,000 angel
investors in the United States. These are rich people, like
Bill Gates and Paul Allen and many others who spend a lot of
time pumping money into small startups. If you raise the tax
rates on them, they are simply going to have less cash and less
incentive to put their money into new startup companies. So I
really think we have to look at the tax policy to spur more
financing of entrepreneurship.
Chairman Ryan. Thank you. Mr. Yarmuth.
Mr. Yarmuth. Thank you, Mr. Chairman. Thanks to the panel.
Governor, welcome. My family owns a company based in your
State. My brother is down there running it. Sonny's Barbecue. I
think he even contributed to your campaign at one point.
Mr. Bush. I like the barbecue.
Mr. Yarmuth. Very good. Thank you. I appreciate the plug.
I am kind of astounded in one way that throughout this
entire conversation, there is all this talk about cronyism and
special interests and preferences and so forth. And there has
been no discussion in terms of how in approaching that, about
the way these preferences get into the law. I am talking about
the campaign finance system in this country.
In terms of dealing with all of these things, do you
believe that that has any role or that we ought to address the
way we finance campaigns, particularly at the congressional
level, where many of these preferences get put into law because
of the lobbying and the money that is in the political system?
Governor, first. You have seniority here.
Mr. Bush. What is that based on, age?
Mr. Yarmuth. Well, you testified first. That is all.
Mr. Bush. Thank you.
In the perfect world, we could have a different financing
system. I love the idea of having campaigns be funded directly
rather than indirectly and have no limits and total
transparency. So if people were offended by a large donor, that
the candidate--he or she would have to accept responsibility
for the message and for the amount of money and for who gave
it, that would be, for me a--talking about markets rather than
government--controlled kind of response. That would be a better
approach.
But you know magic wands don't exist. The law exists the
way it is. I would suggest to you that Congress ought to show
more self-restraint about allowing that influence to change
policy, if that is the view. I mean, this should not be a honey
pot for people to create either a sanctuary for their own
business, to give them an advantage at the expense of another
business, or to give them a special deal that hinders our
ability to recover in a more robust way.
Mr. Yarmuth. Mr. Edwards, would you like to comment briefly
on that? I am just curious. We have the Koch brothers, for
instance--why not pick on energy--who said they are going to
spend $400 million in this election. They are not doing it, I
am sure, because they just think that we ought to let the free
market work its will and that alternative energy should--I am
sure they would want to promote that. I won't go into that. The
question stands.
Mr. Edwards. Corporate leaders, just like any Americans, of
course, have a fundamental right to lobby or petition Congress.
And frankly, I don't think there is anything we can do about
that. That is a fundamental right. It is always going to
happen. You can pass as many laws as you want. I don't think it
will stop it. I think campaign finance laws too often act as
sort of incumbency protection deals.
But what you can do is, as the Governor pointed out, you
can stop spending the money out. I think having business
subsidy programs, you throw fuel on the fire of the lobbying.
The more business subsidies companies like Boeing get, the more
they are going to lobby for more business subsidies. So it is a
vicious cycle. But the way to stop it I think is to cut the
spending.
Mr. Yarmuth. Congressman Waxman would you like to comment?
Mr. Waxman. The rich and powerful want to stay rich and
powerful. And the less government gets involved to make things
fairer for everybody they will get richer and they will be more
powerful. And now that we have opened the campaign laws to
unlimited and dead-end unreported contributions from
corporations, I don't think that the lower income people are
going to benefit. It is going to be the well-to-do. And some of
these guys, like the Koch brothers and the energy companies,
they don't want competition from alternative energies. They
want to squash competition. That is why government has got to
be involved.
All three of us and a number of people on the committee
have said, Well, we certainly ought to fund research. Right now
on the House floor, we are dealing with the appropriations for
the energy and water bill, and we are now cutting the money for
ARPA-E, which does cutting-edge energy research, by below the
administration's request and nearly a third below current
levels. So we are cutting back on research and we are hearing
that everybody is to blame, so what we need to do is to have
the government do less and let the rich and powerful stay rich
and powerful.
Mr. Yarmuth. Quick question, and I only have 20 seconds.
Governor, I really applaud your comments about research and
also about immigration reform. I think that is important.
What would you say about infrastructure? Is that an
important thing that we ought to be dealing with in that same
category? Should we really be cutting back on infrastructure
spending in the country right now?
Mr. Bush. I am an old-school guy. I think that the role of
government is to protect our shores, to provide security on our
streets, to be the means by which we build infrastructure so
that we can grow, and, I would add, build capacity--this is not
the role of the Federal Government--build capacity so that
these gaps in income are dealt with in a more fundamental way,
which is to prepare people to be competitive in a more open
system rather than trying to redistribute wealth and then
provide support. So I am a conservative.
Beyond that, then everything ought to be challenged. If you
don't challenge it, then those things are the things that get
squeezed out.
Mr. Yarmuth. Thank you.
Chairman Ryan. Thank you. Mr. Rokita.
Mr. Rokita. Thank you, Mr. Chairman. I appreciate all the
witnesses' testimony. It has been very educational, as always.
Governor, my hat is off to your family as well. I associate
myself with Tom Cole from Oklahoma. I was very proud to be an
American last night, for how your family acted and how the
Obama family acted. It was great to see. I hope every American
gets to see that tape.
I also don't think you are old-school. I just think you
believe in the plain meaning of the Constitution and perhaps
that it was one of the greatest documents to prove American
exceptionalism; in fact, a unique document in that it is the
first time those ideas ever came together at the same time in
the same place, and I hope we never lose sight of that.
I want to focus a little bit on my colleague Mr. Waxman's
comments which I agree with--we have some questions to answer
and that we are at a crossroads for the heart and soul of this
Nation. I was intrigued, however, by his use of the term
``rules of the road,'' as if that is what one of the groups
around here wants to do and as if the other group around here
simply wants to engage in anarchy, which couldn't be further
from the truth. I think we all understand that there is a need
for government and a need for it to have reasonable regulations
so that there is an even playing field, so that there is an
equal opportunity for success, if not an equal outcome. And
perhaps that is where the difference is.
On another level I think this is really about how much
control is appropriate for government to have over the
individual. And I think that is where we really disagree.
For this last year, I engaged in my little rank-and-file
office in a program called Red Tape Rollback. This is just one
Congressman's work to try to roll back the scope and heavy boot
of this Federal Government. We had 71 different Indiana
businesses and individuals write us about 41 separate different
regulations, and not all of them made the paper, nor should
they. Most were very obscure. But they prove that what this
Federal Government and what a certain group of people here in
Washington, D.C. want to do--and that goes far beyond
establishing the rules of the road. Several farmers wrote in
and said, the EPA is considering regulating the dust that my
tractors kick up as we cultivate the fields as particulate
matter. That is not establishing the rules of the road. Another
group of farmers wrote in and said, you know what, they want to
limit the kind of work that farm kids do.
This country was built on work ethic and character and
liberty and all those qualities in past generations, and in the
current generation, occurred through work on a farm and work in
other places.
The Department of Labor is also considering prohibiting
youth soccer referees--right--I used to be a referee. I played
soccer. I ref'd for a while as an adult. The Department of
Labor is considering prohibiting these kids from earning the
$10 a game from refereeing little soccer games that happen on
the weekends and after school all over this country. For some
of us, that is establishing apparently the rules of the road.
For others of us, that goes way beyond and is unnecessary.
I don't know any other country on the face of the Earth
that is more masochistic than we are when it comes to sucking
or carving something out of the ground, like coal or oil, and
considering it wealth. Every other country understands this and
exploits it, in the best sense of that word, to its benefit,
except for a group of people here in America who can't
understand that. That is beyond the rules of the road.
What also is beyond the rules of the road is that we, as
American people, are getting told what light bulbs to use, how
much water can be in our toilets, that a farmer not only has to
get a permit to use pesticides on his crops but has to get two
or three pesticide permits from the same agency. There is a
medical device tax being proposed. There are 300 medical device
companies in Indiana, all of them started through
entrepreneurship, another foundation of this country. Yet we
somehow think--at least a group of us think--that it is within
the rules of the road to put a tax on these folks and think
that they are going to keep innovating, that they are going to
keep creating.
That is just a couple of examples in this document. Mr.
Chairman, I thank you for the time. I yield back. And I thank
the witnesses again.
Chairman Ryan. Thank you. Mr. Honda.
Mr. Honda. Thank you, Mr. Chairman. And I want to thank the
panelists for being here this morning.
I am a classroom teacher. I am not a financial expert. But
I felt like we bounced all over the map when we talked about
the title is free enterprise and barriers to free enterprise. I
heard from each one of you things I do agree with, and some of
you I disagree with very strongly. But I guess what we are
hearing are high points and low points of each other's parties
and positions. I think this country is looking for some
balance.
So I guess what I will ask each one of you, what do you
agree with and what do you disagree with on each other's
presentation in terms of, you know, looking at a balanced
approach to our economy, a balanced approach to being fair to
each of our citizens in this country, and do you really think
that money behind each person is the factor that gives power to
a vote? I mean, it seems like when we talk about votes, we talk
about money first, rather than the power of each individual's
singular power of their own vote. One man, one vote, regardless
of their standing.
Where would we be today in this country if each person had
the same amount of votes without reference to their economic
standing or the power of their pocket? And how do you think
that will affect our economy in this country?
Mr. Bush. We would be in a heap of trouble. Empowering
people to make decisions for the future of the country is the
path. I agree with what you are saying, Congressman,
completely. As it relates to money and politics, we basically
have parity. Both sides effectively spend about the same amount
of money if you total it all up. Four years ago, I think maybe
President Obama and his team probably spent significantly more.
This time it looks like it is about the same.
Mr. Honda. Excuse me, Governor. With respect to one person
and one vote without respect to their pocketbook.
Mr. Bush. I am for it.
Mr. Honda. And you were just going through a comparison
between if you had the money and how that would be different in
the outcome.
Mr. Bush. All I am saying is that money goes to both
parties. It is an equal opportunity funder.
Mr. Honda. Mr. Edwards.
Mr. Edwards. Well, I mean, you are suggesting that because
you know the wealthier, they are more powerful and they can----
Mr. Honda. I am not trying to suggest--I am just asking
you, if the situation exists that each person had a vote and
that one vote counted without respect to their pocketbook, how
would that be different than what we are looking at today?
Mr. Edwards. I mean, it is sort of like a political science
question. It seems to me the main reason why policymakers,
Members of Congress, make decisions because of the voters in
their districts. It is actually not money. It is what they
think the voters want in their districts. So I think we already
have sort of an equality between voters like that.
Mr. Honda. Then why do we need Supreme Court decisions that
define corporations as individuals rather than individual
people, human beings having the power for that vote?
Mr. Edwards. You know I don't buy the line--the thing
someone mentioned earlier, the idea that corporations have so
much power in Washington, more power than anyone else. If that
was true, why do we have the highest corporate tax rate in the
world? If corporations were so powerful they would have cut the
corporate tax rate and they would have done all other kinds of
things to benefit them. I think the problem is that
corporations spend all their time pushing for these narrow
benefits just for their company, often to get a competitive
advantage against other businesses. So I want the government in
the economy to be a referee to provide equal treatment. So I am
against any kind of unequal treatment for businesses or
individuals.
Mr. Waxman. Mr. Honda, Chairman Ryan talked about the
special interests here in Washington and how they influence
things to get their way, often at the expense of ordinary
taxpayers. He is absolutely right. But we have now opened up
the special interests to win elections by distortions.
For example, there is a fantasy that has been circulated
that EPA wants to regulate farm dust. And this was referred to
a minute ago. That is just not true. They are not even
proposing anything like that. But that example, promoted by the
special interests, is being used to undermine a bill that
Governor Bush's father signed, which was the Clean Air Act,
which called for regulation of arsenic and toxic pollutants for
mines and power plants and other industrial facilities that
poison kids. Kids get their minds destroyed, often before they
are even born, because of exposure to these chemicals.
So they take a little example that doesn't exist, blow it
up. You don't even know who is paying for the ads. And then
they get their way to try to repeal--the Bush that I respected
the most, President George H.W. Bush's, greatest
accomplishment--only because I don't know Governor Jeb Bush
well enough--to regulate. And you have got to have regulations
because the benefits from regulations so heavily outweigh the
costs in terms of protecting people's health, saving lives,
promoting a community that can work together and accomplish
great things. So money speaks very loudly. And that Supreme
Court decision gave a big megaphone to people who have a lot of
money.
Chairman Ryan. Thank you. Mr. Stutzman.
Mr. Stutzman. Thank you, Mr. Chairman. And I want to thank
the panel for being here as well. I have really enjoyed the
conversation so far. And I want to just pass on to Governor
Bush, I had the chance to visit with your son George within the
past year and we have exchanged some emails and he is a great
guy, and I am really glad to get to know him as well, and I am
sure he reflects the values that you have taught him well. But
I appreciate your family.
And also I, I want to talk about States rights, States
responsibilities and actually where the States are the solution
to the problems that we have. I really do believe that the
States are going to be the solution to the problems that the
Federal Government has created and has been a major part of.
I was in the Indiana legislature in 2005 when Governor
Daniels was elected. And we had a transportation hole to fill.
And we were talking about Garvey bonds, we were talking about
gas taxes, and none of those were the good options. None of us
felt that that was the right thing to do, to either raise taxes
or to borrow more money from the future. So Indiana leased the
toll road that we have in Indiana for $3.8 billion from the
private sector. Now Washington is wanting to punish Indiana
because we were creative, we were trying to find other ways of
funding transportation programs.
Governor Bush, if you could talk a little bit about that.
And also, Mr. Edwards, if you could talk about that. And
Congressman Waxman, coming from the State of California that
has a lot of fiscal issues as well, talk about where the States
can--why can't we allow States to be creative in finding
solutions like that within the States, and why it is important
that Washington shouldn't punish those States for being
creative?
Mr. Bush. Well, thank you, Congressman. Personally, I loved
that deal because they overpaid. So in this case, Indiana
leased out a road that effectively people from Illinois and
Ohio paid disproportionate fares for, to get to and from and
the money was reinvested in infrastructure in places where,
disproportionately, Hoosiers got the benefit from the
infrastructure. It was a very creative deal.
And, interestingly, around the world, this is commonplace.
Center left, center right, it doesn't really matter. The
administrations, it seems as though this idea of private-public
partnerships is very common. In the United States, with huge
infrastructure needs as we have discussed, has lagged way
behind other countries in this regard. So this is an example
of, well, We must do it the way we have been doing it because
we were doing it the way we were doing it, rather than pausing
for a moment and saying, Are there best practices that we could
apply from other places to maybe create more creative
approaches. And I think you are right, to allow States to be
the laboratories for this to work out would be a great idea.
Canada, to use the Canadian example, again, of
transformation which has allowed them to weather these huge
storms that our country is facing right now far better than we
did. Their reforms and their pension obligations and their
spending and the things that they did to get their government
back to a proper level were done under conservative and liberal
administrations. This was not as an ideological battle, it was
simply a recognition that there are structural problems that
exist. Fix the structural problems. That seemed to be the duty
of leaders in Canada. And now they are paying a huge dividend
because of it.
So I will give you another example real quick. Medicaid. We
got under--I guess the Bush that you don't like as much as 41--
I got a waiver or the State got a waiver to try a different
approach on Medicaid that now is based on independent analysis.
It has been proven to be more effective and at a lower cost,
where we moved effectively to a defined contribution system,
away from a pay-and-chase system that the Federal Government
pays enormous amounts for. We got better health care outcomes.
We empowered people to make decisions for themselves, and it
yielded a better result.
Now that pilot that exists--now there is--the State law has
changed based on that. I think the law is even better than what
we proposed. It was modified based on seeing what the pilot
yielded. And now they are in front of President Obama's
administration to see if they can get an extension of the
waiver, and it is possible that they will.
Mr. Waxman. Mr. Stutzman, you are absolutely right, letting
States try things out on their own. In California we adopted a
medical malpractice law that has held down insurance rates for
doctors. So what do the Republicans want to do when faced with
the failure of 30 million, 50 million people without getting
insurance? They say, Oh, let's adopt a Federal law, take the
power away from States and have one-size-fits-all medical
malpractice. And that is their solution to health insurance
inequities where people can't buy insurance because the
insurance companies discriminate against them. Let the States
do things. Let's not preempt them. We are going to learn a lot
from them.
Mr. Stutzman. Can I count on you to help me stop the
punishment from Senator Bingaman to punish Indiana for the
lease of the toll road? Would you help me with that?
Mr. Waxman. Well, I would certainly want to learn more
about it. And if I can help you, I would be glad to.
Mr. Stutzman. I yield back, Mr. Chairman.
Chairman Ryan. I will let you guys do a colloquy later.
Another Californian, Ms. Bass.
Ms. Bass. Thank you. Mr. Waxman, I have two questions. I
want to get my questions out and then let you have the rest of
the time.
After July 2010, the government ended subsidizing banks to
make federally guaranteed student loans. Switching to a 100
percent government direct lending saved taxpayers $61 billion
over 10 years. I wanted to know if you thought reforming the
student loan program was in the best interests of the taxpayer
and put the students first.
And then my second question involves a hearing that you had
in 2008 where you held a series of hearings with the CEOs of
Lehman Brothers, AIG, and others into the causes of the Wall
Street collapse. So I wanted to know if you could share what
you learned from the testimony that was given in particular
about the need of the government to regulate.
Mr. Waxman. I think there are a lot of people who look at
the law and then try to figure out how to get around it or
abuse it. You see that in the tax system all the time. They
have to pay their taxes but they look to see if they can expand
loopholes to their benefit. And that means that sometimes we
have to look at the laws and revise them.
The student loans have been abused a lot by the private
colleges that get students' Federal loan money and then don't
really deliver the education that they prompted to these
students. That is one abuse. The other is that we have a chance
to lower the interest rates for students that are struggling
under the cost of student loan higher interest that are going
to come about if we don't change the law. And we have been
trying to figure out how to pay for that. So the Republicans
say, Let's take away preventive health care. That makes no
sense. We ought to prevent diseases rather have to pay to treat
them later.
They have come up with a new proposal I read about in the
paper today that they want to take away--Governor, you would be
interested in this--they want to take away the ability of
States to raise money for their Medicaid costs through taxes on
the providers. It has been used by many States--I don't know
about Florida, but it has been used in California. If the
States can't come up with their money, the States can't provide
service for the very poor. So we are being told we have got to
cut the benefit for health for the very poor, usually disabled
people, in order to pay for student loans? That doesn't make
sense to me.
We had a lot of interesting hearings about what happened in
2008. And the most dramatic one to me was when Alan Greenspan,
who had the power as the head of the Federal Reserve to
regulate some of these loans that were being used for mortgages
and then diced and sliced and sold off, that brought about the
downfall. And he had the power to regulate, and he didn't. And
I asked him whether his ideology kept him from recognizing the
failure in the market. And he said he was absolutely shocked,
that he was blinded by his ideology, that he thought markets
would correct themselves.
Now what I am concerned about, Chairman Ryan, and others,
is that there is too much of a faith that markets are going to
correct themselves, that businesses will do things right. Well,
they will if they have the rules of the road to regulate them,
to be sure they don't abuse their powers, because often they
are very powerful and they want to squelch out competitors. And
it also means that you have got to protect the public health
and well-being.
So one of the biggest problems for the 2008 recession was,
whatever laws we had, they weren't being enforced. Laws that
could have been adopted were not adopted by the Federal
Reserve. And the cops were not there to tell the banks, You
just can't use other people's money and take these kinds of
risks. That was something for both parties when we did away
with the Glass-Steagall restrictions, which came about during
the Great Depression, when we said, Banks, we are going to
protect you with Federal dollars but we are not going to let
you take depositors' money and take risks with them. And that
was repealed under President Clinton, with strong bipartisan
support--I voted against it--and it allowed the banks to take
all those risks. And with those risks, the taxpayers ended up
having to pay the cost. And a lot of people are still suffering
because of unemployment.
Ms. Bass. With the remainder of your time, if you would
like to elaborate some on the document that Mr. Rokita had
about regulations.
Mr. Waxman. Oh, well, he gave a bunch of examples that I
couldn't agree more with, stupid regulations. We don't want
stupid regulations. To say that regulations are all stupid,
that is just--we don't want that. But regulations are needed in
order to protect the public interest.
President George H.W. Bush signed the law that put in place
a cap-and-trade program that told private enterprise, You
figure out how to reduce the sulfur emissions that are causing
acid rain. They are killing the forests and the streams in the
Northeast and in Canada. And he said, We can't allow that. So
we said, You have got all the market incentives. Industries
came in and said, oh, my God, we will go bankrupt. Well, they
did it at a fraction of the price that they said it would cost
them, and it was successful.
Chairman Ryan. Thank you. Mrs. Black.
Mrs. Black. Thank you, Mr. Chairman. This has been a very
interesting conversation. Mr. Edwards, we have talked about tax
deductions and subsidies a little bit. But one program that I
have become aware of in my last 16 months since being in this
office and visiting a number of the industries in my district,
those that are in the food production area have made me aware
of market allotments, something that I guess I really didn't
know much about until I had them educate me. But the fact that
we in the sugar program have market allotments to certain
producers based on their history and their expected
productions, this has made it extremely difficult for new
entrants to come into the market, which they tell me really
does cause an unnatural high cost for sugar.
Does the sugar program, through these market allotments, in
your opinion, provide a structural barrier to entry?
Mr. Edwards. Yeah. Actually the sugar program is something
I have written about. And it is an interesting example of
corporate welfare that is basically off-budget. It is a
regulatory corporate welfare program. Basically, in my view,
the United States has kind of a Soviet-style system for sugar
production. We have import barriers. We have detailed quotas.
We have loan programs that essentially guarantee the price. And
I think, unfortunately, what it does is, by blocking entry into
the industry, it raises the domestic sugar price that usually,
you know, the price varies. But it is usually about twice the
world sugar price. And the effect of that is not only to hurt
consumers--and there has been Department of Commerce studies on
this--it hurts consumers by the tune of about $2 billion a
year. But it also hurts U.S. companies that produce food items
with sugar, so companies like Kellogg and companies that make
chocolate bars and confectioneries and that sort of thing, they
have had to move their production out of the country to either
Canada or Mexico to access the lower-priced sugar. So the sugar
program in my view is an example of its corporate welfare. It
has actually helped some sugar producers but it creates this
broader damage to other businesses.
Mrs. Black. I do want to note that one of the pieces of
information they gave me was an actual advertisement that was
coming from the Canadian companies to say, Produce your cake
here in the United States, but send it to Canada to get its
sugar frosting, because they can save so much money. And this
is truly happening. So we see now a market that is moving into
Canada, taking jobs away from us, and then also increasing the
costs to the consumer at the other end. So I appreciate your
information on that.
Are there other market allotments that you would raise up
here besides the sugar?
Mr. Edwards. The milk program. We have a similar sort of
program with U.S. dairy production, milk and cheese and the
like. Essentially it acts the same way. It is sort of
competition for--it blocks competition in favor of existing
producers and it pushes up the price of milk and dairy
products, which often hurts lower-income Americans, for
example. So I think that there is a lot the Federal Government
does that helps certain businesses, but it actually hurts
consumers and particularly lower-income consumers.
Mrs. Black. Thank you so much.
And Governor Bush, I want to go to--since I was in State
government and we had TennCare in the State of Tennessee at the
same time that you were dealing with your Medicaid issue, and
we were looking at your State as the model for a defined
benefit for those who are on Medicaid. And I know it was a very
successful program. Unfortunately, I didn't have the kind of
support I needed to bring that same model to the State of
Tennessee.
But given what you are saying about the success there,
would you agree that block-granting Medicaid may be a more
effective way, an affordable way, for States to come up with
their own ingenuity on how they can best provide for those who
need that safety net?
Mr. Bush. I do. I think that there ought to be a careful
review of the rules that go along with the block granting. You
have to apply--if you don't get a waiver from some of the
requirements, that would be a challenge. But it is a far better
approach to be forced to innovate because State budgets--I
don't know if there is a single State that doesn't have a
challenge with their Medicaid budget. And they are forced then
to either stop spending on other things--because we have
balanced budget requirements--or reform how Medicaid works.
So being given the freedom to reform and innovate in return
for some fixed amount of money that would come--in our case I
believe we were probably one-half of the growth projected--that
we gave up that half of the growth in return for the ability to
innovate, that that is a good trade-off.
Mrs. Black. Well, thank you for that because I think too
many times we just continue to think about taxing and bringing
more revenue through taxing to help subsidize these programs,
and yet there are some innovative ways to do it using market
competition. I yield back my time.
Chairman Ryan. Thank you. Ms. Castor.
Ms. Castor. Thank you, Mr. Chairman. And welcome to our
panel. If I have learned anything in my 45 years is that
nothing is black and white. There are very few absolutes in
this world. And that is one of the reasons that I think the
extreme Tea Party ideology is so divorced from reality. Free
enterprise and government are not either/or propositions. Thank
goodness we have both. And we celebrate capitalism and free
markets in America.
But I hope that we recognize that after living through the
worst economic collapse in our lifetimes, that reasonable
oversight of Wall Street excess is important.
Now when we talk about government in America, I view
government as a way to secure opportunity for all. In fact,
Thomas Jefferson wrote in the Declaration of Independence that
we are all endowed by our Creator with certain unalienable
rights; among these are life, liberty, and the pursuit of
happiness. But then Jefferson went on and he said that to
secure these rights, governments are instituted.
People want good government. And thank goodness in this
230-year-plus experiment that has created the greatest Nation
in the world, we have successes to celebrate in government.
When other countries look at us, they see the premiere
government-funded medical research center second to none across
the globe. We can build bridges, airports. Our commitment to
taking care of our veterans is second to none across the world.
That is something government does a pretty darn good job of.
And our public schools and our colleges and universities are
the envy of the world, and people want these institutions to
succeed.
That is why I just don't understand this kind of extreme
Tea Party ideology that says government has no role to play and
the free markets are the answer to all. Because really what I
think drives citizens crazy more than all, are these
impediments to free enterprise and good government, when
special interests achieve an unfair advantage, whether that is
in business or these special interests use campaign
contributions or their political influence to gain an undue
advantage when it comes to public policy.
I have seen it in the State of Florida. We have a
fundamental discriminant policy over education. Governor, you
are an outspoken advocate for school vouchers. I don't think
that is a secret.
I view vouchers as kind of a corporate welfare scheme,
where you are taking money from the public schools, undermining
their mission, giving those funds to private for-profit
centers. I think it is oftentimes those vouchers come with no
accountability for a student's success or fiscal responsibility
or oversight of those profit centers. And I fear that what is
happening with your push to take taxpayer dollars and give it
to the digital classroom as a substitute for a good teacher--a
good classroom as a supplement, fine--but to drain public
resources and hurt our public schools by focusing on a digital
classroom that have a poor record of student success I think is
questionable.
So here is the inconsistency: Vouchers, digital schools
without classrooms, I think you could include private for-
profit tutoring companies that came in under No Child Left
Behind. These are not free enterprise, are they? A free
enterprise in education would be an independent private school
not dependent on government funds. But what we have here are
government-backed, government-funded businesses. What do you
call it when a private for-profit business uses its political
contacts to get the government to direct money to private
business rather than public schools? Is that--you said honey
pot. Is that capitalism, ``crony capitalism'' the chairman has
thrown around here, or just effective lobbying?
So the National Education Policy Center wrote in a recent
report that these policy prescriptions are part of a corporate-
driven agenda to access public education funds. These folks
talk about the free market, but they couldn't exist without
taxpayer dollars.
Chairman Ryan. Since you used up all your time for the
preamble and the question, and it is directed straight to
Governor Bush, go ahead, Governor Bush, and take time to
respond.
Mr. Bush. The voucher programs that exist are three in
Florida. You have a corporate tax scholarship program where
companies voluntarily give a dollar-for-dollar credit to an
organization that is not for profit, that provides for low-
income Floridians a chance to go to a private school. The best
I can tell, every one of those is a not-for-profit, not a for-
profit.
We have a McKay scholarship program which says that if a
parent is not satisfied, based on Federal law, with the
individual education plan under the IDEA law, that they can
take, dollar for dollar, the money that is not the government's
money; it is their money for their child to go to a private
option. The best I recall every one of those entities is a not-
for-profit as well.
So to use the Thomas Jefferson analogy, I don't think that
President Jefferson, if he knew that we were spending at the
level we were spending, if he saw the size and the scope of the
Federal Government, he would be appalled. Why not empower
people that don't have choices to be able to--be able to go to
another option? It has worked. Public schools in the State of
Florida are better off based on the only measurement that
matters, Congressman Castor, which are outcomes. Based on the
NAEP scores, public schools are better. We have gone from, for
example, 29th out of 31 in fourth grade reading, to something
like now I think we are 11th out of 50 States.
Ms. Castor. But those same accountability standards have
not been applied to many of----
Chairman Ryan. The gentlelady's time has expired.
If we give you 10 minutes, then everybody else. So the time
for the gentlelady has expired. He gets time to respond since
you used up all your time to ask him a question.
Mr. Bush. On digital learning, a great majority of the
courses on digital learning will be done in the classroom,
high-quality content brought in. Using the Internet and the
abilities for adaptive software to enhance the learning
experience seems to be a 21st century solution that ought to be
embraced by everybody. In fact, a great majority of people in
the States, left and right, are supporting this. Thank you.
Chairman Ryan. Thank you. Mr. Huelskamp.
Mr. Huelskamp. Thank you, Mr. Chairman.
And Governor, I want to thank you for being here. And I am
glad the gentlelady--or I guess you brought up the McKay
Scholarship issue. That is I think a tremendous model for
providing options for special needs children and their
families. It has been a very successful program.
I also applaud the State and your efforts on Medicaid
reform and actually presenting some options. I come from the
State of Kansas. We tried to emulate and implement some of
those, even under our former Governor, who is now head of the
HHS. It is kind of interesting that we put some proposals
before her as a State that she wanted to do when she was
Governor, so I look forward to her approval of those.
But one thing I want to talk about this morning is the
Obama jobs deficit, though. Based on the projections from the
administration that with their stimulus package, that if
nothing had passed in the stimulus package they projected the
unemployment rate today, this month, would be 6 percent if
nothing was done. It is sitting at 8.2 percent. The Obama jobs
deficit is a 13 million dollar--13 million job failure that
they failed. Its impact has not worked.
And I will ask Chris and the Governor as well, can you tell
us why you think that stimulus plan failed? Again, it is going
to cost us about $1.1 trillion. So I open it up for that
question.
Mr. Edwards. I think it is astounding. I think the Governor
mentioned that it is the slowest recovery of any of the
recessions since World War II, which is remarkable. I think,
you know, what market economies do when they are left alone is
they naturally adjust, prices and wages adjust, and the economy
starts growing again. We have seen that in every recession that
when the government leaves it alone, it naturally starts
growing again. Go back to 1921, there was a terrible recession;
unemployment soared to 15 percent. But the government at the
time, Congress at the time didn't do anything, and the U.S.
economy very quickly adjusted and started growing again. I
think that there has been lots of mistakes.
I think the jobs problem I think is ultimately a business
investment problem. If you look at the national income accounts
data, U.S. companies are not building new factories. They are
not expanding their factories. They are buying equipment.
Investment and the like has recovered. But investment in new
factories has not recovered. It plunged, and it is at very low
levels today. When businesses invest, they need to hire new
workers. And so we need to get the business investment first,
which is why I have suggested corporate tax rate cuts.
I think there has been lots of mistakes. I think the
extended unemployment insurance benefits artificially pushed up
the unemployment rate. If you have unemployment benefits the
last 2 years, you create this national incentive for people not
to make the tough decisions they need to to go out and find
jobs. So, you know, I don't believe that the basic idea of
Keynesian spending stimulus works. We have had trillion dollar
deficits 4 years in a row now. So, even this year, the 2009
stimulus bill has basically already ended, but we have still
got a trillion dollars of so-called stimulus with the Federal
Government deficit. That is, in basic sort of textbook
Keynesian terms, that is stimulus. And yet look at the results.
The results are still very high unemployment.
So I don't think this model works. I think when the
government spends more money, it takes money away from the
private sector. I think the private sector is more efficient.
So the bigger the government gets, the more you push down GDP.
And it just hasn't been working.
Mr. Waxman. I had an employer in my area tell me I don't
care how much they give me in tax breaks, I am not going to
hire more people unless there is a demand, unless the economy
is growing. And we see in Europe the idea of austerity; it has
put England into a double dip recession. We see people all over
Europe bridling under the yoke of this austerity notion.
What we needed to do in this country was to work together
on a bipartisan basis to do something about it. But everything
that the President Obama proposed the Republicans opposed. And
I haven't heard any jobs proposals from the Republicans except
give upper-income people more tax breaks.
Mr. Huelskamp. Mr. Waxman, I appreciate that. I do have a
question for you.
Mr. Waxman. Oh, good.
Mr. Huelskamp. And it would be great for you to defend a
stimulus that is 13 million jobs short of what the President
promised us. And I wasn't here. And I presume you voted for it.
But one thing that has bothered me on the regulatory side as
well is this idea that--and I want this question asked for you
because it is a question constituents ask me. And they say,
Congressman, do you think Washington politicians and regulators
can make better decisions than businessmen and women? And that
would be my question for you.
Mr. Waxman. That is a good question. There are things
called market failures.
Mr. Huelskamp. And there are things called government
failures.
Chairman Ryan. Let's let him answer the question.
Mr. Waxman. There are market failures. And that is where
government needs to step in. For example, if you don't regulate
pollution, the waste disposal into the air would be free. The
market provides no incentive for polluters to control
pollution. It imposes social costs on everybody in terms of
disease and death that far outweigh the costs to clean up.
The other area where there is a failure of the market is
insurance companies. I have so many people tell me I want----
Mr. Huelskamp. Could you answer the question, Mr. Waxman?
Mr. Waxman. You asked me about----
Mr. Huelskamp. I am out of time. I am wondering if you
could answer the question.
Mr. Waxman. On the stimulus? I am trying to answer your
question.
Mr. Huelskamp. Yeah.
Mr. Waxman. The market failure of insurance for health
care. People cannot buy it if they have preexisting medical
conditions. You can't blame the insurance companies, because if
they have to provide insurance coverage for sick people, they
have to raise the cost of insurance for everybody. So the idea
behind the Romney plan in Massachusetts and the Obama plan here
was to spread the costs out with the requirement that everybody
participate. Stimulus, either by tax cuts or direct
expenditure, is what you need when there is strong unemployment
to get people back to work. And that is what we needed to do.
And I wish there were some Republicans who would have helped.
There was not a single Republican in the House that voted to
help President Obama.
Chairman Ryan. Thank you. I think you did answer his
question, but I want it keep on time.
Mr. Ryan.
Mr. Ryan of Ohio. Thank you, Mr. Chairman. We have covered
a lot of ground here this morning. And I just want to kind of
go back over a couple things. One, first of all, with the auto
bailout and the government getting involved, the reason the
government got involved is because there wasn't any private
sector money to help marshal them through this bankruptcy. A
State like Ohio, one in every eight jobs in Ohio is tied
directly to the auto industry. And they are good manufacturing
jobs. We would have lost a lot of those.
And I will tell you that it was my Republican car dealer
friends who were coming to Washington, D.C., weekly to tell us
how we needed to do this. And I will quote here about Bob Lutz
from General Motors, the vice chairman, also happens to be a
Republican, talking about some of other Republicans letting the
auto industry go belly up. He says, quote, ``It is once again
the fiction that ah, we didn't need the government and this
could have been a privately run bankruptcy with the normal
chapter 11. What these people always deliberately forget is
there was no money. Nobody had any money.'' And that is why the
government had to intervene. And for those of us in Ohio, we
are very, very glad that they did.
Also there was an issue of, and I think it is this balance
between public-private partnerships. And the gentleman from
Indiana talked about the Indiana turnpike. I think it is very
important for those people who are listening to know that the
tolls on the Indiana turnpike have doubled in the last 5 years,
because you are not only maintaining the road, you are not only
making sure it is cared for, you also got to factor in some
profits. So the tolls on the Indiana turnpike that have been
privatized have doubled in the last 5 years.
Mr. Stutzman. Would the gentleman yield?
Mr. Ryan of Ohio. Sorry, man. I only got 5 minutes.
Mr. Stutzman. Be glad to talk to you about it later.
Mr. Ryan of Ohio. Be happy to. Can't alter the facts,
though, and those are the facts.
The other thing that you mentioned, Governor Bush, and I
agree with you wholeheartedly, was the issue of Canada, how
Canada solved their problem by the Conservatives and the
Liberals coming together to solve the problem. The issue in
Canada, though, is that the Conservatives in Canada would be
moderate Democrats in the American political system. And there
is no question about that as well. And so what we are trying to
argue here is that it is going to take a balance, it is going
to take both parties. And it has got to be a moderate approach,
like I think you probably espouse, and like your father
certainly espoused as well. Is that--down the middle. Be happy
to, if you want to comment on that.
Mr. Bush. Well, structural reform is not really
ideological, but it did take outyear entitlement costs and
pension costs and modified them in a way that made it possible
for them to reduce their size of their government as related to
the size of the economy. Now, I am not sure that is a--that is
not an ideological thing, but it is reality checking. When you
have structural problems you have to pause and deal with them.
And many countries do that. And, you know, so I would disagree
that Conservatives are moderate Democrats or moderate liberals
or whatever.
Mr. Waxman. Nobody in Canada said, take away their health
care for all the people. They said let's do some things on a
bipartisan basis that make sense.
Here we have proposals to cut the safety net out of the
poor, take away the guaranteed benefit for Medicare so that
millionaires and billionaires can have tax cuts. That makes no
sense to me. And I don't think it makes sense to the American
people.
And the auto bailout was a success. Why are we fighting
against what was a success?
Mr. Ryan of Ohio. I agree.
Let me just ask Governor Bush one question, because I think
the debate of investments and what the role of government is
today I think is a very important question for us. And I know
that in the Florida budgets, when you were Governor from 1999
to 2006, had went up significantly from $48 billion in 1999 to
$74 billion in 2006. And my question is just what were the
investments that were made? What were the priorities that were
given? And explain some of those increases, and has Florida
yielded some of those benefits from the investments that you
made?
Chairman Ryan. You have 30 seconds left. So if you are
going to ask him a big open-ended question like that, give him
a second to answer it.
Mr. Bush. The largest increase was our Medicaid budget,
which the Federal Government was our partner in increasing. And
it grew dramatically because we had no control over it. We did
spend increased money in real terms on public education. We
increased money on land conservation and things that--the
objective was to take one-time moneys as best as possible and
spend them on long-term things. So we created a research focus
of taking one-time moneys to spend over the long haul and
brought five or six private research institutes from
California.
And so, you know, we did, we prioritized. Our government
grew slower than personal income growth in the State. We had
22,000 fewer State workers, in spite of the growth of the
government. And I think our job creation in the State, not
because of the government, but because it was--they were good
times and we had a good business climate--grew faster than
any--we created more jobs than any State in the United States,
roughly about 20 percent of all the jobs during that period. So
it was a different time than we are in right now, that is for
sure.
Chairman Ryan. Thank you.
Mr. Ribble.
Mr. Ribble. Thank you, Mr. Chairman. Thanks to the panel. I
will get right at it, since I only have 5 minutes. Mr. Edwards,
if you had--let's just say the existing Tax Code disappeared
and you had a blank piece of paper in front of you. Would you
tell me your top three principles that you would use as your
guide in writing a new Tax Code?
Mr. Edwards. Yeah. I would say economic efficiency,
simplification, and visibility and transparency. So, you know,
economic efficiency, the key is lowering marginal tax rates.
And the chairman's plan certainly does that. Lowering rates
down to 10 and 25 percent.
Simplification: The Tax Code is usually complex, especially
for business and small business. That is just a compliance tax
on the overall economy that doesn't do any of us good.
And transparency and visibility: I would take steps, for
example, Americans only see half of the Social Security and
Medicare tax on their pay stubs every couple of weeks. So they
only know half the giant costs of Social Security and Medicare.
I would make that visible on pay stubs. So that is the type of
thing I would do.
Again, I would say the most important thing, economic
efficiency. Lowering the corporate tax rate is the single most
important thing we can and should do in this country. And
again, that has been a bipartisan reform around the world. I
mean, even the most socialist welfare states in Europe, France
and the like, have chopped their corporate tax rates just
because of this realization that they want their businesses to
do well in the global economy. And we should do the same.
Mr. Ribble. Just a quick follow up on that. Where does any
corporation get the money to pay the taxes? Where does that
money come from?
Mr. Edwards. Of course, corporate taxes are really--the
ultimate burden lands on either workers, consumers, or workers
for corporations. Every economist, left and right, agrees with
that. There is disagreement about where corporations actually
push down the burden. But in a global economy, the general rule
is that the burden lands on the most immobile factor of
production. The most immobile factor of production is labor. So
economists more and more agree that the corporate tax burden
ultimately lands on labor, American workers. And there has been
studies by AEI scholars and others that find that most of the
corporate tax burden has the effect of lowering wages of
workers.
Mr. Ribble. Thank you.
Governor, what would be your principles?
Mr. Bush. Those sounded pretty good to me. Simple,
transparent, and at a place that creates, you know, the most
efficiencies for economic growth and for the government to
receive the revenues that they need to do the basic things.
Time and time again you see examples of higher rates not
necessarily yielding higher revenues for government. So there
is a point where there is a balance, you know, there is an
efficiency, a place of efficiency where the rate will yield a
greater amount and will create--at the same time create
economic activity, which is really ought to be the objective.
Because a growing economy based on our Tax Code creates far
more revenue for government, disproportionately more.
Mr. Ribble. Can I do a follow up question on that topic? If
we reform the Tax Code to eliminate the expenditures, take the
savings and apply it to a lower rate that is essentially the
effective rate, which is what it is, have we really done
anything to gain competitiveness? Or do we need to go below the
effective rate?
Mr. Bush. I think the first thing that happens when you do
that is that you are shifting power away from Washington and
the surrounding areas, which is probably the place of greatest
economic prosperity right now, back to the rest of the country,
where decisions, economic decisions are made by individuals
that want to risk their capital and pursue their dreams. Right
now, you know, it is fun to go to Dulles Airport and drive by
there. These are major companies that have huge growth, lots of
construction, housing prices are incredibly high, income levels
here are the highest in the country. And why is that? I am sure
that Maryland has a great business climate, and so does
Virginia. But it is because this is a source of business now
that is incredibly important for all sorts of businesses. So
you would shift power away from Washington. And I think you
would have more economic activity if you simplified the code
that would generate more revenues for the government.
Mr. Ribble. All right. Thank you.
I just make one comment to Congressman Waxman. Thank you
for being here today. I know it is tough to come in here. But I
would say you used the phrase that House Republicans seem to
want to return America to the era of robber barons. I will just
give you my take of a robber baron. A robber baron is a
government that steals money from middle class hard-working
taxpayers and gives it to rich bundlers like Solyndra. Thank
you. And I yield back my time.
Chairman Ryan. The gentleman okay?
Mr. Waxman?
Mr. Waxman. I don't think that was a question. It was his
comment, and he has his views. I disagree.
Chairman Ryan. Okay. I just want to make sure because you
were invoked. Out of fairness.
Who is next? I don't know if you know this, the gentlelady
from Florida, her name is Ms. Wasserman Schultz.
Ms. Wasserman Schultz.
Ms. Wasserman Schultz. We have met.
Mr. Bush. Yes, we have.
Ms. Wasserman Schultz. Governor, it is good to see you.
Welcome to the Budget Committee. I want to ask my question
and frame it from my standpoint as a mom, who is raising three
young children attending the public schools in Florida and also
as someone who served for 6 years of my tenure in the
legislature with you as Governor.
And the one-time moneys that you just referenced that were
created to lure five or six research institutes from
California, and I do find some irony here that you are here
today under the guise of removing barriers to free enterprise.
While in office, you recall, you spearheaded a deal to use
more than $600 million in public money to lure the Scripps
Research Institute to build a facility in Florida. Now, as a
State legislator at the time, I remember being called into
special session of the legislature so that we could pass a one-
time $310 million gift to the Scripps Research Institute from
Federal stimulus moneys that were allocated from Florida. In
fact, Palm Beach County anted up about $269 million to pay for
land and buildings for Scripps.
At the time, you were quoted as saying there is no better
way to spend the one-time Federal economic stimulus money than
by investing in a project that spurs targeted economic growth.
Now, I was on the Appropriations Committee, and remember
distinctly questioning your staff and you about the importance
of accountability with that investment. You insisted that
wasn't necessary.
I remember distinctly attempting, through amendments, that
we could ensure that if the promised jobs were not created,
that Scripps would have to pay some of the funds back to the
State. You opposed that and said it wasn't necessary.
In spite of our strong reservations about this gift with no
accountability at all to a private entity, Democrats, including
me, voted for the Scripps bill. I voted for the Scripps bill.
Mr. Bush. I know you did.
Ms. Wasserman Schultz. So we tried it your way.
Let me describe the results. As of 2010, Scripps Florida
employed 377 people. That is $1.32 million per employee. The
operation is projected to employ 545 people by 2014. That is
over $900,000 per employee. In fact, Governor Bush, estimates
of the Scripps Florida deal and the promises of massive job
creation were massively overblown. Depending on which proponent
you were listening to, it would create 2,800 direct jobs after
15 years. But as of the end of year seven, Scripps Florida
employed just 377 people. Estimated spin-off jobs in other
companies were largely overblown, from 6,500 at the time to
40,000 or 50,000 were predicted.
Quoting directly from the Florida Office of Program Policy
Analysis and Government Accountability, in fiscal year 2004
Scripps had only supported the creation of a projected 615
full-time and part-time equivalents, and in fiscal year 2007,
it had supported of creation of just an estimated 1,327 jobs.
In 2003, the year the Scripps giveaway passed in Florida,
there was a $40 million cut for State universities, and the end
of enrollments in the Healthy Kids Children's Health Insurance
Program. Given the employment numbers, which were far lower
than projected, was it a good decision to fund a private
enterprise ahead of education and health care? How many low-
income children could have had health insurance, or students
could have received tuition assistance at the equivalent of
$1.32 million per employee?
This same policy is writ large in the Romney-Ryan budget
plan, which doubles down on a policy that benefits large
private corporations and the wealthiest, most fortunate
Americans, and leaves the middle class and working families to
fend for themselves. Florida has had one of the worst high
school graduation rates in the country. And roughly half of
Florida's graduates require remediation when they get to
college. Yet we are paying for a company dependent on importing
highly educated and trained employees to relocate rather than
investing in education, which is the main draw for good
employers. Just this year, Florida will forced universities to
cuts $300 million from their reserves and operating budgets.
Chairman Ryan. Is the gentlelady going to give the
gentleman time to respond?
Ms. Wasserman Schultz. I am trying.
Mr. Waxman. It is her time.
Ms. Wasserman Schultz. You just took some seconds off my
time. So if you would restore it, I would appreciate it. All
because the economic policies originally established by you,
Governor, gave away billions of dollars in taxes that could
have gone to education, infrastructure, and other important
investments. So here is my question.
Is this, quoting from your testimony this morning, because
you said, that is why my best advice to you is to perform a
fundamental cost-benefit reconsideration of many programs in
the Federal budget. You said, please know that no matter your
good intentions, the government creates unintended consequences
when it acts. You go on to ask what would a cost-benefit
analysis show? And later, in reference to your example of the
supposed 49 different Federal job training programs, you asked,
are they being measured on the success with which they get
people retrained? Good question. So how do you think that if we
apply your advice to the Scripps deal, that a cost-benefit
analysis of $1.32 million of State funds per job would hold up?
Given that students in our State graduate unprepared for
college level work, tens of thousands of low-income children
languish on State waiting lists for affordable child care, how
could you justify giving away $600 million in public funding
with no accountability to a private company?
Chairman Ryan. Again, welcome to the Budget Committee,
Governor Bush. You have nine seconds to respond. We will let
you go over your time.
Mr. Bush. So the Scripps Research Institute is not a
corporation. It is not a for-profit company, it is a premier
not-for-profit research institute that does world-class
research. The accountability that you voted for--I am glad that
you voted for it. You weren't against it before you were for
it. You were for it before you were against it now. I am happy
that we had your vote--was based on the money would go out
based on the 575 jobs that are in the process or probably have
already been completed. So this is an idea to spur innovation,
to spur additional activity. It gets hit by the downturn in the
economy, but there has been significantly higher numbers of
jobs, spin-off jobs or jobs created because of Scripps, and
Burnham, and Torrey Pines and other institutes. And we have
increased, at least during my tenure, I haven't followed the
budget of the State since I left, but we increased funding for
research for our universities as well.
So in the life science sector, Florida has gone from being
in the back of the pack to aspiring to top tier status. I would
say we are probably in terms of research spending, probably
number five or number four. And 10 years ago, we were probably
25 or even higher than that. So I think, from that perspective,
it ought to be reviewed. I completely agree with that. There
ought to be an analysis done. But I think for something that is
a work in progress, I would say it has been a success. And I
would add that had we not spent this one-time money on these
long-term things, the money would have been spent. And it would
have been spent creating huge recurring gaps that many other
States have had to deal with that would have ended up creating
higher taxes for Floridians that would have hurt our economy
and made our business climate worse.
Ms. Wasserman Schultz. Mr. Chairman, I don't want----
Chairman Ryan. The time of the gentlelady has expired.
Ms. Wasserman Schultz. I know, Mr. Chairman. I am not going
to respond. I would just ask----
Chairman Ryan. Unanimous consent to include something in
the record? Is that what you are asking for?
Ms. Wasserman Schultz. Yes. And let me just say what it is
so that I can get it included. It is an article from the Sun
Sentinel that shows that Palm Beach County's----
Chairman Ryan. The gentlelady ask for unanimous consent to
include a Sun Sentinel article in the record?
Ms. Wasserman Schultz [continuing]. Should return to its
farming roots because it was such a debacle.
Chairman Ryan. Without objection, the gentlelady's article
will be included in the record.
[The information follows:]
Palm Beach County OKs Replacing Biotech Property With Sugar Cane
Mecca Farms, the $100 million intended home for the Scripps
Research Institute, would be leased to sugar cane growers
March 6, 2012--By Andy Reid, Sun Sentinel
Mecca Farms, Palm Beach County's $100 million biotech-investment-
turned-real-estate-blunder, should return to its farming roots, county
commissioners decided Tuesday.
The 1,919-acre property once slated to become a ``biotech village''
anchored by The Scripps Research Institute would instead be leased to
sugar cane growers under a proposal approved by the County Commission.
Pope Farms Inc. proposes to pay $200 an acre a year to lease 750
acres for at least five years. That would generate about $150,000 a
year for the old citrus groves west of Palm Beach Gardens, next to the
J.W. Corbett Wildlife Management Area.
The commission chose Pope from among three potential agricultural
tenants. Final terms of the lease still must be negotiated and then
approved by the commission.
``We have been trying to find a use for that site ever since the
(Scripps) deal collapsed,'' County Commissioner Steven Abrams said.
``It's farmland. * * * This is the best of the deals.''
In addition to generating revenue on Mecca Farms, finding a tenant
allows the county to avoid paying about $250,000 a year for security
and maintenance of property.
The Sun Sentinel in August reported that the county was paying the
Sheriff's Office $116,000 a year for a deputy to provide security at
the overgrown former citrus grove north of Northlake Boulevard.
Sugar cane is a far cry from what Palm Beach County once expected
to grow from Mecca Farms.
County and state leaders once envisioned Mecca Farms becoming a
biotech-industry hub, featuring high-tech businesses bringing new jobs
and spawning thousands of homes in new neighborhoods on surrounding
farmland.
The county in 2004 paid $60 million for Mecca Farms and then
invested another $40 million in planning, permitting and initial
construction. The county also built a $51 million pipeline to provide
water to development it expected on Mecca Farms and beyond.
But in 2006, environmental concerns killed plans to build Scripps'
East Coast headquarters and research labs there. Instead, Scripps moved
to Florida Atlantic University's Jupiter campus.
The county's fallback plan for Mecca Farms if Scripps went
elsewhere was to sell the land to developers and recoup taxpayer money.
But soon after Scripps left, the South Florida housing boom went bust
and serious development interest in Mecca Farms disappeared.
The county still has visions of selling Mecca Farms. As currently
proposed, the county could buy its way out of the lease deal with Pope
Farms if a potential buyer for Mecca Farms surfaces within the five-
year lease period.
Loxahatchee community activists voiced concerns about allowing
sugar cane on Mecca Farms.
The practice of burning sugar cane fields during harvest threatens
to worsen air-quality problems in The Acreage, blamed on burning
western sugar cane fields and pollution from a new power plant nearby,
said Alex Larson.
``New sources of pollution are not a good idea,'' Larson said.
Abrams said burning sugar cane fields is a longstanding practice
and likened proposed burning at Mecca Farms to the controlled burns
conducted at nearby nature preserves.
Chairman Ryan. Governor Bush, were you finished with your
answer?
Mr. Bush. I am finished. It is a joy to be here.
Chairman Ryan. Mr. Amash.
Mr. Mulvaney. We do this every day.
Mr. Bush. I know. It is amazing.
Mr. Amash. Thank you, Mr. Chairman.
And thank you all for being here. I won't give a 5-minute
campaign speech.
Mr. Edwards, to what extent is it necessary for government
to provide infrastructure? And how much can the private sector
do?
Mr. Edwards. The Governor actually touched on this. He
commented that we are actually behind a lot of countries around
the world in terms of privatizing our infrastructure, moving at
least to a public-private partnership structure. The Indiana
toll road was mentioned. But where I live in Virginia, the
Capitol Beltway is being widened by a billion dollars of
private money. Down around Norfolk and Virginia Beach, they are
building new tunnels and bridges, all with private money. So
there is a heck of a lot the private sector can do in terms of
infrastructure spending. I am actually on a monthly email list
by this consulting company that tallies the global totals in
private money going into public infrastructure. And the United
States is way behind. I mean, countries like Australia and
Canada are ahead of us on this. So that there is a hell of a
lot we can do.
You know, I mentioned Canada, for example, in terms of
infrastructure. They privatized their air traffic control
system back in 1996. Now, people in this country think, you
know, wow, that is crazy, something as important as the air
traffic control system. In Canada, it is run by an independent
self-funded nonprofit corporation. And it has been a huge
success. It has got international awards for innovation. So,
you know, the private sector can do a heck of a lot if we
really opened up some of these barriers to investment.
Mr. Amash. And Mr. Waxman earlier talked about market
failures when my colleague from Kansas was speaking to him. Do
you have any general thoughts about market failures versus
government failures?
Mr. Edwards. Well, I mean, I actually think that, you know,
there is a lot of government failures that led up to the big
crash in 2008. I think the central bank, the Federal Reserve,
held interest rates too low. I think all these housing
subsidies that helped create the housing bubble. And I think
that, you know, the idea of more regulation is really
problematic because I think some of the biggest scandals, I
mean the Bernie Madoff one, for example, was not a result of
lack of regulation. That one was a result that the SEC was
simply sitting on its hands and ignoring the obvious evidence
that was out there. The Enron Corporation debacle to me, that
was just outright fraud. You know, that is always illegal. So I
don't think regulation is going to solve our problems.
Mr. Amash. This is a change of topic. People are paying
most of their taxes to the Federal Government rather than to
State or local governments. Do you think that is the right
balance? Should we shift in the long term toward more taxes
going to local governments rather than the Federal Government?
Mr. Edwards. You know, for a century now, there has been
this huge pressure of centralization in the United States which
I think is really problematic. If you look at total government
spending in the United States, it is now 70 percent Federal and
30 percent State and local, which is rather astounding. It
should be the other way around, in my view. The Federal
Government should have some basic functions that we all agree
with, and we ought to leave a lot of stuff like infrastructure
and education to State and local governments. Again, I believe
in the laboratories of democracy. I think when State and local
governments fund their own programs, they have control over
their own programs, there is a lot more information. The
programs are leaner and better run. And that is the direction
we should move in.
Mr. Amash. And as I talk to constituents, whether they are
Tea Party people or people in the Occupy movement, there seems
to be a lot of anger about similar things. It is the bailouts,
the subsidies, the revolving door between Wall Street and the
Treasury Department. These are the kind of things, these crony
capitalist features, which seem to be a part of
interventionism. Do you think that cronyism, corruption, waste
are a natural byproduct of interventionism? Is it inevitable
that when you have a government that is this big, you are going
to get cronyism, corruption, waste?
Mr. Edwards. Yes. Absolutely. I mean, again, we are always
going to have lobbying, and that is always going to be a
problem. But we don't need to have all these subsidy programs.
I calculated that the United States now has--the Federal
Government has 2,000 different subsidy programs, all the way
from Medicare down to, you know, hundreds of obscure programs
most of us have never even heard of. All of those 2,000
different subsidy programs, they get lobby groups, you know,
grab onto them and they lobby for more and more and more. That
is the fundamental problem. I actually think Congressman Waxman
and myself could probably get together and find a lot of these
corporate crony programs in the budget and agree to cut them.
And I think that is what Congress ought to be doing.
Mr. Amash. Governor Bush, do you have any thoughts on that?
Mr. Bush. On what?
Mr. Amash. Cronyism in general.
Mr. Bush. The more complex, the bigger government gets, the
more interactions, the more the unintended consequences, and so
you are going to see more of this. And the less clarity on what
the rules of engagement are. A good example of that is Dodd-
Frank, with 500 separate rulemaking processes that will take 7
or 8 years to implement. The unintended consequences of all
this will play out. And Congress will have to adjust it. But in
the interim, it freezes job-creating kind of activities. And it
is not a question of regulation. We had regulation in place.
And to the Congressman's point, if the Federal Reserve chairman
at the time said, well, we just didn't apply the regulations
that the law already allowed, that is a separate subject than
being deregulated or unregulated.
Mr. Waxman. Greed is not unique to government. Greed is
unique to people. And therefore, you need to establish
restrictions so that people don't take advantage of others.
That is why we have police. That is why we have law. The rule
of law needs to apply to government and to individuals. There
is abuse in the private sector. When we have cronies decide
that salaries of CEOs who also have contracts to do work for
the executives of those same companies, you can be sure they
are going to recommend an inflated amount of pay for those
CEOs. Government has nothing to do with that. That is just
rampant greed. And that is why I was pleased, as a result of
one of our hearings, that the advisers for compensation
realized they couldn't also be the consultants for the
corporation. But they didn't pay attention to that, and there
was an area where there was abuse because of greed. And let's
keep that in mind.
Chairman Ryan. Thank you.
Ms. Kaptur.
Ms. Kaptur. Yes, Mr. Chairman. I would like unanimous
consent to place certain newspaper articles in the record.
Chairman Ryan. Without objection.
[The information follows:]
The Wall Street Journal, August 27, 2007
Jeb Bush: Lehman's Secret Weapon
By Dana Cimilluca
In the arms race by private-equity firms to line up ever-higher
profile ``advisers,'' Lehman Brothers may have just taken the lead.
According to a small handful of reports Friday, including this one
in Investment Dealers' Digest and another in Private Equity Hub, the
investment bank has hired former Florida Governor and presidential son
and brother Jeb Bush for its in-house investing arm.
No sign of an announcement from Lehman on the hire.
Private-equity firms hire politicos and former corporate honchos
all the time to help them open doors to deals, as well as to manage
government relations and the companies in their portfolios. Carlye
Group chief David Rubenstein, in fact, discussed the increasing value
of such moves in this Q&A published in The Wall Street Journal today.
No family these days has better door-opening skills in Washington
or corporate America than the Bushes. The family of the 41st and 43rd
presidents is no stranger to Wall Street either. Jeb's father, George
H.W., used to serve as an adviser to Carlyle, and his grandfather was a
partner at Wall Street firm Brown Brothers Harriman.
It is the second corporate gig for the former Florida governor, who
stepped down after two terms in January. He already has joined the
board of Tenet Healthcare.
Bloomberg
Barclays Buys Lehman U.S. Units for $1.75 Billion
By Ben Livesey and Yalman Onaran, September 17, 2008
Barclays Plc, the U.K.'s third-biggest bank, will acquire the North
American investment-banking business of bankrupt Lehman Brothers
Holdings Inc. for $1.75 billion, three days after abandoning plans to
buy the entire firm.
Barclays rose as much as 11 percent in London trading after it
agreed to pay $250 million in cash for the Lehman operations and $1.5
billion for the New York headquarters and two data centers, it said
today in a statement. The London-based bank plans to raise at least 600
million pounds ($1.1 billion) in a stock sale to help fund the deal and
may buy other Lehman units.
Lehman becomes the second Wall Street institution after Merrill
Lynch & Co. to lose its independence in the industry's biggest
retrenchment since the Great Depression. Barclays President Robert
Diamond seized a ``once in a lifetime opportunity'' to buy a business
ranking seventh in advising on U.S. mergers and employing about 10,000,
almost two-fifths of Lehman's total, after it filed the biggest
bankruptcy in history on Sept. 15.
``It looks a steal,'' said Leigh Goodwin, a London-based analyst
for Fox Pitt Kelton Ltd. ``The money they are raising may also allay
concerns that they may not have had enough capital to do this deal.''
Barclays rose 17 pence to 325 pence at 10:20 a.m. London time,
valuing the company at 26.6 billion pounds.
Barclays plans to ``immediately commence discussions'' to buy
Lehman operations outside the U.S., New York-based Lehman said in a
separate statement.
`wonderful outcome'
``This is a wonderful outcome for a great number of our employees
that will preserve and strengthen our terrific franchise,'' Lehman
Chief Executive Officer Richard Fuld said in a separate statement.
The purchase price of Lehman's assets is on par with the market
value of Sanders Morris Harris Group Inc., a Houston, Texas-based
brokerage with 617 workers, and is less than a third of the value of
KBW Inc., a New York-based firm that employs 529.
``Certain Barclays shareholders have expressed support for the
transaction and interest in increasing their shareholdings, Barclays
said. Further details of the share issue will be announced due course
it said.
Lehman is selling off pieces of itself that weren't included when
the holding company filed for bankruptcy. Diamond said last month he
wants the bank to take market share from Wall Street firms weakened by
the credit crunch and break into the ``top tier'' of U.S. securities
firms.
m&a rankings
The purchase includes the equities and fixed-income sales, trading
and research businesses, commodities and foreign exchange, merger
advisory and prime brokerage units, Barclays said.
Lehman slipped to seventh in advising on mergers and acquisitions
involving U.S. companies this year from fifth in 2007, according to
data compiled by Bloomberg. Barclays ranks 35th in that market.
Lehman is in discussions to sell its investment-management unit to
private-equity bidders Bain Capital LLC and Hellman & Friedman LLC,
according to people familiar with the negotiations. The firm is also
proceeding with an auction announced last week as part of Chief
Executive Officer Richard Fuld's failed plan to save the 158-year-old
firm.
Diamond was in New York last weekend as Lehman met with Wall Street
executives to discuss a rescue plan. Lehman needed a bailout after
Korea Development Bank pulled out of a plan to provide new capital and
Lehman shares lost most of their value.
walking away
Barclays declined to bid for all of Lehman after three days of
emergency negotiations involving the U.S. Treasury and Federal Reserve,
Barclays spokesman Leigh Bruce said Sept. 14. Barclays couldn't get
guarantees from the government to mitigate what it called Lehman's
``open-ended'' trading obligations.
Bank of America Corp. also walked away from a possible Lehman
acquisition over the weekend.
``Clearly Barclays's negotiating position is strong, which suggests
a value-creating deal,'' said JPMorgan Cazenove Ltd. analysts in an e-
mail note to clients before the deal was announced. ``Investors will
want reassurance on the impact on Barclays's capital,'' said the
analysts, who rate Barclays ``neutral.''
Credit Suisse Group, Deutsche Bank AG and JP Morgan Cazenove Ltd.
were finance advisers on the deal, Barclays said.
lagging behind
Barclays's so-called core equity Tier 1 capital ratio, a closely
followed measure of a bank's ability to absorb losses and writedowns,
rose to about 5.8 percent from 5.1 percent after it raised 4.5 billion
pounds in a share sale in June. Barclays's ratio lags behind U.K. peers
including HBOS Plc and Royal Bank of Scotland Group Plc.
CEO John Varley, 52, said in June that Barclays would use half the
proceeds for growth, including acquisitions. Barclays sold shares to
sovereign funds in Qatar, Singapore and China.
The deal, which requires legal and regulatory approval,
``accelerates the execution of our strategy of diversification by
geography and business in pursuit of profitable growth on behalf of our
shareholders,'' Varley said in the statement.
While Barclays ``traded satisfactorily'' in July and August, the
average pretax profit in the two months through August was below the
average for the first six months of the year, it said ``reflecting
usual seasonality.''
Barclays Capital, the bank's London-based securities arm, has
16,000 employees and contributes about 16 percent of Barclays's
earnings, down from 39 percent a year ago. First-half pretax profit
slumped 69 percent to 524 million pounds after the unit wrote down 2.8
billion pounds of subprime and Alt-A mortgages and other assets damaged
by the credit turmoil.
Barclays's highest priority is to sell or liquidate troubled
assets, Diamond said Aug. 7.
Lehman ranked No. 7 in global equity underwriting this year,
according to data compiled by Bloomberg. Barclays, which wasn't listed
among the top 25 on the list, could also use Lehman to increase its
share of bond underwriting in the U.S. and add mergers and acquisitions
advice worldwide.
Lehman Brothers Bosses Could Face Court Over Accounting `Gimmicks'
Andrew Clark in New York, the Guardian, Thursday 11 March 2010
A court-appointed US bankruptcy examiner has concluded that there
are grounds for legal claims against top Lehman Brothers bosses and
auditor Ernst & Young for signing off misleading accounting statements
in the run-up to the collapse of the Wall Street bank in 2008 which
sparked the worst financial crisis since the Great Depression.
A judge last night unsealed a 2,200-page forensic report by expert
Anton Valukas into Lehman's collapse, which includes scathing criticism
of accounting ``gimmicks'' used by the failing bank to buy itself time.
These included a contentious technique known as ``repo 105'', which
temporarily boosted the bank's balance sheet by as much as $50bn.
The exhaustive account reveals that Barclays, which bought Lehman's
US businesses out of bankruptcy, got certain equipment and assets it
was not entitled to. And it reveals that during Lehman's final few
hours, chief executive Dick Fuld tried to get Gordon Brown involved to
overrule Britain's Financial Services Authority when it refused to
fast-track a rescue by Barclays.
With Wall Street shaken by the demise of Bear Stearns in March
2008, Valukas said confidence in Lehman eroded: ``To buy itself more
time, to maintain that critical confidence, Lehman painted a misleading
picture of its financial condition.''
The examiner's report found evidence to support ``colorable
claims'', meaning plausible claims, against Fuld and three successive
chief financial officers--Chris O'Meara, Erin Callan and Ian Lowitt.
Valukas said the bank tried to lower its leverage ratio, a key
measure for credit rating agencies, through a device dubbed ``repo
105'', through which it temporarily sold assets with an obligation to
repurchase them days later, at the end of financial quarters, in order
to get a temporary influx of cash. Lehman's own financial staff
described this as an ``accounting gimmick'' and a ``lazy way'' to meet
balance sheet targets.
A senior Lehman vice-president, Matthew Lee, tried to blow the
whistle by alerting top management and Ernst & Young. But the auditing
firm ``took virtually no action to investigate''.
During the bank's final hours in September 2008, Fuld tried
desperately to strike a rescue deal with Barclays but the FSA would not
allow the British bank an exemption from seeking time-consuming
shareholder approval. The chancellor, Alistair Darling, declined to
intervene and Fuld appealed to the US treasury secretary, Henry
Paulson, to contact the prime minister.
``Fuld asked Paulson to call prime minister Gordon Brown, but
Paulson said he could not do that,'' says the examiner's report. ``Fuld
asked Paulson to ask president Bush to call Brown, but Paulson said he
was working on other ideas.''
In a ``brainstorming'' session, Fuld then suggested getting the
president's brother, Jeb Bush, who was a Lehman adviser, to get the
White House to lean on Downing Street.
Barclays eventually bought the remnants of Lehman's Wall Street
operation from receivership for $1.75bn--a sum that has enraged certain
bankruptcy creditors who believe it was a windfall for the British
bank.
The examiner's report finds grounds for claims against Barclays for
taking assets it was not entitled to, including office equipment and
client records belonging to a Lehman affiliate, although it says these
were not of material value to the deal--the equipment was worth less
than $10m.
A lawyer for Fuld last night rejected the examiner's findings.
Patricia Hynes of Allen & Overy said Fuld did not structure or
negotiate the repo 105 transactions, nor was he aware of their
accounting treatment. She added that Fuld ``throughout his career
faithfully and diligently worked in the interests of Lehman and its
stakeholders''.
A spokesman for Ernst & Young, which is headquartered in London,
told Reuters the firm had no immediate comment because it was yet to
review the findings.
Ms. Kaptur. Thank you very much. Along with the governor's
biography as presented to the committee.
Chairman Ryan. That is already in the record. But okay.
[The information follows:]
Jeb Bush
Jeb Bush is the 43rd governor of the state of Florida, serving from
1999 through 2007. He was the third Republican elected to the state's
highest office and the only Republican in the state's history to be
reelected.
Governor Bush remained true to his conservative principles
throughout his two terms--cutting $20 billion in taxes, vetoing more
than $2.3 billion in earmarks and reducing the state government
workforce by more than 13,000. His limited government approach help
unleash one of the most robust economies in the nation, creating 1.4
million net new jobs and improving the state's credit ratings on Wall
Street.
To further strengthen the economy, Bush launched a strategic plan
to diversify the state's economy. After securing the second campus of
the renowned Scripps Research Institute, an international leader in
biomedical breakthroughs, Florida's life sciences industry began to
flourish with several more leading research institutes moving to the
state.
During his two terms, Bush championed major reform of government
programs. In education, Florida raised academic standards, required
accountability in public schools and created the most ambitious school
choice program in the nation. After gaining permission from the federal
government, Florida launched Medicaid Reform to improve quality and
control the rising cost of the $16 billion state-federal partnership
that pays for the healthcare of 2.2 million poor, disabled and elderly
citizens. The state also launched and accelerated restoration of
America's Everglades, the largest project of its kind in the world, to
save the habitat of 60 threatened and endangered species and provide a
long-term supply of drinking water for eight million people in South
Florida.
On the national stage, Governor Bush is most widely known for his
leadership during two unprecedented back-to-back hurricane seasons,
which brought eight hurricanes to the state of Florida in less than two
years. To protect the state from loss of life and damage caused by
catastrophic events, such as hurricanes, Bush worked tirelessly to
improve the state's ability to respond quickly and compassionately to
emergencies, while also instilling a `culture of preparedness' in the
state's citizenry.
Bush served as Florida's secretary of commerce under Bob Martinez,
Florida's 40th governor. As secretary of commerce, he promoted
Florida's business climate worldwide. Following an unsuccessful bid for
Governor in 1994, Bush joined forces with the Greater Miami Urban
League to establish one of the state's first charter school, Liberty
City Charter School, in one of the most underserved parts of Miami-Dade
County. He also co-authored Profiles in Character, a book profiling 14
of Florida's civic heroes--people making a difference without claiming
a single news headline.
Bush earned a bachelor's degree in Latin American studies from the
University of Texas at Austin. He moved to Florida in 1981, where he
started a real estate development company with partner Armando Codina.
Currently, Bush is the President of the consulting firm Jeb Bush
and Associates and a Senior Advisor to Barclays Capital. He is on the
boards of Tenet Healthcare Corporation, Angelica Corporation, Rayonier,
Inc., Empower Corporation and CorMatrix Cardiovascular, Inc. In civic
and charitable affairs, Bush is the Chairman of the Foundation for
Excellence in Education and the Foundation of Florida's Future,
Honorary Chairman of Volunteer USA, and serves on the National Civic
Leaders Advisory Board of America's Promise Alliance, the George H.W.
Bush Presidential Library, the George W. Bush Institute Board and the
Bloomberg Family Foundation Board. He and his wife Columba live in
Miami and have three grown children. Bush is the son of President
George H.W. Bush and Barbara Bush.
Ms. Kaptur. Thank you very much.
Welcome, Governor, Congressman Waxman. Thank you all for
being here today. Governor Bush, I read your testimony with
interest, and apologize, I was on the floor and couldn't be
here for the earlier part of the hearing. But in your
testimony, you state, and I quote, ``I understand that there
may be political support for specific industries and companies.
And we know from recent experience that government is not good
at picking winners and losers in the economy. And
fundamentally, it is not the job of government to pick winners
and losers in the economy.''
I would like to learn more about your thoughts then on the
financial services industry, one that I understand from press
reports you have worked with. According to the Wall Street
Journal, shortly after you left the Governor's office you went
to work for Lehman Brothers in what is described as the in-
house investing arm of the company. Was that correctly
reported? Is that correct?
Mr. Bush. I was on the private--the advisory council of the
private equity arm of Lehman Brothers.
Ms. Kaptur. Thank you. And you were working for or with
Lehman Brothers then when it collapsed? Is that correct?
Mr. Bush. I was a consultant, an adviser to Lehman
Brothers.
Ms. Kaptur. Okay.
Mr. Bush. Not an employee.
Ms. Kaptur. Excuse me, sir?
Mr. Bush. Not an employee.
Ms. Kaptur. And did you receive compensation for that
engagement?
Mr. Bush. Yeah. Sure.
Ms. Kaptur. Do you still work for Lehman Brothers Merchant
Banking, which I understand was spun off?
Mr. Bush. No.
Ms. Kaptur. You do not?
Mr. Bush. No.
Ms. Kaptur. Thank you. Thousands of people lost their jobs
when Lehman Brothers collapsed and many people lost money. What
was your job at Lehman Brothers exactly?
Mr. Bush. I was an adviser to Lehman Brothers. Had dealt
with--basically spent most of my time dealing with their
customer base. Providing insights in things like the madness of
Washington, D.C., sharing my experiences with customers to try
to add value in the relationship. So it was not related to
internal functions of the company. It was related to client
interface.
Ms. Kaptur. If you could provide any specificity for the
record, it would be greatly appreciated.
Do you think the government picked winners and losers
during the financial bailouts?
Mr. Bush. I think government oversight was lax, not the
rules that were created afterwards, but the oversight was lax
for sure.
Ms. Kaptur. Might I get some clarification on another small
point? Because of some reporting in The Guardian newspaper in
Britain, for whom do you work now? And do you have any
relationship to Barclays?
Mr. Bush. I do.
Ms. Kaptur. You do. What is your relationship?
Mr. Bush. I am a senior adviser to Barclays capital.
Ms. Kaptur. All right. The Guardian newspaper in Britain
reported in 2010 that a U.S. bankruptcy examiner concluded that
grounds exist for legal claims against top Lehman Brothers
bosses and auditor Ernst & Young for signing off misleading
accounting statements in the run up to the 2008 collapse. The
newspaper said a 2,200-page forensic report, which I am sure
you are familiar with, by Anton Valukas----
Mr. Bush. No.
Chairman Ryan. Look, does the gentlelady have a question
about the subject of the hearing at hand?
Ms. Kaptur. I do. Revealed that Barclays, which bought
Lehman's U.S. business out of bankruptcy, got certain equipment
and assets to which it was not entitled. I am quoting. Are you
aware of any of these allegations, and do you have a response
to them?
Mr. Bush. No, I am not.
Ms. Kaptur. The Valukas report revealed that during
Lehman's final few hours, its chief executive officer, Dick
Fuld, sought to convince Prime Minister Gordon Brown to
overrule Britain's Financial Services Authority when it refused
to fast track----
Chairman Ryan. Does the gentleman imply that this gentleman
had anything to do with that?
Ms. Kaptur. Well, Mr. Chairman, if you could just allow me
to finish here.
According to The Guardian, and I quote, ``During the bank's
final hours in September 2008, Fuld tried desperately to strike
a rescue deal with Barclays, but the FSA would not allow the
British bank an exemption from seeking time-consuming
shareholder approval. The chancellor, Alistair Darling,
declined to intervene, and Fuld appealed to the U.S. Treasury
Secretary Henry Paulson to contact the Prime Minister. And
according to the Volukas report, Fuld asked Paulson could to
call Prime Minister Gordon Brown, but Paulson said he could not
do that. So Fuld asked Paulson to ask President Bush to call
Brown, but Paulson said he was working on other ideas. But in a
brainstorming session, Fuld then suggested getting the
President's brother, Jeb Bush, who was a Lehman adviser, to get
the White House to lean on Downing Street.''
Governor Bush, to your knowledge, did your boss, Mr. Fuld,
in fact make such a suggestion?
Mr. Bush. First of all, he wasn't my boss. I was a
consultant to Lehman Brothers, as I stated. And no, he didn't
ask me to do anything, and I didn't do anything.
Chairman Ryan. The time of the gentlelady has expired. And
I would simply say, why don't you direct your questions to Mr.
Fuld? This gentleman doesn't have any information on that.
Mr. Garrett.
Ms. Kaptur. Well, Mr. Chairman, it is very interesting how
terse you were with my questioning this morning.
Chairman Ryan. You are not asking him questions about the
hearing here. You are injecting innuendo it seems. And the
gentleman has answered your questions.
Ms. Kaptur. It seems to me it is important for the American
people to under to understand the witnesses that are before us
and what their financial connections actually are.
Chairman Ryan. Mr. Garrett.
Mr. Garrett. So I will bring it back to the hearing. I will
start off with actually testimony from the witnesses.
Mr. Waxman, or Congressman, you made the comment with
reference to the I guess the appearance of impropriety--let's
call it that way--when you have consultants who are on the
payroll for the companies on the one hand and they are also the
ones that are involved with the decision-making of the salaries
and what have you, the positions there. Certainly there is an
appearance of impropriety there.
I guess in politics you can sometimes see the same things,
where you have people who are making donations to politicians
or elected officials on the one hand, and at the same time,
those very same politicians or elected officials are making
decisions with respect to those donors. Is there not the same
situation there for us politicians?
Mr. Waxman. I think there is an appearance of unseemliness.
And that is why I think the system we have for funding
campaigns is one that we ought to definitely change. But I
think there are distinctions between the two. But I get your
broader point.
Mr. Garrett. I appreciate that. So we have the same
situation on financial matters, since the gentlelady brought it
up, and the situation at MF Global, where you have an
individual who is now one of the largest bundlers for this
administration on the one hand, and on the other hand, that is
the same individual who is being investigated, or is at least
the company is being investigated by that very same
administration. So there is at least an appearance of
impropriety when someone donates to the administration and that
administration is either investigating or maybe not doing a
valid investigation there.
Mr. Waxman. We need to go beyond the appearance and look at
the facts. For example, in the Solyndra investigation----
Mr. Garrett. I am not on that, but thank you very much.
What I am concerned about is your testimony when you make the
accusations that Republicans want to return to an era of robber
barons, with no restraint on Wall Street, and enriching
themselves at the expense of everyone else. I don't know
actually how you can say that.
Furthermore, you go on to say that the problems of 2008
were demonstrated on the collapse of Wall Street was caused by
the absence of cops on the beat. Really? There were cops all
over the beat. When you look at the institutions that failed,
AIG, they were a regulated institution. Lehman Brothers, they
were a regulated institution. This gentleman next to you was
not sitting inside Lehman Brothers at the time, but there were
regulators who were sitting inside Lehman Brothers on a daily
basis and they failed to do their job.
Mr. Waxman. I would dispute that fact. I would absolutely
dispute that fact.
Mr. Garrett. There were regulators at Lehmans.
Mr. Waxman. They may be regulated for some things, but
their financial practices were not being regulated or being
watched. And I think Governor Bush was absolutely right when he
said there was not government oversight. At the SEC, it was
shocking how poorly the SEC did its job.
Mr. Garrett. Exactly. And that is exactly my point here, is
that you had regulators from the SEC, from the OTS, to the
Federal Reserve, and each one of these institutions were
regulators involved with starting from Bear Stearns on out, the
regulators had the authority, they had the information, they
had the wherewithal to try to prevent the meltdown in 2008 so
we would not find ourselves in this situation today, but the
regulators failed to do the job. So whereas your testimony
likes to point the finger entirely at Wall Street and the free
enterprise system and capitalism for failing in greed over
there, I think we can equally point the finger back at the
regulators who were sitting in these companies. They failed to
do the job.
Mr. Waxman. The solution isn't to end regulation, which is
what I hear from the Republicans, or to put in people who won't
enforce the regulations.
Mr. Garrett. And I appreciate that. But as you can see from
both in this committee and Financial Services, there is not a
single Republican who has ever said to end regulation. Everyone
simply said to reform it.
But let's turn to another issue that I know is dear to the
Governor's heart, and that is the area of education. And that
is also important to me as well. So you have K through 12
education, and we know what has been able to be done in various
States, such as yours, as far as reforming it, which will
provide for better educated students and a better economy going
down. My question to you is this, though. Do the States have
enough flexibility in this area in order to achieve what they
need to achieve, or is this one other area where the Federal
Government has intruded to such an extent that we are once
again providing for an impediment or a barrier to free
enterprise to be able to grow by allowing for a flourishing
educational system in the States?
Mr. Bush. Well, historically the Federal Government's role
in education has been limited. It has grown in the last few
years. The last decade it has grown I would say. But it is not
similar to say health care, where the Federal role is now
significantly, both in regulation, spending, and the two major
programs, significantly higher. But there should be
flexibility. I think the objective ought to be a year's worth
of knowledge in a year's time. There ought to be effective
measuring. And States ought to try to apply different
approaches.
In our case, we had an accountability system that was based
on grading schools, 100 percent based on student learning,
ending social promotion, school choice, compensation for
teachers that was different than just longevity of service
driving it. Digital learning being an element now of the
Florida strategy. And the results are there.
Just Congressman Waxman will probably appreciate this, low-
income Hispanic kids do better than the California average on
the fourth grade reading test even though we spend, you know,
we spend less than $7,000 per student. It is because we had a
focused, strategic approach. Washington is not equipped to
provide that. And Florida is different than California. We are
different than other States. And so, you know, we ought to be
given more freedom to do things.
I think the Title I moneys is a place where maybe there
could be more innovation, for example, in the lower performing
schools. You know, I think you could trust Governors and State
legislatures and the communities in States to be able to come
up with the best solutions.
Chairman Ryan. Thank you. A vote has been called, so we
have to move with dispatch. And the last, but not least, is Mr.
Mulvaney.
Mr. Mulvaney. Very quickly, Mr. Edwards, thanks very much
for coming.
I am going to ask a question on a different topic, which
are miscellaneous tariff benefits, something that is getting
some attention here this week. By way of quick introduction,
these are reductions in tariffs on things that are not made
here that are generally available to the marketplace. And we
are having some debate now as to whether or not those are
earmarks, whether or not those are tax subsidies. In fact,
there is some specific discussion as to whether or not
miscellaneous tariff benefits are a subsidy similar to tax
loophole. And I would just like your opinion as to whether you
think MTBs are tax subsidies or tax loopholes.
Mr. Edwards. Tariffs are taxes. I mean, they are taxes on
international trade. Ultimately, we should move to
international trade agreements, get rid of all tariffs. You
know, tariffs don't just hurt American consumers. Tariffs hurt
American businesses that use imported products. You know, you
look at big corporations like General Motors, I mean, they
import an enormous amount of parts and other goods. So when we
put tariffs on their production, it hurts American businesses.
So, I mean, you know, I am not familiar with the particular
bill that is in front of Congress there. But you know, tariffs
are not a good idea in general. Like taxes, they distort the
economy.
Mr. Mulvaney. Generally speaking, would these reductions on
tariffs, on products that are available across the market,
would you consider that to be corporate welfare?
Mr. Edwards. No. Certainly not. You know, I am for closing
tax loopholes. I am for closing--I am for getting rid of
special deals on the tariff side. But I don't--special deals
for particular industries on tax and spending and tariffs are
distortionary. But it does strike me there is a difference
between, you know, tax reductions and tariff reductions and
spending.
Mr. Mulvaney. And ultimately, the primary beneficiary of
these lower tariffs is the consumer, is that right?
Mr. Edwards. Oh, absolutely. Again, both consumers and
American businesses that use those imported products.
Mr. Mulvaney. Thank you, Mr. Edwards. I appreciate you
being here.
Governor, I don't have any questions for you. Thank you for
coming. I appreciate your time.
Mr. Waxman, I have one question for you. I have sat here
for about the last hour and heard the auto bailouts mentioned
several times. They were designed to somehow save the auto
industry, save them from bankruptcy. Of course, you knew that
Chrysler went bankrupt anyway, right?
Mr. Waxman. I do know that there is a vibrant American
auto----
Mr. Mulvaney. Did Chrysler go bankrupt in April of 2009?
Mr. Waxman. Yes, they did.
Mr. Mulvaney. Did GM go bankrupt in June of 2009?
Mr. Waxman. I don't know. I will refer to that to Mr. Ryan.
Mr. Mulvaney. Did GM go bankrupt after the auto bailout?
Mr. Waxman. I don't know.
Mr. Mulvaney. They did. I can assure you they did. It was
the second largest I think bankruptcy in the history in the
country. I am a little surprised you hadn't heard about it. I
have only got one question about it, which is that when they
went bankrupt, Mr. Waxman--I will ask the question. I
appreciate your answers.
Chairman Ryan. Give him a chance to answer.
Mr. Mulvaney. When Chrysler went bankrupt, it did so in an
extraordinary bankruptcy proceeding that denied, for the first
time in a long time, if not ever, secured bond holders of the
rights to which they were entitled. One of those secured bond
holders was the Indiana State Teachers Retirement Fund. Another
was the Indiana State Police Pension Fund. Together, those two
pension funds of public employees, teachers and policemen, lost
several millions of dollars of their retirement money. And my
question to you, as a supporter of the auto bailouts, what
would you like to tell them?
Mr. Waxman. Well, I am not an expert in this area. But I
know when the airline industry goes into bankruptcy, they tell
their workers, you can't continue the pay that you have already
negotiated from us. This is a way to break the unions and to
take away benefits from them. People get hurt. And when
businesses go bankrupt, the stockholders get hurt, the bond
holders get hurt, but in this country, the CEOs all come out on
top.
Mr. Mulvaney. Mr. Waxman, do you understand the difference
between a secured bond holder and a stockholder?
Mr. Waxman. I do.
Mr. Mulvaney. So what would you like to tell the secured
bond holders, who were entitled to certain protections under
ordinary bankruptcy law, who didn't get them in these
particular circumstances? And specifically, I am speaking of
the retired teachers and retired policemen of the State of
Indiana.
Mr. Waxman. Tell me what you would like to tell the
unemployed auto workers and the industries in the Midwest that
are dependent on them if we let the auto industry go down the
tubes.
Mr. Mulvaney. And I will ask you again, Mr. Waxman, do you
understand the legal difference between a secured bond holder
and an employee, a secure bond holder and a supplier, or a
secured bond holder and an ordinary stock holder?
Mr. Waxman. I don't want anybody to get hurt. But the fact
is that people do get hurt when we have a mismanagement of the
economy so that we have banks taking huge risks with other
people's money on securities that don't make sense, and then
slice them and dice them and sell them abroad, and the whole
bubble fell. And government should have been there to stop that
from happening, and government wasn't there.
Mr. Mulvaney. And instead, what government was there to do,
Mr. Chairman, was to steal money from retired teachers and
policemen in order to give it to unions. With that, I yield
back the balance of my time.
Chairman Ryan. Thank you. All time is yielded. As you can
tell, Washington is as friendly and kind as it ever was before.
Henry Waxman, Congressman Waxman, thanks for coming,
spending your morning with us.
Chris Edwards, you have come and testified a number of
times. I appreciate your insights.
And Governor Bush, it is not all this bad. When these
microphones are turned off, some of us actually do kind of get
along with one another. So I just want to thank you for taking
the time out of your busy schedule to come and share your
insights with us. Thank you very much. This hearing is
adjourned.
[Whereupon, at 11:47 a.m., the committee was adjourned.]