and becomes a negative. we would be pushing down the number -- the level of debt, but at the same time pushing up the amount of debt owed to the public. from that point of view, it is a swap. the question that i think all you economists should ponder is due the markets understand this, and should they care? our reports are out there every year, and people can see what should be happening, and to the extent markets understand this, they would be good at forecasting future events. if they understand this, one would think they could see it coming, therefore it would not have a big impact. i guess the randomness of securities

impact on total federal debt. -- the social security impact on total federal debt. that is that much less the treasury has to balance -- b orrow. the fact is nil. jockey look at it as a publicly held -- if you look at it as a publicly held -- stop 4 in total? we have two more slides. pitiable leave that total debt matters and they care about the totality of the debt to treasury than social security size of the trust fund or non does not matter. few believed publicly held debt is the issue, then it has a big impact.

this shows under budget scoring convention, it assumes that there is on the publicly held debt. would assume something very interesting. programs like social security will continue to pay out benefits. when our trust fund is exhausted and is not allow a payment on schedule and, moreover, whenever we reach that when congress would have changed to put in more revenue, take down benefits, or a combination of the two. the concept of doing budget scoring is a pretty enormous. the amount of publicly owned debt, and d-the line would continue to be spending money. when we fine now that are interpreting the graph about

the lies of publicly held debt that it does resume social security and medicare will continue to pare long after the trust fund is exhausted. should we consider only publicly held debt? that is something for people to consider. do they pay attention to it? there may be some who work in the financial markets to are pretty savvy, pay attention, but the reality is that total security dead does matter and these are not budget issues from that point of view. this is why you heard paul ryan and others say that social security, per say, is not part of the "budget issue." how this will play out is really hard to say going forward. what do we do?

now that we have talked about the fact that there is a shift in the aging population so not just social security. medicare is also effected by that. there were lots of people who wanted to buy those houses and in 20 years you want to sell it, everything, every asset will be affected by the shifting demographic. what are going to do in general? we can encourage people to work longer. we will be doing that. we can increase the retirement age. that certainly is a big help. we can reduce monthly benefit levels. we can increase tax rates.

we can increase them on earnings above where the tax rate is now $0 for the payroll tax. we can push immigration referred to it brigid further and encourage -- we can push immigration further and encourage births. what we're facing with the current demographics and the economic situation, which is not optimistic for pessimistic, we agreed with the nice and down the road projection that we're looking at a position where we will have the their -- either lower benefits by 25%, increase revenue by 33%, or some combination of the two. that is what is going to be required. i will stop there. gosar for taking up so much time.

-- sorry for taking up so much time. >> thank you very much for being here. i am 69 years old and still working. finally started drawing social security. i sat down and made double check of the accuracies of social security. i'm going to file an appeal. what i have learned in doing this is what the effect of these points are. i do not know how many people have done the calculation, but when you realize is the amount of income redistribution within social security because of those points. my question is this. you talk about changes down the road. one of the ways to deal with this is a, in effect, shortchange higher-income people even more than they are now being shortchanged by social security. then the question comes that i was quite in time the social

security lose the political support that it has? -and middle-income people wake up and realize how much they're getting shortchanged and the president points to a taxation of benefits. >> i hope everyone has a progressive benefit formula like the first $800 or so average monthly earnings of wage and expectations you get 90%. for the next roughly 4000 average monthly earnings, you get 32%. above that you did a 15% return. we of proposals of various types. we would leave the 90% alone. it would affect some portion of the 32% and most would affect the 15%. the 15% of payroll average cost, that is only 26% of payroll, a very small portion. 24% is a charitable to the benefits that come in under the

15% factor of the range. if you have concerns about having all of the savings on the backs of people in the 15% range, we need 25% less benefits if we do nothing about revenue. >> one has a negative political impact. >> however, there is one thing you should be aware of. a lot of people have done work on this. we tried to do a little bit of work fine, but it is true that people with lower earnings benefit, however one thing we also recognize is that people with higher incomes tend to live longer. studies done have said and of a wash in terms of lifetime benefits. you get a lower replacement rate, you live longer on a lifetime basis but it is relative to the taxes you pay in. estimates indicated is not a

complete wash and that there is probably still some shifting. >> talking about longer-term projections, could you talk about what kinds of assumptions you're making about long-term economic growth -- the only as part of the growth because that is an important area. >> for economic growth, we are projecting that the aggregate real gdp will be growing slowly in the future for one for double reason. if the growth rate and the numbers of workers is going to be slower, less than 1% in the future when it was 2%-3% during the baby boomers, if we go from 2% down to 1%, that takes 1.5%

right off the top for aggregate g.d.p. growth. per-capita gdp growth per worker, labor, productivity, we are projecting growth will be at about 1.7% which is about the average and has been of the last century. there's a period during what was the 1973-1995 and they were saying the economy was not doing so well. then there was the period between 1995-2005 which they refer to the new economy. it was over 2%. they've remained pretty steadfast. things do come and go. we look at long-term averages to try and set assumptions are 1.7%. because the benefit levels for people nearly becoming eligible

grow at the rate of average wages and our tax revenues grow with the average wage, the actual solvency in the cost of the system relative to the payroll is relatively insensitive to differences in the rate of growth, productivity, and wages. it is different than the rate of growth in the population of by birth rates and other demographic factors. >> i want to make sure that i understand. sometimes when there is a surplus, tapped in the trust fund is -- technically the trust fund is to intervene to the debt. last year, there were more than -- benefits paid out than revenues coming in which means the trevor rees -- treasuries had to cash in. it counts as a liability for the

treasury? >> i believe it was in 2010, our estimate is that we had about $16 billion more in benefit payments than we had in the tax revenue coming in. that is $16 billion and net that had been drawn out of the trust fund, well our interest in the trust fund is well over $100 billion. that was a small amount. the trust fund did have to go and in fact net redeem about $16 billion to pay for the access of tax revenue in that year. if the government were running surpluses, that would have been fine. they would have been buying down publicly held that but it would not brought it down by as much. since they were running deficits, it means the publicly held debt had to buy last year was increased by about $16 billion.

when the social security trust fund is reduced to $16 billion, the debt they owe to the social security is reduced by $60 billion. but they have to borrow to pay those benefits, they take from the public so they increased their debt to the public by $60 billion to reduce their debt to social security trust fund by $16 billion so it is a wash. >> so it depends of the public demand for treasury. >> everyone is concerned about everyone's return on their contributions. if you think of the pension plan, then you do not understand the way it is set up. logically, they do have a claim from the government and everyone who works and contributes to get the documentation when they get to be 65 or whatever. in my opinion, that is not

different than having a bunch of zero coupon bonds sitting out there. they should be on the balance sheet. i understand your where reporting in the at a local frame work is traditional. i do not have a problem with it. as a supplement to get us to the point of what is sustainable, which is what your proposal is doing, why cannot talk about not a welfare payment to someone else but what it means for us as a group? it to do that logically than you know your contributions have to match the accrued value be a straightforward financial calculations. my question is do you do that as an alternative presentations to you get us to the point of calculating what today is a liability? i'm afraid the politicians will continue the procrastination economics and believe we do not have a problem until 200037.

do you do that? do they ever see it? >> it is in the trust the report. with estimated not only on the pay-go system. you look at any point in time and say of all the money up to this day and what we're doing today, do we have enough money to cover on a pay-go basis? that is the taxes versus the benefits. the you're speaking to is fully advanced funded government defined pension plan. >> of the inc's, that is regardless of whether it is a [inaudible] it should be on the balance sheet. and basically answers that if we were to close the system to people not under 15% and were people are now 15 or older, they

can continue paying and close the system off. that is in the trust the report and it shows what the unfunded obligation is on that basis. that number they were looking for is a useful thing to look out, but if you're operating on a pay-as-you-go system to not advance find it, of course you expect have a large unfunded obligation. that is by design. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> starting at 7:00 p.m., the ninth circuit hears oral argument from an organ based organization challenge to their designation as a terrorist group. then, microsoft chairman bill gates talks about his work as a philanthropist and global health-care issues. after that, first city michelle obama and secretary of state hillary clinton host the annual

international women of courage awards ceremony at the state department. finally, congress holds a joint meeting to hear remarks from the australian prime minister, julia gillard. >> potential presidential contenders have been making stops in key primary states. minnesota congresswoman michelle bachman at a fund-raiser for the republican state committee sunday 6:30 p.m. and 9:30 p.m. eastern and pacific. >> the house returns on sunday -- monday at noon for morning our speeches. on the agenda next week, another temporary 2011 federal spending bill. this one is expended to extend government spending for three more weeks. current funding expires next friday, march 18th. also next week, two measures to

propose to amend foreclosure assistance programs. and ohio congressman dennis kucinich plans to oppose a war powers resolution that would require president obama to withdraw all u.s. armed forces from afghanistan by the end of the year. follow the house live as always here on c-span. the senate returns on monday at 2:00 p.m. eastern. at 4:30 p.m. eastern, they take up a judicial nomination for the district of columbia. at 5:30 p.m., members take their first votes of the week on that judicial nomination. also a vote to move forward with the reauthorization of the small business administration programs. live coverage of the u.s. senate on c-span2. >> an estimated 1.2 million homes will be foreclosed on this year according to realtytrac. at a hearing on the u.s. housing market earlier this week,

economists and real tors agreed that high unemployment and general uncertainty about the market continues to slow recovery. the senate housing and banking committee held a hearing. this is one hour and 20 minutes. >> good morning. i call the meeting to order. families are reeling from the impact of the bubble that burst several years ago. many regions have yet to stabilize. regulators are struggling to find an appropriate balance between had good credit availability and improving underwriting standards. it is clear that the current housing market is friend from and a strong recovery in housing is not yet underway. as we begin debating the future

of housing in america, it is important for the committee to understand the challenges that our nation faces. today's hearing is part of that process. we will explore various aspects of the housing market including the impact of foreclosures in the single unit family and the availability of work force housing. the housing sector remains in turmoil. today, we see a decrease in the property values hurting homeowner's equity, rabin foreclosures, devastating neighborhoods, and falling homeownership rate that threatens the option of home ownership out of reach even for qualified borrowers. according to the case-shiller

house again? -- housing index, levels have fallen to 2003 which has put in record levels of homeowners under water in their mortgages and effectively trapped in homes they cannot sell. meanwhile, widespread foreclosures compound the problem by shutting down -- shutting down the availability of other homes in the neighborhood. losing one's home to foreclosure often means the loss of the largest part of a family's wealth and can create further instability in communities. last but not least, an unemployment rate that remains near 9% has contributed to home ownership falling to the level last seen in 1998. the housing bubble hit in 2006

and its aftermath left american families under water and struggling to cover their mortgage each month. i look forward to hearing from our witnesses regarding how changes in foreclosure trends, the housing supply, and falling home values are interacting to effect the housing market and economic recovery. today's hearing will also explore the state of the housing market for middle and lower- income households. the recession appears to have worsened the the affordable housing crisis that already existed for so many americans. one study found a number of very low-income workers with the worst case housing needs 07-reased by 20% from 201

2009, the largest two-year increase in 25 years. furthering homelessness, increased by 4% from 2008-2009 and the number of people doubled up in temporary arrangements, unfortunately, is a common occurrence in many communities increased by 12%. in the last few years, we have seen that no segment of the population is immune to problems in the housing sector. it is clear that addressing these problems is an urgent need for americans of all economic backgrounds. we examine the transient causes today. as my colleagues know, we have a hearing next week with the secretary geithner. this will begin the long term

discussion regarding housing and finance reform. i ask my colleagues to reserve specific questions on that topic for next week. senator shelby. >> the well known problems in the housing market deserve the full attention. national home prices have declined sharply from the unprecedented levels reached at the height of the housing bubble. not since the great depression has our housing market such a severe correction. today, we hope to learn what the future may hold. how close is the market to bottoming out?

what will it take for home sales to reach local levels -- normal levels? how does the housing market very by region and what factors account for the differences? what is the appropriate level of homeownership and why? in addition, it is my hope that today's hearing was set the stage for a discussion of the future of housing finance. without question, our housing finance system is broken. the federal government now? approximately 97% -- now backs 97% of all new mortgages. it has largely been replaced by government programs. i believe this is a dangerous situation but will not only erode innovation and competition but ultimately reduce the availability of housing and expose taxpayers to future bailouts. the banking committee should fully examine our house in

markets with the goal to promptly adopt any needed reform. i believe we will soon be upon the third anniversary of the american taxpayer bailout of fannie mae and freddie mac. if every history provides a clear lesson on the importance of congress acting in a timely manner, is this committee's failure, i believe, to address the gst's. -- gse's. unfortunately, they were a very powerful political force right up until the time that they collapsed. fannie and freddie's disproportionate influence on this committee in congress ultimately cost taxpayers billions and should be long remembered as a major, major policy mistake. mr. chairman, i like to take a moment to discuss recent news

reports about a proposal that has been described as a "global mortgage servicing settlement." mr. on the facts reported, i have serious concerns not only about the substance but also the process of the proposal. it appears to be nothing less than name regulatory shakedown by the consumer protection agency, certain attorney general's and others led by elizabeth warren. the proposed settlement seems to be an attempt to advance the administration's political agenda of rather than an effort to help homeowners who were harmed by actual conduct. just last year, i warned that the new bureau of consumer financial protection would prove to be an unaccountable and unbridled bureaucracy. i did not expect to be proven correctly so quickly.

under the guise of helping homeowners hurt by improper foreclosures, regulators are attempting to extract a staggering payments of nearly $30 billion for unspecified conduct. the $30 billion would find a new slate of housing programs long sought by the administration previously rejected by the congress. setting aside for a moment the attempt to in run congress, i question whether removing $30 billion in capital through a back door bank tax is the best way to jumpstart lending in today's recession. the long-term consequences of the settlement could be even more serious. it would politicize our financial system. for example, the proposed settlement requires the appointment of third-party monitors, paid for by the banks. mr. chairman, i thought our financial regulators monitor our

backs? under this incredible proposal, those days would be over. to my these third-party monitors be? acorn or other community organizers or perhaps other special interest allies of the administration backs-- administration? we need to know. as trouble some of the -- as the proposal is, it is far more concerned that the proposed settlement would fundamentally alter want to regulation of our banks, yet this would be done without congressional involvement by this committee. instead, it would be gone by executives, intimidation, threats and regulatory sanctions. the administration and our france for regulators are clearly hoping that the banks will consent -- the administration and our financial regulators are hoping the banks

will just consent. the should be a concern to all citizens, especially the members of this committee. if this can be used on financial is a tuitions, these tactics can be used on any business. i want to be very clear. if that person was harmed by the actions of these banks, i believe they should be compensated to the full limits of the law. as everyone knows, i did not vote to bail out the banks. i strongly opposed tarp. i believe banks should be responsible for their actions. they should be held accountable here, as well. however, efforts to help homeowners who were legitimately harmed by the banks should not be hijacked for the purpose of imposing a regulatory agenda and that the american people clearly rejected in the last election. because of the long-term consequences of the repurpose settlement and serious due process issues, i am proposing we began an immediate inquiry into the facts and circumstances

surrounding the sector. i am requesting that our financial regulators refrain from entering into any agreement until congress, the congress of the united states, has had an opportunity to conduct appropriate oversight on this matter. i think this is to inform for congress to sit on the sidelines. i hope he will heed this, mr. chairman. >> thank you and ranking member, mr. shelby, for having this meeting today. thank you for being here. thank you for being here today. we understand that a sustainable economic recovery has to depend on a healthy housing economy. we have seen great turmoil of the last two years.

i looked at the testimony by witnesses and each one of them noticed the fact that the swollen inventory of housing, made worse by hamas facing foreclosure, is dragging on the economy. the issues that have been discussed by the chairman and senator shelby of about how do we resolve this foreclosures and how do we get them back on the market? had we put a floor into the housing market so we can grow uneasy central to overall economic development. minister and the crisis has grown with great complexity because of the allegations of robotic signing, illegal behavior, and we also understand as alluded to by senator shelby, that the attorney general's of each state have banded together and taking the lead to protect their constituents and their neighbors

to provide satisfaction. this effort was there and it has been supplemented. they want to deal with a proposal. illegalities with respect to foreclosure procedures? who holds title to homes? that upsets the ability to grow the economy once again. the status of bondholders in these mortgage-backed securities. did they have the ability to sue for billions of dollars? until we try to resolve this, frankly, and comprehensive way, there's going to be a drag on the economy, a reluctance to move forward, not simply because of homeowners and financial institutions, but a whole array of financial actors. in that spirit, i propose, and i am sure there'll be others this

act to protect. this should be a comprehensive solution. legislatively, we should recognize that it will take probably -- and will not happen tomorrow. things did not happen around here tomorrow. i think in substance and in fairness that there should be a pursuit of some type of comprehensive solution, voluntary because that is the nature of the solution in which the financial institutions feel like it is in their interest, state attorney generals, bond holders to them to a conclusion and do so rapidly. time is wasted. we should approach to this with the view that every homeowner deserves to be treated fairly. some may not be able to maintain their home, but it is a retail

-- a fair valuation on whether or not their mortgage should be modified whether in their home or at least knowing that a fair offer was made to help them. with that, i think you, mr. chairman. >> i will pass for now look forward to the testimony of the witnesses. >> and its chairman and says -- senator menendez. >> i was not aware we were going to permit opening statements. since we're going to have a vote, i will be brief. >> does anyone have an opening statement to get? >> will then come in two boats are scheduled for 3:00 -- well then, 2 votes are scheduled for

3:00. dr. wachter is a professor of real estate and finance. she is the author of over 150 publications and is frequently called upon to testify before the u.s. congress on mortgage markets in the financial crisis. our next witness is dr. mark calabria. he is the director of financial regulation studies at the cato institute and is a former staffer for this very committee. dr. calabria has served as deputy assistant secretary of the u.s. department of housing and urban development prior to his work on capitol hill.

we welcome you back to the committee. david crowe is the senior vice president at the national association of home builders. dr. crowe is responsibile for the nahb's economic trend research and analysis of the homebuilding industry and consumer preferences as well as macroeconomic analysis of policies that affect housing. welcome, dr.. our next witness is ron phipps. he represents 1.1 million members involved in all aspects of the residential land commercial real-estate industries. he has served in many

leadership positions within the national association of realtors. welcome to the committee. jeffrey lubell has been the executive director for the center of housing policy since 2006 and is a recognized expert in development policy. he has previously served as director of the policy development division in the hud office of policy development and development. thank you for being here, mr. lubell. dr wachter, will you proceed? >> chairman johnson, ranking member shall become and other distinguished members of the committee, think for the invitation to testify today. it is my honor to be here to discuss the current state of the housing market. at this time, housing markets

for single-family own homes are fragile. the most recent available from radar larger shows that home prices continue their decline in jean-marie 2011 with prices down over 34% of peak value. for the fourth quarter 2010, the most recent data available, the census bureau reports, honor and a vacancy rates have increased. it is 2.7% up from 2.5%. this is nearly 50% higher than the historical average vacancy rate for single-family homes. consensus estimate is that home prices will continue to decline in the range of 5-10% in the coming months. this is due to the unsolved inventory and the shadow inventory. the expectation of continued price decline will come in

itself, deter home buying. the most pressing issue in the home market today is how and when the excess inventory of homes will be resolved. although the supply overhang could depress prices further, national housing prices may not be far from reaching a fundamental bottom. the national house price to read to ratio, as calculated by case shiller, is near the level of 2002-2003. given the low interest rates prevailed with not significantly inflated rates. homes today are also affordable relative to men, according to the national association of realtors housing affordability index. the family at median income has the income needed but that has

major issues of the ability to qualify. the biggest threat facing the housing market is the uncertainty. but if they do return to historical levels, and they are way beneath that, the excess vacancy could be absorbed and i emphasize "could be." it is possible by 2014 that markets could do so on an international basis. in the short and intermediate run, a decline in the availability would delay this and could cause further price plunging and a spiral of prices as we saw. with or that stabilization of prices, distressed properties will continue to account for a large portion of total sales in the market.

the recovery will depend upon continued strengthening of job markets and increased consumer confidence. for a recovery to take hold, and the available of -- the availability of financing and private capital is also crucial. given the policy questions before the committee, it may be useful to comment briefly on the broader issue of housing finance. but borrowers to qualify are able to access historically low mortgage rates for a 30-year fixed-rate loan which is helping to shore up the market. questions about whether such mortgages will be available or what will replace them is likely to be an additional increasingly important factor going forward creating uncertainty. we need to find a future and it will be less vulnerable to the economic disruption if borrowers continue to have access to standardized fixed-rate

mortgages that are not subject to refinance. with that, i think you and i am open for questions. i appreciate it. >> thank you, dr. wachter. dr. calabria. >> i want to thank you for the invitation and it is it a pleasure to be back to run this side of the table for a change. i want to start by saying you will hear a lot of predictions about where the housing market is at and where it is going. i largely agree with them, and i think there's a consensus about where the market is out. i touched on that in my testimony, so rather than repeating, i think i will spend my time talking about why points of departure with other witnesses not to minimize the appointive agreement.

we have tried to keep prices above where they should be. prices should be given by income more than anything else. i want to see if i can submit for the record a title in "bloomberg" yesterday. housing markets work like every other market. if you want to clear excess inventory, prices have to come down. that is the way we need to do it. while we have seen stabilization of him at the national level, there are tremendous differences across the khaled is. while we see median home to and come about three, -- home to income around 3, that is about normal. san fransisco is about eight.

almost all the federal policies we have, whether federal reserve interest-rate policy, home buyer tax credit, it is on the demand side of the market. in markets with a very rigid demands, but think back to your economics 101, that forces prices of. you end up having excess supply. this is best illustrated by phoenix and san diego. they are the same size, yet san diego has seen price increases where arizona is seeing a price decline. despite a similar population and migration trend, the number of building permits in phoenix is over twice that in san diego. local conditions matter. we cannot lose sight of that. but looks like the stabilization of the national level is really just an offsetting of what is going on in very different markets which is something to keep in mind. the other point, to make in

terms of the foreclosure crisis is the need to keep in mind that nec -- negative equity is not the cause of delinquencies. it is coupled with a life events like a job loss, health care costs. yes, there is some degree of strategic defaults who walk away because they do not have any money. i think those are under 25% and should not be the focus of policy. i think we need to be focused on solutions. we need to be focused on the impact on labor markets. usually the higher you have structural unemployment. about a percentage point of the unemployment rate we are seeing today is the high ownership rate we had combined with the foreclosure assistance programs and other things in the marketplace that delayed this. i would also say in terms of balancing that i think the risks are much greater if we keep the crisis above market clearing

levels than if we allow them to overshoot on the way down. there are risks if we allow them to overshoot on the way down. i want to focus on something that dr. wachter said. it will have a further impact on keeping homeowners on the sidelines. we are far better if we get to the point where buyers believe they can go no further. in my opinion, we are not there yet. i wish to close by saying that i am greatly concerned, as i am sure members of the committee are, that the taxpayer stands behind on most of the credit risk. we are potentially looking at further bailouts. this is incredibly unhealthy. we recognize under all of the administration's three proposal that interest rates will go up and they will go up because of and/or inflation or federal reserve policy. we need to prepare for that now and move away from a sense of having a market not take this risk and pass it on to the taxpayer. as i know it's in my testimony, there is a tremendous amount of capacity outside of the gse's

and i have to go into further detail with the that in a q&a. i look forward to the discussion. >> thank you dr. calabria. dr. crowe. >> i'm the chief economist for the national association of home builders, a trade association of roughly 160,000 members who work in residential construction industry. i appreciate the opportunity to testify today on the condition of the nation's housing markets and the prospects for recovery in the housing sector. the state of the nation's housing market is improving but fragile. while the bottom of the market is behind us, we rose to a robust recovery for -- the road remains a long and difficult path. high unemployment, and available by. bill the financing, and consumer uncertainty are challenges. a weakened housing sector will hold back growth.

traditionally, housing has led the economy out of recessions. in previous recoveries, housing group in 20% during the first year of the coverage. in this recovery, housing grew less than 5%. construction on a climate remains the highest of any major area with more than 1.4 million jobs lost in residential construction and an equal amount lost in the building supply sector. national housing prices stabilized in early 2010 but have weakened due to the elevated share of distressed sales. however, in many areas the ratio of house prices to income has returned to historic levels. on a national basis, the price to income ratio has returned to its historic average. currently, housing production is running around 600,000 units per year, well below the long run trend of 1.7 million new homes

which is necessary to accommodate the replacement of older housing stock. the gap between current production and the trend is a result of multiple factors. first, the access -- excess has held back home pricing. the inventory of existing homes has fallen from over one year's supply to about one month. inventories of new homes for sale are at a 42-year low and the ready to occupy new homes stand at an all-time record low of 78,000. foreclosures remain a drag on prices and demand and are likely, not on likely, to fade. foreclosures remain concentrated with very high rates in six states that hold almost half of the foreclosure inventory.

one promising sign is the pick up demand from delayed household formations. young people in particular have not moved out of their parents' homes or have remained as roommates. nahb estimates that 2 million household formations have been delayed. these constitute a shadow demand that will beam unlocked as the economy improves. finally, and most importantly, in terms of the long-term health, lack of financing available to small builders is holding construction back where demand exists. small businesses are at the heart of the residential construction sector who typically rely on debt financing for such firms this persists and the lending conditions are as tight as ever. as a result of these factors, near-term outlook for new construction remains clouded. these sobering signals have persisted despite record high

housing affordability and historically low mortgage interest rates. yet, tight buyer finance and challenges with appraisals mean housing demand remains alert levels. nahb forecast production will remain weak in the first half of 2011, pick up slightly in the second half of the year come and build momentum into 2012. nahb urges congress to approach housing policy issues with caution. for builders, these policy issues include providing a secondary mortgage market that insures a reliable and uniform credit for homebuyers, preservation of other housing tax rules, on a blocking the lending channels to prevent homeowners to contribute to the economy where and when demand exists. nahb will present policy

proposals. thank you for the opportunity to testify and i look forward to your questions. >> thank you, dr. crowe. mr. phipps. >> mr. chairman, senator shelby, thank you for having me today. my name is ron phipps and i am the 2011 president of the national association of realtors. i am part of a four-generation realtor family. my dream is making, on a ship available for american families. i am proud to testify on behalf of the 1.1 million realtors who share that dream but also the 75 million americans who own homes in the 310 million americans who require shelter. most americans aspire toward home ownership. they measure their personal financial well less in large part in terms of -- well less in

large part of home ownership and equity in the home. it is the first commandment of self-reliance for most families. what is the state of housing? in a word, when you have heard repeated, it is fragile. the housing climate continues to be erratic. mortgage rates have jumped from the exceptionally low rates of last year and risen slightly and we expect them to go a little further. the consumer malaise continues in the overall economy effectively retarding the housing recovery. we may not be able to rely heavily on those consumers who help the overall economic recovery. this to some job creation, existing home sales will likely see improvement. however, changes in the median home price will be determined by how fast inventory is worked off. assuming that the pace of home sales can hold at a nearby 0.3 million units this year, the

industry absorption rate will be to keep home values by the stable. this should also help to absorber some of the distressed shadow inventory coming into the market. we consider the future of the federal housing policy. we must keep in mind the immense value that sustainable homeownership provides for our country. aside from the financial benefits gained over many years, home ownership and proves communities coming increases of the purse to the haitian, and improves student test scores -- improves communities, increases civic participation, and improves student test scores. our research suggests that 1 million additional home sales in 2011 can create 500,000 additional private sector jobs. while housing alone may not pull us out, helping its recovery --

hampering its recovery will hurt the overall recovery. we believe the pendulum and mortgage credit has swung too far in the wrong direction and it is hurting consumers and the economy. the harmful products that led to the bubble and the crash are gone. no one wants to be brought back. it is making it harder for those who can afford to obtain safe mortgages to further the recovery. let's be clear. realtors agreeing that reform is required to prevent a recurring of the housing market meltdown. unnecessary raising of down payments and other mortgage costs will have stark ramifications for the overall economy. realtors believe that federal regulators should honor the congressional attempt by crafting qualified residential mortgages with exemptions that include a variety of well underwritten products for 30, 15, 10, five-year rates.

they have flexible down payments and would require mortgage insurance. it is likely to shape housing policy for the future and it is very important. this is a precursor for the future of gse's and likely to be able for securitization andq. rm policy would displace a large number of potential home buyers which in turn would slow economic growth. further, increases in fees from fha and gse's would make it more difficult for people to finance. 10-15% are being precluded from obtaining mortgages. remember. every two additional closed transactions generates 5000 additional sales and can produce 250,000 jobs. fdr said a nation of homeowners is incomparable.

they preserve the need in order to promote the most of corn aspect of the american dream -- homeownership. america realtors agree. we ask you, congress, to maintain a forward-looking approach to overcome the obstacles and ensure that housing and the national economic recoveries are sustained. i think you for the opportunity to speak to you today. as always, the national association of realtors is ready, willing, and able to create a brighter future for our children and grandchildren. thank you. >> thank you, mr. phipps. we had two votes and the committee will recess for a short time and will resume the hearing after the votes.

[captions copyright national cable satellite corp. 2011] [captioning performed by national captioning institute] >> thank you, chairman johnson and distinguished members of the committee for the opportunity to testify. my name is jeffrey lubell. we are the research facility of the national housing conference, a nonprofit policy organization dedicated to helping insure safe, decent, and affordable housing for all americans. i have asked to focus on the state of the housing market faced by lower income americans. the bottom line is that despite the housing market decline in terms of home prices, housing

affordability for lack all and moderate income families has actually worsened. it is counter-intuitive, but i will explain why. lower home prices primarily benefit those who have bought a home in recent years. if you stayed where you are, or you rents, things have gotten worse. home prices have only gone down slightly, about 1%, where as rent has gone up. the number of americans with severe housing challenges increases. i have a figure from a worst case needs report which chairman johnson cited in his opening statement. as of 2009, 7.1 million renter households had need, which mean they have low-income rent and

did not receive rental assistance. that as an increase of 20% in two years, and 40% since 2001. the reasons are increased competition and a limited availability. housing affordability challenges are not confined to those who rent and to the lowest income families. we released a study looking working households, households working at least 20 hours or more per week, with an comes up to the -- of 2120% of the medium income. nearly one in four paid half of their income for housing costs. one in four working families spend more than half of their income. that is 10.5 million households nationwide, an increase of 600,000 households in just one year. as this table shows, there were

increases in the share of working households with severe burdens throw the country. costs went up by a statistically significant amounts in 25 states. those states include alabama, new jersey, north carolina, and tennessee. the share of working families who spent more than half of their income for housing went up by a statistically significant amount in those states. they went down by a statistically significant amount in no states. there were increases in other states like hawaii, but because the large -- numbers were not large enough, there were not significant. >> [unintelligible] >> why did they go up? the reason that those numbers went up is that incomes went

down, people have less opportunity for work, and rent went up, and owner costs went down only slightly, 1%. when you talk about affordability, that is for new housing. most people are staying where they are, and for them the problem has gone worse. in the next chart, i show the challenges effect brought the family types, split evenly between renters and owners. basically, we have challenges among owners and renters, and are most prevalent among those at the bottom of the income scale, but experienced by those across the spectrum. we have problems across the income spectrum. my testimony includes specific numbers of all rural communities. we have significant challenges in rural communities, and an increase of about 3%-5% of

homeless families between 2008- 2009. i wanted to make an impact about the -- note about the impact of rising energy prices. it is effected by utility and transportation costs. as energy prices rise, affordability will get worse. there is a huge connection between housing and transportation. families think about them and treat them as a single budget item. if we want to address this, we need to improve our policy to increase cost and affordability. i look forward to your questions. >> thank you, mr. lubell. dr. wachter, can you discuss the structural barriers to the house in -- the housing recovery that

may exist in the financial system? >> there is, right now, of course, a great deal of uncertainty about the future structure of the housing finance system, and while that might not be weaned on the housing prices at this moment, as we go forward, that is likely to be an increasingly important factor in the uncertainty of the future of housing prices. i would like to reiterate that housing is different than most commodities in that it is an asset. the price is very determined by households expectations of the future. for example, future scarcity of

housing finance what impact housing prices today. >> mr. lubell, are there barriers to financing affordable rental housing in the credit market, and if so, how can they be overcome? >> the short answer is yes, there are barriers to financing affordable housing, particularly affordable rents in house will, but also honor- occupied housing. to some extent, they are starting to resolve themselves. the market for equity in lower income tax credits has rebounded, but there is difficulty on the debt side. one of the things that is really helping is the availability of credit through fannie mae and freddie mac. i know it is not popular these days to talk about the benefits of those entities, but one of

the things that those entities are doing is helping to ensure the availability of credit for affordable rental housing particularly at a long term fixed rate of interest. those entities and their lending on a multi-family side has not incurred the same losses we have seen on the single-family side. it is important to understand that. i do think that one of the problems we have is that the number of families that need assistance in terms of affordable housing has gone up, as shown by these charts, and there is not enough subsidy available to fill the gap between what the market can pay and the cost of building those homes. that is of continued interest as we think about how to meet the growing challenge of affordable housing in america. >> dr. crowe and mr. phipps, you

discussed the idea that potential homeowners are not hindering the market, creating a shadow of the mint. -- demand. could you explain what factor would bring that demand out of the shadows? first, you, dr. crowe? >> thank you, senator. several things. one is the jobs. young people that have not yet moved out of their parents' home or remained as roommates are not able to, either because they have no income or not a sufficient income -- a consistent job growth would be the first thing. the second thing would be clarity of the warehousing market is going. i think jeff is correct that we will see rent increases because we are not building enough units to keep up with demand. rents will go up, which will

retard the delay. as house prices remains uncertain, that will retard the folks moving into a home because they do not want to buy a house until they're sure about of long-term sustainability. >> mr. phipps? >> senators, four of us use the word "fragile" to describe the market, and i am struck by the part where we said "handle with care." the media treats real estate as a single market. it is all local. we need to understand that financing sources our national. the challenge we are facing now is that a lot of people who should be able to obtain financing are not able to. when fannie and freddie have credit scores dead average from

760 to 720, we have the second piece that we would like to resolve to go back to normal, stable, a dynamic market. there is an opportunity for short sales in the market which has not been realized in an effective way that is clearly better for the investor, and in most instances better for the family. the investor ends up losing 37% of principal on average as opposed to 50%. the process of getting a short sale approved in a timely, human fashion is just non-existent. we need understanding of mortgages and finance universally. it needs to be something people understand, and i believe the consumer understands their house, and what they are buying, but they have great difficulty understanding what the 100 or

150 pages of documents they need to sign at the closing -- that process of understanding and comprehending what happens is important in order for us to get back to normal, informed market. we need to get through the overhang, have the excess inventory resolved, so that the market does what the markets do. there will be a stabilization once they get beyond that. >> senator shelby. >> thank you, mr. chairman. dr. calabria, some groups have called for more regulations to govern the foreclosure process, which would lengthen the time to complete for closures. some have even called for a foreclosure moratorium. what would be the consequences in your opinion of these policies on the housing market and the economy? >> in the aggregate, we would be delaying the adjustment of the housing market to reaching a

lick -- equilibrium. i am concerned that while we need to deal with those who can be held, those that can't, we need to move that quicker. somewhere between 44 cents sign and 40% are on vacant properties, which do not do any good. we need to have a two track approach where we focus on families that can be helped, but those that we know cannot be helped, that process needs to be quicker. i also want to comment on a couple of things the chairman mentioned, which is we need to keep in mind that we want to get to a normal market. we want to remember 2005 and 2006 were not normal market spurred >> they were housing bubbles. >> they were housing bubbles. 2002-2003 was more like a normal market. >> the chances of us going back to that is pretty slim toward >>

in the short term, yes, but we have had a long history of housing bubbles every 10-15 years. i hope we have learned something, but i'm not optimistic. i am sure many of us know -- i have friends that have tried to buy foshortfalls and had those transactions come through. anytime we try to push up prices artificially we are just transferring wealth from buyers to sellers. >> and, we are interfering in the market. >> we are. i would reiterate that the fundamental way to get the pent up demand out there is to get prices to the point where buyers do not believe they could go further down, and right now i have concern that potential buyers feel they will lose money

by buying something today. we need to get past the point where the only direction for prices to go is up. >> dr. crowe, in your testimony you state that the mass no association of home builders urges -- national association of home builders urges congress to come to solutions regarding government-sponsored enterprises. expect -- except for the need of a transition period, would you agree that congress needs to begin considering how to reform our housing finance system now the knicks reach it now? >> the simple answer is yes. we need a solution, but we need to understand the fragile nation of our housing market and have a transition. would also say that we support some alternate backstop by the

federal government in order to maintain a 30-year fixed rate mortgage in this country. >> i want to get into the hamp program which was promoted as a way to help 3 million-4 million straggling home owners. -- struggling homeowners. by contrast, 8000 people have dropped out of the program. this is significantly -- significant, i think, and disturbing because the special inspector general of tarp recently pointed out in testimony before the house financial services committee that "failed trial modification often lead bar wars with principal outstanding on their -- bar wars with principal outstanding on their loans, depleted savings, and worse credit scores."

dr. calabria, the you agree with that analysis? >> i think he is 100% correct. we need to be concerned that many people that have been through these programs have come out worse. it is important to keep in mind that we simply have not, in either this or the left of the restoration, put forth at a base line or a discussion of what is a reasonable -- regional -- reasonable number. >> is a good use of taxpayer money? >> i question whether it has been used effectively. >> mr. phipps, you testimony that frequent increases in fees from both fhfa and the gse's and credit overlays will unnecessarily increase the cost of home buyers and discourage consumers who can't otherwise afford a mortgage from participating in the housing market.

in both cases, these were existing fees designed to protect the taxpayer. if these reasonable fee increases care -- deter a consumer from buying a house, does it not indicate that a person is better off renting a house, and do you support sounding -- challenging as to where early sound fees to prevent further bailouts? >> the short answer is that we believe got fha serves a specific purpose, and it has filled a void in the markets, a larger percentage than historical a. there have been several increases recently on fha. each time, the increases of the threshold becomes higher. there has to be a balance between cost and benefits, and we welcome that analysis. in the short answer, we think the stepping up of costs will

really demand -- defect the level of demand. if you raise that too high, the people do not get on it, and we have further compromising of overall value. it is woven. we would like to get better 28 -- back to a normal market were people who can sustain the mortgage can have access to enjoy the benefit of homeownership. >> i have one last question. dr. calabria, you stated " unemployment is the primary driver of mortgage delinquency." previously, we heard testimony from dr. paul will end of the federal reserve st. "when home prices fall, some borrowers can no longer profitably sell, and like you dense take a call after call one of a life events heat

referenced was -- life in dense take a toll." is one of the best ways to help owners is to spur economic growth? >> i agree. i think is significant amount of problems would go away if we brought unemployment down significantly. >> do you disagree with that dr. crowe? >> no, senator. >> what about you, dr. wachter? >> unemployment is a major driver, and we need it to strengthen in order to have a housing market because every. >> thank you, mr. chairman. >> senator menendez. >> thank you, mr. chairman. i want to talk about liquidity in the marketplace. it seems to me, and i would like to be your perspectives on this, how do we get banks to commit to lending for real estate projects again, particularly -- right now

it seems to me that except for a very high asset class, for example on which attracts institutional investors like the luxury higher rental market, like in our area in new jersey -- other than that, you have an underwriting criteria on lenders where projects debt are performing -- -- projects that aren't performing, borrowers' debt have not had a blip in that process -- that have not had a blip in that process, ultimately finding themselves because they do not appraise today at the level of alone " -- of low loan closing, totally stopping projects. i look of that liquidity issue and the flip side on the consumer side and see the

changes in the underwriting criteria, and we certainly understand legitimate changes to insure that we do not have people buying homes they cannot afford. by the same token, if we had a 25% drop in real estate values, but you could get a 10% down based on your income, and that would be take whatever price level you want -- $400,000 home, so $40,000, and i have to put 25%-30% down, which is nearly $100,000. i do not know how many people have $100,000 to put down on a home. so, i am wondering, from your perspective, how do we deal with the challenge of a liquidity crisis, both for the actual movement forward in the market by those who developed it, and from the consumers who seek to

purchase it? take the first stab at that, senator. on the production side, on the builders side, the builders are having that difficulty. we have asserted builders for six or seven years through the boom and into the bus, and what we find is that a greater percentage of them are being turned down at financial institutions, and that is their source of loanable funds. if they're small companies and they go to small banks to borrow the money to sell to customers. they cannot get that money. we go to the regulators and say there is something strange. we do not see a differentiation between banks' response between the markets that are in good shape and those that are not. we understand why a mark -- of bank would say no in a market that is overgrown with excess inventory, but we do not see why

they would say no in a market that a showing signs of recovery and people want to buy a house. we did not give satisfactory answers from the regulators. we will be right -- presenting legislation that we hope you will consider -- things like making guidelines absolute so that the regulator has guidelines, yet they have turned them into absolute, so there is no breaking those barriers, or evaluating develop properties at their distress level instead of their build-out level. there will be that level eventually, but we cannot seem to convince examiner said that will correct itself as the market corrects. requiring a payout of the loan when it is current, but the selling rate is not the same as it should have them, therefore the bank has decided they want

their money back, even though the builder is making regular payments. finally, we would like to see the sba loan system more friendly to home builders. it is not useful to homebuilders read dr. >> anyone else? mr. phipps? the sixth to home builders right now. >> anyone else? mr. phipps? >> if one starts with the presumption that banks tend to be spread lenders -- there is a degree of truth to that. if we start with the observation that despite the financial crisis, insured depository balance sheets have increased, and insured deposits actually increased. what they have done is change what they're holding on their balance sheet, and part of this is their incentive. when you have set up a situation

where you can borrow from the federal reserve near zero, put it in treasuries, and earned a nice spread that is absolutely risk-free. when you look at the decline of small-business lending at the commercial bank, it equals the increase. we have changed to we went to. what is important is we need to change the incentive system. what the federal reserve has paid to try to get this out of this crisis, it does not make sense to pay interest on reserves. we are encouraging banks to hold excess reserves. insurance depositories have $1 trillion in cash just sitting around. there's not a lot of capacity. is really just changing the incentives system so they put that into risk. we need to to get -- look at

monetary policy as a component to this. >> center, the only thing i would add is that on the consumer side, your scores become the equivalent of your sap score. we need to get back to common sense, holistic lending, where they take the amount down, the whole potential profile when analyzing whether to give them financing or not. you do not need 760 as a minimum credit score into the hon.. the pendulum has swung so far that the rate of default over the 2009 instruments is about 1.2%, which is well below the normal we would have seen in the early 2000's range. we have been meeting with the lenders, fha, fannie and freddie, to say please bring a.

to a sustainable criteria. we've not seen that and act as quickly as we would like. that 50% of the market, if we move to five%, but as a lot of transactions and a lot of jobs. >> thank you, mr. chairman. i have questions for the record for mr. limbaugh on affordable housing. we look forward to seeing your -- lubell, an affordable housing. we look forward to your answers. >> senator berkeley. >> thank you, mr. chair. in your testimony, dr. crowe, you've noted that for home builders and financial the cetaceans having to work soon not blocked lending channels.

you mentioned you might have a legislative proposal. i was wondering if there are some points you would like to preview for us. >> thank you, senator. i was given an opening by a son of german and does, so i took it. -- senator mendez, so i took it. when we are looking as for the senate to throw its weight around. we have not had any success in convincing the regulator that there seems to be one systematic regulation concerning home builders rock the country, even though the markets are dramatically different across the country. we have recovering markets in texas, for instance, and some other states, and not sold recovering in other states, if we see no differentiation in the ability for builders to borrow. when we are looking for is a

little more sanity to the regulatory oversight that would allow financial institutions who tell us they are perfectly comfortable lending to real- estate in certain -- certain markets, but are being told no by regulators. >> it is essentially a cap on the loan portfolio that could go to homes? >> one of them is a guideline of no more than 100% of capital going to real-estate. it is being used as a hard and fast rule. if an institution has that much loans on its balance books already, it can no longer at any, even though there's another good one out there. >> a business person was telling me as the owner of a commercial building, the bank did it as a non-real-estate loan, essentially for going the collateral, which was insane from a common-sense point of

view, but as a result of these caps the you are referring to. mr. phipps, i appreciated your point about the intent -- intangible value of home ownership. it is certainly something i feel strongly about. do you want to mention some of what you consider to be the intangible benefits? >> at the end of the day, we all need shelter. we need a place to live. when you look of the benefits, when you're talking about skiing in the game, it is a down payment. skin in the game is my name on the deed, saying i own that property and have an investment for my family. we got away from the discipline of taking on a 30-year mortgage and paying it off, but that is the concept. if it weren't for my parents and my grandparents. -- that is an aspect that

worked for my parents and grandparents. we need to get back to that. we, as realtors, are committed to the concept of self reliance. we believe homeownership is a prerequisite for that. when you get the benefits for neighborhood, community, test results, etc., there are all a cost. we watch it with great caution because this government has made a historic commitment to home ownership. we think the game has been played this way for 100 years. we are anxious about any effort to reduce the number of baseball bases on the diamond, or change the number of innings or house because we think home ownership at the end of the day is right for our children and grandchildren. >> thank you, and i echo that. i saw in my work for habitat for

humanity and other work in home ownership that the fact that one has the ability to have the freedom of choosing to do what you want on that property -- no longer is there a rule about what color is there to paint the house, all or a landlord to call when there is something broken, you have to take responsibility. stability, and you mentioned tax results, study after shot -- study showed that families have higher incomes, are more likely to graduate high school and college, and more likely to have lower dependence on future public payment. that is not just in tangible, that is tangible. that is a real benefit. it bothers me to hear folks saying that we should not press for home ownership in our society, especially because what

they are responding to is the impact of predatory mortgages. if a family was unsuccessful on a predatory, exploding interest rate mortgage, that does not mean they would not be successful if they had been offered a straightforward, prime, fully amortized mortgage in that sense, one of our major programs is a home loan to -- homeowner interest reduction, and it is a valuable program over the long term to reduce the size of payments. one thing that i have been interested in is more help at the front end, and that is for working families the home owner interest reduction provides only a modest amount of assistance, especially when interest rates are low. on a two hundred thousand dollars house, 10% down would-be ask a $180,000 mortgage, 5%, would be $9,000 per year, and

that is less than the standard deduction for the couple, which would not get anything on the state had additional advisable expenses. if they did, it would proudly be a modest amount. i have been floating the idea not of a temporary downpayment tax credit, or better yet ability to use those funds at closing, but permanent. i realize that might be too expensive and too hard for people to seize on, but really what i am saying is we used the credit as a short-term stimulus, but in terms of working families have imagined assistance to get into a home to begin with, spending a little bit of money on the front end is highly valuable. spending around $100 billion a year -- for somewhere around $500 billion a year, we could help a lot of families make that transition, and in the short term, it would help of toward

the excess inventory several folks have mentioned. i would invite you to share any thoughts about that. >> center, we actually study the proposal and are very intrigued. if the experience of the tax credit before we thought were an effective in stabilizing the market. in australia, they have that program and it is working well. you prefaced the conversation with the mortgage interest deduction, and we believe that life is choices, and that is the penultimate thing that we will defend, but we certainly support and encourage programs that provide home ownership opportunities for that. >> dr. crowe, from the home builder's point of view, any thoughts about that? >> i think a similar comment -- downpayment is the single biggest retardant for a first- time home buyer to get into a home. we still favor higher loan-to-

value mortgages with your corporate premiums paid for the rest, so if there is another way to subsidize that down payment through tax credit, we would certainly be supportive of that, certainly with the caveat that we still believed to be the mortgage interest deduction is very important to the broad base of households. yes. >> there is one of the thing that is disturbing to me. the assumption is if someone puts 5% down, that is all they are putting down. closing costs run between 3% and 5% additional. we need to add the real cost that the homeowner has to bring to closing. it is more than 5%, 10%, or 20%. is that amount plus the related closing costs. >> point very well taken. mr. chair, i am over my time, so i will follow up with additional comments you all have.

>> thank you. senator berkeley. the housing market has several challenges to overcome. we took the initial steps in dodd-frank by strengthening underwriting standards and risk protection, but we still have work to do. i look forward to continuing this discussion about the future of housing in america in the coming weeks and months. i am hopeful, but as we explore the path forward, we will find more areas of agreement than disagreement. it is essential that we get this right, and create a sustainable housing market for american families. thank you again to my colleagues and our panelists for being here today. this hearing is adjourned. [captions copyright national cable satellite corp. 2011] [captioning performed by national captioning institute]

>> sunday on "washington journal" laura mechler and patricia murphy discussed extending resolutions. then, ian ? was. then, michael doonan talks about the success and struggles of the health-care program. "washington journal, live on c- span. >> despite what passes for conventional wisdom in certain circles, there is nothing radical or on americans in

holding these hearings. >> ascribing to evil acts of the few individuals to an entire community is wrong. his ineffective, and risks making a country less states -- safe. >> watched the entire hearing on possible radicalization in u.s. muslim communities, along with other events before and after the hearing, including reaction from viewers, all of-the c-span video library. search and share. is washington, you're white. -- your way. >> if you missed the house homeland security hearing on radicalization within muslim communities, or could not watch the entire event, we will show the hearing again sunday morning at 10:00 third p.m. eastern here on c-span. [laughter] [applause] >> earlier this week, rhode island governor lincoln chafee did his first address since been

elected in november, with proposals that include a $60 million cut in medicare expenses. he spoke at the state capitol in providence for about one half hour. [applause] >> thank you. it is a privilege to speak to you from this chamber, a shrine to the democratic debate that has defined our lively experiment since rhode island was fined. every bit that i report to work- honored by the trust that you a place in may. i intend to show the people of the state the state can't count on their government to make wise

financial decisions, -- they can count on their governments to make wise financial decisions, and build a rhode island that makes us proud. in so many ways, rhode island has already achieved greatness. in our early centuries we were a bastion of democracy, a zealous in the defense of rights and liberties. with the industrial revolution we became a beehive of entrepreneurialism activity, surprising the american people with tools that were essential to the winning of the west, the winning of worse, and the winning of a better life for millions of immigrants. in the 20th century, we did more than our share to help america suppress tyranny of broadband build prosperity at home. the 21st century has been more difficult. we have not adapted to new ideas and new markets. if we face high unemployment and

huge budget deficits. our democracy has been lively, but not always once again, we need to find a new path to greatness. we have to retool and rethink our place in the world. that will not be easy, but none of us in this room were sent here to do a job that we thought was easy. this is a challenge worthy of all of our talents and energy. i am reminded of the potential for prosperity simply by walking into this building. our state house was built at an enormous cost over nearly a decade before it was dedicated. we imported 320,000 cubic feet of marble, 13 million bricks, and 1,300 tons of steel beams. architects found inspiration from the best features of u.s. capital, and the dome structures

of london, paris, and rome, but it was designed to be a unique rhode island statement. our state government was supposed to set a high standard. they did not want a building that would last for just a few years, and they give us a structure that has stood the test of time. like them, we also need to think ahead for the benefit of our children and their children -- how wrong it would be a future historians said the loss they responded to the issues of the day, but did little to plan for the future, or even worse, they failed to respond to the issues of the their day. we cannot allow that to happen. i guess you think about leadership and the hard decisions that it can demand. we have those hard decisions before us, but i believe a better future starts today. by directly confronting our challenges, we make it the first

steps on a path to prosperity. our greatest responsibility this year is to pass a budget that closes the enormous deficit, invest in our schools, and fixes structural problems. in recent years we have relied on federal funding to close budget gaps instead of making tough choices on what services our government should provide and how much we can afford. the federal stimulus money has ended, and we face a deficit of two hundred $95 million budget billion dollars. we can no longer delay difficult decisions. my budget aims to close the deficit to a combination of revenue enhancement and program cuts, while ensuring we did not harm the investments are necessary for growth. one of the key areas for new revenue must examine the sales tax. the 7%, rhode island has the highest sales tax in new

england, it because we exempt items, we have one of the most narrow tax bases in the country. i am proposing a two-tiered plan that will address our near-term needs while making our state more competitive. while i do not like the idea of imposing new taxes, we must take this vital steps to address our structural deficit. as i have mentioned in the past, we need to take a close look at items are currently exempt. during the campaign, i recommended taxing currently exempt items at 1%, and i remain committed to that plan to help us reduce our deficit, however i believe that government should always listen to its citizens, and their response that the sales-tax might pose a hardship on a rumble populations, i propose maintaining current exemptions for food, gasoline, prescription drugs, and medical

devices. all would remain exempt from the sales tax. there is another simple and fair way to increase revenue. rhode island businesses are facing on fair competition from internet sell said and not subject to sales tax. this is not a small problem. rhode island is projected to lose $70 million in sales tech -- sales tax revenue in 2012. i believe that internet sales by -- and give consumers access to more options, but they should not enjoyed advantages of a local businesses by been exempt by the sales tax. i am calling on congress to test the main street fairness act, which would allow states to collect taxes from out-of-state sellers. this would level the playing field. when i was in washington, d.c.,

i raise the issue with house speaker john boehner and senate majority leader harry reid, and i will continue to press for passage. the act with a rhode island businesses and provide us with enough revenue to repeal the 1% sales tax. [applause] >> looking ahead, we must also modernize our sales tax of it adapts to a changing economy. when it was enacted in rhode island in 1947, 60% of u.s. personal household consumption was of good, and 40% on services. since then, the united states has moved to a more service- based economy, with the average household spending 70% on services, and 30% of goods, yet the items subject to a sales tax

have not changed. i propose expanding our sales tax to include certain services such as dry cleaning, beauty salons, and recreational activities. if we apply the sales tax to a broader base, we could lower it to a more competitive rate. i propose reducing the sales tax rate from 7%, to 6%, of returning next to the level -- [applause] >> this return to the level we had in 1990, before the credit union crisis. the new 6% rate would be lower than massachusetts, and the proposed rate for connecticut, encouraging more people to shop in our state, and providing a much-needed boost to our retail industry here. it would also send a signal that rhode island is committed to attracting new businesses. any talk of taxes is painful in a time of recession, but we need

to make our states solvent if we are to rebuild. the sacrifices we make will be terrible if they are shared equally by all of our citizens, -- unbearable if their shared equally by all of our citizens and -- bearable if they are shared equally by all of our citizens. by confronting these problems immediately, we will show the world we are serious about returning rhode island to greatness. raising new revenues is only halfway to closing the deficit. if we want to balance the budget in the short term and long term, we must make difficult decisions to cut government spending. expenditures on health and human services programs are not only the largest portion of the state budget, but they are also the fastest growing. unless we take action, spending

on these programs is on track to grow from $96 billion between 2008 and 2012, and in comparison, other government agencies in the note -- rhode island climb only $12 billion over the same years. and, municipal aid was cut by $195 million over the same period of time for if it is time to make hard decisions about what services are the government should provide and how much we're willing to pay for them. wheaton with the office of health and human services, we have conducted eight top-to- bottom review and identified areas for savings by reforming service delivery, restructuring existing contracts, and improving oversight. we can cut spending by over $60 million in the fiscal year 2012, with an even larger amount

projected for 2013. many of these reforms are common sense, such as paying providers the same rate for comparable services. the changes will make our health care payments system more transparent, and allow us to leave l.a. will we are getting for our tax dollars. -- allow us to redouble we are getting for our tax dollars. i encouraging in the general assembly to discuss and debate these proposals the rally. at the end of the day, i urge you to recognize that we cannot simply continue to fund our current level of services. i also propose $20 million in cuts to other departments as a first step in a larger review of their operations and management. state government administers many important programs, yet we have no systematic way of knowing how well we are doing.

i am working with my department directors and their employees to review operations throughout our government. we must identify the most important responsibilities of government, in sure we do them well, and decide how to measure their effectiveness. we will make our department's more accountable in deficient, then determine which programs are worthy of continued investment, and which should be modified or eliminated. the combination of revenue enhancements and cuts will help us close the current deficit, but that is not enough. our budget must promote economic development for long-term growth. one area of particular attention is our staid business climate. for too long, our economic development strategy has been targeted toward individual companies, instead of creating an environment that fosters broad, economic growth. one such example is the jobs

development tax credit, which lowers the corporate rate for companies that create jobs. well the program is well- intended, and in reality, very few companies can navigate its complex reporting requirements and its effectiveness is difficult to determine. a corporate tax code also compared -- creates an unfair and vantage with companies house -- advantages to companies that allow them to send profits out of state. by moving our system to combine reporting, which is used by the federal government in most new england states, we can treat all of our business fairly. we need a climate where all businesses are encouraged to grow and prosper. tonight, i propose that we face up the jobs development tax credit, and adopt the system of combined reporting. the revenue we gain from those

changes will allow us to lower the corporate minimum tax from 500 two hundred $50 for more than 30,000 small businesses. [applause] >> that is good. we also reduce our corporate tax rate over three years, from 9%, one of the highest in the nation, to 7.5%, putting us on par with connecticut, and lower than massachusetts. [applause] >> this lower corporate tax rate will benefit existing businesses with plans to expand operations and make our state more attractive to companies looking to locate here. another important factor is developing a well-educated and

skilled work force. last year, the general assembly passed historic legislation creating an education funding formula. that will ensure that our cities and towns have a stable and predictable source of revenue to invest in public education for the first time. congratulations. [applause] >> even in these difficult times, my budget honors that agreement by providing the additional funds necessary to support the school funding formula. [applause] >> i am committed to ensuring a first-class public education system for our students so that they can graduate with the skills needed to succeed in life. [applause]

>> i was going to do it -- we are going to do it. [applause] >> the best area we can make our investments. we also must makes less in investments in higher education systems. we're fortunate to have the university of rhode island, rhode island college, and the community college of rhode island, each plane an important role in educating our students. unfortunately, the state's contribution to higher education has plummeted in recent years. my budget reverses a trend by proposing an additional $10 billion for a higher education system. [applause] >> even in these tough times we must demonstrate our commitment to higher education into the of

people of this state. there is no more important rung on a ladder to success. maintaining our transportation infrastructure is vital to the future. one of the core function is to build and maintain roads and bridges, our method of paying for these projects is broken. right now, the department of transportation uses proceeds of the gas tax sioux fun part of the state's share of the federal -- tax fund -- to fund highwaythe state's projects. we have one of the highest gas rates in the country. instead, we must break our habit of borrowing money to build roads. in 2011, rhode island will spend $43.6 million in debt service on transportation. that is more than $40 million we

could have spent to repave our roads and rebuild our bridges. to six this problem, i propose a five-year plan to dedicate the revenue we get from drivers' licenses and registration fees for the transportation fund. by making incremental additions to this fund, we can diversify our transportation funding sources, avoid increases in the gas tax, and reduce wasteful interest payments. [applause] >> $43 million in this year alone in interest payments -- we have to change that. another area for urgent action is our state pension system. our on funded liability is about $5 billion a month and the gap could be larger. the current system is not sustainable and a burden on our

taxpayers. in fiscal year 2012, the state is contributing 238 million dollars toward state employee and teacher pensions, and that number will increase to 420 two million by 2016 -- a 77% increase over four years. the state has made progress in recent years to address the problem, but we need a comprehensive plan. under terms of an agreement made by the previous administration, state employees received a 3% cost-of-living adjustment in january, and scheduled to receive another 3% in july, july 1. tonight, i propose that all state employees contribute the 3% july race for the pension program. i also ask teachers and police to match the new state employee rate of 11.5%, since all groups benefit from a strong pension

system. this proposal will provide $40 million in additional contributions this year. in light of the shared sacrifices i'm asking all of rhode island to make, i believe this increased contribution rate is reasonable and warranted. these higher funding levels would last until we establish a comprehensive pension reform plan, at which time we can adjust them as necessary. we expect we expect more information in the coming months. i will work with you and all interested parties to establish a long-term solution. this solution should align the interests of ryland taxpayers and our public employees. as we work together to tackle our problems, we must not ignore the challenges facing local governments. like our state, many cities and towns face deficits and unfunded pension plans.

unfortunately, we have contributed to the problem. we have cut state aid to cities and towns by $195 million over the last four years in an effort to balance our own budgets. if we do not want additional cities and towns to face the problems confronting others, we must take action now. my budget includes an additional $5 million in aid to distressed communities for this fiscal year to help cities and towns in the greatest need. i also propose a new local aid initiative, the transparency program. it will provide nearly $20 million in additional funds to communities that pursuit sound financial planning and budgeting practices. those cities and towns that do not make the necessary changes in the coming years will forfeit a portion of their state aid. under the program, the state

will be able to closely work with cities and towns to understand their challenges at an early stage and avoid crisis. the state should encourage municipalities to get their finances in order. we must set an example by demonstrating our own commitment to fiscal responsibility. i want to say a word about how the budget will affect rhode islanders. he will have to bear his part of the burden if we live up to our responsibilities in this chamber. if we spend taxpayer funds with discipline so that our economy recovers and our people are well served, these sacrifices will have met their purpose. my goal is to reduce our taxes to be more competitive. i also want to ask all of you to

pledge with me that we will commit to lower taxes as the economy recovers. [applause] the budget i am submitting tonight is required to use the revenue projections from last november's revenue estimating conference. we have some indication that the actual revenues for the fiscal year 2012 may be higher than the november estimates. if those trends hold, and strongly encourage the chamber to use the additional money to lower taxes instead of adding new spending. [applause] we want to continue to get more competitive. ideally, we could lower our sales tax to 5.75%.

that would be a signal to the region and nation that rhode island is serious about reducing our tax burden. you can do it. [applause] the may numbers are good and we can get to 5.75%. that would be a great signal. you have listened to and numbing phrases of the last 30 minutes. let me be clear. all of our challenges are made easier by a growing economy. if we demonstrate fiscal discipline, our economy will prosper. i have been a deficit hawk throughout my career in public service. my votes as a mayor, senator, and councilman are a testament to that. i believe the reason our nation is in the current economic state is because we have lost our discipline.

the many challenges facing our state are intimidating but not insurmountable. the budget proposal does not promise to solve all our woes in a single year. instead, it represents the first step on a bold new pathway to prosperity. long term vision is the form of leadership we need at this turning point in our islands history -- rhode island's history. we must begin to think anew. getting rhode island on the right path will mean making difficult decisions. i am confident we will work together to restore the greatness that still radiates from this state house. thank you. [applause]

>> here is a look at our prime- time schedule. starting at 7:00 eastern, the night circuit court of appeals hears an oral argument in an oregon-based organizations challenge to its designation as a terrorist group. then microsoft chairman bill gates talks about his work as a philanthropist and global healthcare issues. after that, first lady michelle obama and secretary of state hillary clinton host the annual women of courage awards ceremony at the state department. finally, congress holds a joint meeting to hear remarks from australian prime minister julia gillard. >> this weekend, the howard university professor on the participation of african- americans in the civil war. it will focus on the political philosophy of our 30 as president and the commemoration

of the anniversary of the day the massacre that led to the second seminole war fought over slavery. go online where you can also have our schedules emailed to you. >> on wednesday, the house oversight subcommittee looked at internet providers regulations recently handed down by the fcc. these new rules have to do with the concept of net neutrality. that is the idea that internet providers to allow all providers equal access to networks. this is two hours and 15 minutes.

>> i would like to call the subcommittee to order. we have the hearing on the resolution to stop the fcc from regulating the internet. this is our second hearing on this topic. on february 16, 2011, this committee had a three hour hearing with all five fcc commissioners. at the request of our democratic colleagues, i delayed its previously scheduled mark up and scheduled this hearing to shed more light on the rules for regulating the internet. i have introduced the resolution under the congressional review act that provides congress with an expedited process to nullify agency rules. the resolution only requires a simple majority in each chamber and is a filibuster-proof in the senate. the form of the resolution is provided for in statute. it is not subject to amendment. senate majority leader harry reid has described the process

as reasonable and sensible approach to regulatory reform. with an open and thriving internet thanks to our historical hands-off approach. the internet works well. it is the government that does not. on december 21, 2010, the fcc adopted rules to regulate the internet without statutory authority to do so. before we get into the harm the government regulation of the internet will cause, it is important to regular -- recognize that the theory of authority would allow the commission to interstate any interstate communications services with barely more than a whim and without additional input from congress. i do not want to see such authority at the federal communications commission. section 230 makes it u.s. policy to preserve the vibrant and competitive free-market that presently exists for the internet and other interactive computer services unfettered by federal or state regulation.

under the fcc's rationale, its authority is bounded only by its imagination. this new rule is an attempt to do an end run around the ruling that the fcc failed to show it had authority to regulate the internet. the sec -- do my democrat colleagues agree that the fcc has the right to regulate the internet in coffee shops? the fcc believes it does. in my opinion, this is an agency exceeding its congressional authority. its action will hurt investment and cost jobs. the small cable and internet providers from my district wrote to me about her concerns. she says the sec chairman primed the pump by threatening to apply it rules to broadband. the sec --

the commissioners are looking in the rearview mirror, attempting to regulate the internet as of yesterday absent any market fell year. how will companies like ours be able to compete if we bear the brunt of the regulations like giants like google go free? the internet is evolving. all members of the ecosystem need to work together to innovate. the chairman has picked winners and losers in the latest effort to impose net neutrality regulations. it will cost jobs and dampen investment." this is not a partisan issue. in 2006, 58 democrats voted with us on the floor of the house to oppose that network neutrality amendment to video legislation. some of those democrats are still on the full committee. some are still on the subcommittee. that was not a vote against the title to approach. there was a vote against imposing net neutrality rules. there was no crisis warranting

the sec -- fcc deviation from the historic approach. the fcc admits he conducted note market power analysis -- that it conducted no market power analysis. one technologist warned in 2010 couldop-ed the fecc sweep the entire internet into the big tent of regulation. does this mean that customer needs will take second place and a vibrant industry becomes a creature of government rulemaking? this will also make it harder for upstarts to compete with web incumbents. new entrants will have fewer resources to abdicate and will lack the needed flexibility to strike deals to create -- compete.

what is even more universally damaging is the rule's potential to destroy the ability to raise capital. we will also hear that the rule will transfer wealth from broadband providers to application providers. that does not begin to grasp the party -- problem for both parties. the transfer of wealth can be beneficial to one at the expense of the other. the transfer of wealth that will ultimately cripple the party upon which the other allies for its existence profoundly are harmful to both. these regulations will cost jobs. they will hinder the necessary investment in network upgrades thus forcing the free market vibrancy and innovation of the internet. let's keep the internet open and innovative. i urge my colleagues to support the resolution. i will recognize my colleague ms. eshoo for an opening

statement. i will recognize the gentleman from california, mr. waxman, as he needs to go to another committee hearing. >> i want to thank the ranking member of the committee for allowing me to go before her in making this statement. thank you for agreeing to our request for a legislative hearing on the resolution of disapproval under the congressional review act. democrats on the subcommittee feel strongly that before we rush to consider the legislation we would all benefit from hearing from companies, public interest groups, and economists. my concern is there is an enormous disconnect between the facts and the majority's policy objectives. technology innovators oppose the disapproval resolution. consumers oppose deregulation. economists oppose deregulation. even broadband providers do not

support the resolution. in the letter of the committee received on monday, the cable industry says it's the ports the -- supports the fcc rule because it codifies the status quo. it provides helpful language around what constitutes reasonable network management. it provides greater certainty about our ability to manage and invest in our broadband services. the alternative to title two presented a greater risk. we will hear similar testimony from at&t today. is today, the consumer federation of america and consumers union released a poll showing overwhelming support for an open internet. consumers oppose congressional action to block the fcc rule. none of this seems to matter.

the reason we're debating this resolution is that republicans claim the regulation would stifle the internet and hurt the economy. the fastest-growing companies like google, amazon, and others say the opposite. they urged the fcc to adopt open internet rules because "baseline rules are critical to ensuring that the internet remains a key engine of economic growth, innovation, and global competitiveness. " most of the internet companies wanted stronger rules than those adopted by the fcc. i wanted to get independent advice. our staff contacted economists at leading academic institutions. they told us the fcc got the rules right.

the phone and cable companies have near monopolies as providers of internet access, especially wireless internet access. without sensible regulation, they could choke off innovation by charging internet companies for the right to communicate with consumers. one cost of this misguided regulation is that it is distracting us from important telecommunications issues that we should be addressing. we could do so on a bipartisan basis. we should be working together to grow our economy by freeing up spectrum. we should be working together to make our nation safer by building a broadband network for public safety. we should be protecting taxpayers and consumers by enacting universal service reform. we are doing none of these things. instead, we're wasting time about and destructive resolution that threatens innovation on the internet. i want to thank the witnesses for being here.

i look forward to your testimony. i want to yield the balance of my time. >> thank-you very much. why is the internet so important? it enables freedom of expression and the sharing of ideas across towns and around the world. it prevents a single entity from exercising total control. it is a vital tool that helps small businesses compete and expand, pumping life into our economy. that is what the open internet is about. one of our witnesses here it embodies the importance of an open internet to our economy. miss chase opened a car sharing service available in one and 200 cities. she used the open nature of the internet to build for innovative business from the ground up without having to ask permission from verizon, comcast, at&t or other carriers.

$186 million in revenue. 540,000 members. that is what the open internet means to our economy. if the debate we're having today is not just a solution in search of a problem, it is a resolution in search of a problem. if we want to move forward in a way that deals with this issue, comcast agrees that they can live with the rules. at&t agrees they can live with the rules. the key to the internet is insuring it is open so that new companies, applications, gadgets are being defended on a daily basis in hundreds of thousands of cities across our nation that utilize the engine for economic growth as a way that keeps america's lead over the rest of the world. that is what makes us great, the open internet. if we allowed a small number of

companies to control how fast the change and innovation moves, we will be stifling our ability to continue to be the engine of growth in the world using the internet as our way of revolutionizing the rest of the world. if we did not have an open internet, there would be no facebook, twitter, google, youtube. thank you for graciously extending the extra time to me. >> we will turn to the chairman of the full committee for opening statements. >> i would remind my friend from massachusetts that we have all of those and not have net neutrality now. i urge my colleagues to support h.j. res 37. president obama has said it is his priority to focus on jobs. he has also said his administration will avoid onerous and unnecessary

regulations that stifle innovation. in a jan. executive order, the president said that agencies must face regulations on a reasoned determination that the benefits justify the cost. executive order does not apply to independent agencies like the fcc. the president urged such agencies to follow it. german genachowski has said he does agree with the orders principles. if the fcc had taken the approach for the last year, we might not of needed the resolution today. the reality is that if the fcc was truly weighing the cost and benefits of the action, the agency would not be attempting to regulate the internet. there is no crisis warranting intervention. the internet is open and thriving because we have refrained from regulating it. imposing these rules will cause more harm than good by chilling the very investment and innovation we need to ensure that the internet keeps pace

with the growing demands being placed on it. this will only hurt our economy. the internet is not broken. the market has not failed. to justify its power grab for a favored sector, the fcc is speculating about the possibility of future harm. apparently, they never heard the phrase about not fixing it is not broken tree we can go one step further. as a former fcc commissioner said, "if it is not broken, do not break it." it since it did not conduct market analysis. -- it admits it did not conduct market analysis. we reviewed the response to our follow-up. it is lacking. they point to paragraphs the content to do that contained summaries of comments. i do not believe we should be

regulating the internet. if we follow the fcc logic, they would be regulating google and other internet companies. press accounts indicate that google puts some search results over others. this affects what traffic internet users see. it also can have a financial impact on websites. should the fcc determine whether google is engaged in a reasonable discrimination? would it be appropriate for the government to intervene because of the possibility of future harm without analysis of future problems or market power? i think not, not for google or anybody else. ultimately, there is a question of authority. their story changed about where they get the power more times than it has uttered the word "transparency." egos from one week explanation to another -- it goes from one

explanation to another. they're all in france about the they are all -- they're all endr runs. i yield the balance of my time to mr. barton. >> you gave an excellent explanation for why we should support h j 37. to be as succinct as possible, the internet has thrived in large part because this congress repeatedly has stated we did not want it to be regulated. the fcc keep attempting to get a nose under the tent to come back with heavy-handed regulation. this latest attempt is simply an effort to establish the principle that the fcc can regulate the internet id is not

as important what they do, but the fact that they have the authority to do it. h. j. 37 would say that they do not have the authority. if it is not broken, do not fix it. all of these great things happening are happening under of the regulated -- a deregulated environment. we should keep it that way. i yield back to the subcommittee chairman. >> i now yield to the gentlewoman from california, miss eshoo. >> thank you all for being here today. given the significance of the resolution under consideration today, i want to thank chairman walden for respecting the request of the ranking member of the full committee, mr. waxman, myself, and members of the subcommittee to have a legislative hearing. i think it is essential that members of the subcommittee have

an opportunity to hear from key stakeholders who are here today before voting on a resolution that would overturn the open internet rules. it is fascinating to listen to the statements that members make. this is all about an open and free internet. those words are really the hallmark of the internet. all of the reasons my republican colleagues are saying they're doing this, it is fascinating. sticklers themselves are on the other side of the issue -- the stake holders themselves are on the other side of the issue. they do not believe a light touch and of the fcc is missing. -- menacing.

letters have poured into this committee from groups and organizations across the country. from religious leaders to consumer organizations, to high- technology associations -- they have all weighed in and said i"o not do this. " it is fascinating to me that they say they are for an open internet after reviewing the record of where there have been abuses. we want to see consumers making the choice, not corporations. we want companies to grow and be successful. there is a long list of them. many of them are constituent companies from my congressional district. i think everyone here needs to think carefully about the direct and indirect consequences of passing this resolution.

disapproving the fcc rules is a serious threat to our economy. i think is a direct attack on transparency. it could lead to further uncertainty in areas beyond the order is the -- such as the rules that prevent privacy -- piracy and protect children. the history of an open internet speaks for itself. businesses that rely on an open internet continue to grow. an open internet. a stunning example is ebay. in 15 years, it has gone from a living room start up to companies that enable hundreds of thousands of american small businesses and entrepreneurs to sell their goods to consumers across the country and around the world. the significance to our economy

is enormous. it is stunning. $60 billion in goods sold globally on ebay marketplaces in 2009. netflix is similar success story. it has added 8 million new subscribers in the last year. it has over 2000 employees and physical presence in every state. netflix is continuing to grow. there's a reason for it. open, accessible -- consumers making the choice. that is what we seek to protect. wire of the basic rules of the road essential for continued growth? by preventing blocking and discrimination, the internet to remain a source of innovation and new ideas. it is not a platform where consumers and businesses are told which sources of news, information, and entertainment they can access.

the witnesses that are here today, we're all grateful to. i want to express a special thanks to robin chase who flew from france to be here today only to fly back to berlin, germany, this afternoon. that is one hell of a commitment to come here and speak on this really extraordinarily important issue. we are very grateful to her. i think this is just one example among thousands of internet innovators who understand how the cra would hinder job creation and consumer choice. i am pleased that members will be presented with the economic theory supports in the -- supporting the sec rules. thank you for making sure that we have this legislative hearing. i want to thank the witnesses. i do not have any time to yield

back. >> thank you for your comments. we look forward to hearing from the witnesses. the prime minister of australia will be speaking to a joint session of congress. at some point, we will recess. we're not allowed under our rules to me during a joint session. i would like to point out how much we appreciate your being here. ms. chase, i know you had to fly from france and back to germany. maybe we could have used high- technology to get your testimony. we could have worked on that. i would like to point out that this is our second hearing on this topic. we had all five fcc commissioners before. we have witnesses here today. at the conclusion of the hearing, there will have been two hearings. it is probably one of the first times in the history of the committee that the minority has

had more witnesses on the topic than the majority. we're trying to be open and balanced about this. we look forward to your testimony when we resume. i will recess the committee until after the prime minister. probably about an hour we are guessing by the time members go and get back. it may be more. if you could hang out not too far away, that would be helpful. with that, the committee stands in recess. [gavel pounds] [indistinct conversations]

>> i am going to call the subcommittee back to order and welcome our witnesses. thank you for being here and making the effort to be here from europe and back. we will start with -- we will go left to right. we will start with mr. turner. we appreciate your willingness to come and testify. go ahead and start, research director for "free press."

we look forward to your testimony. >> i appreciate the opportunity to offer the perspective of internet users on house resolution 37. let me acknowledge and often forgotten truth. the principle of nondiscrimination is the bedrock of net neutrality policy. it was not always the political football is today. unfortunately, the debate around non-discrimination has become susceptible to the ills of special interest politics. this is at odds with the long bipartisan effort to prevent market power abuses but owners of our critical infrastructure. the nixon administration put in place the strong rules to prevent abuses that might

stifle an industry. this was improved upon by the carter and reagan administrations. in the telecom act of 1996, a bipartisan congress recognize that to foster new industry, we needed the fcc to ensure that everyone had access to the open superhighway. congress intended non- discrimination to survive any the regulation -- deregulation. the commission recognized the underlying non-discriminatory outcomes were worth preserving. the sec chairman michael powell outlined four freedoms that were adopted by the house in 2006. action was taken in 2008 to stop comcast discrimination. we've seen the debate move away

from the shared goals of preserving the open internet. the problem of market power and communications networks is very real. it is increasingly politically inconvenient. we have seen those who used to recognize the problem abandon those views. some policy makers seem resigned to the misguided notion that the duopoly is competitive. this is unfortunate. i believe we all agree the internet should be preserved as an open platform. allowing gatekeepers to erect barriers is unacceptable. public policy should prevent it. if we can agree that insuring access is a worthy policy goal, we have a duty to confront the reality that network owners have incentives to close the platform and favor their own content at the expense of everyone else's. i recognize some of you are uncomfortable with the open internet order. my organization opposed it. we felt it failed to adequately protect the open internet. we opposed the resolution of

disapproval. it will leave consumers completely unprotected. it will remove the limited certainty that the fcc rules provide. it will prevent the fcc from addressing censorship in the future. this resolution is unnecessary and dangerous. make no mistake. adoption of this resolution will increase market uncertainty and harm economic growth. most eye as peas have told wall street the truth. these rules are no burden. upholstery the truth. it is a solution in search of a problem. this resolution will remove the uncertainty and subject them to the discriminatory winds of the isp's.

there may be much to dislike about this. the fundamental point is we cannot set up a false choice with no policy at all. we cannot wish away the a concentrated market structure. we cannot hope the duopoly isp's will make decisions in favor of all americans. i favor the free market. internet users cannot afford for congress to remove what little oversight is left. instead of pursuing this path, we urge the body to remember its commitment to protecting non- discrimination and work on constructive solutions that will benefit all americans. i look forward to your questions. >> we appreciate your testimony. mr. chase, we welcome you to the subcommittee. -- miss chase, we welcome you to the subcommittee and appreciate your effort to be here today. >> thank you for the opportunity

to discuss the importance of net neutrality rules for job creation, economic development, and innovation. i am the founder of doh local -- go local, and the founder and former ceo of zipcars. when i received the invitation to testify, i was working across the land. later today, i will fly back. i accepted the invitation because the course of action that congress is considering eliminating the authority of the fcc will greatly harm our ability to innovate, produce jobs, and remain globally competitive. as a successful american entrepreneurs, i care about maintaining our leadership in the marketplace. our innovation was to make rent- a-car as simple as getting cash

from an atm. it is only because of the zero marginal costs that anyone would be willing to rent a car for an hour. without an open internet to facilitate the transactions, zipcars would not exist. eliminating the rules will put future entrepreneurs of a significant disadvantage. network neutrality prevents the industry from discriminating against new applications. i want to draw an important parallel. imagine if we had been forced to rely on the odder -- auto industry's definition of car ownership. our fleet would have been seen as threatening. we cannot rely on the telecommunications industry to define the internet or what me people -- people may use it for.

these companies will define the internet to mirror their defined triple play and their notion of the ideal internet experience. they will squash any service that threatens their revenue stream. this is not just speculation about the potential for shortsightedness. this is first hand experience. during the first years of zipcars, the wireless industry was unable to think outside the box. we were met with non responsive stairs. the industry had only one definition of wireless at the time and only one product to sell. i recall many representatives not understanding the difference between purchasing kilobytes and minutes. innovation is the lifeblood of a competitive economy. circulatoryternet is the system.

it gives the ability to find new ways of thinking to problems. it breaks into silos that do not often get new thinking applied to them. the low input cost allows us to leverage ideas at virtually no cost. assuring the internet will continue to promote innovation is the reason we're having the debate. i agree that excessive innovation -- the most important thing i have to say to the committee and the reason i am here thinking all this way is that the protections enacted fcc by the will help ensure an open internet. net neutrality will not stifle innovation. it promotes innovation and protect consumers by preventing telecommunications companies from stifling new applications. i think the rules did not go far enough with respect to wireless. the idea that different rules should apply iand my experience

of the internet would be different at home or on a park bench is nonsense. the arbitrary distinction complicates things for entrepreneurs who will have to contend with two different internet's and everything they do. if congress wants to unlock the potential of the internet and fully tap into the innovation potential of our country, it should improve the fcc rule and not repeal it. 20 years ago, no one thought the internet would be used to share cars among large numbers of people. i do not know what the internet will enable tomorrow. it is critical that fundamental characteristics of the internet is that it will be able to evolve, protected from companies that want to control how the on shippers and general public use it. these protections are vital if america will remain competitive.

protecting the open internet and preventing an oligopoly is in america's best interest. thank you for letting me testified. i look forward to your questions. >> thank you for your testimony. cicconi fromr. at&t, legislative affairs. >> thank you for inviting me to testify today on behalf of my company, at&t. i recognize it is unusual to the house to testify on a resolution where we have not taken a position. we have been involved in issues that underlie the resolution. that is the protracted dispute over net neutrality regulation. at&t has long supported the broadband principles laid out by the fcc six years ago. we support the open internet. we have promised to abide by the

concept voluntarily. this debate devolved into a long discussion over specifics. fcc have the authority to put such rules in place, all this despite any real evidence of a problem. as in most regulatory debates, this one does not lack radical voices. many saw a heavy-handed government regulation and control of free markets. since the debate began back in 2005, at&t has consistently opposed any fcc regulation. this is still our preference today. we feel the antitrust laws, the federal trade act, and the discipline of competitive markets are more than adequate to police any potential abuses. nonetheless, pressure for internet regulation has continued. we have heard the saying that

there is nothing as powerful as an idea whose time has come. unfortunately, this is sometimes true of a bad idea. versions of net neutrality put forth work truly bad and radical. in october of 2009, some of the bad ideas down their way into a proposed net neutrality rule at the fcc. at&t and the industry opposed it. it created a bad climate for investment. in the spring of 2010, the situation went from bad to worse. after a decision by the circuit of appeals that questioned the fcc authority, the commission reacted by proposing to subject all broadband facilities to common carriage regulation and to title -- under title 2. this was extreme and without foundation in law. we thought it vigorously.

the radical proposal upset the financial markets in a delicate situation. after hearing from a bipartisan majority of house and senate members, chairman genachowski began seeking a different approach. discussions began between the opposing sides. at&t participated because we felt the issue was on a dangerous path that could end badly for our company in the industry. the process was long, hard, contentious. it led to discussions last fall and the auspices of german waxman and a compromise were no one was entirely happy. but most felt it was fair. regulation proved impossible. fcc made it clear they would move forward with regulations by the end of the year. my company faced a difficult decision given that the only

proposals were either bad or worse in our view. with others in the industry, we decided we would be willing to accept a rule modeled on the compromise we reached in the waxman process. we were not willing to support anything beyond that. chairman genachowski was under tremendous pressure to impose a title 2 regulations. he and his staff worked with the industry in good faith to craft a compromise rule to balance major differences while avoiding bad proposals. i would be the first to stress this is not a perfect solution. our preference has always been that the fcc should not regulate any internet space. it was also cleared the fcc determined to move forward and we would not be representing our shareholders if we let the perfect be the good -- enemy of the good.

harm might be done to our industry and investment. chairman genachowski resisted the pressures and acted in good faith to find a fair middle ground. the rule is consistent with our current open internet policies. it would not require us to change any business practices or plans, assuming it is applied in a narrowly tailored way. as the chairman of at&t has said, it provides a path for continued investment by removing much of the uncertainty the issue has caused. it was a factor along with recent tax law changes and that at&t decision to accelerate investment in the build out of our wireless network. we believe the result is both fair and will help maintain an hour company's ability to invest. thank you. >> we appreciate your testimony. we will go to dr. anna-maria

kovacs was strategic choices. go ahead. please pull the microphone close. make sure it is turned on. >> good afternoon. thank you for the opportunity to appear before you today. it has been roughly -- i spent roughly 25 years covering the telecommunications industry before retiring as an analyst in 2010. i intend to work as a consultant. at the present time, i have no clients and i represent myself. the internet has become central to the lives of most americans. it is something i rely on almost every day for news, information, and communication. i agree with the stated goals of the fcc order. the desire for an open internet,

transparency, an environment where investment flourishes for the benefit of consumers and providers of all levels of the ecosystem. i am concerned that some aspects of the order will result in an intended and detrimental consequences to investment and innovation at the edge and core. i think it is important to emphasize that the debate is not about whether blocking or degradation of service are good or bad. it is about whether they're more likely to occur through the intentional actions abroad and internet access providers or through lack of investment. that is really what the debate boils down to. the order appears to be premised on the view of the internet that assumes that teh he core is mature.

service providers are left free to prove -- transform their business practices at will. transport is provided free to them. they may compete with carriers that the application level. the order restricts the carrier'sflexibility in business plans, limits sources of revenue, dictates they spend capital to expand the networks at the will of the edge providers and forces them to subsidize providers to cannibalize their customer base. to characterize this as a transfer of wealth from broadband providers to application providers is accurate. it does not begin to grasp the problem for both parties. the transfer of wealth between two parties can be beneficial to one at the expense of the other. the transfer of wealth will ultimately cripple the party on which the other relies for its very existence. that is profoundly harmful to

both. 's implicitrder assumption that concerns me the most. the two are intwined to protect -- the two are entwined. to protect one, you have to protect the other. the capacity of the internet can be flash frozen for lack of investment. innovative applications can only follow a step behind the network capacity and quality. networks have an unending need .or capital j no application or network can rest on its laurels. the must constantly be upgraded to satisfy the need for increasing speed, quality, and security. carriers can only raise capital

to invest if they have enough revenues to cover costs. to raise revenues, companies need flexibility. the need to be able to adjust their business plans to changing market conditions. they need to be able to charge for their services and have the flexibility in doing so. just as professional application providers cannot afford to give away their content and services for free, neither can the carriers. as an example, the fcc model that allows frontier to charge skype at the wholesale level while skype takes away customers at the retail level. the carriers are forced to charge only for broadband axis. they can no longer charge for video or voice. the cost of the axis will increase. the excess will fall.

that is damaging to the carriers and application providers that ride on those networks and are restrained by the quality limitations of the networks. my concern is that there is a false dichotomy that drives the debate that sees the edge as separate from the core, needing to be protected, and only able to prosper at the expense of the corporate innovation at the application level is completely tied to investment and innovation at the transport level. the edge can only exist if the court prospers. the best way to encourage innovation and jobs at the edge is to also promote innovation and investment, and job at the core. >> thank you for your testimony. we appreciate it. >> next is dr. shane greenstein

from northwestern university. >> thank you for the opportunity to speak. i am happy to share my views with you. i do not work for anyone. i come as a professional economist who has had the privilege to study and write about the commercial internet access market almost since its inception. there are great potential risks from disposing of the open internet order. the gains from continuity are high. if you want to create a prosperous commercial internet in the next 15 years, think about how well the internet works today. think about all the ways it could have gone wrong. my advice boils down to avoiding the same problems we avoided in the past. how do you do that? you keep transactions, costs low for entrepreneurs.

the internet functions well because it avoids a number of industry practices that would have raised the cost of innovation. today any entrepreneur can enter without worrying about gaining the permission of the gate we firm. if the u.s. government commits to no regulatory convention, with that invite problems? the last 15 years say there is a risk it will and a chance it will not. it is hard to tell. until recently, regulatory restraints prevented all carriers from taking certain actions. there's little experience to forecast from. one central concern arises from commercial activities with broadband services affecting video entertainment. if carriers act on economic incentive, we would expect them to hope all of their businesses. there would become less transparent to rivals.

they would block some content and of lower priority to competitors. concentrated supply of excess in some areas of the united states would also affect things. a balanced view would also note there are other factors pushing the other direction. the user tendency is to substitute to alternative carriers. but also reduces incentives to block traffic. reasonable people can differ on the relative importance of these forces. that is an additional reason why forecasting is hard to make. the dangers would be costly. any movement towards less transparency and more discrimination of traffic into to -- introduces delays for entrepreneurs and companies around the globe. overall, taking away regulatory oversight risks emergence of a very desirable consequence.

there would be less commercial innovation and less economic growth. policies that tend toward continuity are the most desirable. continuity is a regime of continued regulatory presence with occasional action. it is my view and that of others that the fcc represents continuity. i think broadband firms can live with the rule because it does not change much of what they do. entrepreneurs can live with it because it lets them start businesses as easily tomorrow as in the past. the rule includes important and appropriate exceptions for reasonable management and for the application of wireless applications. the gains from continuity are high. it looks like good economic policy. thank you for your attention. thank you for allowing me to testify. >> our final witness this afternoon is tom dereggi from

maryland. you may have come the least distance, but certainly not from overseas. thank you for being here. >> thank you very much for the opportunity to testify. it is a great honor to be here today. i started selling dls and my company is -- dsl and my company sells to businesses and rural communities.

widths are real competition. they can reach areas of others are unlikely to discover without substantial government subsidies. i am here today to show my support for house resolution 37 and to ask congress to reverse the open internet rules. it is my belief that the fcc has overstepped their authority to address a problem that did not exist. it is a detriment to our industry and to consumers. it will deter investment, create uncertainty, create

liability, the great broadband performance and possibly put some isp's out of business. these would be contrary to the goals of the fcc's broadband plan. we need more jobs to expand abroad and access to all americans. we do not need regulated band- aids. we need to competitive environment to give consumers a choice. the consequences will be open internet content. it is unnecessary if we build competitive industries. internet before -- internet providers need to support -- support from policy makers. i have to consider whether to reinvest money into my company.

rather than recognize the two different broadband products that exist -- it is inappropriate to expect broadband providers to allow the operation of second-generation broadband applications. it is inappropriate to insist that broadband access products need to support a user application for which the product was not originally designed to support. the rules do not properly match technology. the rules give special consideration to mobile carriers. failing to. recognize this, the committee has become the entity to pick

and choose winners. i wish i could see the internet was simple. it is not. it is extremely complicated. it is different in every community it is employed. it is an ever-changing industry with many barrels. the fcc rules address what could happen rather than what did happen. content providers have demonstrated actual anti- competitive behavior. espn 360 disney prevents its customers from accessing its content unless the provider pays a fixed fee for every customer even though most of them do not watch the content. it gives favorable rates carriers. the fcc rules bill to address the serious content neutrality -- fail to address the serious

current net neutrality issues. there is an environment where content providers can be discriminated against. that is not a neutral network. the rules literally could render a provider's network inoperable. it constitutes a great victory shaking up a network in violation of the thick amendment. the commission justifies the rules by claiming they are necessary because many areas are served by only one or two providers. not only is this false, but the rules would make the problem worse by making it more difficult for competitive providers to expand their services. wymax delivers more capacity to the end user.

the fiber cable system has a network that is usury engineered where 2000 subscribers are connected to a cabinet. a wireless system has a radio with 24 megabits and serves 60 or fewer users. it is divided evenly, each cable provider gets 80 bits per second. >> you have exhausted your time. can you wrap it up? >> there are a number of reasons why the fcc rules are inappropriate. do not misinterpret this testimony that the rules will limit the ability for people to

express themselves online. the sec regulations would fail to -- fcc regulations would fail to do what they were intended to. thank you. >> thank you to all who testified today. we will go into our questions. we are on time constraints. to not take offense if we ask things in a yes or no environment. that was pioneered quite successfully. do you believe the fcc is on strong legal grounds and it will be upheld in the courts? >> i believe they took an unnecessary risk by going down the title one route. they are on less firm legal ground than they could have been. >> you oppose the approval not because you like the fcc. he believes the fcc will lose in court.

you will push for a reclassification. >> once congress disapproves of these rules, the fcc is forbidden from enacting similar rules in that space that could extend beyond net neutrality. >> the real issue is that they cannot do title to if this becomes law -- title 2 if this becomes law. >> i do not believe the resuscitation -- reclassification would fall under the cra. >> there are the same kind of legal arguments rejected by the courts last spring. it is a short-sighted attempt to reclassified broadband under title two of the broadband communications at. it places the fcc's entire

broadband agenda in jeopardy. a voted against this resolution is a vote for reclassification. something that congress has imposed on a bike person basis. -- bipartisan basis. ultimately, you will be the one -- companies like yours -- will have to pay the price. >> that is correct. the smaller and more competitive providers will pay the price for the rules. i agree. i would say that all of us could live with the rules if we had to if they stayed there. the question is, they do not necessarily stay there and the rules do not give of the protection needed for the access providers. content providers are not the only people on the table to protect. >> does it give you concerned

that the fcc refused to close its title two rule-making? >> i think this is an issue that needs to be decided by congress. congress should stop title two and pass laws that are through the right process. >> some of us on this committee believe they do not have the authority by the fcc. dr. kovacs, you explain that networks have and unoffending need for capital. will this hurt capital for network providers? be sure to turn on your microphone. >> yes, i think this rule, if it is implemented the way it appears likely, is going to be

detrimental. it is going to hit at the revenue sources. it is going to make it easier to cannibalize the network providers' revenues. for example, skype driving up the costs of broadband. short version, yes. i think it is going to be a problem. our capital. >> i would suggest to members that she does have to leave to catch a flight back. she may have to part before we - depart before we finish our questions. do i understand correctly that you support these rules because you believe they are needed to ensure that small companies can compete on the internet? >> these rules have not existed.

if we think about innovation, it does not have a long life. the power of the telcos is new. >> you have said without these rules smaller companies with this week out by larger companies that can pay -- get squeezed out by larger companies that can pay for access to the internet. >> telecommunications companies can decide what access looks like. i could be separated from my market. >> the fcc says this is not going on today. you are worried it might go on in the future, right? >> i see this as a duopoly. >> we do be wary if bhutto charged for prioritized placement -- google cars or

prioritize placed on the internet? are you concerned about that. somewhere on the end of the pipe, somebody is prioritized. >> yes, i could be worried about that. >> i did a search on carshare on google. the search started with an advertisement for zipcar, the company you ran. isn't that exactly what you are talking about? >> if a person could buy a full-page ad on a newspaper and other companies could not afford that, that is the line i'd like

to draw. >> thank you to all of the witnesses for the and stop the hearing. first to ms. chase. thank you for traveling the distance you have. you are an american entrepreneur, an american businesswoman. i do not know if my colleagues know this. ms. chase was named as one of the 100 most influential people. to the tableot and i am surprised -- i am proud that a woman has brought to the table with you have. you heard what dr. kovacs said. i will be paraphrasing. she claims that the rules that

the fcc adopted would hit revenue sources, damaged capital for investment. do you want to comment on that? i will ask dr. greenstein to give a comment on that. would you go to the heart of this whole issue of capital formation, business is thriving or not driving, whether the rules are held for our fall -- hurtfulor l? i think there is a virus in congress. it is not about net neutrality. it is about any kind of regulation and whether government agencies have the right to carry out rules in their regulations. >> when we think about it for and what we are protecting the court or the edges, the core is a duopoly.

they have no competitive reason to make a good investment choices. we can invest in something or we can cut our costs. we can do more innovations from an operational perspective. there has been an argument that there is only one revenue source. there are lots of revenue sources. i do not buy the argument that if we are cutting 1 revenue source, the whole thing crumbles. it does not make sense. >> thank you. dr. greenstein? >> we should recognize there are different costs and there is a large variety. 15% of the population lives in the low density areas where there are difficulties running an isp.

there are firms that are healthy. they get margins between 70% and 90%. of the $1 they collect, 70 cents or 90 cents on the dollar goes back to capital investments to the stockholders or the owners. the rest of it covers the cost of their data and the cost of service. for 15 years, we have been watching the amount of users go up. i do not think there is any particular crisis over how much data the isp's can handle. it is $1 per month. >> i am going to stop you. i want to get a couple more questions in. mr. dereggi, i mentioned in my opening statement about it a base of -- an elevated companies

like netflix and skype across the country. in your written testimony, you suggest that appropriate network management might be to simply block netflix altogether. i find that a little chilling. >> i can explain why. >> will you turn on your microphone? >> i do not believe in blocking anything. >> but to block anyone is part of the heart of all this. why would you suggest that an appropriate network management is to block? bill in the blank. he said netflix. why do you find that to be appropriate? >> it is appropriate because you block the source of a problem.

if the person is violating your a acceptable use policy and it is netflix, you got netflix. it takes network resources -- >> this is an ineloquent statement about a school of thought. i do not agree with it. it would be offensive to consumers across the country. that is my view and you have yours. thank you. >> thank you. dr. kovacs, the you have a response to ms. eshoo's question? microphone please. it is still not on. >> i would like to correct a that. if you actually look at the margin of the carriers, the net

income margin is 10% or at&t and verizon. i am afraid dr. greenstein's numbers are reversed from what he indicated. to go back to the issue of revenues, part of what is being menaced is backed -- missed is that not only are the companies not being allowed to charge for wholesale carriage, the revenues that are going to get lost are skypeatnue is backe takes away from frontier. the broadband is treated as

incremental. if the core revenues go away, broadband will have to carry it all. >> i appreciate it all. i wanted to give you that opportunity. mr. cicconi, there was a statement made during the opening statements that this rule was necessary because companies like horizon -- verizon and at&t have blocked or somehow interfered with the vibrancy of the internet and ingenuity. can you tell me what policies have existed with at&t in which you pander or block the vibrancy of the internet? >> i do not think anyone can point to a single instance where at&t has done anything like that. probably no company has made

available to consumers more innovations or to assist to consumers -- innovations or choices than at&t. we have no incentive to this advantage anyone at this table. >> what about blocking? how have you blocked access? >> we have not. >> you have not? ms. chase, since you have come so far, i want to make sure we use your time. in your statement, you said there was an issue with wireless. can you tell us with your previous company, whether there were problems with isp's or any part that hinder the ability of that company? >> the anecdote i gave about

starting in 2000, it turned out we were the second application for consumers outside the cell phone. i was struck then. think about it today, the telecommunications industry was lagging behind innovation. but they were the gatekeepers about how i could buy internet packages. >> did they work with the? >you? >> no. we had to do a work around until they came up with packages. there was a four month delay while the telecommunications companies gave us permission to manipulate the boxes as they saw fit. that was a significant delay for us. it is better for innovators not to have to ask permission when

it is possible. >> would you like to reply? she said that was verizon and not at&t. is that a net neutrality issue? microphone, please. >> companies are free to price their services in a competitive market how they choose to price them. that may help some companies and hurt others. that is within their purview in our system. the second point is that none of the thing sited would-be net neutrality the violations including the ones that we rejected pretty strenuously. >> my time is up. i would like to recognize the right member of people commit a , congressman waxman. -- the ranking member of the

committee, congressman waxman. >> i understand that at&t would have preferred no rules in this area. based on your public statements and conversations with my staff, it is my understanding that you think the fcc landed on a reasonable middle ground that removed the on certainty that was impeding jobs and investment. is that an accurate description of at&t's position? >> yes, we think it is a reasonable middle ground. the sec interprets this role in a -- fcc interpret this rule in a narrow way and could provide the certainty we need. >> in a letter filed with the committee earlier this week, the

cable industry says it supports the fcc order because it provides greater certainty about their ability to manage and invest in broadband services today and those they may employ in the future. dr. greenstein, in looking at the question of whether the ftc should have ruled -- fcc should have rules to protect the internet, my staff reached out to economists. they shared the common belief in competitive markets. all of them suggested unnecessary regulation can undermine the efficient markets. there is also a consensus around the idea that competition in the market for broadband internet access services is limited. most said the lack of competition may be fcc's open

internet rules all appropriate. do you agree jim? >> yes, i do. accessing the internet goes back to the founding of the internet. there has always been a question of who can use it and who has access to the transport level. it goes back to when the internet was privatized. they allow for multiple users. in the terms of economics, there has always been a question of who can use it. it has always operated as a network where every user and supplier does not have to ask permission to use it. >> and that leads to growth and innovation. >> in entrepreneurs at harvard. [laughter] >> i have heard of one.

i saw the movie. >> i absolutely agree. you can only look at the number of jobs to realize an open internet is the key to our future. if we close that down and we do not protect the status quo, which is an open internet, we are putting ourselves in such an anti-competitive position relative to the rest of the world. >> in addition to reaching out to academics, my staff spoke to economists at the department of justice. we wanted to get their reaction to the argument often repeated here that the issue of the net neutrality is better addressed through antitrust enforcement. the department of defense told us that is not the case -- department of justice told us that is not the case.

antitrust law does not stop a phone or cable company from blocking websites our applications that do not pay for access. favoring websites and degrading website is perfectly legal under the antitrust laws as long as the phone or cable company is not in direct competition with the websites been degraded. i do not know who to direct this to. let me ask you dr. greenstein, do you agree that antitrust laws are not sufficient to keep the phone and cable companies from taking advantage of their power? >> they are about mergers. >> does anyone disagree with the department of justice position? >> there are numerous presence -- places in the marketplace

where the antitrust law does not govern. >> thank you. i give back my time. >> we now go to the gentleman from california. the gentleman yields to the gentlewoman from tennessee, miss blackburn. >> i want to thank our witnesses for being here today. miss chase, your testimony seems a little disconnected for me. i was hoping you could clear up a couple of things for me. you set up a very successful company using the internet as it was, basically the status quo internet. you did that without a lot of

trouble. is that right? >> i would not say without a lot of trouble at all, but yes. >> you do not have to overcome horrific odds or anything. you work your business plan and got it in place. now hear you saying that you want to preserve the net neutrality rules that the fcc has moved forward on. >> yes. >> you say you want to do that so that end companies like yours can innovate -- edge companies like yours can innovate. the internet without net neutrality rules has worked great for innovators. now you are wanting to change the rules. why should the fcc rules allow you to innovate and not other entrepreneurial companies? >> i would like to see the fcc

rules preserve the status quo of when i was doing the innovation. >> there was no federal ofernment's -- governance the internet. >> i think you summed it up with your statement. >> i have a very rural part of my district. they're very concerned about broadband. speak to me about what you think will happen with broadband. what should their expectation be? >> people should not spend money if they're not going to get a return on it. the cost of deploying to difficult areas is much higher than the cost to deploy it to the easy areas. >> to you have any idea of what the magnitude of job loss would be for these areas that cannot get it?

>> astronomical. it will also lead to the population leaving for other areas. >> i was sitting here looking through everything. mr. cicconi is with at&t. mr. dereggi and miss chase, it is clear who they are representing. mr. turner, it is not as clear to you are representing was "free press." -- with "free press." could you detail to us where you get your funding? >> now or in writing? >> i would love to do it now. if you could submit the 10 largest supporters, that would be great.

>> would take zero corporate money. we're completely supported by our members and foundation support. >> would you submit your funding? >> absolutely. >> that would be great. i would appreciate that. i am going to yield back the balance of my time. >> the gentleman -- gentlewoman yields back the balance of her time. the chair now recognizes the representative from massachusetts. >> thank you for being here and walking the tightrope today. i have heard you say that you feel the regulations promulgated are a fair middle ground. you also testified that as the rules have now been promulgated, it will require no change in the business plans of at&t. >> that is correct. >> you are also testifying is

creating a longer-term predictable investment environment for at&t. >> that is correct. that is provided that the fcc continues to interpret the plain language of the rule in a narrow way and with appropriate regulatory humility. >> you have identified the appropriate level of humility. i think that is important for people to hear. is there something that we are trying to cure that does not exist? before august of 2005, the non- discrimination principals were there. the internet grew and expanded for years until the ruling in 2005. all of these companies were able to be founded in the nondiscriminatory year of --

era. miss chase, you are here representing thousands of smaller companies are looking at the decision or potential resolution that the republican majority is thinking of promulgating. what would be the impact on the venture-capital industry and having reviewed the thousands of companies in the space trying to innovate using the internet? >> if the venture capitalists think i cannot compete because i cannot pay for special access or may be stymied by special rules, they would not invest. >> how many companies are in this space as smaller startups? >> we know that start-ups are the ones that have created 75% of the jobs in the last 10 years. i would say there are significant numbers of them.

>> the hope that the antitrust laws could be used. how much would it cost zipcar to use the antitrust approach? >> you have made a very good point. without a body such as the fcc to whom i can turn to and who can protect me, as a small business, you can never sue anybody or into that at all. >> that is false protection. the antitrust -- 80% of new jobs are created by smaller companies. a disproportionate number of them are created by companies dependent upon the internet. this is a huge distinction that are making now.

at&t and comcast say they can live by the rules. the smaller internet companies are saying that they can live by the rules. mr. turner, could a simple explanation of who you represent just be the consumer? >> we are concentrated on the interest of consumers. >> expand on what the impact of repeal of these non- discriminatory principles could mean for consumers in the united states. >> it could be devastating. we have learned there is no problem the marketplace has with the fcc rules. if you remove the certainty, you create potential discrimination against innovative companies. you potentially have companies that would block content for competition. the next zipcar may not be able to start their business.

the consumers are the ultimate losers in that. >> if you have an idea now and your girlfriend is a business school and says she can help to raise money, what is the difference in terms of the perspective of an investor if you have discrimination or non- discrimination principles on the books in terms of the startup of a small business that would provide consumers with more choice? >> it would create tremendous uncertainty. we keep hearing that there was never network neutrality. the internet was born from the principle of non-discrimination. it existed for the 30 years before it became commercialized. it existed until 2005. it was not until the recent change -- >> that was the testimony we had from the creator of the world wide web. he made it clear that when he created it, he baked the current -- principle of non-

discrimination into the internet. he invented the internet. he is still only 54 years old. that was the first witness we had before the committee. should we not give some deference to the creature of the world wide web? he testified non-discrimination was the central characteristic of the web. >> the chair recognizes the gentleman from louisiana. >> thank you, mr. chairman. i appreciate the opportunity to ask questions of the panel and to have a focusing on the new government regulation of the internet. i am amazed at some of the comments i am hearing from people on the panel and my colleagues on the other side. i am a computer science major. i have watched as the industry has thrived probably more than any other industry in the world.

it has thrived because the government has not figured out how to regulate it or mess it up. you have a rule coming in by the fcc where the government is coming in and saying they're going to fix the internet. we will come in with regulations to fix the internet. if the president was really focused on what the real problems are, he would be focused on creating jobs. if you want to find a good template of how to create jobs, look at the internet. look at these great innovative companies. look at the great innovators who dropped out of college and are because theires federal government had not figured out a way to regulate it. the fcc is saying they're going to regulate. people are saying it is good that the fcc is regulating to keep the status quo.

it is the other format, the non- regulated format, that allowed all of the innovation to this day. with the fcc coming in, there is a concerned in the industry of people who invest billions of dollars. mr. cicconi, your company is one of many that have invested tremendously. fcc commissioners came before us talking about the new regulation of the internet. we heard testimony from one commissioner that over $500 billion of investment has been made to build the broadband infrastructure exists today that allows all of the innovation. none of that was taxpayer money. maybe that is one thing this administration does not like. it happened with private investment.

how much has your company invested around this innovation in creating and building this network infrastructure? >> i do not have an exact figure in front of me. last year, we invested approximately $19 billion in capital. that was in the united states. nearly all of that was in the united states. i think that was more than any other american company invested in the united states last year. >> that was under non-net neutrality rules. >> this year, we will invest roughly $19 billion in capital again. >> in your testimony, you used a number of comments about were interesting. maybe some people are thrilled about net neutrality. you said all of this without any real evidence of a problem. it is still at&t's preference not to have it.

you are talking about earlier proposals. then you said the only proposals before you were either bad or worse. the government is coming in and saying that there is no problem. innovation has never been greater no country in the history of the world has seen this much innovation. the government is going to come in and regulate it. they would give you a bad or worse option. anybody would take the back instead of the worst option. that constitutes you supporting the new regulation of the internet. i want to put in that context. there is an assumption by some that the fcc will interpret the rules in a narrow way. what if the fcc does not interpret these rules in a narrow way? if we're not able to pass our regulation -- resolution to block the regulation, they will be free to interpret it as they like. what if they do not interpreted narrowly? >> it depends on the circumstance. >> we would reserve the right to

challenge in court if something were to occur that we feel is inconsistent with the plain language of the rule. >> some would think it was good to have companies that add $17 billion of their own capital to build out the infrastructure. they're now concerned about going to court to continue innovating. miss chase, i appreciate your coming here from france to participate. the chairman did a google search on car sharing. your company came up. is there anything in the fcc ruling that prohibits you from being able to purchase premier placement under net neutrality where a startup would not have the same advantage? >> i feel like that is not the question at hand. >> that is the question at hand. maybe you do not want to answer because you are given an advantage over the new start.

i am not as concerned about the company's successful today being able to innovate as much as the new idea that we will be blocking from innovating. maybe you like the idea because under net neutrality, google is still able to give the preference over the new start up that is at a competitive disadvantage because of net neutrality. i would hope that you would be concerned about the new startup company that would be as innovative as yours. >> time is up. >> i yield back my time. >> the chair recognizes the gentleman from pennsylvania, mr. doyle. >> it is amazing. maybe sometimes we do not speak clearly enough. until 2005, the transmission component was regulated as a telecommunications service. in the dialogue world, companies provided data transmission. they were regulated as a

telecommunications service because the data travelled over phone lines. to keep hearing statements that there was never any regulation of the internet is not based in any reality. dr. kovacs, a disinterested in your testimony. i hear you say we cannot take care of the edge at the expense of the core. you feel the rules the fcc has put forward will stifle investment in this. are you aware of the analysis done by bank of america and merrill lynch? they came to a different conclusion. how about citibank? they came to a different conclusion than you. wells fargo called the rules a light touch. raymond james also disagrees with your analysis. it seems to me that you are somewhat of an out wire -- out

liar as to whether this stifles growth in the field. dr. greenstein, you have looked at the literature on this and did a literature. you. -- to the literature review. what was your consensus on the fcc order? >> it largely does not change the practice of most eyas peace -- isp's. >> i appreciate your company and the competition it provides in areas that needed. i notice hard for entrepreneurs to come to the committee and provide testimony and engage in policy matters. i appreciate the fact that you are here. i am confused by some things you have said. you have expressed support for open internet principles, specifically in comments you

made in response to the second round of funding. you stated that rapid dsl fully endorsed the comments of the wireless providers association. they argued the agency to make clear to any funding recipient that they will agree to abide by the rules that the fcc adopts in its proceedings. since you agree with applying the fcc rules to funding recipients, why would you support a wholesale rejection of the rules to a resolution like this? >> great question. the government is paying for the network, not me. i do support an open network -- internet. net neutrality favors content providers and gives them discriminated rights. >> you sent an e-mail to the fcc chairman regarding blocking

traffic. you said that comcast sets the precedent that this blocking will not expand as a -- advantage for foreign competitors. it also expressed support for rapid dsl being subject to rules of disclosure of management practices. you said that in a letter to chairman genachowski. if you are in support of some of these rules such as transparency requirements widely want to see the congressional act used to invalidate all of the rules? would it be better to take a more surgical approach to deal with what troubles you cannot throw the entire rules out? what they do not deal with any of the things that troubles. we are a provider. protecting our competition does not help us. all of the things i have asked help for, we have not gotten. >> you are here to support the

practice that will throw out what to agree with as well as what you have a problem with. you think the fcc did not go far enough, would that be an accurate statement? >> yes, sir. >> i represent pittsburgh. i think it is a fantastic service, zipcar, people use of a lot in pittsburgh. you are here and have come a long way to do that. we are policy makers. what is the one thing you would like to share with all of the policy-makers up here with regard to the internet? what do you think congress should be doing? >> we have talked about how this will prevent investment for the core. the figure of $19 billion was

thrown out that at&t was intending to invest. i would like to point out that small business contributions to the economy is vastly larger than any of that. your talking about throwing out rules that protect those small businesses. we cannot go after antitrust lawsuits. it comes back to this duopoly control of access to the internet and not about what happens on the internet. the internet is self is fairly open if you can get there. >> the chair recognizes the gentleman from illinois. >> we appreciate your effort to be here. this is what i have struggled with. i think i am going to open up with miss chase. i think all of us appreciate the

business model that people have an idea of a service not being rendered. you have to develop a business plan. then you go to the markets to raise money. you are assuming risks. hopefully somewhere down the road, there is a return. that is the way the business works. it is the capitalist system. it is great and thriving. it is why we have one of the greatest economies in the world even during a down time. if the fcc can control the pipeline by picking winners and losers, what is the market signal to build out more pipes? >> and not think the fcc is controlling the pipeline to pick winners and losers.

>> where is the market signal if you want to build up more pipes? can a government agency say region usually if there is a constrained supply, the market would say that you can pay a premium for access. eventually, the market signal would be what? to build out another pipe. you made these decisions in your business plan. what is the market signal that would encourage the build out of more pipes? the better answer than government regulation is to build more pipes. >> i think there are a variety of answers. that may be one of them. >> it is the only market answer. it is the only answer in a

competitive market. then flow to build it. we have had intervention with the stimulus. we found out we overbuilt, incentivized, we have underserved areas. the stimulus is a perfect example of how we failed by providing government money to do what the markets should do. i have two minutes left. a one to ask mr. -- i want to ask mr. cicconi, the fcc says the rules will bring certainty. if you have certainty, you have lower risk. you can borrow more capital or the cost of capital is lower.

was the uncertainty that fcc cured call originally caused by the fcc? -- was the uncertainty that the fcc cured originally caused by the fcc? was that unfair? >> i think reflected this in my opening statement. i think the rule is a fair middle ground. it is fair in comparison with the alternatives we were facing. >> i want to end up with mr. d ereggi. i appreciate your testimony. i see a segue to market principles as the best way to provide services to individuals. do you believe it is equable that these rules apply to you but not what companies? >> i find it to be a tragedy that they applied solely to us and not webb cos. >> do you agree with the letter

we received from the cable folks the drawing these distinctions between broadband providers and with companies no longer makes sense? >> i would agree. >> the gentleman yields back the balance of his time. the chair recognizes miss matsui. >> i still have reservations regarding the process. there are too many unanswered questions that will lead to unintended consequences on the market. i strongly oppose the resolution. it undermines market certainty, harms consumers, discourages innovation and job creation. it does nothing to move our economy forward. mr. cicconi, it is no secret

that over the years, at&t has raised questions and concerns over net neutrality rules. at&t took a stance to say that the open internet order ended up at a place where we have a line of sight and we know we can commit to investment. what are the specific factors that lead you to supporting the fcc orders? >> as i said earlier, we are comfortable with the order primarily because it will walk the line in a more balanced way than the other proposals in front of the fcc. the two proposals -- one had a discrimination standard in it that we felt was a violation of

the telecom act and did not have support in the act. it would have led to legal challenges. the other was to impose common carriage regulation on these services. i think that would have been an extreme proposal. we were pleased the fcc was willing to work with us to deal with our concerns and those of stakeholders to see if there was a middle ground. like any middle ground, we're not happy with every part of it. we would have preferred a different language and standards. we would have preferred not going wireless. >> we have heard from the great number of leading economists the support the fcc order. assuming the fcc moves forward with the orders as the rules of the road, what impact does the cra have on wall street? >> that is tough to predict.

if the cra were to pass, the ball passes to the fcc. i think the market reaction will depend upon how the fcc reacted. if the fcc reacted by deciding it did not want to move forward with further regulations in this area, i think the market would be pleased. that would provide a high degree of certainty. if the fcc reacted by going back to the still open title 2 proceeding, i think it would create a great deal of uncertainty. i think the answer rests with the fcc. it is not really a product of the cra and what the congress decides. it is more a product of what the fcc decides to do in the wake of that. >> you are still dealing with uncertainty. >> potentially.

that is depending on what the fcc decides to do. >> the fcc open internet order includes a meaningful transparency requirement so that consumers and innovators have information to make informed choices. this transparency rule was widely supported by all industries stakeholders and deemed non-controversial. if the resolution becomes law, the transfer is to rule would simply state that broadband providers must disclose their network management practices and terms and conditions to consumers. that would be eliminated. that would be bad for consumers, business, and the internet economy. i have a question for the panel. i would like a yes or no answer. do you support the fcc's principal on transparency that would provide people with information they need to make

informed choices? >> mr. turner? >> yes. >> yes. >> yes. >> thank you for your answer. the order includes a meaningful transparency requirement. the whole panel seems to agree that should be in place. as our economy continues to revolve, a free and open internet will be vital. that will ensure that all sticklers are planned by one rule. miss chase, you rely on the internet to conduct business. how will be open internet order impact new sectors like smart grid and health i.t.? >> i think it will have an enormous impact. that is one thing i am concerned about. >> i yield back my time. >> the gentle lady's time has

expired. i recognize the chairman of the oversight committee, mr. stern'earns. >> they have praised u.s. supporting the fcc approach to rule making. i know that must put you in an awkward position having been the ranking member of the committee. -- they have praised u.s. supporting the fcc -- they have praised e.u. as supporting the fcc approach to rule making. in your testimony, i think this made clear it up for mr. waxman and mr. markey. the chairman of your company summed up his reaction to the fcc in his decision. i think it goes to the point and it's you off the hot seat. he is speaking for your company.

he said that we would be lying if we were pleased with the approach. it is a place we know we have. we did not get everything we would like to have. i would like to have no regulation. that was his point. i would have liked to have had no regulation, to be candid. mr. waxman and mr. markey are saying that you folks are out there talking this -- touting this. the chairman is saying he would rather have nothing. is that accurate? >> that is absolutely accurate. the entire debate in the past two years has revolved around difficult questions. that is whether one should regulate to deal with hypothetical problems. that is what we're dealing with -- hypothetical. it is the hardest thing for policymakers to decide. if you move into the space, it

is hard to draw lines. this worries us the most about moving into this area. it was stated earlier that different members of the egos. might be regulated in a different fashion. -- of the egos fear -- ecosphere might be regulated in a different fashion. the government does not do this very well. >> dr. kovacs, in your opening statement, you talk about the transfer of wealth from curious to application providers is accurate. you say it does not grasp the problem for both parties. you say it provides those who ride the network with a viable financial weapon to use against broadbent access -- broadband

axis. it takes all bargaining power away from them. >> one of the things the fcc did not look at is the situation in which google might decide to withhold its services from verizon in boston but continue to provide them to contest. that could become a huge problem for verizon maintaining customers. revenues taken away from a provider like frontier, all of those represent a transfer of wealth. they become problematic for google, etc., if that means

the network cannot continue to innovate. what is troubling is the idea that only the companies at the edge need to innovate. she will not be able to do her business and less he keeps investing. -- unless he keeps investing. >> have you read the fcc approach to the net neutrality? have you or your staff taken time to read it? what is specifically in there that you do not like? can you tell the committee some specifics? >> the thing i do not like the most is that everything is a double standard. i want consumers to have their choice of content. it does not really give that. >> it is vague in areas where you think it should be precise.

>> exactly. it allows it to be interpreted by the person who happens to be in the office at a specific time. they can have a completely different viewpoint of what those terms mean. >> does it create uncertainty in terms of the investment? >> tremendous amount of uncertainty. i do not know what to expect. >> the chair recognizes mr. rogers from michigan. >> the fcc claims the order brings certainty to the market. i am having a hard time finding where the uncertainty was except for the fact that the fcc was talking about intervening in the market. does a lawsuit over the fcc's lack of authority bring even more uncertainty? >> it has not been settled at this point because of the possibility for litigation and because of the point that mr.

cicconi made about how we will not know what the rules mean until the fcc interprets them one by one. they do not know what they can do in terms of pricing and product development. that is on the carrier side until a case fog develops at the fcc. >> that never happens in a hurry. now we have added another layer of uncertainty to the definitive uncertainty that the fcc put into the market in the first place. we're just a small construction company in michigan. it may be beyond our intellectual prowess to understand how we got the uncertainty in the first place. thank you for being here today. i am really interested in your business model. when you negotiate a parking place in washington or philadelphia, is that something

the company pays for or something the city gives you? >> it is done by jurisdiction. it is typically done by an rfp. >> do you compensate or are they given to you in most cases? >> i have paid for municipal parking spaces. >> it was a good business model. you took advantage of the concrete and curb paid for by taxpayers. you negotiate a much lower rate. i have seen those cars and had to go around the block to park 16 times. you utilize taxpayer supported networks, the infrastructure. you have taken that parking space off the market for the rest of the taxpayers who paid for it and for the service business model. i think it is clever. you can clearly see that you are taking advantage someone else's

investment, mainly the taxpayer. i know you have several millions of dollars to help you start your company from the federal government. i think we found $6.5 million on your marks to -- earmarks to zipcar. i believe the number is larger than that at the end of the day. you can understand why i believe advocacy is important. your company did well. it was financed by the federal government. you are taking advantage of tax payers by using their infrastructure and take -- making money off it. if you can get away with it, god bless you. now you are saying we want to do the same thing with the internet. you want the government to come in and protect me so i do not have to pay for the expansion of the internet that should happen based on increased volume and more businesses coming into the internet. that is the part i find

confusing about your advocacy. your business model is heavily weighted on subsidies, especially by taxpayers. >> let me correct a few things. in the first three years, we took zero government dollars. parking is grotesquely underpriced everywhere. citizens park for free generally. if you were to rent it, it would be $3,000 a month for that space. >> i am not sure where the free parking is. if you are putting quarters and, you better bring about 8,000 pounds of them. >> i do not think we have sucked the government tit in any case. market signals are driven by demand and competitive pressure. we can look to what we're

talking about, that the access to an open internet is gated by two major companies. the market signals might be working -- >> i hear your point. you said something interesting. "if you can get their." i agree with you. ramps are incredibly important. the government now comes in and makes everything nice in theory. they decide who wins and loses. why would you invest in new ramps for the internet? i see my time is almost up. please insert that, mr. dereggi. >> i agree with what you have said. on ramps and off ramps are

definitely important to our company. and at&tthis stifle 18 and verizon? >> it definitely does. >> i yield my time to the gentle lady from california. >> i thank the gentleman for yielding his time to me. i would like to ask unanimous consent that the following items be entered into the record. a letter to the committee from numerous based based organization, a letter to the committee from the consumers union, a letter to the committee from the consumer federation of america, a survey conducted by consumers union and consumer federation of america, a letter to the committee from the mountain information network, an editorial from the "l.a. times