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"Building a More Competitive America" - Remarks by Thomas J. Donohue

Tuesday, November 1, 2005 - 7:00pm

Remarks to Town Hall Los Angeles
By Thomas J. Donohue
President and CEO, U.S. Chamber of Commerce

Los Angeles, California
November 2, 2005

Thank you very much. It's an exciting time to be in California, with the special election less than a week away.

The nation will be watching to see what California voters decide on fundamental issues of government spending, teacher tenure, redistricting, and the right of public employees to decide how their dues dollars are spent.

As you consider the future course of your state, I would like to take this opportunity to ponder the economic future of our nation.

Presently, our economy appears to be doing very well.

We've achieved consistent growth of better than 3% for more than two years, during which time 4 million new jobs have been created.

The unemployment rate is lower than the averages of the last three decades. Nearly 70% of Americans own homes. Interest rates and inflation, though edging up recently, remain low by historical standards.

However, there is also evidence to suggest we are losing our edge, and we face competitors the likes of which we have never seen before.

China graduates more than eight times as many engineering students than the United States…India five times as many.

This is a troubling trend in a high-tech global economy in which scientists, computer programmers, engineers are—and will be—at a premium.

Of 120 large chemical plants under construction globally, one is in the United States and 50 are in China. That says something about the skills of our workforce, the regulatory burdens we impose on business, and the cost of energy.

The United State ranks only twelfth in the world in broadband penetration. One in four South Koreans has high-speed Internet access.

That's double the percentage of Americans with high-speed connections.

U.S. industry spends more on tort litigation than on R&D…just think about what that says about our nation's priorities and the challenges we could face in the future if we don't reorder those priorities.

In a recent year, only three American companies ranked among the top recipients of patents granted by the U.S. Patent and Trademark Office. Our competitors are coming up with new ideas faster than we are.

You can see a troubling picture beginning to take shape.

In many respects, our response to increased competition has been defined by complacency. We do not have the luxury of resting on our laurels.

We've seen it before. Nearly fifty years ago, when the Russian Sputnik first orbited the planet, America was stunned by this threat to our global leadership, and we responded with purpose.

We focused on recapturing our scientific preeminence, and the result was numerous inventions and innovations that in turn spurred advances in technology, new jobs, and economic growth.

We need the same sense of urgency and purposeful response today. Even more so, because the competitive challenges facing us are even more real.

And this time the competition is coming not only from Russia, Japan and Germany, but also from China and India, along with a host of smaller emerging competitors.

These countries are opening their economies, embracing free markets, encouraging entrepreneurs, building critical infrastructures, competing for energy and natural resources, challenging us in third country markets, and developing and educating their workforce…in other words, doing all of the things that we've encouraged them to do for the past fifty years.

Yet we haven't been following the advice we've been giving others. We need to adjust to the changing competitive environment across the world as well as a changing society here at home, a society that is growing older and running short of workers at all skill levels.

We need to create a more flexible, more open, and less bureaucratic economy.

We can no longer take our status as the world's strongest economy for granted.

We must constantly work to improve, modernize, compete, and move up the ladder of innovation.

And at the most basic level, we need to address the impediments and high costs that have simply made it too expensive to do business and create and keep jobs in the United States – and I don't have to tell you that the same is for California.

There are six major issues that we need to address in order to secure our economic future.

Legal Reform

The first is an environment of extreme litigation abuse.

Nearly 90% of U.S. corporations are faced with some type of litigation, and the average company balances a docket of 37 U.S. lawsuits.

Companies with $1 billion or more in annual revenues face 147 lawsuits at any given time.

Our tort system costs $246 billion a year, or more than 2% of GDP.

By comparison, tort costs in Canada, Japan, France and the United Kingdom each equate to less than 1% of GDP.

Put another way, tort costs in the United States amount to more than 8 times what the federal government spends on homeland security and more than 4 times what it spends on education.

The threat of litigation is powerful enough even to deter Good Samaritans and prevent organizations from developing much-needed goods and services. It brings new meaning to the term "no good deed goes unpunished."

Contractors and volunteers in the Gulf Coast are being sued for their work helping hurricane victims.

U.S. pharmaceutical companies are discouraged from developing a vaccine for avian flu out of fear of being sued if someone has an adverse reaction to their drug.

There is only one pharmaceutical company in the world that currently makes a drug to treat the bird flu – and it's a Swiss company.

California, in many respects, sets trends for the rest of the country. That can certainly be said about legal trends, both good and bad.

Some of the worst abuses of the legal system occur here California. In fact, every year, the U.S. Chamber and the Harris Poll team up to ask corporate attorneys to rank the liability environments in the states where their company does business, and California finished 45th in this year's rankings.

I can assure you that the business community is challenging the trial bar like it's never been challenged before.

Eight years ago, business wasn't even putting up a fight. In 1998, the Chamber started the Institute for Legal Reform, and business got serious about restoring balance and fairness to our legal system. Let me share with you some of our recent successes as well as our priorities.

ILR has successfully worked to pass legal reform on the federal and state levels. Earlier this year we passed the Class Action Fairness Act, landmark legislation that moves some cases from state courts to more predictable federal courts.

We also played a key role in winning meaningful legal reform victories this year in Texas, Missouri, South Carolina, Georgia, and Illinois.

Illinois passed medical liability reform bill this summer in an extremely tough political environment.

The bill includes caps on non-economic damage awards and was signed into law by a governor who at one time swore he would never sign a bill that included damage caps.

ILR is also educating voters about their choices for state Supreme Court and Attorney General. In last year's elections, ILR participated in voter education efforts in 16 important races across the country, and the pro-legal reform candidate won in 15 of them.

We're spearheading a multi-faceted campaign to rein in the rapidly increasing number of securities class action suits.

In 2001, settlements from securities class action suits totaled $1.9 billion. In 2004, they totaled $5.4 billion, amounting to almost a 300 percent increase over three years.

To kick off this project, we recently released a study that illustrates abuse of the securities class action system. We will follow up on this study with additional research and a public education campaign.

ILR is engaged in an effort to stop state attorneys general who are circumventing legislatures and regulatory agencies and sometimes acting like the fourth branch of government—single-handedly redefining industry practices; trying cases in the media; and threatening criminal prosecution to force settlements.

Some attorneys general have delegated their authority to plaintiffs' lawyers on a contingency fee basis, and it is often the plaintiffs' lawyer who shops the case to the AG.

ILR has a comprehensive strategy in place to head off a new effort by trial lawyers to import foreign disputes to U.S. Courts, where they can take advantage of our more permissive judicial system.

Through the Coalition to Curb Global Forum Shopping, we have started addressing the issue through education efforts with the Washington diplomatic corps, the business community here and in Europe, as well as on Capitol Hill.

And finally, we're successfully challenging the validity of abusive lawsuits in court. The Chamber's own law firm, the National Chamber Litigation Center, is considered the leading organization in challenging punitive damages and class action litigation and is building a formidable reputation in securities litigation issues.

All of these efforts are evidence that, for the first time, the business community is challenging America's litigation explosion in a comprehensive and coordinated way.

For the first time, our adversaries know they have a real fight on their hands.

For the first time, business can point to more than just minor successes around the edges.

For the first time, we can point to fundamental changes in the legal landscape across the nation.

But the trial bar is a persistent adversary. You can beat them back in one state or in one line of litigation, but they will pop up again in some other state or in some new litigation arena.

Nevertheless, business will continue the chase as never before, spending more money and energy than ever before.

Capital Markets

As a nation, we must also explore ways to make our capital markets and corporate governance system work for everyone involved – investors, management, directors, and regulators.

In the wake of Enron, some regulatory changes were certainly necessary for improving market transparency and investor confidence, and the Chamber supported them.

But all in all, the knee-jerk regulatory reaction to corporate misconduct has had an unintended negative effect on our economy.

In this new regulatory environment, companies are having difficulty attracting and retaining good board members and executives, especially CFOs.

Few candidates for these jobs are willing to take the chance of going to jail for making a simple accounting mistake.

Visionary business leaders have become number crunchers and spreadsheet analyzers. They are avoiding risks and playing it safe.

And why wouldn't they, with some prosecutors and attorneys general bent on criminalizing honest mistakes and legitimate accounting differences?

Like with legal reform, the Chamber is leading the challenge against overregulation because no individual company can.

We're fighting to preserve the basic right of due process so that businesses don't feel forced to negotiate a settlement when no wrongdoing has been committed.

This effort includes challenging the Department of Justice and the SEC to cease their demands for waivers of the attorney-client privilege—the legal doctrine that protects communications between attorneys and their clients.

It's a little known fact that the U.S. Sentencing Commission last year enacted an amendment that effectively forces companies to waive their attorney-client privilege whenever the government demands it.

Waiver of this sacred privilege discourages openness and honesty between attorneys and their clients, weakens a company's internal compliance programs, and opens up companies to "follow on" litigation by other parties, including civil litigants.

We are suing the SEC for its requirement that 75% of a mutual fund's board of directors, and its chairman, be independent from the fund. In August, a federal court ruled in our favor and ordered the SEC to delay implementation of the mutual fund independence rule.

We're challenging special interest groups—such as trial lawyers, labor unions, public pension funds and rating agencies—that are exploiting concerns about corporate governance to win concessions and advance their interests.

The California Public Employee Retirement System, CalPERS, happens to be one of the biggest offenders.

When the CalPERS board decided to go after Safeway and several other corporations last year for alleged failures in corporate governance, it exposed within its own organization conflicts of interests, political gamesmanship by labor union officials, and hush-hush alliances with trial lawyers.

And finally, we are organizing an independent, high level bipartisan commission to consider the question of how to best regulate our markets in the 21st century.

Our current system of capital market oversight consists of a patchwork of state and federal laws and regulations. The recommendations put forth by our Commission will be meant to ensure that the capital markets remain healthy and vibrant, and not the victim of overregulation.

Throughout this process, we will continue to remind lawmakers, regulators, and law enforcement types that capital can and will go where it is welcome, where it is safe, and where it stands a reasonable chance to earn a return on investment.

It can move out of California - and out of the United States – in a flash. And with it goes innovation and creation.

Health Care

A third competitiveness issue is the cost and accessibility of health care. Some of the best health care in the world is delivered in the United States, but the cost of providing it is hurting companies and putting coverage out of reach for a growing number of Americans.

The Big Three U.S. automakers provide a compelling example of the impact of rising health care costs on American competitiveness.

General Motors spends more than $1,500 on health care for every vehicle it produces, more than what it spends on steel. Ford is experiencing similar costs.

Keep in mind that U.S. companies big and small provide health care coverage to 136 million Americans – not by law, but rather, voluntarily.

At the rate of health care inflation, how can American companies continue to do this and effectively compete with European and Canadian companies who don't have these costs?

If your answer is a "single-payer" system, just remember who that single payer would be – the American taxpayer.

And think about what the necessary tax increases would do to our economy and what a government-run system would do to healthcare quality.

A combination of several market-driven initiatives can slow the rate of cost increases while improving healthcare quality. We should:

Expand alternative health insurance products and vehicles for purchasing coverage…things such as health savings accounts, which give consumers greater control over their health care dollars;

Reduce medical liability, a significant cost driver. California showed us how this could be done years ago.

Improve patient safety and the measurement of quality, efficiency, and outcomes;

Put greater emphasis on prevention and chronic management; and

Introduce the industry to information technology.

As major purchasers of health care, businesses are putting a lot more thought into these issues.

Energy/Environment

Let me move to the fourth issue – the lack of plentiful and affordable supplies of energy.

The global energy markets have undergone dramatic change in the past decade. India, China, and the rest of the developing world are thirsting for energy to power their fast-growing economies.

China is now the second biggest energy consumer in the world, after the United States. In twenty years, China and the rest of Asia will need 129% more energy than it uses today.

The United States is also greatly increasing its energy demands. Twenty years from now, we will need a third more energy than we use today – even with continued improvements in efficiency.

Where are we going to get that energy? Are we going to continue to rely on such unstable exporters in the Middle East, Venezuela, Africa, and Russia?

Are we going to put our country's economic future in the hands of leaders like Venezuela's Hugo Chavez, whose contempt for the United States is no secret?

Our nation's heritage is one of independence and self-reliance. We must secure our future by developing greater energy supplies in our own country.

The energy plan that was signed into law this year is an important step. It calls for increased domestic production of traditional energy sources and also contains 60 provisions targeted specifically at alternative and emerging energy technologies – wind, biomass, ethanol, hydrogen fuel cells, and hybrid technology, to name a few.

But we need additional legislation to increase refinery capacity, open up more federal land to energy exploration, and increase incentives to expand nuclear power plants – which by the way, do not emit the greenhouse gases believed to cause global warming.

When it comes to energy, we are a nation of contradictions. We encourage more use of natural gas for environmental reasons, but we don't allow more drilling for it.

We acknowledge a lack of oil refinery capacity, but impose regulations that have prevented construction of a new refinery for the past 30 years.

We decry the high price of gasoline but prohibit the drilling of oil on federal lands and offshore on both the West and East coasts.

If businesses can't get affordable energy in the United States, they will go wherever the can find it.

It's already happening. Chemical companies, which are big consumers of natural gas, closed 70 facilities in the United States last year and have tagged 40 more for shutdown.

We must fix this before the next industry follows the chemical industry in the search for affordable and reliable energy supplies.

Globalization/Trade

The fifth of my six issues is America's willingness to engage in global trade and investment.

For a long period of time, the United States was a strong proponent for increased global trade because, well, we had a lot of stuff to sell to other countries, and they didn't have as much to sell to us. We liked that arrangement.

These days, developing countries are exporting high tech products to the United States—not to mention commodities and agricultural products.

Suddenly, some U.S. industries have decided they don't like trade anymore. They're going to their elected officials in Washington and asking for protective subsidies and tariffs.

It's a critical time for global trade and investment. In December, trade ministers from the 148 nations belonging to the World Trade Organization will meet to negotiate further cuts in global tariffs and other trade barriers.

Will America lead, or will it send a mixed message of "we want trade, but only on our terms?"

Their can only be one answer. When you combine all forms of trade, we are the world's largest exporter, and its largest importer.

Trade and returns on foreign investment account for a third of our economy, and in no state is it more critical to the economy and everyday life than California.

In fact, were it not for trade, more than one million Californians would not have the jobs they have today.

There is no doubt that the United States will continue to be among trade's biggest beneficiaries – as long as we work to ensure that market barriers are torn down, that the rules of trade are evenly applied, and that U.S. intellectual property is protected all around the globe.

Education/Workforce/Immigration

Finally, ladies and gentlemen, we must tackle the enormous challenges surrounding the availability of qualified workers – now and in the future.

Lots of CEOs, but very few policymakers, are asking the difficult question of whether we have enough workers, with the right mix of skills, to compete in the global economy.

And they're also asking whether or not we are adequately preparing our young people today to do the jobs of tomorrow.

The answers to both questions are not easy to digest. We are staring straight in the eyes of a severe worker shortage as 77 million Baby Boomers get set to retire in the next few years—with a fewer number of younger workers available to replace them.

Many of the jobs becoming available today look much different than they did yesterday and will look still different tomorrow.

They will require more technical skills and a greater understanding of math and science, subjects in which American students fail to show a suitable level of competence or even interest.

Consider this: Less than one-third of U.S. 4th and 8th grade students are proficient in math. Even more troubling, 30% of students who start high school don't finish in four years.

Science labs on college campuses are increasingly populated by foreign nationals who traditionally stay and work in the United States after earning their degrees.

More and more, however, they are returning home to capitalize on new opportunities.

The United States must take dramatic steps to improve student performance in math and science and motivate our students to study and enter careers in these fields.

As a nation, we are spending more than ever on education, yet receiving a very poor return on our investment.

Rather than throwing more money at the problem, we need higher standards and greater accountability, and No Child Left Behind takes an important first step in this direction.

However, education is primarily a state and local issue, and that is where the battles will be won and lost.

The Chamber is using its resources to spur local action. We are partners in the Business Education Network, whose goal is to build business and education partnerships that improve competitiveness and scholastic performance across all levels.

With several other business organizations, we have started an initiative with a goal of doubling the number of science, technology, engineering, and math graduates by 2015.

And, similar to our legal reform efforts, we will conduct independent professional research to identify and rank student performance by state, or even by county, with the idea that businesses would find this information useful in determining where to locate the best human resources.

Better education is just one part of ensuring that the United States has the right number and quality of workers.

The other part is immigration reform that makes it easier for immigrants to take unfilled U.S. jobs and for undocumented workers already contributing to our economy to have the opportunity to stay and keep their job.

I know that I've stepped right into the middle of one of the most contentious issues in California. You've experienced some of costs associated with rampant immigration – namely, the strain on education and health care resources.

But you've also benefited greatly from immigrants and their labor. In many ways, immigrants define who California is and what it's all about. The abundant labor pool, cultural diversity, and entrepreneurial spirit that you find here can't be found anywhere else in this country.

We must protect our borders, and we must account for who is coming and going. But to keep out people who want to come here to work would be not only contrary to our national heritage—and California's—but it would also severely restrain the nation's—and this state's—economic potential.

Conclusion

Ladies and gentlemen, I've chosen California as a place to deliver a message on U.S. competitiveness for a reason. This is where the challenges I've mentioned are most acute…where the impediments to a more competitive economy are the greatest.

California has struggled with the issues I've mentioned, and it has experienced the consequences of that struggle – jobs, businesses, and opportunities going to other states.

But California's capacity to change, its talent, its brainpower, and its risk-taking, entrepreneurial spirit are second to none.

California has an opportunity to lead on competitiveness issues…to pave the way to economic opportunity and prosperity that will sustain us for the rest of this century and beyond.

The rest of the nation looks to you for guidance and to catch a glimpse of its own future. I hope California makes the right choices to ensure a future with great potential.

Thank you very much.