Prepared Testimony of James Glassman

Thank you for inviting me to give testimony at this very important Biotechnology Summit. I am honored to join you today, and especially to be on the same panel as Peter Lynch, who has been a hero for a long time. My name is James K. Glassman. I am a resident fellow at the American Enterprise Institute, a Washington think tank. For six years ending this past June, I was a regular columnist on financial, economic and political matters for the Washington Post.
Next month, I begin a financial column for the Reader's Digest, the world's largest-circulation magazine.
With the economist Kevin Hassett, I am co-author of a new book on the stock market, "Dow 36,000,"
which has just been published by Times Books. You have heard today about the wonders that the
biotechnology industry has already produced and those that it will certainly produce in the future. I want
to talk to you today about one of the elements that is essential to the success - indeed, the survival - of the
biotech industry. It is capital, which is merely a fancy name for money for investment. The biotech
industry needs capital to fund its research, and that capital is not easy to come by. The next panel of
CEOs will probably be more specific about some of the problems of funding biotech - including a
lamentable lack of understanding both at the political and venture-capital level of where innovation comes
from and just how important it is. I want to be much more general. This is a nation of wonderful
entrepreneurs, hard-working scientists, great managers, fabulous ideas. But they can't bring products to
the marketplace without capital. Where does that capital come from? Lately, much of it has come from
abroad. Over the past 17 years, while the U.S. has undergone the greatest single round of prosperity in its
history, capital inflows for portfolio investment purchases (stocks and bonds) have increased at an
average annual rate of 19 percent. Foreign direct investment has increased at an average annual rate of 15
percent. Net foreign inflows to this country: $4.8 trillion - a figure that amounts to 2.5 times the annual
federal budget and about half of our annual GDP. A big, big number. But will this strong flow of capital
continue unabated? There are doubts. Right now, the U.S. is attracting capital because of our sensible
regulation, decent tax rates (which could become more decent, just as regulation could become more
sensible), low inflation and entrepreneurial culture. But Europe and Asia are developing along similar lines,
undergoing the same managerial revolution that we did in the early 1980s. In other words, the rest of the
world will have other places to invest as time goes on. What about capital from within? There, the picture
is not nearly as bright as it could be. A major source of capital is personal savings - which the Bureau of
Economic Analysis defines as the difference between after-tax income and expenditures. Unfortunately,
the official household savings rate fell in May to its lowest level in recorded history: m inus-1.5 percent.
The latest number is minus 1.4 percent. To give you an idea how low this is: In 1974, when Congress
created the IRA to boost the incentive to save, the savings rate was 9.5 percent. Why so low? One
immediate reason is a little technical: after-tax income does not include the capital gains that Americans
earn on their stock and bond holdings. But, frankly, spending those gains is not a very good idea. They
should be reinvested anyway. Also, Americans simply like to consume. It's their money. They should be
able to do what they want with it. Right? Well, yes and no. Americans are not saving enough - and, more
importantly, not investing enough in biotechnology and other equities (that is, stocks) for two reasons that
can be remedied. The first is the subject of the book, titled "Dow 36,000," that I have co-authored with
Kevin Hassett, a former senior economist with the Federal Reserve Board. We argue that scholars, Wall
Street analysts and media pundits have scared millions of Americans away from the stock market with
continual talk of bubbles and imminent crashes - talk we have heard all the way up from 1982, when the
Dow as at 777, to the present, with the Dow over 10,000. These frightening judgments are based on a
flawed model of stock valuation, a model that has been repudiated by the facts. In our book, we offer a
new model, and we encourage Americans to invest in the stock market in a prudent, long-term fashion
with a sensibly diversified portfolio. The other reason Americans aren't saving and investing enough is that
public policy deters it. And this is the main message I would like to leave you with today. Americans are
not investing because we have a tax code that encourages consumption over saving. We tax the earnings
of corporations, then tax the dividends they pay, then tax the income from those dividends and the capital
gains that result, and then, as if that isn't enough, we tax the estates of those with the prescience and the
discipline to invest for the long term. What kind of system is that? Yes, we have IRAs and 401 (k) plans,
but they are burdened with all sorts of restrictions. And let's not forget Social Security. Including the
employer's portion, 10 percent of the salaries of working Americans go into a system that produces
returns of only I or 2 percent. If just as small portion could go into the stock market, Americans could
develop real wealth, and get a taste for investing that would almost certainly lead to a higher savings rate.
In fact, I believe that even President Clinton's USA Accounts represent an impressive step in the right
direction. Something needs to be done. Indeed, as I see it, the most urgent economic issue on the policy
agenda is wealth creation. Half of Americans have no wealth at all - no significant bank account, no
stocks, no bonds, nothing to pass on to their kids, nothing for a decent retirement other than Social
Security. That is a shame. For most Americans, the best chance for a comfortable retirement - in many
cases, the only chance - is through stock market investing. The flip side to this deficiency is the lack of
capital I discussed earlier. In the case of the biotechnology industry, capital saves lives. There is no
substitute for it, and the need is urgent. Thank you.