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Treas,
rtJ
\6
M.1^5
P R E S S
m
R E L E A S E S .
WS-213
through
WS-264
FEB.2,1975
through
MARCH 31,1975
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"Meet the Press" (Guest: Al Ullman)
Date:
1975-02-02
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Page(s):
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https://fraser.stlouisfed.org
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1975-02-02
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Federal Reserve Bank of St. Louis
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NBC Nightly News, "Energy Proposals"
Date:
1975-02-03
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Federal Reserve Bank of St. Louis
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APPENDIX A
Television Receivers
Parts of Television Receivers: Color television
picture tubes, resistors, transformers
(deflection components), and tuners for
receivers with integrated circuits.
Radio Receivers
Radio - Phonograph Combinations
Radio - Television - Phonograph Combinations
Radio/Tape Recorder Combinations
Tape Players
Record Players and Phonographs complete with
Amplifiers and Speakers
Tape Recorders
Simon’s Campaign to
There’s a television show on the
air in Washington every Saturday
that features a mixed group of cor
respondents discussing what’s been
going on around town.
“I watch you each week,” William
E. Simon told a participant one day
at a luncheon. “Boy, you guys don’t
know how many times I’ve been on
the verge of calling you up right then
and telling you what you just said
was all wet.”
“I talk back to the television set,”
Mr. Simon explained a- few moments
later. “I just can’t stand it when
somebody gets something perfectly
simple messed up in trying to ex
plain it.”
As. Secretary of the Treasury and
chairman of the President’s Econom
ic Policy Board, Mr. Simon is equal
ly pained that in this period of eco
nomic stress so many ignore what to
him is a simple explanation of why
we are now struggling with recession
and inflation.
“We’re in this mess because of
things done in the past,” he says.
“Inflation causes recession. We’re
going to come out of it, but we don’t
want to come out of it and two years
from now have worse inflation, which
could only lead to worse recession.
“What I wish everybody would un
derstand is that government spend
ing doesn’t cure economic problems.
Massive government spending just
creates them.”
Statements similar to these have
caused some members of Congress,
N A T IO N ’S B U S I N E S S /F E B R U A R Y 1975
By the time he arrives at the White House at 8 a.m. each day for meetings, Treasury Secretary
William E. Simon has already put in an hour's work in his own office. President Ford meets
at least twice weekly with the executive committee of the Economic Policy Board, which Mr. Simon
chairs, and the two frequently talk alone about Administration economic plans for the nation.
Curb Big Government
columnists and economists to accuse
the 47-year-old former New York in
vestment banker of being a “Nean
derthal,” or “Eighteenth Century
thinker.”
To this, Bill Simon says simply:
Its the philosophy that bothers
them. If they can’t punch holes in
the philosophy, they try to tear down
the man.”
He contends his philosophy is
merely an unshakable belief in the
American free enterprise system,
which has brought us the greatest
prosperity in the history of the world.
AH I’m saying is that this system
has worked, is working and will work
i1 We k t it and don’t strangle it with
government and regulation.”
I Mr. Simon has been preaching a
■ N A T I O N ’S B U S I N E S S /F E B R U A R Y 1975
message of less government and less
government spending ever since he
joined the Administration in 1972 as
Deputy Secretary of the Treasury.
But it wasn’t until the energy
crisis struck in December, 1973, that
he jumped overnight from being a lit
tle known sub-Cabinet official to a
household word.
That was when he was named to
take over the Federal Energy Office,
established by President Nixon to
coordinate federal energy policies.
With imported Arab oil cut off in a
global political power play, Mr. Si
mon’s job became one of keeping fuel
going to businesses so they could
continue to produce, and making
enough fuel available to the public
to keep it comfortable and mobile.
He succeeded—“and without get
ting into any coupon-rationing fias
co,” he says with a grin of satisfac
tion.
Big, bad Bill?
But along the way there started
building a long list of what he calls
“myths about Simon.”
Such as?
• Mean, tough to work for and get
along with.
• Has a short fuse . . . temper blow
ups.
• Fighting for power.
• Rigid.
“Your list could go on and on,” he
says. “They just aren’t true, so why
worry about these petty things?”
What does worry him, he says, is
19
Simon’s Campaign to Curb Big Government continued
that in this “critical issue stage” dent Ford named him to chair the
there seems to be very little concern newly created Economic Policy
about issues, but a lot of focus on Board.
personalities.
The Board’s executive committee
“You know, Sen. Fulbright [J. meets in the White House daily at
William Fulbright, a former chair 8:30 a.m., to discuss the economic
man of the Senate Foreign Relations state of the nation, and it meets with
Committee who lost an Arkansas pri President Ford twice a week, some
mary contest] put it pretty well in times more often.
his farewell speech at the National
Press Club when he said, ‘You peo An early bird
ple are more interested in the singer
By the time of the 8:30 a.m. meet
than the song.’ ”
ing, Mr. Simon has already put in a
The song being sung today could pretty good day. He gets up every
very well be entitled, “The Econo morning by 5, “catches up on my
my,” with Congress and the Admin reading with a cigaret and a cup of
istration a Washington version of Tin coffee,” and is usually in his Trea
Pan Alley.
sury office shortly after 7. At 8, there
When Mr. Nixon named him is a meeting with Donald Rumsfeld,
Treasury Secretary (after a first the President’s top assistant, and the
choice declined the job) to succeed senior White House staff.
George Shultz, Mr. Simon immedi
After the executive committee ses
ately put on 44 other hats—for that’s sion—the other participants are L.
how many officially designated func William Seidman, staff director of the
tions the nation’s top financial officer Policy Board; Alan Greenspan, chair
has. He added another when Presi man of the Council of Economic Ad
visers; the director of vUfe Office of
Management and Budget; and the
President’s special assistant for trade
—he is back at Treasury coping with
a schedule that changes almost hour
lyThe Secretary was one of the chief
suppliers of the options President
Ford considered when he finalized
the Administration fiscal policies
that he outlined in his State of the
Union message to Congress.
Says Mr. Simon: “The President
has to have every option available to
him when he makes his decisions.
The Economic Policy Board certain
ly tries to give it to him. Sometimes
recommendations are unanimous.
Sometimes strong opinions of a vary
ing nature are also given.”
Does he ever give his opinions to
the President, personally and alone?
“Oh, sure. He knows how I feel.
He knows how a lot of people feel.
He gets a good input. Then he makes
the decisions. Sometimes, when we
The easiest place for the Simon family to pose for a picture is in the living room of their big home
in McLean, Va. They are (left to right), Julie, 11; Secretary Simon; Aimee, 14; Mrs. Simon (Carol);
Peter, 21; Mary, 20; Katie, 7; Bill, 23, and Leigh, 17.
talk, it’s philosophical. Other times,
I’ve got position papers with me, es
pecially when we talk about taxes.”
To get the nation out of recession,
the President proposed a $12 billion
reduction in income taxes for 1974,
to be rebated by the Treasury in two
checks. In addition, noting that in
flation is pushing people into higher
tax brackets, he called for a $16.5
billion annual reduction in personal
income taxes from 1975 on.
Mr. Ford also proposed a one-year
$4 billion increase in investment tax
credits for farmers and business. For
the future, both to offset “inflation
ary distortions” and to stimulate
activity, he urged a reduction in the
I corporate income tax rate from 48
i per cent to 42 per cent of profits
[ above $25,000 (the present 22 per
cent rate on profits below $25,000
[ would remain).
On the energy front, the President
I asked Congress to increase excise
I taxes or import fees on all crude oil,
land on imported petroleum products,
I by $2 a barrel. Meantime, on his own
I authority, he said, he will raise imIport fees $3 per barrel by April 1,
land he will limit imports if he feels
lit is necessary. And he said he will
lend price controls on “old” domestic
■oil.
I Also, he would delay certain enviIronmental standards for autos, deIregulate the price of new natural gas,
r a is e natural gas excise taxes and imP°se a windfall profits tax on energy
jtbroducers. In addition, he would exBend the investment tax credit in
cre a se (a rise from 7 per cent to 12
■ or most businesses and from 4 per
C en t to 12 for utilities) for two years
in the case of utilities that build powifer plants which don’t use oil or naCural gas.
A “ horrifying” deficit
■ A result of his proposals, Mr. Ford
Said, would be a 1976 budget deficit
of at least $45 billion.
■The size of the deficit “horrifies
^C>” Mr. Simon says, but he adds
H a t it is necessary to stop the na■ ° n’s <tec?nomic slide. He emphaI intend to fight to enact the
president's entire program. And it
^Cauld be taken in its entirety.”
^C*hat the Administration is going
^Chave a big fight on its hands in
^ B r i O N ’S B U S I N E S S /F E B R U A R Y 1975
Congress is obvious. The Democratic
majority has proposed its own ver
sion of a remedy for the nation’s
economic ills and, while it favors a
tax cut, it prefers one different in
emphasis than the President’s.
Because Mr. Simon is an ardent
advocate of pay-as-you-spend poli
cies, eyebrows were raised all over
Washington when it became known
some weeks before the President’s
message that the Administration was
thinking of the cut and that he hadn’t
hit the roof.
The Secretary says he doesn’t see
any contradiction.
“First of all, nothing is more im
portant than responsible budgeting,”
he explains. “If we had followed
pay-as-you-go policies over the past
decade, we wouldn’t be in our pres
ent mess. However, I don’t advocate
a balanced budget when the economy
is falling off into recession. Budget
deficits in recession are inevitable
and even desirable, since they do
provide a needed degree of fiscal
stimulus.
“But we also have rampant infla
tion to contend with. And there is a
world of difference in terms of infla
tion between a deficit which results
from sluggish tax revenues, and one
which results from runaway federal
spending. The first type of deficit
helps to stabilize the economy; the
second type would further destabilize
it.”
Since the Secretary isn’t shy about
speaking up for Administration eco
nomic views, there’s hardly a net
work talk show on television he
hasn’t appeared on more than once.
In fact, he and Secretary of State
Henry Kissinger are probably the
most publicly recognizable of all
Cabinet members.
In his TV appearances, or when he
is testifying before a Congressional
committee, Mr. Simon startles lis
teners with the machine-gun rapidity
with which he hurls out a seemingly
endless array of facts and figures—
specifics on almost any subject with
in the sphere of the moment.
“It’s discomforting to see a man
so damn sure of himself,” one Con
gressman confides. “You’d think he’d
have to look at some notes once in a
while just to make sure he’s right.”
One reason he doesn’t need notes
Whatever he is doing at the
moment receives the utmost
concentration from Mr. Simon.
is because “I have an almost photo
graphic memory,” the Secretary says.
“I seem to be able to remember al
most anything I ’ve read, including
some damn silly stuff. I don’t mean
just the substance of something, but
the page number.”
In a cross fire
Mr. Simon is considered, even by
his critics, a dedicated, hard-work
ing and competent person. But his
views—and more importantly the
ability to influence the President
with those views—bring him into a
strong cross fire from Congressmen,
from dozens of diverse groups, and
even from within the Administration.
One basic cause of conflict be
tween some in Congress and Mr. Si
mon is his belief that whatever you
do in the short term for the econo
my has to be consistent with longrange objectives.
“Unfortunately, too many in gov
ernment view long-term projection as
the next election,” he says.
“I tend to take the longer view.
I’m dedicated to turning around this
21
Simon’s Campaign to Curb Big Government continued
The telephone is an essential tool In Secretary Simon's workday and he's never very far from one.
Gerald Parsky, Assistant Secretary for Trade, Energy and Financial Resources Policy Coordination,
catches up on some last-minute details before talking to his' boss when the call Is ended.
V
big ship of government. Government
at all levels today is taking about 32
or 33 per cent of our gross national
product. If it continues to grow, it’s
going to be the end of our free enter
prise system.”
Mr. Simon says he is enough of a
“political realist” to know it isn’t
easy to cut government spending or
convince everyone that overspending
is the prime cause of inflation.
“We have a love-hate relationship
with inflation,” he contends. “We
hate inflation, but we love every
thing that causes it.”
Regulations that restrict
The biggest surprise to him when
he came to Washington, he says, was
the way everybody runs to govern
ment for the answer to a problem.
Everybody, business included. I was
simply amazed. Government’s not
the answer. Government’s mostly the
problem.”
One area, in the Secretary’s view,
| that s long overdue for a close look
24
is just what regulation is really do
ing to American business.
“The regulations that were created
to protect have ended up protecting
special interests,” he says. “Most
are anticompetitive and cost con
sumers billions of dollars. And they
certainly cost business, too.
“It will be an excruciatingly dif
ficult thing to do to judge these regu
lations on the basis of what they’re
really accomplishing. But just be
cause it’s tough doesn’t mean you
shouldn’t try.”
The Secretary and his wife, Carol,
live in McLean, Va. They have seven
children, ranging from William E.
Jr., 23, to Katie, 7.
When he isn’t working, which is
rare, Mr. Simon likes to play tennis,
and he scrounges around for a part
ner when an unexpected free hour
turns up.
“I usually can get Art Buchwald
[the columnist]. He’s a tennis bug,
too, and seems to be able to drop
what he’s doing almost any time.”
Mr. Simon had an intimate knowl
edge of some of the Treasury’s activi
ties before he officially joined it. As
a senior partner of Salomon Brothers
he was responsible for the investment
banking firm’s government and mu
nicipal securities department.
“I knew the financial end of Trea
sury,” he says. “But I didn’t know
much about the law enforcement
part. I learned.”
While Mr. Simon plans to stay as
Secretary of Treasury as long as the
President wants him, he definitely
doesn’t intend to be a 3Q-year gov
ernment man.
“I worked my way up to the top
once before and I can do it again,”
he says, grinning.
\
But he is serious when he answers
a question on how he will feel about
the job he’s done if and when he
does return to private business:
“Comfortable. I’ll feel comfortable.
I won’t have compromised any prin
ciples. I’ll have spoken my piece and
done my best.”
END
N A T IO N ’S B U S I N E S S /F E B R U A R Y 1975
Department of
«SHINGTON, D C. 20220
thefREASURY
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
February 4, 1975
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON DOMESTIC MONETARY POLICY
OF THE HOUSE BANKING COMMITTEE
WASHINGTON, D.C., FEBRUARY 4, 1975
Mr. Chairman and Members of this Distinguished Subcommittee:
On behalf of the Administration, I want to express my
sincere appreciation for this opportunity to testify on
H.R. 212.
It will come as no surprise to Members of this Sub
committee to learn that the Administration emphatically and
unalterably opposes this legislation.
Knowing the strength of our opposition, the Members will
forgive me if I resort to strong language in describing this
measure. The bill’s title, the ’’Lower Interest Rate Act of
1975,” endorses a goal which all of us share, but it would
seek to achieve that goal through means that are wholly con
trary to the spirit of free enterprise and are totally un
acceptable to the Executive Branch. It would destroy the
flexibility of our monetary system and would undermine the
independence of the Federal Reserve Board, thus removing one
of the last disciplinary forces we have in the fight against
inflation. It would inflict upon the country an unprecedented
system of credit controls that are unnecessary, unenforceable
and unworkable. It would drain the vitality and strength from
our financial system, long the centerpiece of our economic
growth. And it would rob the American people of many of the
freedoms they have always held precious.
In short, we view this bill with an aversion and a concern
bordering on alarm. And we urge the Members of this Subcommittee
to turn your attention to other, more productive ways of
achieving lower interest rates and correcting the imbalances
in our economy.
WS-213
2
Controlling Monetary Growth
Section 2 of this bill requests the Federal Reserve Board
and the Federal Open Market Committee to direct their efforts
during the first half of this year toward maintaining an
increase in the M]^ money supply -- demand deposits and currency
outside banks -- of no less than 6 percent a year, over each
three-month period, and to report to designated committees of
the Congress whenever they deviate from this target for sub
stantive or technical reasons.
Since the Chairman of the Federal Reserve Board is to
appear before this Subcommittee within the next few days, my
comments on this portion of the bill will be relatively brief.
We oppose specific, legislated targets for growth in the
money supply on several grounds.
First, there appears to be no conceivable way for the
Federal Reserve -- with or without the active participation
of the Treasury -- to control monetary growth to within narrow
limits for short periods like three months. In the short run
there are great variations in the relationships between, the
money supply and the policy actions of the Federal Reserve,
including changes in the discount rate, in reserve requirements
and in the holdings of securities by the Reserve System.
Strenuous efforts by the Federal Reserve to control short-run
movements in the money supply could have highly destabilizing
long-run effects on economic activity and prices. Even for
longer periods such as a year, achieving specific targets would
be exceedingly difficult.
Second, it is not enough to focus on a single measure of
the money supply as this proposal contemplates. Demands by
the public for different types of financial instruments shift
over time relative to its demands for demand deposits and
currency, so that it becomes necessary to give attention
to a great variety of money and credit flows: the narrowly
defined money supply, the broadly defined money supply, total
bank credit, total credit, etc. One prominent economist has
identified thirteen different measures of the money supply.
These measures do not move in concert, especially in the
short-run, and the divergent patterns of the full family ol
monetary aggregates must be taken into account in setting
Federal Reserve Policies. It would, therefore, be harmful
rather than helpful to determine monetary policy on the basis
of only one monetary aggregate.
3
Third, and most important, even if it were possible to
conduct policy on the basis of a single monetary measure and
even if that measure could be tightly controlled over short
periods, it would be wrong to adopt a fixed-growth rule.
Just as conditions in the economy change, there are changes
in the appropriate monetary response. Monetary policy must
be conducted with flexibility, not with mandated targets.
Large disturbances of the financial markets, such as
the Penn-Central *s troubles or the near-failure of the Franklin
National, sometimes require a rapid one-time increment in
money and credit. The Federal Reserve's position as a lender
of last resort is an essential part of our economic structure
that should not be cast aside. In the period immediately ahead,
a step-up in money growth might be appropriate to accomodate
the energy price increases that would develop out of the
President's proposals to impose excise taxes on crude oil
and natural gas. On the other hand, other circumstances -a sharp fall in the rate of inflation, for example -- might
call for slower growth in money and credit than was thought
onlya short time earlier to be appropriate. Thus, the Federal
Reserve must have flexibility to move in either direction, as
circumstances warrant.
Moreover, we must recognize that this proposal, if
enacted, would be a serious encroachment upon the Federal
Reserve System itself. When that system was first created
in 1913 -- more than 60 years ago -- the Congress specifically
assigned it the task of furnishing "an elastic currency".
Furthermore, it has long been generally accepted that the
Federal Reserve System should be independent of both the
Legislative and Executive branches -- that it should be outside
the ebb and flow of American politics so that it could make
more objective and dispassionate judgments about our monetar)
system. This is no time, When public confidence in our
economy is already fragile, to place the passions of the
present ahead of sensibilities for the future.
For all of these reasons, Mr. Chairman, we respectfully
urge that this provision be disapproved.
4
CREDIT CONTROLS
The remainder of this bill, contained in Section 3,
is if anything less desirable and more dangerous than
the preceding section. This provision would create a
system of mandatory controls on credit that would go far
beyond any form of compulsory credit allocation this
country has ever known, even in wartime.
1.
Historical Experiences
Most of the Members of this Subcommittee will
recall that during the Second War, the Federal
Government placed selective controls on consumer credit
in order to encourage a greater flow of funds into defenserelated industrieso Those controls were temporarily reinstituted.
In 1948-49 pursuant to anti-inflationary legislation,
and were put into effect again— along with selective credit
controls on real estate--during the Korean War. Authority
for such controls was repealed by the Congress in 1952.
These have been our only ventures into compulsory credit
controls. I must emphasize that they were carefully limited
to credit for consumer spending and real estate, and they
were justified only on the basis of emergencies arising from
armed conflicto There has never been any attempt to control
every loan and line of credit in the country.
There have also been a couple of attempts at voluntary
allocation programs0 Near the end of World War I, a capital
issues committee was briefly set up to review loans and
securities, but it was quickly disbanded after the Armistice.
That program has few lessons for us today, except to note
that approximately one-third of the applications disapproved
came from State and local governments0 During the
Korean War, a much more ambitious program of voluntary
controls, extending to most forms of borrowing, was
set up under the Federal Reserve System. But this
program was abandoned after the war because of the
impossibility of defining eligible loans and the political
5
repercussions that followed the disapprovals for two States
that wanted to issue bonds for veterans bonuses0 If
acceptable credit standards could not be defined in the
early 1950s, I ask the Members to consider how much more
difficult it would be almost a quarter of a century later
in an economy more than four times as large and far more
complex.
■
The Korean War experiment with large-scale voluntary
controls and selective mandatory controls is especially
instructive for us today. As you will recall, M r 0 Chairman,
a Subcommittee of the Joint Economic Committee--under your
very able leadership--took a hard extensive look at those
controls as well as other economic policies after the war
was over. Let me note two of its conclusions here:
(A) With regard to the experiment with voluntary
restraint, the Subcommittee concluded that it "was probably
helpful in restraining inflationary pressures...Programs of
this character are easily subject to abuse, however, and
are unlikely to be uniform in their distribution of burden.
They also tend to become less effective with passage of
time. We believe that such programs should be resorted to
only under extraordinary circumstances."
(B) With regard to selective mandatory controls, the
subcommittee found them inferior to the free market system.
"In the absence of affirmative evidence to the contrary,"
the subcommittee found, "the allocation of resources which
would result from the free operation of the price system
must be considered that most likely to maximize social
welfare. Selective controls should be used with special
caution, therefore, and only when thoroughly justified."
A majority felt that legal authority for selective controls
should be retained, but the Chairman (Wright Patman) entered
a dissent: "I believe that the disadvantages of selective
controls over consumer and housing credit are so great that
the authority for the imposition of those controls should
he repealed immediately.” The advice of the Chairman was
subsequently followed by the Congress.
6
Despite these experiences, the Congress once again
ventured down the road to mandatory credit allocation in
1969 when it passed the Credit Control Act. That legislation,
enacted without formal hearings and over the opposition of
the Executive Branch, allowed the President to authorize
controls over all extensions of credit by the Federal Reserve»
For unrelated reasons, the President felt compelled to sign
the bill but he publicly denounced such controls and vowed
that he would never use them. Fortunately, the Credit
Control authorities have been gathering dust ever since.
Another part of the 1969 legislation reactivated the
authority under which the Federal Reserve Board Administered
a voluntary credit restraint program during the Korean War.
As a result, the Federal Reserve Board set up a Federal
Advisory Council and in September of 1974, the Council
issued a statement suggesting credit policies that commercial
banks might voluntarily follow in order to combat inflation.
The priorities contained in the legislation before us today
closely resemble the suggestions of the Advisory panel, but
they would convert what were intended to be general, voluntary
restraints with more limited purposes into mandatory
requirements which carry the penalty of law. Furthermore,
the Advisory Council made it clear that it felt that those
policies were already being followed by many banks, an
observation which I believe to be accurate since few lenders
are likely to extend credit except for economically
justifiable purposes.
2»
How the Credit Controls Would be Imposed
The bill that we have before us would remove the
President's discretionary power to authorize credit controls,
replacing it with a mandatory system of controls to be run
by the Federal Reserve Board. The Board would be endowed
with the full panoply of powers included in the 1969 act
as well as additional authority to require banks to maintain
special supplemental reserves.
In language that can only be described as exceedingly
broad, the bill requires that the Board "allocate credit
toward national priority uses as determined by the Board”
and then goes on to name a few of these priorities such
as "essential and productive capital investment0” The
Board is also specifically directed to allocate credit
away from inflationary uses, including "purely financial
activity", "speculative" loans, and loans to foreigners or
for foreign activities which divert loan funds from United
States customers. This last provision could literally
terminate all foreign lending by U 0S 0 banks, including
loans needed to support our foreign trade and held to
recycle petro-dollars.
The Board’s control would extend to every loan made
by every creditor in the country. Every family that wanted
to buy a home or a car, every man or woman who needed a
personal loan, every farmer who wanted to buy new equipment
on credit, every employee who wanted to borrow from his
local credit union, every small businessman who needed a loan,
every corporation that wanted to enter the capital markets,
every city or state that wanted to float a bond, every school
board that needed money to build new schools -- each and
every one of u s , in fact, would find that our financial plans
were totally under the control of the Federal Government.
No longer would your request for a loan be judged on
your integrity and your ability to pay. No longer would a
business seeking to borrow money be able to rely upon the
soundness of its management or the return it could offer an
investor. What would count instead is whether you would
qualify as a "national priority" on a list sent down from
Washington, D.C. -- a list undoubtedly devised by a well-meaning
and dedicated GS-16.
Under this law, the Federal Reserve Board would have the
authority to prescribe the size of your loan, the interest
rate to be charged, and the length of maturity. Meticulous
records would be required, and formal reports under oath would
have to be filed with the Government. If the Government were
dissatisfied with your report, it would have the authority to
compel you to produce your books and papers, and it could seek
an injunction to block any loan to which it objected.
Violators of these controls could be fined or sent to prison.
In effect, this bill would establish a national credit
police state. It would put the hand of the Federal Government
8
at the jugular vein of our economy and give it full authority
to choke the life out of anything it wanted. I can hardly
believe that the Members of this Congress, after looking at
the full implications of this bill, would wish to impose it
upon the people of this land.
Americans have always relished their freedoms, and building
upon those freedoms we have created an incredibly complex and
innovative economy. Our economy is not only the largest but
the most sophisticated in the world. We have an estimated
35,000 financial institutions in this country employing
hundreds of different credit instruments within almost as many
different financial markets. No one knows precisely how many
loans are made each year, but the figure must be in the billions
and the number of different credit transactions must run into
the trillions.
Does anyone honestly believe that government bureaucrats
counting the best and the brightest among them -- can or should
be the ultimate arbiters of how each of these loans is to be made?
Within the words of this statute, how could we trust a
federal official, however well- irtentioned, to answer the
questions that would quickly pile up in Washington?
Would a businessman who wanted to add a wing to his
store and hire a dozen more people be able to obtain a loan?
Under this law, he would have to stand in line behind low-income
housing, even though the tenants in that housing might be
looking for a job.
-- Would a housewife who wanted to buy a new refrigerator
at a department store be denied the use of her charge account
because somebody in Washington thinks she can do just as well
with the old refrigerator? H.R. 212 would give the Government
the power to make that decision.
-- Would a family of six that wanted a station wagon be
able to borrow the money, or would it be limited to a smaller
car that Federal officials thought would be better for the
country?
What about the young man or woman who wants to start
a business? This proposal casts a dim light on new business
(|
ventures, endorsing instead only "established business customers.
I
wonder, too, what the Board would say to a young
Thomas Edison, a Robert Fulton, the Wright Brothers, Madame Curie,
or Dr. Jonas Salk -- men and women whose creative genius only
became apparent after they had made their discoveries. This
statute would almost certainly prohibit loans to such ventures
because they were too speculative.
Or think of the small farmer who is already in debt
and wants a new combine to shift from corn to soybeans. Does
this represent a "productive capital investment" or just another
socially undesirable investment?
Suppose a steel corporation, foreseeing a coal strike,
wants to build up its inventory of coal. Many companies did
that before the recent strike and averted great difficulties,
but under the terms of this legislation, their efforts could be
considered "excessive inventory accumulation."
Or what of the older couple who want to buy a parcel
of land out in the country for their retirement years? Would
they have to submit "well-defined plans for its useful development"
before they could obtain a mortgage?
How would Washington treat the city fathers who
wanted to build a new courthouse and create two new parks?
Would the courthouse be considered "productive" and the parks
denied? Or would both be treated the same way?
And how would state bond issues be treated? Any
Governor who thinks back on the troubles that states had in
the voluntary credit programs of the Korean War and the
First World War can only shudder at the thought.
How, indeed, would the Board determine which
investments in new forms of energy production were sound and
which were only speculative? Research and development in
this field is one of the most pressing tasks facing the nation,
but under H.R. 212, innovative investments in new forms of
energy production could be seriously hampered.
None of these questions is clearly answered in this
legislation, and in all of these cases the loans might well
be denied. For some of them, the bill implies that requests
for such loans should be denied.
The bill fails to distinguish between what is "essential"
and what is "non-essential" and it fails for a simple reason:
10
Such a distinction in a complex society defies human wisdom.
The only thing we know for sure under this bill is that the
American people would surrender their freedom to make these
decisions to a new brigade of bureaucrats in Washington.
3.
Specific Objections to Credit Controls
By now, many of my objections to credit controls have
become apparent, but let me outline them more specifically here:
First, this program would be totally unworkable. It is
inconceivable to me that we can effectively substitute a credit
czar in Washington for the multitude of private credit decisions
made each day throughout our vast economy. We have neither the
necessary informational systems nor the wisdom to undertake
such staggering responsibilities.
Second, this system would be inequitable and extremely
disruptive. Credit allocation would mean that some borrowers
could not obtain funds at any price, creating serious hard
ships for them, while others could obtain larger amounts of
money than they actually needed or would be justifiable in a
free marketplace. Eventually, there would be gross distor
tions within the economy and economic conditions would sadly
deteriorate.
In making this point, I am reminded of our debates over
wage and price controls. Like them, credit controls might
have effects that would be desirable temporarily but would
soon prove to be seriously damaging to the economy.
Third, credit controls would lead to evasion and chicanery
on the part of some creditors and debtors. Every credit
allocation scheme attempts to control the "end uses" of credit,
but borrowed funds can easily be switched to different uses
or substituted for internal funds. Only a large bureaucracy
could attempt to police such actions, and even that would be
unlikely to prevent violations.
Fourth, virtually all of the credit now flowing in this
country could be reasonably classified as essential or pro
ductive under the terms of H.R. 212, so that the relatively
small amount of credit for "inflationary uses" as defined by
the bill cannot be regarded as a significant source of credit
to be redirected to more essential purposes -- even if we
could define what those essential purposes are. Thus, at
tempts to cut off credit completely in these "inflationary"
areas would release only miniscule funds for other uses.
11
r
Fifth, we should recognize that within the Federal
establishment we already have about 150 different credit
assistance programs which have been enacted by the Congress
over the past 40 years and now channel about billions of
dollars a year into uses that have been considered socially
desirable. As of June 1975, we expect that there will be
approximately $317 billion in loans outstanding that are
tied to Federally sponsored or Federal direct loans or guar
antees. In each of these programs, the Congress tried to
define the various categories of eligible recipients of credit
aid and the terms on which such aid should be provided. While
there is certainly room for improvement in these programs, I
do not believe we should superimpose upon this credit aid
system yet another new system that overlaps and subsumes
everything in existence. Instead, we should continue to
identify specific credit needs which the Government is
particularly well suited to meet and direct Government
resources to fulfill those needs.
We should also recognize that in addition to these 150
specific credit assistance programs, the Federal Government
also allocates the available supply of credit through the
budget. Budget deficits -- which are going to total some
$184 billion in the decade through fiscal 1976 -- mean that
the Government is allocating credit away from the private
sector to itself, and then reallocating it towards its own
priorities.
Finally, and of utmost importance, the Administration
is totally opposed to the philosophy of this legislation -to the view that the judgments of the Government should pre
vail over those of the marketplace, that decisions should be
based not on economic merit but on political clout.
This legislation mistakenly assumes that if we add up all
of the socially desirable investments that should be made in
coming years, there will be enough capital available to make
those investments and we must simply divide up the money.
In coming years, unless we increase the incentives for savings
and investment by strengthening the free market system, there
will be a definite tendency for capital demands to outrun the
supply of savings to finance it. This problem will only
worsen to the extent to which the Federal Government becomes
the major competitor for capital funds. We have already
moved too far in that direction.
12
While no system can pretend to be perfect, the credit
markets in the United States today remain the best in the
world. They continue to be the best forum for sorting out
those capital investments which can be economically justified
from those which fail to meet that criterion.
We have had the experience of price controls and rationing,
the promises that Government controls will solve basic economic
problems. But they don’t work.
Credit allocation is another illustration of Government
attacking the results of a problem, rather than its causes.
The basic cause here is the inadequacy of the volume of saving
and investment, and the overemphasis that we place on con
sumption and Government spending. That is the problem we
must address ourselves to most urgently. As a matter of fact,
I believe history will judge this period not on how we
handle our short-run problems such as recession, but on
our ability to deal with the more fundamental problems
of the allocation of resources and capital formation. If
we, as a Nation, fail to address these problems, we will
fail to attain the prosperity and the rising standard of
living that the American people can achieve. Our goal
should be to enlarge the economic pie, not just to re
distribute it.
Thus, we must not hobble our financial system, with even
more bureaucratic regulation, as this bill would do. Rather,
we need to improve it in a fundamental way. We need to continue the fight against inflation, and that fight can only be
won by achieving greater discipline in our fiscal and mone
tary affairs, not by short cuts or gimmicks. And we need to
increase the capital investments in our society, a process that
will be aided by restoring general economic health and offering
greater incentives for investment, not by shackling our economy
with still more Government controls.
Many of the troubles in our economy today can be directly
traced to the gradual encroachment of Government upon every
sector of free enterprise. For 40 years, we have turned in
creasingly to the Government to solve our social and economic
problems. Some of those problems have been solved, but many
have only grown in size because the Government is the least
effective and least productive way of attacking them. We must
wake up to the fact that in the economic sphere, the best
choices for our country are those based on sound economics,
not politics. Yet this legislation completely ignores the
lessons of history. It turns its back on the many experiments
13
with economic controls that have failed time and time again.
It ignores the enormous benefits that our economy has realized
from its financial system in the past and the imbalances that
have already been created in that financial system by growing
governmental domination. Once again, it would substitute
political considerations for sound economic judgements, allow
ing the decisions of the Government to prevail over the views
of more than 200 million Americans.
On this same theme, let me note that the author of this
bill, Mr. Reuss, has in the past opposed tax incentives and
subsidies for good and valid reasons. But credit allocation
is itself a tax and subsidy process. Prohibiting a lender
from putting his money where the return is the greatest would
be imposing a tax on him. Picking out a borrower and saying
"You will be the beneficiary of the allocation process" is in
effect giving him a subsidy by making more credit available
at lower rates. The question is whether it is more just and
equitable to recognize these taxes and subsidies directly or
to hide behind an allocation system and pretend they don’t exist.
Mr. Chairman, we respectfully submit that H.R. 212 is unwise
and dangerous legislation. We ask that you disapprove of it in
its entirety, and we urge that you join with us in exploring
more constructive means of strengthening our economy and our
financial institutions so that all of us may enjoy the blessings
of prosperity and liberty in the future.
Thank you.
oOo
D ep artm en tal
niNGTON. D C 20220
theTREASURY
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
FEBRUARY 5, 1975
PETER 0. SUCHMAN NAMED DEPUTY ASSISTANT
SECRETARY FOR TARIFF AFFAIRS
Secretary of the Treasury William E. Simon announced
today the appointment of Peter 0. Suchman to be the Deputy
Assistant Secretary for Tariff Affairs. Mr. Suchman, who
reports to Assistant Secretary David R. Macdonald, will
assume direct supervision of Treasury tariff affairs policies
and programs including administration of the Antidumping and
Counterveiling Duty laws. He has been serving as Acting
Deputy in this area since July 1974. He previously served
as Director, Office of Trade Policy under the Assistant
Secretary for International Affairs (OASIA) from July 1972
to July 1974, and from November 1970 to July 1972 was Deputy
Director of that Office.
Born August 16, 1935 in New York, Mr. Suchman was raised
in Staten Island and received his law degree from Columbia
University in 1960 and was admitted to the New York bar
in 1961. He received his Bachelor's degree from Wagner College
in 1957 and attended the State Department's Foreign Service
Institute from 1964-1965 for Italian language studies and again
in 1969 where he studied International Economics.
Prior to his duties at the Treasury Department,
Mr. Suchman was a Foreign Service Officer with the Department
of State, where he served as Vice Consul, Genoa, Italy, from
1965-1966; Political/Labor Officer, Consulate General, Milan,
Italy, from 1966-1968; Staff Aide to the Assistant Secretary
for European Affairs, 1968-1969; International Economist, Bureau
of Economic Affairs, 1969; and Assistant to the Deputy Under
Secretary for Economic Affairs, 1969-1970. He was an Attorney
for the American Stock Exchange in New York in 1964.
Mr. Suchman was a member of the U.S. Coast Guard from
1960-1964 with the rank of Lieutenant (j.g.) and was law
enforcement and legal officer at Honolulu, Hawaii and Long Beach,
California. He attended Officers Candidate School at Yorktown,
Virginia.
WS-216
FOR RELEASE 6:30 P.M.
February 5, 1975
RESULTS OF TREASURY’S 52-WEEK BILL AUCTION
Tenders for $2.1 billion of 52-week Treasury bills to be dated
February 11, 1975, and to mature February 10, 1976, were opened at the
Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
High
Low
Average
(Excepting 1 tender of $4,385,000)
Equivalent annual rate 5.238%
Equivalent annual rate 5.375%
Equivalent annual rate 5.313% 1/
94.704
94.565
94.628
Tenders at the low
TOTAL
TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Applied For
Accepted
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
$
18,600,000
2,854,330,000
1,180,000
4,085,000
16,210,000
7,660,000
218,275,000
59,105,000
8,475,000
23,095,000
17,590,000
123,595,000
$
8,600,000
1,712,070,000
1,100,000
4,085,000
12,210,000
7,660,000
175,765,000
55,105,000
8,475,000
20,595,000
16,590,000
79,095,000
$3,352,200,000
$2,101,350,000
TOTALS
fc/ This is on a bank discount basis.
11
Includes $35,020,000
The equivalent coupon issue yield is 5.61%
noncompetitive tenders accepted at the average price
Departm entoftheTREASURY
MING-TON. D C 20220
TELEPHONE W04-204T
FOR IMMEDIATE RELEASE
■i
February 6, 1975
BUREAU OF PUBLIC DEBT TO DEDICATE NEW BUILDING
Savings bonds operations of Treasury's Bureau of Public Debt
will be consolidated in a new six-story building to be dedicated
Monday, February 10 in ceremonies at Parkersburg, West Virginia.
Located in the redevelopment area of the city, the 245,000
square-foot building will hou^e one of Treasury's largest computer
activities, servicing more than 614 million savings bonds and
savings notes held by the public and worth in excess of $64 billion.
Occupancy of the new building culminates a program undertaken
by the Bureau of the Public Debt in 1972, to bring together in one
location related savings bonds operations performed in Parkersburg
and Chicago.
The Consolidated office, under the direction of an Assistant
Commissioner, will employ about 1,250 people, all concerned with
servicing savings bonds -- such as computer specialists, systems
and procedures analysts, programmers, security analysts, claims
examiners, correspondents, attorneys, clerks, accountants, auditors,
key encoders, microphotographers, mail and files specialists,
searchers, and personnel technicians.
Senator Jennings Randolph of West Virginia and Representative
Clarence E. Miller of Ohio's 10th District will be among those in
attendance at the dedication. Warren F; Brecht, Assistant Secretary
for Administration, John K. Carlock, Fiscal Assistant Secretary,
and Mrs. Francine I. Neff, Treasurer and National Director, U.S.
Savings Bond Division, will represent the Office of the Secretary
of the Treasury.
Other participants will be Parkersburg Mayor William P. A.
Nicely; Bureau of Public Debt Commissioner H. J. Hintgen, and
Assistant Commissioner Michael E. McGeoghegan; and General Services
Administration's Acting Commissioner Walter A. Meisen, of the
Public Buildings Service.
GSA will operate the new building, constructed by Leased
Housing Developers, Inc., of Indianapolis, Indiana, under a lease
arrangement.
NS-215
(over)
2
Consolidation of savings bonds operations under the direction
of an Assistant Commissioner, will permit organizational and
procedural changes that will, according to Commissioner Hintgen,
"reduce operating costs and at the same time improve the quality
of service to bondholders."
"The levels of service and protection provided to bondowners
has been a key factor in the success of the Savings Bonds Program,"
said Hintgen. Begun in 1935, he said, "the program is stronger
today than at any time since World War II."
Series E and H bond sales are currently running at a level of
146 million yearly at an issue price of $6.9 billion, with some
135 million bonds redeemed in the same period for a total of 281
million transactions. Processing this volume constitutes a sub
stantial part of the annual workload of bonds operations.
Under the consolidated system, the savings bonds operations
office receives an individual record of the registration of each
bond that is issued by a Federal Reserve bank, branch or one of
the 35,000 companies, financial institutions, and others acting as
issuing agents. It also receives all of the bonds paid by a Reserve
Bank or one of the 36,000 financial institutions serving as paying
agents.
These items are microfilmed, converted to tape, audited and
accounted for; from them the records of ownership and status are
established or updated.
The records are a combination of microfilm and magnetic tape
and they cover each of the 3.8 billion savings bonds and savings
notes that have been issued since 1935.
In addition, the office establishes and maintains accounts
for the 1.4 million owners of Series H bonds and authorizes the
issue of 4.2 million semiannual interest checks to the bondowners.
Updating the accounts to reflect the 114,000 changes of address
is an important adjunct of their maintenance.
From these various records the office processes annually
some 150,000 claims cases, and 125,000 other types of inquiries
from bondowners and others.
oOo
a
•REMARKS OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE NINTH ANNUAL EXECUTIVE UPDATE
FAIRLEIGH DICKINSON UNIVERSITY, RUTHERFORD, NEW JERSEY
FEBRUARY 5, 1975, 8:30 P.M.
D r . Po l l a c k ,
distinguished
guests, ladies and
gentlemen:
Dr . Va u g h a n
had
two
suggestions
for
this
talk.
First,
HE SAID I SHOULD TELL YOU WHAT'S GOING TO HAPPEN IN THE
ECONOMY IN
1975.
T h e n HE SAID IT WOULD BE NICE IF I COULD
ALSO MATCH CHURCHILL, GIVING FAIRLEIGH DICKINSON THE SAME
INTERNATIONAL FAME THAT CHURCHILL BROUGHT TO WESTMINSTER
-
Co l l e g e
when
he d e l i v e r e d
2
-
"I r o n C u r t a i n "
his
speech
there
AFTER THE WAR.
After
to rival
reflecting
Ch u r c h i l l
on t h a t ,
than
to
give
I
decided
you
an
it w o u l d
be
easier
absolutely accurate
PREDICTION ABOUT THE ECONOMY.
No b o d y
dictions.
"If YOU
bats
As
a thousand
in t h e
game
of
economic
pre
ONE ECONOMICS PROFESSOR SAID TO HIS STUDENTS,
MUST PREDICT, DO IT OFTEN."
'No n e t h e l e s s ,
within
the
Ad m i n i s t r a t i o n ,
we
have
been
WORKING HARD TO DEVELOP AN EFFECTIVE PROGRAM TO COMBAT THE
THREE MAJOR PROBLEMS CONFRONTING US TODAY —
RECESSION,
INFLATION, AND AN EXCESSIVE RELIANCE ON FOREIGN ENERGY SOURCE —
AND IN THE PROCESS WE HAVE ARRIVED AT PREDICTIONS FOR THE FUTURE
THAT
I WOULD
LIKE TO SHARE WITH YOU TONIGHT.
- 3 W h a t 's A h e a d
The
for the
problems
of
Ec o n o m y
recession
and
SERIOUS FOR SOME TIME TO COME.
inflation
will
remain
REAL OUTPUT DECLINED AT A 9
PERCENT ANNUAL RATE IN THE FOURTH QUARTER AND IS AGAIN FALLING
t
SHARPLY DURING THE CURRENT QUARTER.
UNEMPLOYMENT ROSE ABOVE
7 PERCENT BY THE CLOSE OF LAST YEAR AND WILL PROBABLY EXCEED
8 PERCENT THIS YEAR BEFORE BEGINNING A GRADUAL DECLINE,
FOR
1975 AS A WHOLE THE UNEMPLOYMENT RATE IS LIKELY TO AVERAGE
CLOSE TO 8 PERCENT, FAR ABOVE LAST YEAR'S 5.6 PERCENT.
Th e
trend
through
BETTER THAN LAST YEAR.
BY THE END OF THE YEAR.
BE RISING.
In 1974,
the
year, however, should
In 1974,
By
be
distinctly
OUTPUT WAS FALLING RAPIDLY
THE END OF THIS YEAR, OUTPUT WILL
THE RATE OF INFLATION WAS IN DOUBLE DIGITS
BY THE END OF THE YEAR.
WELL BELOW '10 PERCENT.
BV THE END OF THIS* YEAR,
IT WILL BE
We
realize
convincing.
OTHERS —
that
La s t
these
forecasts
may
y e a r 's p r e d i c t i o n s
—
not
our
be
own
altogether
and
most
CALLED FOR OUTPUT TO RISE AND INFLATION TO FALL IN
THE SECOND HALF OF THE YEAR AND THE BAD NEWS HERE IN THE PRESENT
SOME SKEPTICISM IS INEVITABLE.
O ur
case
for a
recovery
*
in t h e
second
RESTS PRIMARILY UPON CYCLICAL FORCES.
half
of
this
year
INFLATION CAUSED THE
SUPPLY OF MORTGAGE CREDIT TO DRY UP AND SENT THE HOUSING
INDUSTRY INTO A TAILSPIN.
WlTH INFLATION GRADUALLY RECEDING
NOW AND THE ECONOMY SOFT, SHORT-TERM INTEREST RATES HAVE
DECLINED SHARPLY.
THIS HAS RENEWED THE INFLOW OF FUNDS TO
THE THRIFT INSTITUTIONS AND PROVIDED THE ESSENTIAL PRECONDITION
FOR A HOUSING UPTURN.
In f l a t i o n
✓
also
cut
deeply
into
the
real
income
of
consumers
"
AS PRICES TRANSFERRED INCOME FROM MOST CONSUMERS TO GROWERS OF
- 5 GRAIN AND SUGAR AND TO OWNERS OF OIL BOTH HERE AND ABROAD.
*
In f l a t i o n
#
also
cut
indirectly
into
real
HIGHER EFFECTIVE RATES OF TAXATION.
disposable
As A
through
CONSEQUENCE; REAL
CONSUMER PURCHASES FELL 3 PERCENT IN THE PAST YEAR.
!■
■
income
.i
HOWEVER,
NOW THAT THE PATTERN OF WAGE SETTLEMENTS HAS ACCELERATED AND THE
RATE OF INFLATION IS SUBSIDING; THE REAL INCOME OF WORKERS SHOULD
BE ON Tr;E UPGRADE AGAIN IN 1975.
THIS.
IN TURN. SHOULD LEAD TO
AN INCREASE IN CONSUMER SPENDING; PROVIDING ANOTHER ELEMENT OF
SUPPORT FOR THE GENERAL ECONOMIC RECOVERY,
A THIRD CYCLICAL ELEMENT THAT SHOULD TURN AROUND DURING THE
YEAR IS INVENTORY INVESTMENT.
BUSINESSMEN ARE LIQUIDATING
EXCESSIVE STOCKS NOW; NOT ONLY IN THE AUTOMOBILE INDUSTRY; BUT
ALSO IN A WIDE RANGE OF OTHER INDUSTRIES.
SINCE FINAL DEMANDS
IN THE ECONOMY WILL NOT FALL AWAY PRECIPITOUSLY —
*
FOR MANY
REASONS; INCLUDING THE AUTOMATIC STABILIZERS BUILT INTO OUR
BUDGET —
THE DECLINE IN INVENTORY INVESTMENT WILL END AND WILL
TURN AROUND AND BECOME A POSITIVE ECONOMIC FACTOR ONCE AGAIN.
6
-
■*;
-
m
These
three
forces
INVENTORY INVESTMENT —
—
housing, consumer
spending
and
WILL ALL BE CONTRIBUTING TO A RE
COVERY FROM THE RECESSION DURING
1975.
THEY ARE IMPORTANT
WEATHERVANSS TO,KEEP YOUR EYE ON IN THE MONTHS AHEAD.
t
Our
expectations
are
not
COME OUT Or A CRYSTAL BALL.
based
on
faith, nor
do they
If WE LOOK AT HISTORY, WE SEE
THAT IN TIE PAST 120 YEARS, WE HAD 27 ECONOMIC CONTRACTIONS,
WITH AN AVERAGE DURATION OF
19
We
MONTHS.
SURVIVED THEM ALL,
AND WE WIL l SURVIVE THIS ONE, TOO.
T h e OFTEN OVERLOOKED FACT IS THAT EVERY RECESSION CARRIES
WITHIN IT THE SEEDS OF ITS OWN RECOVERY.
JUDGING FROM CURRENTLY
AVAILABLE INFORMATION, THE PRESENT RECESSION WILL FALL WITHIN
THE HISTORICAL PATTERN.
CERTAINLY, THERE IS ClTTLE PROSPECT
FOR A LONG AND DEEP ECONOMIC DOWNTURN ON THE SCALE OF THE
take
No n e t h e l e s s ,
we
its c o u r s e .
Th e F e d e r a l R e s e r v e
are
not
prepared
simply
has
to
let
already
nature
eased
1930s.
MONETARY CONDITIONS SUBSTANTIALLY,
$16
HAS RECOMMENDED A
SIMILARLY, THE PRESIDENT
BILLION TEMPORARY TAX REBATE THIS
CALENDAR YEAR TO PROVIDE ECONOMIC STIMULUS AT A TIME WHEN THE
ECONOMY IS WEAK,
ESTIMATED
$17
THIS TAX REBATE IS IN ADDITION*TO THE
TO
$18
BILLION THAT WILL BE SPENT ON UNEMPLOY
MENT COMPENSATION AND PUBLIC SERVICE EMPLOYMENT PROGRAMS IN
FY 1976.
We
advocate
the
$16
billion
temporary
tax
cut
not
BECAUSE THE ECONOMY WOULD NOT RECOVER WITHOUT IT, BUT BECAUSE
IT WILL MAKE THE RECOVERY IN THE SECOND HALF OF THE YEAR MORE
SOLID AND CERTAIN.
Ev e n
troubles
or m o r e .
so, there
grew out of
Wh i l e
are
no
instant
multiple
special
cures,
causes
factors
such
Our
reaching
as
current
back
food and
a
fuel
economic
decade
were.
IMPORTANT, "THE MOST FUNDAMENTAL SOURCES OF OUR DIFFICULTIES
HAVE BEEN OVERSTIMULATIVE MONETARY AND FISCAL POLICIES.
It
I$ UNREALISTIC TO EXPECT THAT THE ECONOMIC WEAKNESS CAN BE
CURED OVERNIGHT.
A CAREFUL AND BALANCED POLICY APPROACH
IS REQUIRED, AND IT WILL TAKE TIME TO YIELD ITS FULL RESULTS.
Th e
worst
policy
o f a l l , in m y
opinion, would
be
to
CRANK UP FEDERAL SPENDING AND SIMULTANEOUSLY CUT BACK TAXES
IN A MASSIVE AND PERMANENT WAY.
THAT GOT US WHERE WE ARE NOW,
THOSE ARE THE VERY POLICIES
THAT SORT OF ADVICE IGNORES
OR MINIMIZES THE FACT THAT INFLATION REMAINS A PROBLEM OF THE
FIRST MAGNITUDE.
It ALSO IGNORES OR MINIMIZES THE FACT THAT
THE ENORMOUS BUDGET DEFICITS HAVE TO BE FINANCED IN CAPITAL
MARKETS THAT ARE ALREADY STRAINED BY A DECADE OF INFLATION.
Ev e n
with
a cyclical
recovery
beginning
in t h e
middle
MONTHS OF THE YEAR, THE ECONOMIC SITUATION WILL REMAIN
difficult,
Pr o d u c t i v i t y
in t h e
should
But
year
mean
prices, costs, and
anything
like
existed b e f o r e
the
the
fallen.
has
that
productivity
productivity
balanced
Ga i n s
will
.
In f l a t i o n
output
growth
not
n on -inflationary
m i d -1960 s
in
has
will
quickly
later
resume.
come
relationship
become
into
that
deeply
IMBEDDED IN THE ECONOMIC SYSTEM AND IT WILL NOT BE REMOVED
IN
A MATTER OF A FEW QUARTERS.
L o n g e r R u n Co n s i d e r a t i o n s
W
e must
face
circumstances we
up t o t h e
will
fact that
finish
this
under
the
best
of
with
the
rate
of
year
UNEMPLOYMENT AND THE RATE OF INFLATION FAR ABOVE ACCEPTABLE
l o n g -t e r m
levels.
Fr o m
there, at
INTO THE ECONOMIC FUTURE.
least
two
paths
branch
out
ONE CHOICE WOULD BE TO ATTEMPT
TO PUSH THE ECONOMY BACK TO FULL CAPACITY OPERATIONS AT
BREAKNECK SPEED WITHOUT REGARD TO THE INFLATIONARY CON
SEQUENCES.
Th a t
is t h e
wrong
path
to
travel
because
it
WOULD LEAD TO PROBLEMS MORE DEVASTATING THEN ANYTHING WE HAVE
SEEN IN THIS DECADE.
AGAIN BE RAMPANT.
In A
W
e WOULD
VERY SHORT TIME, INFLATION WOULD
T H E N .RETRACE THE SAME SEQUENCE
OF EVENTS WE HAVE JUST BEEN THROUGH, TUMBLING INTO ANOTHER
RECESSION AND SHAKING PUBLIC CONFIDENCE EVEN MORE SEVERELY
THAN AT PRESENT."
-10
Th e
other
Am e r i c a n
path
people.
economy
so that
requires
Th e r e
we
can
yC
-
patience
must
be
steadily
on
vigorous
reduce
the
part
growth
of
the
in t h e
unemployment.
But
SOME MARGIN OF ECONOMIC SLACK MUST REMAIN FOR A PERIOD OF
t
YEARS TO INSURE THAT INFLATION CAN BE SQUEEZED OUT GRADUALLY.
Th e r e
must
In
flation
be
the
early
remote
were
flation.
no
we have
been
we h a v e
built
to
historical
followed
S ince
return
the
by
of
excess
past, periods
of
rapid
financial
economic
unwilling
conditions
and
into
and
an
financial trauma
to accept
safeguards
panics
that
the
result
economic
demand.
in
of
1930s
the
a nd, quite
and
de
ensuing
properly,
financial
system
TO PREVENT ANY DEEP CUMULATIVE DOWNTURN FROM OCCURRING,
BUT WE
HAVE NOT YET LEARNED ANY WAY OF AVOIDING THE .INFLATIONARY
CONSEQUENCES WHEN THE ECONOMY IS PRESSED TOO FAR, TOO FAST,
Pr i c e
controls
economy
hold the
if
are
used
economy
no
solution,
permanently
within
the
in
Th e y
would
peacetime,
zone
of
destroy
our
Th e r e f o r e ,
acceptable
price
we
market
must
performance
AND APPLY SUCH OTHER POLICIES AS MAY BE REQUIRED TO DEAL
WITH ANY STRUCTURAL UNEMPLOYMENT THAT REMAINS.
I HAVE GAINED THE REPUTATION OF BEING A "HAWK ON
i n f l a t i o n ."
Th a t
is
a
label
I'm p l e a s e d
to
w e a r , ‘b e c a u s e
TO ME OUR GREATEST LONG-TERM DANGER IS NOT RECESSION ITSELF
BUT THE THREAT OF CONTINUING INFLATION WHICH CAN LEAD TO
RECURRING CYCLES OF UNEMPLOYMENT AND RECESSION IN THE FUTURE.
I DO NOT BELIEVE THAT OUR ECONOMIC SYSTEM CAN LONG SURVIVE
THE KIND OF INFLATION WE'VE KNOWN IN RECENT MONTHS.
In 1919,
Jo h n M a y n a r d K e y n e s w r o t e :
"Th e r e is no s u b t l e r , no s u r e r m e a n s o f
OVERTURNING THE EXISTING BASIS OF SOCIETY
THAN TO DEBAUCH THE CURRENCY.
THIS PROCESS
ENGAGES ALL THE HIDDEN FORCES OF ECONOMIC LAW
ON THE SIDE OF DESTRUCTION, AND DOES IT IN A
MANNER WHICH NOT ONE MAN IN A MILLION IS ABLE
TO DIAGNOSE."
I
MUST SAY THAT IS ONE STATEMENT BY KEYNES IN WHICH I
AM IN FULL AGREEMENT.
-
12
-
In c r e a s i n g Sa v i n g s a n d Ca p i t a l In v e s t m e n t
As
o
WE LOOK TO THE LONGER RUN, IN ADDITION TO ACHIEVING
GREATER DISCIPLINE IN OUR FISCAL AND MONETARY AFFAIRS, MUCH
GREATER EMPHASIS MUST ALSO BE PLACED UPON THE CENTRAL ROLE
OF CAPITAL FORMATION IN ECONOMIC GROWTH.
OUR OWN RATIO OF
PRIVATE INVESTMENT TO GROSS NATIONAL PRODUCT IS MUCH LOWER
THAN THAT OF OTHER MAJOR INDUSTRIAL NATIONS.
In TURN,
THIS
IS REFLECTED IN OUR MUCH LOWER RATE OF GROWTH IN PRODUCTIVITY,
In THE FUiURE, WE ARE GOING TO HAVE TO DO BETTER.
inE
CAPITAL REQUIREMENTS OF THE AMERICAN ECONOMY OVER THE NEXT
DECADE WILL BE ENORMOUS.
FOR ENERGY ALONE.
W e WILL NEED UP TO A TRILLION DOLLARS
BEYOND THAT, WE WILL NEED EXTREMELY LARGE
SUMS FOR CONTROL OF POLLUTION, URBAN TRANSPORTATION, AND REBUILDING SOME OF OUR BASIC INDUSTRIES WHERE NEW INVESTMENT
LANGUISHED OVER THE PAST DECADE.
In ADDITION, THERE ARE THE
MORE CONVENTIONAL, BUT STILL MAMMOTH, REQUIREMENTS FOR CAPITAL
TO REPLACE AND ADD TO THE PRESENT STOCK OF HOUSING, FACTORIES
AND MACHINERY.
- 13 Ye t
in t h e
face
of t h e s e
massive
r e q u i r e m e n t s , we
ARE NOT PROVIDING ADEQUATE INCENTIVES FOR NEW INVESTMENT,
Ov e r
the
past
decade
the
i n f l a t i o n 'h a s
led to
high
effective
RATES OF BUSINESS TAXATION AND LOW RATES OF PROFITABILITY,
t
WHICH IN TURN HAVE GREATLY ERODED THE INCENTIVES FOR CAPITAL
FORMATION.
In m y
opinion, we
THIS COUNTRY.
have
ENTERED
a
PROFITS
depression
in
NONFINANCIAL CORPORATIONS REPORTED PROFITS
AFTER TAXES IN 1974 OF $65.5 BILLION AS COMPARED TO
BILLION IN 1965, AN APPARENT 71 PERCENT INCREASE.
$38.2
BUT WHEN
DEPRECIATION IS CALCULATED ON A BASIS THAT PROVIDES A MORE
REALISTIC ACCOUNTING FOR THE CURRENT VALUE OF THE CAPITAL USED
IN PRODUCTION AND WHEN THE EFFECT OF INFLATION ON INVENTORY
#
VALUES IS ELIMINATED, AFTER-TAX PROFITS ACTUALLY DECLINED
✓
from
$37.0
billion
in
1965
to
$20.6
billion
in
1974 —
a
50 PERCENT DROP.
A MAJOR FACTOR CONTRIBUTING TO THIS DECLINE IS THAT INCOME
TAXES WERE PAYABLE ON THESE FICTITIOUS ELEMENTS OF PROFITS.
Th a t
resulted
in a
rise
in t h e
effective
tax
rate
on
true
PROFITS FROM ABOUT 43 PERCENT IN 1965 TO 69 PERCENT IN 1974.
Th u s ,
a realistic
calculation
shows
that
the
sharp
'■■■■'
reported
profits
In o u r
rise
in
*■
was
an
optical
economy, corporate
illusion
profits
caused
are
the
by
inflation.
major
source
OF FUNDS FOR NEW INVESTMENT AND THUS IN THE CREATION OF NEW
JOBS, SO THAT THE PROFITS DEPRESSION HAS GRAVE IMPLICATIONS
FOR CAPITAL FORMATION AND GROWTH.
IN THE FIGURES FOR
THAT IS PERHAPS SEEN BEST
- 15 .RETAINED EARNINGS OF NONFINANCIAL CORPORATIONS, RESTATED
ON THE SAME BASIS TO ACCOUNT REALISTICALLY FOR INVENTORIES
AND DEPRECIATION.
EARNINGS,
INCREASED
By
36
1973,
In 1965,
THERE WERE
$20
BILLION OF RETAINED
AFTER EIGHT YEARS IN WHICH REAL
GNP
HAD
PERCENT, THE RETAINED EARNINGS OF NONFINANCI AL
CORPORATIONS HAD DROPPED 70 PERCENT TO $6 BILLION.
AND FOR
1974, OUR PRELIMINARY ESTIMATE FOR RETAINED EARNINGS IS A
MINUS OF NEARLY $10 BILLION.
THAT MEANS THAT THERE WAS NOT
NEARLY ENOUGH EVEN TO REPLACE EXISTING CAPACITY, AND NOTHING
TO FINANCE INVESTMENT IN ADDITIONAL NEW CAPACITY.
It IS A SIMPLE BUT COMPELLING ECONOMIC FACT OF LIFE
THAT INCREASES IN PRODUCTIVE PERFORMANCE ARE REQUIRED OVER
TIME TO SUPPORT A RISING STANDARD OF LIVING.
Y e t , AS A
*
Na t i o n , we ar e r a p i d l y e x p a n d i n g p u b l i c p a y m e n t s t o i n d i v i d u a l s
but
NEGLECTING TO PROVIDE ADEQUATE INCENTIVES FOR NEW INVESTMENT.
S ince 1965, in r e a l t e r m s , e c o n o m i c o u t p u t h a s i n c r e a s e d b y o n e
THIRD WHILE GOVERNMENT TRANSFER PAYMENST TO PERSONS MORE THAN
doubled.
On t h e OTHER HAND, p r i v a t e INVESTMENT EXPENDITURES —
-
16
-
UPON WHICH THE ECONOMIC FUTURE OF ALL OF US INEVITABLY DEPENDS -HAVE FAILED TO KEEP PACE, RISING BY ONLY A BIT MORE THAN ONE
FOURTH,
IT IS IMPERATIVE THAT WE MAKE BETTER PROVISION FOR THE
FUTURE.
Th i s m e a n s t h a t w e m u s t p l a c e m u c h GREATER EMPHASIS u p o n
SAVING AND INVESTMENT AND MUCH LESS UPON CONSUMPTION AND
GOVERNMENT EXPENDITURE.
I
BELIEVE HISTORY WILL ULTIMATELY JUDGE US,.NO SO MUCH ON
HOW WE HANDLE OUR SHORT-RUN PROBLEMS SUCH AS RECESSION, BUT ON
OUR ABILITY TO DEAL WITH THE MORE FUNDAMENTAL PROBLEMS OF THE
ALLOCATION OF RESOURCES AND CAPITAL FORMATION.
IF, AS A [¡ATION,
WE FAIL TO ADDRESS THESE PROBLEMS, WE WILL FAIL TO ATTAIN THE
PROSPERITY AND THE RISING STANDARD OF LIVING THAT THE AMERICAN
PEOPLE CAN ACHIEVE< OUR GOAL SHOULD BE TO ENLARGE THE ECONOMIC
PIE, NOT JUST TO REDISTRIBUTE IT,
F i n a n c i n g Fe d e r a l B u d g e t D e f i c i t s
As
ALL OF YOU KNOW, FEDERAL BUDGET DEFICITS ARE ESTIMATED TO
- 17 -
TOTAL $37 BILLION IN FISCAL YEARS 1975 AND 1975 —
THIS FISCAL YEAR AND $52 BILLION NEXT YEAR.
$35 BILLION
I HAVE MADE NO
SECRET OF THE FACT THAT I FEEL THAT SUCH DEFICITS ARE HORRENDOUS
BY ANY STANDARD.
ÎHEY RAISE SERIOUS QUESTIONS ABOUT INFLATION
t
AND THE FINANCIAL MARKETS, PARTICULARLY IF WE ARE UNABLE TO
HOLD SPENDING WITHIN THE LIMITS REQUESTED BY THE PRESIDENT.
18
-
Le t
me mak e
my views
-
on the
, ’-
financial markets
V
quite
v
CLEAR, FOR THEY HAVE BEEN THE SUBJECT OF SOME INTEREST.
Al t h o u g h
our
projected deficits
will
STRAINS ON THE FINANCIAL MARKETS,
WILL BE MANAGEABLE IF —
inevitably
cause
some
I BELIEVE THOSE STRAINS
AND I WANT TO STRESS T H I S —
IF
THE DEFICITS DO NOT BECOME SIGNIFICANTLY LARGER AND IF THEY
ARE TEMPORARY IN DURATION.
It IS TRUE THAT FINANCIAL CONDITIONS NORMALLY EASE
SUBSTANTIALLY DURING A RECESSION AND NORMALLY THEY REMAIN
EASY WELL INTO THE PERIOD OF RECOVERY.
REASONS FOR THIS:
THERE ARE TWO MAIN
FIRST, SOME PRIVATE DEMANDS FOR CREDIT
ARE CLOSELY RELATED TO THE PACE OF BUSINESS ACTIVITY AND
DECLINE SHARPLY DURING A RECESSION PERIOD.
SHORT-TERM
BUSINESS BORROWING TO FINANCE INVENTORIES IS A PRIME EXAMPLE.
Se c o n d ,
the
Fe d e r a l R e s e r v e
customarily
"l e a n s
against
the
wind"
DURING A PERIOD OF RECESSION AND SEEKS TO EXPAND, OR AT LEAST
»,
-
-19-
MAINTAIN, THE RATE OF GROWTH IN MONEY AND CREDIT.
THEREFORE,
INTEREST RATES CAN BE EXPECTED TO DECLINE AND THE AVAILABILITY
OF CREDIT TO INCREASE AS A NORMAL PART OF THE CYCLICAL PROCESS.
IT MUST BE CONSIDERATIONS OF THIS GENERAL NATURE WHICH
LEAD SOME OBSERVERS TO CONCLUDE, TOO READILY IN MY OPINION,
THAT THE FINANCING OF LARGE FEDERAL DEFICITS IN THE CURRENT
RECESSION IS A ROUTINE MATTER, LARGELY DEVOID OF ANY PARTI
CULAR ECONOMIC SIGNIFICANCE.
I RESPECTFULLY DISAGREE.
T h e CURRENT RECESSION IS AN OUTGROWTH OF A LONG PERIOD
OF INFLATION THAT HAS LEFT PRIVATE FINANCING DEMANDS MUCH
HEAVIER THAN USUAL.
THERE HAS BEEN THE MARKED DECLINE IN
PROFITS I MENTIONED EARLIER AND A SERIOUS EROSION OF THE
♦
LIQUIDITY BASE OF HOUSEHOLDS AND BUSINESSES.
✓
T h e DECLINE
IN THE STOCK MARKET HAS IN MANY CASES VIRTUALLY RULED OUT THE
SALE OF NEW EQUITY AS A SOURCE OF FUNDS.
-
20
-
qO.
Fo r
usually
these
and
reasons, there
other
has b e e n
an
un
LARGE SUPPLY OF PRIVATE DEBT ISSUES COMING INTO
the m a r k e t ,
O ur
latest
projections
show
that
net
new
CORPORATE BOND ISSUES, WHICH ROSE FROM $12-1/2 BILJLION IN
1973 TO $25 BILLION IN 1974, WILL ADVANCE EVEN FARTHER TO
SOME $30 BILLION OR MORE IN 1975.
WHILE CORPORATE CAPITAL
SPENDING PROGRAMS ARE BEING CUT BACK, THERE WILL STILL BE
A VERY HEAVY VOLUME OF CORPORATE LONG-TERM BORROWING,
FURTHERMORE, THE STAiE AND LOCAL FISCAL POSITION HAS CHANGED
DRASTICALLY.
T h EIR SURPLUSES HAVE MELTED AWAY, TAX RECEIPTS
ARE AFFECTED BY THE RECESSION, AND STATE AND LOCAL BORROWING
NEEDS WILL BE SUBSTANTIAL.
So m e
is
slackening
in
private
demands
UNDERWAY AND MORE CAN BE EXPECTED.
;
for
s h o r t -t e r m
credit
YET BY ANY PREVIOUS
V
RECESSION STANDARDS, TOTAL PRIVATE DEMANDS FOR CREDIT —
BOTH SHORT AND LONG T E R M —
ARE LIKELY TO REMAIN FAIRLY LARGE.
At
the
same t i m e ,
INCREDIBLY LARGE.
that d ur in g
1975
Fe d e r a l
borrowing
demands
will
be
EVEN WITH PRESENT PROGRAMS/ WE ESTIMATE
the
Tr e a s u r y
will be
coming
into the
CAPITAL MARKETS FOR ALMOST $70 BILLION OF NET NEW ‘FINANCING,
while
$10
Fe d e r a l l y
billion.
sponsored
To t a l
agencies
government
may
account
borrowing
during
for
the
another
coming
FISCAL YEAR MAY DRAIN OFF AS MUCH AS 80% OF ALL THE FUNDS
AVAILABLE IN THE CAPITAL MARKETS/ HAVING ONLY 20% TO PRIVATE
ENTERPRISE.
INDEED, TOTAL FEDERAL BORROWING IN 1975 MAY
EXCEED ALL BORROWING BY PRIVATE AND PUBLIC SECTORS ALIKE IN
ALL PREVIOUS YEARS.
Ca n THERE BE ANY DOUBT THAT WE HAVE MOVED TOO FAR IN
THE DIRECTION OF TRANSFERRING OUR NATION;S WEALTH FROM THE
MOST PRODUCTIVE PAST OF OUR SOCIETY, FREE. ENTERPRISE, TO THE
LEAST PRODUCTIVE PART, THE GOVERNMENT?
THAT IS WHY IT HAS
BECOME CLEAR TO ME THAT WE HAVE MORE GOVERNMENT THAN WE NEED,
MORE GOVERNMENT THAN MOST PEOPLE WANT, AND CERTAINLY MORE
-
government
gates
than
we
are
willing
Two
dangers
could
in
Fe d e r a l
spending
First,
the
22
-
to
immediately
this
pay
for.
arise
if w e
open
the
elbow
aside
sluice
year.
Fe d e r a l Go v e r n m e n t
could
too
MANY PRIVATE BORROWERS, DRIVING UP INTEREST RATES EVEN HIGHER.
Ju d g i n g
from
past
experience, the
VERY LIKELY TO SUFFER, AND INDEED,
BE ABORTED.
At THE
housing
industry
would
be
ITS RECOVERY MIGHT EVEN
WORST, FINANCIAL FACTORS MIGHT BE SUCH
A BINDING CONSTRAINT AS TO DAMPEN THE NORMAL CYCLICAL RECOVERY
THAT WOULD OTHERWISE OCCUR.
The
second
risk
is
on
the
inflation
side.
So m e
OBSERVERS SUGGEST THAT, IN ORDER TO AVOID ANY STRAINS ON
THE CREDIT MARKETS, THE FEDERAL RESERVE SHOULD UNDERTAKE
WHATEVER RA'TE OF GROWTH IN MONEY AND CREDIT IS REQUIRED
TO INSURE THAT FEDERAL AND ALL OTHER BORROWING REQUIREMENTS
- 23 ARE MET AT STABLE OF DECLINING INTEREST RATES.
THIS U p PR
HOWEVER, COULD BE A S’URE FORMULA FOR STILL HIGHER INFLATI
WHEN THE RECOVERY GETS INTO FULL SWING
D iligent
restraint
of
Fe d e r a l
IF NOT SOONER,
spending
remains
t h e k
SUCCESSFUL FINANCING OF LARGE FEDERAL BORROWING NEEDS JUS
MUST BE THE KEY TO BRINGING INFLATION UNDER CONTROL.
Re v i e w i n g
the
broad
range
of
economic
problems
now
c
US, I BELIEVE THERE ARE A NUMBER OF POSITIVE STEPS WE CAN TAKE TO
restore
the
N a t i o n 's
economic
health:
EjjRSI, WE CAN SUPPORT THE PRESIDENT IN HIS
STRUGGLE TO MAKE THE NECESSARY ANTI-RECESSIONARY
MEASURES ONLY TEMPORARY, RESISTING THE TEMPTATION
TO CREATE VAST NEW SPENDING PROGRAMS THAT WOULD DO
✓
LITTLE TO GET US OUT OF RECESSION BUT WOULD DO MUCH
TO PROLONG INFLATION.
WE MUST NOT ABANDON THE LONG-RANGE FIGHT
AGAINST INFLATION, WHICH WAS THE MAJOR CULPRIT IN
>
-
2H -
CAUSING THE RECESSION AND WHICH REMAINS A SERIOUS THREAT TO
OUR ECONOMY.
—
T h i r d , we can t a k e c o n s t r u c t i v e s t e p s t o e n d o u r
EXCESSIVE RELIANCE ON FOREIGN SOURCES OF ENERGY., REDUCING
t
THE DRAIN OF DOLLARS FLOWING ABROAD'-AND ENDING OUR VULNERABILI
TO THE WHIMS OF FOREIGN NATIONS.
THIS IS A SUBJECT I
HAVE NOT TRIED TO ADDRESS IN MY TEXT, BUT I SHALL BE
HAPPY TO RESPOND TO YOUR QUESTIONS.
—
Ep u r i h ,
WE MUST SUPPORT LEGISLATION t h a t w i l l
CREATE GREATER INCENTIVES FOR CAPITAL INVESTMENT,
INCREASING PRODUCTIVITY, CREATING MORE JOBS, AND RAISING
THE STANDARD OF LIVING FOR ALL.
OFTH,
OVER THE LONG RUN, WE MUST RESTROE A
REASONABLE BALANCE TO THE FEDERAL BUDGET AND EVEN
SEEK TO ACHIEVE BUDGETARY SURPLUSES IN GOOD YEARS SO
THAT WE CAN FREE UP A MAXIMUM AMOUNT OF CAPITAL FOR
SAVINGS AND INVESTMENT.
EiMLIX. WE MUST RESIST THOSE WHO WOULD HAVE US TURN MORE
- 25 AND MORE TO GOVERNMENT FOR THE SOLUTIONS TO OUR PROBLEMS.
I
Co n s i d e r i n g
the
severity
of
our
economic
troubles
today,
IT IS EASY TO UNDERSTAND WHY THERE ARE SO MANY WHO LOOK TO
GOVERNMENT FOR INSTANT SOLUTIONS.,MANY WANT TO TAKE THE EASY
ROAD, WHICH MEANS LETTING GOVERNMENT INTRUDE MORE AND MORE
INTO OUR DAILY LIVES.
WE SHOULD UNDERSTAND BY NOW THAT WHENEVER
WE ALLOW THE GOVERNMENT TO DO SOMETHING FOR US, WE MUST
SURRENDER SOME OF OUR OWN FREEDOM.
Go v e r n m e n t
can
serve
many
worthy
and
noble
p u r p o s e s , but
I SUBMIT THAT GOVERNMENT IS NOW ALMOST BEYOND OUR CONTROL.
It
COMES NEATLY PACKAGED IN THE GUISE OF HANDOUTS AND SUBSIDIES AND
PROTECTION FROM COMPETITION, BUT BENEATH THE RIBBONS AND BOWS IS
A LUMBERING, CLUMSY GIANT THAT IS THREATENING THE LIBERTIES
AND SMOTHEFUNG THE SPIRIT WHICH WERE ONCE THE FOUNDATION OF
Am e r i c a 's
greatness.
Th r o u g h o u t
*wEN THAT ^
our
visioned
h i s t o r y , the
by
ideal
form
T h o m a s Je f f e r s o n
in
of
his
<#
government
first
has
inaugural
address:
"...A WISE AND FRUGAL GOVERNMENT.» WHICH SHALL
RESTRAIN MEN FROM INJURING ONE ANOTHER, WHICH
SHALL LEAVE THEM OTHERWISE FREE TO REGULATE
THEIR OWN PURSUITS OF INDUSTRY AND IMPROVEMENTS,
AND SHALL NOT TAKE FROM THE MOUTH OF LABOR AND
BREAD IT HAS EARNED.
THIS IS THE SUM OF GOOD
GOVERNMENT," M r , JEFFERSON SAID.
Ce r t a i n l y
the
world
has
changed
J e f f e r s o n 's
since
BUT ONE HAS TO WONDER WHETHER THE CHANGES —
COMPLICATED AS THEY HAVE BEEN —
toward
B ig G o v e r n m e n t
In
in
this
v i e w , if t h e r e
my
Hr . J e f f e r s o n 's
neither the
vision
strength
no
AS
JUSTIFY THE OMINOUS TRENDS
country.
ever
before
day,
was
a
u s , it
time
when
is n o w .
TO SAY " n o "
wisdom
to
we
If
should
we
keep
have
those
who
offer
✓
SECURITY
in r e t u r n
nation
on
0F
free
the
the
ND GIVEN US
road
for
to
enterprise
the
our
a
freedom, we
planned
system
highest
economy
that
standard
has
of
will
and
set
to
this
the
preserved
living
man
destruction
our
has
great
liberties
ever
known.
- 27 -
I DO NOT WANT THAT FOR MY CHILDREN, AND I AM SURE YOU DON'T
WANT IT FOR YOURS.
LET US RECOGNIZE, THEN, THAT IT IS TIME FOR
EACH OF US TO ACCEPT THE RISKS OF FREEDOM SO THAT WE MAY
PRESERVE ITS REWARDS.
Th a n k
you.
■>
department of the T R E A S U R Y
ASWNGTON, D.C. 20220
TELEPHONE W04-2041
FOR IMMEDIATE RELEASE
February 5, 1975,
É
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
\
SECRETARY OF THE TREASURY
BEFORE THE JOINT ECONOMIC COMMITTEE
WASHINGTON, D. C., WEDNESDAY, FEBRUARY 5, 1975 AT 10:00 A.M.
Mr. Chairman and Members of the Joint Economic Committee:
It is a pleasure to appear again before your distinguished
Committee. These sessions provide a valuable opportunity to
review the economic and financial developments of the recent
past and to discuss appropriate policies for the future.
We have no shortage of problems to deal with this year.
The economy is in recession while intolerably high rates of
inflation still persist. At the same time, we must take drastic
steps to reduce our dependence upon foreign oil. These same
three problems of recession, inflation, and high-priced oil
also dominate the international scene and we must continue to
work with our friends abroad in search of acceptable solutions.
Our discussions today take place within the context of
three recent events: the formulation and submission by President
Ford of a comprehensive program to cope with the interrelated
problems of the economy and energy; the submission by the
President of the budget for the coming fiscal year; and the
release yesterday of President Ford’s first economic report.
The main elements of the Administration’s program are familiar
to you and I will not take your time this morning to review this
program at any length. It does seem to me that your Committee
is uniquely equipped to take a broad view of our economic
situation and possible remedies, and it is to these that I
wish to turn initially.
Domestic Economic Outlook
We have an economy with a short-run problem of recession
and a continuing problem of inflation. There is no doubt
about the recession; it may very well turn out to be the
longest and deepest decline since World War II. There is
also no doubt about the inflation. It dwarfs anything that
we have experienced in our peacetime history. Both of these
conditions must be brought under control.
/
u
2
Much of the current discussions concentrates almost
exclusively upon the recession. This is understandable.
Falling output and rising unemployment create economic hard
ship, which would be intolerable if continued for too long
a period. Real output declined at a 9 percent annual rate
in the fourth quarter and is again falling sharply during
the current quarter. Unemployment rose above 7 percent by
the close of last year and will probably exceed 8 percent
this year before beginning a gradual decline. For 1975 as
a whole the unemployment rate is likely to average close to
8 percent, far above last year’s 5.6 percent.
The trend through the year, however, should be distinctly
better than last year. In 1974, output was falling rapidly
by the end of the year. By the end of this year, output will
be rising. In 1974, the rate of inflation was in double
digits by the end of the year. By the end of this year, it
will be well below 10 percent. The Economic Report provides
our best estimates on output, prices, and employment. As in
other recent years, our own estimates are close to the con
sensus of private economic forecasts.
The forecasts may not be altogether convincing. Last
year's forecasts -- our own and most others -- called for
output to rise and inflation to fall in the second half of
the year. That was not the way it turned out. Now, with
the good news once again scheduled for the second half of
the year and the bad news here in the present, some skepticism
is inevitable.
Our case for a recovery in the second half of this year
rests primarily upon cyclical forces. Inflation caused the
supply of mortgage credit to dry up and sent the housing
industry into a tailspin. With inflation gradually receding
now, and the economy soft, short-term interest rates have
declined sharply. This has renewed the inflow of funds to
the thrift institutions and provided the essential pre
condition for a housing upturn.
Inflation also cut deeply into the real income of consumers
as prices transferred income from most consumers to growers or
grain and sugar and to owners to oil both here and abroad.
Inflation also cut indirectly into real disposable income
through higher effective rates of taxation. As a consequence,
real consumer purchases fell 3 percent in the pastyear.
ow
ever, now that the pattern of wage settlements has accelera
and the rate of inflation is subsiding, the real income 0
workers should be on the upgrade again in 1975. This, in tu »
should lead to an increase in consumer spending, providing
another element of support for the general economic recovery.
3
A third cyclical element that should turn around during
the year is inventory investment. Businessmen are liquidating
excessive stocks now, not only in the automobile industry, but
also in a wide range of other industries. Since final demands
in the economy will not fall away precipitously -- for many
reasons, including the automatic stabilizers built into our
budget -- the decline in inventory investment will end and
will turn around and become a positive economic factor once
again.
Thus housing, consumer spending and inventory investment
will all be contributing to a recovery from the recession
during 1975.
There have been 5 cyclical contractions in the postwar
period, 27 in the past 120 years. We have survived them all.
From every indication, the present contraction will fall within
the accustomed postwar pattern. I think there is no prospect
whatsoever of a long and deep economic downturn on the scale
of the 1930s.
Nonetheless, we are not prepared simply to let nature
take its course. The Federal Reserve has already eased monetary
conditions substantially. Similarly, the President has recom
mended a $16 billion temporary tax rebate this calendar year
to provide economic stimulus at a time when the economy is
weak. This tax rebate is in addition to the estimated $17
to $18 billion that will be spent on unemployment compensation
and public service employment programs in FY 1976. We advocate
the $16 billion temporary tax cut not because the economy
would not recover without it, but because it will make the
recovery in the second half of the year more solid and certain.
Even so, there are no instant cures. Our current economic
troubles grew out of multiple causes reaching back a decade or
more.; While special factors, of which food and fuel are the
most prominent, were important, the most fundamental sources
of our difficulties have been overstimulative monetary and
fiscal policies. It is unrealistic to expect that the economic
weakness can be cured overnight. A careful and balanced policy
approach is required, and it will take time to yield its full
results.
The worst policy of all, in my opinion, would be to both
crank up federal spending and cut back taxes in a massive and
permanent way. Those are the very policies that got us where
we are now. That sort of advice ignores or minimizes the fact
that inflation remains a problem of the first magnitude. It
also ignores or minimizes the fact that the enormous budget
deficits have to be financed in capital markets that are
already strained by a decade of inflation. The financial
4
implications of a massive swing to fiscal ease are so dis
turbing that I want to discuss them with you subsequently
at some length.
Even with a cyclical recovery beginning in the middle
months of the year, the economic situation will remain
difficult. Productivity has fallen. Gains in output later
in the year should mean that productivity growth will resume.
But prices, costs, and productivity will not quickly come
into anything like the balanced non-inflationary relationship
that existed before the mid-1960s. Inflation has become
deeply imbedded in the economic system and it will not be
removed in a matter of a few quarters.
Longer Run Considerations
We must face up to the fact that under the best of cir
cumstances we will finish this year with the rate of unemploy
ment and the rate of inflation far above acceptable long-term
levels. From there, at least two paths branch out into the
economic future. One choice would be to attempt to push the
economy back to full capacity operations at breakneck speed
without regard to the inflationary consequences. That is the
wrong path to travel, because it would not work. In a very
short time, inflation would again be rampant. We would then
retrace the same sequence of events we have just been through,
tumbling into another recession and shaking public confidence
even more severely than at present.
The other path requires patience on the part of the
American people. There must be vigorous growth in the economy
so that we can steadily reduce unemployment. But some margin
of economic slack must remain for a period of years to insure
that inflation can be squeezed out gradually. There must be
no early return to conditions of excess demand. If this seems
an overly cautious approach, it might be recalled that in
early 1965, after four years of recovery from the 1960-61
recession, the unemployment rate was still only slightly below
5 percent but the economy was relatively free from inflation.
In the remote historical past, periods of rapid inflation
were followed by financial panics and an ensuing deflation.
Since the economic and financial trauma of the 1930s we have
been unwilling to accept that result and, quite properly, we
have built safeguards into the economic and financial system
to prevent any deep cumulative downturn from occurring. But
we have not yet learned any way of avoiding the inflationary
consequences when the economy is pressed too far, too fast.
Price controls are no solution at all. They would destroy
our market economy if used permanently in peacetime. There
fore, we must hold the economy within the zone of acceptable
price performance and apply such other policies as may be
required to deal with any structural unemployment that remains.
As we look to the longer run, much greater emphasis
also needs to be placed upon the central role of capital
formation in economic growth. Our own ratio of private
investment to gross national product is much lower than that
of other major industrial nations. In turn, this is re
flected in our much lower rate of growth in productivity.
In the future, we are going to have to do better. The
capital requirements of the American economy over the next
decade will be enormous. We will need up to a trillion
dollars for energy alone. Beyond that, we will need extremely
large sums for control of pollution, urban transportation,
and rebuilding some of our basic industries where new invest
ment languished over the past decade. In addition, there are
the more conventional, but still mammoth, requirements for
capital to replace and add to the present stock of housing,
factories and machinery.
Yet in the face of these massive requirements, we are
not providing adequate incentives for new investment. Over
the past decade the inflation has led to high effective rates
of business taxation and low rates of profitability, which
in turn have greatly eroded the incentives for capital
formation. It is not unfair to say that we are in a profits
depression in this country. Nonfinancial corporations
reported profits after taxes in 1974 of $65.5 billion as
compared to $38.2 billion in 1965, an apparent 71 percent
increase. But when depreciation is calculated on a basis
that provides a more realistic accounting for the current
value of the capital used in production and when the effect
of inflation on inventory values is eliminated, after-tax
profits actually declined by 50 percent from $37.0 billion
in 1965 to $20.6 billion in 1974. A major factor contributing
to this decline is that income taxes were payable on these
fictitious elements of profits. That resulted in a rise
in the effective tax rate on true profits from about 43
percent in 1965 to 69 percent in 1974. Thus, a realistic
calculation shows that the sharp rise in reported profits
was an optical illusion caused by inflation.
6
Since, in our economy, corporate profits are the major
source of funds for new investment, and thus in the creation
of new jobs, all of this has grave implications for capital
formation and growth. That is perhaps seen best in the
figures for retained earnings of nonfinancial corporations,
restated on the same basis to account realistically for
inventories and depreciation«, It is the retained earnings
that corporations have available to finance additional new
capacity (as distinguished from the replacement of existing
capacity)o In 1965, there were $20 billion of retained
earnings. By 1973, after eight years in which real GNP had
increased 36 percent, the retained earnings of nonfinancial
corporations had dropped 70 percent to $6 billion«, And for
1974, our preliminary estimate for retained earnings is a
minus of nearly $10 billion. That means that there was not
nearly enough even td replace existing capacity, and nothing
to finance investment in additional new capacity«,
It is a simple but compelling economic fact of life that
increases in productive performance are required over time to
support a rising standard of living«, Yet, as a Nation, we
are rapidly expanding public payments to individuals but
neglecting to provide adequate incentives for new investment«,
Since 1965, in real terms, economic output has increased by
one third while government transfer payments to persons more
than doubled. On the other hand, private investment expenditures
upon which the economic future of all of us inevitably depends-have failed to keep pace, rising by only a bit more than one
fourth.
It is imperative that we make better provision for the
futureo This' means that we must place much greater emphasis
upon saving and investment and much less upon consumption and
government expenditurec Today, recession, inflation, and
energy policy dominate the discussion of economic events and
policy. We must take determined action to deal with these
interrelated problems. At the same time, however, we must
begin to shift the long-run balance of domestic priorities away
from consumption and government spending and toward investment
and increased productivity0 I believe history will judge us,
not on how we handle our short-run problems such as recession,
7
but out ability to deal with the more fundamental
problems of the allocation of resources and capital formation.
If as a Nation, we fail to address these problems, we will
fail to attain the prosperity and the rising standard of
living that the American people can achieve. Our goal
should be to enlarge the economic pie, not just to redistribute
ito
Financing Federal Budget Deficits
Federal budget deficits are estimated to total $87
billion in fiscal years 1975 and 1976--$35 billion this
fiscal year and $52 billion next year. I have made no
secret of the fact that I feel that such deficits are large
by any standard and that they pose a substantial problem0
Let me make my conclusion on this issue quite clearc Although
they present dangers and although they will inevitably impose
strains on the financial markets, I believe those deficits
will be manageable if--and I want to stress this--if they
do not become significantly larger and if they are temporary
in duration.
It is true that financial conditions normally ease
substantially during a recession and normally they remain
easy well into the period of recovery. There are two main
reasons for this: First, some private demands for credit
are closely related to the pace of business activity and
decline sharply during a recession period. Short-term
business borrowing to finance inventories is a prime example0
Second, the Federal Reserve customarily "leans against the
wind" during a period of recession and seeks to expand, or
at least maintain, the rate of growth in money and credit.
Therefore, interest rates can be expected to decline and the
availability of credit to increase as a normal part of the
cyclical process.
It must be considerations of this general nature which
lead some observers to conclude, too readily in my opinion,
that the financing of large Federal deficits in the current
recession is a routine matter, largely devoid of any
particular economic significance. I, respectfully disagree.
The current recession is an outgrowth of a long period
of inflation that has left private financing demands much
8
heavier than usual. There has been the market decline in
profits I mentioned earlier and a serious erosion of the
liquidity base of households and businesses0 The decline
in the stock market has in many cases virtually ruled out
the sale of new equity as a source of funds»
For these and other reasons, there has been an unusually
large supply of private debt issues coming into the market.
Our latest projections show that net new corporate bond
issues, which rose from $12-1/2 billion in 1973 to $25 billion
in 19749 will advance even farther to some $30 billion or
more in 1975. While corporate capital spending programs are
being cut back, there will still be a very heavy volume of
corporate long-term borrowing. Furthermore, the state and
local fiscal position has changed drastically. Their
surpluses have melted away, tax receipts are affected by the
recession, and state and local borrowing needs will be
substantial.
Some slackening in private demands for short-term
credit is underway and more can be expected» Yet by any
previous recession standards, total private demands for
credit--both short and long term--are likely to remain
fairly large.
Federal requirements will, of course, have to be met.
But there are risks in such a situation» First, if private
demand does not fall back spontaneously to make room for the
larger Federal borrowing, credit demand will outrun supply,
interest rates will be driven higher, and some private
borrowers will be crowded out. Judging from past experience,
the housing industry would be likely to suffer» Indeed, its
recovery might even be aborted. At the worst, financial
factors might be such a binding constraint as to dampen the
normal cyclical recovery that would otherwise occur»
The second risk is on the inflation side. Some observers
suggest that, in order to avoid any strains on the credit
markets, the Federal Reserve should undertake whatever rate
of growth in money and credit is required to insure that
Federal and all other borrowing requirements are met at
stable or declining interest rates. This approach, however,
could be a sure formula for still higher inflation rates
when the recovery gets into full swing--if not sooner.
The key to successful financing of the large Federal
deficits lies in diligent restraint of Federal expenditures.
Large as they are, the $85 billion in deficits projected for
fiscal years 1975-76 can probably be accommodated, although
they will produce some strains in the financial markets.
However, if Congress were to push Federal expenditures much
beyond the budgeted levels, it would not be possible to
retain much optimism as to the result. Either the recovery
would be delayed or more inflation would be experienced in
the future.
In previous recessions one could be more relaxed about
the financing of temporary Federal deficits. This recession
began, however, with the financial markets under considerable
[pressure. If the Congress will work with us in a joint effort
■to restrain expenditures, we can probably move through the
[period ahead without undue difficulty, but it would be a
mistake to ignore the possible adverse effects of having to
finance large Federal deficits. In my opinion, the'projected
Ideficits for fiscal 1975-76 are--in the context of our
Iexpectations about the course of the economy--about as large
las our financial system can tolerate without doing more harm
I than good for the economy.
The Domestic Economy and The Energy Program
In addition to the temporary measures designed to
■cushion the impact of recession and promote recovery,
■President Ford is recommending a comprehensive program to
■achieve self-sufficiency in energy in ten years. The
■essence of the program is the reduction of energy consumption
■through the use of the market mechanism. Under the Presidents
■program, energy price increases and other measures will enable
■us to achieve an estimated 1 million barrels per day saving
■0n sported oil by the end of this year and another 1 million
I arrels per day by the end of 1977. From a macroeconomic
■point of view, the program is designed to be neutral in its
10
impact on total demand. An additional $30 billion will be
collected in the form of taxes and fees but it will then be
returned to the economy, mostly in the form of permanent
tax reductions and payments to non-taxpayers0
The introduction of such a program, many of whose effects
cannot be predicted with absolute precision, is bound to be
controversialo There probably would never be an ideal time
fox such action. The plain fact of the matter is, however,
that many non-economic considerations dictate the necessity
of prompt, credible action to move toward energy independence.
With our own economy in recession, it is important to
insure that the energy program has as neutral an impact as
possible on the overall economy. In particular, this requires
that the timing of the economic impact be carefully considered.
Taken in conjunction, the temporary $16 billion tax cut to
stimulate the economy and the various energy taxes are designed
to exert their maximum stimulus in the second and third
quarters of this year and then to taper off to a position of
neutrality by the end of 1976. A table attached to my
statement provides an estimate by quarters of the direct
budget impact.
One undesired, but unavoidable, impact of the energy
program will be a temporary inflation effect. Our best
estimate is a one-shot increase in the general price level
of roughly 2 percent. It should be stressed that the rate
of inflation is increased by this amount once only, not on
a permanent basis.
It is a valid question whether any program seeking to
reduce energy consumption through a sizable shift in relative
prices can confidently be described as neutral in its impact.
Its neutrality is, of course, only with respect to the net
effect on economic activity. Energy intensive industries
and higher income taxpayers--to mention only two examples-will feel a disproportionate impact. Furthermore, there are
uncertainties and gaps in our knowledge which preclude a
definite and precise estimate of all the effects. To the
best of our ability, however, we have put together an eflergy
program which should be neutral in its total impact on
economic activity. At the same time, it represents a
comprehensive and balanced national energy policy that
will effectively reduce our reliance on insecure sources
of energy.
11
Foreign Economic Outlook
The picture I have given you of the U.S. economy also
portrays only too well the economic situation in most other
major industrial countries. As the industrialized nations
have become more interdependent, their economies increasingly
march in step together. In 1972-73, the industrialized
nations experienced virtually simultaneous boom conditions.
No*w most have moved into a generalized condition of minimal
or nagative growth and substantial unemployment in the face
of continuing price pressures.
The recession which most major countries are experiencing
is the worst since World War II. Collectively, our partners
in the Organization for Economic Cooperation and Development
(OECD) saw their growth rate fall to lh percent last year
from 6^ percent in 1973. Toward the end of last year the
Secretariat of the OECD was predicting 2% percent growth for
the area in 1975, again excluding the United States. From the
reports I have heard from my colleagues abroad recently,
however, I juge that this estimate will have to be revised
downward.
Japan and Germany, like the U.S., are experiencing a more
pervasive slowdown in economic activity than expected only a
few months ago. To a lesser degree, the outlook for French,
British and Canadian economies has also weakened. TThere is
considerable evidence of loss of confidence on the part of
both consumers and investors, with consequent damage to invest
ment and jobs. Reduced levels of consumer spending, along with
high interest rates, have led to continued retrenchment in
business plans for plant and equipment expenditure.
Unemployment has also become a problem abroad. Declines
in average hours worked, increases in part-time work and actual
declines in employment, particularly in the manufacturing and
construction sectors, are characteristic. Unemployment rates
m Europe are in many cases approaching postwar highs, and in
the case of France, unemployment has already reached a postwar
record. As in the United States, unemployment levels may well
j increase further before levelling off and starting down again
stoward the end of the year.
Intolerable inflation rates abroad have recently shown
I signs of easing. But for much of last year, far from abating,
m most countries they climbed to even higher levels under the
IPressure of the oil price increases and escalating wage and
I salary demands. Double digit inflation rates were recorded in
[ J"
the 24 OECD countries in 1974. Excluding the United
I tates, the OECD inflation rate was over 15 percent for that
■ 4 ?ar* as compai*ed with Sh percent in 1973 and an average of
I 4* Percent in the previous ten years.
12
All of the OECD countries hope to bring down their
inflation rates in 1975, but none expects to achieve a level
which it would consider satisfactory. Of the other OECD
countries, price increases of less than 10 percent are fore
cast for only Germany and Switzerland. Japan, Italy and the
United Kingdom still face the prospect of rates above 15
percent for 1975.
>
For the policy maker searching for the means to restore
both price stability and growth, the difficulty has been
compounded by record wage demands. In many countries, wage
increases in 1974 averaged more than 20 percent -- well
above inflation rates -- and in Japan they approached 30
percent. The extent to which these pressures can be moderated
will be a key factor in determining the success of efforts to
reduce inflation in 1975.
In my talks with other finance ministers, I find an
acute awareness that economies are caught in a two-way stretch
and that it would be dangerous to focus on only one source of
the tension. Individually and together, governments are
reappraising their policies as time passes and the situation
changes. In several countries, government policies have
shifted, just as they have in the United States. Most govern
ments are moving cautiously, however, seeking to absorb slack
gradually so as to avoid giving a new boost to inflationary
pressures. Germany -- which had the best record on inflation
in 1974 -- has relaxed previous restrictive policies signifi
cantly, and Britain has also moved progressively to stimulate
its economy. Canada has moved modestly toward less restraint
in both budget and monetary policy. France, on the other
hand, has sought to maintain restraints. Japan, laboring
under a cost of living increase of 25 percent in 1974 and
facing demands for another 30 percent increase in wages, has
also kept restraints taut despite a 6.7 percent decline in
output in the fourth quarter.
One implication of the depressed outlook for major
economies this year is that foreign demand will not be of mucn
assistance in achieving early recovery. The volume of inter
national trade may well decline in 1975. Another, more
heartening, implication is that there could be greater progres
against inflation than earlier foreseen. There is a possibi
lity that the worldwide slump may lead to more softness in
the prices of basic commodities than has been incorporated in
most forecasts. With higher unemployment rates, wage demands
may turn out to be somewhat more modest than anticipated.
Inflationary pressures could thus subside somewhat more rapi
than expected, if governments can resist pressures for exces
sively stimulative policies.
13
International Payments
Never in peacetime has the pattern of international
payments shifted as sharply and as suddenly as it did last
year under the impact of the OPEC cartel’s quadrupling of
oil prices. The OECD countries, which had a combined current
account surplus of $2% billion in 1973, faced a deficit of
perhaps $37% billion in 1974. Countries which :had.been
accustomed to exporting capital and transferring real
resources to the developing countries found; themselves unable
to pay for their own imports with their exports. ;,They have
been forced to become borrowers -- on a scale out of all
proportion to previous experience.
The announcement that the United States had a ,$3 billion
merchandise trade deficit in 1974 (census basis) occasioned
headlines here in Washington. This was a deterioration of
less than $5 billion from the 1973 balance *-jnWith the trade
surplus of the OPEC countries rising -- in rough order of
magnitude -- $60 billion in 1974, there had to be an equiva
lent deterioration in the trade balances of the oil importing
countries as a group. Since the U.S. was importing not much
less than a quarter of the oil and our oil import bill rose
$18 billion, our trade position clearly strengthened relative
to most of the oil-importing world. Germany was the ,only
important industrial nation to experience an increase in its
surplus on trade account.
hiijod^
Record deficits in the oil importing countries had their
counterpart in record surpluses of the oil exporters.. We
estimate that in 1974 the thirteen OPEC countries^received
about $90 billion from oil exports , or roughly .«four- (times the
amount they earned in 1973* In addition, their;other exports
amounted to about $5 billion, bringing their total receipts
to $95 billion. During this same period, the OPEC nations
spent approximately $35 billion -- or. a little more than a
third of their export receipts
on imports. This -left a
balance of approximately $60 billion;available for .investment
abroad.
B H H H H IHH I
OPEC needed to find investment outlets for this balance,
and oil-importing countries needed to borrow; the.s;e ftinds .
Our rough and tentative estimates suggest that *in;;.1974, the
OPEC countries invested their surpluses as follows
Some $21 billion, or about 35 percent of the
surplus, apparently went into the Eurocurrency
market, basically in the form of bank deposits.
14
Some $11 billion, or 18% percent, flowed
directly into the United States. Available
figures suggest that of this amount, roughly
$6 billion went into short and longer-term
U.S. Government securities, while some $4
billion were placed in bank deposits,
negotiable certificates of deposit, bankers’
acceptances, and other money market paper.
As best we can tell, less than $1 billion
was invested in property and equities in
this country.
Some $7% billion, or about 12% percent, is
believed to have been invested in pound
sterling denominated assets in the United
Kingdom, some of it in U.K. government
securities, some in bank deposits, some in
other money market instruments and some in
property and equities. This amount, I
should note, is quite apart from the large
Eurocurrency deposits there.
Some $5% billion, or about 9 percent, may
have been accounted for by direct lending by
OPEC countries to official and quasi-official
institutions in developed countries other
than the U.S. and the U.K.
About $3% billion, or 6 percent of the total,
represented OPEC investments in the obliga
tions of official international financing
institutions such as the World Bank and the
IMF.
Perhaps $2% billion, or 4 percent, has flowed
from the OPEC countries to other developing
countries. This includes funds channeled
through various OPEC lending institutions
such as the Kuwait Fund and the Arab Bank for
Africa.
- 15
With regard to1;the remaining 15 percent, we
have only limited information, but this resi
dual would cover funds directed to investment
management accounts as well as private sector
loans and purchases of corporate securities
in Europe and Japan. There are, of course,
other transactions we simply know nothing
about.
The rather wide distribution of OPEC capital flows among
markers in the oil-importing nations explains in part why the
massive shifts in financial assets did not lead to the finan
cial crises that some envisioned, OPEC funds did not move to
one or only a few attractive capital markets, as once was
feared. The United Sfhtes, with the largest capital markets,
received directly only 18^ percent of the total, an amount
substantially less than OPEC’s increased receipts from oil
sales to the U.S. The United States also continued to export
large volumes, of capital to other areas abroad, and our net
capital imports last year, as measured by our current account
deficit,, were probably in the range of only $3 billion.
it appears that something approaching half of the OPEC
investments laa't year! were placed through the commercial
banking systems; of the major industrialized countries. The
banks redistributed these funds, exercising their traditional
intermediation role in meeting the needs of borrowers through
out the world.5 Admittedly, the sheer volume of OPEC funds
placed some strains on the banking systems. Probably few
banks expect to continue to increase international lending at
the 1974 rate. Banks as a whole may not be able to accept as
large a portion, of the OPEC surplus in 1975.
-
Changes in the methods of channeling OPEC investments
already evident in‘the course of 1974 . Banks were
increasingly playing the role of broker and assisting their
OPEC clients in arranging direct placements. OPEC countries
t® lying. more heavily on government -to -government credits ,
,Ipe^tment in longer-term securities of governmental and quasigovernmental agencies and lending to international institutions
There was also evidence of a small amount of OPEC funds being
invested in corporate securities and real estate. As time
passes, We are likely to see a more varied pattern of investment as well as increasing disbursements under OPEC commitments
• assistance to developing nations.
3
16
That last year's totally unexpected and unprecedented
shift in international payments flows occurred without
financial crisis and without disruption of trade says a
great deal for the soundness of the international banking
system and the international capital markets, the network
of intergovernmental financial cooperation, and the system
of floating exchange rates.
Nevertheless, I recognize that at times concern has
been expressed about the magnitude of exchange rate
fluctuations under the present regime. We recently
witnessed a temporary episode of large fluctuations in
individual rates, when the Swiss franc appreciated by
about 5 percent against the dollar within a span of a few
days. These abberations tend to reflect market reactions
to specific, immediate developments -- in this case probably
to a bank failure and the decline in U.S. interest rates -but become subsumed as the market adapts to broader economic
trends. As has generally been the case, this most recent
experience has had only a minor impact on a broader measure
of the dollar's "exchange rate": the dollar's average
value, relative to the currencies of all of the major
industrial countries, declined by only about 1 percent before
a reversal was set in motion. Taking a more relevant period
of comparison, the dollar's average exchange rate is still
at the level reached after the major exchange rate
realignments of 1971 and 1973, despite nearly two years of
generalized floating since the latter realignment.
Throughout this period of generalized floating, our
intervention policies have been directed to the avoidance
of disorderly exchange market conditions and not to the
achievement of maintenance of any particular rate.
International Cooperation
The experience of the past year has served to reinforce
our conviction that the financial aspects of the oil situation
are manageable. Nonetheless, we have recognized the
possibility that some countries might encounter particular
difficulty in meeting their financial requirements and turn
to restrictive actions which could disrupt the world economy.
To reduce that risk, the United States developed a
comprehensive series of proposals involving expanded use
of the resources of the International Monetary Fund, the
establishment of a new "solidarity Fund" to provide a
"safety net" for members of the OECD, and a Trust Fund to
provide the concessional assistance needed by the poorest oi
the developing countries. Other countries also had
suggestions for new financing arrangements. These proposals
have been the subject of intensive consultation and
negotiation over the past months.
17
Finance Ministers around the world have developed a
whole family of committees and informal groupings in which
they can meet periodically to consider the world’s economic
and financial needs. The great value of this network -including the Group of Ten, the Interim Committee of the IMF
and the IMF/IBRD Development Committee, as well as smaller,
less formal groups -- was demonstrated by the agreements
reached at a series of meetings here in Washington in
mid-January. In the course of these sessions, a consensus
was reached on a number of measures which will provide
additional financial security for the near future and
strengthen the monetary system for the longer term:
Agreement was reached among the major OECD countries
that a new Solidarity Fund, a financial support arrangement
along the lines of the United States proposal for a $25
billion "safety net” , should be established at the earliest
possible date. This arrangement is to be available to
provide supplementary financing, if the need arises, to
participating OECD countries which follow cooperative
economic and energy policies. Detailed work on this new
arrangement is to be completed promptly.
Agreement was reached among IMF countries that IMF
resources would continue to play a role in 1975 to the
extent needed. As one expression of this intent, it was
agreed that the IMF oil facility should be continued on a
limited basis during 1975. Borrowing from oil producers
and others for this facility will be limited to about
$6 billion (or 5 billion SDR's), less than some countries
originally favored. This agreement was preceded by considerable
discussion of different methods of using IMF resources.
One approach is to use the Fund’s resources in effect as
collateral for loans as is done for the special oil facility.
A second approach is to mobilize the Fund's resources directly
for lending. In the end, it was agreed to do both.
There will be some new borrowing and also increased direct
use of IMF resources to meet the needs of nations in difficulty.
Contributions from oil producers and industrial countries
to subsidize interest costs of the IMF Oil Facility for the
very poorest countries may also become a feature of the
facility in 1975.
Agreement in principle was also reached to increase
IMF quotas of member countries by approximately one-third,
subject to agreement on a related package of amendments to
the IMF Articles of Agreement. The major oil exporters’
collective share of the total IMF quotas will be doubled in
order to call for greater participation and a greater voice
tor these countries in the activities of the International
Monetary Fund. Quota increases will be dependent upon the
agreement of countries when such use is economically justified.
18
Agreement was also reached on the general lines
of a number of other amendments to the IMF Articles, with
the particulars to be worked out over the months ahead.
These amendments are designed to improve the structure of
the IMF and bring it more in line with current realities.
One amendment supported by the United States will provide
that member countries are no longer required to maintain
their exchange rates within narrowly fixed margins, but can
float their currencies -- a practice which is not legally
permissible under the IMF Articles as now written.
Considerable progress was also made toward narrowing
differences with respect to the broader question of gold and
its role in the international monetary system. It was
agreed in principle that the official price of gold -- and
hence its central function as "numeraire" of the monetary
system -- should be abolished and that obligations on the
part of members to pay the IMF in gold, and on the part
of the IMF to receive gold, should be ended. Progress was
also made toward replacing the existing prohibition against
members of the IMF buying gold in the private market with
safeguards assuring that this freedom would not be used to
return gold to the center of the monetary system. Our aim
is to arrive at workable arrangements which will take gold
out of the center of the international monetary system, while
also allowing countries greater freedom to utilize their
gold holdings. It is my hope that the entire package of
quota provisions and amendments, including those relating
to gold, will be ready for approval at the Interim Committee
meetings scheduled for this June.
Less progress was made at these meetings than had been
hoped in organizing assistance for developing countries, some
of which face very serious difficulties. As I mentioned
earlier, there was some support for measures to subsidize
interest rates for loans to these countries from the IMF oil
facility. The United States proposal for a new facility -- a
Trust Fund managed by the IMF which would channel funds to
the poorest of the developing nations on concessional terms y
remains under study. It continues to be our hope that
adequate arrangements can be devised, and that the OPEC
nations will provide an appropriate part of the contributions
to this effort.
Oil consuming countries have also made considerable
progress in concerting their energy policies. Last fall
agreement was reached among a number of consuming countries
on the International Energy Program which was an outgrowth
of Washington Energy Conference in February of, 1974.
We have developed an unprecedented program to limit individual
and collective vulnerability during emergencies created by
supply interruptions. Under this arrangement, participating
countries have agreed to:
19
Build a common level of emergency selfsufficiency, which would allow them to
live without imports for a certain period.
Develop demand restraint programs to cut
oil consumption by a common rate without
delay if necessary.
Allocate available oil to spread shortfalls
among participants should there be supply
interruption.
Concrete plans are also now being laid to coordinate
programs of energy conservation and longer term development
of new sources of supply. The new solidarity fund, by
providing financial assurance and promoting confidence,
will support accelerated efforts in the energy field.
And consumer solidarity in both energy and finance will
prepare the way for a fruitful dialogue with the oil
producing countries.
U. S. participation in the solidarity fund will involve
commitments requiring the endorsement of the Congress.
I hope the Congress will recognize the importance of this
arrangement in furthering our economic goals and, following
presentation of the detailed agreement, endorse U. S.
participation without delay.
With the passage of the Trade Act of 1974, the new
round of multilateral Trade Negotiations can move into
substantive bargaining. The February meeting of the Trade
Negotiations Committee will open this stage of negotiations
that are the most comprehensive ever attempted. They will
deal not only with the traditional trade problems of tariffs
and nontariff barriers, but also with overall reform of the
international trading framework.
Getting the trade negotiations under way is more
important now than ever because of current world economic
conditions. These negotiations should help forestall
unilateral measures which attempt to shift economic burdens
to other countries, and which, if widespread, could have
a depressing effect on the world economy.
The Challenges Ahead
«
• Chairman, the past year has seen the development
° + • e hl&h deSree of consensus necessary for effective
actions to deal with the multiple problems of recession,
20
inflation, and a disruption in the world energy balance.
While there still remains room for honest differences as
to the course to be followed, I believe that the scope
for disagreement has become increasingly smaller.
Certainly we cannot afford, either in this country
or abroad, excessively stimulative policies which could
only lead to further escalation of an already intolerable
inflationary spiral.
Nor can any country afford not to take prompt steps
to ensure that the current recession does not deepen and
is instead succeeded by a resumption of the sustainable
growth of production and productivity necessary to maintain
the health of economies around the world.
And we cannot afford to delay, programs of strong
action to create a new energy balance.
The President has placed before the Congress an
effective program to address all of these problems.
He has expressed his desire and evidenced his willingness
to work with the Congress in carrying out that program.
We recognize that Members of the Congress have views of
their own -- views that are held with the same degree of
conviction as we hold ours within the Administration.
Our hope is that we can find reasonable means of reconciling
those differences, so that together we can provide America
with the leadership it needs at this critical hour.
k R<
pita:
L G<
ider;
mi
It
0O0
Net
1/
/
Table 1
Direct Budget Impact
of the Presidentas Economic and Energy Proposals
($ billions)
Calendar Years
1975
i------n
jergy Taxes
m
r?
1976
i
n
+ 7.6
+7.5
+7.5
+7.5
-5.6
9.0 - 9 .0
2.0
0.5 -0 .5 ‘ -0 .5
-0.8
0.8 - 0 .7
-7.9
-6.3
-2.0
-0.5
-0.8
-6.4
+0.2
+4.1
+ 12. 6 + 7 . 6
.0
-3.2
.0
.0
-0.5
.0
-
Ip o r a r y Tax
If
'
.0
-6.1
- 7.9 - 0 . 6
-0.8
-0.9
Iket E f f e c t
+0.2
-5.7
- 7c6 - 3 . 2
-0.1
-2.5
rrr
rv
Burn of Energy
lx Revenues to
Bo nomy
lax Reduction
Bntaxpayers
rL G o v ’ t s
jjd e ra l G o v t .
-0.5
-0.7
0
-2.1
-0.5
-0.7
0
-0.1
Department of t h e T R [ A $ lllt Y
SHINSTON. D.C 20220
T E L E P H O N E W 04-2041
¥
FO R I M M E D I A T E R E L E A S E
T R E A S U R Y 1S W E E K L Y
The Department
two s e r i e s
of
thereabouts,
the Treasury,
Treasury bills
to b e
91-day bills
thereabouts,
of
issued
the a m o u n t o f
20,
(to m a t u r i t y date)
May
22,
this
1975
amount
as
1975
amount
of
tenders
$5,200,000,000
of
$2,700,000,000,
of b i l l s
for
» or
and
or
dated November
912793 WK8),
the additional
invites
follows:
in the amount
(CUSIP No.
$2,104,890,000,
public notice,
1975,
an additional
7,
BILL OFFERING
the aggregate
February
representing
and t o m a t u r e
to
by
February
originally
original
bills
21,
1974,
issued
to be
in
freely
interchangeable.
182-day bills,
and to m a t u r e
for
August
$2,500,000,000,
21,
The bills w i l l be
F e b r u a r y 20 ,
Government
1975,
issued
and
for
in
exchange bills
the a v e r a g e p r i c e s
of
accepted
be
issued
competitive bidding,
and
interest.
be
They will
$50,000,
one-thirty p . m . , E a s t e r n
received
Each t e n d e r m u s t
for
multiples of
$5,000.
be e x p r e s s e d
on
Banking
In
their
in bearer
for Treasury bills maturing
$4,801,650,000»
for
themselves
and
presently hold
for
the bills
of w h i c h
as
agents
of
$2,774,125,000.
now being
offered
at
basis
face
under
competitive
amount will
be payable without
form in denominations
$1,000,000
and non
of
$10,000,
(maturity value),
and
in
at
Federal Reserve
at
time,
Friday,
the Department
$10,000.
the
case
of
of
100,
with not more
Banks
and
February
of
14,
over
tenders
than
up
to
1975.
the Treasury,
Tenders
competitive
Branches
Washington.
$10,000 must
the price
be
in
offered must
three decimals,
e.g.,
99.925.
b e used.
institutions
and
1975
bidders.
a m i n i m u m of
the basis
Fractions m a y n ot
a discount
Standard
Tenders w i l l n o t b e
be
on
$500,000 and
received
20,
tenders.
issued
$100,000,
be
of
authorities,
at m a t u r i t y
book-entry fo r m to de s i g n a t e d
Tenders will
in exchange
the amount
they hold
to b e d a t e d F e b r u a r y
9 1 2 7 9 3 X K 7 )•
Federal Reserve Banks,
These a c c o u n t s m a y
$ 1 5 ,000,
cash and
international monetary
The bills will
thereabouts,
( C US I P No.
outstanding
accounts
foreign a n d
1975
or
dealers who make
(OVER)
primary markets
in Gov e r n m e n t
securities
with
for
and report
respect
account
such
to Government
of
trust
face
express
companies
amount
of
range
of
or
to
reservations,
in part,
other
ment.
maturing bills
amount
of
from any
20,
discount
tenders
bills
(other
Federal
income
the price
the
during
funds or
issue.
Branch.
be made
and
sold,
Copies
insurance
return,
year
of
of
issued
of
the
competitive
shall be
t h e average
the respective
be made
20,' 1 9 7 5 ,
companies)
issued
gain or
whether on original
either upon
receive
of
equal
for which the return
treat-
the par value
of
the n e w bills.
sold
1954, the
is c o n s i d e r e d
of,
Accordingly,
and
t h e bills
include
the difference
issue or on
i n his
between
subsequent
redemption
to
t h e o w n e r of
hereunder must
sale or
or
purchase,
at maturity
is m a d e.
418
and
circular may be obtained
(current
govern
the
j
of Trea s u r y bills
between
loss,
issues.
i n c a s h or
the Internal Re v e n u e Code of
capital assets.
Subject
$ 2 0 0 , 0 0 0 o r less
in full at
for
the
tenders,
final.
for
or otherwise disposed
the Treasury bills
all
the
tenders
S e c r e t a r y of
any or
February
are
of
company.
tenders will
hereunder
redeemed
2 percent
the Treasury of
The
the issue price
t h e T r e a s u r y C i r c u l a r No.
terms
of
exchange
of
the bids must
for differences
as o rdinary
the bills,
taxable
the
of
in a like face amount
1221(5)
in investment
a r e a c c o m p a n i e d b y an
each issue
competitive bids
Cash and
actually received
Department
prescribe
life
for
amount
the
are
for
Bank or Branch on
at w h i c h bills
tax
paid
dealers
submitting
in accordance with
from consideration as
than
tenders
in exchange and
454(b)
the bills
excluded
banks
to a c c e p t or r e j e c t
of a c c e p t e d
except
in
from incorporated
trust
such respect
forth
their
one bidder will be accepted
1975.
accepted
Sections
accrue when
Those
set
tenders
for
the tenders
the Department
action in any
Cash adjustments will
Under
be made by
the Federal Reserve
February
deposit
incorporated ban k or
noncompetitive
for accepted
at
tenders
recognized
unless
the right
immediately available
maturing
submit
t h e i r position!
submit
are
accompanied by payment
accepted bids.
and his
(in t h r e e d e c i m a l s )
completed
and
of
be
for,
by an
reserves
stated price
Settlement
the customers
to
and
thereon may
the acceptance or rejection thereof.
in w h o l e
are
applied
payment
expressly
price
t h e names, o f
from others must
Treasury
without
and borrowings
from responsible
announcement will
advised
these
provided
bills
of
and price
be
and
Tenders
Public
will
securities
Others will not be permitted
guaranty
amount
to the F e d e r a l R e s e r v e B a n k of N e w Y o r k
Tenders will be received without
securities.
the
customers
tenders.
own account.
and
daily
revision)
conditions
from any Federal
and
of
Reserve
this
notic
their
B a n k or
j
Department o f the T R E A S U R Y
i H I N G T Q N , D.C. 20220
TÉLÉPHONE WÛ4-2041
Assistant Secretary of the Treasury David R.
Macdonald issued the following statement today regarding
reports of a cheese war resulting from the resumption
of subsidization of cheese exports by the European
Community:
’’Like the reports of Mark Twain*s death, the
reports of a *cheese war* between the European Community
and the United States are greatly exaggerated. The
resumption of export restitution payments by the Common
Market will, indeed, bring an immediate preliminary
determination by the Treasury Department that a "bounty
or grant," under the countervailing duty laws does exist.
This preliminary determination, required by the 1974
Trade Act, should be published next week. The next step
some time thereafter, will be a simultaneous final
determination (1) of the amount of the bounty or grant
and (2) whether the discretionary provisions of the
Trade Act of 1974 can be applied to this situation."
*'The Common Market, in the course of consultations
with the U.S. Government,'* Macdonald noted, "has indicated
that this resumed export program will be substantially
modified from the one which was in effect prior to July 1974
when restitution payments on exports to the United States
were suspended. The EC is fully aware of the provisions
of the Trade Act of 1974 and the three requirements it
contains for a waiver by the Secretary of the Treasury of
the imposition of countervailing duties. They have told
us that this new program will be operated so as to meet
the statutory criteria for such a waiver. Concerned
agencies of the U.S. Government have been in contact with
representatives of the domestic dairy industry and
interested members of Congress regarding the new EC program,
and will continue these consultations as the time approaches
for a final decision on whether or not the EC program
qualifies under«the statutory criteria."
oOo
ws- 2 1 8
Department o f the T R E A S U R Y
ASHINGTON. D.C. 20220
T E L E P H O N E W 04-2041
ADDRESS BY THE HONORABLE DAVID R. MACDONALD
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT, OPERATIONS, AND TARIFF AFFAIRS)
BEFORE
THE ABA NATIONAL INSTITUTE
ON "CUSTOMS, TARIFFS AND TRADE"
SAN JUAN, PUERTO RICO
FRIDAY, JANUARY 31, 1975
The State of Health and Future Prospects
Of The Antidumping and Countervailing Duty Laws,
As Reported by David R. Macdonald, Resident Physician
It's an honor to appear before this select body of
distinguished practitioners for the purpose of reporting
on the "Future of the Countervailing Duty and Antidumping
Laws." When that title was given to me as the subject of
my speech, it seemed to me to imply something other than
a legal or economic assessment. In fact, the more I thought
about it, the more I came to the conclusion that a medical
view was called for. I hasten to add that I have not taken
the Hippocratic oath, nor am I related to one "Doc" Customs
who was mentioned in a speech recently made to the American
Importers Association. I find, however, that my medical
friends have never hesitated to pass their legal opinions
on to me as ex cathedra? you will pardon me, therefore, for
unabashedly volunteering my services as resident M.D.
Health Of
Countervailing Duty Law
The Countervailing Duty Law, as most of you know, is
an 1897 statute which provides that whenever a bounty or
grant is paid or bestowed on dutiable merchandise exported
to the United States, there shall be levied and paid "...an
additional duty equal to the net amount of such bounty or
grant..."
W S-217
2
After a lengthy coma, I can now report that this law
is reviving and presently ambulatory. A number of consultants
helped to bring it back to health, not the least of which was
Congress, which in the Trade Act of 1974 performed surgery on
the law in a manner which I will presently describe.
In addition to the assembled medicos who have ministered
to this patient, there are several more basic considerations
which have created an atmosphere which was bound to focus
attention on the Countervailing Duty Law.
First, there has been, in recent years, as tariffs have
generally dropped, a new interest in non-tariff trade barriers
and distortions to trade which has brought export subsidies
into prominence.
Second, oil payments flowing to OPEC and other countries
have promoted a fight for world capital that brings with it a
temptation to subsidize exports.
Third, developing countries in recent years have moved
away from home manufactures asw a means of import substitution
and toward exports of manufactures in order to develop new
industries and balance trade.
Fourth, there is a sense of frustration by domestic
industry in this country because of increasing effects of
import competition, which frustration has been forcefully
expressed to Congress and the Administration.
Fifth, a major segment of U. S. labor has, to some degree,
switched from an aggressive internationalist posture to more
of a defensive posture.
Finally, social, environmental and safety legislation in
this country, although perhaps beneficial for its intended
purpose, has tended to restrain improvements in productivity
and thus raise domestic prices, inviting competition from
abroad. Some manufacturers, looking for a defense, correctly
or incorrectly envisage foreign subsidies as a primary cause
of their problems.
Health of
Antidumping^Act
The Antidumping Act is an international price discrimina
tion statute. Under its provisions if it is determined that
3
the sale of products in the United States is at a lower
price than the exporter sells the same product in his home
market, Treasury issues a determination to that effect and
the Tariff Commission (now the International Trade Commis
sion) determines whether the domestic industry has been or
is likely to be injured.
In the event that the Commission does determine that
injury has occurred or is likely to occur, a dumping finding
is entered by Treasury, and Treasury and Customs proceed to
levy "dumping duties" equal to the amount of the price dis
crimination, or "dumping margin."
Many price adjustments
are provided in the statute and regulations in order to
determine whether sales at less than fair value have occurred,
and, if they have* what the size of the dumping margin is.
I will not go into these adjustments, except to say that all
are designed basically to make a fair comparison of the export
sales price with the home market sales price of the product,
in order to bring both of them down to a "mill net" price.
The antidumping law has been extensively analyzed in
law review articles and has not been radically changed by
the Trade Act. My annual checkup reveals that it is in
continuing health, although relatively inactive, possibly
in part because world shortages of raw materials have removed •
the incentive to dump those products. In addition,' injury
may be difficult to prove in cases where demand has been
rising in relation to supply, as was occurring until the
last few months.
Since I wish to address myself primarily to the
Countervailing Duty Law today, I will not dwell on details
of the antidumping statute, except to point out that Treasury
has, over the past year, together with the International Trade
Commission, developed a means of taking a new look at dumping
findings in those cases in which sales at dumping margins may
be continuing, although injury or likelihood of injury no
longer appears to exist. In such situations, upon a new
application Treasury renews its less than fair value deter
mination and sends the case to the International Trade
Commission for a de novo injury inquiry.
Recent Amendments To The
Countervailing Duty Law
The purpose of the Countervailing Duty Law is to equalize
competition between American and foreign manufacturers in
4
order that the latter will not, by reason of governmental or
other assists, have a competitive headstart in producing and
selling products to American consumers. Written before the
economic sophistication associated with the stimulation of
exports in today*s world, the breadth of this simple statute
cuts across a multitude of export assists and subsidies which
characterize the present aggressive competition to promote
exports, and generally stimulate economic activity.
The terms of the statute are mandatory. Whenever a
bounty or grant is found within the meaning of the law, there
shall be levied and paid a countervailing duty. More impor
tantly, the law demands that, "The Secretary of the Treasury
shall from time to time ascertain and determine, or estimate,
the net amount of each such bounty or grant, and shall declare
the net amount so determined or estimated." With the new time
limits enacted as amendments to the Countervailing Duty Law
in the Trade Act of 1974, the mandatory nature of the statute
is amplified. Each valid complaint of unfair subsidies brought
to the attention of the Treasury must now be published promptly
after receipt. A tentative decision on the complaint must now
be made six months after receipt and a final determination is
now required within a 12-month period. If bounties or grants
within the meaning of the law are found, appropriate action
must be taken by the Treasury.
Injury Considerations
Under the law when dutiable merchandise is benefiting
from bounties or grants, there is no need to establish a link
between the imports of subsidized merchandise and injury in
curred by U. S. industry. This feature of the U. S. statute
would contravene GATT Article VI, to which the U. S. is a
signatory, because the GATT permits the imposition of counter
vailing duties only if the subsidized imports cause or threaten
to cause material injury to a domestic industry. The United
States, however, does not have to comply with this GATT Article
by reason of the "Protocol of Provisional Application", better
known as the "Grandfather Clause", which exempts pre-existing,
inconsistent national legislation from the terms of Article VI.
In the Trade Act of 1974, the Countervailing Duty Law was
expanded to cover non-dutiable as well as dutiable merchandise.
With continuing tariff reductions and the implementation of
the Generalized System of Preferences for developing countries,
more and more of our imports will be entering duty free. With
this amendment, the law was revised to require an injury
determination (so long as our international obligations
require such a finding) before countervailing duties can
be imposed on non-dutiable merchandise. With this injury
requirement, the United States maintains formal compliance
with Article VI.
Definition of a Bounty or Grant
The very simplicity of the law confounds a strict
definition of what constitutes a bounty or grant. One
general rule of thumb to judge whether a program is a
bounty or grant is to ascertain whether a foreign economic
program ordinarily contributes to the promotion of exports.
For a more precise delineation, however, one must turn to
the body of precedent accumulated over decades of adminis
tration of the law. In order to provide an idea of the kind
of export assistance programs which have been considered
bounties or grants, I shall cite examples of practices that
Treasury has either directly countervailed or has been pre
pared to countervail.
Direct Subsidies
Whenever payment of a bounty is made according to the
volume or value of the exported merchandise, a direct subsidy
is involved and the countervailing duty is assessed in a like
amount. For example, if the equivalent of $1 per ton is paid
as a premium by a government upon exportation of a raw material,
a countervailing duty will be assessed at $1 per ton.
Multiple Exchange Rates
Sometimes a direct subsidy is found in the form of
multiple exchange rates. A country will grant an exporter
a more favorable exchange rate for dollars received from
exports than the exchange rate which is more generally avail
able for commercial transactions. Treasury has determined
that favoritism of this sort constitutes a bounty or grant.
Tax Rebates
One of the most complex issues in the administration of
the law concerns the treatment of direct and indirect taxes.
The rebate of direct taxes, e.g. income taxes, has long been
recognized as countervailable, and under economic theory and
GATT principles the. assumption is made that a direct tax is
borne by the producer and not the product. Therefore, any
rebate or non-collection of a direct tax results in increased
6
income for the exporter.
In contrast, the rebate or non-collection of indirect
taxes, i.e. sales taxes, excise taxes, etc., which are
directly related to and borne by the product have not been
considered as countervailable. Under the principle of tax
ation by destination, which was adopted in GATT at U. S.
urging, such a rebate is considered justified since the tax
is assumed to be passed forward to the final purchaser.
The rebate of such tax on exports would in theory only
affect the price of the product, and not the profit of
the producer, therefore offering no incentive to export.
Furthermore, under this theory, the product is then subject
to imposition of indirect taxes in the country of importa
tion, thus equalizing the tax burden on it with that borne
by domestic producers.
These theories are no longer accepted by economists
with the same universality as was once the case, and I
personally can see many reasons why "shifting" may not
occur in this way. In addition, two ancient Supreme Court
cases state that any rebate ofwany indirect tax is a bounty
or grant. Nevertheless, Treasury precedents and interna
tional agreements executed subsequent to these decisions
are founded on these principles, subscribed to over a long
period of time, and we cannot therefore lightly discard
them. Furthermore, the measurement of the actual absorption
and pass through of direct and indirect taxes would be
extremely difficult and would be founded on data that would
be tentative, and conclusions that would be arbitrary, at
best. While the latter consideration is of an operational
nature and could be surmounted, the former is an issue for
courts and/or the Congress to review if present policies
are to change.
A major issue in administering present policy is the
treatment of indirect taxes which are either overrebated
or not directly related to the production or manufacture
of the merchandise in question. When a manufacturer receives
10% in tax rebates after having paid indirect taxes of 7%, for
example, this overrebate results in increased income for
the seller and is countervailable.
The rebate or non-collection of indirect taxes which
are not directly related to the production, manufacture or
export of the merchandise has also been considered counter
vailable, since the tax is not deemed to be borne by the
7
product. For example, while taxes on the tanning of the
leather contained in a pair of exported shoes are obviously
directly traceable to the final product, excise taxes on
real estate transactions by a manufacturer of the merchandise
concerned are not. The process of ascertaining that portion
of a tax which is unrelated requires a vast amount of
pertinent business data, which may not always be available.
Indirect Government Assists
Even when a government provides assistance to domestic
producers which is not directly related to exports, a counter
vailing situation may still exist. The type of program to
which I am referring includes development authority grants
of free land or subsidized plant construction, labor training
payments, preferential loans at reduced rates, government
sales of supplies at reduced prices, price support or
guarantee systems and accelerated depreciation provisions,
not solely applicable to exports. Whether or not those
types of subsidies constitute a bounty or grant within the
meaning of the Countervailing Duty Law has turned on the
proportion of production that the plant is expected to or
does in fact export. In the chse of Canadian Steel Belted
Tires for instance, a Countervailing Duty Order was issued
when it was shown that the plants in question which- had
received benefits of this nature were designed to export
about 80% of their output. At the same time, a country
which promotes investment in a plant in an undeveloped
region with a primary view to production for domestic
consumption will probably escape countervailing on these
same subsidies if only a small portion of its output is
exported. Needless to say, there is a gray area here that
must await future decisions for clearer delineation.
One point is often overlooked when discussing counter
vailing duties. The statute specifically includes within
its purview bounties or grants bestowed by non-governmental
sources. So, for instance, an association of producers
which establishes a fund to encourage exports by making
up any losses suffered by members in their export trans
actions would create a countervailable situation. Other
cartel-like arrangements in this area have not yet been
ruled on by the Treasury Department.
8
Time Limits for Determinations
The Trade Act of 1974 establishes strict time limits
for action to be taken under the Countervailing Duty Law.
According to the Act, the Secretary of the Treasury is
required to publish a notice initiating an investigation
upon the filing of a petition alleging the payment of^
bounties or grants and an explanation of this allegation.
I do not consider this provision as calling for the auto
matic initiation of an investigation on the slightest
pretense of an allegation. A substantial prima facie
case will have to be alleged before the normal course of
trade is distracted by a countervailing duty investigation
and the Treasury expends a considerable amount of time and
energy pursuing the petition. Nevertheless, the new law
guarantees that bona fide petitions will be treated expedi
tiously, with the formal initiation of a full-scale
investigation.
The Act requires the Treasury to make a preliminary
determination within six months of a filing of a petition;
final action is required within 12 months. By the nature
of any time limitations on an investigatory process, these
time constraints in the Countervailing Duty Law may present
some administrative difficulties in larger or more complex
cases. This is especially the case when the inquiry is
largely dependent upon factual information within the control
of foreign governments. However, we will make preliminary
and final actions within the maximum periods allotted even
if in some cases investigations cannot be as thorough as we
might like, and failure of foreign governments or exporters
to provide information may require us to rely more than we
might otherwise upon the allegations of the petitioner.
Processing of Old Petitions
Under the Act and its legislative history, we are
required to treat all pending petitions as if received on
the day following enactment (that is, January 4, 1975). We
have already begun processing these pending cases and on
January 15, we published in the Federal Register notices
opening 30 investigations. Four other pending investigations
had formally been initiated prior to enactment. In all of
these cases, preliminary decisions must be made by July 4,
1975, and final determinations by January 4, 1976.
- 9 Future of
Countervailing Duty Law
Although a beehive of activity presently exists regarding
investigations under the Countervailing Duty Law, the law is
also in a state of flux. A new round of GATT-sponsored
negotiations over both tariff levels and non-tariff trade
barriers is about to commence. The authority for the U. S.
participation in these negotiations is provided by the Trade
Act. •! Among the non-tariff distortions to be discussed are
subsidies, or bounties, granted to exporters by their home
countries. Tho object of such a discussion will be to better
define permissible and non-permissible subsidy practices in
international trade. There is, of course, no assurance that
the new negotiations on this subject will be successful. If
these talks do result in an international agreement and if
Congress is in accord with it, the Countervailing Duty Law
may well have to be again amended to bring the U. S. into
conformity.
In the meantime, in order to avoid the difficult problem
of countervailing against arcountry*s subsidies while nego
tiating to determine whether those subsidies are legal,
Congress has provided that for four years following enactment
of the Trade Act countervailing duties need not be imposed,
in the discretion of the Secretary of the Treasury, even
though there has been a determination that bounties or grants
exist. Three tests must be met before the discretionary power
may be used:
1)
The exporting country must take steps to reduce
or substantially eliminate the adverse effect of
the bounty or grant;
2)
Successful non-tariff barrier agreements are
reasonably likely?
3)
Countervailing in the case under consideration
would be likely to seriously jeopardize
negotiations.
The Secretary*s decision not to impose additional duties may
be overridden in either house of Congress by a majority vote
within 90 days after the decision is notified to Congress.
L
- io During these NTB negotiations, our Special Trade
Representative will keep in mind that other countries often
achieve import restrictions and trade distortions in a more
informal manner than our published and open policies. It
reminds me of the old saw about the difference between a
doctor and a lawyer — a lawyer publishes his mistakes,
while a doctor buries his. This country has a way of
publishing those policies which affect international trade,
while other countries often bury theirs in bureaucratic
confidentiality. Be that as it may, during the very delicate
negotiations that are about to begin, we at the Treasury will
be there with our scalpels (some have accused us of using
pickaxes), in order to administer both the law and the
discretionary power not to impose duties as impartially
and as expeditiously as possible.
Deparlm entoflhefUEASlIltY M
TELEPHONE W04-2041
SHINGTON. D C 20220
J
FOR RELEASE
6: 3 0 P.M.
February
RESULTS
Tenders
for
$ 2 . 7 b i l l i o n of
of 2 6 - w e e k T r e a s u r y
were opened
at
OF TREASURY'S
bills,
both
WEEKLY
the F e d e r a l R e s e r v e
to b e
Banks
and
for
$2.5 billion
*
todl
3
/ 3
RANGE OF A C C E P T E D
COMPETITIVE
1975
BILL AUCTIONS
13-week Treasury bills
series
10,
13-week bills
BIDS:
maturing
May
15,
1975
Equivalent
Annual Rate
Price
High
Low
98.549
98.525
Average
98.534
5.740%
5.835%
a/
Tc
a/ E x c e p t i n g
1 tender
of
$20,000
b/ E x c e p t i n g
1 tender
of
$625,000
Tenders
at
the
low price
for
the
13-we
Tenders
at
the
low price
for
the
26-wei
TOTAL T E N D E R S
APPLIED
District
Applied
Boston
$
New York
Philadelphia
Atlanta
Chicago
Accepted
For
$
30, 245, 0 0 0
2 , 2 5 5 , 685 , 0 0 0
62, 725, 0 0 0
29, 4 6 0 , 0 0 0
281, 025, 0 0 0
26, 275, 0 0 0
1 1 4 , 380, 0 0 0
2 5, 120, 0 0 0
8, 270, 0 0 0
Louis
40, 220, 0 0 0
1 0, 2 7 0 , 0 0 0
31, 9 6 5 , 0 0 0
32, 9 4 5 , 0 0 0
City
7
FE!
38, 690 , 0 0 0
2 2, 690, 0 0 0
Minneapolis
é , M ïf/ / z ÿ y S
11 , 100,000
27.100.000
6,845,000
6,745,000
20.820.000
15.820.000
27,530,000
10.030.000
187, 625, 0 0 0
27, 4 4 0 0 0 0
22, 290, 0 0 0
66, 4 7 5 ,00 0
146,035,000
39.335.000
$4, 1 0 6 , 3 6 0 , 0 0 0
$ 2 , 7 0 0 , 2 8 5 ,000
c/$3,794,600,000
Dallas
San F r a n c i s c o
TOTALS
BY
38, 6 9 0 , 0 0 0
36, 6 9 0 , 0 0 0
Richmond
Kansas
FOR AND ACCEPTED
41, 245, 0 0 0
3, 2 9 3 , 4 2 5 , 0 0 0
82, 8 0 0 , 0 0 0
Cleveland
St.
1/
5.800%
$ 2 , 5 0 0 , 4 4 0 , 0 0 0 d/
c/Includes
$378,120,000
noncompetitive
tenders
from
the
public,
d/lncludes
$130,945,000
noncompetitive
tenders
from
the
public.
.1/ T h e s e
yields
rates
are
are 5.97%
on a b a n k - d iscount
for
the
basis.
13-week bills,
The
equivalent
and 6.06%
for
coupon-issue
the. 2 6 - w e e k b i l l s .
j Department of t h e T R E A S U R Y
IsHINGTON. D.C. 20220
FOR RELEASE
T E LE P H O N E W O4-20 4Î
6 : 3 0 P.M.
February
RESULTS
Tenders
for
$2.7 billion
of 2 6 - w e e k T r e a s u r y
were opened
RANGE
at
O F T R E A S U R Y ’S W E E K L Y
bills,
to b e
Banks
issued
today.
13-week bills
BIDS:
maturing
May
15,
on
The
and
High
98.549
Low
98.525
98.534
Average
$2.5 billion
details
13,
are
follows:
1975
Equivalent
Annual Rate
Price
5.740%
5.835%
1/
5.800%
1975,
as
26-week bills
m a t u r i n g August 14
1975
Annual Rate
a/
for
February
Equivalent
Price
1975
BILL AUCTIONS
13-week Treasury bills
series
the F e d e r a l Res e r v e
OF A C C E P T E D
COMPETITIVE
of
both
10,
97.094 b/
5.748%
97.051
5.833%
97.068
5.800%
Ì/
a/ Excepting 1 tender of $20,000
b/ Excepting 1 tender of $625,000
Tenders
at
the
low price
for
the 13-week bills were
allotted
£%.
Tenders
at
the
low price
for
the 26-week bills
allotted
18%.
TOTAL T E N D E R S
APPLIED
District
Applied
Boston
$
New York
FOR AND ACCEPTED
For
BY
FEDERAL RESERVE DISTRICTS:
Accepted
41.245.000
$
were
Applied
30,245,000
$
For
20,035,000
3,183,670,000
Accepted
$
6,685,000
2,230,770,000
293.425.000
2,255,685,000
Philadelphia
82.800.000
62.725.000
Cleveland
38.690.000
38.690.000
17.335.000
78.730.000
Richmond
36.690.000
22.690.000
9.875.000
8.875.000
Atlanta
29.460.000
26.275.000
9.750.000
9.750.000
Chicago
281.025.000
114,380,000
246.875.000
107,265,000
40.220.000
25.120.000
27.100.000
Minneapolis
10.270.000
8,270,000
6.845.000
6.745.000
Kansas
31.965.000
32.945.000
27.440.000
22.290.000
20.820.000
15.820.000
27,530,000
10.030.000
187.625.000
66.475.000
146.035.000
39.335.000
$4,106,360,000
$2,700,285,000
c/$3,794,600,000
St.
Louis
City
Dallas
San F r a n c i s c o
TOTALS
c/Includes
$378,120,000
noncompetitive
tenders
d/Includes
$130,945,000
noncompetitive
tenders
.1/ T h e s e
yields
rates
are
are 5.97%
on a b a n k - d iscount
for
the
basis.
13-week bills,
The
15.335.000
38.730.000
11 .100.000
$2,500,440,000d/
from the public,
from the public.
equivalent
and 6.06%
for
coupon-issue
the. 2 6 - w e e k b i l l s .
op
Department of
theTREASURY
WASHINGTON, D.C. 20220
T E L E P H O N E W 04-2041
178Ì
I
MEMORANDUM FOR CORRESPONDENTS :
v
February 10,1975
Attached is a news release issued jointly by the
Treasury Department and the Department of Housing and
Urban Development dealing with Arbitrage Housing Bonds
i i
\
2
The
U
parenthetical phrase was added to this definition, among
other changes, by the 1974 amendment.
On January 22, 1975, HUD expressed to interested parties
and to Treasury its view that section 3(6), as amended, had
not yet been implemented and that, accordingly, the bonds in
question were not entitled to the exemption provided in
section 11(b).
Further, where bond proceeds will not be used
principally for project construction but, instead, for arbitrage,
it is the position of each Department that issuance of the bonds
is not in connection with a low-income housing project.
In view of the difficulties which would arise if it were
necessary to reverse closed transactions where bonds have been
delivered, and in view of the possibility of good faith reli
ance in some of these closed transactions, it has been decided
that HUD will make section 3(6) effective with respect to such
transactions.
HUD expects to issue regulations under which it
will implement sections 3(6) and 11(b) as to such bonds sold
and delivered prior to 5:00 P.M., January 22, 1975, and under
which use of the proceeds of these issues will be deemed to be
in connection with low-income housing so that the section 11(b)
exemption will apply to such bonds.
Under regulations to be
issued by HUD, bonds which are sold or delivered subsequent to
January 22, 1975, will be tax exempt under section 11(b) only
if the public housing agency and the low-income housing project
have been approved by HUD and the amount of the obligations
does not exceed the estimated reasonable development cost of
the low-income housing project and the reasonable expenses of
issuing the bonds.
Co
The Treasury Department and the Department of Housing
and Urban Development ("HUD") have received inquiries from
bond counsel concerning the Federal income tax status of interest
payable on certain bonds issued by nonprofit corporations with
opinions of counsel that the interest is exempt from Federal
income tax under section 11(b) of the United States Housing Act
of 1937, as amended by the Housing and Community Development
Act of 1974.
Typically, most of the bond proceeds are placed
in a reserve and invested at a yield well in excess of the bond
yield, and the principal and interest on the bonds are payable
from, and secured by, this reserve. Of the remaining bond pro
ceeds as much as half may be applied to pay fees of promoters
and others while the rest is used for project construction.
HUD and Treasury are concerned about the efficiency of the
construction financing and the arbitrage effects under such
arrangements.
Section 11(b) provides in part as follows:
"... obligations, including interest thereon, issued by
public housing agencies in connection with low-income
housing projects shall be exempt from all taxation
now or hereafter imposed by the United States whether
paid by such agencies or by the Secretary [of Housing
and Urban Development]".
Section 3(6) of the Housing Act, as amended, provides that
the term "public housing agency" means:
"... any State, county, municipality, or other govern
mental entity or public body (or agency or instrumentality
thereof) which is authorized to engage in or assist in
the development or operation of low-income housing . .."•
L p o r im e n t of th e T R E A S U R Y
ISHINGTON, D .C . 20 220
■ TTELEPHONE
H w > nn»iF u
i n ^ n n
W04-2041
îf
IH-
\
\
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE SENATE FINANCE COMMITTEE
WASHINGTON, D. C,
Monday, February 10, 1975
(Petroleum Import Fees)
Mr. Chairman and Members of this Committee:
I welcome the opportunity to testify before this
distinguished Committee on the pressing problem of petroleum
imports. Since two of my colleagues in the Administration,
Mr. Lynn and Mr. Zarb, will also be speaking to you this
morning on this subject, I will confine my opening remarks
to the legal and economic justifications for the President's
plan for oil import fees and I will also touch briefly on
the Green bill, H.R. 1767.
Legal Authority
As you know, the President recently signed Proclamation
No. 4341 authorizing increases in the fe;es on imported oil.
His authority for signing that proclamation is contained in
Section 232 of the Trade Expansion Act of 1962, as amended by
the recently enacted Trade Reform Act of 1974.
Section 232 provides that if the Secretary of fhe
Treasury, after appropriate investigation, finds that an
article is being imported into the United States in such
quantities or under such circumstances as to threaten to
impair the national security, he should promptly advise the
President of that fact. Unless the Preisidint determines to
the contrary, he must "take such action, and for such time, as
he deems necessary to adjust the imports of such article
and its derivatives so that such imports will not threaten
to impair the national security."
As you can tell, this is a broad grant of authority
that includes the authority to impose quotas, license fees
and other types of import restrictions.
WS-221
2
Section 232 also provides that the Secretary of the
Treasury shall, if it is appropriate and after reasonable
notice, hold public hearings or otherwise afford interested
parties an opportunity to present information and advice
relevant to a national security investigation. Treasury
Department regulations, implementing the national security
provision, allow an exception to procedures for public
comment when, in the judgment of the Secretary of the.
Treasury, national security interests require that these
procedures be dispensed with.
On January 4, in accordance with Treasury Regulations,
I/directed Assistant Secretary for Enforcement, Operations
'and Tariff Affairs, David R. Macdonald, to initiate an
investigation to determine the effects on national security
of imports of petroleum and petroleum products. I also
determined that it would be inappropriate to hold public
hearings and that national security interests required that
the procedures for public comment under the regulations not
be followed. I decided to proceed in this manner because I
believed that the national security required an immediate
determination and action with regard to petroleum imports.
In addition, a number of public investigations and hearings
on the effect of petroleum imports had already been carried
out during the past, year, and the results of these
investigations had been made generally available to the public.
The Attorney Generali, whose opinion I requested, concluded
that to proceed without public hearing was fully consistent
with both the spirit and the letter of the law.
V-'- • '
l\
EpSSl ‘.if'-
I I
'•
.§ ; :
.
m ,|
As you know, the authority of the President to issue
the Proclamation and my authority to proceed with the
investigation and report without public hearings has been
challenged in the courts. Since the matter is properly before
the courts, it would not be proper for me to discuss it
any further here.
Based on the report that I received from Mr. Macdonald
after his investigation as well as my own knowledge of the
situation, I reported to the President that crude oil and
petroleum products are being imported into the United States
in such quantities and under such circumstances as to threaten
to impair the national security.
National Security
As I have noted, the test which must be met under
Section 232 of the Trade Expansion Act of 1962, in order
to authorize such trade restrictions is that petroleum
"is being imported into the United States in such
quantities or under such circumstances as to threaten to
impair the national security," In making a determination
under the statute, the Secretary of the Treasury takes into
consideration a number of factors, probably the most
important of which is that the economic welfare of the
country is closely tied to the national security of the
country.
The facts which, in my view, amply justify the
national security finding in this case are these:
(1)
Petroleum is a unique commodity, entering into
almost every facet of our economy, either as
the fuel for transportation of goods and people
or as the raw material for a myriad of products
like fertilizer and petrochemicals. It is
hardly an exaggeration to say that petroleum
has become the lifeblood of our economy.
(2)
Because our demands for energy have been
outstripping the growth in domestic production,
we have become increasingly reliant upon
foreign sources of oil. We are now importing
about 401 of our total petroleum consumption;
by 1985, if present trends continue, we would
be dependent on foreign nations for more than
half of the oil we consume.
(3)
Only a small portion of these imports can be
deemed to be secure from interruption in the
event of a political or military crisis, and
recent history strongly indicates that such a
crisis is by no means a remote possibility in
an area where two-thirds of the world's known
petroleum reserves are located.
(4)
Most of the countries which export the oil that
we import are organized into a cartel which
has managed to raise international oil prices
to a level four times above that which prevailed
prior to the 1973-74 embargo.
4
(5)
The outflow of U.S. funds to those oil-rich
countries greatly enhances their economic and
political power and weakens our own and that
of our allies. In 1970 our total bill for
foreign oil was $2.7 billion. In 1974, that
figure shot up to approximately $24 billion,
and unless we act to restrict imports, theA
bill will rise within a short time to over
$30 billion a year.
(6)
At the present time, we cannot safely stop the
import of all petroleum to this country. We can,
however, reduce our imports by one million
barrels a day without significantly damaging
our economy.
Mr. Chairman, after reviewing these facts, it was clear
to me -- as it is to most Americans -- that immediate action
was needed to reduce our reliance on imported petroleum and
that a failure to take prompt action would indeed severely
threaten our national security.
Policy Implications
Underlying all of the difficult economic and energy
decisions required in preparing the President's program has
been the need to turn away from the policies that have helped
to create our current difficulties. We must reduce imports
of expensive and insecure foreign oil and increase the
production of our own resources so that by 1985 this Nation
will no longer be vulnerable to an energy embargo.
The President's initial goal is to reduce our oil imports by
one million barrels a day by the end of 1975 and by two
million barrels a day before the end of 1977. He is calling
for swift action so that we can prove our willingness and
capacity to act decisively in the face of our national security
threat, thereby regaining control of our economic destiny.
While the process of attaining greater self-sufficiency
will require the long-term development of various energy
resources, we must rely heavily upon conservation in the
short run. It will take years to develop many of these
potential energy sources -- too long a period for us to wait
to reduce our reliance on foreign supplies.
The President recognized that we face essentially three
choices in the field of conservation.
5
First, we could continue along our present course of
doing nothing, but as I have said, that option is clearly
unacceptable.
A second choice is to ration fuels, but this also
presents intolerable objections. The basic problem with
rationing is that it cannot be done fairly and practically.
Every family, every car and motorcycle, every store, school,
church, and business -- everything and everybody -- would
have to obtain a permit for gasoline, electricity, and
natural gas. Those allocations would have to be changed
every time someone was born or died or moved or got married
or divorced, and every time a business was started, merged,
or sold, and even when the church or school added a room.
When we consider the problems of just getting the mail
delivered, are we really ready to trust an army of civil
servants--however able and well-intentioned--to decide who gets
what? Rationing may be appropriate for temporary emergencies
arising from a war, but it is hardly suitable for the 5-10
year period tht would be required to meet the current oil
challenge.
The third choice is to employ the pricing system as
a mechanism for both discouraging consumption and encouraging
production. This is the alternative the President has
chosen -- wisely so, in my judgment. The President made this
decision with full recognition that energy prices would
increase and we would suffer a small, one-time rise in the
rate of inflation, but he has coupled the price increases
with changes in the tax structure that should compensate
most energy users, especially low and moderate income families,
and should also prevent energy producers from realizing
windfall profits. This is a sound, thoughtful approach, and
I hope that the Members of the 94th Congress will ultimately
recognize its wisdom.
Under the proclamation recently signed by the President,
an increase of $1 a barrel in the fee on imported crude oil
went into effect on February 1. That fee will be increased
to $2 on March 1 and to $3 on April 1. Increases of up to
a maximum of $1.20 per barrel are being imposed on refined
oil, or what is known as petroleum products. It is estimated
that these fees will increase average petroleum prices by
about 3-1/2 cents per gallon. It is also assumed that these
fees would be reduced to $2 a barrel when the President’s
legislative package is acted upon.
6
It is worth asking what economic risks, if any, are
created by the decision to increase the import fees on
crude oil and petroleum products. Possible risks include:
(1) that the increased taxes might constrict the entire
economy by reducing the available purchasing power of
individuals and businesses; (2) that the timing of the tax
collections and the offsetting reductions might not be
coordinated properly; (3) that geographic or specific^
industry inequities might result; and (4) that the increased
fees might significantly increase inflationary pressures.
Let me address each of these problems in turn.
Our best estimate, based on various economic projections,
is that the President's total energy package would raise
energy costs by about $30 billion. However, the program
should effectively overcome any depressant effects by
returning that entire amount back into the economy. Of this
sum, $19 billion would be returned to individuals, $6 billion
to businesses and $2 billion to State and local governments.
The final $3 billion represents increased costs of the Federal
Government. The proposed changes in taxes for individuals are
designed to favor low- and middle-income families. In fact,
those who pay no income taxes will receive $2 billion in
benefits.
Nor is the phasing of the collection and redistribution
of the import fees an insurmountable problem. As indicated
in Table 1, the import fees are expected to total only $200
million during the first three months of 1975. The fees
would increase to $400 million under the administrative
authority and $700 million under the new legislation requested
by the President. Fees of $900 million are projected for the
third and fourth quarters of 1975. The redistribution of these
fees through the income tax system can begin in June of 1975
if the necessary legislation is enacted quickly. Therefore,
the potential collection of fees prior to getting the
redistribution started should not be a major problem.
As shown below, the net effect of the entire energy tax
redistribution and temporary tax cut proposed by the President
is clearly stimulative in every quarter after the first (in
which the amount is negligible in a $1500 billion economy):
Energy Taxes
Timing of Direct Budget Impact
(Dollars in Billions)
1975
I
II
III______ IV
+0.2 +4.1
+12.6
+7.6
Redistribution and
Temporary Tax Cut
-0.0 -9.8____-20.2
-10.8___
Net Effect
+0.2 -5.7
- 7.6
- 3.2
(Negative figures indicate amount of stimulus to
the economy.)
As to the third risk involving geographic and industry
sector inequities, the President and his energy advisers
have repeatedly emphasized that they will work to even out
such distortions wherever possible. The meetings that have
been held with various governmental and industry representatives
are good examples. More specifically, the "Old Oil
Entitlements" program of the Federal Energy Administration
will be utilized to spread price increases on crude oil among
all refiners and to lessen disproportionate regional effects,
as in New England, or in any specific industries or areas of
human need where oil is essential. In order to overcome
any severe regional impacts in areas which are especially
dependent on imports, imported products will receive a fee
rebate corresponding to the benefit that would be obtained
under the "Old Oil Entitlements" program.
The fourth problem that I raised is the question of
the inflationary impact of the energy package. There can be
no doubt that the possible effects on prices are difficult
to determine. Our most reliable estimate is that the entire
energy package is expected to cause a one-time increase m
the consumer price indexes of approximately 2 percent.
This estimate combines the direct and indirect effects of
the entire $30 billion energy conservation taxes and fees
package. It assumes that all of the increases in fees and
excise taxes are passed through to the final users; of energy
(both businesses and consumers) and, further, that there are
no secondary effects in the form of increases in profit
margins or increases in wages.
The 2 percent figure is, of course, an estimate, and
thus an uncertain figure, but we believe that it is
reasonable. In Calendar Year 1975 the import fees are expected
to total $3.1 billion or 12.7 percent of total energy tax
receipts in that year. In Calendar Year 1976 the import
fees are projected to be $4.1 billion or 13.6 percent of the
total. Therefore, the potential inflationary impact of the
oil import fee part of the energy package is small.
I recognize that the 2 percent estimate has been widely
challenged. Some say it is too low, others claim it is too
high. Those who believe the inflationary effect will be less
than two percent contend that the rise in energy prices is a
relative price increase only -- that is, because the energy
part of the President’s program does not change some of the
basic determinants of inflation (such as the overall operating
rate of the economy, or fiscal policy, or the money supply),
prices of things other than energy will have to rise less
than they otherwise would, which will partly offset the
overall inflationary impact of the energy package.
8
Those who believe the price impact of the energy policy
actions will be more than 2 percent believe that there will
be substantial secondary effects -- in other words, that a
pyramiding of profit margins will take place as the excise
taxes are passed through the refining and distribution system.
Moreover, they foresee that the energy price increases will
cause wage settlements to escalate further, and the higher
wage costs will then feed back through the system in the form
of higher prices.
We believe, on the contrary, that there will be little
margin pyramiding and little effect through the wage side.
Let me explain why. First, with unemployment at 8 percent
or more this year and the product markets comparably weak,
economic conditions are not at all conducive to either a
further escalation in the wage trend, or a pyramiding of margins.
Second, since for the economy as a whole the individual and
corporate income tax reductions offset the excise tax increases,
the typical employee and the typical corporation are left no
worse off than before and, thus, do not feel pressures that
might cause them to demand higher profits margins or still
larger boosts in pay.
Furthermore, I think it is very important to stress that
this price increase is a one-time event. The great bulk of
the increased energy prices will be felt within this calendar
year. No further inflationary effect will take place in
future years. The ongoing rate of inflation, therefore, should
not be permanently affected by this policy.
H.R. 1767
In conclusion, Mr. Chairman, I would like to comment
on H.R. 1767, the bill recently passed by the House. H.R. 1767
would effectively rescind the President's oil import
proclamation, and for 90 days after its enactment would also
abrogate the authority of the President to use Section 232 of
the Trade Expansion Act, or to use any legal provision, in
order to "adjust imports of petroleum or any product derived
therefrom." In other words, by enacting H.R. 1767, the House
of Representatives, without any assurance that Congress would
adopt a conservation plan to counteract the problem of petroleum
imports, would strip the President for 90 days of all his
authority to take any action whatsoever on behalf of the
country to solve the import problem.
9
The bill passed by the House of Representatives does
preserve the right of the President to act "under certain
circumstances involving the United States armed forces
engagement in hostilities." But armed warfare is not the
crisis that now faces us. What if the oil exporting
countries were to impose a selective embargo on some
consuming nations only, or increase the price of oil by 50
percent over its present level, or take some other unforeseen
action? Unless the Congress were to immediately rescind this
bill, it would paralyze the President from responding to any
kind of additional threat short of armed hostilities.
In other words, H.R. 1767 replaces leadership with vacuum.
We have already delayed for well over a year in finding
a solution to a problem that we all knew existed. Each day
of additional delay drains our strength and our capacity to
act effectively. Each day of delay leaves the OPEC nations
with a knife at our throat. To delay for at least 90 more
days without solid assurance of a viable energy program at
the end of that period is unconscionable.
Finally, our failure to take affirmative action in
this situation must be viewed by allies and adversaries alike
as a demonstration of American vulnerability and weakness,
due to domestic divisiveness in the face of a new kind of
foreign policy challenge. Decisive action is essential.
We have signalled our intention to move toward energy
self-sufficiency and have demonstrated with action the
strength of our commitment. We urge the Congress to cooperate
with us in this venture, so that together we may provide the
leadership that our country needs at this critical hour.
Attachment
Table 1
oOo
Table
Direct
Budget
Impact
of
the
1
President's
Economic
and Energy
Proposals
_______________________________________ ($ b i l l i o n s ) _______________________________ ________
:
C a l e n d a r Y e a r s ______________
1975
I
nergy
___________:__________________ 1 9 7 6
: III
:
II
I
IV
:
IV
II
: III
+1.1
+0.9
+0.9
+0.9
+1.1
+1.1
+1.3
+1.6
+1,6
+1.8
+ 1 o8
+ 1 •8
+1.8
+1.7
+2.1
+2.1
+2.0
+2.2
+2.2
+2.4
—
+8.0
+3.0
+2.9
+2.4
+2.4
+2.3 !
+7.5
-6.4
taxes :
Oil
import
Oil
fees
excise
Natural
. . . . . . . . . ... .
. . . . . . ....... ..
excise
profits
Subtotal
.eturn of
tax
gas
Windfall
to
:
......
—
........
—
tax
tax
+0.2
o*000000««*0«0090«
energy
N o n t a x p a y e r s ....... .
State and local governments
femporary
Government
tax cut
Office
the
+7.6
+7.6
+7.5
-9.0
-5.6
-7.9
--
-6.3
.
—
-3.2
-9.0
—
—
-0.5
"■•*
-2.0
--
+0.2
—
.............
......... ..... •
let e f f e c t ....... ............. .
pffice o f
+4.1 +12.6
+7.5
+1.0
tax revenues
economy:
T a x r e d u c t i o n ............... .
Federal
+0.2
—
.
Secretary
of T a x Ana l y s i s
of
the
Treasury
-2.0
--
-0.5
-0.5
-0.5
-0.5
-0.5
-0.8
-0.7
-0.8
-0.7
-0.8
-0.5J
-0.7
-6.1
-7.9
-0.6
-0.8
-0.9
1*
—
-5.7
-7.6
-3.2
-
0.1
-2.5
-2.1
-0,1
February
6,
—
—
1975
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Date:
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"The Today Show" Interview with Treasury Secretary William Simon
Date:
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D epartm en t th e T R E A S U R Y
TELEPHONE W04-2041
HINGTON, D.C. 20220
For i n f o r m a t i o n o n
FOR I M M E D I A T E
submitting
tenders:
TELEPHONE W04-2604
RELEASE
February
TREASURY TO AUCTION
The T r e a s u r y w i l l
auction
and up to
$1.5 b i l l i o n
issued a t
the average price
Fe d e r a l R e s e r v e B a n k s
monetary a u t h o r i t i e s .
The notes
to be
Treasury Notes
of
to
the public
of
up
to
$1.5 b i l l i o n of
Additional
accepted
themselves
tenders
and
as
amounts
of
to G o v e r n m e n t
agents
of
and
of
Series L-1976
of
The notes wi l l
$10,000,
Series
be
dated March
F-1977
issued
$100,000
designated b i d d e r s .
for t h e n o t e s m a y
3,
1975,
dated March
3,
due August
on August
to
1975*,
in r e g i s t e r e d
and
$1,000,000.
Deliverv
not
be made
and bearer
They will
be
form
31,
Washington,
through
accounts.
D.
C.
20226;
provided,
2 8,
1975,
in d e n o m i n a t i o n s
issued
be made
loan
1975,
due February
of b e a r e r n o t e s w i l l
tax and
31,
3 1,
on March
however,
of
in b o o k-entry
3,
T e n d e r s f o r t h e n o t e s w i l l b e r e c e i v e d u p to 1 : 3 0 p.ip., E a s t e r n
Wedn e s d a y , F e b r u a r y 1 9 , a t a n y F e d e r a l R e s e r v e B a n k o r B r a n c h a n d a t
the P u b l i c D e b t ,
and
international
a u c t i o n e d w i l l be:
1977 (CUSIP No. 9 1 2 8 2 7 EF5) w i t h i n t e r e s t p a y a b l e o n A u g u s t
F e b r u a r y 29, 1 9 7 6 , A u g u s t 3 1 , 1 9 7 6 , a n d F e b r u a r y 2 8, 1 9 7 7 .
$5,000,
18-month notes
these notes may be
accounts
foreign
1976 (CUSIP No. 9 1 2 8 2 7 EE8) w i t h i n t e r e s t p a y a b l e
F e b r u a r y 2 9, 1 9 7 6 , a n d A u g u s t 31, 1 9 7 6 , a n d
Treasury Notes
1975
$3.0 BILLION OF NOTES
2-year notes.
for
11,
form
1975.
to
Payment
S t a n d a r d time,
the B u r e a u of
that noncompetitive
tenders w i l l b e c o n s i d e r e d t i m e l y r e c e i v e d i f t h e y a r e m a i l e d t o a n y s u c h a g e n c y
under a p o s t m a r k n o l a t e r t h a n F e b r u a r y 18.
T e n d e r s m u s t b e in th e a m o u n t of
$5»000 o r a m u l t i p l e t h e r e o f a n d m u s t s t a t e t h e y i e l d d e s i r e d , i f
tender, o r t h e t e r m " n o n c o m p e t i t i v e " , i f a n o n c o m p e t i t i v e t e n d e r .
a competitive
Competitive tenders m u s t b e e x p r e s s e d in terms of a n n u a l y i e l d in two d e c im a l
places, e . g . , 7 . 1 1 , a n d n o t i n t e r m s o f a p r i c e .
T e n d e r s at the l o west yields, a nd
noncompetitive tenders, w i l l b e
offered.
After a determination
yield w i l l b e
determined
to m a k e t h e a v e r a g e
interest
that wi l l
interest r a t e s ,
for
each
accepted
be
paid
the price
a c c e p t e d to t h e e x t e n t r e q u i r e d
is m a d e as to w h i c h t e n d e r s a r e
issue
prices
on all
on
each
to
the nearest
100.00 or
of
the
less.
of
1 percent
Those will
securities
competitive
1/8
to attain
accepted,
of
tender
each
be
the
issue.
necessary
rates
Based
allotted will
be
the amounts
a coupon
of
on
such
determined
nnd e a c h s u c c e s s f u l c o m p e t i t i v e b i d d e r w i l l p a y t h e p r i c e c o r r e s p o n d i n g t o t h e
Yield h e b i d .
P r i c e c a l c u l a t i o n s w i l l be c a r r i e d to thr e e d e c i m a l p l a c e s on the
nsis o f p r i c e
0
per hundred,
the T r e a s u r y
shall be
an 9 9 . 7 5 1 w i l l
the a v e r a g e p r i c e
not
of
be
e.g.,
final.
accepted.
accepted
99.923,
Tenders
and
at
the determinations
a yield
that will
Noncompetitive bidders will
competitive
tenders;
of
the
produce
be
Secretary
a price
required
the price will be
100.00
or
Fractions m a y not be used in tenders.
The notation "TENDER FOR TREASURY
°u d b e p r i n t e d a t t h e b o t t o m o f e n v e l o p e s i n w h i c h t e n d e r s a r e s u b m i t t e d .
(Over)
less
to p a y
less.
NOTES"
!
-2The
any
be
or
Secretary
all
of
tenders,
final.
Subject
the Treasury expressly
in whole
to
or
in part,
reserves
and his
the right
action
in a n y
these reservations noncompetitive
for eac h issue of notes
c o m p etitive tenders.
will be
accepted
in
full at
to a c c e p t
o r r e ject
such respect
tenders
for
the average
shall
$ 5 0 0 , 0 0 0 o r less
price
of accepted
C o m m e r c i a l b a n k s , w h i c h f o r t h i s p u r p o s e a r e d e f i n e d a s b a n k s a c c e p t i n g demand
d e p o s i t s , a n d d e a l e r s w h o m a k e p r i m a r y m a r k e t s i n G o v e r n m e n t s e c u r i t i e s a n d report
d a i l y to th e F e d e r a l R e s e r v e B a n k of N e w Y o r k t h e i r p o s i t i o n s w i t h
m e n t s e c u r i t i e s an d b o r r o w i n g s thereon, m a y submit tenders for the
customers,
will
own
not
provided
be
the names
permitted
to
of
submit
the
customers
tenders
except
are
set
for
their own
forth
in
respect
account
such
t o Govern
of
tenders.
Others
account.
T e n d e r s w i l l b e r e c e i v e d w i t h o u t d e p o s i t f r o m c o m m e r c i a l a n d o t h e r b a n k s f o r theiij
a c c o u n t , F e d e r a l l y - i n s u r e d s a v i n g s a n d l o a n a s s o c i a t i o n s , S t a t e s , p o l i t i c a l sub
divisions
funds,
foreign
ment
or
instrumentalities
international
central banks
securities
tions with
Banks, and
and
thereof , public pension
organizations
and
foreign
report
daily
respect to Government
Government accounts.
5 percent of the face
in p a y m e n t o n t e n d e r s
to
find
it n e c e s s a r y
the
time
will
not
be
1975.
Payment for accepted
P a y m e n t m u s t b e in
sent
States,
to
and
the United
dealers who make
the Federal
retirement
and
o t h e r public}
States holds membership,
Reserve
primary markets
B a n k of N e w Y o r k
i n G ov e rn
t h e i r p o s i-
submit
full payment
pertaining
to b i d d e r s w h o
to
for
checks
submit
the notes wit h
as h e reinafter
noncompetitive
their
set
tenders
forth.
i n o r d e r to
A l l o t m e n t notices!
tenders.
t e n d e r s m u s t b e c o m p l e t e d o n o r b e f o r e M o n d a y , M a r c h 3,
c a s h , i n o t h e r f u n d s i m m e d i a t e l y a v a i l a b l e t o t h e Treasury
b y t h e p a y m e n t d a t e o r b y c h e c k d r a w n t o t h e o r d e r o f t h e F e d e r a l " R e s e r v e B a n k to
w h i c h t h e t e n d e r i s s u b m i t t e d , o r t h e U n i t e d S t a t e s T r e a s u r y i f t h e t e n d e r is s u b m it^
t o it, w h i c h m u s t b e r e c e i v e d a t s u c h b a n k o r a t t h e T r e a s u r y n o l a t e r t h a n :
(1) W e d n e s d a y , F e b r u a r y 2 6, 1 9 7 5 , i f t h e c h e c k i s d r a w n o n a b a n k i n t h e F e d e r a l
Reserve
District
of
the Bank
Reserve
District
in
case
check
is
drawn
on
of
to w h i c h
t h e c h e c k is
the Treasury,
or
a bank in another district.
submitted,
(2) M o n d a y ,
Checks
or
February
received
t h e F i f t h Fe d e ral
24,
after
1975,
the
if the
d a t e s set
f o r t h i n t h e p r e c e d i n g s e n t e n c e w i l l n o t b e a c c e p t e d u n l e s s t h e y a r e p a y a b l e at a
F e d e r a l Re s e r v e Bank.
W h e r e f u l l p a y m e n t i s n o t c o m p l e t e d o n t i m e , t h e allotm ent wilf
be c a n c e l e d an d the d e posit w i t h the tender up to 5 p e r c e n t of
a l l o t t e d w i l l b e s u b j e c t to f o r f e i t u r e to t h e U n i t e d States.
Commercial banks
collateralized
r e q u i r e d to b e
are
prohibited
from making unsecured
the amount
loans,
or
o f notes
loans
in w h o l e or in p a r t b y t he n o t e s b i d for, to c o v e r t h e d e p os it s
p a i d w h e n t e n d e r s a r e e n t e r e d , a n d t h e y w i l l b e r e q u i r e d t o make the
usual certification
m a k i n g such loans.
to
that
effect.
Other
lenders are
requested
to
refrain
from
A l l b i d d e r s a r e r e q u i r e d t o a g r e e n o t t o p u r c h a s e o r t o s e l l , o r t o m a k e any
a g r e e m e n t s w i t h r e s p e c t t o t h e p u r c h a s e o r s a l e o r o t h e r d i s p o s i t i o n o f t h e notes
f o r u n d e r t h i s o f f e r i n g a t a s p e c i f i c r a t e o r p r i c e , u n t i l a f t e r 1 : 3 0 p . m . , Eastern
bid!
Standard
time,
j
s e c u r i t i e s a n d b o r r o w i n g s t h e r e o n , F e d e r a l Reserve
T e n d e r s f r o m o t h e r s m u s t b e a c c o m p a n i e d b y p a y m e n t of
a m o u n t o f n o t e s a p p l i e d for.
H o w e v e r , b i d d e r s w h o s u b m i t checks
s u b m i t t e d d i r e c t l y t o a F e d e r a l R e s e r v e B a n k o r t h e T r e a s u r y may}
meet
limits
in w h i c h
Wednesday,
February
19,
1975.
FOR IMMEDIATE RELEASE
February 12, 1975
TREASURY ANNOUNCES MODIFICATION OF
DUMPING FINDING ON TELEVISION RECEIVING SETS
FROM JAPAN
Assistant Secretary of the Treasury David R. Macdonald
announced today a Modification of Dumping Finding on
television receiving sets from Japan with respect to one
company. Notice of this action will appear in the Federal
Register of Thursday, February 13, 1975.
For the reasons stated in the "Notice of Tentative
Determination to Modify or Revoke Dumping Funding" pub
lished on August 15, 1974, television receiving sets
from Japan are no longer being, nor likely to be, sold
in the United States at less than fair value by the
Sony Corporation of Japan.
During the period of November 1972 through October
1973, imports of Sony television sets were valued at
$82 million. During calendar year 1973, imports of all
television sets from Japan were valued at $276 million.
SHINGTON, D.C. 20220
T ÌL E P H O N E W 04 2041
FOR IMMEDIATE RELEASE
February 12, 1975
TREASURY ISSUES PRELIMINARY DETERMINATION
IN COUNTERVAILING DUTY INVESTIGATION OF
NON-RUBBER FOOTWEAR FROM ARGENTINA
Assistant Secretary of the Treasury David R. Macdonald
announced today the issuance of a preliminary negative
determination in a countervailing duty investigation with
respect to non-rubber footwear from Argentina. This notice
states payments were made by the Government of Argentina
upon the exportation of non-rubber footwear which would
have constituted a bounty or grant within the meaning of
the countervailing duty law. After consultations with
Treasury, however, the Argentine Government has abolished
for footwear producers the program under which such pay
ments were made.
Action in this case was taken under Section 303 of
the Tariff Act of 1930, as amended (19 U.S.C. 1303).
Under this section the Secretary of the Treasury .is required
to assess an additional duty equal to the amount of a
"bounty or grant" paid or bestowed on merchandise imported
into the United States. The Determination, which will
appear in the Federal Register of February 18, 1975, states
that an export loan program has been proposed by the
Government of Argentina which does not appear to be a
payment or bestowal of a bounty or grant.
The preliminary determination will be followed by
a period, which could extend until January 4, 1976, during
which the programs of the Argentine Government relating
to the export of footwear will be kept under close obser
vation by the Treasury Department. At the end of this
period a final determination would be issued.
Interested persons will have an opportunity to sub
mit their views on the preliminary action before Treasury
makes a final determination in this case.
SUMMARY OF LENDING ACTIVITY
January 27-February 7, 1975
Federal Financing Bank lending activity for the period of
January 27 through February 7 was as follows:
On January 30, 1975, the Federal Financing Bank purchased $200
million of 5-year Tennessee Valley Authority Power Bonds at an
interest rate of 8.05%. The purpose of this loan was to refund $130
million maturing with the FFB on January 30, 1975.
Also on January 30, the Student Loan Marketing Association
(Sallie Mae) borrowed $100 million from the FFB; $25 million at 6.48%
maturing July 31, 1975, $25 million at 6.70% maturing January 29,
1 9 7 6 , and $50 million at 6.80% maturing May 111 1976.
The funds were
used to refund $100 million of notes maturing with the Bank.
On January 31, the FFB closed the following transactions:
The purchase of $500 million of Certificates of Beneficial Owner
ship from the Farmers Home Administration at an interest rate of 7.80%
on an annual basis.
Advanced $2.23 million to the Oglethorpe Electric Membership
Corporation at 7.151 and maturing February 2, 1977. The loan is
guaranteed by the Rural Electrification Administration.
The purchase of a series of Government of Guyana notes from the
Overseas Private Investment Corporation at a price of $5.4 million.
The notes mature serially out to January 2, 1988. The effective rate
To the FFB is 8-3/81,
On February 3, the Federal Financing Bank signed a $600 million
[commitment with the Department of Defense to purchase guaranteed notes
lssued by foreign borrowers. On the same day, the bank purchased,
under this commitment, a $35 million Government of Turkey note, gua
ranteed by the Department of Defense, at an interest rate of 7.75%.
ue note will be repaid in installments with the final maturity
January 1 , 1984.
On
rate of
ranteed
HI be
February 7, the FFB purchased a $13 million note at an interest
8% from Harbison Development Corporation, a new community gua
by the Department of Housing and Urban Development. The loan
repaid in installments with the final maturity January 31, 1995.
*. Federal Financing Bank loans outstanding on February 7, 1975 total Jy
f -3 billion. Unfilled commitments total $4.4 billion.
Department o f t h e f R E A S U R Y
%
FOR IMMEDIATE RELEASE
February 12, 1975
PARSKY LEADS U.S. DELEGATION TO RUSSIA
Gerald L. Parsky, Assistant Treasury Secretary for
Trade, Energy and Financial Resources Policy Coordination,
is heading a U.S. delegation of trade and economic experts
for meetings in Moscow February 12-14. These meetings will
focalize on the exchange of information on economic, indus
trial and commercial trends.
Treasury Secretary William E. Simon has described the
meetings as "a most important step in our joint efforts to
expand trade and peaceful understanding between the United
States and the Soviet Union.”
The meetings are being held under the auspices of the
U.S.-U.S.S.R. Commercial Commission which was established
in 1972 and further are the result of a long-term agree
ment, signed on January 29, 1974, between the United States
and the U.S.S.R. to facilitate economic, industrial and
technical cooperation.
Parsky noted, "We believe that expanding the exchange
of information on performance of our economies will add a
new dimension to the potential for cooperative action not
only in the trade and industrial areas, but in technical
areas as well."
Other members of the U.S. delegation include Dr. Gary
L. Seevers, member of the President’s Council of Economic
Advisers; Arthur T. Downey, Deputy Assistant Secretary for
East-West Trade, Department of Commerce; and Richard E. Bell,
Deputy Assistant Secretary for International Affairs and
Commodity Programs, Department of Agriculture.
oOo
WS-224
(
EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL ON WAGE AND PRICE STABILITY
726 JACKSON PLACE, N.W.
WASHINGTON, D.C. 20506
FOR IMMEDIATE RELEASE
Tuesday, February 11, 1975
FOR INFORMATION CALL:
(202-456-6757)
COUNCIL ON WAGE AND PRICE STABILITY
FILES COMMENTS BEFORE THE
NATIONAL HIGHWAY TRAFFIC SAFETY ADMINISTRATION
Attached are the comments the Council on Wage and Price
Stability submitted today to the National Highway Traffic
Safety Administration (NHTSA) on the question of whether
the September 1, 1975 effective date of Standard 105-75,
Hydraulic Brake Systems, ought to be postponed or .cancelled
o 0 o
Attachment
CWPS-25
BEFORE THE
DEPARTMENT OF TRANSPORTATION
NATIONAL HIGHWAY TRAFFIC SAFETY ADMINISTRATION
MOTOR VEHICLE SAFETY STANDARD NO. 105-75
AND
DOCKET 70-27
HYDRAULIC BRAKE SYSTEMS
COMMENTS OF THE COUNCIL ON WAGE AND PRICE STABILITY
REGARDING POSTPONEMENT OF EFFECTIVE DATE
George C. Eads
Assistant Director for
Government Operations
and Research
Vaughn C. Williams
General Counsel
Council on Wage and Price Stability
New Executive Office Building
Room 3222
Washington, D.C. 20506
February 11, 1975
BEFORE THE
NATIONAL HIGHWAY TRAFFIC SAFETY ADMINISTRATION
MOTOR VEHICLE SAFETY STANDARD NO. 105-75
AND
DOCKET 70-27
HYDRAULIC BRAKE SYSTEMS
COMMENTS OF THE COUNCIL ON WAGE AND PRICE STABILITY
REGARDING POSTPONEMENT OF EFFECTIVE DATE
The Council on Wage and Price Stability
(CWPS) hereby submits comments as requested by the
National Highway Traffic Safety Administration (NHTSA)
in its Notice dated January 29, 1975 (40 Fed. Reg. 4673),
on the question of whether the September 1, 1975 effective
date of Standard 105-75, Hydraulic Brake Systems, ought
to be postponed or cancelled.
CWPS further requests
that these comments be made a part of the record of
NHSTA's February 11, 1975 public hearing on the proposed
postponement or cancellation of Standard 105-75.
In its December 26, 1974 filing before NHSTA,
commenting on the proposed postponement of Standard 121,
Air Brake Systems, CWPS indicated its belief that
agencies proposing cost-increasing activities ought
to be particularly careful during this heightened
period of concern over inflation to assure both them
selves and the public that the costs of these activities
will be more than counterbalanced by the benefits, both
quantifiable and non-quantifiable.
We suggested that
the implementation date for Standard 121 be postponed
indefinitely "pending a detailed, formal study of its
economic impact" and that such a study "be made part
of the public record so that interested parties, includ
ing CWPS, can critique it."
The current proceeding raises clearly analo
gous issues.
It is CWPS* understanding that while
some rudimentary analysis concerning the economic impact
of Standard 105-75 has been performed, NHSTA does not
believe that this analysis is of a quality sufficient
to constitute a meaningful input into the decision as
to whether to proceed to implement Standard 105-75.
The Council, therefore, is in no position to comment
one way or another concerning the net economic impact
of the standard.
The Council on Wage and Price Stability makes
3
the same request with regard to Standard 105-75
that it did with regard to Standard 121 —
that the
implementation of the standard be indefinitely delayed
pending a detailed, formal evaluation of its economic
impact.
CWPS further requests that, when completed,
that analysis be made a part of the public record
so that all interested parties can critique it.
CWPS does not believe that economic impact
is the only factor that should be considered in decid
ing whether to undertake an activity such as implement
ing Standard 105-75.
Other factors, such as the
subjective cost of "pain and suffering" to individual
accident victims, also obviously enters in.
We do not
suggest that in evaluating the economic impact of
proposed activities, agencies strain to quantify these
unquantifiables.
However, we believe that a thorough
knowledge of the tangible economic costs and benefits
of such actions form a necessary basis against which
such intangible or unmeasurable costs and benefits
can be judged.
It is for this reason that we believe
4
it essential that NHSTA conduct the type of analysis
we are requesting.
Respectfully submitted,
C
C j ~
George f t . Eads
Assistant Director
Government Operations
and Research
UxujJaa* ^ UliLCtcum*
aughn c.
C. William*
Vaughn
williams
General Counsel
11 February 1975
¡kpartm ento/lheTREASURY
i. DC
n r ^noon
Hmnrm
INGTON
20220
TELEPHONE W04-2041
17
“L
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE SENATE FINANCE COMMITTEE
WASHINGTON, D.C., FEBRUARY 10, 1975
(Debt Ceiling Extension)
Mr. Chairman and Members of the Committee:
In the second portion of my testimony today, I would
like to discuss with you another subject of immediate
concern: The need to raise the Federal debt ceiling.
As you know, the current limit on the Federal debt
is $495 billion. That is a temporary limit which will
expire on March 31; in the absence of legislation, the
limit will revert on April 1 to $400 billion.
Our current estimates show that the Government
will exceed the temporary limit of $495 billion on
February 18 -- less than 10 days from now. Thus, there
is a genuine need for immediate action on the part of the
Congress.
Just over two weeks ago I presented to the House Ways
and Means Committee the Administration’s proposal to raise
the debt ceiling to $604 billion. Barring unforeseen
developments, that new ceiling should be adequate to carry
us through June 30, 1976, which would be the end of fiscal
year 1976. I also pointed out that if the ceiling were
extended only to the end of fiscal year 1975, it would have
to be set no lower than $531 billion. Our estimates are
based on the conventional assumption of a $6 billion cash
balance and a $3 billion margin for contingencies.
The House last week approved a bill authorizing a
temporary debt limit of $531 billion through the end of
WS-220
2
the current fiscal year, at which time the limit would
revert to the permanent ceiling of $400 billion.
Our request for a higher figure carrying us through
fiscal year 1976 was consistent with i1egis1atien passedc
by the Congress last year, the Congressional Budget and
Impoundment Control Act. In that law, the; Congress set
up a timetable for spending and revenue decisions. When
that timetable takes effect, the Congress by Hay 15 of each year
is to have completed action on the first concurrent resolution
providing new budget authority, setting revenue figures: and
establishing the public debt limit for the fiscal year beginning
that October 1. A second concurrent resolution and reconciliation
bill, if needed, must be enacted by late September. Thus, prior
to the new, fiscal year, the debt limit will be set for that
entire fiscal year. This is essentially the idea that we are
asking the Congress to approve for fiscal year 1976, and we
strongly urge your support for this proposal0
For your background, I am submitting to the committee
today four tables which usually accompany our discussion of
the debt ceiling;
Table 1 shows actual operating balances:and the
debt which is subject to limit through December 31, 1974.
It also shows the estimated debt subject to limit at the
end of each month through the end of fiscal year 1975.
Table; 2 extends these estimates through fiscal
year 1976,
Table 3 shows the budget estimates for fiscal years
1975 and 1976, providing you with the basis for the figures
in the earlier tables.
,II i
Table 4 presents our tentative revenue estimates for
fiscal years 1975 and 1976.
As all of you know, the rapid downward slide of the
economy has reduced the Federal revenues below our original
expectations in January of 1974. As a result, Federal
deficits are mounting rapidly and are causing the current
squeeze on the debt cei1ing. A slowdown in the economy
had been anticipated, but the current recession is steeper
and will probably last longer than first expected. We have
thus been required to reduce our fiscal year 1975 estimates
of individual income taxes by $6.7 billion* reflecting higher
unemployment* shorter work-weeks, less overtime, and fewer
second jobs. We have also reduced our estimates of corporate
income taxes by ,$3.7 billion, due in large measure to the
decline in corporate profits.
3
Most of you are aware that a number of corporations
are switching their inventory accounting methods from
"first in, first out" to "last in, first out." LIFO accounting
methods exclude a large portion of the effect of inventory
price increases from the calculation of business profits and
thus lessen corporate tax liability. This trend toward LIFO
accounting methods in fiscal year 1975 is expected to
reduce our total revenues by $3-4 billion. I should point
out that in first estimating revenues for fiscal year 1975, we
anticipated reductions in revenue of approximately this size
from companies switching to LIFO, so that it has not been a
factor in changing our predictions.
The changes in forecasts that we are making this year
are similar in nature to those that were made in past recessions.
In the recessions of 1969-1970 and 1960-61, corporate and
individual income tax collections fell well below estimates.
On one of those occasions, fiscal year 1962, an increase in
the debt ceiling was also needed prior to the expiration of the one
then in effect.
The new debt ceiling we are requesting today incorporates
our tentative estimates for both Federal revenues and
expenditures, based upon our projections for the economy over
the next 17 months and upon the economic and energy proposals
that the President has presented to the Congress. As I noted
earlier, it also includes the traditional $6 billion cash
operating balance and the $3 billion margin for contingencies.
¡It does not take account of new spending programs which might
be enacted.
Let me point out that the debt figures also include
Treasury borrowing to finance the Federal Financing Bank.
The Bank has one marketable issue of $1.5 billion now outstanding
and maturing at the end of March. In the future, I believe
that the Bank should borrow from the Treasury rather than
going into the market. The Bank’s cost of borrowing is
somewhat greater than Treasury’s and the additional interest
costs which result are inappropriate. Moreover, we can
¡already anticipate that large budget deficits projected for
fiscal years 1975 and 1976 will put some upward pressure on
interest rates. Federal Financing Bank market borrowing
¡wjuld be likely to put somewhat more pressure on rates than
the equivalent Treasury borrowing. In order to minimize costs
t° the Government and the taxpayers, it would thus be prudent
ror "the Bank to borrow from the Treasury.
Some Members of the Committee may think that the new
l ebt ceiling is too high and the deficits too big. I would
emphasize that there is no one in Washington today who feels more
t r o n g i y than either the President or I that deficits of the
[ agnitude we are now facing are horrendous. We believe that many
4
of the economic troubles we have today are rooted in more than
a decade of excesses in fiscal and monetary policy. To continue
the rapid upward momentum of Government growth over an indefinite
period would erode the very foundations of our economy and
could threaten us with social ruin. But we also recognize that
because of the recession, receipts are inevitably going to be
lower than we would like and we believe that in order to stimulate
the economy, we must temporarily
and I stress the word
temporarily -- cut taxes and leave more money in the private
spending stream. Big Federal deficits in fiscal years 1975 and 1976
are thus a result of both the recession and the cumulative cost
of the many Federal spending programs that have been enacted in
recent years.
Other Members of this Committee may feel that to the
contrary, Federal outlays should be increased signficantly this
year so that the deficits and, therefore, the debt ceiling
should be much higher than we propose. The President strenously
opposes this view. If we open up the sluice gates on Federal
spending during the coming year, we could seriously overheat the
economy and insure that further down the road we will be riding
the tiger of inflation once again -- and inflation then would
be even more virulent and powerful than what we have had over
the past year. That is why the President has proposed a
moratorium on all new spending programs outside of the energy
field and why he intends to veto bills which Violate that
moratorium.
Impact of Deficits on the Credit Markets
A second reason why the Administration wants to
hold the line on massive new spending programs is in order
to preserve the private credit markets.
There is a considerable dispute among economists and
market specialists on this question. My own view is that the
deficits anticipated by the President’s program will cause
some strains in the markets, but those strains could be
manageable. However, in the event that the Congress is unwilling
to accept the strong discipline the President is trying to
impose upon the Federal spending, the higher deficits that will
result will certainly threaten the private credit markets with
intolerable burdens» We could quickly clog up those markets
and create genuine havoc in the Nation’s financial system.
The anticipated deficits already exceed the upper limit
of demands that the Government should place on the financial
markets. Normally, financial conditions ease substantiality
in a recession, and normally they remain easy for sometime
after the recovery gets underway. This slackening occurs because
<U
7
^
fall off at the samel time lihat the
5
private demands for credit
Federal Reserve moves to maintain or increase the rate of growth
in money and credit. We have seen some evidence of this easing
in recent declines in business loans and in the Federal
discount rate. Under such conditions, interest rates decline
and credit becomes more readily available -- all of which is
part of the process by which the economy pulls out of a
recession and regains the road to prosperity.
A decline in interest rates, in both the short-term
and long-term markets, has in fact been underway for
several months. There are reasons to question, however,
whether the decline in interest rates will continue.
In the first place, current pressures on the financial market
from private business are heavier than normal for a recession.
The borrowing needs of only a few sectors have moderated, and
the financing of oil consumption both here and abroad as
well as the external financing needs of business have remained
extraordinarily large. As businessmen will readily confirm,
the inflationary forces of recent years have helped to
produce a marked decline in profits and have seriously eroded
the liquiding base of both households and businesses. As a
result, huge amounts of credit are needed in the private sector
just to sustain existing levels of economic activity. Moreover,
with the stock market so low that many issues are selling well
below book value, new equity financing is not a feasible source
of funds. Therefore, the demand from the private sectdr for
new long-term debt issues is unusually high -- unusual at least
tor this stage of the business cycle.
The Members of this Committee have probably read that
borrowing demands are declining in the private sector and
therefore, according to some analysts, Federal borrowing
should not present a problem in the credit markets. Private
short-term credit demands are indeed declining, but the point is
that they are not declining as much as we would expect in a
normal recession, and corporate bond issues are running at
evels considerably above the totals of any other previous year.
. latest projections show that net new corporate bond
tin'll * Yhich rose £rom 12 1/2 billion in 1973 and to $25
uiion in 1974, will advance even further to some $30
ir^K^01-1 or more in 1975. In addition, while some slowing
business demand for short-term credit is underway, total
ith°rvi•^erm crec^t f°r 1975 is still expected to be one of
I e highest yearly totals on record.
I, . A second reason why interest rates may not continue
I heir decline lies in the borrowing needs of the Federal
1overnment. Under proposed programs, we estimate that the
treasury during this calendar year will be coming into the
markets for almost $70 billion of net new financing,
[ which $65 billion will be marketable securities (Table 5).
6
Federally sponsored agencies may account for another $14 billion
in borrowing. Total borrowing of net new money attributable
to the Federal Government will thus come to an enormous sum -more net new funds, in fact, than have ever been borrowed before
by both the private and public sectors combined.
I
have frequently attempted to provide some perspective
on the enormity of the Governments financing requirements,
and I have pointed out that borrowing for all Federal programs
has ranged between half to two-thirds of the total amount
of funds borrowed by all issuers of securities in the U.S.
capital markets in recent years.
In the attached table 6 we have charted the level of
Government borrowing in the debt capital markets over a period
of more than two decades. This table clearly illustrates
the progressive domination of the private capital markets
by the Federal Government. In fiscal years 1955-59, the
Federal Government accounted for 20 percent of net funds in
the capital markets; in fiscal years 1970-74, the Federal share
grew to 45 percent. In fiscal year 1976, we anticipate
that even with the moratorium on new spending and other
spending control measures proposed by the President, total
Federal borrowing will account for 68 percent of the capital
markets, and if we add to that amount the anticipated
borrowing by State and local governments, total government
borrowing during the coming fiscal year will be 80 percent
of the capital markets. Only 20 percent will be left to
private industry in a financial market that has always been
the centerpiece of our free enterprise system.
Some observers have suggested that those figures
are misleading because they do not take into account the
full range of borrowing in our financial markets0 For
instance, they do not encompass the mortgage market0 My
staff has recently been working to develop measurements
of the entire financial markets0 This project poses many
difficult analytical and data collection problems, but
we have developed preliminary data for current, years,
and in the near future we hope to have a more comprehensive
presentation which will show these borrowing activities
for earlier years0 The preliminary data is included in
Tables 7A, 7B, and 7C. These tables measure" the levels
of borrowing in all of our financial markets for fiscal
years 1972 through 1976 and show the impacts of Federal
and Federally-assisted borrowings on each major sector
within these markets0 Included here are the markets for
debt securities, mortgages, securities, business loans, and
consumer credit.
These are remarkable tables, and I would urge that,
at your leisure each of you spend a few moments examining
them» The tables show that the estimated Federal share
of funds raised in all sectors of the economy increased
from less than one-fourth in fiscal year 1974 to almost
one-half in fiscal years 1975 and 1976» The growing
domination of the Government in our credit markets
represents an alarming situation, reflecting the even more
alarming growth of Government in this country0
It is startling enough to realize that we reached
the point in recent years where the Federal Government's
stamp was on 1 out of every 4 dollars of credit flowing
in this countryo But we are now entering a period in
which 1 out of every 2 credit dollars must be blessed by
Washington.,
There are several ways in which the strains created
in the private capital markets by Federal borrowing could
be eased this yearG For instance, the deficits could be
financed without difficulty and interest rates could
decline even further if the recession becomes deeper than
8
we expect, if inflation subsides more than we anticipate,
if the OPEC nations put a larger amount of their
accumulated funds into investments in this country, or
if the American people save more and spend less of their
rebate. Some financial analysts expect such developments
even with a set of economic projections similar to our
own. We cannot, however, be sure that any one of these
events will occur so that it would be foolish to base our
policy decision upon such assumptions.
Moreover, we must be aware of what might happen if
the Federal Government does begin to elbow other borrowers
out of the market:
--
Housing, for example, is always at the end of
the line in the credit markets and thus the
first sector to be crowded outc We now expect
that a recovery in housing starts will get
underway by mid-year, but we cannot overload
the continuing danger that excessive Government
borrowing, coupled with a high demand coming
from a private sector that is suffering from
illiquidity, could drive up interest rates and
seriously disrupt this recovery or even abort it
at an early stage.
Business firms of marginal financial strength,
especially small businesses, would also be cut
off from the supply of credit if the Federal
Government completely dominates the capital
markets. This would further weaken the creditworthiness of such firms. Lenders would then
intensify their preference for high quality debt
issues, and marginal firms would be unable to
obtain enough credit. Their ability to expand
would therefore be limited and bankruptcies
could result.
Let me stress that I am not predicting these events,
I am only suggesting the scenarios that could unfold if
we ignore the President's call for fiscal discipline and
9
increase Federal deficits beyond their projected levels0
It is too early to tell precisely what will happen this
year in the credit markets, but we do know that Government
will pre-empt most of this market and we must constantly
be alert to the possibility that unrestrained Government
borrowing could drive the economy into an even worse mess
than it is today0
Some observers suggest that it would be easy to
avoid these difficulties--at least for now— if the
Federal Reserve were to adopt more aggressively easy
monetary policies 0 In other words, to prevent the
Federal Governments demands from crowding others out
of the market, the Federal Reserve would make the market
larger by increasing the total supply of money and credit0
This approach, however, is a sure formula for still
higher inflation rates when the recovery gets into full
swing— if not sooner0 It does not solve bur problems, it
only postpones them, and when they recur they could be
much worse than they are today0 By now, like the man
who gives up drinking because he can't stand the hangovers,
we should have learned that short-term binges with easy
money and excessive spending are no substitute for the long
term virtues of savings, investment and moderation in
our monetary and fiscal policies0
This dilemma, I would hope, emphasizes for all of the
Members of this Committee the fundamental importance of a
tough policy to restrain the growth of budget outlays by
reducing less urgent programs and postponing new initiatives
that are not included in the President's package of
economic and energy policies0 We already have enough
problems on our hands--many of them created by irresponsible
Government policies over the past decades— so that we
should be sensible enough to avoid the shoals of even more
serious troubles«
10
Let me review for a moment the staggering size of the
deficits that are already contemplated. Under the budget
program submitted by the President the deficit estimated for
fiscal year 1975 is close to $35 billion and in fiscal year
1976 the estimated deficit is the biggest in peace time
history -- almost $52 billion. That's a total of approxi
mately $87 billion over two fiscal years, an amount that
hardly anyone can welcome gladly. But I would remind you
that even these deficits are significantly below what will
happen without the cap that the President is seeking to impose
on Federal expenditures. Six billion dollars will be saved
by limiting Federal pay increases to five per cent through
the end of fiscal year 1976 and by placing a similar limit
on those federal beenfit programs like social security, that
increase automatically with the cost of living. In addition,
we can realize savings of $14 billion through the budget
reductions requested or planned by the Administration for
fiscal years 1975 and 1976. Thus, overall, the President's
proposed actions would save $20 billion in expenditures. If
the Congress ignores this call and overrides the President
without making savings in other areas, the additional $20
billion in deficits would make the combined deficit figure
for fiscal years 1975 and 1976 well over $100 billion -- more
than the total deficits of the previous ten years combined.
Unfortunately, even these deficits do not tell the full
story of Federal borrowing, for they do not include the borrow
ing for off-budget programs or the myriad of obligations issued
by Federally sponsored agencies or guaranteed by Federal agencies.
For fiscal years 1965-1974, the cumulative deficit of the
unified budget was $102.9 billion. During that same period,
the cumulative borrowing for off-budget programs was $137
billion.
I cannot over-emphasize the dangers that may be created
by such mammoth deficits at the Federal level, nor can I urge
upon you more strongly a plea for maximum fiscal discipline
during the life of the 94th Congress. It is absolutely
imperative that during the 1970's we turn this country's
fiscal policies around.
The Capital Investment Challenge
If time permitted today, I would very much like to
discuss with you in greater detail the impact that the growth
of Government has had upon our free market system:
-- The way that irresponsible fiscal and monetary
policies stretching back to the mid-1960’s
and earlier have created strong, underlying
forces of inflation in our economy, forces that
we must contend with for many years to come;
11
-- The way that excessive governmental regulation has
discouraged new production and growth in many of
our industries, particularly in the fields of
agriculture and energy;
-- The wa!y that the wage and price controls of the
early 1970*s disrupted the economy and have left
us a residue of troubles that are still working
their way through the system;
-- The way that the Government’s policies have en
couraged consumption at the expense of adequate
savings and investment;
-- The way that broad Government domination of many
of the industries in the Nation has stifled
individual initiative and spawned a new breed of
business managers who seem more eager to rely
upon the judgments of a GS-16 in Washington than
upon their own judgements and competitive instincts.
To me, there is nothing more distressing than to
see businessmen trade their economic freedoms to
the Government in exchange for what they falsely
perceive to be financial security.
Rather than dwelling further on this point, however, I
ask you to consider the net result of kind of Government
growth as well as other social forces which have gained favor
in the United States.
The net result, I would suggest, is that we have tilted
our great economic machine in the wrong direction. Instead
of continually renewing and enlarging our economic foundations,
we have allowed them to rust and crumble while we have enjoyed
a long binge of over-spending and over-consumption. The bills
are coming due today, and unless we soon reverse these trends,
the bills can only grow larger in the future.
Once again, let’s look at the facts. From 1960 through
1971, as an accompanying table shows (Table 8), annual capital
investment in this country averaged approximately 18 percent
of our gross national product -- the smallest figure of any
major industrialized nation in the Free World. In Japan,
for instance, annual capital investment averaged over 33
percent of the GNP, while in Germany it averaged 26 percent
and in France, 25 percent. Thus, the amount of its annual
income that the United States was willing to put back into
new plant equipment was smaller than in most of the Nations
with whom we compete.
12
The recent figures that are available for international
comparisons -- figures showing investments in 1973 -- indicate
an even bleaker investment picture for the United States. In
that year, our investment in private industry sank to 14,9
percent of our GNP, lower than any other major industrialized
nation except Italy.
Higher rates of capital investment do not guarantee lower
rates of inflation. Japan, for instance, has the highest rate
of inflation among the countries mentioned, even though it has
also had the highest level of capital investment. But there
is a close correlation between the rate of capital investment
and the increase in a nation’s productivity. The annual
growth in productivity during the 1960’s and early 1970’s
averaged more than 10 percent in Japan, almost 6 percent in
Germany and France, and only 3.3 percent here in the United
States. As you can see, the U.S. had the lowest level of
capital investment among these countries and also the
rate of growth in productivity. I need not explain to this
Committee that it is growth in productivity which determines
how much of an increase in living standards that the American
people can achieve over time.
In the future, we are going to have to do better. The
capital requirements of the American economy over the next
decade will be enormous. We will need up to a trillion dollars
for energy alone. Beyond that, we will need extremely large
sums for control of pollution, urban transportation, and
rebuilding some of our basic industries where new investment
languished over the past decade. In addition, there are the
more conventional, but still mammoth, requirements for capital
to replace and add to the present stock of housing, factories
and machinery.
Yet in the face of these massive requirements, we are not
providing adequate incentives for new investment. Over the
past decade the inflation has led to high effective rates of
business taxation and low rates of profitability, which in
turn have greatly eroded the incentives for capital formation.
It is not unfair to say that we are in a profits depression
in this country. Nonfinancial corporations reported profits
after taxes in 1974 of $65.5 billion as compared to,$38.2
billion in 1965, an apparent 71 percent increase. Those
profit increases are an optical illusion created by inflation
and outmoded accounting methods. When depreciation is calcu
lated on a basis that provides a more realistic accounting
for the current value of the capital used in production and
when the effect of inflation on inventory values is eliminated,
after-tax profits actually declined from $37.0 billion in
1965 to $20.6 billion in 1974 -- a 50 percent decline. A
major factor contributing to this decline is that income taxes
were payable on these fictitious elements of profits. That
resulted in a rise in, the effective tax rate on true profits
from about 43 percent in 1965 to 69 percent in 1974.
Corporate profits normally provide the foundation upon
which corporations build for the future. They are not only a
source of investment funds in themselves, but they also permit
corporations to attract or borrow other funds which may _be
used for capital investment and which in turn create more jobs.
The decline in profits therefore has grave implications for
capital formation and growth. That is perhaps seen best in
the figures for retained earnings of nonfinancial corporations,
restated on the same basis to account realistically for
inventories and depreciation. It is the retained^earnings
that corporations have available to finance additional new
capacity, as distinguished from the replacement of existing
capacity. In 1965, retained earnings totalled $20 billion.
By 1973, after eight years in which real GNP had increased
more than 35 percent, the retained earnings of nonfinancial
corporations had dropped 70 percent to $6 billion. And for 1974
our preliminary estimate for retained earnings is a minus of
nearly $10 billion. That means that there was not nearly enough
even to replace existing capacity, and nothing to finance invest
ment in additional new capacity.
It is a simple but compelling economic fact of life that
increases, in productive performance are required over time to
support a rising standard of living. Yet, as a Nation, we are
rapidly expanding public payments to individuals but neglecting
to provide adequate incentives for new investment. Since 1965,
in real terms, economic output has increased by one-third
while government transfer payments to persons has more than
doubled. On the other hand, private investment expenditures -upon which the economic future of all of us inevitably depends
" have failed to keep pace, rising by approximately one-fourth.
It is imperative that we make better provision for the
future. This means that we must place much greater emphasis
uPon saving and investment and much less upon consumption and
government expenditure. Today, recession and inflation dominate
14
the discussion of economic events and policy. We must take
determined action to deal with these interrelated problems and
I believe we shall. At the same time, however, we must begin
to shift the long-run balance of domestic priorities away from
consumption and government spending and toward investment and
increased productivity. I believe history will judge us, not
on how we handle our short-run problems such as recession,
but on our ability to deal w.ith the more fundamental problems
of the allocation of resources and capital formation. If, as
a Nation, we fail to address these problems, we will fail to
attain the prosperity and the rising standard of living that
the American people can achieve. I hope that the recession
has taught all of us the folly of pursuing a "no-growth”
policy, as some figures once argued. Our goal should be to
enlarge the economic pie, not just redistribute it.
Conclusion
While many of the challenges of the economy must be solved
primarily in the private sector, the Federal Government has
a positive responsibility to help, and there are a number of
ways that I believe we can help:
-- First, we can and must take steps to prevent the
recession from deepening to intolerable levels.
-- Second, we must not abandon the more long-range
fight against inflation, for inflation is a
bitter enemy of savings and investment and exacts
a heavy toll on economic growth.
-- Third, we must enact legislation that will create
greater incentives for capital investment and
will allow our financial institutions to operate
more flexibly.
-- Fourth, we must lift the heavy hand of Federal
regulation from the many areas where it restricts
the efficiency and growth of the free enterprise
system. Competition is still the best route to
an efficient and productive economic system, and
that in turn remains the best means we have of
fighting inflation and creating more jobs.
Fifth, as we emerge from the recession, we must
restore a reasonable balance to the Federal
budget and even seek to achieve budgetary
surpluses in better years so that we can free up
a maximum amount of capital for savings and
investment.
15
"" Finaj-ly> even as we recognize that the Government
should provide strong leadership, let us also
resist those who would have us turn to the Govern
ment for solutions to all of our problems.
Considering the severity of our economic troubles today,
it is easy to understand why there are so many who look to
Government for instant answers. Many want to take the easy
road, which means letting Government intrude more and more
into our daily lives. We should understand by now that when
ever we allow the Government to do something for us that we
can do for ourselves, we must surrender some of our own freedom.
In these difficult times, there is a continuing danger that
temporary security may become so attractive to many Americans
that they may become not only willing but eager to give up
more of their liberty in return for security.
If we have neither the strength nor the wisdom to say
"no” to those who call for further Government domination over
our affairs, we will set this nation on the road to a planned
economy and the destruction of the free enterprise system that
has preserved our liberties and given us the highest standard
of living man has ever known. I do not want that for my
children, and I am sure you don’t want it for yours. Let us
recognize, then, that each of us must accept the risks of
freedom so that we may preserve its rewards.
Thank you.
0
O0
TABLE I
PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1975
Based on Estimated
Budget Receipts of $279 Billion,
Outlays of $313 Billion,
and Deficit of $35 Billion
($ Billions)
Operating
Cash
Balance
Public Debt
Subject to
Limitation
With Usual
$3 Billion
Margin For
Contingencies
ACTUAL
1974
June 30
9.2
476.0
July 31
6.5
475.6
Aug. 31
5.4
482.1
Sept.30
8.7
481.7
Oct. 31
2.2
480.5
Nov. 30
3.1
485.7
Dec. 31
5.9
493.0
5.9
494.5
1975
Jan. 31
ESTIMATED
Feb. 28
6
502
505
Mar. 31
6
507
510
Apr. 30
6
510
513
May 31
6
522
524
June 30
6
528
531
February 10, 1975
TABLE 2
PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1976
Based on Estimated
BUDGET RECEIPTS OF $298 BILLION
OUTLAYS OF $349 BILLION
AND DEFICIT OF $52 BILLION
($ Billions)
Operating
Cash
Balance
Public Debt
Subject to
Limitation
With Usual
$3 Billion
Margin For
Contingencies
ESTIMATED
1975
June 30
6
528
531
July 31
6
532
535
Aug. 31
6
538
541
Sept 30
6
544
547
Oct. 31
6
551
554
Nov. 30
6
558
561
Dec. 31
6
567
570
Jan. 31
6
571
574
Feb. 29
6
577
600
Mar. 31
6
583
586
Apr. 30
6
584
587
May 31
6
596
599
June 17(Peak)
6
601
604
June 30
6
596
599
1976
February 10, 1975
TABLE 3
BUDGET SUMMARY
Billions)
:Actual:
: 1974 :
Receipts :
l
:
Estimated
: 1075' : i$76
Federal Funds.............. ....
Trust Funds............. . ....
Inter-fund transactions..... ....
181
105
-21
186
119
-26
199
127
- 28
Total budget receipts..... ____
265
279
298
Outlays:
Federal Funds................ ....
Trust Funds........ ....... ....
Inter-fund transactions..... ....
199
91
-21
229
110
-26
254
123
- 28
268
313
349
plus or deficit (-):
.ederal Funds.............. ....
....
Trust Funds.......... .
-18
14
-43
__8
-55
3
Total budget....... ...... ....
- 4
-35
-52
Total budget outlays......
February
NOTE:
10,
1975
Figures are rounded and may not add to totals.
TABLE
Estimated
4
Unified
Fiscal
Budget
Years
Receipts
1975-1976
($ b i l l i o n s )
_________________
•C u r r e n t
;
,
proposed
Individual
income
Corporation
Employment
taxes
Unemployment
taxes
Estate
and
Customs
for
'otal
Office
gift
duties
of
the
of
contributions
..................
other
....................................
..........
receipts
106
38
48
75
80
7
7
4
5
20
32
5
5
4
®
..................................
279
Secretary
of
the
Treasury
rounded
and
may
February
Analysis
are
1976
118
....................................
receipts
Tax
Figures
taxes
Y e a r s ___________
:
insurance
.........................
budget
Office
....................
....................................................
Miscellaneous
Note:
and
retirement
Excise
......................................
tax
i n s u r a n c e ...............
Contributions
and
tax
income
1975
including
legislation
;_________ F i s c a l
•
______________ _
estimate
not
add
to
totals
4
H
298
10,
1975
TABLE
TREASURY MONEY MARKET BORROWING
5
([Including Foreign nonmarketab1e securities)
(Xii b i l l i o n s
Calendar
Year
Gross New
Issues 1/
First Half
Maturities , Net New
2/
Money
of
dollars)
Gross New
Issues 1/
Peak In
crease in
Borrowing
Second Half
Maturities Net New
Money
2/
Peak In
crease in
Borrowing
1970
$22
$24
$-2
$ 4
$31
$15
$16
$16
1971
27
24
3
3
37
15
22
22
1972
13
15
-2
7
21
7
14
16
1973
17
16
1
10
20
15
5
5
1974
17
22
-5
4
32
18
14
14
1975est
45
17
28
31
48
11
37
37
1976est
49
23
24
28
Calendar
Year
Gross New
Issues 1/
Full Year
Maturities Net New . Peak InMoney
crease in
2/
Borrowing
est: estimated
1970
$53
$39
$14
$14
1/ Includes increases
in regular bills.
1971
64
38
25
25
1972
34
22
12
13
1973
37
31
6
6
1974
49
40
9
9
1975
93
65
65
2/ Includes paydowns
in regular bills.
jruary
10,
1975
27
,_____________
.
TABLE 6
Net
Funds
Raised in the Capital Markets by Major
(fiscal yearsj b i l l i o n s of dollars)
,»• ,x.
U.S. Treas.
& Financing
Bank
Corp. &
foreign
1/
: Total
: secur: ities
Sector
: Federal
; sector as
:a % o f t o t a l
: securities
:
Gov't.
;
sector as
:
% of total
: s e c u r i t i e s 2/
Federal &
sponsored
agencies
: Total
¡Federal
: sector
1.7
.1
.6
.9
.8
1.4
5.3
1.7
-3.7
-2.7
7.1
9.3
5.5
5.4
4.6
4.0
5.1
5.7
3.4
2.6
3, 3
5.7
6.9
4.7
14.2
9.7
4.1
7.0
19.2
19.7
37.4
17.4
37.1
47.5
76.0
73.1
21.0
18.6
63.9
76.4
: State &
:
local
;
:
1954
1955
1956
1957
1958
1959
3.6
1.7
-4.3
-3.6
6.3
8.0
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
.8
2.0
8.8
6.4
2.7
3.1
-1.0
•6
18.2
-1.9
2.0
.1
2.4
1.1
1.5
2.2
6.7
2.6
5.5
5.7
2.8
2.1
11.2
7.6
4 ;2
5.4
5.7
3.3
23.8
3.8
5.7
4.9
6.0
5.5
5.2
6.9
7.3
6.0
7.2
12.0
3.5
5.0
5.5
5.5
3.8
5.2
9.2
12.2
15.1
14.7
12.1
12.0
22.7
18.6
13.2
17.5
22.2
21.5
46.1
30.5
23.5
17.7
49.4
40.7
31.8
30.8
25.8
15.2
51.6
12.4
70.7
58.5
75.6
70.3
71.4
70.4
58.9
43.3
67.3
51.8
1970
1971
1972
1973
1974
1975e2/
1976e2/
6.8
20.5
19.6
18.5
2.1
43.9
63.7
8.1
2.7
8.7
14.3
21.3
17.6
14.7
14.9
23.2
28.2
32.8
23.3
9.7
15.0
15.6
12.6
16.7
12.5
14.6
14.8
23.0
15.8
10.5
15.6
26.3
22.7
39.4
61.3
59.7
55.9
- 55.6
37.9
37.9
47.2
58.6
41.9
62.4
62.4
73.5
81.2
72.0
100.3
115.7
61.3
67.8
73.8
80.4
Office
Source:
1/ Bonds
of the
Office
-
S e c r e t a r y of the
of Debt Analysis
61.5
78.4
Treasury
FY 1954-1974 data based on FRB "Flow-of
issued by nonfinancial corporations.
February
Funds."
2/ Assumes adoption of President's Budget program,
with budget deficits of $35 billion in FY 1975 and $52 billion
in ’— 1976.
3/
In
es State
Etna local as p a rt of governmer.
-
actor.
7
1975
T a b i, e
Federal
NET
FUNDS
7A
a n d Federally-Assisted C r e d i t as P e r c e n t o f T o t a l F l o w
Funds in U.S. F i n a n c i a l Markets, b y T ype of Credit*
Fiscal years, 1975 and 1976 projected
RAISED
; Total
: ($ b i l )
Fiscal 1975
Federal
:
; Government ; Percent
Total
($ b i l )
;
;
Long-Term Funds
Mortgages:
Residential
Commercial
. Farm
Total
Corporate Securities;**
Bonds
Stocks
Total
29,1
5.3
34.4
2.0
--- à
«&9Ì g
2,0
Total
82.2
19.3 *
43.9
17.6
12.5
74.0
43.9
17.6
2,2
63.7
long-term
Government Securities
U . S. G o v e r n m e n t
Federal agencies
State & local governments
Total
Other Funds***
Business credit
Consumer credit
Security credit
Other loans, including
foreign
Total
35.3
7.9
4.6
47.8
Total
($ b i l )
of
Fiscal 1976
Federal
Government
($ b i l )
: Percent
; Federal
43.7
8.7
5.2
57.6
8.5
---
19.5
—
3.8
12.3
73.1
21.3
5.8
26.9
7.9
34.8
1.6
-—
1.6
5.9
—
4.6
23.5
92,4
13.9
15.0
63.7
14.7
14.6
93,0
63.7
14.7
1.9
80.3
100.0
100.0
13.0
86.3
41.1
7.0
1.0
7.9
.3
.- i -
19.2
4.3
----
9.2
58.3
5.3
13,5
57.6
23.2
10.4
29.5
6.9
17.3
150.0
36.2
6.9
100.0
100.0
1 7 . 6 •*
86.1
p v '1
36.8
3.2
-.4
1.9
41 ;5
6.1
.r
- — *? >
. 4.0
10.2
16.6
3.1
—
y
210.5
24.6
,
TOTAL FUNDS RAISED
197.7
93,2
47.1
243.7
Office of the Secretary of the Treasury
Office of Debt Analysis
* B a s e d o n F e d e r a l R e s e r v e F l o w o f F u n d s (through t h i r d q u a r t e r 1974)
C & E , U. S. B u d g e t , f i s c a l y e a r 1 9 7 6 .
eluding foreign.
* * - a c l u d e s b a n k t e r m l o a n s a n d l o n g - t e r m Fed».
1 credits.
107.7
February
and
Special
44.2
7, 1 9 7 5
Analyses
¡Sj¿
Table
Federal
a n d F e d e r a l l y - A s s i s t e d C r e d i t as P e r c e n t o f T otal
F u n d s iti U . S . F i n a n c i a l M a r k e t s , T y p e o f C r e d i t *
Fiscal Years, 1973 and 1974
:
NET FUNDS
RAISED
.
Long-Term Funds
Mortgages :
Residential
Commercial
Farm
Total
Corporate Securities:**
Bonds
Stocks
Total
Total
long-term
Government Securities
U.S. G o v e r n m e n t
Federal agencies
State & local governments
Total
Other Funds***
Business credit
Consumer credit
Security credit
Other loans, including
foreign
Total
TOTAL
FUNDS
Office
*
7B
RAISED
Total
($ b i l )
Fiscal 1973
Federal
Rnvprnment
|
t # bil )
10.9
3.2
14.1
55.7
16.7
3.3
75.7
:
: Percent
Federal
:
.
.
Total
($ b i l )
Flow
of
Fiscal 1974
Federal
Government
($ b i l )
Percent
Federal
28.5%
46.7
22.8
19.6%
97.0
18.6
45.3
15.9
4.5
65.7
12.9
2.1
15.0
1.3
.6
.6
2.4
3.4
.2
.7
17.4
7.1
24.5
103.4
14.3
13.8
90.2
15.6
17.3
18.5
14.3
12.6
45.4
18.5
14.3
2.2
35.0
100.0
100.0
17.5
77.1
2.1
21.3
16.7
40.1
2.1
21.3
1.9
25.3
100.0
100.0
11.4
63.1
53.1
23.3
-4.8
4.5
-
8.5
72.3
16.3
-3.7
6.8
.1
9.4
.6
13.2
84.8
3.2
7.7
24.2
9.1
13.8
98.7
2.4
9. 3
17. 4
9.4
233.6
57.0
24.4
229.0
50.2
21. 9
15.5
12.2
27.7
.2
-
-
-
-
-
of the Secretary of the Treasury
Office of Debt Analysis
-
February
Based on Federal Reserve Flow of Funds Accounts and Special Analyses C & E,
U. S. Budget for fiscal years 1975 -~>d 1976.
* *
In c lu d in g
**
Includes bank term loans
fo r e ig n .
and
long—te.
federal
credits.
-
-
1,
1975
In c lu d in g
to r e ig n .
Includes bank term loans
and
long—t
e
.
,
T a b le
federal
credits.
7C
Federal and Federally-Assisted Credit as Percent of Total Flow of
Funds in U.S. Financial Markets, Type of Credit*
Fiscal
NET FUNDS
RAISED
Long-Term Funds
Mortgages :
Residential
Commercial
Farm
Total
Corporate Securities:**
Bonds
Stocks
Total
Total
Year
:
1972
Total
($ b i l )
:
:
:
Federal
Government
($ b i l )
43.7
12.6
2.6
58.9
:
:
:
Percent
Federal
11.2
25.6%
-
-
2.3
13.5
88.5
22.9
21.6
15. 5
37.1
.2
-
.9
-
.2
.5
96.0
13.7
14.3
Government Securities
U . S . Government
Federal agencies
State & local governments
Total
19.6
8.8
16.2
44.6
19.6
8.8
1.9
30.3
100.0
100.0
11.7
67.9
Other Funds***
Business credit
Consumer credit
Security credit
Other loans, including
Total
26.7
15.2
9.5
9.4
60.8
3.3
2.9
6.2
12.4
30.9
10.2
201.4
50.3
25.0
TOTAL
Office
*
'*
’*
long-term
FUNDS
foreign
RAISED
of the Secretary of the Treasury
Office of Debt Analysis
Based on Federal Reserve Flow of Funds
U . S. B u d g e t f o r f i s c a l 1 9 7 4 .
Including foreign.
Includes bank term loans and long-te
-
February
Accounts
’’e d e r a l
and
Special
credits.
Analyses
7,
C
1975
& E r
. Mil— Ml.. .
%
Ia b l e 8_
International Comparisons of Investment
and Productivity, 1960 through 1973
Average
Private Investment as
Percent of GNP (Excl.
Defense Expenditures)
Average Annual
Growth in
Productivity
(Output Per
Man-Hour)
3.3%
United States
18.0%
Canada
Japan
France
Germany
Italy
U. K.
22.4
33.4
24.9
26.2
21.4
18.9
4.3
10.7
5.9
5.8
6.2
4.2
OECD less U.S.*
24.2
6,3
All OECD*
20.5
4.8
* Figures in the first column for the OECD country groups
represent private investment as a percent of GNP including
defense expenditures and cover the 1960-1971 period only.
February 10, 1975
Sources:
OECD and national sources; Bureau of Labor Statistics
TABLE 9
SUMMARY RECONCILIATION OR,
DEBT LIMIT NEED IN
FISCAL YEAR 1975 AND 1976 WITH
BUDGET AND OFF-BUDGET ACTIVITY
($ Billions)
1975
1976
Debt Subject to Limit end of prior year,........,..
Adjusted to $6.0 cash balance., ...... ...
$476
473
$531
531
Plus: Unified Budget Deficit............,..........
Trust Fund Surplus.........................
Off-Budget agency spending financed
by Treasury........................,........
Allowance for contingencies. 1..............
35
8
52
3
14
3
:;£
11
-
Tess: Change in checks outstanding
(assumed flow of tax rebate checks).... ..
2
~2
Equals Debt Subject to Limit end of year..........
$531
$599
pffice of the Secretary
of the Treasury
GPO 8
8
6
2
4
8
February 10, 1975
Departm ent of th e Treasury
Washington, D.C. 20220
Official Business
Penally for Private Use, $300
Postage and Fees Paid
D ep artm ent of th e Treasury
TREAS-551
iill
Departm entoftheTREASURY
SHINGTON, D.C. 20220
T E L E P H O N E W04-2041
February 3, 1975
FOR RELEASE 6:30 P.M.
RESULTS OF TREASURY’S WEEKLY BILL AUCTIONS
Tenders for $2.7 billion of 13-week Treasury
26-week Treasury bills, both series to be
w e re opened at the Federal Reserve Banks toda
^
bills and for $2.4 billion
.
of
RANGE OF ACCEPTED
COMPETITIVE BIDS:
13-week bills
maturing May 8, 1975
Price
High
Low
Average
Equivalent
Annual Rate
5.633%
5.701%
5.669%
98.576
98.559
98.567
1/
j T.
736
a/ Excepting 1 tender of $20,000
Tenders at the low price for the 13-wec
Tenders at the low price for the 26-wee
District
Applied For
Accepted
26, 375, oooi
36, 375, 000 $
Boston
$
3 ,410, 550, 000
2, 302, 785, 000
New York
24, 875, 000
27, 120, 000
Philadelphia
37, 445, 000
108, 955, 000
Cleveland
35, 505, 000
43, 940, 000
Richmond
48, 640, 000
57, 985, 000
Atlanta
200, 575, 000
60, 025, 000
Chicago
58, 210, 000
29, 050 000
St. Louis
38, 885, 000
3, 885 000
Minneapolis
28,
095, 000
30,
000
725,
Kansas City
985 ,000
25,
000
985,
18,
Dallas
203, 860, 000
85, 800 000
San Francisco
TOTALS
3 6
f
f / i o / i s
-------
/
/h '
46, 970,000
12, 390,000
18, 685,000
9, 455,000
337 ,750,000
$4 ,243, 165, 000 $2, 701, 465 ,000 b/$5,043
s .
14.030.000
2.390.000
14.205.000
8.435.000
97.250.000
ON
o
o
o
o
o
</>
T0TAL TENDERS APPLIED FOR AND ACCEPTED BY FEI £
Includes $347,740,000 noncompetitive tenders accepted at average price.
- Includes $135,710,000 noncompetitive tenders accepted at average price.
1/ These rates are on a bank-discount basis. The equivalent coupon- issue
yields are 5.83% for the 13-week bills, and 5.99% for the 26-week bills.
Department o f the T R E A S U R Y
SHINGTON D C. 20220
FOR R E L E A S E
TELEPHONE W04-2041
6:30 P.M.
February
RESULTS
Tenders
for
$2.7 billion
of 2 6 - w e e k T r e a s u r y
were o p e n e d
at
OF TREASURY'S
bills,
of
both
COMPETITIVE BIDS:
to b e
Banks
issued
today.
May
8,
on
The
13-week bills
maturing
and
for
$2.4 b i l lion
February
details
6,
1975
maturing
August
7,
Equivalent
Annual Rate
Annual
Price
Rate
98.576
5.633%
97.113
Low
98.559
5.701%
97.087 “
5.762%
Average
98.567
5.669%
97.100
5.736%
1 tender
of
follows:
1975
High
a/ E x c e p t i n g
1975,
are as
26-week bills
Equivalent
Price
1/
a/
5.711%
Ì/
$20,000
Tenders
at
the
low price
for
the 13-week bills wer e allotted
79%.
Tenders
at
the
low price
for
the 26-week bills were
16%.
TOTAL T E N D E R S
APPLIED
District
Applied
Boston
$
New Y o r k
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. L o u i s
Minneapolis
Kansas City
Dallas
San F r a n c i s c o
TOTALS
1975
BILL AUCTIONS
13-week Treasury bills
series
the Federal Reserve
RANGE O F A C C E P T E D
WEEKLY
3,
FOR AND ACCEPTED
For
FEDERAL RESERVE DISTRICTS:
Accepted
36,375,000 $
3/,410,550,000
27,120,000
BY
26,375,000
2,302,785,000
24,875,000
108,955,000
37,445,000
43,940,000
35,505,000
57,985,000
200,575,000
48,640,000
58,210,000
allotted
60,025,000
29,050,000
Accepted
Applied For
$
17,915,000 $
7,485,000
4,167,405,000
37,515,000
2,143,595,000
9,415,000
48,080,000
21,500,000
12,990,000
36,795,000
289,140,000
17,525,000
46,970,000
14,030,000
9,000,000
63,920,000
38,885,000
3,885,000
12,390,000
2,390,000
30,725,000
28,095,000
18,685,000
14,205,000
25,985,000
18,985,000
9,455,000
8,435,000
203,860,000
85,800,000
337,750,000
97,250,000
$4,243,165,000
$2,701,465,000
b/$5,043,600,000
$2,400,240,000
Includes $ 3 4 7 , 7 4 0 , 0 0 0 noncompetitive tenders accepted at average price.
- Includes $ 1 3 5 , 7 1 0 , 0 0 0 noncompetitive tenders accepted at average price.
1/ These rates are on a bank-discount basis.
The equivalent coupon-issue
yields are 5 . 8 3 % for the 13-week bills, and 5 . 9 9 % for the 26-week bills
~
c/
theJR[A$URY
Deperimento/
V
FOR I M M E D I A T E R E L E A S E
F e b r u a r y 4,
TREASURY*S WEEKLY
The D e p a r t m e n t
of the Treasury,
I two s e r i e s o f T r e a s u r y b i l l s
thereabouts,
to b e issued
91-day b i l l s
thereabouts,
to
by
BILL OFFERING
this public notice,
the aggregate
February
13,
(to m a t u r i t y dat e )
1975,
amount of
invites
M a y 15,
1975
as follows:
in the amount
(CUSIP No.
the a m o u n t o f
$2,103,850,000,
tenders for
$5,2 0 0 , 0 0 0 , 0 0 0 » or
of
$2,700,000,000,
representing an additional amount of bills dated
and to m a t u r e
1975
or
November
912793 W J l ) , originally
the additional and original bills
14,
1974,
issued
in
to be freely
interchangeable.
182-day b i l l s ,
for
and to m a t u r e A u g u s t
$2,500,000,000,
1 4,
T he b i l l s w i l l b e
February 13,
1975,
1975
issued
thereabouts,
( C U S I P No.
for
outstanding
Government a c c o u n t s a n d
or
of
Federal Reserve Banks,
accepted
The b i lls w i l l b e
competitive b i d d i n g ,
interest.
$15,000,
they hold
$4,806,355,000,
for themselves
presently
and
at m a t u r i t y
their
in bea r e r
$500,000 and
book-entry f a r m t o d e s i g n a t e d
$2,971,595,000.
face amount will be payable without
f o r m in denom i n a t i o n s
$1,000,000
r e c e i v e d at
time, M o n d a y ,
of
$10,000,
(maturity value),
and
and Branches up
February
10,
in
$10,000.
Tenders
over
In the case of c o m p e t i t i v e t enders
be e x p r e s s e d o n t h e b a s i s o f 1 0 0 ,
with not more
than
to
1975.
the Department of the Treasury,
Each t e n d e r m u s t b e f o r a m i n i m u m o f
I
hold
bidders.
one-thirty p . m . , E a s t e r n S t a n d a r d
$5,000.
and as a g e n t s of
for the bil l s n o w b e i n g o f f e r e d at
Tenders w i l l b e r e c e i v e d at F e d e r a l R e s e r v e Banks
multiples of
of w h i c h
issued on a discount basis under competitive and non
$100,000,
Tenders w i l l n o t b e
1975,
tenders.
They will be issued
$50,000,
13,
cash and in exchange for Treasury bills maturing
foreign a n d i n t e r n a t i o n a l m o n e t a r y a u t h o r i t i e s ,
the a v e r a g e p r i c e s o f
February
9 1 2 7 9 3 XJ0)»
in the amount
These a c c o u n t s m a y e x c h a n g e b i l l s
to b e d a t e d
Washington.
$10,000 must
be in
the price offered must
three decimals,
e.g.,
99.925.
fractions m a y n o t b e u s e d .
Banking institutions and de a l e r s w h o m a k e p r i m a r y m a r k e t s
(OVER)
in G o v e rnment
2
-
securities
with
and report
respect
for account
such
trust
securities
customers provided
tenders.
own account.
and
d a i l y t o t h e - F e d e r a l R e s e r v e B a n k o f N e w Y o r k t h e i r position
to Government
of
companies and
Tenders
Public
of b i l l s a p p l i e d for,
in whole or in part,
stated price
unless
the right
of
tenders
m a t u r i n g F e b r u a r y 13,
1975.
Under
are excluded
bills
the bills
are
a n y o r a l l tenders,
tenders for each issue for
for
and 1221(5)
sold,
return,
t h e average
t h e r e s p e c t i v e issues.
1975,
i n cash or
o f T r e a s u r y bills
C a s h a n d e x c h a n g e t e n d e r s w i l l r e c e i v e e q u a l treat
t h e n e w bills.
i s s u e d h e r e u n d e r a r e s o l d i s c o n s i d e r e d to
r e d e e m e d or o t h e r w i s e d i s p o s e d of,
Accordingly,
issued hereunder must
as o r d i n a r y g a i n o r loss,
the price paid for the bills,
t h e p a r v a l u e of
o f t h e I n t e r n a l R e v e n u e C o d e o f 1954. the
(other than life insurance companies)
tax
Subject
$ 2 0 0 , 0 0 0 or less
in full at
F e b r u a r y 13,
in a like face amount
from consideration as capital assets.
Federal income
company.
i n a c c o r d a n c e w i t h t h e b i d s m u s t b e m a d e or
amount of discount at w h i c h bills
accrue when
2 p e r c e n t of
shall b e final.
in e x c h a n g e a n d the issue p r i c e of
Sections 454(b)
of
t h e T r e a s u r y o f the
Cash adjustments will be made for differences between
accepted
i n investment
T h e S e c r e t a r y o f the
to accept o r r e j e c t
the F e d e r a l R e s e r v e B a n k or B r a n c h o n
maturing bills
e x c e p t f o r their
T h o s e s u b m i t t i n g c o m p e t i t i v e t e n ders
of a c c e p t e d compet i t i v e b i d s
immediately, a v ailable funds or
ment.
trust
from any one bidder will be accepted
for accepted
s e t f o r t h in
t h e t e n d e r s a r e a c c o m p a n i e d b y an
by an incorporated b a n k or
noncompetitive
(in t h r e e d e c i m a l s )
at
are
s u b m i t tenders
f r o m i n c o r p o r a t e d banks
and his action in any such respect
to t h e s e r e s e r v a t i o n s ,
completed
tenders
the acceptance or rejection thereof.
expressly reserves
Settlement
to submit
announcement will be made by the Department
w i l l b e a d v i s e d of
without
the customers
from others must be accompanied by payment
and p r ice r a nge of accepted bids.
Treasury
thereon may
from responsible and recognized dealers
express guaranty of payment
other
the names of
Others will not be permitted
the face amount
price
and borrowings
Tenders will be received without deposit
securities.
amount
-
a n d t h e bills
t h e o w n e r of
i n c l u d e in his
the d i f f e r e n c e between
w h e t h e r on original issue or on subsequent
purchase»
and the amount a c t u a l l y r e c e i v e d eith e r u p o n sale or r e d e m p t i o n at maturity
d u r i n g th e t a x a b l e y e a r f o r w h i c h t h e r e t u r n is made.
Department of
prescribe
issue.
Branch.
the T r e a s u r y C i r c u l a r No.
the terms of
Copies of
418
(current revision)
a n d this not
t h e T r e a s u r y b i l l s a n d g o v e r n t h e c o n d i t i o n s o f the i r
t h e c i r c u l a r m a y b e o b t a i n e d f r o m a n y F e d e r a l R e s e r v e Bank o
Department of t h e f R E A S U R Y
HINGTON, D C. 20220
T E L E P H O N E W04-2Û41
FOR IMMEDIATE RELEASE
February 4, 1975
TREASURY ISSUES PRELIMINARY DETERMINATION
IN COUNTERVAILING DUTY INVESTIGATION
ON CERTAIN JAPANESE ELECTRONICS PRODUCTS
Assistant Secretary of the Treasury David R. Macdonald
announced today the issuance of a preliminary determination
in a countervailing duty investigation with respect to
certain Japanese consumer electronic products. This
determination states that although the benefits of the
programs which Treasury investigated under the counter
vailing duty law appear to be de minimis, reports will be
required from Japanese exporting firms which are eligible
for benefits under one particular tax deferral program
before final action is taken.
Action in this case was taken under Section 303
of the Tariff Act of 1930, as amended (19 U.S.C. 1303) .
Under this section, the Secretary of the Treasury is
required to assess an additional duty equal to the amount
of a "bounty or grant" paid or bestowed on merchandise
imported into the United States. The Determination, which
will appear in the Federal Register of February 5, 1975,
states that:
...benefits have been received under
three programs which constitute bounties
or grants within the meaning of Section
303 of the Act. These programs include
preferential interest rate loans from
the Japanese Development Bank, pro
motional assistance from the Japan
External Trade Organization (JETRO),
and tax deferrals under the Overseas
Market Development Reserve.
In the first two programs, the
benefits bestowed on exporters involve
an amount considered to be de minimis.
In the case of the Overseas Market
Development Program, the aggregate data
available indicates that the pro rated
-
'
2-
benefits to exporters of the consumer
electronic products in question are also
de minimis, and that, when considered in
this light in the aggregate, all three
programs combined are also considered
de minimis. Since the Overseas Market
Development Program is available only
to firms which are capitalized at less
than one billion yen, however, signifi
cant benefits could conceivably be
concentrated in a few smaller firms
exporting these products to the United
States. In order to ensure that
significant bounties or grants are
not being paid or bestowed under this
program, the Commissioner of Customs
will require reports from Japanese
firms eligible for tax deferrals under
the Overseas Market Development Pro
gram and exporting the consumer electronic
products in question to the United States
to ascertain whether and to what extent
they benefit from the program.
If no Japanese firms are found to benefit from this
program in more than an amount considered legally and
economically insignificant in relation to the quantity of
exports involved, a final negative determination will be
issued. In the event that significant subsidies under
this program are found, appropriate action will be taken
under the law.
A list of the affected consumer electronic products
is attached to this release.
Interested persons will have an opportunity to sub
mit their views on the preliminary action before Treasury
makes a final determination in this case.
During calendar year 1973 imports of electronic
products from Japan were valued at approximately $1.7 billion.
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Transcript
Number of Pages Removed: 2
Author(s):
Title:
"The American Woman" Interview with William Simon
Date:
1975-02-11
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
OepartmentoftheTREASURY
INGTON. D C. 20220
T E L E P H O N E WQ4-2041
FOR IMMEDIATE R E L E A S E
February 14, 1975
Contact: ORS Public Affairs
(202)634-5248
W a s h in g to n , D. C.
--
F o r th e f i r s t t i m e s i n c e th e 19 7 0 c e n s u s ,
p e r - c a p i t a income and p o p u l a t i o n d a t a have been updated f o r more than
39,000 l o c a l government r e c i p i e n t s o f g en e ra l reve nu e s h a r i n g f u n d s .
Graham W. W a t t , D i r e c t o r o f t h e T r e a s u r y D e p a r t m e n t ' s O f f i c e o f
Revenue S h a r i n g , s a i d th e new d a t a i s be in g f o r w a r d e d t o a l l
governments by mail t o d a y .
L o c a l government o f f i c i a l s w i l l
local
be g iv e n
30-days t o r e v i e w t h e d a t a and e i t h e r a c c e p t i t by no response o r
provide e v id e n c e t o s u p p o r t pro po sed c h a n g e s , Wa tt s a i d .
In th e e v e n t o f a l o c a l c h a l l e n g e o f d a t a , s u p p o r t e d by r e c i p i e n t government j u s t i f i c a t i o n o f t h e propo sed c h a n g e s , th e O f f i c e o f Revenue
Sharing w i l l work w i t h th e Bureau o f t h e Census o r t h e Bureau o f I n d i a n
A ffa irs to su b s ta n tia te or c o rre c t the questioned data.
The new d a t a b ei n g m a i l e d t o d a y i s based on 1973 p o p u l a t i o n and
1972 p e r - c a p i t a income f i g u r e s p r o v i d e d by Census and t h e Bureau o f
Indian A f f a i r s .
Ge ne r a l Revenue S h a r i n g a l l o c a t i o n s t o r e c i p i e n t
governments a re based on a f o r m u l a i n c l u d i n g p o p u l a t i o n , p e r - c a p i t a
-more-
2
i n c o m e , and l o c a l t a x e f f o r t .
today w i ll
The new da t a be in g d i s t r i b u t e d f o r revi ew
be used i n c a l c u l a t i n g g e n er a l revenue s h a r i n g S i x t h E n t i t l e m e n t
P e r i o d ( J u l y , 1975 - J u n e , 1 9 7 6 ) a l l o c a t i o n s t o a l l
The t o t a l
r e c i p i e n t governments.
t o be p a i d f o r t h a t p e r i o d i s $ 6 , 3 5 0 , 0 0 0 , 0 0 0 .
Payments are
made q u a r t e r l y .
T o d a y ' s m a i l i n g o f new d a t a i n f o r m a t i o n a l s o i n c l u d e s s p e c i a l forms
f o r some 697 r e c i p i e n t government whose d a t a f o r E n t i t l e m e n t P e r i o d S i x
a l l o c a t i o n s may have been a f f e c t e d by a P r e s i d e n t ! * a l l y - d e c l a r e d ma jor
n a t u r a l d i s a s t e r between A p r i l
1 and June 3 0, o f 1 9 7 4 .
In t h o s e c a se s,
t h e D i s a s t e r R e l i e f A c t o f 19 7 4 p e r m i t s th e j u r i s d i c t i o n s t o use t h e i r
p r i o r y e a r d a ta i f t h e E n t i t l e m e n t P e r i o d S i x d a t a were a d v e r s e l y a f fe c t e d
by th e o c c u r a n c e .
R e c i p i e n t j u r i s d i c t i o n s o f th e se s p e c i a l forms must
c e r t i f y such d i s a s t e r e f f e c t s w i t h i n th e n e x t 3 0 - d a y s .
A ll
S t a t e s , C o u n t i e s , C i t i e s , Town s, T o w n s h i p s , I n d i a n T r i b e s and
A l a s k a n n a t i v e v i l l a g e s a re r e c i p i e n t s o f g en era l re venue s h a r i n g fun ds.
T o - d a t e , some $ 1 7 . 3 b i l l i o n
i n g en er a l re venue s h a r i n g fun d s have been
d is trib u te d to re c ip ie n t ju r is d ic tio n s .
total
The 1 9 7 2 - 7 6 program w i l l pay a
o f $ 3 0 .2 b i l l i o n i n shared r e v e n u e s .
P r e s i d e n t F o r d has announced
h i s i n t e n t t o propose t o th e 94th Congress a f i v e - y e a r - n i n e - m o n t h renewal
o f th e program t h a t a l l o w s S t a t e and L o c a l governments t o u t i l i z e
Federal
a s s i s t a n c e fun ds i n accordan ce w i t h S t a t e and l o c a l p r i o r i t i e s es ta b l i s h e d
by t h e i r own o f f i c i a l s .
#
Department of th e T R E A S U R Y
ruary
14,
1975
IS
tnd f o r $ 2 . 5 b i l l i o n
s b r u a r y 20, 1 9 7 5 ,
lils a r e
as
follows:
îk b i l l s
A u g u s t 2 1,
1975
Equivalent
Annual Rate
5.447%
5.495%
5.483%
i/
e allotted
56%.
e allotted
93%.
rE D I S T R I C T S :
Accepted
for
15,000
55,000
$
5,515,000
2,084,995,000
o
o
o
o
10,870,000
£0,000
19,130,000
55,000
50,000
7,045,000
9,470,000
b,ooo
149,095,000
05,000
23,405,000
15,000
45,000
2,395,000
9,840,000
80,000
5,480,000
40,000
173,135,000
05,000
$2,500,375,000
k/ Includes $ 3 7 1 , 2 7 5 , 0 0 0 n o n c o m p e t i t i v e t e n d e r s f r o m t h e p u b l i c .
£/ Includes $ 1 0 2 , 0 2 0 , 0 0 0 n o n c o m p e t i t i v e t e n d e r s f r o m t h e p u b l i c .
y These r a t e s a r e o n a b a n k - d i s c o u n t b a s i s .
The equivalent coupon-issue
yields a r e 5 . 5 6 % f o r t h e 1 3 - w e e k b i l l s , a n d 5 . 7 2 % f o r t h e 2 6 - w e e k b i l l s .
Department of th e JR E A S U R Y
NGTON,
D.C. 20220
FOR R E L E A S E
T E L E P H O N E W04-2041
6:30 P.M.
February
RESULTS
Tenders
for
$2.7 b i llion
of 2 6 - w e e k T r e a s u r y
were o p e n e d
at
O F T R E A S U R Y 'S W E E K L Y
bills,
of
both
the F e d e r a l R e serve
RANGE O F A C C E P T E D
COMPETITIVE BIDS:
to b e
Banks
bills
issued
today.
13-1w e e k b i l l s
m a t u r i n g M a y 22, 1 9 7 5
:
and
for
$2.5
on February
The
details
20,
are as
Annual Rate
: Price
5.360%
; 97.246
5.428%
. 97.222
5.495%
Average
98.633
5.408%
. 97.228
5.483%
1 tender
of
1975
Equivalent
Annual Rate
98.645
98.628
a/ E x c e p t i n g
follows:
26-week bills
A u g u s t 2 1,
Low
High
billion
1975,
: maturing
Equivalent
Price
1975
BILL AUCTIONS
13-week Treasury
series
14,
1/
a/
5.447%
i/
$750,000
Tenders
at
the
low price
for
the 13-week bills w e r e allotted
56%.
Tenders
at
the low price
for
the 26-week bills were
93%.
TOTAL T E N D E R S A P P L I E D
District
FOR AND ACCEPTED
Applied For
BY
FEDERAL RESERVE DISTRICTS:
Accepted
46, 150, 000 $
Boston
27, 710,,000
$
3 ,207, 375, 000 2,135, 845,,000
New York
25, 170,,000
25, 670, 000
Philadelphia
38, 245,,000
40, 885, 000
Cleveland
66, 560, 000
25, 060,,000
Richmond
25,
800,,000
35,
585,
000
Atlanta
168,
530,,000
275,
245,
000
Chicago
48,
000
26,
855,,000
635,
St. Louis
19, 060, 000
6, 450,,000
Minneapolis
42,
000
975,,000
315,
31,
Kansas City
000
610,,000
34,
610,
19,
Dallas
169, 340,,000
250, 775, 000
San Francisco
TOTALS
allotted
$4 ,092, 865, 000 $2,700, 590,,000
Applied For
A c c e p t e d ________
$ ,21,515,000 $
5,515,000
3,803,355,000 2,084,995,000
10.870.000
18.870.000
49.130.000
19.130.000
7.045.000
41.055.000
9.470.000
16.650.000
149.095.000
269.545.000
49.405.000
23.405.000
2.395.000
14.915.000
9.840.000
27.845.000
5.480.000
18.480.000
319.940.000
173.135.000
,500,375,000c/
$4,650,705,000
V Includes $ 3 7 1 , 2 7 5 , 0 0 0 n o n c o m p e t i t i v e t e n d e r s f r o m t h e p u b l i c .
£./ Includes $ 1 0 2 , 0 2 0 , 0 0 0 n o n c o m p e t i t i v e t e n d e r s f r o m t h e p u b l i c .
1/ T h e s e r a t e s a r e o n a b a n k - d i s c o u n t b a s i s .
The equivalent coupon-issue
y i e l d s a r e 5 . 5 6 % f o r t h e 1 3 - w e e k b i l l s , a n d 5 . 7 2 % f o r the. 2 6 - w e e k b i l l s .
REMARKS BY THE HONORABLE STEPHEN S. GARDNER
DEPUTY SECRETARY OF THE TREASURY, BEFORE THE
SENATE APPROPRIATIONS COMMITTEE
THURSDAY, FEBRUARY 13, 1975
Mr. Chairman and Members of the Committee:
It is a pleasure to appear before this distinguished
committee as you begin your considerations of the President's
proposed budget for Fiscal Year 1976.
I believe that my colleagues from the Administration
who are also here this morning, Mr. Lynn and Mr. Greenspan,
will be presenting a detailed exposition of the budget and
responding to your questions on our economic forecasts.
In representing the Treasury Department and Secretary Simon,
I would like to discuss the budget more generally within
the framework of our overall economic policies.
As President Ford stated in his budget message to
the Congress, this budget marks the beginning of our
bicentennial observance. It also comes at a time when
our economy appears to be in the most difficult straits
since World War II. Thus, it is especially important
that we act wisely and well as we lay the foundations for
our third century as a nation.
We believe that the policy recommendations submitted
by the President represent a sound and sensible approach
for lifting us out of the recession without reigniting
the fires of inflation.
The budget message itself is a remarkably candid docu
ment, but perhaps it has created a greater sense of pessimism
about the future than is justified. It confirms that unemploy
ment this year will average above 8 percent. It shows that
the rate of inflation for the full year may again break the
double digit barrier. And it also indicates that our troubles
are unlikely to disappear quickly.
Nonetheless, we also believe that the trend of the
economy through the year should be considerably better than
last year. While unemployment was rising at the end of 1974,
\ we expect it to be falling by the end of 1975. While the
\ rate of inflation was above 10 percent at the end of 1974,
lt: should fall below 10 percent by the end of 1975. Thus,
jJ as we enter 1976, even though our progress may be slower
than anyone would like, we expect that the Nation will be
on the road to recovery.
-
2
-
In view of the difficulties that economic forecasters
have had in the past, we realize that these calculations
may be greeted with some skepticism. Nevertheless, there
are solid grounds for hope.
For one thing, there are positive cyclical forces with
in three areas of the economy — housing, consumer spending,
and inventory investment — that should begin to assert them
selves during the second half of the year:
— As you know, the housing industry went into a decline
when inflation dried up the supply of mortgage credit and
drove up interest rates. With the Federal Reserve now pro
viding greater monetary ease and with inflation receding
somewhat, short-term interest rates have declined sharply.
This has renewed the flow of funds into the thrift institu
tions and has provided the essential precondition for an
upturn in housing.
— Similarly, some of the same forces that created
inflation also cut deeply into the real income of consumers,
causing consumer spending to suffer its biggest drop since
the Second World War. Now, with the rate of inflation
subsiding and with a pattern of higher wage settlements
having emerged, the real income of workers should be on
the upgrade again during 1975. As it turns upwards, we
should experience higher rates of consumer spending.
— With regard to inventories, the picture is more
mixed, but it seems clear that many businessmen, as in
the auto industry are now liquidating excessive stocks.
Consumer purchasing should continue at a sufficiently
high pace to drain off much of these excessive inventories,
so that before the year is out, inventory investment will
again become a positive factor.
Thus, within the recession itself, we can find the seeds
of recovery. As they take root and grow, the recession
will bottom out and we can begin the long road back.
A second factor in buoying our hopes for recovery is
the supportive monetary policy of the Federal Reserve Board.
Its chairman, Arthur Burns, has testified on several occasions
that the Federal Reserve intends to follow an expansive
policy while also trying to prevent an explosion in the money
supply. As I have noted, we are already seeing results of
these policies in the decline of short-term interest rates.
3
The third factor which strengthens our prospects for
a recovery is the budget itself. The President has pro
posed a $16 billion tax cut not because the economy would
not recover without it, but because it will make the recovery
in the second half of the year more solid and certain. More
over, the budget provides for an estimated $18 billion for
expanded unemployment compensation and bigger public service
employment programs during Fiscal Year 1976. I must also
point out that total outlay s in the new budget represent an
increase of more than $80 billion over the level of just
two years ago. The sharp increases in spending underscore
the fact that the President has been, and will continue to
attack the problems of recession. The President remains
committed to the position that he will do everything he can
to alleviate the suffering caused by unemployment.
Tax Cut Versus Higher Spending
Some members of Congress have asked why the President
has chosen a tax cut as the primary form of stimulation
and why he is resisting much larger spending programs.
Let me try to address those questions.
In planning on how fiscal stimulus could best be intro
duced into the economy, we carefully considered both basic
options — cutting taxes or increasing expenditures beyond
budgeted levels or some combination of the two. We decided
that the tax route was highly preferable for two reasons.
First, the stimulus from a tax cut will get into the
income stream much more rapidly than a further rise in
Federal expenditures.
Some have questioned this view because they believe
a large number of households would save rather than spend
their tax rebates. Although most of the money will go
directly into the spending stream, there are certainly
many families who will put it in the savings bank, or
will use it to pay off debt. But the money that goes into
the savings account or is used to repay debt will also be
very helpful in strengthening the economic recovery. I
have in mind, particularly, the money that flows into
savings and loan associations and the other financial inter
mediaries that provide the great bulk of funds for new
mortgages. The tax-rebate dollars which flow in that
direction will surely aid the hard-hit housing industry.
4
It would also be wrong to assume that the initial
desire by some households to save their tax rebates will
mean that the tax cut will not work to stimulate consumer
spending. Once households have increased their liquidity
position, either by adding to savings or reducing their
debt, they will feel much better about their economic
situation. They will have more confidence in their eco
nomic future and a more positive attitude about spending
from their current income.
Thus, whether the tax-rebate checks go in the first
instance into savings or whether they go directly into
spending, it will not be very long at all before the great
bulk of the tax rebate gets into the spending stream and
thereby contributes to a recovery in economic activity.
The other side of this coin is even more important
to the issue of prompt economic stimulus: The fact that
with few exceptions, additions to federal spending programs
for goods and services are likely to be much too slow in
providing impetus to the economy. This fact was persuasive
ly documented by a study made several years ago by
Nancy H. Teeters of the Brookings Institution. She analyzed
the experience of the 1962 accelerated public works program -and I emphasize the accelerated nature of that effort., The
program was passed in September, 1962, with initial obligational authority of $850 million. Although $152 million
of the amount was obligated in that fiscal year,, only $62
million was spent then. The bulk of the money was obliga
ted and spent in Fiscal Years 1964 and 1965, with vestiges
of the program still in existence in 1971.
This is shown in the table below.
Tabic 4. New Obligalional Authority, Obligations, and Expenditures
coder the Public Works Acceleration Program, Fiscal Years 1963-71
Mitions of dollars
Obligations
Fiscal
year
|*SJ
1564
1565
1566
1967
1963
1969
n :o
1971 (est.)
Total
N ew
obligalional
authority
850.0
3 0 .0
4 .0
S ta te
a n d local
projects
96 .7
313.7
192.3
Federal
projects
5 5.0
81.8
15.7
3 .0
1 .9
0 .6
...
...
...
...
» • •
• • •
• • •
- •
...
...
...
• • •
• • •
884.0
602.7
Administration
152.5
...
•. »
5 .5
E xpendi
tures
6 2 .5
331.8
321.6
8 8 .2
21.1
5 .0
2 .0
0 .8
3 .0
836.0
Source»: T he B u d g et o f th e U n ite d S ta te s G overnm ent.
various fiscal years, and T h e B u d g e t o f th e U n ite d
G overnment— A p p e n d ix , various fiscal years.
5
The momentum of federal spending growth is already
so strong that it is hard to imagine a deliberate policy
decision to boost it still further. If, however, we were
to make a decision now in an effort to provide economic
stimulus during the current recession, we could expect
to get only a very small part of the Work started when it
is most needed. Remember that the 1962 program described
above was an accelerated public works program; special
efforts were made to get the program moving in a hurry.
If that program can be used as a model — and we have no
reason to believe otherwise — we could expect that of
the additional funds voted early in Fiscal 1976 for one
or another federal program, only about 7 percent of the
expenditures would be made during that fiscal year, when
the economic recovery should still be in its early stages.
The bulk of the spending would take place at a time when
we may want to apply fiscal restraint to ward off a renewal
of inflationary pressures. Thus, the economic effects of
a further rise in federal spending would be of extremely
limited help during and immediately after the recession
and could be seriously inflationary a couple of years
from now, when so much of the spending would actually
take place.
The second reason why we feel that cutting taxes is
a superior means of providing stimulus to the economy as
opposed to further increases in government spending is
that it puts the stimulus in the most dynamic sectors of
the economy. The private sector still provides some 85
percent of all the jobs in this country. If we are going
to bring down the rate of unemployment, it is vital that
we have a vigorous recovery in the private sector. While
increases in unemployment compensation and public service
employment programs are very desirable to cushion the fall
in employment during the recession, they do not provide the
foundation for a productive and prosperous economy. Increased
government spending can provide additional demand in the
private sector, but through secondary effects rather than
directly. Surely the most efficient means of creating
additional job opportunities in this economy is to provide
incentives directly for the private sector. We want to do
that both by increasing consumer demand through cuts in
individual income taxes and by a boost in the investment
tax credit to spur new spending by businesses for the
plant and equipment that is vitally needed.
6
Need for Spending Restraint
In the belief that the budget as proposed already
includes a healthy degree of economic stimulation, the
President has asked for a moratorium on new spending
programs and for firm limits on several existing programs.
As he has said, his position is not set in concrete and
we must adjust our policies to meet changing circumstances,
but it is clear that a central emphasis of our economic
policy is to restrain further growth in the Federal budget.
A primary reason for this emphasis is the continuing
threat of inflation. Even though the rate of inflation is
subsiding somewhat, it could easily shoot upwards again if
we overheat the economy, as we have done so often in the
past. Furthermore, it is essential to understand that the
forces of inflation are very largely to blame for the
recession we are experiencing today. Both the housing
industry and consumer spending, as I have noted, faltered
under the pressures of rising prices. If we revive those
pressures through excessive fiscal and monetary policies,
there is a very real danger that we will enter a new and
more vicious cycle of inflation and recession. It is
imperative that we be continually alert to the threat of
new inflation. We must attack both the recession and
inflation at the same time, and that requires a balanced,
careful approach — the kind of approach contained in
this budget.
We have also made no secret of our views that the
budget deficits which are already projected — some $87
billion for Fiscal Years 1975 and 1976 — will cause strains
in the private financial markets. Those strains should be
manageable, but — and I want to stress this — they will
remain manageable only if Federal borrowing needs do not
become significantly larger and if they are only temporary
in duration.
There is, of course, another school of thought on the
question of Federal borrowing in the capital markets. This
other school believes that the Government's borrowing needs
should be easily met because private demands for funds
should slacken considerably.
It is true that financial conditions normally ease
substantially during a recession and normally they remain
easy well into the period of recovery. There are two main
reasons for this: First, some private demands for credit
are closely related to the pace of business activity and
7
drop sharply during a recession. An example can usually'
be found in short-term business borrowing to finance
inventories. Second, the Federal Reserve customarily
"leans against the wind" during a period of recession and
seeks to expand, or at least maintain, the rate of growth
in money and credit. Therefore, interest rates can be
expected to decline and the availability of credit to
increase as a normal part of the cyclical process.
Considerations of this nature have apparently led
some observers to conclude that the financing of large
Federal deficits in the current recession is a routine
matter and of little economic significance. Secretary Simon
and I, as well as many other members of this Administration,
differ with that judgment.
As we have said on several occasions, the current
recession is an outgrowth of a long period of inflation
that has left an unusually heavy residue of private fi
nancing demands. In recent years, there has been a marked
decline in real corporate profits and a serious erosion of
the liquidity base of households and businesses. Condi
tions in the stock market have virtually ruled out the sale
of new equity as a source of funds and have postponed needed
long-term debt refinancing.
For these and other reasons, the number of private
long-term debt issues coming into the market is unusually
large.
Our latest Treasury projections show that net new
corporate bond issues, which rose from $12-1/2 billion in
1973 to $25 billion in 1974, will advance even farther to
some $30 billion or more in 1975. While corporate capital
spending programs are being cut back, there will still be
a very heavy volume of corporate long-term borrowing.
Furthermore, the state and local fiscal position has changed
dramatically. With tax receipts reduced by the recession,
their surpluses have melted away so that their borrowing
needs should be substantial.
Some slackening in private demands for short-term
credit is underway and more can be expected. Yet by any
previous recession standards, total private demands for
credit — both short and long-term — are likely to remain
Much larger than might ordinarily be expected in a recession.
8
Federal requirements will, of course, have to be met.
But there are clear risks in such a situation. First, if
private demand does not fall back spontaneously to make
room for the larger Federal borrowing, credit demand will
outrun supply, interest rates will be driven higher, and
some private borrowers will be crowded out. Judging from
past experience, the housing industry would be likely to
suffer. Indeed, its recovery might even be aborted. At
the worst, these financial pressures could constrain the
normal cyclical recovery that would otherwise occur.
The second risk is on the inflation side. Some
observers suggest that, in order to avoid any strains on
the credit markets, the Federal Reserve should undertake
whatever rate of growth in money and credit is required
to insure that Federal and all other borrowing requirements
are met at stable or declining interest rates. This
approach, however, could be a sure formula for still higher
inflation rates when the recovery gets into full swing —
if not sooner.
We are not saying that any of these events will occur,
but there is a high risk of their occuring should private
market demands continue as expected and Federal borrowing
demands be increased substantially.
The key to successful financing of the large Federal
deficits lies in diligent restraint of Federal expendi
tures. Large as they are, the deficits projected for Fiscal
Years 1975-76 can probably be accommodated, although they
will produce some strains in the financial markets. How
ever , if the Congress were to push Federal expenditures
much beyond the budgeted levels, it would not be possible
to retain much optimism as to the result. Either the
recovery would be delayed or more inflation would be ex
perienced in the future.
In our opinion, the projected deficits for Fiscal
1975-76 are — in the context of our expectations about
the course of the economy — about as large as our financial
system can tolerate without doing more harm than good for
the economy.
Conclusion
Mr. Chairman, in conclusion, I would like to re-emphasize
our belief that the President's budget is a sound and balanced
9
(
>
approach to the challenges confronting us. It is a vital
part of a broader strategy to bring both the recession and
inflation under control while at the same time taking the
first vital steps toward achieving self-sufficiency in
energy. As the President has promised, we are anxious to
work with you as closely as possible to reconcile our views
and to provide the American people with the strong leader
ship they deserve.
Thank You.
1
ize
¡Departm ent o f t h e T R E A $ U R Y
Kington, d.c. 2 0 2 2 0
m
telephone
W0 4 - 2 0 4 1
RELEASE ON DELIVERY
STATEMENT BY
JACK F. BENNETT
UNDER SECRETARY OF THE TREASURY
FOR MONETARY AFFAIRS
BEFORE THE
SENATE COMMITTEE ON INTERIOR
AND INSULAR AFFAIRS
FEBRUARY 13, 1975
Mr. Chairman, I appear this morning on behalf of
Secretary Simon to make clear the Treasury's support
for Title XIII of the Energy Independence Act of 1975
proposed by the President.
We believe the standby
Executive authority to be provided by this Act is
essential to insure that the President may act appro
priately to deal with two possible contingencies:
first, a national energy shortage which threatens the
national security and is created by either an interruption
m imported petroleum supplies or acts of God or sabotage;
and second, the need to fulfill international obligations
undertaken by the U.S.
I will discuss each of these
briefly.
National Energy Shortages.
Administrator Zarb and Assistant Secretary Carlson
have already described the specific details of our proposed
legislation, and I would like to concentrate at this time
2
on the particular need for the authorities involved„
The Nation’s current vulnerability to interruptions
in its supply of petroleum imports has been clearly
established, and needs no detailed repetition here.
At present, we rely upon foreign sources for approximately
35 percent of our oil supply0
The possibly grave adverse effects of this reliance
upon foreign sources in the event of a sudden, major
interruption were demonstrated by the embargo on crude
oil imposed in October of 1973 by certain members
of the
Organization of Petroleum Exporting Countries»
Even though not as all-embracing as
it might have
been, this embargo kept 2»4 million barrels per day from
reaching United States shores, and had far reaching
consequences throughout the nátional economy.
The impacts
of the 1973 embargo have been documented
most recently in the report of an investigation undertaken
at the request of Secretary Simon pursuant to Section 232
of the Trade Expansion Act»
This report was submitted to
the President on January 14, 1975, and I am attaching a
copy for the record»
In this report, the Secretary found, inter alia,
that petroleum was being imported in excessive quantities
3
¡and at levels that were continuing to increase0
The
¡report also pointed out that, during the first quarter
¡of 1974, following the cut-off in foreign supplies, the
seasonally adjusted Gross National Product fell by 7 percent
Increased energy prices following the cut-off are believed
to have caused 30 percent of the increase experienced in
the Consumer Price Index.
Moreover, additional sources of domestic energy
expected to emerge in the next several years will them
selves be exposed to some risk of interruption.
Develop
ment of the oil fields on the North Slope of Alaska and
delivery of these resources to the contiguous United States
will require the use of the Trans-Alaska Pipeline, and
terminal facilities both in Alaska and on the West Coast.
Both the pipeline and the terminal facilities will present
security problems from the standpoint of possible acts of
sabotage or natural disaster.
Our current efforts towards conservation and increased
domestic production are taking effect, and will continue
0 do so in the coming months and years.
It is, however,
clear that the nation will remain, for the near future,
vulnerable to sudden, large supply interruptions such as
t^L .
at represented by the recent embargo or by the types
\
emergency I have mentioned.
- 4 -
We must begin now to prepare ourselves for such
eventualitieso
To accommodate possible interruptions,
the President should have the authority to act expediti
ously to minimize the serious dislocations that would
result.
Accordingly, the proposed legislation would
authorize direct federal action to regulate the distri
bution of existing stocks through allocation and rationing,
and to increase available supplies through adjustment of
current levels of production.
Since the problems that would be presented by the
emergency circumstances I have noted above involve not
only the availability of petroleum but its deliverability
to specific areas, we have also proposed that the President
be granted authority to allocate materials and equipment
connected with petroleum delivery systems.
At this point I would like to comment briefly upon
what I consider to be the most critical element of the
legislation we have proposed, namely its standby and
discretionary
character.
Experience has demonstrated
the importance of our ability at the federal level to
act decisively, effectively, and expeditiously where
critical shortages arise.
Experience has also demonstrated,
however, that the exercise of the kinds of authorities
that would be needed to accommodate such shortages could
have the undesirable effect of creating new distortions
and requiring the establishment of new bureaucratic
machinery.
5
In any case, we do not relish the prospect of having
to utilize the authorities contained in the proposed
legislation.
As a result, our bill is expressly condi
tioned upon a finding by the President that energy
shortages reflecting truly serious threats to the national
security exist.
Only such a finding will trigger either
the authority or the need for the President to act under
the sections not relating to international agreements.
IIo International Aspects
In addition to the authorities granted to the
President to react to grave domestic energy shortages,
the proposed legislation is also designed to create the
authorities necessary to implement the Agreement on an
¡International Energy Program (the "IEPn) signed by the
United States on November 18, 1974.
Representatives of
the State Department are prepared to discuss with you the
elements of that agreement and the domestic legislation
required to implement
its provisions.
The Administration proposal has been drafted so as
to fulfill these requirements and to allow our participa
tion in the International Energy Agency.
I would like to note, however, the importance of
phis Agency in establishing a comprehensive and meaningful
I omestic energy policy.
We are by no means alone in our
6
present high levels of imports.
Most of the Free World
is today heavily dependent on imported energy, and longrange cooperative solutions are required for problems
that we now have in common 0
The underlying basis of our approach has been the
development of a coordinated response among the consuming
nations.
To this end, an intensive series of discussions
has been taking place during recent weeks and months.
The success of these efforts depends upon all partici
pating nations agreeing to cooperate in the field of
finance, to build common levels of energy self-sufficiency,
develop restraint programs to reduce oil consumption at a
common rate, and allocate oil equitably among participants
in an emergency.
Thus, the proposed legislation would give us the
authority to achieve the desired result both domestically
and internationally,
Conclusion
The Nation has already experienced the grave results
of one curtailment of our imported supplies of energy.
Its serious impacts throughout the economy placed strains
upon all of our energy production, distribution and
financial resources.
7
A tta c h m e n t
THE
SECRETARY
OF THE
WASHINGTON
TREASURY
2 0 2 2 0
0
JAN X U
MEMORANDUM FOR THE PRESIDENT
SUBJECT:
Report on Section 232 Investigation on
Petroleum Imports
This report is submitted to you pursuant to Section
232 of the Trade Expansion Act of 1962, as amended, and
results from an investigation that I initiated under that
Section for, the purpose of determining whether petroleum*
is being imported into the United States in such quantities
or under such circumstances as to threaten to impair the
national security.
At the present time, the demand for petroleum in the
United States is 18.7 million barrels per day. Of this
amount, imports provide 7.4 million barrels daily. The
deficit in petroleum production compared with demand has
grown since 1966, when the United States ceased to be
self-sufficient.
i
Our increasing dependence upon foreign petroleum had,
|by 1973, created a potential problem to our economic welIfare in the event that supplies from foreign sources were
interrupted. Its adverse contribution to our balance of
payments position had also significantly increased, and
for the year 1973 the outflcw in payments for the purchase
pf foreign petroleum was running at $8.3 billion annually,
pnly partially offset by exports of petroleum products.
In September 1973, the worsening petroleum import
pituation was further seriously aggravated by an embargo
on crude oil imposed by the Organization of Petroleum Ex
porting Countries, which effectively kept 2.4 million
¡needed,barrels of oil per day from U. S. shores. After
I o initiation of the embargo, the price of imported oil
|^u^ ruPled from approximately $2.50 per barrel to approxiI ately $10.00 per barrel and has since that time risen
¡somewhat further. Simultaneously, the balance of payments
* Th o +.
I.J tG^m "petroleum", as used in this report, means crude
L r P-^Hcipal crude oil derivatives and products, and
ated products derived from natural gas and coal tar.
2
problem deteriorated by reason of the increased oil bill
paid by United States consuming interests. Today the
outflow of payments for petroleum is running at a rate of
$25 billion annually.
As a result of my investigation, I conclude that the
petroleum consumption in the United States could be reduced
by conserving approximately one million barrels per day
without substantially adversely affecting the level of
economic activity in the United States. Any sudden supply
interruption in excess of this amount, however, and partic
ularly a recurrence of the 2.4 million barrel per day
reduction which occurred during the OPEC embargo, would
have a prompt substantial impact upon our economic well
being, and,., considering the close relation between this
nation*s economic welfare and our national security, would
clearly threaten to impair our national security.
Furthermore, in the event of a world-wide political
or military crisis, it is not improbable that a more
complete interruption of the flow of imported petroleum
would occur. In that event, the total U. S. production
of about 11 million barrels per day might well be |
insufficient to supply adequately a war-time economy,
even after mandatory conservation measures are imposed.
As a result, the national security would not merely be
threatened, but could be immediately, directly and
adversely affected.
In addition, the price at which oil imports are now
purchased causes a massive payments outflow to other
countries. The inevitable result of such an outflow is
to reduce the flexibility and viability of our foreign
policy objectives. For this reason, therefore, a payments
outflow poses a more intangible, but just as real, threat
to the security of the United States as the threat of
petroleum supply interruption. On both grounds, decisive
action is essential.
3
FINDINGS
As a result of my investigation, I have found that
crude oil, principal crude oil derivatives and products,
and related products derived from natural gas and coal
tar are being imported into the United States in such
quantities as to threaten to impair the national security.
I further find that the foregoing products are being
imported into the United States under such circumstances
as to threaten to impair the national security.
RECOMMENDATIONS
I
therefore recommend that appropriate action be
taken to reduce imports of crude oil, principal crude
oil derivatives and products, and related products derived
from natural gas and coal tar into the United States, to
promote a lessened reliance upon such imports, to reduce
the payments outflow and to create incentives for the use
of alternative sources of energy to such imports. I
understand that a Presidential Proclamation pursuant to
Section 232 of the Trade Expansion Act of 1962 is being
drafted by the Federal Energy Adn.inistration consistent
with these recommendations.
(Signed) William* E . Simon'
William E. Simon
DEPARTMENT OF THE TREASURY
REPORT OF INVESTIGATION OF EFFECT OF PETROLEUM IMPORTS
AND PETROLEUM PRODUCTS ON THE NATIONAL SECURITY PURSUANT
TO SECTION 232 OF THE TRADE EXPANSION ACT, AS AMENDED
By
The Assistant Secretary of the Treasury
for Enforcement, Operations and Tariff Affairs,
David R. Macdonald
January 13, 1975
REPORT OF INVESTIGATION UNDER SECTION 232 OF THE TRADE
EXPANSION ACT, AS AMENDED, 19 U.S.C. 1862
I. INTRODUCTION AND SUMMARY
This investigation is being conducted at the request
and on behalf of the Secretary of the Treasury pursuant
his authority under Section 232 of the Trade Expansion
Act (the "Act"), as amended, 19 U.S.C. 1862. (Annex A)
The purpose of the investigation is to determine whether
crude oil, crude oil derivatives and products, and related
products derived from natural gas and coal tar are being
imported into the United States in such quantities or under
such circumstances as to threaten to impair the national
security. Under 31 CFR 9.3, the Assistant Secretary of the
Treasury for Enforcement, Operations, and Tariff Affairs is
responsible for making this investigation.
of
to
The Secretary of the Treasury has determined pursuant
to Section 232 that it would be inappropriate to hold public
hearings, or otherwise afford interested parties an oppor
tunity to present information and advice relevant to this
investigation. He has also determined pursuant to his
authority under 31 CFR 9.8 that national security interests
require that the procedures providing for public notice and
opportunity for public comment set forth at 31 CFR Part 9
not be followed in this case.
(Annex A)
In conducting the investigation, information and advice
have been sought from the Secretary of Defense, the Secretary
of Commerce, and other appropriate officers of the United
States to determine the effects on the national security of
imports of the articles which are the subject of the investi
gation. Information and advice have been received from the
Departments of State, Defense, Interior, Commerce, Labor,
the Council of Economic Advisers, and the Federal Energy
Administration. (Annex B)
In summary, the conclusion of this report is that
petroleum is_ being imported in such quantities and under
such circumstances as to threaten to impair the national
security of this country.
Petroleum is a unique commodity: it is essential to
almost every sector of our economy, either as a raw material
component or as the fuel for processing or transporting goods,
is thus essential to the maintenance of our gross national
5
6
9
U
80-7
52
-
2
-
product and overall economic health. Only a small percentage
of present U. S. petroleum imports could be deemed to be
secure from interruption in the event of a major world
crisis. The quantity of petroleum imports, moreover, is
now such a high percentage of total U. S. consumption that
an interruption larger than one million barrels per day at
the present time would adversely affect our economy. If our
imports not presently deemed to be secure from interruption
were in fact kept from our shores, the effect on the U. S.
economy would be staggering and would clearly reach beyond
a matter of inconvenience, or loss of raw materials and fuel
for industries not essential to our national security. The
outflow in payments for petroleum also poses a clear threat
not only to our wellbeing, but to the welfare of our allies.
As the State Department has concluded, the massive transfer
of wealth greatly enhances the economic and political power
of oil rich states who do not necessarily share our foreign
policy objectives, and correspondingly tends to erode the
political power of the United States and its allies.
The purpose of this investigation under Section 232 of
the Act is to determine the effects of our level of imported
petroleum upon our national security and not to fashion a
remedy. Nevertheless, it would appear that we must, over
the longer term, wean ourselves away from a dependence upon
imported oil, conserve our use of petroleum, promote the use
of alternative sources of energy, and at least in part, stanch
the outflow of payments resulting from our purchases of this
commodity. As Secretary Kissinger states:
"Clearly, decisive action is essential. We
have signalled our intention to move toward energy
self-sufficiency. We must now demonstrate with
action the strength of our commitment. In the
short-term, our only viable economic policy option
is an effective program of energy conservation.
A vigorous United States lead on conservation will
encourage similar action by other consuming nations.
Consumer cooperation on conservation now and then
development of new supplies over time will deter
producer aggressiveness by demonstrating that
consumers are capable of acting together to defend
their interests."
3
lit/
II. STATUTORY CONSIDERATIONS
This investigation has proceeded in recognition of the
close relationship of the economic welfare of the Nation to
our national security. As required by Section 232, consider
ation has been given to domestic production of crude oil and
the other products under investigation needed for projected
defense requirements, the existing and anticipated availability
of these raw materials and products which are essential to the
national defense, the requirements of the growth of the
domestic petroleum industry and supplies of crude oil and
crude oil products, and the importation of goods in terms of
their quantities, availabilities, character and use as those
affect the domestic petroleum industry and the ability of the
United States to meet its national security requirements.
In addition, other relevant factors required or permitted
by Section 232 have been considered, including the amount of
current domestic demand for petroleum and petroleum products
which is being supplied from foreign sources, the degree of
risk of interruption of the supply of such products from
these countries, the impact on the economy and our national
defense of an interruption of such supplies including the
effects on labor, and the effect of the prices charged for
foreign petroleum and petroleum products on our national
security.
4
111•
IMPORTS OF PETROLEUM AND PETROLEUM PRODUCTS
During the first eight months of 1974, the United States
imported approximately 5.8 million barrels per day of petro
leum and petroleum products.
(Annex C) This figure amounted
to 35.6 percent of total United States demand for such
products during this period. The latest data available
indicates that United States dependence on imported oil is
growing. For the four weeks ending December 13, 1974, the
United States imported about 7.4 million barrels per day of
petroleum and petroleum products, which represented 39.5
percent of total United States demand for such products
during the same period.
(Annex C)
Imports into the United States may be divided into two
major sources, the nations belonging to the Organization of
Petroleum Exporting Countries (OPEC) and other nations.
(Annex D) The OPEC nations have far more production capacity
than the non-OPEC nations. Of the world1s total production
of approximately 55 million barrels per day, OPEC members
produce 30 million barrels, Communist countries 11 million
and the balance of 14 million barrels per day is produced
by other countries including the U. S. 1/ Moreover, the
OPEC countries have over 8 million barrels per day of pro
duction potential which is not being utilized while virtually
no unused capacity exists in the rest of the world. 2/
Most recent indicators show that 3.5 million barrels per
day of crude oil and petroleum products are being imported by
the U. S. directly from the OPEC member states.
(Annex D)
In addition, as much as 850,000 barrels per day of finished
products imported into the U. S. from third country sources
may originate from OPEC nations. 3/ In total, 4.35 million
barrels per day of the 1974 U. S. demand of approximately
17.0 million barrels per day came from OPEC sources. In
percentage terms, U. S. imports from OPEC members account
for over 25% of domestic demand.
The major Western Hemisphere suppliers of petroleum to
the United States are Canada and Venezuela. The latter
country provided the United States with approximately 1.1
million barrels per day from January through October 1974.
For the same period, Canada exported to the U. S. over
1,000,000 barrels per day or slightly over 17% of our
imported supplies.
The Canadian Government has recently conducted a study
of its own energy potential. It concluded that steps should
be taken to reduce exports of oil with a view to conserving
petroleum for future Canadian requirements. 4/ Accordingly,
on November 22, 1974, the Canadian Government announced its
intention to limit exports to the U, S. to 650,000 barrels
per day by the end of 1975. Further reductions in exports
will take place after annual review’s. As a result, it
appears that the U. S. can no longer count on the availability
of large volumes of oil from Canada but may have to increase
our reliance on OPEC to make up for the reduction of Canadian
imports.
In summary, 60 percent of current imports of crude oil
comes directly from OPEC members and another 15 percent is
refined by third countries using OPEC crude oil. At least
851 of the imported petroleum, however, whether from OPEC
or non-OPEC countries, appears to be subject to the threat
of interruption in the event of a crisis. Moreover, the
outlook in the short run is for the percentage of imports
derived from OPEC members to increase as a result of limita
tions on Canadian exports.
-
*
IV.
6
-
EFFECT OF 1973-1974 EMBARGO ON THE DOMESTIC ECONOMY
The interruption of the supply of a major part of U. S.
imports of petroleum during the Winter of 1973-74 had a
serious adverse impact on the economy of the United States.
In his memorandum, Secretary Dent stated:
"The experience of the Arab oil embargo last
year, even though it halted only about one-half of
our oil imports, confirms the risk of disruption to
the economy which is implicit in dependence on imports
of oil to this degree. The oil embargo is believed
to have produced a reduction in U. S. GNP by some
$10 to 20 billion. All sectors of the economy were
adversely affected, with the consumer durables sector
and housing construction most heavily hit. Further,
it is estimated that a substantial part of the infla
tionary rise of prices during 1974, particularly in
the first half, is attributable to the direct and
indirect effects of the rise in overall energy costs
which followed the rapid escalation of costs for
Arab oil. In view of this record of injury caused
by loss of foreign oil supply and our continuing
vulnerability to future injury of even greater'impact,
it is my opinion that imports at current and projected
levels do constitute a threat to impair the national
security."
The Federal Energy Administration noted in its Project
Independence report that the embargo's impact was serious
as a result of the nation's high level of dependence upon
foreign petroleum imports. In the years 1960 through 1973
U. S. production did not keep pace with U. S. consumption of
petroleum. The resulting gap represented the level of U. S.
imports, which increased drastically:
u. S. Production and Consumption of Petroleum
(1960-73)
Petroleum (Millions Barrels/Day)
Year
1960
1965
1970
1972
1973
Production
8.0
8.8
11.3
11.2
10.9
Consumption
9.5
10.8
14.7
16.4
17.3
Gap (Imports)
1.5
2.0
3.4
5.2
6.4
-7-
Ilf
imports can be shown by 1
The impact of the embargo on
a comparison of import figures for both crude and refined
oil imports for each of the months September 1973 through
February 1974, and the percent change reflected in such
figures from the same months of the preceding year:
Monthly Imports
Before and During the Oil Embargo 2/
(Millions Barrels/Day)
Crude Oil
Sept 1973
Oct
Nov
Dec
Jan 1974
Feb
3.47
3.86
3.45
3.99
2.46
2.10
% Change from
Previous Year
Total Refined
Products
% Change from
Previous Year
+47
+49
+50
+45
-13
-22
2.65
2.67
3.14
2.90
2.85
2.55
+26
+ 9
+30
+ 1
- 4
+17*
*The indicated positive balance in this month is reflected
by the disproportionately large imports of motor gasoline,
to accomodate critical shortages of this refined product.
Both the National Petroleum Council and the Federal
Energy Administration have: made detailed analyses of the
impact of the 1973-74 embargo# A demand reduction of over
1 million barrels per day has been attributed to curtailment
and conservation. These savings occurred in areas which
caused minimum individual or collective hardship. However,
many such savings were the result of one-time only reductions
in usage patterns, such as lowering of thermostat levels.
Once accomplished, by voluntary or other restraints upon
energy usage, such savings cannot thereafter be duplicated.
The cost of the embargo to the economy, in terms of both
increased energy costs and adverse impacts on the labor maret, was severe. During the first quarter of 1974, the
seasonally adjusted Gross National Product fell by 7% and the
seasonally adjusted unemployment rate changed from 4.6% in
fh°ker
to 5.1% by March of 1974 * Of course there were
0 her factors at work in the economy during this period and
1
fi°ult to isolate those declines attributable solely
0
embargo. However, according to the FEA, increased
energy prices during the embargo period were responsible for
8
at least 30% of the increase in the Consumer Price Index
with the long-term effects of the embargo and the subse
quent price rises continuing after the embargo was lifted.
As the FEA has pointed out, a comparison of the nation’s
economic performance for the two years preceding the embargo
with the first quarter of 1S74 demonstrates a clear and
uninterrupted upward historical trend (albeit a reduced
rate of increase beginning in the second quarter of 1973)
followed by a sudden sharp decline during the relevant
period:
Gross National Product Statistics 3/
(1572-1974)
Real GNP a/
1972 - I
II
III
IV
1973 - I
II
III
IV
1974 - I
768.0
785.6
796.7
812.3
829.3
834.3
841.3
844.6
831.0
Present Changes in GNP from
Preceding Quarter_(Annual Rate)
9.5
5.7
8.0
8.6
2.4
3.4
1.6
-6.3
a/ Seasonally adjusted at annual rates in billions of
1958 dollars.
A similar effect has been identified by FF.A with respect
to real personal consumption expenditures and real fixed
investments. These are set forth in detail in the Appendix
to the Project Independence Report, and are not set forth in
detail herein.
Following the embargo, the Department of Commerce reduced
its forecast of real output for the first quarter of 1974 by
$10.4 billion, and its forecast for the first quarter of 1975
by $15 billion.4_/ Again, studies showing detailed effects
upon the labor market and contributions to changes for selected
items w7ithin the CPI have been analyTzed in detail by the
Department of Commerce and the Federal Energy Administration,
and set forth in the Project Independence Report.
y
The adverse change of .5% in the seasonally adjusted
national unemployment rate between October 1973 and March
1974 represents an increase of approximately 500,000
unemployed people. The Department of Labor has estimated
that during the period of embargo 150,000 to 225,000 jobs
were lost as a direct result of employers' inability to
acquire petroleum supplies. An additional decline of
approximately 310,000 jobs occurred as an indirect result
of such shortages in industries whose products or processes
were subject to reduced demand as a result thereof (most
notably, the automobile industry). The Department of Labor
estimates that 85% of the total jobs lost were those of
semi-skilled workers, 5% clerical and 3% professional,
technical and skilled. 5/
The Federal Energy Administration has projected the
loss in economic activity (GNP) which could be reasonably
correlated to a shortfall in oil supplies. The pattern of
this correlation indicates that at any given time, the
economy can absorb a modest reduction in consumption before
painful reductions in economic activity occur. After this
reduction in nonessential uses of oil is made, further
reductions of oil supplies will result in sharply increasing
losses in the GNP. Based on such models, the FEA has deter
mined the impacts of interruption of imports under several
conditions. For example, a recently calculated situation
shows that a 2.2 million bbl/day import reduction for six
months' duration is estimated to cause a $22.4 billion
reduction in GNP. 6/
The Federal Energy Administration estimates that a
reduction in consumption of approximately 1 million barrels
per day can be managed without imposing prohibitive costs
on the economy. While recognizing that a figure of 1 million
barrels per day is not precise, it does approximate a reasona
ble estimate of the short-term reduction beyond which more
severe economic readjustments would take place. Of the
u
barrels per day current demand, it is estimated
tnat 16 million is the proximate quantity required to prevent
progressive deterioration of the economy at the present time.
It should also be noted that the impacts of any supply
interruptions will be disproportionately felt in the various
regions of the country. The major determinants of the impact
569-1X8 O - 75 - 3
-
10 -
within any given region is the amount of imports into that
region, climatic conditions of the region, and the industries
located there. The northwestern and northeastern parts of
the country import large amounts of their petroleum require
ments, the climatic conditions require them to use more
energy for heating than other regions, and they have more
energy using manufacturing industries in general than other
parts of the country (this is especially true of the North
east) .
The direct effects of an embargo would be concentrated
in PAD (Petroleum Administration for Defense) Districts 1
and 5. PAD District 1 includes the Eastern Seaboard of the
U. S. where it is estimated that 83 percent of the 1975
crude petroleum demand will be imported. In PAD District 5,
the West Coast of the U. S. including Alaska and Hawaii,
imports are 43 percent of total uses. The East Coast problem
is especially difficult because of the high fuel oil demands
in the New England area and the fact that approximately 98
percent of the residual fuel oil for PAD District 1 is
imported as a refined product or made from imported crude.7/
-
11 -
V. VULNERABILITY OF U, S. ECONOMY TO OIL AND DEVELOPMENT
OF ALTERNATE ENERGY SOURCES
!(i*
The vulnerability of the U. S. economy to petroleum
supply interruptions is highlighted by (1) the fact that it
is the backbone, not only of our defense energy needs, but
also of our economic welfare, and (2) the difficulty of
bringing in alternate energy sources immediately.
Although there may have been some recent minor changes,
the 1973 figures show that petroleum accounted for 46 percent
of domestic energy consumption, natural gas for 31 percent,
coal for 18 percent, hydropower for 4 percent and nuclear
for 1 percent.
(Annex E)
The degree to which other energy forms can in the short
run be physically substituted for oil is limited. Residual
oil used in heating or utilities can be replaced with coal
only after conversion of the plant*s combustion facilities
has taken place. Other energy sources are limited in supply
or feasibility of use. Supplies of natural gas are declining
and an interstate pipeline curtailment of 919 billion cu. ft.
is expected in the 1974-75 heating season. 1/ The natural
gas reserve/production ratio has declined from 21.1. in 1959
to 11.1 in 1973, 2/ indicating the production potential is
seriously impaired. It does not appear that we can substitute
natural gas for oil. On the contrary, the prospects are that
either oil or coal may have to be substituted for natural gas.
The nation's ability to increase its hydroelectric power
generating capacity is severely limited. Other energy sources
such as nuclear electrical generating power require long lead
times for development and will not be available in materially
increased quantities for a number of years. For example,
nuclear power is not expected to reach a significant per
centage (12%) of our total energy capacity until 1985. 3/
The availability of coal is subject to further mine develop
ment, expansion of transportation systems and convertibility
of furnaces and boilers, all of which require significant
development time. Moreover, both the production and
combustion of coal is currently subject to environmental
restrictions which further limit its accelerated development
as an energy source.
The outlook for increasing production of crude oil from
domestic sources is not favorable for the near term. Domestic
-
12
-
production has declined from 9.6 million barrels per day in
1970 to 8.7 million barrels per day in December 1974. A
further gradual decline is anticipated until oil from the
North Slope of Alaska becomes available in late 1977, or
until oil is produced from presently undeveloped areas as
the Outer Continental Shelf. Nevertheless, the sharp increase
in the price of oil should stimulate increased exploration
which, in the intermediate or longer term, if combined with
conservation efforts should ameliorate the present threat to
our economy.
Also, long-term energy sources such as the development
of geothermal and oil shale energy resources and the practical
utilization of solar energy require major advances in the
technology involved. This technology may take several years
to develop, but should assist in the solution of the domestic
shortage of energy sources if sufficient incentive is pro
vided .
-13VI. THREAT TO THE NATIONAL SECURITY OF FUTURE SUPPLY
INTERRUPTIONS
Section IV has described the serious impact on the
national economy and consequently on the national security
of the winter 1973-1974 embargo. It is reasonable to expect
similar or even worse effects of an interruption of supply
in the future, particularly in light of increasing dependence
on foreign sources of supply. U. S. production is declining 1/
and alternative sources of energy supply require a long lead
time for development. 2/ Moreover, supplies from the most
secure Western Hemisphere sources are likely to decline as
illustrated by the Canadian action to reduce oil exports to
the United States.
The Department of Defense has described the risks to
our national security posed by the threat of a future supply
interruption. The Department of Defense, in its memorandum
to me of January 9, 1975, stated:
"The Department of Defense holds that this
nation must have the capability to meet the essential
energy requirements of its military forces and of its
civil economy from secure sources not subject to
military, economic or political interdiction^ While
it may be that complete national energy self-sufficiency
is unnecessary, the degree of our sufficiency must be
such that any potential supply denial will be sustain
able for an extended period without degradation of
military, readiness or operations, and without signifi
cant impact on industrial output or the welfare of
the populace. This is true because the national
security is threatened when:
(1) the national economy
is depressed; (2) we are obliged to rely on non-secure
sources for essential quantities of fuel; (3) costs
for essential fuels are unduly high; and (4) we reach
a point where secure available internal fuel resources
are exhausted.
"As you know, the Mandatory Oil Import Program
was established in 1959 for the express purpose of
controlling the quantity of imported oil which at
that time had been found to threaten to impair the
national security. In the intervening years we have
-14observed with growing concern the decline in domestic
and western hemisphere petroleum productive capacity
in relation to demand. The result has been a rapid
expansion in our dependence on eastern hemisphere
sources for the oil which is so essential to our
military needs and the nation's economy. By 1973
that dependence had reached a level which risked
substantial harm to the national economy in event
of a peacetime supply denial. In event of general
war, those risks would be substantially greater
because of the sharply increased level of military
petroleum consumption which would require support
from domestic petroleum resources. The 1973 Arab
oil embargo offered proof, if proof were needed,
of the deterioration in our national energy situation.
"Energy conservation efforts and expanded use
of alternate fuels halted the growth in crude oil
and product imports during much of 1974. However,
production of both oil and gas in the United States
continues to decline, and indications are that import
growth has resumed. Projections for 1975 indicate
that imports may exceed seven million barrels a day,
sharply higher than in 1974 and equal to near 19
percent of the probable total energy supply in 1975.
To the extent that demand for petroleum imports
causes increasing reliance on insecure sources of
fuel, then such demand/reliance is a severe threat
to our security."
Although oil exporters vary in their specific national
goals and from time to time make unilateral decisions in
regard to oil policies, oil exporters have the potential to
bring about concerted actions which can explicitly deny the
U. S. needed imports through such actions as last year's
embargo. The loss in GNP growth and the significant unem
ployment created have on their face a significant impact
in terms of the overall strength of the national economy.
Continued reliance on foreign sources of supply leaves the
U. S. economy vulnerable to further disruptive, abrupt
curtailment or embargo of supplies, as well as to further
increases in prices. Consequently, it is only prudent from
a national security standpoint to plan for the possibility
that another embargo, or other type of supply interruption,
could occur.
VII.
THE EXCESSIVE RELIANCE ON IMPORTED OIL AS A SOURCE OF
WEAKNESS IN A FLEXIBLE FOREIGN POLICY
The dependence of the United States on imported petroleum
can also adversely affect the ability to achieve our foreign
policy objectives.
A healthy and vital domestic economy coupled with modern
and adequate defense forces are the basic elements of strength
in protecting our national security, but equally important in
today’s interdependent world is the continued smooth func
tioning of the international economic system and, in particular,
the economic strength and viability of our Allies. The economies
of many of these countries are almost totally dependent on
imported oil and are therefore much more vulnerable to the
threat of a new oil embargo. This could adversely affect the
extent to which we can rely on those Allies in the event of
a serious political or military threat to this country.
The risk to our Allies and to ourselves comes not only
from the possibility of disruptions of supply and the impact
this could have on foreign policies but also from the effect
on their domestic economies of the high cost of oil imports.
Individual consumer states faced with balance of trade deficits
and having difficulties in financing them, could attempt to
equilibrate their trade balances through "beggar-thy-neighbor"
actions.
For example, deliberate measures could be taken to inter
fere with markets so as to increase exports and/or decrease
imports from non-oil exporting countries. Specific examples
would include export subsidies, import tariffs, quotas, and
perhaps other non-tariff barriers to trade. Such action would,
of course, be infeasible as a concerted policy by all deficit
nations and therefore irrational. Indeed, should all embark
on such a course, a severe economic loss would result through
income reductions to all. Exports would be reduced for all
oil importing countries with loss in economic activity.
A slowdown in economic growth and consequent unemployment
resulting from such a course could have economic and social
effects that could have serious political implications for our
own security.
These potential problems could arise from the continued
nigh levels of oil imports in conjunction with the price of
oil, which generate large current account surpluses for OPEC.
Given the limited absorptive capacity of some of these
countries the increased oil revenues to these countries
will not be immediately translated into increased imports.
A recent estimate of the OPEC 1974 current account imbalance
is about $60 billion. In contrast, the 1973 OPEC current
account balance was only $13 billion. Projections of these
balances through time indicate continued reserve accumulations
at least until 1980, as some OPEC members will only gradually
adjust their import levels to higher export revenues. An
estimate of these accumulations as of 1980 is on the order of
$200 to 300 billion (in terms of 1974 purchasing power) for
OPEC as a group. Such a massive transfer of wealth would
enhance the economic and political power of oil rich states
which do not necessarily share our foreign policy objectives.
It is our expectation that these funds will be held and
invested in a responsible manner. There is every economic
incentive for the owners of these resources to take this course.
The United States' basic economic position strongly favors
maximum freedom for capital movements and we believe there is
no reason to change this policy.
However, in view of the possible problems noted above,
it is imperative that we join with our Allies in a concerted
program of conservation, reduced reliance on imported sources
of oil and development of alternative energy supplies. In
this way we promote market forces that will work against
further rises in already monopolistic oil prices, and exert
some downward pressure on world oil prices.
The Department of Defense confirms these conclusions:
"The appropriate restriction of oil imports
will also impact favorably on the balance of pay
ments and, more importantly, will permit the
United States to make a significant contribution
to international efforts to reduce total world oil
demand which, through its recent rapid growth, has
contributed to harmful increases in world oil prices.
Those increases have posed serious threats to the
economic and military viability of NATO and other
friendly nations, as well as to the United States.
Reduced dependence on imported oil can also minimize
the adverse impact on the United States, NATO and
other friendly nations of boycotts such as that
imposed by the Arab nations in 1973."
-17
The Federal Energy Administration has pointed out that
o f reliance on imported oil and conservation are
e s s e n t i a l to U. S. participation in the International Energy
program. Administrator Zarb states:
reduction
"Given the inability to create effective
emergency supplies in the short run, it is
important that the U. S. actively support and
participate in international security agreements
such as the International Energy Program (IEP),
or a producer-consumer conference, with the
objective of establishing future world oil prices
acceptable to the U. S., the other importers, and
the OPEC countries? and to decrease the likelihood
of politically or economically motivated supply
disruptions.
"The IEP particularly is an important com
ponent of the U. S. energy supply security program.
It would coordinate the responses of most major oil
importing nations to international supply disrup
tions, provide guidelines for conservation and
stockpile release programs, and avoid competition
for available supplies, and thus limit the oilprice increases likely to result from an oil shortage.
"The IEP deters the imposition of oil export
embargoes because it diminishes the ability of oil
exporters to target oil shortfalls on particular
oil importers, or greatly increases the cost of
doing so. For example, under an IEP, a U. S. import
shortfall of 3 MM B/D would require a much larger
export cutoff, and increase the political and
economic costs exporters would incur in imposing
an embargo.
"These measures do not exhaust the options
available to the U. S. Government. They seem to
us, however, to be among the most effective programs
which the U. S. can implement at this time, given
the character of the international energy market.
As such, these options offer attractive prospects
for minimizing the threat to our national security
resulting from our need to continue to rely on
imported oil."
-18VIII.
FINDINGS AND RECOMMENDATIONS
As a result of my investigation, I recommend that the
following determinations and recommendations be made by the
Secretary of the Treasury and forwarded to the President:
FINDINGS
As a result of the investigation initiated by me, I
have found that crude oil, principal crude oil derivatives
and products, and related products derived from natural
gas and coal tar are being imported into the United States
in such quantities as to threaten to impair the national
security. I further find that the foregoing products
are being imported into the United States under such
circumstances as to threaten to impair the national
security.
RECOMMENDATIONS
I therefore recommend that appropriate action be
taken to reduce imports of crude oil, principal crude oil
derivatives and products, and related products derived
from natural gas and coal tar into the United States, to
promote a lessened reliance upon such products, to reduce
the payments outflow and to create incentives for the use
of alternative sources of energy to such imports. I
understand that a Presidential Proclamation pursuant to
Section 232 of the Trade Expansion Act of 1962 is being
drafted by the Federal Energy Administration consistent
with these recommendations.
David R. Macdonald
Assistant Secretary
(Enforcement, Operations
and Tariff Affairs)
-19
Section I I I .
1/ Treasury sources, Office of Energy Policy.
[2/ Treasury sources, Office of Energy Policy.
3/ Treasury estimate, Office of Energy Policy.
4/ Statement of Donald S. MacDonald, Minister of Energy,
Mines and Resources, on Canadian Oil Supply and Demand.
Press Release November 22, 1974.
Section I V .
11/ Federal Energy Administration, Project Independence Report
Appendix at 284 (November 1974).
2/ Ibid, at 285.
3/ Ibid, at 289.
4/ Ibid, at 291.
5/ Ibid, at 296.
6/ Federal Energy Administration, Office of Economic Impact,
The Potential Economic Costs of Future Disruptions of
Crude Oil Imports, at 11 (December 23, 1974).
\y
Ibid, at 3.
Section V .
1/ Federal Power Commission, Staff Report, Requirements and
Curtailments of Major Interstate Pipeline Companies Based
on Form 16 Report (November 15, 1974).
2/ Report of a subcommittee of the House Committee on Banking
and Currency on Oil Imports and Energy Security: An
Analysis of the Current Situation and Future Prospects;
93rd Cong., 2d Sess. at 28 (September 1974).
y
Federal Energy Administration, Project Independence Report
at 30 (November 1974) .
-
20
-
Section VI.
1/
Federal Energy Administration, Project Independence Report
at 5 (November 1974) . See figures set forth in Annex F.
2/
See discussion of alternative energy sources in Section V.
See also Federal Energy Administration, Project Independence
Report at 6 (November 1974).
ANNEX A
THE S E C R E T A R Y O F T H E T R E A S U R Y
W A S H IN G T O N
2 0 2 2 0
JAN 4
1975
MEMORANDUM FOR ASSISTANT SECRETARY MACDONALD
SUBJECT: Request for Section 232 Investigation
Pursuant to my authority under Section 232 of the Trade
Expansion Act, 76 Stat. 8?7 (19 U#S,C.‘1862), I am requesting
you to conduct an investigation under that section to deter
mine the effects on the national security of imports of
petroleum and petroleum products*
In my judgment, national security interests require
that the procedures requiring public notice and opportunity
for public comment or hearings, set forth in the Treasury
regulations at 31 CFR Part 9? not be followed in this case,
I further find that it would be inappropriate to hold public
hearings, or otherwise afford interested pe.rties an oppor
tunity to present information and advice relevant to the
investigation as provided by Section 232, as amended by the
Trade Act of 1 9 7 U. Therefore, I request that you proceed
immediately with the investi
William E. Sir;on
AMEX B
THE SECRETARY OF STATE
WASHI NGTON
January 11, 1975
Dear Bill:
I am responding to your January 3 memorandum and
that of David Macdonald requesting the view of the
State Department as to the effect of petroleum imports
on our national security.
The. 1973-1974 oil embargo and production cutbacks
demonstrated our vulnerability and that of other indus
trial nations to an interruption in foreign oil sup
plies. In addition to its direct economic cost in
lost GNP and increased unemployment, the embargo stimu
lated massive and abrupt price increases which the
producers have been able to maintain and increase.
Without preventative action, OPEC's accumulation of
financial' assets will accelerate, reaching a total
of about $400 billion in investable funds by the end
of 1980. This massive transfer of wealth will greatly
enhance the economic and political power of the oil
rich states who do not share our foreign policy objec
tives. It will also cause a serious erosion of the
political power of the United States and its allies
relative to the Soviet Union and China.
Clearly, decisive action is essential. We have
signalled our intention to move toward energy selfsufficiency. We must now demonstrate with action the
strength of our commitment. In the short-term, our
only viable economic policy option is an effective
program of energy conservation. A vigorous United
States lead on conservation will encourage similar
The Honorable
William E. Simon,
Secretary of the ‘Treasury.
-
2-
action by other consuming nations. Consumer cooperatio
on conservation now and the development of new supplies
over time will deter producer aggressiveness by demon
strating that consumers are capable of acting together
to defend their interests.
From the national perspective, a major United
States' conservation effort will: '
—
—
reduce OPEC's financial claims on United
States resources and the transfer of
economic and political power to the pro
ducers ;
1
reduce our vulnerability to supply disrup
tions;
—
limit the effect of future OPEC price rises
on United States growth and inflation; and
—
exert some downward pressure on world oil
prices.
We believe substantially j._gher import license
fees will contribute to our conservation strategy.
They should reduce our dependence on imported energy
and demonstrate to other consumers and producers the
seriousness of our commitment not to remain vulnerable
to escalating oil prices and threats of supply inter
ruptions.
Warm regards
Henry A.'Kissinger
ASSISTANT SECRETARY OF DEFENSE
WASHINGTON, D.C. 20301
9
JA N 1975
INSTALLATIONS A N D LOGISTICS
M EM O R A N D U M F O R T h e A s s i s t a n t S e c r e t a r y o f th e T r e a s u r y
( E n f o r c e m e n t, O p e r a t io n s , a n d T a r i f f A f f a i r s )
S U B JE C T :
S e c tio n 232 I n v e s tig a tio n on P e t r o l e u m I m p o r ts
R e f e r e n c e is m a d e to y o u r m e m o r a n d u m o f 4 J a n u a r y 1975 in w h ich you
a d v is e d th a t th e D e p a r t m e n t o f th e T r e a s u r y is c o n d u c tin g a n in v e s tig a
tio n u n d e r S e c tio n 232, 76 S ta t. 877 (19 U .S . C . 1 8 6 2 ), to d e te r m in e the
e f f e c ts on th e n a tio n a l s e c u r i t y o f i m p o r t s o f p e t r o l e u m a n d p e tro le u m
p r o d u c ts . D e p a r tm e n t o f D e fe n s e v ie w s o n th e s e c u r i t y im p lic a tio n s of
c u r r e n t a n d p r o je c te d o il i m p o r t le v e l s w e r e s o l i c i t e d .
T h e D e p a r tm e n t o f D e fe n s e h o ld s th a t th is n a tio n m u s t h a v e th e capability
to m e e t th e e s s e n t i a l e n e r g y r e q u i r e m e n t s o f i t s m i l i t a r y f o r c e s and of
i t s c iv il e c o n o m y f r o m s e c u r e s o u r c e s n o t s u b je c t to m i l i t a r y , economic
o r p o litic a l in te r d ic tio n . W h ile i t m a y b e t h a t c o m p le te n a tio n a l energy
s e lf - s u f f ic ie n c y is u n n e c e s s a r y , th e d e g r e e o f o u r s u f f ic ie n c y m u s t be
s u c h t h a t a n y p o te n tia l s u p p ly d e n ia l w ill b e s u s t a i n a b l e f o r a n extended
p e r io d w ith o u t d e g r a d a tio n o f m i l i t a r y r e a d i n e s s o r o p e r a t i o n s , and
w ith o u t s ig n if ic a n t im p a c t o n i n d u s t r i a l o u tp u t o r th e w e lf a r e o f th e
p o p u la c e . T h is is t r u e b e c a u s e th e n a tio n a l s e c u r i t y i s t h r e a t e n e d when:
(1) th e n a tio n a l e c o n o m y is d e p r e s s e d ; (2) w e a r e o b lig e d to r e l y on nons e c u r e s o u r c e s f o r e s s e n t i a l q u a n titie s o f fu e l; (3) c o s ts f o r e s s e n tia l
f u e ls a r e u n d u ly h ig h ; a n d (4) w e r e a c h a p o in t w h e r e s e c u r e a v a ila b le
i n t e r n a l fu e l r e s o u r c e s a r e e x h a u s te d .
A s y o u k n ow , th e M a n d a to ry O il I m p o r t P r o g r a m w a s e s t a b l i s h e d in 1959
f o r th e e x p r e s s p u r p o s e o f c o n tr o llin g th e q u a n tity o f i m p o r t e d o il w h i c h
a t t h a t tim e h a d b e e n fo u n d to t h r e a t e n to i m p a i r th e n a tio n a l s e c u r i t y .
In th e in te r v e n in g y e a r s w e h a v e o b s e r v e d w ith g ro w in g c o n c e r n the
d e c lin e in d o m e s tic a n d w e s t e r n h e m is p h e r e p e t r o l e u m p r o d u c tiv e
c a p a c ity in r e l a t i o n to d e m a n d . T h e r e s u l t h a s b e e n a r a p id ex p an sio n
in o u r d e p e n d e n c e on e a s t e r n h e m is p h e r e s o u r c e s f o r th e o il w h ic h is
so e s s e n t i a l to o u r m i l i t a r y n e e d s a n d th e n a t i o n 's e c o n o m y . B y 1973
t h a t d e p e n d e n c e h a d r e a c h e d a le v e l w h ic h r i s k e d s u b s t a n t i a l h a r m to
th e n a tio n a l e c o n o m y in e v e n t o f a p e a c e tim e s u p p ly d e n ia l. In ev en t of
general w a r, th o s e r i s k s w o u ld b e s u b s t a n t i a l l y g r e a t e r b e c a u s e o f th e
Eharply in c r e a s e d le v e l o f m i l i t a r y p e t r o l e u m c o n s u m p tio n w h ic h w o u ld
require s u p p o rt f r o m d o m e s t ic p e t r o l e u m r e s o u r c e s . T h e 1973 A r a b
oil em bargo o f f e r e d p ro o f , i f p r o o f w e r e n e e d e d , o f th e d e t e r i o r a t i o n in ^
our n ational e n e r g y s itu a tio n .
/ I
Energy c o n s e rv a tio n e f f o r t s a n d e x p a n d e d u s e o f a l t e r n a t e f u e ls h a lte d V
the growth in c ru d e o il a n d p r o d u c t i m p o r t s d u r in g m u c h o f 1 9 7 4 . H o w
ever, p ro d u c tio n o f b o th o il a n d g a s in th e U n ite d S ta te s c o n tin u e s to
decline, and in d ic a tio n s a r e t h a t i m p o r t g ro w th h a s r e s u m e d . P r o j e c t i o n s
for 1975 in d ic a te th a t i m p o r t s m a y e x c e e d s e v e n m il l i o n b a r r e l s a d a y ,
¡sharply h ig h e r th a n in 1974 a n d e q u a l to n e a r 19, p e r c e n t o f th e p r o b a b le
total energy su p p ly in 1975. T o th e e x te n t t h a t d e m a n d f o r p e t r o l e u m
imports c a u s e s i n c r e a s i n g r e l i a n c e o n i n s e c u r e s o u r c e s o f f u e l, th e n
such d e m a n d /r e lia n c e i s a s e v e r e t h r e a t to o u r s e c u r i t y . G iv e n th e
gradual re d u c tio n in th e q u a n tity o f p e t r o l e u m a v a il a b le f r o m r e l a t i v e l y
(secure W e s te rn h e m i s p h e r e s o u r c e s , r e l a t i v e d e p e n d e n c e o n i n s e c u r e
(sources in th e e a s t e r n h e m i s p h e r e w ill g ro w m o r e r a p id ly th a n th e o v e r
a ll growth in o il i m p o r t s .
The exhaustion o f o u r a v a il a b le i n t e r n a l f u e l r e s o u r c e s w o u ld p o s e a n e v e n
greater th r e a t to o u r s e c u r i t y . T h e r e f o r e , o u r p e t r o l e u m p o lic y s h o u ld
properly b a la n c e th e s e o p p o s in g n e e d s . T h a t is to s a y , n a tio n a l s e c u r i t y
¡considerations w o u ld s e e m to r e q u i r e a p r o p e r b a la n c e o f i m p o r t r e s t r i c
tions with a d e c r e a s e in d e m a n d . W e r e c o g n iz e t h a t th e n a tio n f a c e s a
period of s e v e r a l y e a r s d u r in g w h ic h d e p e n d e n c e o n i n s e c u r e i m p o r t e d
oil will e x ce e d le v e ls w h ic h w e w o u ld c o n s i d e r a c c e p ta b le f r o m a n a tio n a l
security v iew p o in t. A c c o r d in g ly , w e b e lie v e t h a t e v e r y r e a s o n a b l e e f f o r t
should be m a d e to in h ib it d e m a n d g ro w th , a n d i n c r e a s e t o t a l i n t e r n a l e n e r g y
supply w hile k e e p in g th e q u a n tity o f i m p o r t s a t th e lo w e s t l e v e l c o m m e n
surate w ith th e e s s e n t i a l n e e d s o f n a tio n a l s e c u r i t y a n d th e c iv il e c o n o m y .
The p ro p e r c o n tro l o f p e t r o l e u m i m p o r t s a t m in im u m e s s e n t i a l l e v e l s w ill
provide a s s u r a n c e to th o s e e n g a g e d in th e d e v e lo p m e n t o f c o n v e n tio n a l a n d
non-conventional d o m e s t ic e n e r g y r e s o u r c e s t h a t f o r e ig n o il, r e g a r d l e s s
of its a v a ila b ility a n d p o te n tia l p r i c e c o m p e t i t i v e n e s s , w ill n o t b e a llo w e d
to deny fu tu re m a r k e t s to s e c u r e d o m e s t ic e n e r g y s u p p lie s . T h e a p p r o
priate r e s tr ic tio n o f o il im p o r t s w ill a l s o i m p a c t f a v o r a b ly o n th e b a la n c e *
paym ents an d , m o r e i m p o r ta n tl y , w ill p e r m i t th e U n ite d S ta te s to m a k e
a significant c o n tr ib u tio n to i n t e r n a t i o n a l e f f o r t s to r e d u c e t o t a l w o r ld o il
demand w hich, th r o u g h i t s r e c e n t r a p i d g ro w th , h a s c o n tr ib u te d to h a r m f u l
increases in w o rld o il p r i c e s . T h o s e i n c r e a s e s h a v e p o s e d s e r i o u s t h r e a t s
to the econom ic a n d m i l i t a r y v ia b ility o f N A T O a n d o t h e r f r i e n d l y n a tio n s ,
as weU a s to th e U n ite d S t a t e s . “ R e d u c e d d e p e n d e n c e on i m p o r t e d o il c a n
a l s o m in im i z e th e a d v e r s e im p a c t o n th e U n ite d S t a t e s , N A T O a n d o th e r
f r i e n d l y n a tio n s o f b o y c o tts s u c h a s t h a t im p o s e d b y th e A r a b n a tio n s in
1973.
I t i s o u r c o n c lu s io n t h a t c u r r e n t a n d p r o j e c t e d le v e l s o f d e m a n d a n d need
f o r i m p o r te d p e tr o le u m p r o d u c ts a n d c r u d e o il p o s e s u b s t a n t i a l r i s k s to
th e n a tio n a l s e c u r i t y o f th e U n ite d S t a t e s . A d d itio n a l g ro w th in th e need .
to i m p o r t w ill r e s u l t in f u r t h e r d e p e n d e n c e o n e a s t e r n h e m i s p h e r e sources
f r o m w h ic h o il m u s t m o v e o v e r lo n g a n d v u ln e r a b le s e a l a n e s . M o reo v er,
i t w ill d e p e n d p r e d o m in a n tly o n n a tio n s w h ic h h a v e d e m o n s t r a t e d th e will
a n d a b ility to e m p lo y t h e i r o il r e s o u r c e s f o r p o l i t i c a l p u r p o s e s . F u rth e r,
th e r a p id g ro w th in U .S . o il i m p o r t s s in c e 1970 h a s h a d , a n d w ill continue
to h a v e i f i t p e r s i s t s , a m a j o r r o l e in c r e a t i n g a n d m a in ta in in g th e condi
tio n s w h ic h le d to th e o il p r i c e r i s e s o f 1973 a n d 1 9 7 4 , a n d i m p a i r e d the
a b ility o f o u r N A TO a l l i e s to o b ta in t h e i r m i n i m a l o il n e e d s in p e r io d s of
s u p p ly d is r u p tio n . F u t u r e g ro w th w ill e x a c e r b a t e th o s e c o n d itio n s .
I n c r e a s i n g d e p e n d e n c e o n im p o r t e d o il is i n i m i c a l to th e i n t e r e s t s o f the
U n ite d S ta te s a n d s h o u ld b e s u b je c t to s u c h c o n t r o l s a s m a y b e n e e d e d to
i n s u r e th a t o il i m p o r ts a r e p r o p e r l y b a la n c e d a g a i n s t o u r e s s e n t i a l needs
a n d r e f l e c t o u r d e v e lo p m e n t o f a d d itio n a l e n e r g y r e s o u r c e s .
A tta c h e d f o r y o u r in f o r m a t io n a r e e s t i m a t e s o f m i l i t a r y p e tr o le u m re q u ire
m e n ts .
A tta c h m e n t
A R TH U R I. M EN D O U A
A s s is ta n t S e c r e ta r y o f D efense
(Installations & Logistics)
M IL IT A R Y P E T R O L E U M R E Q U IR E M E N T S
I 'i| I--
■■
\
I
V\
\
1/
Estimated c o n s u m p tio n , U . S. f o r c e s , F Y 1975 - 5 5 8 , 000 b a r r e l s p e r d a y JkJ
Estimated c o n s u m p tio n in g e n e r a l w a r - 1, 8 0 0 , 000 b a r r e l s p e r d a y
tn addition to p u r e ly m i l i t a r y r e q u i r e m e n t s t h e r e is a s u b s t a n t i a l a d d itio n a l
meed for d ir e c t a n d i n d i r e c t u s e o f p e t r o l e u m b y d e f e n s e - r e l a t e d p r i v a t e
[industry. No d a ta i s a v a il a b le on th e a m o u n t o f p e t r o l e u m in v o lv e d , b u t
broad e s tim a te s o f to ta l e n e r g y c o n s u m p tio n b y d e f e n s e i n d u s t r y in d ic a te
[that from 1. 5 to 3. 0 p e r c e n t o f t o t a l n a tio n a l e n e r g y c o n s u m p tio n is
[currently r e q u ir e d . T h a t p e r c e n t a g e w o u ld i n c r e a s e s u b s t a n t i a l l y in a
[protracted g e n e r a l w a r , p r o b a b ly l a r g e l y d u e to c o n v e r s io n o f i n d u s t r y
[to war p ro d u c tio n , w ith o u t n e c e s s a r i l y r e f l e c t i n g s h a r p l y i n c r e a s e d e n e r g y
[requirem ents on a b tu b a s i s .
¿/
C u rre n tly a p p r o x im a te ly 35% o f c o n s u m p tio n i s o b ta in e d f r o m f o r e ig n
s o u rc e s. No s ig n if ic a n t c h a n g e s , in c o n s u m p tio n a r e p r o j e c t e d th r o u g h
FY 1976.
UNITED STATES
DEPARTMENT OF THE INTERIOR
OFFICE OF THE SECRETARY
WASHINGTON, D.C. 20240
In Reply Refer To:
EBM :AD/MMSDA-MS-DFF
J A N 8 * 1975
Honorable David R. Macdonald
Assistant Secretary
Enforcement, Operations and Tariff Affairs
Department of the Treasury
Washington, D.C. 20220
Dear Mr. Macdonald:
In response to your memorandum of January 4, 1975, relating to
the request for investigation on petroleum imports under S e c t i on
232 of the Trade Expansion Act, we have enclosed some o b s e r v a t ions
concerning the effects on the national security of imports of
petroleum and petroleum products.
Sincerely yours,
Enclosure
THE EFFECTS ON NATIONAL SECURITY
ON IMPORTS OF PETROLEUM AND PETROLEUM PRODUCTS
Imports of crude oil in the first nine months of 1974 averaged
3.3 million barrels per day, and imports of petroleum products
tend unfinished oils in petroleum averaged 2.6 million barrels
per day. Total imports as a percent of supply accounted for
36 percent and demand for petroleum products in the same period
averaged nearly 16.5 million barrels per day. In the first
nine months of 1974, residual fuel oil accounted for 60.2 percent
of our product imports and 61.3 percent of domestic residual fuel
oil demand; distillate fuel oil, 9.3 percent of imports, and 8.6
percent of demand. Imports of gasoline constituted 8.4 percent
of products, but only 3.4 percent of domestic demand; jet fuel,
6.3 percent of imports and 16.7 percent of demand. Imports of
liquefied gases and ethane comprised 4.6 percent of products
land 9 percent of demand. Other products, which includes naphthas,
kerosine, lubricants, waxes, asphalt, etc., aggregated 11.2
percent of product imports and 13.7 percent of domestic demand.
If crude oil imports were cut off, refining operations in the
IJ.S. would have to be curtailed sharply. Based on average
[refinery yields (August 1974), domestic refineries obtained
ifrom the 3.3 million barrels a day of crude oil imported,
nearly 1.6 million barrels a day of gasoline, nearly 700 thousand
parrels a day of distillate fuel oil, and 274 thousand barrels a
day of residual fuel oil.
wiewed narrowly, namely in terms of the probable needs of the
■Department of the Defense under present conditions or in a
pajor nuclear war, it would appear that petroleum importations
Pt current levels would not jeopardize national defense per se.
Bowever, a cut off of foreign supplies of crude petroleum and/or
Petroleum products would have a serious impact on the national
■economy, such as was demonstrated in the 1973-74 Arab Oil Embargo.
I roadly viewed, a disruption of imports could have serious impli
cations for the national security, as well, in that a strong and
i1 ^
generally considered essential to our overall
P ity to maintain our free democratic institutions.
lb * econom
y
Ptill another consideration is the adverse impact petroleum prot C s lmPorts have on expansion of domestic refinery capacity.
P cannot now meet our normal domestic needs from the full output
iuld^h^fP' refinery caP acitY* An increase in imports of products
r
e hannful to national security because increasing dependenci
pblSUCti sources would not only make the United States more vulnerL.*? t0 ^^sruPti°ns in supply flows, but also inhibit domestic
pfinery expansion.
-
2-
Even without a further embargo, large imports pose an economic
threat. The accompanying chart includes a 1974 estimated value
of products and crude oil imports totaling $23.5 billion. Further
more, in view of recent OPEC announcements, expenditures for
petroleum imports could be even greater in 1975, and subsequent
years. Therefore, this capital drain could have serious reper
cussions on the U.S. economy, and endanger the national security
thereby. Moreover, large capital exports to nations not neces
sarily friendly to the objectives of the United States increases
the potential for harm to ourselves or to our allies, and thus
increases the threat to our security.
THE SECRETARY OF COMMERCE
Washington, D.C.
20230
JAN 1 O 1975
MEMORANDUM FOR THE SECRETARY OF THE TREASURY
SUBJECT:
Section 232 Investigation of Petroleum Imports
This is in response to your memorandum of January 4, 1975,
concerning the investigation of oil imports being initiated
[under Section 232 of the Trade Expansion Act of 1962, as
amended. Specifically, your memorandum forwarded the re
quest of Assistant Secretary of the Treasury Macdonald
for (a) any information this Department has bearing on the
effects on the national security of imports of petroleum
and petroleum products, and (b) advice as to whether petro
leum and petroleum products are being imported into the
United States in such quantities or under such circumstances
as to threaten to impair the national security.
Based on prior analyses and a brief review during the past
¡five days, it is my opinion that there is no question that
imports of petroleum at current volumes and circumstances,
including the current level of OPEC prices, threaten to
impair the national security. Under these circumstances,
we recognize the threat posed by oil imports to the ability
of the United States to produce goods and services essential
for ensuring our national security preparedness. We recogjnize the additional threat posed by the possibility of an
extended embargo of oil imports. Section 232 of tlie Trade
Expansion Act, the basis for the present investigation, in
fact requires that recognition be given to "the close re
lation of the economic welfare of the Nation to our national
security."
|As you know, the quota system of the Mandatory Oil Import
Irogram, based on national security findings, was in effect
rom 1959 to early 1973. Its objective was to restrict imP°r^s °f petroleum and petroleum products to 12.2 percent
r domestic production in Districts I-IV (the Eastern 80
IPercent of the continental U.S.) and to no more than the
2
difference between demand and domestic supply in District V
(the West Coast). At that time, foreign oil was priced well
below domestic oil and restrictions on imports were judged
necessary to preserve a viable domestic crude oil producing
industry. However, in recent years domestic consumption
has increased much faster than production, and it has not
been feasible to maintain the old formula. In early 1973,
import quotas were replaced by the license fee program, and
imports of crude petroleum and products by the end of 1974
reached a figure which amounted to slightly more than 35 per
cent of consumption. I am enclosing a publication from the
Bureau of the Census in which import quantities for 1973 and
11 months of 1974 are given.
The experience of the Arab oil embargo last year, even though
it halted only about one-half of our oil imports, confirms
the risk of disruption to the economy which is implicit in
dependence on imports of oil to this degree. The oil embargo
is believed to have produced a reduction in U.S. GNP by some
$10 to $20 billion. All sectors of the economy were adversely
affected, with the consumer durables sector and housing con
struction most heavily hit. Further, it is estimated that a
substantial, part of the inflationary rise of prices during
1974, particularly in the first half, is attributable to the
direct and indirect effects of the rise in overall energy
costs which followed the rapid escalation of costs for Arab
oil. In view of this record of injury caused by loss of
foreign oil supply and our continuing vulnerability to future
injury of even greater impact, it is my opinion that imports
at current and projected levels do constitute a threat to
impair the national security.
In summary, I perceive the threat as being based on two factors,
the possibility of an extended embargo and the inflationary
impact of higher prices and volumes. We certainly want to
ensure, should a positive finding be determined, that any
recommended course of action would address these factors.
If I can be of any further assistance in your deliberations,
please let me know.
Secretary of Commerce
Enclosure
U .S. D E P A R T M E N T O F L A B O R
O ffice
of the
S ecretary
WASHINGTON
IJAN 9
1975
MEMORANDUM TO DAVID R. MACDONALD, ASSISTANT SECRETARY
(ENFORCEMENT, OPERATIONS, AND TARIFF AFFAIRS)
SUBJECT:
Section 232 Investigation on Petroleum Imports
REFERENCES:
Memorandum, January 4, 1975, above subject
from Secretary of the Treasury, William E. Simon.
Memorandum, January 6, 1975, above subject,
Assistant Secretary of the Treasury,
David R. MacDonald.
The Department of Labor currently has no information
available directly relating to whether petroleum or petro
leum products are being imported into the United States
in such quantities or under such circumstances as to
threaten to impair the national security.
Data usually provided by the Department of Labor for
Section 232 investigations could not be collected and made
available within the time required by Mr. Simon's
memorandum of January 4. If you wish us to proceed with
[the fully detailed Department of Labor portion of a
Section 232 investigation, we would be pleased to consult
with you on the matter.
As noted in the memorandum of January 4, some work has
been done in the Department concerning the current effects
of imports of petroleum and petroleum products, albeit
not in relationship directly to national security. This
work includes*
1. The Secretary of Labor's Report on the Impact
of Energy Shortages on Manpower Needs'^ dated
March 1974. This report, required under
Section 506 of the Comprehensive Employment
and Training Act of 1973, deals with the impact
of energy shortages«on current and future
employment. A copy is enclosed.
2. Labor Report, a part of the Project Independence
Blueprint Task.Force Report, dated November 1974.
This report is available from the Federal Energy
Administration.
-
2-
3. "The Effects of Oil Resource Allocation", an
unpublished study recently completed by
Professor Yoram Barzel of the University of
Washington under contract to the Department
of Labor. The study is currently being
reviewed within the Department. If it appears
that this study contains material relevant
to the effect of petroleum and petroleum
products imports on national security we will
advise you.
JOEL SE6ALL
Deputy Under Secretary
International Affairs
Enclosure
T H E C H A IR M A N O F T H E
C O U N C IL O F E C O N O M IC A D V IS E R S
W A SH IN G T O N
January 8, 1975
Dear Mr. Macdonald:
Petroleum and petroleum products are being imported
[into the United States in such quantities and under such
[circumstances as to threaten to impair the national security.
The quantity of imports of petroleum and petroleum
[products is so large that these imports are essential to the
[continued functioning of our economy at acceptable levels of
[employment and output. Unless appropriate action is taken,
¡petroleum and petroleum product imports would continue at
[current or higher levels, leaving the economy open to serious
¡damage if those imports were interrupted.
The circumstances under which petroleum and petroleum
(products are being imported into the United States lead to a
¡threat, to national security. Foreign governments may interrupt
[the flow of petroleum and petroleum product imports to the
[United States to achieve economic or political ends. Oil[exporting nations whose exports are now essential to the
[continued security of the United States have agreed to act
[jointly in matters of oil exports. Collective action by some
[petroleum exporters reduced U.S. petroleum imports during 19731.974 with serious damage to the economy and security of the
IJnited States. A threat to our national security will exist
bntil the United States can absorb the effects of an embargo
►ithout damage to its vital economic and military interests.
I
The United States can absorb the effects of an embargo
without serious damage only if imports from those countries
Ihich act jointly on petroleum matters are not essential to
the United States. These imports would not be essential if
►he economy of the United States required only as much
petroleum and petroleum products, or their substitutes, as
pould be produced within our borders or imported from nations
►which did not belong to the group which acted jointly on
petroleum matters. Consequently, actions which cause the
pconomy to adjust to the consumption of less energy in the form
1 petroleum and petroleum products, and/or which cause more
-
2-
petroleum products to be supplied by domestic sources, would
lead to greater national security.
Alternatively, imports from those nations which act
jointly on petroleum matters would not threaten the security
of the United States if alternative sources of petroleum and
petroleum product supply could easily and readily replace
interrupted imports. At present such supplies do not exist, and
consequently there is a threat to the national security of the
United States.
In summary, petroleum and petroleum products are now
being imported in quantities such that serious damage to’
national security would result from interruption of these
imports. The circumstances under which petroleum and petroleum
products are being imported makes those imports insecure.
Consequently, petroleum and petroleum product imports threaten
the national security.
Alafi Greenspan
Honorable David R. Macdonald
Assistant Secretary (Enforcement, Operations,
and Tariff Affairs
Department of the Treasury
Washington, D.C. 20220
•
FEDERAL ENERGY ADMINISTRATION
W ASHINGTON, D .C . 20461
J A N 1 1 1975
OFFICE OF THE ADMINISTRA
David R. Macdonald
Assistant Secretary
Enforcement, Operations, and
Tariff Affairs
U.S. Department of the Treasury
Washington, D. C. 20220
Dear Mr. Macdonald:
This is in response to your memorandum of January 4, 1975,
concerning Treasury Department Section 232 Investigation
on Petroleum Imports.
The Project Independence Report projected continued U.S.
reliance on imported oil through 1980, given projected
U.S. domestic supply/demand responses to world oil prices
of $4-$ll per barrel.
It is our judgment that, whatever its source, imported
oil is inherently less secure than domestic oil. Oil
|import shortfalls jeopardize the national security of the
|U.S. and other oil dependent nations because they impose
Isevere economic costs. For that reason, the costs of
offsetting that insecurity ought to be reflected explicitly
in the domestic price of imported oil.
The future supply security of U.S. imports was a major
focal point in the Project Independence Report. The
International Assessment of that report assessed U.S.
vulnerability to foreign political and economic coercion
[resulting from disruptions in the supply of imported
[crude, it should be noted, moreover, that a significant
[disruption in imports of certain finished products, such
[as residual fuel oil, could have major economic security
[implications for the country. For example, approximately
180 percent of residual fuel oil consumed in the U.S. is
[imported and most of it is consumed on the East Coast
[for the production of electricity and for industrial use.
I At the present time, very few of these users have the
[capability of converting to other fuels in the event of
[a temporary supply disruption lasting several months or
longer.
2
The report evaluates a number of alternatives for off
setting the costs of oil import interruptions. The
criteria for evaluating these options included their
relative contribution to U.S. energy import supply security,
their costs, and their impact on world oil prices. The
most prominent options are: 1) Regulation of energy
consumption during an oil import shortfall; 2) Alternative
domestic emergency energy supplies; 3) International
oil sharing. Each of these is discussed in greater detail
below.
1.
Regulation of energy consumption:
As was demonstrated during the 1973-74 embargo, government
regulation of domestic fuel supplies can diminish the
economic impact of an oil import embargo. FEA has esti
mated that an oil shortfall of approximately 1 million
barrels/day can be managed by fuel allocation programs,
without imposing prohibitive costs on the economy. In
the short-term, 1975-76, this option is likely to remain
effective. In the longer term, more efficient energy
utilization will diminish the extent to which oil import
shortfalls can be managed exclusively by relying on mini
mal cost fuel allocation programs.
2.
Alternative emergency energy supplies:
In the short-term, 1975-76, emergency energy supply
availability is limited to current inventories, domestic
and international stocks, and any available production
capacity of exporting states not participating in the
embargo.
In the longer term, strategic petroleum reserves could
be developed. For example, our assessment of current oil
import security indicates .the desirability of 1 billion
barrels of crude oil, stored in U.S. salt-dome caverns
as they become available. The amount could be adjusted
as the threat assessment changes. Such a stockpile could
offset a 3 MM barrel/day import cut for nearly one year.
Given domestic conservation programs and alternate supply
sources, however, the stockpile would most likely last
longer than one year.
It will take several years to build strategic reserves
to the desired level. In the meantime, the U.S. must
consider ways to dampen the rate of increase in oil
imports. We feel that, even at current world oil prices,
3
[3.
International energy agreements:
[Given the inability to create effective emergency supplies
[in the short run, it is important that the U.S. actively
¡support and participate in international security agree
ments such as the International Energy Program (IEP),
[or a producer-consumer conference, with the objective
[of establishing future world oil prices acceptable to the
U.S., the other importers, and the OPEC countries; and
[to decrease the likelihood of politically or economically
[motivated supply disruptions.
The IEP particularly is an important component of the
U.S. energy supply security program. It would coordinate
the responses of most major oil importing nations to
international supply disruptions, provide guidelines for
conservation and stockpile release programs, and avoid
competition for available supplies, and thus limit the
oil price increases likely to result from an oil shortage.
The IEP deters the imposition of oil export embargoes
because it diminishes the ability of oil exporters to
target oil shortfalls on particular oil importers, or
greatly increases the cost of doing so. For example,
under an IEP, a U.S. import shortfall of 3 MM B/D would
require a much larger export cutoff, and increase the
political and economic costs exporters would incur in
imposing an embargo.
[These measures do not exhaust the options available to
the U.S. Government. They seem to us, however, to be
among the most effective programs which the U.S. can
[implement at this time, given the character of the inter
national energy market. As such, these options offer
attractive prospects for minimizing the threat to our
¡national security resulting from our need to continue to
rely on imported oil.
4
We have enclosed a copy of the International Assessment
chapter from the Project Independence Report together with
a copy of thé PIMS "U.S.-OPEC Petroleum Report," which
provides OPEC export volume and pricing data for 1973
by individual member countries. The 1974 report has not
yet been compiled.
We trust that this information will be helpful in the
conduct of your investigation.
S
y,
Fr^rnk/G. Zarb
Administrator
Attachments
a/s
cc:
William E. Simon
Secretary of the Treasury
ANNEX C
CRUDE PETROLEUM AND PETROLEUM PRODUCTS
1/
1974 Data in 1,000 bbl/day
Domestic
Production
iMonth
fight Month
¡Average
8,932
Crude
Imports
Product
Imports
Total
Imports
Domestic
Demand
2,382
2,973
5,455
17,270
2,243
2,973
5,271
17,371
2,462
2,753
5,215
•16,045
3,267
2,703
5,970
15,919
3,748
2,454
6,202
15,624
3,957
2,218
6,175
16,459
4,167
2,143
6,310
16,156
3,905
2,286
6,190
16,332
3,267
2,563
5,830
16,397
7,407
13,742
>rts as percent of demand - 35.6%
LATEST DATA 9
four Weeks
ndingfee, 1 3 )
p p o rts
8,661
4,047
3,360
as percent of demand - 39.5%
r FEA, Monthly Energy Review - Oct. 1974
FEA, Petroleum Situation Report - Dec. 13, 1974
ANNEX D
U,S, IMPORTS OF CRUDE OIL
AND PETROLEUM PRODUCTS BY SOURCE
* JANUARY THRU OCTOBER 1974
IN 1000 BBLS/DAY
Country
Total
Algeria
Egypt
Kuwait
Qatar
Saudi Arabia
United Arab Emirates
Major Arab OPEC Countries
220
14
2
16
332
82
716
Ecuador
Indonesia
Iran
Nigeria
Venezuela
Gabon
Major OPEC Countries
71
296
542
670
1,131
33
3,459
Canada
Netherland Antilles
Angola
Italy
Netherlands
Mexico
Bahamas
Trinidad
Others
Grand Total
1,015
494
50
100
52
10
213
272
178
5,843
Source: Federal Energy Administration from
Census Bureau FT-r13 5 Report.
B
THE
RECOVERABLE Ü.S. RESERVES
CRUX
OF
U .S . P R O B L E M
PRESEMI U.S. CONSUMPTION
A N N EX E
PETROLEUM
2.7%
15
BTU's - 270 x 10
N A T U R A L GA S
2.7%
15
BTU's - 2 7 5 x 10
S o u y c e ; F E A ** P r o j e c t I n d e p e n d e n c e P ~ 1 3
ANNEX F
U . S . C ru d e O i l
D a i l y A v e r a g e s i n 1 , 0 0 0 b b l s p e r day P r o d u c t i o n
Date
1964
1965
1966
196 7
1968
1969
1970
1971
1972
1973
4 weeks e n d i n g D e c .
Sources:
Quantity *
b
7 ,6 14
7,8 0 4
8,295
8 ,8 10
9,095
9,238
9,637
9,462
9,441
9 ,18 7
13
8 ,6 6 1**
* A P I A nnu al S t a t i s t i c a l R ev ie w (B u M i n e s ) S e p t .
* * F E A Petroleum S i t u a t i o n Report Dec. 1 3 , 1 9 7 4 .
1 9 7 4 , page 13.
U. S. GOVERNMENT PRINTING O FFIC E : 1975 O - 569-Ü
O
Departmental t h e T R E A S U R Y
SHINGTON,
D.C. 20220
TELEPHONE W04-2041
m
FEBRUARY 18, 1975
FOR IMMEDIATE RELEASE
TREASURY SECRETARY SIMON NAMES JOHN M. HOERNER
AS H S. SAVINGS BONDS CHAIRMAN FOR GEORGIA
John M. Hoerner, President, USS Agri-Chemicals Divi
sion of United States Steel Corp., Atlanta, is appointed
volunteer State Chairman for the Savings Bonds Program in
Georgia by Secretary of the Treasury William E. Simon,
effective immediately.
He will head a committee of business, banking, labor,
government and media leaders who -- in cooperation with
the U. S. Savings Bonds Division -- assist in promoting
Bond sales in the state.
Hoerner earned a BS degree in 1931 from Dickinson
College, Carlisle, Pa. Two years later, he earned his MS
from the University of Pennsylvania. He has since attend
ed the Northwestern University School of Management. In
1965, he received an honorary Doctor of Science degree
from Dickinson College.
He began his business career in 1931 with Atlantic
Refining Co., Philadelphia. During his 22 years with the
firm, his responsibilities ranged over a wide area of the
petrochemical business, including sales, sales management
and technical services.
In 1953, Hoerner joined Armour § Co. as Director of
Sales for the Chemical Division, and was soon made Gener
al Manager of both the Chemical and Soap Divisions. Six
years later, he organized the A-rmour Grocery Products
Division, and was made a company Vice President. In 1961,
he was appointed Executive Vice President in charge of all
non-food operations, and was elected to the Armour Board
of Directors. He was later named President of Armour Ag
ricultural Chemical Co., which was acquired by U. S. Steel
in 1968. In July of that year, Hoerner assumed his pres-
( over )
2
ent post in the newly renamed company.
He is active in a number of business, civic and educa
tional activities, including -- Board of Trustees, Dickin
son College; Advisory Council, National 4-H Foundation;
Director, The Fertilizer Institute, which he served as
Chairman in 1972; Commerce Club, Capital City Club, Atlanta.
Hoerner and his wife, Lee, have a son, John M., Jr.,
and a daughter, Mrs. S. L. Bisoni.
0O0
Department of th e fR E A S U R Y
K ington,d.c .20220
TELEPHONE W 04-2041
FOR IMMEDIATE RELEASE
February
TREASURY'S
The D e p a r t m e n t
two s e r i e s o f
t h e r e abouts,
the
Treasury
to
be
9 1 -d a y bills
t h e r e abouts,
of
issued
to
by
February
2 9,
an
BILL
this
27,
amount
( CUSIP No.
$2,102,000,000»
the
as
of
tenders
$5,200,000,000
of
$2,700,000,000,
of b i l l s
for
, or
and
or
dated November
912793 WL6),
additional
invites
follows:
in the amount
additional
1975
notice,
amount
1975,
1975
OFFERING
public
the aggregate
(to m a t u r i t y d a t e )
MaY
the a m o u n t o f
Treasury,
bills
representing
and to m a t u r e
WEEKLY
1 8,
originally
original
bills
29,
1974,
issued
to be
in
freely
interchangeable.
182-day bills,
and to m a t u r e
for
August
$2,500,000,000,
28,
The b i l l s w i l l b e
F e b ruary 27,
1975,
Government a c c o u n t s
foreign a n d
1975
issued
cash and
in
and
Reserve
Federal
exchange
the a v e r a g e p r i c e s
of
will
be
issued
and
interest.
be
They will
$50,000,
bills
accepted
competitive bidding,
$15,000,
for
outstanding
These a c c o u n t s m a y
Tenders will
be
received
one-thirty p . m . , E a s t e r n
Banks,
they
hold
for
2 7,
1975,
for
Treasury
bills maturing
$ 4 , 8 0 5 , 6 4 0 , 0 0 0 , of w h i c h
for
authorities,
a discount
their
in b e a r e r
$500,000 and
book-entry f o r m to d e s i g n a t e d
of
February
X L 5 ).
in exchange
the amount
at m a t u r i t y
$100,000,
912793
to b e d a t e d
themselves
and
as
presently
hold
the bills
now being
agents
of
$2,753,300,000.
offered
at
tenders.
on
issued
thereabouts,
(C U S I P No.
international monetary
The bills
or
basis
face
form
under
competitive
amount will
be payable without
in d e n o m i n a t i o n s
$1,000,000
and n o n
of
$10,000,
(maturity value),
and
in
bidders.
at
Daylight
Federal
Saving
Reserve
time,
Banks
Monday,
and
Branches
February
up
24,
to
1975.
Tenders w i l l n o t b e r e c e i v e d a t t h e D e p a r t m e n t o f t h e T r e a s u r y , W a s h i n g t o n .
Each t e n d e r m u s t
multiples
of
be
$5,000.
be e x p r e s s e d o n
a minimum
In
of
$10,000.
competitive
the
case
of
of
100,
with
the b a s i s
Fractions m a y not
Banking
for
not more
Tenders
over
tenders
than
$10,000 must
the
three
price
be
in
offered must
decimals,
e.g.,
99.925.
be used.
institutions
and
dealers who make
(OVER)
primary markets
in Govern m e n t
2
-
securities
with
for
and report
respect
account
such
and
trust
companies
face
express
Tenders
amount
amount
will
of
guaranty
Public
and
be
bills
range
of
in w h o l e
or
to
reservations,
(in
Settlement
completed
other
in part,
maturing
ment.
February
bills
Under
amount
of
(other
Federal
income
the price
the
during
paid
issue.
or
be m a d e
bills
actually
taxable year
the
Copies
of
issued
of
of
the
issued
gain or
for which
the return
C i r c u l a r No.
the Treasury
circular may
bills
for
are
27,
tenders,
Subject
$ 2 0 0 , 0 0 0 or less
at
t h e average
be made
1975,
receive
issues.
or
i n cash or
e q u a l treat
t h e p a r v a l u e of
the n e w bills.
C o d e of
is
disposed
of,
and
t h e bills
include
the difference
in his
between
subsequent
redemption
to
t h e o w n e r of
hereunder must
on
1 9 5 4 the
considered
Accordingly,
or
the
of T r e a s u r y bills
sold
or
of
the respective
of
issue
tenders
final.
full
between
loss,
sale
all
for
in
February
assets.
either upon
any or
Internal Revenue
whether on original
received
Secretary
the bids must
otherwise
companies)
competitive
tenders will
hereunder
or
t h e T r e a s u r y o f the
shall be
price
b y an
company.
issue
bids
issue
the
capital
as o r d i n a r y
the Treasury
terms
of
redeemed
insurance
the bills,
the
accompanied
The
reject
for differences
1221(5)
of
face amount
exchange
and
are
be accepted
in a like
banks
trust
each
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Department
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thereof.
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set
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dealers
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funds
and
at w h i c h
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or rejection
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454(b)
the bills
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accepted
1975.
accepted
discount
excluded
bills
and
27,
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submit
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available
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accrue when
are
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action
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maturing
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and
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and his
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the
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418
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B a n k or
Departmentie]REA5URY
jilNGTON, D.C. 20220
T E L E P H O N E W04-2041
V
REMARKS BY THE HONORABLE STEPHEN S. GARDNER
DEPUTY SECRETARY OF THE TREASURY, BEFORE THE
SENATE APPROPRIATIONS COMMITTEE
THURSDAY, FEBRUARY 13, 1975
Mr. Chairman and Members of the Committee:
It is a pleasure to appear before this distinguished
committee as you begin your considerations of the President's
proposed budget for Fiscal Year 1976.
I believe that my colleagues from the Administration
who are also here this morning, Mr. Lynn and Mr. Greenspan,
will be presenting a detailed exposition of the budget and
responding to your questions on our economic forecasts.
In representing the Treasury Department and Secretary Simon,
I would like to discuss the budget more generally within
the framework of our overall economic policies.
As President Ford stated in his budget message to
the Congress, this budget marks the beginning of our
bicentennial observance. It also comes at a time when
our economy appears to be in the most difficult straits
since World War II. Thus, it is especially important
that we act wisely and well as we lay the foundations for
our third century as a nation.
We believe that the policy recommendations submitted
by the President represent a sound and sensible approach
for lifting us out of the recession without reigniting
the fires of inflation.
The budget message itself is a remarkably candid docu
ment, but perhaps it has created a greater sense of pessimism
about the future than is justified. It confirms that unemploy
ment this year will average above 8 percent. It shows that
the rate of inflation for the full year may again break the
double digit barrier. And it also indicates that our troubles
are unlikely to disappear quickly.
ice,
Nonetheless/ we also believe that the trend of the
economy through the year should be considerably better than
last year. While unemployment was rising at the end of 1974,
We exPec^ tt to be falling by the end of 1975. While the
^ ate °f inflation was above 10 percent at the end of 1974,
it should fall below 10 percent by the end of 1975. Thus,
as we enter 1976, even though our progress may be slower
than anyone would like, we expect that the Nation will be
on the road to recovery.
-
2
-
In view of the difficulties that economic forecasters
have had in the past, we realize that these calculations
may be greeted with some skepticism. Nevertheless, there
are solid grounds for hope.
For one thing, there are positive cyclical forces with
in three areas of the economy — housing, consumer spending,
and inventory investment ■— that should begin to assert them
selves during the second half of the year:
— As you know, the housing industry went into a decline
when inflation dried up the supply of mortgage credit and
drove up interest rates. With the Federal Reserve now pro
viding greater monetary ease and with inflation receding
somewhat, short-term interest rates have declined sharply.
This has renewed the flow of funds into the thrift institu
tions and has provided the essential precondition for an
upturn in housing.
— Similarly, some of the same forces that created
inflation also cut deeply into the real income of consumers,
causing consumer spending to suffer its biggest drop since
the Second World War. Now, with the rate of inflation
subsiding and with a pattern of higher wage settlements
having emerged, the real income of workers should be on
the upgrade again during 1975. As it turns upwards, we
should experience higher rates of consumer spending.
— With regard to inventories, the picture is more
mixed, but it seems clear that many businessmen, as in
the auto industry are now liquidating excessive stocks.
Consumer purchasing should continue at a sufficiently
high pace to drain off much of these excessive inventories,
so that before the year is out, inventory investment will
again become a positive factor.
Thus, within the recession itself, we can find the seeds
of recovery. As they take root and grow, the recession
will bottom out and we can begin the long road back.
A second factor in buoying our hopes for recovery is
the supportive monetary policy of the Federal Reserve Board.
Its chairman, Arthur Burns, has testified on several occasions
that the Federal Reserve intends to follow an expansive
policy while also trying to prevent an explosion in the money
supply. As I have noted, we are already seeing results of
these policies in the decline of short-term interest rates.
m
3
(7)«5
The third factor which strengthens our prospects for
a recovery is the budget itself. The President has pro
posed a $16 billion tax cut not because the economy would
not recover without it, but because it will make the recovery
in the second half of the year more solid and certain. More
over, the budget provides for an estimated $18 billion for
expanded unemployment compensation and bigger public service
employment programs during Fiscal Year 1976. I must also
point out that total outlay s in the new budget represent an
increase of more than $80 billion over the level of just
two years ago. The sharp increases in spending underscore
the fact that the President has been, and will continue to
attack the problems of recession. The President remains
committed to the position that he will do everything he can
to alleviate the suffering caused by unemployment.
Tax Cut Versus Higher Spending
Some members of Congress have asked why the President
has chosen a tax cut as the primary form of stimulation
and why he is resisting much larger spending programs.
Let me try to address those questions.
In planning on how fiscal stimulus could best be intro
duced into the economy, we carefully considered both basic
options — cutting taxes or increasing expenditures beyond
budgeted levels or some combination of the two. We decided
that the tax route was highly preferable for two reasons.
First, the stimulus from a tax cut will get into the
income stream much more rapidly than a further rise in
Federal expenditures.
. Some have questioned this view because they believe
a large number of households would save rather than spend
their tax rebates. Although most of the money will go
directly into the spending stream, there are certainly
many families who will put it in the savings bank, or
will use it to pay off debt. But the money that goes into
the savings account or is used to repay debt will also be
very helpful in strengthening the economic recovery. I
have in mind, particularly, the money that flows into
savings and loan associations and the other financial inter
mediaries that provide the great bulk of funds for new
mortgages. The tax-rebate dollars which flow in that
direction will surely aid the hard-hit housing industry.
4
I t would a l s o be wrong t o assume t h a t t h e i n i t i a l
d e s i r e by some h o u s e h o l d s t o s a v e t h e i r t a x r e b a t e s w i l l
mean t h a t th e t a x c u t w i l l n o t work t o s t i m u l a t e consumer
spending.
Once h o u s e h o l d s have i n c r e a s e d t h e i r l i q u i d i t y
p o s i t i o n , e i t h e r by a d d i n g t o s a v i n g s o r r e d u c i n g t h e i r
d e b t , t h e y w i l l f e e l much b e t t e r a b o u t t h e i r economic
situ ation .
They w i l l have more c o n f i d e n c e i n t h e i r e c o
nomic f u t u r e and a more p o s i t i v e a t t i t u d e a b o u t s p e n d in g
from t h e i r c u r r e n t in com e.
T h u s , w h e th e r t h e t a x - r e b a t e c h e c k s go i n t h e f i r s t
i n s t a n c e i n t o s a v i n g s or w he th e r t h e y go d i r e c t l y i n t o
s p e n d i n g , i t w i l l n o t be v e r y l o n g a t a l l b e f o r e t h e g r e a t
b u l k o f t h e t a x r e b a t e g e t s i n t o t h e s p e n d i n g s t r e a m and
t h e r e b y c o n t r i b u t e s t o a r e c o v e r y i n econ omic a c t i v i t y .
The o t h e r s i d e o f t h i s c o i n i s even more i m p o r t a n t
t o t h e i s s u e o f prompt economic s t i m u l u s :
The f a c t t h a t
w i t h few e x c e p t i o n s , a d d i t i o n s t o f e d e r a l s p e n d i n g programs
f o r goods and s e r v i c e s a r e l i k e l y t o be much t o o s l o w in
p r o v i d i n g im pe tu s t o t h e economy.
T h i s f a c t was p e r s u a s i v e
l y documented by a s t u d y made s e v e r a l y e a r s ago by*
Nancy H. T e e t e r s o f t h e B r o o k i n g s I n s t i t u t i o n .
She analyzed
t h e e x p e r i e n c e o f t h e 1962 a c c e l e r a t e d p u b l i c works program —
and I e m pha siz e t h e a c c e l e r a t e d n a t u r e o f t h a t e f f o r t .
The
program was p a s s e d i n S e p t e m b e r , 1962, w i t h i n i t i a l o b l i g a t i o n a l a u t h o r i t y o f $850 m i l l i o n .
A l t h o u g h $152 m i l l i o n
o f t h e amount was o b l i g a t e d i n t h a t f i s c a l y e a r , , o n l y $62
m i l l i o n was s p e n t t h e n .
The b u l k o f t h e money was o b l i g a
t e d and s p e n t i n F i s c a l Y e a r s 1964 and 1965, w i t h v e s t i g e s
o f t h e program s t i l l i n e x i s t e n c e i n 1971.
This i s
shown i n t h e t a b l e b e l o w .
Table 4. New Obligational Authority, Obligations, and Expenditures
radcr the Public Works Acceleration Program, Fiscal Years 1963-71
Millions of dollars
O bligations
F iscal
year
J96J
1564
1565
N ew
obligational
‘ auth ority
S ta te
an d local
projects
Federal
projects
Adm inistration
E xpendi
85 0 .0
3 0 .0
4 .0
9 6 .7
313.7
192.3
5 5 .0
81 .8
15.7
3 .0
1 .9
0 .6
6 2 .5
331.8
321.6
1566
88.2
1967
21.1
1963
5 .0
1969
2.0
1970
197J (est.)
Total
tu res
0.8
8 84.0
602.7
152.5
5 .5
3 .0
836.0
Source,: T he B u d g et o f th e U n ite d S ta te s G overn m en t, various fiscal years, and
T h e B u d g e t o f th e U n ite d
Sestet G overnment—A p p e n d ix , various fiscal years.
5
The momentum o f f e d e r a l s p e n d i n g gr ow th i s a l r e a d y
so s t r o n g t h a t i t i s ha rd t o im a g i n e a d e l i b e r a t e p o l i c y
decision to boost i t s t i l l fu r th e r .
I f , ho we v er , we were
to make a d e c i s i o n now i n an e f f o r t t o p r o v i d e econ omic
s t i m u l u s d u r i n g t h e c u r r e n t r e c e s s i o n , we c o u l d e x p e c t
to g e t o n l y a v e r y s m a l l p a r t o f t h e work s t a r t e d when i t
i s most n e e d e d .
Remember t h a t t h e 1962 program d e s c r i b e d
above was an a c c e l e r a t e d p u b l i c works program; s p e c i a l
e f f o r t s were made t o g e t t h e program moving i n a h u r r y .
I f t h a t program can be u se d a s a model — and we hav e no
reason t o b e l i e v e o t h e r w i s e — we c o u l d e x p e c t t h a t o f
the a d d i t i o n a l f u n d s v o t e d e a r l y i n F i s c a l 1976 f o r one
or a n o t h e r f e d e r a l pr og ram , o n l y a b o u t 7 p e r c e n t o f t h e
e x p e n d i t u r e s would be made d u r i n g t h a t f i s c a l y e a r , when
the economic r e c o v e r y s h o u l d s t i l l be i n i t s e a r l y s t a g e s .
The b u l k o f t h e s p e n d i n g would t a k e p l a c e a t a ti m e when
we may want t o a p p l y f i s c a l r e s t r a i n t t o ward o f f a r en e w a l
of i n f l a t i o n a r y p r e s s u r e s .
T h u s , t h e econ omic e f f e c t s o f
a f u r t h e r r i s e i n f e d e r a l s p e n d i n g would be o f e x t r e m e l y
l i m i t e d h e l p d u r i n g and i m m e d i a t e l y a f t e r t h e r e c e s s i o n
and c o u l d be s e r i o u s l y i n f l a t i o n a r y a c o u p l e o f y e a r s
from now, when so much o f t h e s p e n d i n g would a c t u a l l y
take p l a c e .
The se co n d r e a s o n why we f e e l t h a t c u t t i n g t a x e s i s
a s u p e r i o r means o f p r o v i d i n g s t i m u l u s t o t h e economy as
opposed t o f u r t h e r i n c r e a s e s i n go vernment s p e n d i n g i s
t h a t i t p u t s t h e s t i m u l u s i n t h e most dynamic s e c t o r s o f
the economy. The p r i v a t e s e c t o r s t i l l p r o v i d e s some 85
percent o f a l l the jo bs in t h i s c o u n try .
I f we a r e g o i n g
to b r i n g down t h e r a t e o f unemployment, i t i s v i t a l t h a t
we have a v i g o r o u s r e c o v e r y i n t h e p r i v a t e s e c t o r .
W h il e
i n c r e a s e s i n unemployment c o m p e n s a t i o n and p u b l i c s e r v i c e
employment programs a r e v e r y d e s i r a b l e t o c u s h i o n t h e f a l l
in employment d u r i n g t h e r e c e s s i o n , t h e y do n o t p r o v i d e t h e
f o u n d a t i o n f o r a p r o d u c t i v e and p r o s p e r o u s economy. I n c r e a s e d
government s p e n d i n g can p r o v i d e a d d i t i o n a l demand i n t h e
p r iv a te s e c t o r , b u t through secondary e f f e c t s r a t h e r than
directly.
S u r e l y t h e most e f f i c i e n t means o f c r e a t i n g
a d d i t i o n a l j o b o p p o r t u n i t i e s i n t h i s economy i s t o p r o v i d e
in ce n tiv e s d i r e c t l y fo r the p r iv a t e s e c t o r .
We want t o do
t h a t b o t h by i n c r e a s i n g consumer demand t h r o u g h c u t s i n
i n d i v i d u a l income t a x e s and by a b o o s t i n t h e i n v e s t m e n t
t a x c r e d i t t o spu r new s p e n d i n g by b u s i n e s s e s f o r t h e
p l a n t and equi pm ent t h a t i s v i t a l l y n e e d e d .
6
Need f o r S p e n d i n g R e s t r a i n t
I n t h e b e l i e f t h a t t h e b u d g e t as p r o p o s e d a l r e a d y
i n c l u d e s a h e a l t h y d e g r e e o f econ omic s t i m u l a t i o n , t h e
P r e s i d e n t ha s a sk e d f o r a mor ator ium on new s p e n d i n g
programs and f o r f i r m l i m i t s on s e v e r a l e x i s t i n g pr ogram s.
As he ha s s a i d , h i s p o s i t i o n i s n o t s e t i n c o n c r e t e and
we must a d j u s t ou r p o l i c i e s t o meet c h a n g i n g c i r c u m s t a n c e s ,
b u t i t i s c l e a r t h a t a c e n t r a l e m pha sis o f our economic
p o l i c y i s t o r e s t r a i n f u r t h e r gr owth i n t h e F e d e r a l b u d g e t.
A p r im a r y r e a s o n f o r t h i s em ph a sis i s t h e c o n t i n u i n g
threat of in fla t io n .
Even t h o u g h t h e r a t e o f i n f l a t i o n i s
s u b s i d i n g somewhat, i t c o u l d e a s i l y s h o o t upwards a g a i n i f
we o v e r h e a t t h e economy, a s we hav e done so o f t e n i n th e
past.
F u r t h e r m o r e , i t i s e s s e n t i a l t o u n d e r s t a n d t h a t the
f o r c e s o f i n f l a t i o n a r e v e r y l a r g e l y t o blame f o r t h e
r e c e s s i o n we a r e e x p e r i e n c i n g t o d a y .
Bo th t h e h o u s i n g
i n d u s t r y and consumer s p e n d i n g , a s I hav e n o t e d , f a l t e r e d
under t h e p r e s s u r e s o f r i s i n g p r i c e s .
I f we r e v i v e t h o s e
p r e s s u r e s t h r o u g h e x c e s s i v e f i s c a l and mone tar y p o l i c i e s ,
t h e r e i s a v e r y r e a l d a n g e r t h a t we w i l l e n t e r a new and
more v i c i o u s c y c l e o f i n f l a t i o n and r e c e s s i o n .
I t is
i m p e r a t i v e t h a t we be c o n t i n u a l l y a l e r t t o t h e t h r e a t o f
new i n f l a t i o n .
We must a t t a c k b o t h t h e r e c e s s i o n and
i n f l a t i o n a t t h e same t i m e , and t h a t r e q u i r e s a b a l a n c e d ,
c a r e f u l a p p r oa ch — t h e k i n d o f a p p r o a c h c o n t a i n e d i n
t h i s budget.
We have a l s o made no s e c r e t o f our v i e w s t h a t t h e
b u d g e t d e f i c i t s w h ic h a r e a l r e a d y p r o j e c t e d — some $87
b i l l i o n f o r F i s c a l Y e a r s 1975 and 1976 — w i l l c a u s e s t r a i n s
in the p r i v a t e f i n a n c i a l m arkets.
Those s t r a i n s s h o u l d be
m a n a g e a b l e , b u t — and I want t o s t r e s s t h i s — t h e y w i l l
rem ai n m anageab le o n l y i f F e d e r a l b o r r o w i n g need s do n o t
become s i g n i f i c a n t l y l a r g e r and i f t h e y a r e o n l y temporary
in duration.
There i s , o f c o u r s e , a n o t h e r s c h o o l o f t h o u g h t on the
q u e s t i o n o f F e d e r a l b o r r o w in g i n t h e c a p i t a l m a r k e t s .
This
o t h e r s c h o o l b e l i e v e s t h a t t h e G o v e r n m e n t ' s b o r r o w in g needs
s h o u l d be e a s i l y met b e c a u s e p r i v a t e demands f o r fu n ds
should slack en c o n s id e r a b ly .
I t i s t r u e t h a t f i n a n c i a l c o n d i t i o n s n o r m a l l y e a se
s u b s t a n t i a l l y d u r i n g a r e c e s s i o n and n o r m a l l y t h e y remain
easy w e l l i n t o the p e rio d o f r e c o v e r y .
There a r e two main
reasons fo r t h i s :
F i r s t , some p r i v a t e demands f o r c r e d i t
a r e c l o s e l y r e l a t e d t o t h e p a c e o f b u s i n e s s a c t i v i t y and
7
drop s h a r p l y d u r i n g a r e c e s s i o n .
An example ca n u s u a l l y
be found i n s h o r t - t e r m b u s i n e s s b o r r o w i n g t o f i n a n c e
inven tories.
Second, the Fe d e ra l Reserve cu sto m a rily
" l e a n s a g a i n s t t h e wind" d u r i n g a p e r i o d o f r e c e s s i o n and
seeks t o e x p a n d , o r a t l e a s t m a i n t a i n , t h e r a t e o f gr owth
in money and c r e d i t .
T h e r e f o r e , i n t e r e s t r a t e s ca n be
e x p e c te d t o d e c l i n e and t h e a v a i l a b i l i t y o f c r e d i t t o
i n c r e a s e a s a normal p a r t o f t h e c y c l i c a l p r o c e s s .
C o n s i d e r a t i o n s o f t h i s n a t u r e have a p p a r e n t l y l e d
some o b s e r v e r s t o c o n c l u d e t h a t t h e f i n a n c i n g o f l a r g e
Federal d e f i c i t s i n th e c u r r e n t r e c e s s i o n i s a r o u t i n e
matter and o f l i t t l e e con om ic s i g n i f i c a n c e .
S e c r e t a r y Simon
and I , as w e l l as many o t h e r members o f t h i s A d m i n i s t r a t i o n ,
d i f f e r w i t h t h a t ju d g m e n t .
As we have s a i d on s e v e r a l o c c a s i o n s , t h e c u r r e n t
r e c e s s i o n i s an o u t g r o w t h o f a l o n g p e r i o d o f i n f l a t i o n
t h a t has l e f t an u n u s u a l l y he a v y r e s i d u e o f p r i v a t e f i
nancing demands.
I n r e c e n t y e a r s , t h e r e has been a marked
d e c l i n e i n r e a l c o r p o r a t e p r o f i t s and a s e r i o u s e r o s i o n o f
the l i q u i d i t y b a s e o f h o u s e h o l d s and b u s i n e s s e s .
Condi
t i o n s i n t h e s t o c k market h a v e v i r t u a l l y r u l e d o u t t h e s a l e
o f new e q u i t y a s a s o u r c e o f f u n d s and hav e p o s t p o n e d needed
long-term debt r e f i n a n c i n g .
For t h e s e and o t h e r r e a s o n s , t h e number o f p r i v a t e
l o n g - t e r m d e b t i s s u e s coming i n t o t h e m arket i s u n u s u a l l y
large.
Our l a t e s t T r e a s u r y p r o j e c t i o n s show t h a t n e t new
c o r p o r a t e bond i s s u e s , w hic h r o s e from $1 2- 1/ 2 b i l l i o n i n
1973 t o $25 b i l l i o n i n 1974, w i l l ad v a nc e even f a r t h e r t o
some $30 b i l l i o n or more i n 1975.
W h il e c o r p o r a t e c a p i t a l
spending programs a r e b e i n g c u t b a c k , t h e r e w i l l s t i l l be
a ve ry he a v y volume o f c o r p o r a t e l o n g - t e r m b o r r o w i n g .
Furth erm or e, t h e s t a t e and l o c a l f i s c a l p o s i t i o n has cha nged
d ram atically.
Wi th t a x r e c e i p t s r e d u c e d by t h e r e c e s s i o n ,
t h e i r s u r p l u s e s hav e m e l t e d away so t h a t t h e i r b o r r o w in g
needs s h o u l d be s u b s t a n t i a l .
Some s l a c k e n i n g i n p r i v a t e demands f o r s h o r t - t e r m
c r e d i t i s underway and more ca n be e x p e c t e d .
Y e t by any
p r e v i o u s r e c e s s i o n s t a n d a r d s , t o t a l p r i v a t e demands f o r
c r e d i t — b o t h s h o r t and l o n g - t e r m - - a r e l i k e l y t o remain
much l a r g e r t h a n m i g h t o r d i n a r i l y be e x p e c t e d i n a r e c e s s i o n
8
F e d e r a l r e q u i r e m e n t s w i l l , o f c o u r s e , h av e t o be m et.
But t h e r e are c l e a r r i s k s i n such a s i t u a t i o n .
F irst, if
p r i v a t e demand do es n o t f a l l b a c k s p o n t a n e o u s l y t o make
room f o r t h e l a r g e r F e d e r a l b o r r o w i n g , c r e d i t demand w i l l
o u t r u n s u p p l y , i n t e r e s t r a t e s w i l l be d r i v e n h i g h e r , and
some p r i v a t e b o r r o w e r s w i l l be crowded o u t .
J u d g i n g from
p a s t e x p e r i e n c e , t h e h o u s i n g i n d u s t r y would be l i k e l y t o
su ffer.
I n d e e d , i t s r e c o v e r y m i g h t e ven be a b o r t e d .
At
the w o rs t, th ese f i n a n c i a l p re ssu re s cou ld c o n s t r a in the
normal c y c l i c a l r e c o v e r y t h a t would o t h e r w i s e o c c u r .
The s e c o n d r i s k i s on t h e i n f l a t i o n s i d e .
Some
o b s e r v e r s s u g g e s t t h a t , i n o r d e r t o a v o i d any s t r a i n s on
the c r e d i t m arkets, the F e d e r a l Reserve should undertake
w h a t e v e r r a t e o f gr ow th i n money and c r e d i t i s r e q u i r e d
t o i n s u r e t h a t F e d e r a l and a l l o t h e r b o r r o w i n g r e q u i r e m e n t s
a r e met a t s t a b l e o r d e c l i n i n g i n t e r e s t r a t e s .
This
a p p r o a c h , ho we v er , c o u l d be a s u r e f o r m u l a f o r s t i l l h i g h e r
i n f l a t i o n r a t e s when t h e r e c o v e r y g e t s i n t o f u l l sw in g —
i f not sooner.
We a r e n o t s a y i n g t h a t any o f t h e s e e v e n t s w i l l o c c u r ,
but there i s a high r i s k o f t h e i r o cc u rin g should p r iv a t e
market demands c o n t i n u e a s e x p e c t e d and F e d e r a l b o r r o w i n g
demands be i n c r e a s e d s u b s t a n t i a l l y .
The key t o s u c c e s s f u l f i n a n c i n g o f t h e l a r g e F e d e r a l
d e f i c i t s l i e s in d i l i g e n t r e s t r a i n t o f F ed eral expendi
tures.
Large as they a r e , the d e f i c i t s p r o je c te d f o r F i s c a l
Y e a r s 1975-76 ca n p r o b a b l y be accommodated, a l t h o u g h t h e y
w i l l p r o d u c e some s t r a i n s i n t h e f i n a n c i a l m a r k e t s .
How
e v e r , i f t h e C o n g r e s s were t o push F e d e r a l e x p e n d i t u r e s
much beyond t h e b u d g e t e d l e v e l s , i t would n o t be p o s s i b l e
t o r e t a i n much o p t im is m a s t o t h e r e s u l t .
E i t h e r the
r e c o v e r y would be d e l a y e d o r more i n f l a t i o n would be e x
perienced in the fu t u r e .
I n our o p i n i o n , t h e p r o j e c t e d d e f i c i t s f o r F i s c a l
1975-76 a r e — i n t h e c o n t e x t o f our e x p e c t a t i o n s a b o u t
t h e c o u r s e o f t h e economy — a b o u t a s l a r g e a s our f i n a n c i a l
s y s t e m can t o l e r a t e w i t h o u t d o i n g more harm t h a n good f o r
t h e economy.
Conclusion
Mr. C h a i r m a n , i n c o n c l u s i o n , I would l i k e t o re-emphasize
our b e l i e f t h a t t h e P r e s i d e n t ' s b u d g e t i s a sound and balanced
9
approach t o t h e c h a l l e n g e s c o n f r o n t i n g u s .
I t is a v ita l
par t o f a b r o a d e r s t r a t e g y t o b r i n g b o t h t h e r e c e s s i o n and
i n f l a t i o n und er c o n t r o l w h i l e a t t h e same t i m e t a k i n g t h e
f i r s t v i t a l s t e p s to war d a c h i e v i n g s e l f - s u f f i c i e n c y i n
en ergy.
As t h e P r e s i d e n t ha s p r o m i s e d , we a r e a n x i o u s t o
work w i t h y ou a s c l o s e l y a s p o s s i b l e t o r e c o n c i l e our v i e w s
and t o p r o v i d e t h e A m e r ic a n p e o p l e w i t h t h e s t r o n g l e a d e r
ship t h e y d e s e r v e .
Thank Y ou .
3
STATEMENT OF THE HONORABLE WILLIAM E . SIMON
SECRETARY OF THE TREASURY
BEFORE THE HOUSE APPROPRIATIONS COMMITTEE
WASHINGTON, D . C . , TUESDAY, FEBRUARY 18, 1975
10:00 A .M . , EST
Mr. Chairman and Members o f t h e Com m it tee:
I welcome t h i s o p p o r t u n i t y t o appear b e f o r e you as
you b e g i n yo ur c o n s i d e r a t i o n s o f th e P r e s i d e n t ’ s p r op os e d
budget f o r f i s c a l y e a r 1976.
My c o l l e a g u e s who a re her e t h i s m o r n i n g , Mr. Lynn and
Mr. G r e e n s p a n , w i l l be p r e s e n t i n g a d e t a i l e d e x p o s i t i o n
of the b u d ge t and r e s p o n d i n g t o your q u e s t i o n s on our
economic f o r e c a s t s .
I would l i k e t o d i s c u s s th e b u d g e t
more g e n e r a l l y w i t h i n the framework o f our o v e r a l l economic
p o licie s.
T hi s b u d g e t i s p a r t o f
gre at c h a l l e n g e s now f a c i n g
s e n s i b l e a pp ro ac h f o r l i f t i n
out r e i g n i t i n g the f i r e s o f
take the f i r s t s t e p s toward
on f o r e i g n e n e r g y s o u r c e s .
a b r o a d e r s t r a t e g y to meet th e
us.
I t r e p r e s e n t s a sound and
g us o u t o f th e r e c e s s i o n w i t h
i n f l a t i o n , and i t w i l l h e l p us
e n d in g our gr ow ing dependence
The b u d g e t message and t h e economic r e p o r t t h a t f o l l o w e d
are rem ark abl y c a n d i d d o cu m e n ts , b u t p e r ha ps t h e y have c r e a t e d
a g r e a t e r s e n s e o f p e s s im is m abo ut th e f u t u r e th an i s j u s t i f i e d .
They c o n f i r m t h a t th e a v e r a g e l e v e l s o f unemployment and
i n f l a t i o n t h i s y e a r w i l l b o t h be h i g h .
They a l s o i n d i c a t e ,
as we have s a i d many ti m e s b e f o r e , t h a t our t r o u b l e s a re
lo n g -t e r m i n n a t u r e .
They p r o v i d e no s u p p o r t , ho we ver , f o r
the view t h a t th e economy i s h e a d i n g toward a n y t h i n g r e s e m b l i n g
a Great D e p r e s s i o n .
I n d e e d , we b e l i e v e t h a t t h e economic t r e n d s t h i s y e a r
should be d i s t i n c t l y b e t t e r th an l a s t y e a r .
Wh il e unemployment
was r i s i n g a t th e end o f 1974, we e x p e c t i t t o be f a l l i n g by
the end o f 1975.
W hile th e r a t e o f i n f l a t i o n was above 10%
at the end o f 1974, i t s h o u l d f a l l be low 10 p e r c e n t by th e
end o f 1975.
T h u s , as we e n t e r 1976, even th oug h our p r o g r e s s
may be s l o w e r th an anyone would l i k e ; we e x p e c t t h a t th e
Nation w i l l d e f i n i t e l y be on th e road t o r e c o v e r y .
WS-225
2
In v ie w o f th e d i f f i c u l t i e s t h a t economic f o r e c a s t e r s
have had i n th e p a s t , we r e a l i z e t h a t t h e s e c a l c u l a t i o n s
may be g r e e t e d w i t h some s k e p t i c i s m .
N e v e r t h e l e s s , we
b e l i e v e t h e r e a r e s o l i d grounds f o r ho pe.
For one t h i n g , t h e r e a re p o s i t i v e c y c l i c a l f o r c e s
w i t h i n t h r e e a r e a s o f t h e economy - - h o u s i n g , consumer
s p e n d i n g , and i n v e n t o r y i n v e s t m e n t - - t h a t s h o u l d b e g i n
to a s s e r t t h e m s e l v e s d u r i n g th e second h a l f o f th e y e a r ;
- - As you know, th e h o u s i n g i n d u s t r y f i r s t went i n t o
a t a i l s p i n when i n f l a t i o n d r i e d up th e s u p p l y o f mortga ge
c r e d i t and dr ove up i n t e r e s t r a t e s .
With t h e F e d e r a l
R e s e r v e now p r o v i d i n g g r e a t e r mone tary s t i m u l a t i o n and
i n f l a t i o n r e c e d i n g somewhat, s h o r t - t e r m i n t e r e s t r a t e s have
declined sharply.
T h i s has renewed th e f l o w o f fu n d s i n t o
t h e t h r i f t i n s t i t u t i o n s and has p r o v i d e d th e e s s e n t i a l
p r e c o n d i t i o n f o r an u p t u r n i n h o u s i n g .
- - S i m i l a r l y , some o f th e c a u s e s o f i n f l a t i o n a l s o led
t o th e b i g g e s t drop i n consumer s p e n d i n g s i n c e th e Second
World War.
Now, w i t h t h e r a t e o f i n f l a t i o n s u b s i d i n g and
w i t h a p a t t e r n o f h i g h e r wage s e t t l e m e n t s h a v i n g emerged,
t h e r e a l income o f workers s h o u l d be on t h e upgrade a g a i n
d u r i n g 1975.
As i t t u r n s up wa rd s, we s h o u l d e x p e r i e n c e
h i g h e r r a t e s o f consumer s p e n d i n g .
"
- - W e have a l s o moved i n t o a p e r i o d o f i n v e n t o r y
liq u id atio n .
Consumer s p e n d i n g s h o u l d c o n t i n u e a t a
s u f f i c i e n t l e v e l t o d r a i n o f f much o f t h e s e e x c e s s i v e
i n v e n t o r i e s , so t h a t b e f o r e th e y e a r i s o u t , i n v e n t o r y
i n v e s t m e n t w i l l a g a i n become a p o s i t i v e f a c t o r .
T h u s, w i t h i n t h e r e c e s s i o n i t s e l f , we can f i n d the
seeds o f r e c o v e r y .
As t h e y t a k e r o o t and grow, th e r e c e s s i o n
s h o u l d bottom o u t and we can b e g i n th e l o n g road b a c k .
A se con d f a c t o r i n b u o y i n g our hopes f o r r e c o v e r y i s
t h e s u p p o r t i v e mone tary p o l i c y o f t h e F e d e r a l R e s e r v e Board.
I t s c h a i r m a n , A r t h u r B u r n s , has s a i d r e p e a t e d l y t h a t the
F e d e r a l R e s e r v e i n t e n d s to e n co ur a ge economic r e c o v e r y by
p r o v i d i n g f o r an a de q u a te e x p a n s i o n in s u p p l i e s o f money
and bank c r e d i t , w h i l e a l s o a v o i d i n g an e x p l o s i o n t h a t
would p l u n g e us i n t o deepe r t r o u b l e .
As I have n o t e d , we
a re a l r e a d y s e e i n g r e s u l t s o f t h e i r p o l i c i e s i n th e d e c l i n e
o f short-term in te r e s t r a te s .
0-
3
The t h i r d f a c t o r which s t r e n g t h e n s our p r o s p e c t s f o r
a recovery i s the budget i t s e l f .
We a r e n o t l e a v i n g t h i n g s
to chance but i n t e n d t o s u p p o r t th e n a t u r a l f o r c e s o f r e c o v e r y .
The P r e s i d e n t has p r o p o s e d a $16 b i l l i o n t a x c u t n o t b e c a u s e
the economy would n o t r e c o v e r w i t h o u t i t , b ut b e c a u s e i t w i l l
make the r e c o v e r y i n th e se con d h a l f o f th e y e a r more s o l i d
and c e r t a i n .
M o r e o v e r , th e b u d ge t p r o v i d e s f o r an e s t i m a t e d
$18 b i l l i o n f o r expanded unemployment c o m p e n s a ti o n and b i g g e r
p u b l i c s e r v i c e employment programs d u r i n g f i s c a l y e a r 1976.
I must a l s o p o i n t o u t t h a t t o t a l o u t l a y s i n th e new b u d g e t
r e p r e s e n t an i n c r e a s e o f more t h a n $80 b i l l i o n ov e r th e l e v e l
of j u s t two y e a r s a g o .
These sh a rp i n c r e a s e s i n s p e n d i n g
underscore t h a t f a c t t h a t th e P r e s i d e n t has b e e n , and w i l l
co nt inu e t o b e , h i g h l y r e s p o n s i v e t o problems o f th e r e c e s s i o n .
The P r e s i d e n t rema ins committed t o th e p o s i t i o n t h a t he w i l l
do e v e r y t h i n g he ca n t o a l l e v i a t e t h e s u f f e r i n g ca u s e d by
unemployment.
Tax Cut V e r s u s H i g h e r S p e n d in g
Some Members o f C o n g r e s s have asked why t h e P r e s i d e n t has
chosen a t a x c u t as th e p r i m a r y form o f s t i m u l a t i o n and why he
is r e s i s t i n g much l a r g e r s p e n d i n g p r o g ra m s.
L e t me t r y to
address t h o s e q u e s t i o n s .
In p l a n n i n g th e way t h a t f i s c a l s t i m u l u s c o u l d b e s t be
in tr odu ced i n t o t h e economy, we c a r e f u l l y c o n s i d e r e d t h e b a s i c
options --• c u t t i n g t a x e s or i n c r e a s i n g e x p e n d i t u r e s beyond
budgeted l e v e l s or some c o m b i n a t i o n o f t h e two.
We decided, t h a t
the t a x r o u t e was h i g h l y p r e f e r a b l e f o r two r e a s o n s .
F i r s t , th e s t i m u l u s from a t a x c u t w i l l g e t i n t o th e income
stream much more r a p i d l y t h a n a f u r t h e r r i s e i n f e d e r a l
expenditures.
Some have q u e s t i o n e d t h i s v ie w b e c a u s e t h e y b e l i e v e a l a r g e
number o f h o u s e h o l d s w i l l s a v e r a t h e r t h a n spend t h e i r t a x
rebates.
A l t h o u g h we b e l i e v e much o f th e money w i l l go d i r e c t l y
into the s p e n d i n g s t r e a m , t h e r e are c e r t a i n l y many f a m i l i e s
who w i l l pu t i t i n t o a s a v i n g s bank or w i l l u se i t t o pay o f f
debt.
But the money t h a t goes i n t o the s a v i n g s a c c o u n t or i s
used to r e p a y d e b t w i l l a l s o be v e r y h e l p f u l i n s t r e n g t h e n i n g
the economic r e c o v e r y .
For e x a m p l e , money t h a t f l o w s i n t o
sa v i n g s and l o a n a s s o c i a t i o n s and s i m i l a r f i n a n c i a l i n t e r m e d i a r i e s
pr ovi des th e g r e a t b u l k o f fu n ds f o r new m o r t g a g e s .
Tax-rebate
do llars flo w in g in t h a t d i r e c t i o n w i l l s u r e ly aid the h a r d - h i t
housing i n d u s t r y .
4
I t would a l s o be wrong to assume t h a t t h e . i n i t i a l d e s i r e by
some h o u s e h o l d s t o s a v e t h e i r t a x r e b a t e s w i l l mean t h a t the
t a x c u t w i l l n o t work t o s t i m u l a t e consumer s p e n d i n g .
Once
h o u s e h o l d s have i n c r e a s e d t h e i r l i q u i d i t y p o s i t i o n , e i t h e r by
a d d i n g t o s a v i n g s or r e d u c i n g t h e i r d e b t , t h e y w i l l have more
c o n f i d e n c e a b o u t t h e i r economic s i t u a t i o n .
They w i l l have
g r e a t e r f a i t h i n t h e i r f u t u r e and a more p o s i t i v e a t t i t u d e about
s p e n d i n g from t h e i r c u r r e n t in com e.
T h u s , w hether th e t a x - r e b a t e c h e c k s go i n th e f i r s t
i n s t a n c e i n t o s a v i n g s or w he th er t h e y go d i r e c t l y i n t o spending,
i t w i l l n o t be v e r y l o n g a t a l l b e f o r e t h e g r e a t b u l k o f the
t a x r e b a t e g e t s i n t o t h e s p e n d i n g str eam and t h e r e b y c o n t r i b u t e s
t o a r e c o v e r y i n economic a c t i v i t y .
The o t h e r s i d e o f t h i s c o i n i s even more im p o r t a n t to the
i s s u e o f prompt economic s t i m u l u s :
th e f a c t t h a t w i t h few
e x c e p t i o n s , a d d i t i o n s t o f e d e r a l s p e n d i n g programs f o r goods
and s e r v i c e s a r e l i k e l y t o be much to o slo w i n p r o v i d i n g impetus
t o th e economy.
T h i s f a c t was p e r s u a s i v e l y documented i n a
s t u d y made s e v e r a l y e a r s ago by Nancy H. T e e t e r s o f t h e
Brookings I n s t i t u t i o n .
She a n a l y z e d th e e x p e r i e n c e o f th e 1962
a c c e l e r a t e d p u b l i c works program - - and I emphasize th e
a c c e le r a te d nature o f th a t e f f o r t .
The program was p a s s e d in
September 1962 w i t h i n i t i a l o b l i g a t i o n a l a u t h o r i t y o f $850.
m illion .
A l t h o u g h $152 m i l l i o n o f th e amount was o b l i g a t e d in
t h a t f i s c a l y e a r , o n l y $62 m i l l i o n was s p e n t t h e n .
The bu lk
o f t h e money was o b l i g a t e d and s p e n t i n f i s c a l y e a r s 1964 and 1965,
w i t h v e s t i g e s o f th e program s t i l l i n e x i s t e n c e i n 1971.
This
is
shown i n th e t a b l e b e l o w .
New O b l i g a t i o n a l A u t h o r i t y , O b l i g a t i o n s , and. E x p e n d i t u r e s under
the P u b l i c Works A c c e l e r a t i o n Pr ogr am, F i s c a l Y e a r s 19 63- 71 .
(M illion s o f D ollars)
O bligations
Fisc al
Year
1963
1964
1965
1966
1967
1968
1969
1970
1971 ( e s t )
Total
Sources:
New
O bligational
Authority
State
and L o c a l
Federal
Proj e c t s
Pr oj e c t s
85 0. 0
3 0 .0
4.0
-
96.7
31 3.7
192.3
- ■
88 4. 0
602.7
-
Admin
istratio n
Expendi
tures
55.0
81 .8
15 .7
1
3.0
1.9
0.6
-
6 2 .5
33 1.8
32 1.6
8 8 .2
21.1
5.0
2 .0
0.8
3.0
15 2 .5
5.5
83 6 .0
The Budget o f th e U n i t e d S t a t e s Go vernm ent,
v a r i o u s f i s c a l y e a r s , and The Bu dge t o f -the
U n i t e d S t a t e s Government - - A p p e n d i x , v a r i o u s
fis c a l years.
The momentum o f f e d e r a l s p e n d i n g growth i s a l r e a d y so
strong t h a t i t i s hard t o im a g in e a d e l i b e r a t e p o l i c y d e c i s i o n
to boost i t s t i l l f u r t h e r .
I f , ho we v er , we were to make suc h
a d e c i s i o n now i n an e f f o r t t o p r o v i d e economic s t i m u l u s d u r i n g
the c u r r e n t r e c e s s i o n , we c o u l d e x p e c t t o g e t o n l y a v e r y s m a l l
part o f t h e work s t a r t e d when i t i s most n e ed ed .
Remember
that the 1962 program d e s c r i b e d above was an a c c e l e r a t e d p u b l i c
works program; s p e c i a l e f f o r t s were made t o g e t th e program
moving i n a h u r r y .
I f t h a t program ca n be used as a model - - a n d
we have no r e a s o n t o b e l i e v e o t h e r w i s e - - w e c o u l d e x p e c t t h a t
° f the a d d i t i o n a l fu n ds v o t e d e a r l y i n f i s c a l 1976 f o r one or
another F e d e r a l pr og ra m , o n l y abo ut 7 p e r c e n t o f t h e e x p e n d i t u r e s
would be made d u r i n g t h a t f i s c a l y e a r , when th e economic r e c o v e r y
should s t i l l be i n i t s e a r l y s t a g e s .
The b u l k o f th e s p e n d i n g
would take p l a c e i n f i s c a l y e a r s 1977 and 1978 when we may want
to apply f i s c a l r e s t r a i n t t o ward o f f a r en ew al o f i n f l a t i o n a r y
Pressures.
6
T h u s , th e economic e f f e c t s o f a f u r t h e r r i s e i n f e d e r a l spending
would be o f e x t r e m e l y l i m i t e d h e l p d u r i n g and i m m e d i a t e l y a f t e r
t h e r e c e s s i o n and c o u l d be s e r i o u s l y i n f l a t i o n a r y a c o u p l e o f
y e a r s from now when touch o f th e s p e n d i n g would a c t u a l l y take
place.
The se co n d r e a s o n why we f e e l t h a t c u t t i n g t a x e s i s a superior!
means o f p r o v i d i n g s t i m u l u s t o t h e economy, as opposed t o further
i n c r e a s e s i n government s p e n d i n g , i s t h a t i t p u t s t h e sti m u lu s
i n t h e most dynamic p a r t o f t h e economy.
The p r i v a t e s e c t o r
s t i l l p r o v i d e s some 85 p e r c e n t o f a l l t h e j o b s i n t h i s co u n tr y .
I f we a r e g o i n g t o b r i n g down t h e r a t e o f unem ploym ent, i t i s
v i t a l t h a t we hav e a v i g o r o u s r e c o v e r y i n t h e p r i v a t e s e c t o r .
W h i l e i n c r e a s e s i n unemployment c o m p e n s a t i o n and p u b l i c s e r v i c e
employment programs a r e v e r y d e s i r a b l e t o c u s h i o n th e f a l l in
employment d u r i n g t h e r e c e s s i o n , t h e y do n o t c r e a t e permanent
j o b s o f p r o v i d i n g t h e f o u n d a t i o n s f o r s u s t a i n e d gr ow th and
prosperity.
F e d e r a l s p e n d i n g f o r n o n d e f e n s e p u r p o s e s has
i n c r e a s e d d r a m a t i c a l l y i n r e c e n t y e a r s , gr o w in g from 1 1 .6
p e r c e n t o f t h e G r o s s N a t i o n a l P r o d u c t i n 1969 t o 1 6 . 0 p e r c e n t
i n t h e b u d g e t f o r t h e coming y e a r , and i t p r o m is e s t o co n ti nu e
g r o w in g a t a r a p i d c l i p i n th e f u t u r e .
Y e t a l l o f these
a d d i t i o n a l fu n ds hav e l i t t l e d i r e c t im p a c t upon employment;
i n s t e a d t h e i r e f f e c t upon th e j o b market t e n d s t o be i n d i r e c t
or secondary.
The most e f f i c i e n t means o f c r e a t i n g a d d i t i o n a l
j o b o p p o r t u n i t i e s c o n t i n u e s t o be t o p r o v i d e i n c e n t i v e s d i r e c t l y
to the p r i v a t e s e c t o r .
We want t o do t h a t b o t h by i n c r e a s i n g
consumer demand t h r o u g h c u t s i n i n d i v i d u a l income t a x e s and by a
b o o s t i n t h e i n v e s t m e n t t a x c r e d i t t o spu r new s p e n d i n g by
b u s i n e s s e s f o r th e p l a n t and equipment t h a t i s v i t a l l y needed.
Need f o r S p e n d i n g R e s t r a i n t
I n th e b e l i e f t h a t t h e b u d g e t as pr o p o se d i n c l u d e s a healthy
d e g r e e o f economic s t i m u l a t i o n , th e P r e s i d e n t has as ke d f o r a
m or at or iu m on new s p e n d i n g programs and f o r f i r m l i m i t s on
s e v e r a l e x i s t i n g pr o g r a m s .
As he has s a i d , h i s p o s i t i o n i s n o t
s e t i n c o n c r e t e and we must be w i l l i n g t o a d j u s t t o meet ch an g in g
c i r c u m s t a n c e s , b u t i t i s c l e a r t h a t a c e n t r a l emphasis o f our
econ omic p o l i c y i s t o r e s t r a i n f u r t h e r gr ow th i n th e F e d e r a l
budget.
m
7
A p r im a ry r e a s o n f o r t h i s emphasis i s th e c o n t i n u i n g t h r e a t
of i n f l a t i o n .
Even th ou g h th e r a t e o f i n f l a t i o n i s s u b s i d i n g
somewhat, i t c o u l d e a s i l y s h o o t upwards a g a i n i f we o v e r h e a t
the economy, as we hav e done so o f t e n i n th e p a s t .
Furthermore,
it is e s s e n t i a l t o u n d e r s t a n d t h a t th e f o r c e s o f i n f l a t i o n a re
very l a r g e l y t o blame f o r t h e r e c e s s i o n we a r e e x p e r i e n c i n g t o d a y .
Both the h o u s i n g i n d u s t r y and consumer s p e n d i n g , as I h a v e n o t e d ,
f i r s t tumbled under th e p r e s s u r e s o f r i s i n g p r i c e s .
I f we r e v i v e
those p r e s s u r e s t h r o u g h e x c e s s i v e f i s c a l and mone tar y p o l i c i e s ,
there i s a v e r y r e a l da n ge r t h a t we c o u l d e n t e r a new and more
vicio us c y c l e o f i n f l a t i o n and r e c e s s i o n .
B e ca us e o f th e
continuing da nge r o f i n f l a t i o n , we must c a r e f u l l y a v o i d th e
temptation o f t r y i n g t o r e t u r n t o f u l l employment a t b r e a k n e c k
speed.
I n s t e a d , we must a t t a c k b o t h th e r e c e s s i o n and i n f l a t i o n
at the same t i m e , and t h a t r e q u i r e s a b a l a n c e d , c a r e f u l a p p r o a c h - the kind o f a p p r o a ch c o n t a i n e d i n t h i s b u d g e t .
We have a l s o made no s e c r e t o f our v i e w s t h a t th e b u d g e t
d e f i c i t s w hi ch a r e a l r e a d y p r o j e c t e d w i l l c a u s e s t r a i n s i n th e
private f i n a n c i a l m a r k e t s .
Those s t r a i n s s h o u l d be m a n a g e a b l e ,
but--and I want t o s t r e s s t h i s - - t h e y w i l l rema in m ana gea bl e o n l y
i f F e d e r a l b o r r o w in g needs do n o t become s i g n i f i c a n t l y l a r g e r
and i f t h e y a r e o n l y te m po rar y i n d u r a t i o n .
There i s , o f c o u r s e , a n o t h e r s c h o o l o f t h o u g h t on t h e
question o f F e d e r a l b o r r o w in g i n th e c a p i t a l m a r k e t s .
This
other s c h o o l b e l i e v e s t h a t th e G o v e r n m e n t1s b o r r o w in g needs
should be e a s i l y met b e c a u s e p r i v a t e demands f o r fu n d s s h o u l d
slacken c o n s i d e r a b l y .
I t i s true t h a t f i n a n c i a l c o n d it io n s n orm ally ease s u b s t a n t i a l l y
during a r e c e s s i o n and n o r m a l l y t h e y rem ai n e a s y w e l l i n t o th e
period o f r e c o v e r y .
There a r e two main r e a s o n s f o r t h i s :
first,
some p r i v a t e demands f o r c r e d i t a r e c l o s e l y r e l a t e d t o t h e p a ce
of b u s i n e s s a c t i v i t y and drop s h a r p l y d u r i n g a r e c e s s i o n .
A prime
example can u s u a l l y be found i n s h o r t - t e r m b u s i n e s s b o r r o w i n g t o
finance i n v e n t o r i e s ^ S e c o n d , t h e F e d e r a l R e s e r v e c u s t o m a r i l y
"leans a g a i n s t th e wi n d" d u r i n g a p e r i o d o f r e c e s s i o n and s e e ks
to expand, or a t l e a s t m a i n t a i n , th e r a t e o f gr ow th i n money
and c r e d i t .
T h e r e f o r e , i n t e r e s t r a t e s ca n be e x p e c t e d t o d e c l i n e
ana the a v a i l a b i l i t y o f c r e d i t t o i n c r e a s e as a normal p a r t o f th e
cyclical p ro ce ss.
8
C o n s i d e r a t i o n s o f t h i s n a t u r e h av e a p p a r e n t l y l e d some
o b s e r v e r s t o c o n c l u d e j t h a t th e f i n a n c i n g o f l a r g e F e d e r a l
d e f i c i t s i n th e c u r r e n t r e c e s s i o n i s a r o u t i n e m a t t e r and
o f l i t t l e economic s i g n i f i c a n c e .
I r e s p e c tfu lly disagree.
As we hav e s a i d on s e v e r a l o c c a s i o n s , th e c u r r e n t recession
i s an o u t g r o w t h o f a l o n g p e r i o d o f i n f l a t i o n t h a t ha s l e f t
p r i v a t e f i n a n c i n g demands much h e a v i e r t h a n u s u a l .
There has
been a marked d e c l i n e i n c o r p o r a t e p r o f i t s i n r e c e n t y e a r s and
a s e r i o u s e r o s i o n o f th e l i q u i d i t y b a s e o f h o u s e h o l d s and
businesses.
C o n d i t i o n s i n th e s t o c k market ha ve i n many
c a s e s v i r t u a l l y r u l e d o u t th e s a l e o f new e q u i t y as a source
of funds.
For t h e s e and o t h e r r e a s o n s , t h e number o f p r i v a t e l o n g
term d e b t i s s u e s coming i n t o th e market i s u n u s u a l l y l a r g e . Our
l a t e s t T r e a s u r y p r o j e c t i o n s show t h a t n e t new c o r p o r a t e bond
i s s u e s , which r o s e from $12-1/2 b i l l i o n i n 1973 t o $25 b i l l i o n
in 1974, w i l l advance even f a r t h e r to some $30 b i l l i o n or more
i n 1975.
While c o r p o r a t e c a p i t a l s p e n d in g programs are being
c u t b a c k , t h e r e w i l l s t i l l be a v e r y hea vy volume o f co rp or ate
lo n g-term borrowing.
F u r t h e r m o r e , th e S t a t e and l o c a l f i s c a l
p o s i t i o n has changed d r a m a m t i c a l l y .
With t a x r e c e i p t s reduced
by th e r e c e s s i o n , t h e i r s u r p l u s e s have m e lt e d away so t h a t
t h e i r b o r r o w in g needs s h o u l d be s u b s t a n t i a l .
Some s l a c k e n i n g i n p r i v a t e demands f o r s h o r t - t e r m c r e d i t
i s underway and more can be e x p e c t e d .
Y e t by any p r e v i o u s
r e c e s s i o n s t a n d a r d s , t o t a l p r i v a t e demands f o r c r e d i t - - both
s h o r t and l o n g - t e r m - - are l i k e l y to remain much l a r g e r than
m ig h t o r d i n a r i l y be e x p e c t e d i n a r e c e s s i o n .
F e d e r a l r e q u i r e m e n t s w i l l , o f c o u r s e , have to be
met f i r s t , and b e c a u s e o f th e s w o l l e n s i z e o f F e d e r a l d e f i c i t s ,
F e d e r a l bo r ro w in g demands w i l l be enormous.
Under proposed
p r o g r a m s , we e s t i m a t e t h a t th e T r e a s u r y d u r i n g t h i s c a l e n d a r
y e a r w i l l be coming i n t o the c a p i t a l markets f o r a l m o s t
$70 b i l l i o n o f n e t new f i n a n c i n g , o f which $65 b i l l i o n w i l l be in
marketable s e c u r i t i e s .
F e d e r a l l y sp o n so re d a g e n c i e s may account
f o r a n o t h e r $14 b i l l i o n i n b o r r o w i n g .
These are huge sums - more n e t f u n d s , i n f a c t , than have e v e r been borrowed in the
c a p i t a l markets i n any s i n g l e y e a r by the p u b l i c and p r i v a t e
s e c t o r s combined.
/
We s h o u l d be f u l l y aware o f th e da n g e r s t h a t would a r i s e i f
budget d e f i c i t s were i n c r e a s e d f a r beyond t h e l e v e l s p r o j e c t e d .
R e a s o n a b l e f i n a n c i n g o f such d e f i c i t s would be p o s s i b l e o n l y i f
the r e c e s s i o n i s much de epe r th an we e x p e c t . O t h e r w i s e , we c o u l d
have v i c i o u s c o m p e t i t i o n between th e Government and p r i v a t e
borro we rs f o r c a p i t a l f u n d s , or th e F e d e r a l R e s e r v e would have
to s u p p l y fun ds w i t h o u t r e g a r d to th e i n f l a t i o n a r y c o n s e q u e n c e s .
There w o u ld be a h i g h r i s k t h a t Government b o r r o w in g would elbow out
medium to l o w e r - r a t e d b u s i n e s s b o r r o w e r s , many o f whom a re a l r e a d y
in m a r g i n a l c o n d i t i o n , and would d r i v e up i n t e r e s t r a t e s f o r
mortgage b o r r o w e r s , c r u s h i n g hopes f o r a r e c o v e r y i n the h o u s i n g
industry.
In s h o r t , huge d e f i c i t s c o u l d doom our p r o s p e c t s f o r
economic r e c o v e r y .
The key to s u c c e s s f u l f i n a n c i n g o f th e l a r g e F e d e r a l
d e f i c i t s l i e s in th e d i l i g e n t r e s t r a i n t o f F e d e r a l e x p e n d i t u r e s .
Large as t h e y a r e , th e d e f i c i t s p r o j e c t e d f o r f i s c a l y e a r s 1975-76
can p r o b a b l y be accommodated, a l t h o u g h t h e y w i l l prod uce some
s t r a i n s i n the f i n a n c i a l m a r k e t s .
However, i f C o n g r e s s were to
push F e d e r a l e x p e n d i t u r e s much beyond th e b u d g e t e d l e v e l s , i t
would n o t be p o s s i b l e t o r e t a i n much o p tim ism as to th e r e s u l t .
E i t h e r th e r e c o v e r y would be d e l a y e d or more i n f l a t i o n would be
e x p e r i e n c e d i n th e f u t u r e .
I n o u r o p i n i o n , th e p r o j e c t e d d e f i c i t s f o r f i s c a l 1975-76 - in t h e c o n t e x t o f our e x p e c t a t i o n s ab ou t th e c o u r s e o f th e
economy - - a re abo ut as l a r g e as our f i n a n c i a l sy ste m can t o l e r a t e
w it h o u t d o i n g more harm than good f o r th e economy.
Big D e f i c i t s
i n a B i g Economy
In r e s p o n d i n g to the p o i n t s I have t r i e d to make t h i s
m o rn in g , some o b s e r v e r s p o i n t ou t t h a t d e f i c i t s o f th e s i z e
we a r e f a c i n g s h o u l d n ot be a c a u s e f o r alarm b e c a u s e th e
economy has a l s o grown s u b s t a n t i a l l y .
Big d e f i c i t s , they argue,
can e a s i l y be accommodated in th e en vir on m en t o f a b i g economy.
Let me a d d r e s s t h a t i s s u e f o r a moment.
In f i s c a l y e a r 1975, we e s t i m a t e t h a t the b u d ge t d e f i c i t
w i l l amount t o 2 . 4 p e r c e n t o f th e Gr oss N a t i o n a l P r o d u c t , w h i l e
in f i s c a l y e a r 1976, i t w i l l come t o 3 . 3 p e r c e n t .
I t i s true
t h a t on some o c c a s i o n s in the p a s t we have come c l o s e to t h e s e
figures.
The ti m e s most o f t e n c i t e d f o r co m p ar iso n a re f i s c a l
years 1959 and 1968, i n which the d e f i c i t s r e a c h e d 2.7 and 3 . 0
percent o f th e GNP r e s p e c t i v e l y .
But what i s u s u a l l y l e f t u n s a i d
in th os e c o m p ar is on s i s t h a t the d e f i c i t s a s s o c i a t e d w i t h t h o s e
periods were c o n f i n e d to a s i n g l e f i s c a l y e a r .
In f i s c a l y e a r
1960 and a g a i n i n f i s c a l y e a r 1969, th e b u d ge t r e t u r n e d to
surplus.
T h i s t i m e , ho wev er, we a n t i c i p a t e v e r y l a r g e d e f i c i t s
not j u s t f o r a s i n g l e y e a r but f o r t h r e e y e a r s i n a row.
10
I f you a n a l y z e th e h i s t o r y o f bu d ge t d e f i c i t s in terms of
t h r e e - y e a r a v e r a g e s (s e e th e f i n a l column o f T a b l e 1 ) , you will
s e e t h a t c u r r e n t d e f i c i t s a re g o i n g to be a s u b s t a n t i a l l y
l a r g e r f r a c t i o n o f our GNP than in any p e r i o d s i n c e World War II
Wh il e th e c a p i t a l markets may be a b l e to ab sorb such l a r g e
b o r r o w in g s by the Government f o r a b r i e f p e r i o d , we ca n no t be
c o n f i d e n t t h a t a l o n g p e r i o d o f heavy Government bo rr ow ing can
be abs or bed w i t h o u t h i g h l y d i s r u p t i v e e f f e c t s «
Beyond t h e s e c o n s i d e r a t i o n s , I would s u g g e s t t h a t there
are a t l e a s t f o u r b a s i c r e a s o n s t o q u e s t i o n Government spending t r e n d s :
F i r s t , we s h o u l d r e c o g n i z e t h a t th e r a t e o f b ud ge t
i n c r e a s e s i s grow ing to o r a p i d l y r e l a t i v e to i n c r e a s e s in the
F e d e r a l b u d g e t o u t l a y s i n f i s c a l y e a r 1975 are expected
GNP.
to r each $314 b i l l i o n , an i n c r e a s e o f 17 .2 p e r c e n t ov e r the
In f i s c a l y e a r 1976, o u t l a y s w i l l jump to at
prev ious y e a r .
These
l e a s t $349 b i l l i o n , an i n c r e a s e o f 11 .5 p e r c e n t .
f i g u r e s r e f l e c t a t r u l y s t a g g e r i n g growth in t h e F e d e r a l
S i n c e then,
budg e t t h a t has ta k e n p l a c e s i n c e th e m i d - 1 9 6 0 ’ s .
as s een from t h e f i g u r e s b e l o w , t h e GNP has grown by a pp r ox imate l y 100% w h i l e F e d e r a l b u d g e t o u t l a y s have r i s e n by over
160 p e r c e n t :
FY 1 966
FY 1 967 ( e s t )
F e d e r a l bu d ge t o u t l a y s
Fed eral budget o u t la y s
$1 34. 7 b i l l i o n
349.4 b i l l i o n
+$ 214 .7 b i l l i o n
CY 1 967
CY 1 975
GNP
GNP ( e s t )
or +160%
$7 49. 9 b i l l i o n
$1,497.7 b i l l i o n
+$ 747 .8 b i l l i o n
or +100%
S e c o n d , we c a n n o t i g n o r e th e i n c r e a s e d s i z e o f th e
n a t i o n a l de b t m e r e l y by r e l a t i n g i t t o a gr ow ing GNP or popu
la t io n base.
In f i s c a l y e a r 1975 th e i n t e r e s t on t h i s cumu
l a t i v e de b t w i l l t o t a l $33 b i l l i o n .
This i s a very s i g n i f i
c a n t s h a r e o f th e t o t a l b u d g e t .
For e x a m p l e , i t r e p r e s e n t s
a bo ut o n e - t h i r d o f th e t o t a l f und s a l l o c a t e d t o n a t i o n a l
secu rity.
S i m i l a r c o m p ar is on s c o u l d be made to s o c i a l s e c u
r i t y b e n e f i t s , h e a l t h , e d u c a t i o n , mass t r a n s i t , e t c .
T h i r d , when we e x c u s e th e f i s c a l y e a r 1975 and f i s c a l
y e a r 1976 b u d ge t d e f i c i t s by s a y i n g t h a t th e GNP has grown,
we i g n o r e th e c o n t i n u e d e r o s i o n o f f i s c a l f l e x i b i l i t y t h a t
o c c u r s when b u d g e t programs b u i l d a c c e l e r a t i n g momentum,
we s u d d e n l y wanted to p i n p o i n t much more a i d f o r unemployment
a s s i s t a n c e , we would f i n d l i t t l e , i f a n y , f i s c a l f l e x i b i l i t y
left.
F i n a l l y , by r a t i o n a l i z i n g c o n t i n u i n g F e d e r a l d e f i c i t s on
t h e b a s i s o f c o n t i n u i n g growth in t h e o v e r a l l economy, we l u l l
t h e p u b l i c i n t o a f a l s e s e n se o f s e c u r i t y abo ut th e un d er ly in g
t r e n d s i n our economy.
Those t r e n d s have n o t> b e en encouraging»
and t h e y b e a r a l a r g e d e g r e e o f r e s p o n s i b i l i t y f o r th e current
w ea kn e sse s i n th e economy.
- 1 1 -
w
We have f a l l e n i n t o a da n ge r ou s p a t t e r n o f t r a n s f e r r i n g
more and more o f our w e a l t h from th e most p r o d u c t i v e p a r t o f
our economy, th e p r i v a t e s e c t o r , t o th e l e a s t p r o d u c t i v e
p a r t , t h e Government.
P a r t l y as a r e s u l t , we have had a
p r e c i p i t o u s d e c l i n e i n r e a l p r o f i t s o v e r th e p a s t d e c a d e ,
we have i n v e s t e d f a r too l i t t l e i n c a p i t a l g o o d s , and our
p r o d u c t i v i t y has grown more s l o w l y than i n a l m o s t any o t h e r
major i n d u s t r i a l i z e d n a t i o n i n th e Fr e e W or ld .
We a r e in
s e r io u s need o f r e d r e s s i n g t h e s e i m b a l a n c e s .
S h i f t i n g from o v e r c o n s u m p t i o n and e x c e s s i v e Government
spending to g r e a t e r s a v i n g s and i n v e s t m e n t f o r th e f u t u r e .
The P r e s i d e n t ’ s moratorium on new s p e n d in g programs and h i s
request f o r o t h e r measures o f r e s t r a i n t r e p r e s e n t a s e r i o u s
attempt on th e p a r t o f t h e A d m i n i s t r a t i o n t o b e g i n r e v e r s i n g
these t r e n d s .
Such l o n g - t e r m t e n d e n c i e s in th e economy
cannot be c o r r e c t e d i n any s i n g l e b u d g e t .
That p r o c e s s w i l l
take many y e a r s .
But i t i s l o n g p a s t time t h a t we g o t
started.
Mr. Ch a ir m a n , I a g a i n want t o th ank you f o r th e opp or t u n i t y t o make t h i s p r e s e n t a t i o n and to answer your q u e s t i o n s
We r e a l i z e t h a t Members o f t h i s Committee may have d i f f e r e n t
vie ws , b ut as th e P r e s i d e n t has p r o m i s e d , we want t o work as
c l o s e l y as p o s s i b l e w i t h you t o r e c o n c i l e our d i f f e r e n c e s and
to p r o v i d e t h i s n a t i o n w i t h th e s t r o n g l e a d e r s h i p i t d e s e r v e s
Thank y o u .
Table 1
Federal Budget Surpluses and Deficits
1954-1976
Fisc al Year
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
.
1971
1972
1973
1974
1975e
I976e
Budget Surplus (+)
or Deficit (-)
($ billions)
Budget Surplus (+)
or Deficit (-) as % of GNP
Three-Y ear
Moving Average
Annual
(Centered)
-0 ,3
-0 .8
1 .0
0 .8
-0 .7
-2 .7
0 .1
-0 .7
-1 .3
-0 .8
—1 • 0
-0 ,2
-0 .5
-1 .1
-3 .0
0 .4
-0 .3
-2 .3
-2 .1
-1 .2
-0 .3
-2 .4
-3 .3
1 .2
- 3*0
+ 4 ,1
+ 3 .2
- 2 .9
-1 2 .9
+ 0 .3
- 3 .4
- 7 .1
- 4 .8
- 5 .9
- 1 .6
- 3 .8
- 8.7
-2 5 .2
+ 3 .2
- 2 .8
-2 3 ,0
-2 3 .2
-1 4 .3
- 3 .5
-35.
-52.
X
*
- .0
-0 .3
0 .3
-0 .9
-1 .1
-1 .1
-0 .6
-0 .9
-1 .0
-0 .6
-0 .5
-0 .6
-1 .6
. 1-1.2
-0 .9
-0 .8
-1 .5
-1 .7
-1 .1
-1 .3
-2 .0
-2 .3
TABLE 2
TREASURY MONEY MARKET BORROWING
( In c lu d in g F o re ig n nonm arketable s e c u r i t i e s )
( In b i l l i o n s o f d o lla r s )
C a le n d a r
Y ear
Gross New
Issues 1/
F i r s t H a lf
Net New
M aturities
2/
Money
Peak In
crease in
Borrowing
Gross New
Issues 1/
Second H a l f
M aturities
Net New
Money
m
Peak Incxease in
Borrowing
1970
$22
$24
$-2
$ 4
$31
1 $15
$16
$16
1971
27
24
3
3
37
15
22
22
1972
13
15
-2
7
21
7
14
16
1973
17
16
1
10
20
15
5
5
1974
17
22
-5
4
32
18
14
14
1975est |
45
17
28
31
48
11
37
37
1976est
49
23
24
28
•
,
C a le n d a r .
F u ll Year
Y ear
Gross New . M aturities
Net New
Money
Issues 1/
. 2/
•
Peak In crease in
Borrowing
e s t : e s tim a te d
1970
$53
$39
$14
$14
1/ In c lu d e s in c r e a s e s
i n r e g u la r b i l l s .
1971
64
38
25
25
1972
34
22
12
13
1973
37
31
6
6
1 9 74
49
40
9
9
27 In c lu d e s paydowns
i n r e g u la r b i l l s .
N e t
F u n < 3 ^ i « ^ s e ^ l ! ^ t n ^ u a p ^ a ^ R a r K e c ^ D ^ r ! ä 5 ö ^ s e c t o r
( f i s c a l
vears.'
hill ions
of
dollars)
JL 7
N et
/ * -r
Fune
(fis c a l
•
•
: U.S. Treas.
:& Fi na nc in g
:
Bank
y e a r s ,'
b illio n s
: ..Federal & : Total
:
:
: sponsored :Fe deral : State & :
: agencies : sector : local
:
1954
1955
1956
1957
1958
1959
3.6
1.7
-4.3
-3.6
6.3
8.0
1960
1961
1962
1963
1364
1965
1966
1967
1968
1969
.8
2.0
8.8
6.4
2.7
3.1
~1.0
.6
18.2
-1.9
2.0
.1
2.4
1.1
1.5
2.2
6.7
2.6
5.5
5.7
1970
1971*
1972
1973
1974
1975e2/
1 9 7 6e2/
6.8
20.5
19.6
18.5
2.1
43.9
63.7
8.1 •
2.7
8,7
14.3
'21.3
17.6
14.7
*
.
1.7
.1
.6
.9
.8
1.4
5.3
• 1.7
-3.7
-2.7
7.1
9.3 \
o f
d o lla r s )
C o r p . & : Total
foreign : secur: ities
Ü
: Federal
: sector as
:a % of total
: securities
s Gov't.
: sector as
: % of 'total
: securities 3/
5.5
5.4
4.6
4.0
5.1
5.7
3.4
2.6
3.3
5.7
6.9
4.7
14.2
9.7
4.1
7.0
19.2
19.7
37.1
47.5
76.0
73.1
21.0
18.6
63.9
76.4
2.8
2.1
• | 11.2
7.6
4.2
5.4
5.7
3.3 .
23.8
3.8
5.7
4.9
6.0
5.5
5.2
6.9
7.3
6.0
7.2
12.0
3.5
5.0
5.5
5.5
3.8
5.2
9.2
12.2
15.1
14.7
12.1
12.0
22.7
18.6
13.2
17.5
22.2
21.5
46.1
30.5
23.5
17.7
49.4
40.7
31.8
30.8
25.8
15.2
51.6
12.4
70.7
58.5
75.6
70.3
71.4
70.4
58.9
43.3
67.3
51.8
14.9
23.2
28.2
32.8
23.3
61.5
78.4
9.7
15.0
15.6
12.6
16.7
12.5
14.6
14.8
23.0
15.8
.10.5
15.6
26.3
22.7
39.4
61.3
59.7
55.9
55.6
100.3
115.7
37.9
37.9
47.2
58.6
41.9
61.3
67.8
62.4
62.4
73.5
81.2
72.0
73.8
80.4
..
Office of the Se cr et ar y of the Treasury
Of fice of D e bt Analysis
Source:
FY 1954-1974 data based on FRB "Flow-of Funds."
1/ Bonds issued by nonf in an ci al corporations.
2/ As sumes ad op ti on of President's Budget program,
w i t h b u dg et deficits of $35 bi l l i o n in FY 1975 and $52 bi l l i o n
in TV 1976.
2 / IncuuDes State and local as p a r t of governmer.
actor.
37.4
17.4
.-
February 7, 1975
TABLE 4
F ed eral and F e d e r a lly -A s s is te d C re d it as Percent o f T o ta l Flow o f
Funds in U . S . F in a n c ia l Markets, by Type o f C re d it*
F i s c a l y ears , 1975 and 1976 p r o je c te d
NET FUNDS RAISED
Long-Term Funds
Mortgages:
Residential
Commercial
Farm
. Total
Corporate Securities:**
Bonds
Stocks
Total
: Total
: ($ bil)
35.3
7.9
4.6
47.8
29.1
5.3
34.4
Fiscal 1975
Federal
:
: Government : Percent
: ($ bil)
: Total
10.4
—
6.9
17.3
—
1.6
4.6
13.9
15.0
63.7
14.7
1.9
80.3
100.0
100.0
13.0
86.3
7.9
.3
19.2
4.3
___
5.3
13.5
57.6
23.2
23.5
92.4
100.0
100.0
17.6
86.1
63.7
14.7
14.6
93.0
16.6
3.1
.....
41.1
7.0
1.0
210.5
24.6
9.2
58.3
43.9
17.6
12.5
74.0
43.9 *
17.6
2.2
63.7
1.9
41.5
—
5.8
Government Securities
U.S. Government
Federal agencies
State & local governments
Total
36.8
3.2 •
-.4
6.9
2.0
19.3
6.1
.1
.
4.0
10.2
: Percent
: Federal
43.7
8.7
5.2
57.6
26.9
7.9
34.8
82.2
8.5
•
•
29.5
—
150.0
36.2
—
Total long-term
Other Funds***
Business credit
Consumer credit
Security credit
Other loans, including
foreign
Total
Total
($ bil)
—
2.0
Fiscal 1976
: Federal
: Government
: ($ bil)
—
3.8
12.3
1.6
.
*
19.5
—
73.1
21.3
5.9
TOTAL FUNDS RAISED
197.7
93.2
47.1
243.7
107.7
44.2
Office of the Secretary of the Treasury
February 7, 1975
Office of Debt Analysis
♦Based on Federal Reserve Flow of Funds (through third quarter 1974) and Special Analyses
C & E, U. S. Budget, fiscal year 1976.
Tftcluding foreign.
***
Includes
bank
term loans
and
long —term Fedi.
1 credits.
C /5
^T
Department of
iS H IN G TO N ,
D C. 20220
TELEPHONE W 04-2041
FOR RELEASE UPON DELIVERY
Lis
F e b r u a r y 18,
1975
term loans
and
long-term Fed.
1 credits
STATEMENT OF THE HONORABLE WILLIAM E . SIMON
SECRETARY OF THE TREASURY
BEFORE THE HOUSE INTERSTATE AND FOREIGN COMMERCE
SUBCOMMITTEE ON ENERGY AND POWER
WASHINGTON, D . C . , MONDAY, FEBRUARY 17, 1975
2:30 P . M . , EST
Mr.
Chairman and Members o f th e Co m m it tee:
I t i s a p r i v i l e g e t o appear b e f o r e you t h i s a f t e r n o o n
to p a r t i c i p a t e i n yo ur r e v i e w o f th e P r e s i d e n t ’ s e n e r g y
proposals.
The Am erican p e o p l e have r a r e l y f a c e d a s e t o f c h a l l e n g e s
as c r i t i c a l as t h o s e b e f o r e us t o d a y .
The economy i s i n a
r e c e s s i o n , and th e da nge r
of in t o le r a b ly high rates of
in flation s t i l l p e r s is t.
A t th e same time we have become
o v e r l y dependent on f o r e i g n s o u r c e s o f e n e r g y t h a t are bo th
o v e r - p r i c e d and s u b j e c t t o d i s r u p t i o n .
We t h u s need a l l
of the d e d i c a t e d wisdom, s k i l l and r e s o l v e which th e A d m i n i s t r a t i o n
and the C o n g r e s s , work ing t o g e t h e r , can muster i n or d e r t o meet
our C o u n t r y ’ s n e e d s .
One month ago t h e P r e s i d e n t p r o p o s e d an economic and
energy program t h a t was c a r e f u l l y d e s i g n e d t o a t t a c k a l l o f
th ese problems s i m u l t a n e o u s l y .
I t i s i m p o r t a n t t o v ie w th e
e n t i r e l e g i s l a t i v e and a d m i n i s t r a t i v e pa ck a g e as a s i n g l e
e n t i t y , f o r i t i s b o t h b a l a n c e d and co m p re h e n siv e i n a p p r o a c h .
We ask f o r th e c o o p e r a t i o n o f t h e C o n g r e s s i n c o n s i d e r i n g
t h i s f u l l p a c k a g e , and we u r g e t h a t i t s l e g i s l a t i v e components
be e n a c t e d as s w i f t l y as p o s s i b l e .
WS-226
2
Why We Must A c t Now
The u r g e n c y o f t a k i n g d e c i s i v e a c t i o n on th e e n e r g y
f r o n t can b e s t be u n d e r s t o o d w i t h i n t h e c o n t e x t o f our
cu rr e n t energy s i t u a t i o n .
P e t r o l e u m i s a un iq u e commodity,
e n t e r i n g i n t o a l m o s t e v e r y f a c e t o f our economy, as th e
f u e l f o r h e a t i n g our r e s i d e n c e s and o t h e r b u i l d i n g s , as the
f u e l f o r t r a n s p o r t a t i o n o f goods and p e o p l e and as th e raw
m a t e r i a l f o r a m y ri a d o f p r o d u c t s l i k e f e r t i l i z e r and
petrochem icals.
I t i s h a r d l y an e x a g g e r a t i o n t o s a y t h a t
p e t r o l e u m has become th e l i f e b l o o d o f our economy.
Y e t , as our demand f o r e n e r g y has s h o t upwards and our
d o m e s t i c p r o d u c t i o n has d e c l i n e d , our c a p a c i t y t o meet our
e n e r g y needs has s t e a d i l y d e t e r i o r a t e d .
We are now dependent
upon f o r e i g n s o u r c e s f o r a p p r o x i m a t e l y 35% t o 40% o f our
current o i l needs.
The most r e c e n t f i g u r e s a v a i l a b l e o f both
s u p p l y and demand show t h a t f o r t h e 4 weeks e n d in g J a n u a r y 31,
we im po rt ed an a v e r a g e o f 6 , 2 5 8 , 0 0 0 b a r r e l s o f o i l ou t o f our
t o t a l d a i l y a v e r a g e demand o f 1 7 , 4 2 5 , 0 0 0 b a r r e l s .
Our domestic
p r o d u c t i o n , on t h e o t h e r h a n d , a v e r a g e d 8 , 5 7 7 , 0 0 0 b a r r e l s
d a i l y , down from 9 , 1 8 4 , 0 0 0 i n th e c o r r e s p o n d i n g p e r i o d one
year e a r l i e r .
In th e f a l l o f 1973, we saw what c o u l d happen as a
r e s u l t o f t h i s he a v y r e l i a n c e upon i n s e c u r e o i l s u p p l y .
The o i l embargo c r e a t e d m ajor d i s r u p t i o n s t h r o u g h o u t our
economy.
F u r t h e r , th e q u a d r u p l i n g o f f o r e i g n o i l p r i c e s has
c o n t r i b u t e d s i g n i f i c a n t l y t o b o t h th e i n f l a t i o n and th e
r e c e s s i o n t h a t we a re now e x p e r i e n c i n g .
The f a c t o f the
m a t t e r i s t h a t we have l o s t th e a b i l i t y t o a l l o w t h e market
t o d e t e r m i n e t h e p r i c e o f o i l , and f o r t h e ti me b e i n g we
have no c h o i c e b u t t o l o o k t o OPEC f o r a l a r g e p o r t i o n o f
our s u p p l i e s .
To r e g a i n c o n t r o l o v e r our economic d e s t i n y , we must
f i r s t a c h i e v e t h e a b i l i t y t o be in d e p e n d e n t w i t h r e s p e c t to
su p p lies o f energy.
The P r e s i d e n t ’ s e n e r g y program i s
d e s i g n e d t o do j u s t t h a t and m o r e - - h e has s a i d t h a t w i t h i n
t h i s c e n t u r y , we must a l s o be a b l e t o s u p p l y a s i g n i f i c a n t
share o f the f r e e w o r l d ’ s energy needs.
In o r d e r t o accomplish
h i s g o a l s , we w i l l need to d e v e l o p a l t e r n a t i v e s f o r imported
o i l and we w i l l a l s o need t o r e d u c e our t o t a l demands f o r
energy o f a l l kin d s.
C o n c u r r e n t l y , we must work w i t h o t h e r consuming n a t i o n s
t o c o o r d i n a t e our e n e r g y p o l i c i e s and a l s o t o c o o p e r a t e
3
f i n a n c i a l l y as we se e k t o a d j u s t t o h i g h e r o i l p r i c e s .
In
t h i s p r o c e s s , i t i s i m p o r t a n t t o remember t h a t we are
d e a l i n g w i t h a l o n g - t e r m pr og ra m , b u t t h a t s i g n i f i c a n t
p r o g r e s s can be made on r e d u c t i o n s i n demand i n th e s h o r t
term.
We have e s s e n t i a l l y
three a l t e r n a t i v e s :
The f i r s t o p t i o n i s t o c o n t i n u e d o i n g n o t h i n g , r e f u s i n g
to take a c t i o n ou t o f f e a r t h a t we m ig h t somehow damage
the economy.
J u s t th e o p p o s i t e i s t r u e ; we must t a k e a c t i o n
now in o r d e r t o improve t h e l o n g - r u n p r o s p e c t s f o r the
economy.
I have a l l u d e d a l r e a d y to some o f th e r e a s o n s
why the P r e s i d e n t b e l i e v e s q u i c k a c t i o n i s s t r o n g l y n e e d e d ,
but l e t me summarize th e b a s i c r e a s o n s h e r e :
- - W e a re a l r e a d y e x c e s s i v e l y dep ende nt upon f o r e i g n
sources o f o i l and by 1 9 8 5 - - i f p r e s e n t t r e n d s c o n t i n u e - we would be dependent on f o r e i g n n a t i o n s f o r more t h a n h a l f
of the o i l we consume.
- - O n l y a s m a l l p o r t i o n o f t h e s e im p o rt s can be deemed
secure from i n t e r r u p t i o n s i n t h e e v e n t o f a p o l i t i c a l or
m i l i t a r y c r i s i s , and r e c e n t h i s t o r y s t r o n g l y s u g g e s t s
t h a t such a c r i s i s i s by no means a remote p o s s i b i l i t y
in an a r e a where t w o - t h i r d s o f th e w o r l d ’ s p e t r o l e u m
r e s e r v e s a re l o c a t e d .
- - The o i l c a r t e l has managed to r a i s e i n t e r n a t i o n a l
o i l p r i c e s t o a l e v e l 4 t i m e s above t h a t w hi ch p r e v a i l e d
p r i o r to th e 1973-74 embargo.
- - The o u t f l o w o f U . S . f u n d s t o t h o s e o i l - r i c h c o u n t r i e s
g r e a t l y s t r e n g t h e n e d t h e i r economic and p o l i t i c a l power and
weakened our own and t h a t o f our a l l i e s .
In 1970 our t o t a l
b i l l f o r f o r e i g n o i l was $ 2 . 7 b i l l i o n ,
in 1974, t h a t f i g u r e
jumped to a p p r o x i m a t e l y $24 b i l l i o n and u n l e s s we a c t to
r e s t r i c t i m p o r t s , th e b i l l w i l l r i s e w i t h i n a s h o r t time t o
over $30 b i l l i o n a y e a r .
N e i t h e r we nor our a l l i e s , nor
indeed any o i l - consuming n a t i o n , ca n c o n t i n u e p a y i n g such
high b i l l s i n d e f i n i t e l y .
Thus i t i s i m p e r a t i v e t h a t we a c t now t o b e g i n c o n s e r v i n g
our cons um pt ion o f e n e r g y and i n c r e a s i n g our own p r o d u c t i o n .
We must r e j e c t th e a l t e r n a t i v e o f f u r t h e r d e l a y and i n a c t i o n .
4
A se co n d c h o i c e i s t o r a t i o n f u e l s , but t h i s a l s o
presents in to le r a b le o b je c tio n s .
The b a s i c problem w i t h
r a t i o n i n g i s t h a t i t c a n n o t be done f a i r l y and p r a c t i c a l l y .
E v e r y f a m i l y , e v e r y c a r and m o t o r c y c l e , e v e r y s t o r e , s c h o o l ,
c h u r c h , and b u s i n e s s - - e v e r y t h i n g and e v e r y b o d y - - w o u l d have
t o o b t a i n a p e r m i t f o r g a s o l i n e , e l e c t r i c i t y , and n a t u r a l
gas.
Those a l l o c a t i o n s would have t o be changed e v e r y time
someone was born or d i e d or moved or g o t m a r r i e d or
d i v o r c e d , and e v e r y time a b u s i n e s s was s t a r t e d , merged, or
s o l d and even when th e c h u r c h or s c h o o l added a room.
When
we c o n s i d e r th e problems o f j u s t g e t t i n g th e m a i l d e l i v e r e d ,
a re we r e a l l y r e a d y t o t r u s t an army o f c i v i l s e r v a n t s - however a b l e and w e l l - i n t e n t i o n e d - - t o d e c i d e who g e t s what?
R a t i o n i n g may be a p p r o p r i a t e f o r te m po rar y e m e r g e n c ie s
such as w ar , b u t i t i s h a r d l y s u i t a b l e f o r th e 5-10
y e a r p e r i o d t h a t would be r e q u i r e d t o meet t h e c u r r e n t o i l
challenge.
The t h i r d c h o i c e i s to employ t h e p r i c i n g sy ste m as
a mechanism f o r b o t h d i s c o u r a g i n g c o n su m p ti on and encouraging
production.
T h i s i s th e a l t e r n a t i v e th e P r e s i d e n t has
c h o s e n - - w i s e l y s o , i n my j u d g m e n t .
The P r e s i d e n t made
t h i s d e c i s i o n w ith f u l l r e c o g n a tio n th a t energy p r i c e s
would i n c r e a s e and we would s u f f e r a s m a l l o n e - t i m e r i s e in the
r a t e o f i n f l a t i o n , b ut he has c o u p l e d t h e p r i c e i n c r e a s e s
w i t h ch a n g e s i n th e t a x s t r u c t u r e t h a t s h o u l d compensate
most
a l l e n e r g y u s e r s , e s p e c i a l l y low and moderate income
f a m i l i e s , and s h o u l d a l s o p r e v e n t e n e r g y p r o d u c e r s from
r e a liz in g w in dfall p r o f it s .
T h i s i s a s o u nd , t h o u g h t f u l
a p p r o a c h , and I hope t h a t th e Members o f t h e 94th Con gr es s
w i l l u l t i m a t e l y r e c o g n i z e i t s wisdom.
Economic and I n f l a t i o n a r y
Im pa ct s
S i n c e th e announcement o f th e P r e s i d e n t ’ s progr am ,
t h e r e has been w i d e s p r e a d d i s c u s s i o n o f th e p o t e n t i a l
econom ic and i n f l a t i o n a r y im p a c t s i n v o l v e d .
I am su r e the
Committee i s f a m i l i a r w i t h th e b a s i c o u t l i n e s o f t h e s e
d i s c u s s i o n s , and I w i l l n o t t a k e th e time t o d e t a i l them
again here.
I
w o u l d , ho we ver , l i k e t o n o t e t h a t t h e e n e r g y
a s p e c t s o f th e P r e s i d e n t ' s o v e r a l l program were d e s i g n e d
so as t o have a n e u t r a l e f f e c t upon t h e economy.
We
e s t i m a t e t h a t t h e c o s t o f th e t o t a l e n e r g y p a c k a g e w i l l
be a bo ut $30 b i l l i o n .
However, t h i s e n t i r e amount would
5
be d i r e c t l y r e t u r n e d t o th e economy.
Nineteen b i l l i o n
d o l l a r s would be r e t u r n e d t o i n d i v i d u a l s , $6 b i l l i o n t o
b u s i n e s s e s , and $2 b i l l i o n t o s t a t e and l o c a l g o v e r n m e n t s .
The b a l a n c e o f $3 b i l l i o n r e p r e s e n t s i n c r e a s e d c o s t s o f
the F e d e r a l g o ve r nm e n t.
T h is i s n o t t o s a y , ho we v er , t h a t th e program w i l l
not have some i n f l a t i o n a r y i m p a c t .
We e s t i m a t e t h a t th e
e n t i r e e n e r g y p a c k a g e w i l l pr od uce a o n e - t i m e i n c r e a s e i n
the Consumer P r i c e In d e x o f a p p r o x i m a t e l y 2%.
This
i n c l u d e s th e d i r e c t and i n d i r e c t e f f e c t s o f th e e n t i r e
package o f e n e r g y c o n s e r v a t i o n t a x e s and f e e s , and assumes
t h a t a l l such i n c r e a s e d c o s t s w i l l be p a s s e d t h r o u g h to
the u l t i m a t e consumer b u t w i t h o u t suc h s e c o n d a r y e f f e c t s
as i n c r e a s e s i n p r o f i t m a rg in s or w a g e s .
I
r e c o g n i z e t h a t t h e r e i s d i s a g r e e m e n t among e c o n o m i s t s
as to t h i s 2% f i g u r e .
We have r e v i e w e d our d a t a and th e
c r i t i c a l a n a l y s e s u n d e r t a k e n by o t h e r s .
We b e l i e v e t h a t
our c o n c l u s i o n s a re sou nd.
S p e c i f i c A s p e c t s o f t h e P r e s i d e n t ’ s En e rg y Program
Mr. Ch a ir m a n , I u n d e r s t a n d t h a t t h i s Subc om mittee has
been a s s i g n e d i n i t i a l j u r i s d i c t i o n o v e r T i t l e s I I , V I I I ,
and X I I I o f t h e P r e s i d e n t ’ s omnibus e n e r g y l e g i s l a t i o n , th e
proposed En e rg y In dep en den ce A c t o f 1975.
I would l i k e
b r i e f l y to d i s c u s s e a ch o f t h e s e t i t l e s , and t h e i r r e l a t i o n s h i p
to the o v e r a l l t h r u s t o f th e A d m i n i s t r a t i o n ’ s pr ogram.
T itle
II
T i t l e I I o f th e p r o p o s e d l e g i s l a t i o n s h o u l d be re a d
together with T i t l e I .
They s e t f o r t h a f e d e r a l p o l i c y
to c r e a t e a N a t i o n a l S t r a t e g i c P e t r o l e u m R e s e r v e i n th e
t o t a l amount o f 1 . 3 b i l l i o n b a r r e l s , t o p r o v i d e p r o t e c t i o n
against futu re in te r r u p tio n s in o i l im ports.
Under T i t l e I , a 300 m i l l i o n b a r r e l r e s e r v e would be
stockpiled for m ilita r y use.
Under T i t l e I I , 1 b i l l i o n
b a r r e l s would be s e t a s i d e as a c i v i l i a n s t o c k p i l e .
The P r e s i d e n t would be a u t h o r i z e d t o use t h e r e s e r v e s
to o f f s e t d i s r u p t i o n s i n i m p o rt s and f o r n a t i o n a l s e c u r i t y
purposes.
The r e s e r v e s would be c r e a t e d and f i l l e d
f o l l o w i n g way.
i n th e
6
Under T i t l e I , th e N a v a l P e t r o l e u m and O i l S h a l e Reserves,
would be d e v e l o p e d and u se d i n p a r t to c r e a t e th e N a t i o n a l
S t r a t e g i c Petroleum R ese r ve .
As p r o d u c t i o n f l o w s from NPR
#4, a t l e a s t 20 p e r c e n t i s e x p r e s s l y earmarked t o f i l l the
national reserves.
In a d d i t i o n , t h e P r e s i d e n t would be a u t h o r i z e d to
a c q u i r e b o t h th e p h y s i c a l f a c i l i t i e s and th e p e t r o l e u m
t o be s t o r e d , under d i r e c t a u t h o r i t i e s .
S p e c i f i c measures t o implement T i t l e s I and I I would
take p la c e pursuant to a d e t a i l e d implementation plan
w h ic h would be s u b m i t t e d t o t h e C o n g r e s s w i t h i n 1 y e a r o f
enactment.
T h i s p l a n would i n c l u d e a co m p re h e n siv e environmental
a s s e s s m e n t o f our s p e c i f i c p r o p o s a l s , a r e v i e w o f a v a i l a b l e
f a c i l i t i e s and methods f o r o b t a i n i n g t h e p e t r o l e u m i n v o l v e d ,
and a t i m e t a b l e f o r c o m p l e t i o n o f th e program i t s e l f .
A p r i n c i p a l o b j e c t i o n r a i s e d i n th e p a s t t o th e
c o n c e p t o f n a t i o n a l r e s e r v e s o f t h i s m a gn itu de has been
economic.
F i l l i n g a p e t r o l e u m r e s e r v e w i t h $11 or $12
o i l p u r c h a s e d on th e i n t e r n a t i o n a l market would be a major
c a p i t a l e x p e n d i t u r e , w h ic h would i t s e l f tend t o h e l p
s u s t a i n h i g h i n t e r n a t i o n a l market p r i c e s .
As I have n o t e d , e x p r e s s p r o v i s i o n i s made f o r the
f i l l i n g o f t h e r e s e r v e s ou t o f t h e p e t r o l e u m or re v e n ue s
pr od uc e d from NPR #4 i n A l a s k a .
A l t h o u g h NPR #4 has not
H
7
been f u l l y e x p l o r e d , i t i s e s t i m a t e d t o c o n t a i n as much
as 10 b i l l i o n b a r r e l s o f r e s e r v e s .
With f u l l develo pm ent
over th e n e x t s e v e r a l y e a r s , we a n t i c i p a t e p r o d u c t i o n
l e v e l s c o u l d r e a c h 2 m i l l i o n b a r r e l s p e r day by 1985.
This c a r e f u l l y r e g u l a t e d use o f our e x i s t i n g r e s e r v e s s h o u l d
m a t e r i a l l y r ed u ce th e c o s t o f f i l l i n g th e s t r a t e g i c r e s e r v e
f a c i l i t i e s , w h i l e i n s u r i n g t h a t a de q u a te s u p p l i e s f o r
m i l i t a r y and c i v i l i a n emergency needs w i l l be b o t h a v a i l a b l e
and r e a d i l y a c c e s s i b l e .
Title V III
T i t l e V I I I o f th e P r e s i d e n t ’ s b i l l i s d i r e c t e d towards
a l l e v i a t i n g th e c u r r e n t d e l a y s and u n c e r t a i n t i e s i n th e
s i t i n g and dev e lo pm e nt o f new e n e r g y f a c i l i t i e s .
While o b s e r v i n g th e p r im a r y i n t e r e s t o f th e s t a t e s
in such im p o r t a n t d e c i s i o n s as f a c i l i t y s i t i n g , i t r e p r e s e n t s
a r e c o g n i t i o n by th e F e d e r a l government t h a t i n t h i s
p a r t i c u l a r a r e a some a c t i o n i s a p p r o p r i a t e a t t h i s t i m e .
T i t l e V I I I sets fo r th a Congressional fin d in g th at
new e n erg y f a c i l i t i e s must be s i t e d and c o n s t r u c t e d i n
a t i m e l y and r a t i o n a l f a s h i o n , w i t h o u t undue d e l a y and w i t h
early o p p o r tu n itie s fo r p u b lic review .
At the f e d e r a l l e v e l , FEA would c o o r d i n a t e a l l f e d e r a l
permit r e v i e w p r o c e s s e s , t o p r e v e n t u n n e c e s s a r y d e l a y s .
With r e s p e c t t o a c t u a l r e s p o n s i b i l i t i e s f o r e n e r g y
f a c i l i t y s i t i n g , T i t l e V I I I would c r e a t e a t w o - s t a g e
process.
F i r s t , w i t h i n one y e a r from th e d a t e o f en ac tm en t
the FEA would p r e p a r e and submit t o th e C o n g r e s s a N a t i o n a l
Energy S i t e and F a c i l i t y R e p o r t .
T h i s would d e t a i l th e
number, t y p e and g e n e r a l l o c a t i o n o f th e e n e r g y f a c i l i t i e s
r e q u ir e d t o meet our n a t i o n a l e n e r g y o b j e c t i v e s , i n c l u d i n g
p r e s e n t and p r o j e c t e d l o n g - r a n g e e n e r g y n e e d s .
The R e p o r t
would l i s t a l l a p p l i c a t i o n s f o r new f a c i l i t i e s p e n d i n g a t
the f e d e r a l and s t a t e l e v e l s , and t h e e c o n o m i c , s o c i a l ,
and e n v i r o n m e n t a l c o n s i d e r a t i o n s t h a t would a p p l y t o c o n s t r u c t i o n
of new f a c i l i t i e s i n v a r i o u s r e g i o n s and m a r k e t i n g a r e a s .
W i t h i n one y e a r from th e i s s u a n c e o f t h i s FEA R e p o r t ,
each s t a t e would be r e q u i r e d to subm it t o FEA f o r a p p r o v a l
a S t a t e En e rg y F a c i l i t y Management Program.
Each such
Program would be r e q u i r e d t o c o n t a i n an e x p e d i t e d p r o c e s s
f o r the a p p r o v a l o f a p p l i c a t i o n s , and p r o c e d u r e s t o i n s u r e
8
t h a t s t a t e s g i v e a d e q u a te c o n s i d e r a t i o n t o r e g i o n a l and
n a t i o n a l energy n eeds.
S t a t e l e v e l d e c i s i o n s on a p p l i c a t i o n s
may n o t be o v e r r i d e n by l o c a l g o v e r n m e n t s , and must be
c o o r d i n a t e d w i t h o v e r a l l s t a t e l a n d us e pr o g r a m s .
A $100 m i l l i o n 5 - y e a r f e d e r a l m a t c h i n g g r a n t program
would be c r e a t e d t o a s s i s t th e s t a t e s i n d e v e l o p i n g and
i m p l e m e n t in g t h e i r management p r o g r a m s .
In a d d i t i o n ,
FEA would p r o v i d e a p p r o p r i a t e t e c h n i c a l a s s i s t a n c e as
w ell.
I t i s o n l y where a s t a t e f a i l s t o su bm it such a
program t h a t t h e F e d e r a l government would be a u t h o r i z e d to
p r o m u l g a t e a program f o r t h a t s t a t e .
The p r o c e d u r a l safeguards
t h a t apply in such ca se s c l o s e l y p a r a l l e l s i m i l a r p r o v is io n s
i n t h e C l e a n A i r A c t , and i n s u r e t h a t t h e p r i m a c y o f s t a t e
involvement i s p r e s e r v e d .
I would l i k e p a r t i c u l a r l y t o n o t e , Mr. C h a ir m a n , t h a t
th e p r o p o s e d l e g i s l a t i o n e x p r e s s l y p r o v i d e s t h a t n o t h i n g
c o n t a i n e d t h e r e i n s h a l l be c o n s t r u e d to a u t h o r i z e th e
F e d e r a l government t o o v e r r i d e any f i n a l s t a t e d e c i s i o n with
r e s p e c t t o t h e a p p r o v a l or d i s a p p r o v a l o f , a n y s p e c i f i c
energy f a c i l i t y .
I p a r t i c u l a r l y en do r se t h i s a s p e c t o f
the p r o p o s a l.
I t em ph a siz es th e i m p o r t a n c e o f m a i n t a i n i n g
t h e a p p r o p r i a t e r e l a t i o n s h i p between s t a t e and f e d e r a l
r e s p o n s i b i l i t i e s i n th e i m p o r t a n t a r e a o f l a n d us e d e c i s i o n s .
As I have a l r e a d y n o t e d , t h i s T i t l e r e p r e s e n t s a s p e c i f i c
and narrow e x c e p t i o n t o our g e n e r a l v ie w t h a t a l l such
d e c i s i o n s are m a t t e r s f o r r e s o l u t i o n a t t h e s t a t e l e v e l .
I s t r o n g l y e n d o r s e th e A d m i n i s t r a t i o n ’ s p o l i c y a g a i n s t the
o v e r r i d i n g o f s t a t e d e c i s i o n s by th e F e d e r a l government on
l a n d us e p o l i c y .
T itle
X III
T i t l e X I I I o f th e P r e s i d e n t ’ s program would c r e a t e
s t a n d b y a u t h o r i t y t o d e a l w i t h f u t u r e embargoes or o t h e r
n a t io n a l energy em ergencies.
I t would a u t h o r i z e th e
P r e s i d e n t , a f t e r a p p r o p r i a t e and s p e c i f i c f i n d i n g s t h a t
emergency c i r c u m s t a n c e s e x i s t , t o a l l o c a t e and c o n t r o l the
p r i c e o f p e t r o l e u m , p r o m u l g a t e 'mandatory e n e r g y c o n s e r v a t i o n
programs, r a t i o n petroleum p r o d u c ts , order in c r e a s e s in
d o m e s t i c o i l p r o d u c t i o n and e x e r c i s e a l l o c a t i o n a u t h o r i t y
o v e r c r i t i c a l m a t e r i a l s needed f o r e n e r g y p r o d u c t i o n .
9
These a u t h o r i t i e s would a l s o s e r v e t o implement by
domestic l e g i s l a t i o n t h e i n t e r n a t i o n a l o b l i g a t i o n s we
undertook l a s t November by s i g n i n g t h e I n t e r n a t i o n a l En e rg y
Program agreement as p a r t o f our membership i n th e I n t e r n a t i o n a l
Energy A g e n c y .
The im p o r t a n c e o f t h e s e a u t h o r i t i e s to d e a l w i t h f u t u r e
emergencies i s most c l e a r l y d e m o n s t r a t e d by th e de g r e e
of impact e x p e r i e n c e d d u r i n g l a s t y e a r ’ s o i l embargo.
As
was more f u l l y documented i n my r e c e n t f i n d i n g under
S ect io n 232 o f t h e Trade E x p a n s i o n A c t , as amended, t h i s
impact was s e v e r e .
I t ke p t 2 . 4 m i l l i o n b a r r e l s o f o i l per
day from r e a c h i n g th e U n i t e d S t a t e s .
D u r in g th e f i r s t
quarter o f 1974 our s e a s o n a l l y a d j u s t e d GNP f e l l by 7%
at an annual r a t e .
Furtherm ore, in c r e a s e d energy p r i c e s
are now b e l i e v e d t o have c a u s e d some 20% to 30% o f th e i n c r e a s e s
t h e r e a f t e r e x p e r i e n c e d i n th e Consumer P r i c e I n d e x , v
In a d d i t i o n , as new d o m e s t i c s o u r c e s such as the N o r t h
Slope o f A l a s k a come i n t o p r o d u c t i o n o v e r t h e n e x t s e v e r a l
years our expanded use o f p i p e l i n e s and o i l t r a n s h i p m e n t
f a c i l i t i e s w i l l b r i n g w i t h i t some r i s k o f i n t e r r u p t i b i l i t y
due to p o s s i b l e s a b o t a g e or n a t u r a l d i s a s t e r s .
In such c i r c u m s t a n c e s , t h e P r e s i d e n t s h o u l d have the
a u t h o r i t y t o a c t e x p e d i t i o u s l y t o m i n im iz e th e s e r i o u s
d i s l o c a t i o n s t h a t would r e s u l t .
The p r o p o s e d l e g i s l a t i o n
is d e s ig n e d t o g i v e him t h a t a u t h o r i t y and e f f e c t i v e l y
m i t i g a t e suc h a d v e r s e i m p a c t s .
I would l i k e to p o i n t ou t t h a t I c o n s i d e r th e s t a n d b y
and d i s c r e t i o n a r y c h a r a c t e r o f t h e pr o p o se d a u t h o r i t y t o be
i t s most im p o r t a n t s i n g l e e l e m e n t .
E x p e r i e n c e has d e m o n s t r a t e d th e need f o r a u t h o r i t y
at the F e d e r a l l e v e l t o a c t d e c i s i v e l y , e f f e c t i v e l y , and
e x p e d i t i o u s l y when c r i t i c a l s h o r t a g e s a r i s e .
Experience
has a l s o d e m o n s t r a t e d , h o w e v er , t h a t th e e x e r c i s e o f th e
kinds o f a u t h o r i t i e s t h a t would be needed c o u l d have th e
u n d e s i r a b l e e f f e c t o f c r e a t i n g new d i s t o r t i o n s And r e q u i r i n g
the e s t a b l i s h m e n t o f new b u r e a u c r a t i c m a c h i n e r y .
Mr. Ch a ir m a n , we do n o t r e l i s h th e p r o s p e c t o f h a v i n g
to u t i l i z e th e a u t h o r i t i e s c o n t a i n e d in th e p r op os e d
legislation .
I have a l r e a d y n o t e d th e s p e c i f i c d i f f i c u l t i e s
aud d i s a d v a n t a g e s we f o r e s e e from impos i t i o n o f a F e d e r a l
Ga so l in e r a t i o n i n g progr am .
As a r e s u l t , our b i l l i s
e x p r e s s l y c o n d i t i o n e d upon a f i n d i n g by th e P r e s i d e n t t h a t
domestic e n e r g y s h o r t a g e s r e f l e c t i n g se r i o u s t h r e a t s t o th e
national s e c u r i t y e x i s t .
O n l y suc h a f i n d i n g w i l l t r i g g e r
e i t h e r th e a u t h o r i t y or th e need f o r th e P r e s i d e n t t o a c t
under the s e c t i o n s n o t r e l a t i n g to i n t e r n a t i o n a l a g r e e m e n t s .
10
In a d d i t i o n t o th e a u t h o r i t i e s g r a n t e d t o th e P r e s i d e n t
t o r e a c t t o g r a v e d o m e s t i c e n e r g y s h o r t a g e s , t h e p r op os e d
l e g i s l a t i o n i s a l s o d e s i g n e d to c r e a t e t h e a u t h o r i t i e s
n e c e s s a r y t o implement t h e Agreement on an I n t e r n a t i o n a l
En e rg y Program ( th e ” I E P ” ) s i g n e d by t h e U n i t e d S t a t e s on
November 18, 1974.
The A d m i n i s t r a t i o n p r o p o s a l has been
d r a f t e d so as t o f u l f i l l t h e s e r e q u i r e m e n t s and to a l l o w our
p a r t i c i p a t i o n i n th e I n t e r n a t i o n a l E n e r g y A g e n c y .
Representatives!
o f th e S t a t e Department have d i s c u s s e d w i t h you th e elements
o f t h a t a g r e e m e n t , and how our pr o p o se d l e g i s l a t i o n would
implement i t s p r o v i s i o n s .
A t t h i s p o i n t , Mr. C h a ir m a n , I would a l s o l i k e t o note
t h r e e f u r t h e r a s p e c t s o f th e P r e s i d e n t ’ s o v e r a l l program
d i r e c t l y r e l e v a n t to t h e omnibus b i l l :
the r e c e n t imposition
o f o i l import l i c e n s e f e e s , our recommendations r e g a r d i n g
e n e r g y t a x e s , and o n g o i n g i n t e r n a t i o n a l i n i t i a t i v e s w i t h
r e s p e c t t o b o t h consumers and p r o d u c e r s .
Import L i c e n s e Fees
D u r in g th e p a s t w e e k s , many q u e s t i o n s have a r i s e n
ab ou t t h e P r e s i d e n t ’ s a d m i n i s t r a t i v e a c t i o n t o impose
a d d i t i o n a l l i c e n s e f e e s on im po rt ed crude o i l and p e tr ol e um
products.
I would l i k e t o c l a r i f y some p o i n t s o f c o n t r o v e r s y .
F i r s t , h i s a c t i o n i s s p e c i f i c a l l y a u t h o r i z e d under
S e c t i o n 232 o f th e Trade E x p a n s i o n A c t o f 1962, as amended
by th e r e c e n t l y e n a c t e d Trade Reform A c t o f 1974.
Section
232 p r o v i d e s t h a t i f t h e S e c r e t a r y o f th e T r e a s u r y , a f t e r
a p p r o p r ia te i n v e s t i g a t i o n , f i n d s t h a t petroleum i s being
im po rt ed i n t o th e U n i t e d S t a t e s i n such q u a n t i t i e s or under
such c i r c u m s t a n c e s as to t h r e a t e n t o i m p a i r th e n a t i o n a l
s e c u r i t y , he s h o u l d p r o m p t l y a d v i s e th e P r e s i d e n t o f t h a t
fact.
U n l e s s th e P r e s i d e n t d e t e r m i n e s to th e c o n t r a r y , he
must " t a k e s u c h a c t i o n , and f o r such t i m e , as he deems
n e c e s s a r y t o a d j u s t th e im p o rt s o f suc h a r t i c l e and i t s
d e r i v a t i v e s so t h a t suc h im p o rt s w i l l n o t t h r e a t e n t o impair
the n a t i o n a l s e c u r i t y . ”
T h i s i s in d e e d a broa d g r a n t o f
a u t h o r i t y t h a t a l l o w s th e P r e s i d e n t t o impose q u o t a s , l i c e n s e
f e e s , and o t h e r t y p e s o f import r e s t r i c t i o n s .
A f t e r c o m p l e t i o n o f an i n v e s t i g a t i o n w i t h i n t h e Treasury
D e p a r t m e n t , I r e p o r t e d t o th e P r e s i d e n t t h a t cr ud e o i l and
p e t r o l e u m p r o d u c t s were b e i n g so im po rt ed i n t o t h e U n i t e d
S t a t e s , and the P r e s i d e n t a c t e d a c c o r d i n g l y t o impose license
O-
11
fees.
In th e i n v e s t i g a t i o n , i n f o r m a t i o n and i d e a s were
sought from th e S e c r e t a r y o f D e f e n s e , t h e S e c r e t a r y o f
Commerce, and o t h e r C a b i n e t and a g e n c y heads i n c o m p l i a n c e
with the s p e c i f i c p r o v i s i o n s o f S e c t i o n 232.
Both t h e S e c r e t a r y
of S t a t e and t h e Departm ent o f D e f e n s e f ou n d t h a t p e t r o l e u m
imports c o n s t i t u t e d a t h r e a t t o t h e n a t i o n a l s e c u r i t y .
I
would be happy t o p r o v i d e t h e f i n d i n g s o f t h e i n v e s t i g a t i o n
and o t h e r documents r e l a t i n g t o t h e i n v e s t i g a t i o n t o you
for the r e c o r d .
In i n c r e a s i n g t h e im po rt f e e s , t h e P r e s i d e n t s p e c i f i c a l l y
d i r e c te d t h a t s p e c i a l a t t e n t i o n be f o c u s e d on th e p o s s i b l e
i n e q u i t i e s t h a t m i g h t b e f a l l p a r t i c u l a r r e g i o n s o f th e
country.
T h e r e f o r e , u n t i l C o n g r e s s a c t s on t h e rem a in de r
of the P r e s i d e n t ' s p r og ra m , t h e F e d e r a l E n e r g y A d m i n i s t r a t i o n ' s
crude o i l e q u a l i z a t i o n r e g u l a t i o n s w i l l e n s u r e t h a t th e
burden o f import f e e s w i l l be e q u a l l y d i s t r i b u t e d n a t i o n a l l y
to as sure s i m i l a r c r u d e c o s t s t o a l l d o m e s t i c r e f i n e r s .
A d d i t i o n a l l y , as t o r e f i n e d p r o d u c t s , t h e f u l l impo rt f e e
of $1.00 w i l l be r e f u n d e d d u r i n g F e b r u a r y . $ 1 .4 0 o f th e
$2.00 f e e w i l l be r e f u n d e d i n M a r c h , and $ 1 .8 0 o f t h e $ 3 .0 0
fee w i l l be r e f u n d e d i n A p r i l and t h e r e a f t e r u n t i l t h e P r e s i d e n t ' s
t o t a l en erg y t a x program i s e n a c t e d .
The t o t a l program th u s
provides c o m p le te p r o t e c t i o n a g a i n s t uneven im p a c t s t o
areas l i k e New E n g l a n d w hi ch i s h e a v i l y dep endent on p r o d u c t
imports.
Energy Tax Packa ge
A p r i n c i p a l g o a l o f the energy ta x package i s to
reduce t o t a l c o n su m p ti on o f o i l and n a t u r a l g a s , w hic h w i l l
help to r edu ce i m p o r t s .
The pa ck a g e has t h r e e p a r t s :
(1)
An impo rt f e e i n c r e a s e u l t i m a t e l y s e t t l i n g
$2 p e r b a r r e l on c r ud e o i l and p r o d u c t s and a
c o r r e s p o n d i n g e x c i s e t a x on d o m e s t i c c r u d e o i l .
(2)
D e c o n t r o l o f c r ud e o i l p r i c e s
P r o f i t s Tax.
at
and a W i n d f a l l
(3)
Pr i c e d e c o n t r o l o f new n a t u r a l gas and t h e e q u i v a l e n t
o f th e $2 b b l . o i l e x c i s e t a x on a l l n a t u r a l g a s , t o
c u r t a i l i t s us e and d i s c o u r a g e s w i t c h i n g from f u e l o i l
to n a t u r a l g a s .
12
This combination of fees, taxes and decontrol will
raise the prices of oil, and gas and related products
relative to other prices. That will discourage their
unnecessary use, encourage the substitution of other energy
sources, and induce the replacement of existing
energy-using devices.
I have testified at length during the past several
weeks before the Ways and Means Committee on the particular
aspects of our tax proposals, and I understand Administrator
Zarb has testified in specific detail this morning upon
our proposal to decontrol the prices of "old" domestic
crude production and deregulate natural gas with accompanying
tax measures designed to soften the impact of such actions.
I will not discuss these specific tax related questions
in more detail at this time, but I would be happy to answer
any specific questions you might have.
International Initiatives
While I understand Assistant Secretary Enders has
also testified on the international aspects of our program
and the most recent developments in our ongoing discussions
with both producer and consumer nations, I would like to
emphasize the importance of these issues to the nation’s
overall energy program and needs.
The President's program finally brings us a comprehensive
and meaningful domestic energy policy which will provide the
basis to work toward solutions with both consuming and
producing nations. I think all of us, however, are becoming
more and more aware of how interdependent our world is
today. As such, it is important to recognize that the
solutions to our problems lie in strengthening this interdependence
Unconstrained bilateralism, artificial restrictions on supplies
of goods or any efforts to distort trade and investment must
be avoided by consumers and producers alike.
The underlying basis of our approach is that a coordinated
response to the oil program is needed. Our policy involves
three parts--cooperation among the oil-consuming countries;
the development of sound U.S. domestic energy policy that
will reduce our dependence on foreign supply; and, cooperation
with the oil-producing nations.
13
With respect to our cooperation with the consumers,
we believe that current oil prices require that we combine
energy and financial policies if we are to maintain economic
stability. Oil consuming countries have made considerable
progress in concerting their energy policies. Last fall^
agreement was reached among a number of consuming countries
on the International Energy Program launched at the Washington
Energy Conference of February 1974. An unprecedented
emergency program to limit individual and collective
vulnerability to supply interruptions by OPEC countries
has been developed. Under this arrangement, participating
countries have agreed to:
-- Build a common level of emergency self-sufficiency,
which would allow them to live without imports for a
certain period.
-- Develop demand restraint programs to cut oil
consumption by a common rate without delay if
necessary.
-- Allocate available oil to spread shortfalls evenly
among participants.
As I have noted, Title XIII of the omnibus bill
implements these goals. Concrete plans are also now being
laid to coordinate programs of energy conservation and
longer term development of new sources of supply. We are
seeking to reach agreement on cooperative efforts to develop
alternate sources of energy as well as to achieve energy
conservation. The essence of our position with regard to
other consuming nations can be succinctly described:
-- To help bring about lower oil prices, and to reduce
the economic burden of oil imports, major consuming
nations should work together to achieve significant
reductions in their imports of OPEC oil.
--They should also coordinate policies and pool their
technical resources to increase energy production within
their own nations.
-- IMF resources should be more fully mobilized for
all its member nations.
J
14
-- A major, $25 billion financial mechanism should be
set up in association with the OECD to provide standby
financial support in case any of the participating
countries find themselves in economic trouble after
having made reasonable efforts on their own part.
These ideas call for a forthright effort by the world's
major industrial countries to resolve the international
energy crisis. I have been encouraged by the recent development!
and anticipate considerable progress through the coming
months.
At the same time that our policy for financial and
energy cooperation among the consumers has been envolving,
we have been undertaking an intensive program of economic
cooperation with the oil producing countries in the Middle
East. This has been done both through the establishment
of bilateral commissions with such countries as Egypt,
Saudi Arabia and Iran and through less formal, though
intensive, dialogue with such countries as Kuwait, Abu
Dhabi, and Qatar.
Mr. Chairman, too many view the countries of the Arab
world as all the same. This is just not the case. Each of
the oil producing countries differ in ability to absorb oil
revenues and in political goals with respect to oil. Such
basic differences have and will continue to result in
different forms of cooperation with the United States and
other consuming countries.
Our analysis of the forces underlying the oil and
energy markets, and of the costs and dangers thrust on the
world economy by the increase in oil prices, has reinforced
our basic belief that it is the price of oil rather than its
financial repercussions that is the real source of trouble
in the world economy.
I might note that there is growing consensus among
economic forecasters that the financial accumulations of
the oil producers will not reach some of the huge figures
predicted last year. Some of these initial projections
of accumulations ranged as high as over a trillion dollars
by 1985. These predictions, however, tended to underestimate
substantially both the responsiveness of oil supply and
demand to high oil prices over the long run and the capacity
of the oil exporting countries to accelerate their imports
15
of goods and services.
Recent projections of OPEC financial
accumulations through 1985 have been on the order of $200
to $300 billion, as measured in 1974 dollars.
They also
suggest that, by the late 1970s or early 1980s, the process
of accumulation may have been substantially completed with
the o i l exporters collectively beginning to run a current
account deficit.
Indeed, one private projection suggested
r e c e n t l y that this could occur by 1978.
A l l of our initiatives are really a response to the
economics of oil.
They should not be regarded as confrontational.
We r e a l l y have no choice but to seek to insure the viability
of our economies and the stability of the international
f i n a n c i a l order.
These essential interests are not in conflict
with t h o s e of the oil exporting countries.
We continue to
support the very legitimate aspirations of the oil producing
n ation s to accelerate their own economic development,
e s t a b l i s h their industrial and agricultural bases, and
improve the living standards of their peoples.
We do
b e l i e v e , however, they can achieve these development
o b j e c t i v e s on a much more secure basis at a substantially
lower level of oil prices.
Conclusion
The energy and economic problems we now face are
multidimensional. They require a balanced approach, and
I believe the President’s program offers such an approach-one which will allow us to maintain our traditional strength
and leadership role in the world.
I look forward to working with the Congress in
implementing a complete and meaningful national energy
policy.
oOo
EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL ON WAGE AND PRICE STABILITY
726 JACKSON PLACE, N.W.
WASHINGTON, D.C. 20506
TTÇ
FOR INF ORMATION C A L L :
( 20 2 ) 4 5 6 - 6 7 5 7
FOR RELEASE UPON D E L I V E R Y
Thursday, F e b r u a r y 2 0 , 197 5
STATEMENT OF A L B E R T REES
DIR EC TO R OF T H E
COUN CIL ON WAGE AND P R I C E S T A B I L I T Y
BE FOR E T H E
S E N AT E J U D I C I A R Y SUBCOMMITTEE
ON A N T I T R U S T AND MONOPOLY
FEBRUARY 2 0 , 19 7 5
Mr. Chairman and Members o f th e Su bc om m it te e :
I ap pr ec ia te t h i s o p p o r t u n i t y t o ex p re s s t h e views o f t h e C o u n c i l on
Wage and P r i c e S t a b i l i t y on S . 4 0 8 , a b i l l t o r e p e a l t h e F e d e r a l e n a b l i n g
legislation p e rm ittin g s t a t e " f a i r trad e" laws.
I am p l e a s e d t o n o t e t h a t
the P r e s i d e n t has s t r o n g l y endorsed S e n a t o r B r o o k e ' s b i l l , and has i n d i c a t e d
that the e l i m i n a t i o n o f r e s t r i c t i v e Go vernment p r a c t i c e s and t h e r e f o r m o f
outdated r e g u l a t i o n s a r e b a d l y needed t o combat i n f l a t i o n and r e t u r n ou r
economy t o s t a b l e growth and p r o s p e r i t y .
As you know, th e C o u n c i l on Wage and P r i c e S t a b i l i t y was c r e a t e d t o m o n i t o r
i n f l a t i o n a r y dev elopments i n t h e p r i v a t e s e c t o r o f t h e economy, and t o
review the a c t i v i t i e s o f Government t h a t c o n t r i b u t e t o i n f l a t i o n o r add
unnecessarily t o c o s t s .
Toward t h i s end we have r e c e n t l y begun t o s t u d y
i nd u st ri es where c u r r e n t p r i c e l e v e l s seem u n j u s t i f i e d i n t h e f a c e o f
decli ning demand.
We seem t o be h a v i n g some e f f e c t .
H o w e v e r , even i f we
are s u c c e s s f u l , we may be hampered by government p o l i c i e s t h a t p u t a f l o o r
under the p r i c e s p a i d by consumers.
The F e d e r a l e n a b l i n g l e g i s l a t i o n t h a t
permits s t a t e " f a i r t r a d e " laws i s a p rim e example o f such p o l i c i e s .
We
believe t h a t th e se laws s e r v e no u s e f u l p ur p o se and t h a t t h e e n a b l i n g l e g i s
l a t io n p e r m i t t i n g t h e s e laws - th e M i l l e r - T y d i n g s A c t and t h e Mc G ui re A c t should t h e r e f o r e be r e p e a l e d .
State " f a i r - t r a d e " laws have had a checke red h i s t o r y .
Th e y o r i g i n a t e d d u r i n g
the De pres sion when th e vi e w was p r e v a l e n t t h a t t h e c u r e f o r t h e i l l s o f t h e
economy was to g e t p r i c e s up .
T h i s b e l i e f i n th e v i r t u e s o f " r e f l a t i o n " has
long s i n ce d i s a p p e a r e d , b u t th e l e g i s l a t i o n t h a t spawned i t l i v e s o n .
It
continues to impose un n ec es sa ry c o s t s on t h e consumer by p r e v e n t i n g c o m p e t i t i o n
p r e c is e l y where c o m p e t i t i o n i s most w o r k a b l e .
(more)
CWPS-26
-
2
-
A r e v o l t a g a i n s t " f a i r t r a d e " laws c u r r e n t l y i s unde r wa y.
J u s t l a s t week
th e M a r y l a n d Se n a te passed a b i l l t o r e p e a l such a law w i t h o u t e i t h e r debate
or dissent.
I n V i r g i n i a a s i m i l a r b i l l has passed th e House and i s now being
considered in the Senate.
" F a i r t r a d e " laws a l r e a d y have been e i t h e r repealed
o r d e c l a r e d u n c o n s t i t u t i o n a l i n t o t o i n t e n s t a t e s , w h i l e i n s e v e n t e e n states
th e s o - c a l l e d " n o n - s i g n e r " c l a u s e s have been s t r u c k down.
Under n o n - s i g n e r c l a u s e s , an agreement reached between a m a n u f a c t u r e r and
one r e t a i l e r who agree s n o t t o d e v i a t e from t h e m a n u f a c t u r e r ' s e s t a b l i s h e d
l i s t p r i c e becomes b i n d i n g on a l l r e t a i l e r s o f t h e i t e m i n th e s t a t e whether
o r n o t t h e y have s i g n e d such an a g r ee m en t .
E l i m i n a t i o n o f such " n o n - s i g n e r"
c l a u s e s s u b s t a n t i a l l y d i l u t e s th e e f f e c t o f t h e " f a i r - t r a d e " l a w s .
We under
s ta n d t h a t f u r t h e r c h a l l e n g e s t o th es e c l a u s e s a r e l i k e l y i n t h e f u t u r e .
The r e v o l t a g a i n s t " f a i r t r a d e " i s n o t c o n f i n e d t o t h i s c o u n t r y .
As long
as two decades ago o t h e r n a t i o n s began t o e l i m i n a t e wh at a r e known elsewhere
as " r e s a l e p r i c e m a in te na n ce " a g r ee m en t s.
These agreements have been pro
h i b i t e d o u t r i g h t i n C ana da , Sweden, Denmark, and F r a n c e and have been banned
w i t h s e v e r e l y l i m i t e d e x c e p t i o n s i n G r e a t B r i t a i n , The N e t h e r l a n d s , and
Japan.
N e v e r t h e l e s s , " f a i r t r a d e " laws remain a s i g n i f i c a n t r e s t r i c t i v e f a c t o r in
this country.
Some form o f " f a i r t r a d e " law e x i s t s i n 36 s t a t e s .
I n 13
s ta te s "non-signe r" p ro v is io n s are s t i l l i n t a c t .
Many o f th e s t a t e s r e t a i n
i n g f a i r t r a d e a r e among th e most p o p u l o u s .
I n i t s c u r r e n t r e p o r t the
C o u n c i l o f Economic A d v i s e r s e s t i m a t e s t h a t a p p r o x i m a t e l y h a l f o f t h e popu
l a t i o n r e s i d e s i n s t a t e s c o v e re d by some form o f " f a i r t r a d e " - l e g i s l a t i o n .
The D ep ar tm en t o f J u s t i c e e s t i m a t e s t h a t a p p r o x i m a t e l y $35 b i l l i o n worth
o f goods a r e s o l d under " f a i r t r a d e . "
I t i s d i f f i c u l t t o e s t i m a t e p r e c i s e l y what t h e s e laws c o s t consumers.
In
t h e i r 1969 R e p o r t th e C o u n c i l o f Economic A d v i s e r s p l a c e d th e c o s t a t $ 1 .5
b illio n annually.
B u t w h a t e v e r t h e p r e c i s e m a g n i t u d e , i t i s c l e a r t h a t the
e f f e c t and i n t e n t o f th e se laws i s t o p r e v e n t p r i c e c o m p e t i t i o n and r a i s e
g ro s s margin s i n r e t a i l i n g .
I n i n t r o d u c i n g S . 4 0 8 , S e n a t o r Br ooke c i t e d
numerous examples o f consumer goods which t y p i c a l l y s e l l f o r up t o o n e - t h i r d
o f f l i s t p r i c e i n n o n - " f a i r t r a d e " a r e a s , b u t wh ich s e l l a t l i s t p r i c e where
" f a i r tra d e " is s t r o n g l y en fo rc e d .
The f o r e i g n e x p e r i e n c e a l s o bears th i s
out.
I n B r i t a i n th e a b o l i t i o n o f r e s a l e p r i c e ma int e na n ce r e s u l t e d i n lower
g r o c e r y p r o d u c t p r i c e s and m a r g i n s .
I n C ana da , th e a b o l i t i o n o f r e s a l e price
m a in te na n ce r e l e a s e d p r e v i o u s l y p e n t - u p c o m p e t i t i v e f o r c e s so t h a t du r in g a
su b s e q u e n t i n f l a t i o n a r y p e r i o d , g ro ss margins i n " f o r m e r p r i c e m a i nt a in e d
t r a d e s " r o s e by much l e s s than margins i n " n o n - p r i c e m a i n t a i n e d t r a d e s . " ! /
" F a i r t r a d e " laws can be condemned on o t h e r g r o u n d s .
Since they r e s t r i c t
o n l y one di m en si on o f c o m p e t i t i o n , namely c o m p e t i t i o n on t h e b a s i s o f p r i c e ,
(more)
1/
L . A . S k e o c h , "Th e A b o l i t i o n o f R e s a l e P r i c e M a i n t e n a n c e :
th e Ca nadian E x p e r i e n c e , "
E c o n o m i c a , A u g u s t 196 4 .
w
Some Notes on
£Jl
they produce an i n c r e a s e d emphasis on n o n - p r i c e c o m p e t i t i o n i n such forms
as a d v e r t i s i n g , f u r n i s h i n g e x t r a s e r v i c e s , and t h e l i k e . P r i c e s and s e r v i c e s
are prevented from r e f l e c t i n g e i t h e r consumer c h o i c e o r v a r i a t i o n i n e f f i c i e n c y
and p r o d u c t i v i t y .
The advocates o f " f a i r t r a d e " have advanced arguments s u p p o r t i n g t h e p r a c t i c e .
They have r a i s e d f e a r s t h a t e l i m i n a t i o n o f " f a i r t r a d e " laws would unl ea sh
a wave o f d e s t r u c t i v e c o m p e t i t i o n i n which smal l b u s in e s s w ou ld be w iped o u t .
This ignores th e e v i d e n c e t o th e c o n t r a r y .
A c c o r d i n g t o a r e c e n t Bu si ne ss
Week a r t i c l e , 2/ t h e number o f d r u g s t o r e s p e r c a p i t a d e c l i n e d by an equal
amount - one p e r c e n t i n each case - i n b ot h " f a i r t r a d e " and n o n - " f a i r t r a d e "
states between 1935 and 19 4 8 .
Between 1958 and 1967 t h e number o f s t o r e s i n
non-"fair t r a d e " s t a t e s i n c r e a s e d by 5 p e r c e n t w h i l e t h e number i n " f a i r t r a d e "
states d ec li ne d by 2 p e r c e n t .
In E n g l a n d t h e a b o l i t i o n o f r e s a l e p r i c e ma int e na n ce
produed no m a jo r d i f f i c u l t i e s , even though b e f o r e a b o l i t i o n i t ex t e n d e d t o a much
broader segment o f r e t a i l i n g than " f a i r t r a d e " e v e r has i n t h i s c o u n t r y . 3 /
Because " f a i r t r a d e " laws r a i s e r e t a i l e r ' s g ro ss m a r g i n s , i t may be imagined
that they r a i s e n e t m a r g i n s , t h a t i s p r o f i t s , and thus g e n e r a t e income f o r
small r e t a i l e r s .
H o w e v e r , such e f f e c t s , i f t h e y e x i s t , must be o n l y t e m p o r a r y .
Retailing i s a c o m p e t i t i v e b u s in e s s and r e l a t i v e l y easy t o e n t e r .
Where high
profits e x i s t , new e n t r y w i l l o c c u r , and th e r e t a i l t r a d e i n an a re a w i l l be
divided among a l a r g e r number o f s t o r e s .
The reduced volume p er s t o r e w i l l
raise u n i t co st s u n t i l t h e p r o f i t s a r e no l o n g e r l a r g e enough t o in d u c e e n t r y .
In the end, th e consumer los es and th e r e t a i l e r does n o t g a i n .
And s i n c e
the " f a ir t r a d e " laws a r e o l d l a w s , t h i s s i t u a t i o n must have been reached
many years ago.
Mr. Chairman, t h e term " f a i r t r a d e " i s a misnomer.
The M i l l e r - T y d i n g s A c t and
the McGuire A c t a r e a n a c h r o n i s t i c l a w s , i n i m i c a l t o h e a l t h y c o m p e t i t i o n and
inconsistent w i t h o u r a n t i - i n f l a t i o n a r y p o l i c y .
In 1968 P r e s i d e n t Jo h n s o n e s t a b l i s h e d a t a s k f o r c e t o recommend r e f o rm s o f t h e
antitrust laws.
T h i s t a s k f o r c e was headed by P r o f e s s o r P h i l i p C. N e a l , Dean
of the School o f Law a t t h e U n i v e r s i t y o f C h i c a g o .
The t a s k f o r c e ' s r e p o r t
contained th e f o l l o w i n g la n g u a g e :
"The case a g a i n s t r e s a l e p r i c e m a int en an ce
has been made so o f t e n and so p e r s u a s i v e l y t h a t we t h i n k no f u r t h e r e l a b o r a t i o n
is necessary.
We recommend r e p e a l o f a n t i t r u s t e x em p t io n s f o r r e s a l e p r i c e
maintenance."
(T a s k F o r c e R e p o r t , p . 1 2 . )
Mr. Chairman, t h a t s t a t e m e n t sums up my views on t h i s m a t t e r .
favorable a c t i o n on S . 408.
I s t r o n g l y urge
o 0 o
CWPS-26
lr ------------------------------------------------ I------------------"Will Congress End F a i r T r a d e ? " Bu si ne ss Week, F e b r u a r y 1 7 ,
1 9 7 5 , p . 8 2.
zi
J - F. P i c k e r i n g , "The A b o l i t i o n o f R e s a l e P r i c e M a i n te na n ce i n G r e a t B r i t a i n , "
Oxford Economic P a p e r s , March 1 9 7 4 .
FOR RELEASE ON DELIVERY
AFTER 1:00 PoM„, FEBRUARY 19, 1975
REMARKS BY
THE HONORABLE JACK F c BENNETT
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE SIXTEENTH WORLD AFFAIRS FORUM
SPONSORED BY THE WORLD AFFAIRS COUNCIL OF PITTSBURGH
PITTSBURGH, PENNSYLVANIA
WEDNESDAY, FEBRUARY 19, 1975
LET'S GET ON WITH THE JOB, AND DAMN THE STATISTICS
Mr. Harper, Ladies and Gentlemen, I appreciate your
kind welcome for me despite your undoubted disappointment
in having to accept an unexciting substitute for Washington's
most famous freedom-fighter.
Unfortunately, Secretary Simon
must testify today before a Congressional Committee.
asked me to express his sincere regrets.
those regrets really are sincere.
He
And, I would judge
He derives real pleasure
from getting away from Washington and talking to those in
other parts of the country with a strong interest in the
Government's policies.
W S-227
Moreover, probably no one has had,
2
over the past two years, more personal experience than he
with the duplicative process that the Congressional hear
ings have so often become.
But I am glad to be here, and to have a chance to re
visit this area, for I spent some wonderful years of my boy
hood in the West Virginia hills south of here.
Those were the worst years of the great depression; yet,
what I remember are not the depression experiences but the
wonders of wandering in those hills.
I
do have some difficulty coming to the microphone after
your expert speakers this morning.
I feel particular
trepidation in following my old colleague, Herb Stein.
He
is the only man I know whose sense of humor improved the
longer he stayed in Washington.
Herb was the author of a
famous comment about a friend of ours whose difficult duty
in Government was to announce and comment publicly each
week, for a long time, on a series of disheartening economic
statistics.
Herb said our friend "had never met a statistic
he didn't like."
This afternoon l'd like to give you a number of
examples why l'd prefer to be known as a man closer to the
3
opposite extreme, "a man who never met a statistic he did
like."
Right today, for example, there appears to be a great
national debate under way on whether the President's energy
proposals will increase the cost of living index by more
than 27oo
Here is a clear case in which attention to a
statistic has totally replaced consideration of the under
lying realityo
The import fees, the excise taxes, and the
removal of price controls which the President has proposed
will increase the prices of petroleum products.
And these
increases will increase the published cost-of-living index
by some amount.
The Treasury analysts say 2%, some others
say more; others less. But that increase is only a small
part of the story.
All of the increased payments -- and
more -- will be returned to the consumers, through tax reduc
tions
and other means.
As a result, the average citizen
will have the wherewithal to buy the same amount of
petroleum products as before, if he chooses to, without
reducing his other purchases0 But that reflow of funds to
the consumer is not taken into account in the cost-of-living
indexo
That is why the whole debate seems so ridiculous.
Some are even arguing that we must adopt rationing to
4
avoid the threatened increase in the consumer price index.
I am sure they are doing so without taking into account the
probability that if the index could then be calculated correctly
the same restraint on consumption would be achieved by an
even larger increase in the price index.
Under rationing,
absolute prices probably would not rise as much initially,
but the quality of the total package of goods and services
to be delivered to the consumer would probably be reduced by
an even greater percentage0
Since the price index should
ideally take into account not only changes in price but also
changes in quality, the percentage increase would be larger
under rationing
if
account could be taken of the inconveniences,
the reduction in associated services, and the possible tie-in
purchases which would be inflicted on the consumer by a rationing
system -- quite apart from the extra taxes he would have to pay to
cover the administrative apparatus and the lawsuits.
The efficiency of the President's proposals result from
the fact that they rely on the decision each individual can
make for himself as to which products to cut back his
of
c o n s u m p tio n
and to what extent -- in the light of the changed
relative price of petroleum products and other products.
In a real and historic sense, this has been the
5
C
A
"American way.1' I hope it remains that way.
Higher prices can lead to more domestic production of
energy.
Rationing -- to speak mildly -- does not encourage
production.
Of course, on average it is expected that consumers will
choose to cut back their consumption of oil.
By the fourth
quarter of this year, it is estimated that the Presidents
program would cut back imports by one million barrels a day
below what they would otherwise have grown to.
But the
absolute year-to-year decline in consumption wouldn't be very
much*
Average U«S* consumption in 1975 would be only about 370>
around 550 thousand barrels a day, below the rate of consumption
in 1974.
That consumption cutback would add a bit to the transi
tional difficulties our economy -- particularly in Detroit
-- is having in adjusting to the world of higher cost energy.
Yet the difficulties would be small compared to the difficulties
which would be brought about by those who would not trust
the consumers to choose for themselves how to cut their
consumption but would force them instead to take the cut all in
gasoline use.
It has been roughly estimated that an excise
tax of 50c a gallon would be necessary if all the
cutback were to be sought in that way, while manufacturers
6
and consumers were given no incentive to mind their thermo
stats more carefully.
In any event, the slight economy-depressing effects of
the energy conservation program can be —
and have been —
taken into account in considering the appropriate size of
the stimulative tax reductions to go into effect -- we hope
-- well before mid-year.
And
the slight depressing effects
of the energy program must be set beside the serious effects
which could follow one day from another embargo if we have not
restrained our consumption —
and beside the continuing
serious effects which there will be if we do so little that
the Europeans and Japanese see no point in joining with us
in cooperative programs to confront the various dangers
created by the sudden four-fold increase in oil prices.
Sometimes I hear it said that we must Mshown those OPEC
oil producers.
I can understand that sentiment, but so far,
I'm afraid, some of the things we are "showing" them are not
very helpful.
We seem to be showing them that it is a
national trauma for us to face the possibility of paying more
than 60 cents a gallon for gasoline, when Europeans are
already paying $1.20 to $1.80 a gallon0 We showed them in
1974 that we could cut back our oil consumption by 3%, while
Germany relied on the price mechanism and cut 9%, while
7
Belgium, Netherlands
and Denmark cut 11%, and while
Switzerland cut 13%,.
Despite our relatively poor performance, the other
major nations are cooperating with us today in the important
energy-related areas.
We have an agreement to share with
each other in the event of a future oil embargo.
We have
an agreement, in principle, on a financial solidarity arrange
ment, about which i'll say more in a moment.
And we are
hard at work now on arrangements to insure that there are
adequate incentives to insure appropriate investments —
by
both producers and users of energy -- to reduce our reliance
on imported oil despite the possibility, which any prudent
investor would take into account, that in coming years there
may be some drastic declines in the import cost of
oilo
After all, marginal producing
costs in the Persian
Gulf are probably even now well under a dollar a barrel.
In approaching this question of investment incentives,
we have to take into account that, to some extent, we shall
be able to provide for security of our energy supply in the
future with emergency stockpiles and stand-by producing
facilities.
We recognize the need to pursue, simultaneously,
our objective of avoiding undue dependence on insecure
foreign sources of energy and our objective of reducing
the real import cost of that oil which we -- and other
nations - - d o import.
After considering those objectives,
we conclude that some Government incentives to investment
for reducing dependence on imports are necessary even
though we know that those incentives, while tending to lower
the import cost of oil, will tend to raise the immediate
price to the consumer.
In all probability, the most
appropriate form of incentive will be some form of import
fee or tariff.
There are, of course, many kinds of tariffs.
They vary from the tariff which grows rapidly smaller as
the import price declines, to the ad valorem tariff, to the
flat tariff, to the other extreme of the tariff which grows
so rapidly as the import price declines as to create an
effective price floor.
National -- and international -- discussion of these
various techniques has not yet led to a consensus.
It is
a complex matter to balance, on the one hand, the
desirability of retaining incentive for foreign producers
to cut their price and of avoiding a riskless featherbed
9
o
for our businessmen, against, on the other hand, the necessity
of avoiding undue dependence on foreign oil.
The basic
objective is, however, already largely agreed internation
ally.
And a national objective is clear to us in Washington:
We must not place our manufacturers and other producers at
a competitive disadvantage.
We remember the situation a few
years ago when our petro-chemical manufacturers were pushed
toward the wall when they were faced with an effective oilimport ticket cost of $1.00 to $1.50 per barrel, while their
competitors were free to operate on cheap foreign oil.
Today, however, when I hear from my former colleagues
in the U.So oil business, I find they worry less about the
impact on their new investments of a possible sharp decline
in foreign oil prices than about the danger of continuation
long into the future of domestic price controls, allocation
schemes, and discriminatory "windfall1* taxes.
While I am convinced that a decline in the import cost of
oil is coming, I can understand why it is hard for others to
focus on that possibility just after we have suffered an
increase in our annual oil-import bill from about $8 billion
to about. $26 billion in just one year0 But that brings me
10
back to my theme for today -- the danger of looking at a
few statistics rather than at the real world.
Just last
Friday, for example, the Department of Commerce published
the first estimate of the U.S. balance of payments for the
full year and for the fourth quarter of 19740 And, on
Saturday, most newspapers stressed the fact that the
official reserves transactions deficit increased from
about $400 million in the third quarter to about $4 billion
in the fourth quarter.
The impression was given by most
accounts that the international payments position of the
UoS. had somehow significantly deteriorated.
Yet, for those
who looked behind that traditional statistic of the official
deficit, it became clear that the U.S. trade deficit actually
declined by a billion dollars from the third to the fourth
quarters.
In both quarters the bulk of the foreign official
dollar purchases reflected in the reported over-all deficit
represented willing investments in U.S. Treasury obligations
by foreign governments, including those in the major oilproducing states, rather than unwilling purchases by foreign
monetary authorities trying to preserve particular exchange
rate relationships.
m
I am not criticizing the Department of Commerce.
Their full release explained the inadequacy of the
traditional payments balances in today's circumstances.
And they are working to revise the presentation with the
help of an advisory committee which includes Pittsburgh's
famous economist, Marina Whitman» But the reports from
that advisory committee's meetings have been dismaying to
me0 Apparently, the business and trade association
representatives have come asking, not for clearer
presentation of the different facets of our payments
position, but rather for some new single statistic which
will purport to tell them all in one number•
Meanwhile, in Washington, another inter-agency committee
is reviewing all aspects of our policies toward foreign
investment in the United States.
The outcome could be
recommendations for limited changes here and there in our
complex of laws and regulations affecting such investment.
At the same time, I am confident that our basic policies will
remain:
with protection for security sensitive activities
but with a continuing warm welcome for investment from
abroad in most circumstances.
In fact, I am hopeful the
12
outcome will be an improvement in our appeal to investors
by ending any uncertainty which may now exist, even if there
are some changes recommended for specific types of investment.
Through much of last year, fears were being widely
expressed that the foreign investments being accumulated by
the OPEC oil producers would be heavily concentrated in the
United States to the extent of threatening financial crises
in other parts of the world.
In fact, the OPEC-country
funds were invested here directly in, roughly, the same
proportion that the U.S. shared in their oil-export sales.
Last year, the oil exporters appear to have accumulated
about $60 billion in new investments abroad after spending
an estimated $40 billion, 40% of their gross income, on rapidly
increasing imports of goods and services.
Of that $60 billion,
the preliminary reports which the Treasury has received from
our banks and other financial institutions suggest that only
about $11 billion were invested directly in the United StatesIn time, we may find there have been some gaps in the reporting
network, and there were probably some investments in the U . S .
made indirectly through companies in other countries, but
m
13
the over-all picture is unlikely to change.
The oil
producers have been following responsible, conservative
investment policies.
They have been diversifying their
investments widely around the world, and they have not been
shuffling their funds around from market to market in a
volatile fashiono
In 1974 the oil producers' investments were
heavily concentrated in short-term Government obligations
and bank deposits.
We estimate that out of the approximately
$11 billion in total invested directly in the United States,
less than $1 billion went into real estate and corporate
shares; and most of that latter investment was on a widely
dispersed portfolio basis0
In recent months, these investors
have begun to lengthen the term of the debt obligations they
are willing to buy, and they are showing more interest in
equity investments, but rarely on a basis which would provide
a significant element of management participation, for these
countries have only limited managerial resources which they
can spare these days from the great challenge of economic
development within their own countries.
Many of them also realize that their investment funds,
14
while still large, are probably already past their peak
rate of accumulation.
As a result of the rapid expansion
of their imports and the gradual impact of the conservation
efforts in the major consuming countries, the increase in
the oil-producers' investments abroad will probably be less
this year than last.
My own forecast is that the producing
countries will have become net dis-investors before the end
of this decade before their new investments have reached
a total of $250 billion, perhaps before they reach $200 billion.
Yet these amounts are large0 Their ownership is not
widely dispersed.
Conceivably they could be unduly concentrated
in investment in just a few places, or even be manipulated for
political purposes.
For these reasons it has been recognized
that powerful mechanisms of international financial cooperation
should be available if needed.
The main line of defense is
the ready resources and procedures of the IMF, the International
Monetary Fund.
They are available in substantial volume for
this year, and it has already been agreed that they will be
increased by about a third for use next year and thereafter for
assistance of any of the IMF's 126 members who may deserve
external short-term assistance.
In addition the possibility
of special supplementary help of a lower interest rate and
possibly also longer-term nature is being considered for a
15
number
the
over
of the poorest countries most severely affected by
drastic changes in the prices of oil and other commodities
the last several years.
At the same time the major, industrial countries have
agreed,
separately from the IMF and within the broader
framework
to seek
of their cooperation on energy-related matters,
legislative approval of a financial solidarity
arrangement which will at the outset provide national
commitments totalling $25 billion to be used in extreme
circumstances as a second line of defense,after the IMF,for
the
major nations upon whose financial operations the whole
structure of international cooperation depends. This will be
a
stand-by arrangement, a form of mutual insurance policy,,
It may well never be used.
But as in the case of other
insurance policies which we hope will never be used, it is
important that *the coverage be there in case of need.
The U.S, Administration proposed the safety net, and has
strongly supported it, even though we recognize that the
flexible private international banking system and flexible
new direct international investing and borrowing arrangements
of individual governments have been handling quite well the
bulk of the expanded flow of international capital during the
past year.
We have supported the new inter-governmental
arrangements even though we have observed that the prevailing
16
system of un-pegged international exchange rates has served
us well in a trying period of rapid economic change, a
period also of widely differing rates of inflation for the
different currencies of the world.
Nevertheless we have not been happy that formally the
basic rules of the international monetary system, as embodied
in the Articles of Agreement of the IMF, have not been brought
into line with current reality.
In fact today the U„S.
Government and all other members of the IMF are| strictly
speaking, in default of their solemn international obligations
because they, wisely, are permitting their currencies to float
in value vis-a-vis other currencies.
This is a situation
which hardly contributes to respect for international obligations,
For this reason we feel strongly that the finance officials of
the world should get on promptly with the job of preparing a broad
set of IMF amendments for legislative consideration.
Fortunately we seem in sight of consensus, not only on
new rules to promote exchange market cooperation in lieu of
the old rules for exchange rate pegging, but also on new
provisions which complete the process of taking gold from the
center of the international monetary system by abolishing the
official price of gold and by abolishing all obligations to
pay gold or accept it in payment „'
Meanwhile here in the U.S„ we have been pleased to note
citizens reacted responsibly last month to their
that U„S.
freedom to invest in gold bullion.
restored
was no evidence of the mob psychology which some
that there
had expected
Last
ounces
to develop«
year U„S. citizens imported net about 7 million
of gold.
for industrial
this year
the
use, considerably less than the previous year -This year, if the price
continues high, we would expect a further decline«
remaining 3
No one
Of that amount about 4 million ounces'were
because of the higher prices«
presumably
of gold
We were pleased
million ounces last year were in coin form.
The
So far »
there has been a sharp drop in imports of this type«
can be sure this year how much imports will be added for
newly-permitted use in investment in bullion form.
Experience so far could indicate that gold imports of all types
this year will be less than last year.
There was a surge in
imports at the beginning of the year but the flow has fallen
rapidly since mid-January«
The total so far appears to have
been less than a million ounces, and in the most recent reporting
week, through February 7, there appear to have been literally
no gold imports at all«
Under the circumstances no decisions have been made by
the Treasury on the amounts or timing of future sales from our
stockpile.
An important factor we shall wish to watch is
18
whether any resumption of imports threatens a new balance
of payments outflow0
In recent weeks there have been many references in the
press to a decline in the value of the dollar in the foreign
exchange markets.
And the dollar has declined over the past
six months relative to the European currencies, most
particularly relative to the Swiss franc.
To me, however,
those references to a dollar decline seem rather over-blown
1 B Ilf
1I
in the light of the broader context.
i f. | I
IMj
H v 11 m Ǥ i m I Ej HHHj
On a trade-weighted
basis versus all the other currencies of the major industrial
nations the dollar is almost exactly where it was a year ago
and much stronger than a year and a half agoQ Relative to
the currencies of our two main trading partners, Canada and Japan,
the exchange value of the U.S. dollar has increased significantly
over the past year.
And the dollar's outlook for the future is
strengthened by the fact that our inflation record--miserable
though it is-- is better than that of most other industrial
countries apart from Germany.
From my talks with bankers and investors it is clear to
me that the decline in the value of the dollar over the last
six months relative to some of the European currencies has
primarily resulted from the decline in U.S„ interest rates,
not just the size of the decline but also the fact that our
rates have generally been leading the movement down
For
19
the foreigner trying to decide where to place his next
investment the big question has now become whether the
dollar has fallen to an extent that the interest earnings
on an investment here are now likely to be supplemented
over the coming months by added return in the form of
appreciation of the dollar versus alternative investment
currencies.
The answer to that question heavily depends, of course,
on our ability to remember over the next few months as we
fight recession that it was inflation which was primarily
responsible for bringing us to the unhappy situation we are
now in0 That is a lesson we must remember in both our fiscal
and monetary policies, but"let me assure you that as a
Treasury official I shall not bomment on the substance of
monetary policy.
In this respect we live in Washington by
an asymmetrical rule0 The Governors of the Federal Reserve
are expected to comment publicly on the fiscal and other policies
of the Executive Branch, which was only established by the
Constitution.
But the Federal Reserve was provided its
"independence" by the Congress, and it would not be appropriate
for an official from the Executive Branch to become involved
in a substantive public discussion of the Fed’s "independent"
monetary policies0 However, in continuation of my vendetta
today against over-reliance on statistics, I do not wish
to miss the chance to say how misguided seems to me the
current drive by some in Congress
f i*
20
to attempt to cure the recession by legislating an increase
in the so-called M-l statistic of the monetary stock in the
nation.
That drive seems misguided to me for several reasons.
First,
it should be obvious to everyone that our financial
leaders are in agreement that what this country needs is
more inflation, more inflation in the sense that no one in
authority is advocating policies to eliminate inflation this
week, this month, this quarter, or even this year0 There is
agreement that it is desirable to avoid the disruptions which
would result from an attempted "cold turkey" cure»
And
secondly, I find it unsophisticated to think that the pace of
our economy and of our inflation is only influenced by the
figurative greenbacks we print and not at all by the number
of liquid interest-bearing Treasury IOU's we print up and put
in circulationo
You will recognize that I have a parochial interest here.
And I confess that I am much pre-occupied right now with trying to
raise $28 billion in net new money for the Treasury in just this
current half year period--the time of year when traditionally the
Treasury's needs have been about zero.
If I were more
foresighted I might be even more worried about what's coming
later in the year, for the Government alone is scheduled to
borrow more in the securities market this calendar year than
all borrowers put together, both public and private? borrowed in t e
securities market last year or in any previous year.
In
21
the fiscal year 1976 starting in June the Treasury is Scheduled
to raise between $60 and $70 billion in net new money.
And
that's assuming the Congress doesn't add even more stimulus
to the program of stimulus proposed by the President.
Some don't share my concern about this massive borrowing
program.
They point out, rightly, that recession tends to
reduce business demands for credit when Government is trying
to borrow more.
They point that the federal debt held by
the public at end of the next fiscal year will be a smaller
proportion of GNP than it was in any postwar year prior to
1973.
As an economist I can understand those arguments;
a bond-salesman I'm still worried.
as
That GNP statistic is
used for many purposes, but I doubt that it is very relevant
here.
What is relevant is that conditions in the debt market
in this recession are not typical.
from the market.
Business has not withdrawn
Many firms are attempting to rebuild their
liquidity positions.
They fear another inflationary surge
may be just around the corner, and they don.'t want to be
caught again.
Corporate bond issues this quarter are therefore
at a record level, even though the total of business borrowing
from banks and the commercial paper market is down.
It is a worrisome situation.
Fortunately the Treasury has
the counsel of some outstanding advisers on the functioning of
the securities market.
from here in Pittsburgh.
Among them I'm glad to say is Ed Yeo
With their help I think we'll get by
22
without a credit crunch--if the Congress doesn't over-ride
too many vetoes.
Still an awful lot of bonds are going to
have to be sold.
And, Mr. Chairman, I have my order book right
here with me if anybody's ready to sign up right now.
Thank you!
Department
ofthefREASURY
IlNGTON. D C. 20220
T E L E P H O N E W04-2041
FOR RELEASE ON DELIVERY
STATEMENT OF EDWARD C. SCHMULTS
UNDER SECRETARY, U.S. TREASURY DEPARTMENT
BEFORE THE SUBCOMMITTEE CN SECURITIES
OF THE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
ON S. 2^9
THE SECURITIES ACT AMENDMENTS OF 1975
THURSDAY, FEBRUARY 20, 1975j AT 10:00 A.M.
Mr. Chairman and Members of this Subcommittee:
As you know, the Treasury has supported the basic reform measures
contained in the Senate and House bills which were considered in'the
93rd Congress.
We urged enactment last year and today urge that you
act promptly on this legislation, in this session.
It is important
that Congress provide the securities industry, the SEC, and other in
terested parties with direction and guidance in achieving reform of
our securities markets.
The Department believes that S. 2^9 is a sound proposal for re
forming our securities markets and we support its basic provisions.
Later in my statement, I shall note the provisions of the bill which
we would prefer to see amended.
First, however, I would like to
explain the reasons why Treasury generally supports this important
legislation.
First, the Department believes that S. 2^9 should be supported
because it would authorize and direct the Securities and Exchange
Commission (SEC) to establish a national market system in which com
petitive forces would be accorded the widest latitude.
WS-22.8
Such a system
-
2-
should provide for the centralization of all buying and selling in
terest and the priority of public orders so that investors will receive
the best possible execution of their orders, regardless of where in the
system they originate.
In addition, the proposed national market system
would maximize market making capacity by encouraging competition among
market makers, increasing the depth and liquidity of our securities
markets.
S. 2^9 also provides for the establishment of a national system
for clearing and settling securities transactions.
Through utilization
of modern communications technology implementation of this system will
result in a substantial savings of both costs and time, not to mention
an important reduction in risks.
Accordingly, the development of such
a national clearing system should be one of the foremost priorities of
those of us concerned with the health of our capital markets, including
investors, the securities industry and the Government.
Commission Rates
Perhaps the most controversial issue during last session’s con
sideration was the question of competitive commission rates.
As you
know, the Treasury Department supports the move from fixed to competi
tive brokerage rates within the securities industry.
We believe that
competitive rates will benefit our capital markets and lead to more
efficient securities markets and a stronger securities industry.
-3~
By promulgating Rule 19"b-3, the Securities and Exchange Commission
has committed itself to requiring the unfixing of public rates of com
mission on May 1st of this year.
We agree with.the Committee that, in
view of the Commission’s action, it appears unnecessary specifically to
legislate an end to fixed rates on May 1, 1975»
Rather, our focus should be on the degree of discretion and flexi
bility which should be given the Commission in dealing with questions
that might arise in making the transition to competitive rates.
We
believe that S. 2^9 grants the Commission sufficient discretion in this
regard.
For example, it contains the so-called "fail safe" provision
with respect to third market trading, which, along with other similar
provisions, gives the SEC more than adequate authority to deal with
any contingency that might arise after the introduction of competitive
rates.
With respect to floor brokerage or intramember rates, the bill
limits the SEC’s flexibility.
As the Committee is aware, to facilitate
the transition to competitive public rates, the SEC deferred the im
plementation of the rule requiring unfixing of floor brokerage rates
until May 1, 1976.
Yet, under S. 2^9, lBO days after enactment,' the
Commission would lose its discretion in this regard, unless it found
that the fixed rates "are reasonable in relation to costs" and are
necessary to accomplish the purposes of the Securities Exchange Act.
M
We do not believe these additional procedural requirements are neces
sary or desirable.
Accordingly, we recommend that the effective date
of the amendments to section 6(e) be changed to May 1, 19 76 , at least
with respect to floor brokerage rates.
In addition, we believe it would be desirable to clarify the legal
authority of money managers to compensate for research with commission
dollars.
Section
2k
of S.
2k9
is intended to remove legal uncertainty
as to the fiduciaries’ authority in this regard.
We strongly support
the purpose of this provision but believe it should be strengthened
and clarified.
Along with the SEC, we support the efforts of the staff
of the Committee to develop an amendment confirming the legality, under
competitive rates, of the practice of paying for research with commission
dollars.
We are aware of the concerns which accompany the transition to
competitive rates.
There is no doubt that competitive rates will re
quire significant adjustments on the part of the securities industry
and investors.
However, based upon our examination of the issues, we
do not expect that the introduction of competitive rates will result
in cataclysmic consequences.
Of course, we will be observing events
closely and be prepared to recommend any necessary remedial steps.
Restrictions on Self-Dealing
On the date fully competitive rates are established, S.
impose restrictions on self-dealing by exchange members.
2k9
would
We believe
these provisions will promote public confidence in our securities
markets and strengthen the broker-dealer network.
They will eliminate
one potential source of conflicts of interest and one basis for the
belief that institutions possess special advantages as compared to the
general public in buying and selling securities.
S. 2^9 would prohibit, without exception, exchange members from
performing brokerage for managed accounts.
to this question.
We prefer the House approach
Treasury believes that member firms should be per
mitted to continue to execute brokerage for managed accounts where the
member serves only as a money manager and is not affiliated or associ
ated with the person for whose account it performs such money management
services, and where provision is made for an independent monitoring of
trading for the managed account to protect against any potential con
flicts of interest.
Permitting broker-dealers to provide money manage
ment services to unaffiliated customers under certain carefully circum
scribed conditions should enhance the financial strength of the
broker-dealer community during these difficult times.
As long as
institutions have access to brokerage services at competitive rates,
we believe that no important objective of public policy would be
jeopardized by such a provision.
Disclosure of Institutional
Holdings and Transactions
S. 21+9 would require large institutional investors and money
6
-
managers to report to the SEC on a regular basis their holdings and
transactions in equity securities.
Reports would be required from
institutional investors managing equity securities having an aggregate
fair market value on the last trading day in any of the preceding
twelve months of at least $100 million, or such other amount not less
than $10 million as the Commission may require.
The bill would require
the reporting of certain data with respect to any transaction having a
market value of at least $500 thousand or such other amount as the
Commission may determine.
All information filed with the Commission
would be made publicly available promptly after filing in such form as
the Commission prescribes, subject to confidential treatment in appro
priate cases.
Treasury supports these provisions.
Periodic disclosure of in-
stitutional holdings and transactions in equity securities should
serve to enhance public confidence in our securities markets and may
prove helpful to legislative and administrative officials in enforcing
the securities and banking laws and in formulating policy relating to
the impact of institutions upon the securities markets and upon issuer
access to those markets.
The Comptroller of the Currency has already prescribed similar
reporting requirements for national banks»
We hope the reporting
system established by this legislation will be integrated with the
-7 -
Comptroller’s system to avoid duplication or undue "burdens on institu
tional investors.
The bill would authorize the SEC to require reports of transac
tions involving amounts less than $500 thousand*
Requiring reports of
smaller transactions could be unnecessarily burdensome.
Therefore, we.
believe consideration should be given to specifying in the bill the
minimum transaction value for which reports could be required.
.In supporting these provisions, we add one additional caveat:.#
We
are concerned that public disclosure of holdings or transactional data,
in some instances, could reveal investment strategies or intentions on
the part of institutional investors.
Disclosure of this type of in- •
formation could harm the interests of persons whose assets are managed
by institutions.
We urge that Congress make clear its intent to avoid
such harm by conferring upon the SEC and other collecting agencies
sufficient discretion to keep such information confidential.
In conclusion, we believe that this legislation would further
our traditional goal of protecting investors, while at the same time
promoting technological innovation and competitive factors within the
securities industry.
We are confident that the measures proposed in
this legislation will strengthen the securities industry and contribute
to more efficient liquid and fair capital markets so as to enable them
to meet our future capital needs.
The enactment of this legislation is, of course, only an initial
step toward the achievement of the desired changes in the organization
and regulation of our securities markets.
Ahead lies the difficult and challenging task of shaping and de
veloping the new national market system.
It will take time; and each
step should be well thought out, because a misstep could entail great
expense to an industry already under strain.
The task will require the expertise and technical knowledge of
the securities industry which is intimately familiar with the problems.
The development of the new system should not proceed, except in close
consultation with the industry.
We hope that this work will progress
rapidly in a spirit of cooperation and compromise.
Department o f th e T R E A S U R Y
ISHINGTON. D C. 20220
T E L E P H O N E W 04-2041
S T A T E M E N T O F T H E H O N O R A B L E F R E D E R IC W . H IC K M A N
A SSIST A N T S E C R E T A R Y O F T H E T R E A S U R Y F O R T A X P O L I C Y
B E F O R E THE
S E N A T E S E L E C T C O M M IT T E E O N S M A L L B U S IN E S S
W A S H IN G T O N , D . C .
T H U R S D A Y , F E B R U A R Y 20, 1975
M r. C h airm an , and m em b ers of the C o m m itte e, it is a p rivilege
to appear before this Com m ittee in connection with your consideration
of the im pact of fe d e ra l taxation on sm a ll b u sin e sse s. The A d m in
istration is concerned about sm a ll b u sin e sse s and s m a ll b usiness
taxes. In both 1970 and 1971, the A d m in istration subm itted tax p ro
posals that would benefit sm a ll b u sin e sse s.
N o n e, how ever, was
enacted. We anticipate that the tax w riting com m ittees of. C o n g re ss
will this year consider various proposals to a lter the tax treatm ent
of sm all b u sin e sse s. We look forw ard to working with them on these
proposals.
This m orning I have no new A d m in istration proposals to advance.
I would like to talk with you fir s t about broader is s u e s germ ane to
tax policies toward sm a ll b u sin ess:
what is meant by the term
small b u sin ess, what the role of sm a ll b u sin e sse s is in the econom y,
and how sm a ll b u sin esses are affected by the m ajor b usiness tax
problems stem m ing from inflation and the double taxation of incom e
earned by corporations. F in a lly , I w ill com m ent on recent proposals
for tax change as they are related to sm a ll b usiness p rob lem s.
WS-229
-
2-
What Is S m all B u s in e s s ?
In 1970 the follow ing b u sin esses w ere reported on incom e tax
r e tu rn s:
P ercen t
Num ber
(m illions )
P artn ersh ip s and p ro p rie to rships
Corporations
Subchapter S
Other
Total
10.33
86 .0
1.67
0.26
1.41
14.0
2. 2
11.8
12.00
100.0
In ge n eral, partnerships and proprietorships are s m a ll and
corporations are la r g e r , as appears from the follow ing:
Table 1
Number of Firms by Size of Receipts and Business Form, 1970
(Thousands)
1 '
Size of business
; Partnerships
‘Proprietorships’
Subchapter S
corporations
Other
corporations
:
Under 25 thousand
502
7,247
58
394
25 to 50 thousand
125
1,006
25
146
50 to 100 thousand
120
661
•40
180
100 to 500 thousand
162
456
97
420
17
23
22
119
9
7
14
122
Over 5 million
__ 1
0.2
0.8
Total
936
9,400
257
500 thousand to 1 million
1 million to 5 million
21_
1,408
The following points should be noted from T able 1:
.
The m ost com m on bu sin ess form is the p rop rieto rship.
77 % of the prop rietorships had rece ip ts under $25,00 0.
.
Am ong
.
Corporations tended to be la r g e r .
The m edian Subchapter
S corporation had re ce ip ts at the low end of the $100,000
to $500, 000 c la s s .
The m edian of "other corp o ratio n s" had
receipts at the high end of the $50,000 to $100,000 c la s s .
Thus, the m edian fo r both c la s s e s of corporations is about
$ 100, 000 .
p a rtn e rsh ip s,
53.6% had rece ip ts under $2 5,00 0.
Undoubtedly, a m a jo r reason fo r the relative la rg e n e ss of co rp o
rations is that this b usiness fo rm is reso rted to as a m eans of ra isin g
capital.
The corporate fo rm is a response to the advantages of
bigness; it does not its e lf bestow b ig n e ss.
It is well known that b u sin esses which em ploy la rg e aggregations
of re so u rces--w h ich u tilize la rg e amounts of capital and em ploy la rge
numbers of w o r k e r s --c h a r a c te r is tic a lly organize as corp o ratio n s.
They do so in order to ensure a continuity of m anagem ent n e ce s s a r y
for the agglom eration of r e s o u r c e s .
It is th erefo re not su rp risin g
to find that, over a ll private se cto r a c tiv itie s , and within p a rticu la r
industry c la s s ific a tio n s , the corporate form of organization i s clo s e ly
associated with business entity s iz e . Am ong a ll entities encom passed
by the 1967 E n te rp rise S ta tistics of the Bureau of the C e n s u s , only
19%* of all entities are incorporated but they em ploy 81% of all
workers.
Within m anufacturing, which includes m ore than 50% of
all workers covered by these s ta tis tic s , the dominance of co rp o
rations is even m ore strik in g:
60% of m anufacturing b u sin esses
are incorporated,
and they em ploy 97% of a ll w orkers in
manufacturing.
The b a sic conclusion from Table 1 is that there is a pronounced
bunching of firm s in the c la s s e s with sm a lle r amounts of b usiness
receipts.
This bunching at the low end occurs no m atter whether
businesses are c la ssifie d by s a le s , em ploym ent, a s s e ts , or value
added. Beyond gen eral observations about bunching, exact sta te
ments about "s m a ll b u sin e ss" are hard to m ake. The b a sic d ifficu lty
is that there is no r e a l reason to lum p a ll " s m a ll b u sin e ss" together
and no clear c r ite r ia fo r c la s s ify in g them by s iz e .
''1 he percentage of corporations here is greater than the p e r
centage reflected in tax returns because these s ta tis tic s exclude
finance, transportation, com m un ication s, u tilitie s , and a gricu ltu re .
- 4 The d ifficu lty becom es apparent if one a sk s: How im portant is
sm a ll business in the econom y? The answer is a rb itra ry and depends
on the c u t-o ff chosen between "la r g e " and " s m a ll" , as can be seen
from the follow ing table.
Table 2
Business Receipts by Size and Business Form, 1970
(Millions of Dollars)
Size of business
receipts
Partnerships
[Proprietorships'
Subchapter S
corporations
:
Other
: corporations
Under 25 thousand
3,290
43,830
391
1,715
25 to 50 thousand
4,361
35,729
876
3,938
50 to 100 thousand
8,436
46,278
2,886
11,160
100 to 500 thousand
32,920
82,624
22,254
94,169
500 thousand to 1 mi llion
11,545
15,142
15,480
79,149
1 to 5 million
17,236
11,912
25,923
237,444
Over 5 million
12,420
2,211
8,287
1,117,213
90,209
237,727
76,097
Total
•
1,544,790
If one uses a c u t-o ff of receip ts of $500 thousand to define "sm all
b u s in e s s ", then 20.3% of the receip ts were accounted for by sm all
bu sin ess in 1971.
U sin g a c u t-o ff of $1 m illion of r e c e ip ts , sm all
b u sin e sse s" account fo r 26. 5% of re ce ip ts.
U sin g a c u t-o ff of $5
m illio n , they account for 41. 5%.
In looking at these data, it is
u sefu l to keep in mind that receip ts m ay not be used to m easu re the
contributions of firm s to our gro ss national product.
A sm all
r e ta ile r , fo r exam ple, m ay s e ll $100,000 of m erchandise which
he purchased for $90, 000.
H is g ro ss receip ts would be $100, 000,
but the "value added" by him and his em ployees, which is their
contribution to G N P , is only $10,000.
- 5 -
Analysis of sm a ll b usiness lite ratu re is com plicated by the
bewildering a rray of definitions of " s m a ll b usin ess' that are used.
Still w orse, authors frequently fa il to r e v e a l, even in th eir footnotes,
what definitions they are u sin g.
Unhappily, this is true of m uch of
the testimony presented to your C o m m itte e .
E v e n the Sm all B u s i
ness A d m in istration 's report fa ils to indicate what definitions are
being used. In fa c t, the S m all B u sin ess A d m in istration is charged
with adm inistering se v e ra l different p ro g ra m s, and there are eight
different purposes fo r which sm a ll business m ust be defined, with
different definitions fo r each.
They range in com plexity from a
simple statem ent that a sm a ll business is one which em ploys few er
than 500 persons to an extensive lis tin g of industry ca te go rie s with
corresponding em ploym ent and/or s a le s c r ite r ia .
M any
of the
definitions are ve ry generous, and, in com bination, these o verlap
ping definitions would account fo r m ore than 99% of a ll e n te rp rise s.
One may question whether that is a useful definition of " s m a ll b u si
ness" for analytic pu rp oses.
Given that a definition of "s m a ll" is to be u sed , it m ight be
well to agree on a percentile approach, u sin g , s a y , the low est 90%
of firm s cla ssifie d by value added or by em ploym ent.
A common
definition would avoid the existence of confusingly different s ta tis tic s
on "sm all b u sin e ss".. Such a definition would show som ething like
the following:
‘m
*
Table 3
Percentages of Economic Activity Accounted for by
Smallest Ninety Percent of Entities
1967 Enterprise Statistics
_
industry division
:
•
Percentage accounted for by smallest (measured by number
of pmDlovees) 90 percent of business entities
: New capital
Value added
Payrolls
Employment
outlays
All
15
11
n.a.
n.a.
■ Retail trade
26
22
n.a.
n.a.
■ Selected services
18
19
n.a.
n.a.
■ Construction
22
16
12
17
I Manufacturing
13
121
12
5
1 Wholesale trade
44
43
n.a.
n.a.
1 Mineral
27
22
26
24
1 Miscellaneous
transportation
44
41
n.a.
n.a.
Bouree : U.S. Department of Commerce, Bureau of the Census:
Statistics, Part if
1967 Enterprise
6
In su m , gen eralization s about " s m a ll b u sin e ss" are v e ry sen si
tive to the definitions used.
A wide range of different conclusions
m ay be reached by adopting different definitions. One thing, however,
is v e ry c le a r .
No m atter how s m a ll b usiness is defined, it is the
la rge agglom erations of capital which account for the great pre
ponderance of our g ro ss business product and our total employment.
B ecau se those e n terp rises em ploy such la rge amounts of capital,
their ownership m ust be distributed widely among both large and
sm a ll sto ck h old ers.
M any of the la rg e s t e n terp rises purchase from
lite r a lly tens of thousands of sm a lle r su p p lie rs, and their employees
represent the purchasing power which sustains m illio n s of small
e n te rp rise s.
T h u s, the w ell-b ein g of s m a ll b usiness is directly
related to the econom ic p rosp erity of the la r g e r co n ce rn s.
The Problem of B u sin ess T a x e s .
There are two m ajo r problem s of business taxation which give
in cre a sin g concern in the present econom ic clim a te .
Both contri
bute to the d ifficu ltie s which b usiness is c le a r ly having in financing
the new investm ent which we m ust have if we are to sustain economic
grow th.
Both a ffe ct la rge and sm a ll b u sin esses alik e , although in
different d egree.
These problem s are fir s t , the overstatem ent of
operating profits a risin g out of the effect of inflation on deprecia
tion and inventory accounting and, second, the neavy anti-investm ent
bias which flow s from the tw o -tie r corporate tax sy ste m .
O verstatem ent of Operating P r o fits .
There are two m ajo r elem ents which substantially overstate
operating p rofits in periods of inflation.
They are inventories and
depreciation.
The inventory situation m ay be illu strated by assum in g a com
pany that n orm ally m aintains an inventory of 100^000 w idgets.
If
inflation causes the p rice of widgets to in crea se by $1, from $2
to $3, under traditional F I F O accounting the $100,000 in crease in
the value of the inventories is reported as p r o fits, even though the
com pany is no better off in rea l term s than it was before the in
flatio n .
E co n o m ists have long recognized that this in crea se is not
a true "p ro fit" and the Departm ent of C o m m e rce national income
accounts have, from the inception of those accounts in the 1940's,
separated it from profit fig u re s .
F o r 3 0 y e a r s , business taxpayers have been perm itted to ex
clude these amounts from taxable incom e by using L I F O accounting,
but only if they reported on the sam e b a sis to their shareholders
7
and the public. M any la rg e r bu sin esses have p referred to pay higher
taxes rather than rep ort le s s e r earnings to th eir
sh areh old ers.
Other com panies, both la rg e and s m a ll, concluded that in their
particular ca se s the dollar advantages of L I F O were not su fficien t
to justify the som ewhat m ore com plicated procedures it required.
With the rapid inflation which has occurred in the la s t y e a r , how ever,
the penalty in in crea se d taxes on unreal incom e has becom e so great
that there has been a m a jo r shift to L I F O accounting.
This is long
overdue.
It is unfortunate that it has taken the b usiness world and
the accounting p rofession so long to get th ere.
A sim ila r situation e x ists with resp ect to depreciation.
In a
period of rapid in flation , depreciation deductions based on h is to r i
cal cost resu lt in reporting as incom e amounts which do not r e p r e
sent an in crease in wealth but which are required m e re ly to stay
even. In a period of constant and substantial inflation, this subject
urgently needs re -e x am in a tio n .
Under cu rren t tax and accounting
rules, business m anagem ent is pow erless to deal e ffe ctiv e ly with
this problem .
The effects of the inventory and depreciation adjustm ents produce
dramatic overstatem ent of r e a l incom e: N onfinancial corporations
reported profits after taxes in 1974 of $6 5 .5 billion as com pared to
$38.2 billion in 1965, an apparent 71% in c r e a s e .
But when depre
ciation is calculated on a b a sis that provides a m ore r e a lis tic
accounting fo r the current value of the capital used in production
and when the e ffe ct of inflation on inventory values is elim inated,
after-tax profits actu ally declined by 50% from $3 7 .0 billion in 1965
to $20.6 billion in 1974.
A m ajo r fa cto r contributing to this decline
is that incom e taxes w ere payable on these fictitio u s elem ents of
profits.
That resu lted in a r is e in the effective tax rate on true
profits from about 43% in 1965 to 69% in 1974.
T h u s, a r e a lis tic
calculation shows that the sharp r is e in reported p rofits was an
optical illusion caused by inflation.
Some point out that, fo r the equity owners of corp o ratio n s,
the adverse e ffe ct of these item s is offset by the fa ct that if the
corporation has borrow ed m oney, inflation perm its it to be repaid
with devalued d o lla rs.
T his is e sse n tia lly the sam e thing that has
been happening to m illio n s of hom eow ners.
Inflation has caused the
value of their homes and their incom es to r is e v e ry sig n ifica n tly ,
while the dollar value of th eir m ortgage indebtedness stays constant.
As a resu lt, they have had a v e ry r e a l and m ajor in crea se in their
total wealth. Inflation h a s, in e ffe c t, caused a redistribution of
wealth from cred ito rs to d ebtors.
Our tax system does not tax that
8
in c r e a s e , how ever, until the home is so ld , and the m ortgage lender
never gets a deduction fo r the lo ss in value of the m oney which he
lent. The ta x a tio n --o r n o n ta xa tio n --o f these v e ry rea le co n o m ic gains
and lo sse s introduces m ajor distortions in a tim e of m ajor inflation.
H ow ever, in the case of business taxation, it is n e ce ssa ry to
separate what m ight be called the "fin a n cia l" gains and lo s s e s from
the "op eratin g" p r o fits.
The capital required to run a business is
supplied by both stockholders and le n d e rs.
In the long run, if a
m anufacturing b u sin e ss, fo r exam ple, is to be healthy, its opera
tio n s --th e m anufacture and sale of p r o d u cts--m u st produce a profit
su fficien t to com pensate both shareh olders and lenders for the capi
tal which they have supplied.
T h u s, in a period of in flation , if we
w ish to see whether business is healthy we m ust restate the opera
ting p rofits to r e fle c t the fa ct that the co sts asso cia ted with depre
ciation and inventories a re , in fa c t, m uch greater than reflected
under conventional fin an cial accounting p rin cip le s. If we are looking
m ore n arrow ly to see whether the equity owners of the businesses
are better or w orse o ff, then we should a lso take into account the
degree to which they have profited, like the hom eow ner, by a re
distribution fro m wealth from cred ito rs to debtors. The point is,
how ever, that we should look at each of these elem ents separately
and should try to co r re c t for each to the extent p r a c tic a l. A t the
presen t tim e our overrid in g concern is with the operating profits,
fo r in the long run they m ake the differen ce between fin an cial health
and fin an cial s ic k n e s s . Inflation is c le a r ly causin g operating profits
to be overstated .
That overstatem ent has s e v e ra l n on -tax conse
quences. To the extent that m anagem ent r e lie s on accounting data
which do not r e fle c t these r e a l c o s ts , bad m anagem ent decisions,
including un d erp ricin g, are lik e ly to be m ade. F u r th e r , the public
is le ft with the erroneous im p ressio n that b usiness is p rofitin g from
inflation when in fa c t it is a m ajo r v ic tim . That in turn leads to
fu rther wage and p rice dem ands, which further compounds both
inflation and the business problem .
F r o m a tax point of view , the overstatem ent of p rofits results
in overtaxation, i . e . , we are taxing m ore incom e than a ctu ally exists
in the sy ste m as a whole*
That is not tru e , at le a st on a current
b a s is , with re sp e ct to the "fin a n cia l" p r o fits, because the increased
wealth which goes to debtors is e xa ctly offset by the lo s s e s of cred i
to r s , and neither is taken into account cu rren tly for tax purposes.
On a periodic b a s is , there m ay also be overtaxation of the financial
profits if stock which benefits from the devaluation of debt is sold
or otherw ise disposed of at a gain, as the gain w ill be taxed but
the offsettin g lo ss to others is not allowed as a deduction to them.
Since, in our econom y, corporate p rofits are a m a jo r sou rce of
funds for new investm ent in productive ca p a city, a ll of this has grave
implications for investm ent and grow th.
That is perhaps seen b est
in the figures for undistributed profits of nonfinancial corpo ratio n s,
restated on the sam e b a sis to account r e a lis tic a lly fo r inventories
and depreciation.
It is the undistributed profits that corporations
have left to fund additional new ca p acity (as distinguished from the
replacement of existin g cap acity).
In 1965, there were $20 b illion
of undistributed p ro fits.
B y 19 73--after eight y ears in which r e a l
GNP (the rest of the econom y) grew 36% --the undistributed profits
of nonfinancial corporations had dropped to $6 b illio n . And for 1974,
our prelim inary estim ate is that the figu re for undistributed profits
is a minus of n early $10 b illio n . That m eans that there was not n early
enough even to rep lace existin g ca p a city, and nothing to finance
investment in additional new ca p a city.
The following chart shows with d r a m a tic--a n d frig h te n in g -clarity the true state of a ffa ir s .
UNDISTRIBUTED
PROFITS O F
NONFINANCIAL CORPORATIONS
%
A S A
PERCENT OF
GNP, 1946-74
This problem of overstatem ent of earnings and the overtaxation
which results from it is com m on to both la rge and s m a ll b u sin e sse s.
However, the low er the tax rate the le s s the problem . T h u s, e n ter
prises which pay little or no tax at the corporate le ve l are the le a st
affected, and to that extent there is le s s overtaxation of sm a ll
businesses than there is of la r g e r b u sin e sse s.
It is also true that
10
-
the overtaxation elem ent in the ca se of inventories m ay be corrected
by any taxpayer who chooses to e lect L I F O , but taxpayers can do
nothing about the understatem ent of depreciation.
It is in general
the case that sm a lle r com panies have a la rg e r percentage of their
total investm ent in inventories and a le s s e r percentage in depre
ciable a sse ts than do la r g e r com p an ies.
T hus, sm a lle r businesses
tend to be le s s a d versely affected than la rg e r com panies. It is true
that use of U F O accounting presents extra com plications which can
in som e ca se s be burdensom e fo r sm a lle r com p an ies, and the
T re a su ry is working on proposals for a som ewhat sim p ler system.
In su m , how ever, the overstatem ent of profits caused by in
flation is a problem for all b u sin e ss.
While s m a ll business tends
to be somewhat le s s affected d ire ctly , the prosp erity of smaller
firm s is inextricable from the prosp erity of la rg e r fir m s , and the
overstatem ent and overtaxation of operating profits is a m ajor threat
to all business and, in the end, to all of u s.
A n ti-In vestm en t B ia s :
The
T w o -T ie r
Corporate
Tax System .
Our tw o-tiered system of corporate taxation in which income
is taxed once at the corporate le ve l and again at the shareholder
le v e l d iscrim in ates against corporate in vestors gen erally and small
equity in vestors p a rticu la rly .
A.n individual in the 20% tax bracket
in effect pays 48% at the corporate le ve l and then an additional 20%
on what is left for a total tax burden of 58. 4%, or n e arly three times
his individual rate.
If the individual is in the 70% b rack et, he pays
48% at the corporate le ve l and then an additional 70% on what is left.
H is total tax burden is 84.4%. If the sam e business could be conducted
in a noncorporate fo r m , the in vestors would pay only 20% and 70%
re sp e ctiv e ly .
Our tax system puts a great penalty on com panies that must
in corp orate.
Com panies that do incorporate are those that have
la rge capital needs that m ust be raise d from m any p erson s.
We
should keep in mind that our system of taxation b ears m ore heavily
on corporations than do the tax system s of alm ost ev ery other major
in du strial nation.
In the la st few y e a rs our m ajor trading partners
have la r g e ly elim inated the c la s s ic a l tw o-tiered system of corporate
taxation. Through a v a rie ty of m echan ism s they have adopted systems
of "in tegratin g" the personal and individual incom e taxes so that
the double taxation elem ent is ra d ica lly le ssen e d .
The problem of double taxation is substantially le s s for small
business than fo r large b u sin e ss.
M ost of what the public thinks
of as sm a ll business either pays no second tier tax at all or pays
-
11
a second tier tax at a substantially low er effective rate than la rg e r
businesses. The reasons why that is so I sh a ll d iscu ss in a m om ent.
But here again, sm a ll business has a substantial stake in the
over-all problem , for the capital investm ents of the la r g e r firm s
account for the bulk of the capital goods output, and their capital
raising difficu lties becom e everybody's d ifficu ltie s with alarm in g
speed.
The Taxation of Sm all B u sin e ss: How Much Is It F a v o red .
Estim ates of fed eral incom e taxes paid by incorporated and
unincorporated business fir m s in 1971, are shown in Table 4.
Of
the $36 billion of incom e taxes estim ated to have been paid by U . S.
businesses in 1970, $3 0 billion was paid by corporations other than
Subchapter S corporations.
The rem aining $6 b illion was paid by
sole proprietorships, p artn ersh ip s, and Subchapter S corporations.
O verall, about 21% of the business taxes com e from b u sin esses
with receipts of le s s than one m illion d o lla rs. Such b usiness account
for most of the taxes paid by unincorporated b u sin e sse s, but le s s
than half of the taxes paid by Subchapter S corporations and only
9% of the taxes paid by other corporations.
Table 4
Taxes
by Size
of
on Incomes
Business
(Millions
Size o f b u s i n e s s
:
All
receipts
:
returns
of
Receipts
:Sole
Businesses,
and
Business
Form,
1971
of Dollars)
propri-
: etorships
1P a r t n e r s h i p s
:S u b c h a p t e r
S:
Other
:c o r p o r a t i o n s :c o r p o r a t i o n s
All "sma l l "
businesses
1/
7,607
4,137
701
Under 25 t h o u s a n d
850
726
17
2/
107
25 to 50 t h o u s a n d
1,060
905
41
2/
114
50 to 100 t h o u s a n d
1,443
1,119
1 01
5
218
100 to 5 0 0 t h o u s a n d
2,953
1,277
427
83
1,166
1,301
110
117
61
1,013
28,333
89
443
198
27,603
35,940
4,226
1,144
349
1 51
2,618
500 t h o u s a n d t o
1 million
Large" b u s i n e s s e s
1/
Total
~
^
V
millicjHj a n d t h e
yl m i l l i o n o r m o r e ;
Not a v a i l a b l e .
6*
t>maix
consist
Details m a y
not
of
those
"large"
add
to
businesses with
consist
totals
of
business
those wi t h
because
of
receipts
business
rounding.
of
30,221
less
receipts
of
12
-
Under existin g system sm a ll b u sin esses do not pay m ore taxes
than la rg e r b u sin e sse s. On the co n tra ry , they pay substantially
le s s . T here are se v e ra l reason s for that.
In the fir s t p la ce , m ost sm a ll b u sin e sse s, as we have seen,
are not incorporated. T h u s, their profits are subject to tax only
at the individual le v e l, as distinguished from corporate incom e,
which is taxed at both the corporate and individual le v e l.
In the second p la ce , about half of a ll corporations have no
incom e subject to ta x. In som e ca se s that is because they have
been unprofitable. But the absence of taxable incom e is in v e ry
la rge part attributable to two further fa c ts : F i r s t , sm a ll clo se ly
held corporations frequently m anage to pay out m ost of their income
in the form of deductible wages or bonuses to their ow ner-m anagers,
so that the incom e is sim p ly taxed once at the individual le v e l.
Second, sm a ll clo se ly held corporations m ay elect to be taxed
under Subchapter S of the Internal Revenue C od e, in which case all
of th eir incom e is taxed d ire ctly to the owners without any tax at
the corporate le v e l--m u c h in the sam e way that incom e is taxed
to an unincorporated business operating as a partnership.
F in a lly , fo r corporations which have incom e sub ject to tax
up to as m uch as $100,000 to $200,000, the corporate surtax
exem ption substantially le sse n s the effective rate of tax. That
can be seen from Table 5.
H H
Table
The
Progressivity
Income
Corporation
income
class
Tax
5
of
the C o r p o ration
for Small Corporations
Effective
1/
rate
of
0
- 25,000
20.4%
25.000
- 50,000
27.5
50.000
-
100,000
36.6
100.000
- 250,000
41.7
250.000
- $ million
44.2
$
over
All
returns
income
1/
Corporations
2/
surtax rates.
To t a l tax di v i d e d
credit,
but
are
2/
»
44.4
$ m i l l i o n or
with
tax
.......... . p e r c e n t .......... ,
(dollars)
subject
to
classified
before
by
total
the
(including alternative
tax
42.0%
by amount
income.
of
income
"Tax"
foreign tax
credit.
tax),
the
after
net
is
subject
liability
"Income"
operating
is
to
t a x at
after
the
income
loss
and
normal
t a x and
investment
subject
dividend
to
tax
deductions.
/
- 13 In addition to the general fa cto rs describ ed above, there are
a number of m ore sp e cia lize d provisions of the Internal Revenue Code
that were enacted to benefit sm a ll b u sin e ss.
They are sum m arized
in the Appendix.
It is very im portant to rem em ber alw ays that b u sin esses are
owned by people, and that it is u ltim ately people who b ear the ta x e s .
Thus, it is relevant to inquire what kind of people in fa ct own sm a ll
businesses.
When we are talking about potential tax benefits for
corporations with taxable incom e of $25, 000, $5 0,00 0, or $100,000,
we should keep in mind that those com panies tend to be owned by
persons who, by m ost of our stan dard s, are considered wealthy.
They tend to be clo se ly held, and in m any, if not m o st, c a s e s the
income which we are talking about is only what rem ain s after the
owner-m anagers have paid th em selves sa la r ie s and bonuses"! "Take,
for exam ple, a sm a ll r e ta il corporation m anaged by its owner.
Assume that he pays h im se lf sa la r y and bonus of $60, 000 and that
the corporation after deducting that amount has taxable incom e of
$25, 000.
That $25, 000 is , in e ffe c t, an amount saved by the owner.
It is presently taxed at a 22% ra te , even though his personal m a r
ginal rate is probably (depending on his exem ptions and deductions)
50% or above and would be substantially higher if the $25,000 were
also included in his in com e.
The right to save $25,000 a year at
a 22% tax rate is a v e ry m ajo r tax benefit to persons in substantial
tax b ra ck ets--w h ich is where m ost owners of such corporations a re .
Ordinary taxpayers pay higher tax rates than 22% when their taxable
income exceeds only $12, 000.
Table 6 indicates c le a r ly , though somewhat in com p letely, the
degree to which sm a ll business is owned by persons in re la tiv e ly
high-income c la s s e s .
Table
Percentage
Distributions
by Adju s t e d
6
of
Income
from Different
Gross
Income
Class
of
Form.s o f B u s i n e s s
Recipient,
Income
1970
from:
Subchapter
Proprietorships
Partnerships
jj
S
corporations
Other
corporations
Item
Percent
within
class
Amount
of
business
income
Percent
class
Percent
Cumul.
within
percent
§p e r c e n t ’
class‘
$10.5
billion
-7.0%
-7.0%
within
jpercent
Cumul.
Percent
Cumul.
within
[percent
class
from
form
Adjusted gross
Cumul.
$30.6
billion
$1.8
billion
$16.0
billion
7.2%
7.2%
income
of r e c i p i e n t :
Under 5 t h o u s a n d
3.8%
3.8%
-13.6%
-13.6%
5 to 10 t h o u s a n d
16.8
20.6
9.7
2 .7
2.1
-11.5
14.0
21.2
10 to 2 0 t h o u s a n d
27.7
48.3
18 . 7
21.4
13.0
1 .5
16.2
37.4
20 to 5 0 t h o u s a n d
34.8
83.1
41.5
62.9
40.1
41.6
24.3
61.7
50 t h o u s a n d a n d
16.9
100.0
37.1
100.0
58.4
100.0
38.3
100.0
over
14 We have no tax data with resp ect to the incom es of owners of small
corporations ge n e ra lly, but we can te ll a great deal about that subject
by looking at data with resp ect to Subchapter S corpo ratio n s. Typi
c a lly , those are re la tiv e ly prosperous sm a ll corporations in the sense
that they have sign ifican t earnings that rem ain after the payment
of sa la r ie s and bon uses.
The table shows that the great preponder
ance of incom e from such corporations goes to persons in income
c la s s e s of $20, 000 and above, and nearly 60% of that goes to persons
with adjusted gro ss incom es of $50, 000 or m o re. It is notable that
stockholders of Subchapter S corporations are d istin ctly m ore affluent
than stockholders of "gian t" publicly held corpo ratio n s, reflected in
the colum ns labeled "corporate d istrib u tio n s".
Partnerships are
functionally v e ry m uch like Subchapter S corporations and similar
patterns of incom e distribution m ay be observed th ere. A great deal
of the dividends of m ajor corporations go to low and m iddle income
persons in d ire ctly through pension funds and life in su ran ce. Those
flow s cannot be traced to individuals or adjusted gro ss incom e c la s s i
fica tio n s, and are therefore not reflected in the colum ns entitled
"corporate distribution s. "
If they were re fle cte d , a significantly
la rg e r percentage of the total distributions would go to low er income
persons than is indicated. Y et notwithstanding this m ajor om ission,
a la r g e r percentage of the incom e flow s from these corporations to
persons with adjusted gro ss incom es below $10,000 than in the case
of the incom e flow s of any of the sm a ll b usiness catego ries shown
on the table.
Is Sm all B u sin ess D e clin in g ?
It is often contended that sm a ll business is weak, unprofitable,
and lackin g a c c e s s to capital funds. H ow ever, the evidence suggests
that sm a ll business is doing re la tiv e ly w ell.
Two m easu res of how w ell b usiness is doing are the number of
b usiness incorporations and the failu re ra te .
In .1973, there were
330, 000 new in corporations, an in crease of 4% over the previous
y ear and 75% over the number of new incorporations in 1963.
(Appendix page 2. )
The S m a ll B u sin ess Adm inistration has estim ated that the annual
failu re rate for 1974 w ill reach 40 per 10, 000 fir m s .
It is true
that the failu re rate for b u sin esses gen erally r is e s during periods
of econom ic downturn, and we can expect the rate for 1974 to be
higher than the 3 6 .4 per 10,000 firm s in 1973, the low est level in
the la st 20 y e a r s .
Even a rate of 40 per 10, 000 firm s w ill be lower
than the rate for 15 of the la st 20 y e a r s , and it is considerably
low er than the high of 64. 4 -reached in 1961, a rece ssio n y e a r.
An important m easu re of the profitab ility of sm a ll corporations
is the rate of return on sto ck h old ers’ equity.
The F T C com piles
data on rates of return from m anufacturing corp o ratio n s. (Appendix
page 3. )
F ro m 1955 to 1964, the rate of retu rn , whether before
or after taxes, was low er fo r m anufacturing corporations with a sse ts
under $1 m illion than fo r a ll m anufacturing corp o ratio n s.
The
relationship reversed from 1965 through 1969,
The rate of return
earned by all m anufacturing corporations was below that earned by
manufacturing corporations with a sse ts under $1 m illio n .
In 1970
and 1971, the rate of return fo r sm a ll corporations fe ll below that
of all m anufacturing corp o ratio n s, but for 1972 through 1974 the rate
of return for sm a ll corporations was again higher than the o v e r -a ll
return.
Credit is available to sm a ll business and at reasonable co st.
In recent years the debt-equity ratio of m anufacturing corporations
has increased sig n ifica n tly .
H ow ever, in a ll y e a r s , the ratio for
small m anufacturing corporations was m uch higher than that of all
manufacturing corp o ratio n s.
In 1973, sm a ll m anufacturing corp o
rations had a debt-equity ratio of 93.6% while the debt-equity ratio
of all corporations was only 62.1% .
The com position of debt,
however, d iffers con sid erably between sm a ll and all m anufacturing
corporations.
S m a ll m anufacturing corporations have greater
reliance on non-bank sou rces and on sh o rt-te rm debt.
Debt Ratios for Manufacturing Corporations,
Fourth Quarter 1973
All
Corporations
Type of
Debt
Small
Corporations 1/
Short-term debt:
Bank
Other
Total
15.4%
40.4
55.8
9.3%
20.0
29.3
Long-term debt :
Bank
Other
Total
14.6
23.2
37.8
8.3
24.5
32.8
Combined long and
short term debt:
Bank
Other
Total
30.0
63.6
93.6
17.6
44.5
62.1
Assets under $1 m i l li o n .
%
- 16 A v a ila b ility of cred it im p lies little about its co st.
It is often
said that the cost of cred it is ve ry high fo r s m a ll b u sin e ss. Though
it is gen erally true that the bank rate on business loans varies
in v e rse ly with the size of the loan, this differen tial has tended to
narrow over the y e a r s . In 1967 the average bank rate on short-term
business loans of $1 m illion or m ore was 5.8% , and the rate on
sh o rt-te rm loans of $1,000 to $10,000 was 6.6% , or 14% higher
than the rate onloans of $1 m illio n or m o re. B y 1974, the differential
between sm a ll and la rge business sh o rt-te rm loans has been almost
elim inated.
In the ca se of lo n g-term lo a n s, the differen tial was
between 5.8% and 6.4% in 1967, a 10% d ifferen tial. In 1974 the
d ifferen tial has decreased to 6%, i . e . , 10. 7% com pared with 10.1%.
Bank Rates on Business Loans,
1967 and 1974
1967
1974
All short-term loans
6.0%
9.9%
Loans of:
$ 1,000 to $10,000
$ 10,000 to $100,000
$100,000 to $500,000
$500,000 to $1 million
$1 million and over
6.6
6.5
6.2
6.0
5.8
9.9
10.1
10.3
10.1
9.8
All long-term loans
5.9
10.2
Loans of:
$ 1,000 to $10,000
$ 10,000 to $100,000
$100,000 to $500,000
$500,000 to $1 million
$1 million and over
6.4
6.5
6.2
6.1
5.8
10.7
10.4
10.5
10.2
10.1
- 17 Proposals F o r Tax C h a n ge .
This Com m ittee has heard a number of proposals fo r tax changes
aimed at helping sm a ll b u sin e ss.
Today I have no Adm inistration
proposals to present to you.
I would, how ever, like to d iscu ss
some of the proposals that have been made to this C o m m itte e.
Increase In The Surtax E xem p tion .
A number of proposals have been made to in crea se the co rp o
rate surtax exem ption from $25, 000 to $50, 000 or $100, 000.
The
tax bill finished yesterd ay by the House W ays and M eans C o m m itee would in crease the surtax exem ption to $50, 000. It is estim ated
that this change w ill reduce revenues by $ 1 .2 b illion a y e a r .
Of
the total business tax r e lie f approved by the Com m ittee y e ste rd a y ,
the increase in the su rtax exem ption rep resen ts on e-th ird .
The
increase in the su rtax w ill provide no r e lie f to sm a ll corporations
with no taxable incom e or with taxable incom e of le s s than $25, 000.
Only 10. 5% of a ll corporations w ill re ce iv e any tax reduction. These
corporations represent only 1.3% of all b usiness e n tities. And only
a very sm all portion of these w ill get m ajo r benefits from in crea sin g
the surtax exem ption.
The m ajor b e n e ficia rie s are the owners of
those corporations that have taxable incom es in range from $25,000
to about $200, 000.
Below that incom e level there is no benefit,
and above that le ve l the percentage reduction in the effe ctive tax rate
is attractive but not m unificent. T hus, assum in g a corporation with
no credits:
Taxable Income
P rese n t
Tax
$ 25, 000
50,000
75,000
100.000
150,000
200,000
$ 5,500
17,500
29,500
41,500
65, 500
89, 500
Tax with
$50, 000
Surtax
Exem ption
$ 5, 500
11,000
25,000
3 5, 000
59,000
83,000
P ercen tage
Reduction
0
37.1
22.0
15. 7
9. 9
7.3
18 In crease In Investm ent C r e d it.
•
The W ays and M eans Com m ittee b ill in cre a se s the investment
tax cred it to 10%.
It has been pointed out that m ost of the dollar
benefits from that in crea se w ill go to la rg e r b u sin e sse s, and some
of your w itnesses have recom m ended that the cred it fo r sm a ll busi
n e sse s be se t at a higher rate than 10%, perhaps 20%. In general,
if sm a ll b u sin e sse s--h o w e v e r d e fin e d --g e t, s a y , 20% of the benefit
from the in crea se in the tax cre d it, it is because they make only
20% of the investm ent.
If we are to give an incentive for investment
in new m achin ery and we wish to make it as effective as possible
we should give it where the investm ents are in fact m ade. There
is no reason to favor additional investm ent made by sm a ll business
over that made by la rg e b u sin e sse s. There is one feature of the
present investm ent tax cr e d it, the net incom e lim itation , which does
tend to penalize sm a ll b u sin e sse s. The A d m inistration recommended
la st October that this net incom e lim itation be lib e ra lize d as part
of a general restru ctu rin g of the investm ent tax cre d it. We still
support this change, and we hope that the tax w riting com m ittees
w ill be able to turn to this proposal la te r this y e a r.
Investm ent C re d it fo r U se d P ro p e rty .
The W ays and M eans in cre a se s this investm ent tax cred it for
used property from $50, 000 to $75,000 per y e a r .
T h is change is
ge n era lly considered a sm a ll b usiness m easu re because used property
is purchased m ore by sm a ll business than by la r g e . T his change
w ill co st $80 m illio n per y e a r .
We opposed the change before the
W ays and M eans Com m ittee because it is an in efficien t way to aid
sm a ll bu sin ess or to stim ulate investm ent.
A c tu a lly , used property
alread y benefits fro m the tax cred it for new property. If a new
m achine co sts le s s because the investm ent cred it provides a 10%
discount, the p rice of used m achines w ill be correspondingly reduced.
In sh o rt, thé cred it is capitalized in the value of used m achinery.
P rovid in g a cred it fo r both new and used property only encourages
the churning of property so that additional tax cred its can b e "earned.
A ccum ulated E a r n in g s .
Another proposal which your Com m ittee has considered is in
c r e a sin g the accum ulated earnings cred it from $100,000 to $150, 000.
Those supporting this change seem to suggest that it is n ecessary
if sm a ll b u sin esses are to rein vest their e arn in gs.
That is not
c o r r e c t.
The accum ulated earnings tax is im posed only on corpo
rations whose accum ulations exceed the reasonable needs of their
19 business, including reasonably anticipated future n eed s.
T h u s, this
tax does not now ham per rein vestm en t.
M o re o v e r, as a p ra ctica l
matter, revenue agents do not ordin arily a s s e r t the tax unless they
observe amounts of liquid a sse ts that are v e ry large in relation to
the size of the b u sin e ss.
A s we all know, this is not the situation
with m ost sm a ll b u sin e sse s, ce rtain ly not with those which m e rit
the concern of this Co m m ittee.
Net Operating L o s s e s .
A s you are aw are, the House W ays and M eans Com m ittee
recently considered and rejected certain proposals to alter the
period to which net operating lo s s e s m ay be ca rrie d .
These p ro
posals were lim ited to the lo s s e s of corporations and thus would
have been of no benefit to that v a st m a jo rity of sm a ll b usin esses
which are unincorporated.
The T re a su ry opposed those proposals
on the ground that they would p r im a rily have advanced the sp e cia l
interest of a few la rge corpo ratio n s.
If there are to be changes
in the carry o v er period, we agree that la rg e corporations should
not be treated m ore favo rab ly than sm a ll b u sin e sse s.
M o re o v er,
we think that in cre a sin g the carryfo rw ard period, e s p e cia lly in
the case of fled glin g b u sin e ss, b ears ca re fu l study.
Conclusion.
I appreciate the opportunity to appear before your Com m ittee
and to discu ss with you this v e ry im portant su b ject.
I hope that
my comments w ill be helpful in your an alysis of the problem , and
look forward to working with you.
o 0 o
A P P E N D IX
P ro visio n s C o n fe rrin g Special Benefits
on Sm all B u sin esse s
(1) Surtax ,f.x.em P ^ Qn*
Corporations pay tax at a rate of 22% on
the fir s t $25, 0OO of taxable incom e, 48% on taxable incom e in excess
of $25, 000.
This resu lts in an estim ated tax expenditure of $3. 6 bil
lion fo r fis c a l 1975. Section 11(d).
(2) Additional fir s t -y e a r dep reciation.
A taxpayer can deduct, in
addition to norm al depreciation, 20% of the cost of up to $10,000
worth of depreciable property ($20, 000 in the case of a husband and
wife filin g a joint return) in the fir s t y e a r in which such property may
be depreciated. Section 179.
(3) Redem ptions to pay death ta x e s. If a decedent's stock in a corporation has a value g re ate r than either 35% of his gro ss estate or
50% of his taxable estate, the corporation can redeem enough stock to
pay all state and fed eral estate taxes and to pay funeral and adminis
tration exp en ses.
This redemption w ill be treated as a sale (usually
producing little gain because the b asis of the stock is the value at the
decedent's death) rather than as a dividend. Section 303.
(4) Gains and lo sse s on sm a ll bu sin ess investm ent company stock.
Any gain on the disposition of sm a ll business investm ent company stock
is taxed at capital gain rates, while lo ss on such stock is treated much
m ore favorably than lo ss on the sale of other capital a s s e ts : (a) 100%
of the amount of such a lo ss (as opposed to 50% fo r a lo n g-term cap
ital loss) is deductible against ordinary incom e; and (b) such a loss
m ay be deducted without regard to any lim it (lim it of $1, 000 for a long
term capital lo s s ). Sections 1242-1243.
(5) Gains and lo sse s on sm a ll business sto ck .
There is sim ilar
capital gain/ordinary lo ss treatm ent up to $25, 000 of lo ss annually
($50, 000 in the case of a husband and wife filin g a joint return) for
the stock of sm a ll dom estic corporations. Section 1244.
(3) Subchapter S - - s m a ll business corpo ratio n s. A corporation with
10 or few er shareholders (a husband and wife owning stock jointly count
as a sin gle shareholder) m ay elect to be exem pt from the corporate
tax; instead, profits and lo sse s flow through to the sh areh old ers. Sec
tions 1371-1377.
(7) Extension of time fo r paying estate taxes.
If either 35% of the
value of the gro ss estate or 50% of the value of the taxable estate con
s is ts of an in terest in a clo se ly held b u sin ess, the tim e fo r paying
the estate tax m ay be extended. Sectio n 6166.
2
Business Incorporations and Failures
Year
:
:
New incorporations
•
Failure annual rate
:(number per 10,000 concerns)
1954
117,411
42.0
1955
139,915
41.6
1956
141,163
48.0
1957
137,112
p i
1958
150,781
55.9
1959
193,067
51.8
1960
182,713
57.0
1961
181,535
64.4
1962
182,057
60.8
1963
186,404
56.3
1964
197,724
53.2
1965
203,897
53.3
1966
200,010
51.6
1967
206,569
49.0
1968
233,635
38.6
1969
274,267
37.3
1970
266,086
43.8
1971
287,547
41.7
1972
316,601
38.3
1973
329,562
36.4
Office of the Secretary of the Treasury
Office of Tax Analysis
Source:
Survey of Current Business; compiled by Dun
and Bradstreet.
3
Annual Rates of Profit on Stockholders' Equity for Manufacturing Corporations
By Asset Size 1/(percent)
: All manufacturing corporations
rBefore Federal „: After Federal
: income tax
: income tax
Year
Manufacturing corporations with
assets under $1 million
Before Federal : After Federal
income tax
•
income tax
1955
23.8%
12.5%
10.7%
1956
22.6
12.3
19.9
11.8
1957
20.0
11.0
14.7
7.8
1958
15.4
8.6
8.0
4.5
1959
18.9
10.4
15.7
8.3
1960
16.7
9.2
12.2
5.6
1961
15.9
8.8
12.1
5.6
1962
17.6
9.8
15.3
8.4
1963
18.4
10.3
15.3
8.2
1964
19.8
11.6
18.7
11.6
1965
21.9
13.0
22.4
1966
22.5
13.5
26.9
17.5
1967
19.3
11.7
22.1
13.7
1968
20.8
12.1
21.8
13.2
1969
20.1
11.5
22.0
12.7
1970
15.7
9.3
14.8
7.6
1971
16.5
9.7
15.0
7.4
1972
18.4
10.6
22.7
14.1
1973
21.8
13.1
26.7
16 .8
24.6
15.5
33.2
21.8
1974
2/
5. 51
.
14.3
----- —
Office of the Secretary of the Treasury
Office of Tax Analysis
1 / Simple average of the four quarters.
"2/ Simple average of first three quarters.
|
Source: FTC-SEC, Quarterly Financial Report for Manufacturing Corpora-^--
KHINGTON, O X . 2022Û
T E LE P H O N E W &4-2041
February 19, 1975
FOR RELEASE AT 6:30 P.M.
RESULTS OF AUCTION OF 18-MONTH AND 2-YEAR TREASURY NOTES
The Treasury has accepted $1.5 billion of the $2.8 billion of tenders for
the 18-month notes and $1.5 billion of the $3.0 billion of tenders for the
2-year notes received from the public for the notes auctioned today.
The range of accepted competitive bids was as follows:
18-month notes
Lowest yield
Highest yield
Average yield
5.88%
5.98%
5.94%
2-year notes
5.97%
6 . 12%
6.09%
The interest rate on the 18-month notes will be 5-7/8%. The interest r^te
on the 2-year notes will be
6 %. At those rates, the above yields result
in the following prices:
5-7/8% 18-month notes
Low-yield price
High-yield price
Average-yield price
99.993
99.852
99.908
6 % 2-year notes
100.056
99.778
99.834
The $1.5 billion of accepted tenders for the 18-month notes includes 86$
of the amount of notes bid for at the highest yield and $0.2 billion of
noncompetitive tenders from the public accepted at the average yield.
The $1.5 billion of accepted tenders for the 2-year notes includes 83%
°f the amount of notes bid for at the highest yield and $0.2 billion of
noncompetitive tenders from the public accepted at the average yield.
In addition, $0.15 billion of tenders for the 18-month notes and $0.15
billion of tenders for the 2-year notes were accepted at the average-yield pr
from Government accounts and from Federal Reserve Banks for themselves and as
agents of foreign and international monetary authorities.
X. ?
Department
oftheTREASURY
(À
STATEMENT OF
T H E H O N O R A B L E C H A R L E S A. C O O P E R
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
THE S U B C O M M I T T E E ON M U L T I N A T I O N A L C O R P O R A T I O N S
OF THE
SENATE' F O R E I G N R E L A T I O N S C O M M I T T E E
W A S H I N G T O N , D.C.,
F E B R U A R Y 20, 1 9 7 5
BEFORE
Mr.
discuss
Chairman,
the
you
financial
Secretary Kissinger
I am p l e a s e d
all
to
most
to
focus
a definition
of
U.S.
to y o ur
of
my
the
of
aspects
participation
U.S.
Interests
The
must
N S - 2 30
of
a
conviction
join
their
the
President's
establishment
strong
in
decision
that
energy
in
proposed
by
and
on
of
to
the
economic
fund.
main
of
are
the
areas:
fund;
essential
and budgetary
fund.
Fund
put
forward
solidarity
a creative
the
three
legislative
in t h e
and
I am sure y o u
features
to b e
the world's
and
to
in.establishment
Solidarity
financial
together
common
fund;
you
last November,
request.
I consider
the
first
Simon
general
interests
of what
U.S.
fund,
remarks, b r i e f l y
characteristics
of
I appear before
and Secretary
like
a description
that
solidarity
respond
familiar with
I would
asked
major
and
proposals
for
fund
reflected
the
oil
importing
countries
coordinated
problems.
response
Cooperation
in
to
2
finance
is
progress
Energy
an e s s e n t i a l
already
Agency,
emergency
oil
the
of
areas
programs
new
reducing
energy
an
energy
for
and
among
also
in
and
will
with
major
domestic
properly
provide
the
The
U.S.
smoothly
operating world
interest,
tional
the
that
reflected
cooperative
period,
in
has
past
the
decisions
been
two
U.S.
is
taken
in
cement
scope
underscored with
not
immune
elsewhere,
to
the
in
oil
policies,
solidarity
conditions,
consumer
policy
issues.
a cooperative
framework
in
were
by
interna
postwar
the
ever
any
developments
embargo
and
and
That
of
the
a vengeance
economic
is
trade
unmistakable.
If t h e r e
of
and policy
developed
the
increases.
economic
is
in
proposed
of
a
for
countries
The
IEA
the wo rl d
for e f f e c t i v e
extensive
so.
basis
range
price
terms
of
economy
the
or
programs
preservation
arrangements
years
But
policies,
aims,
These
the
oil
in
threat of
confront
policies.
full
interest
the
and
programs
lay
oil-importing
designed
the
the
the b r o a d
that
economic
financial
cooperation across
of
stockpiling
action
against
deal with
problems
International
and production.
i m p o r t e d oil.
cannot
the
for oil
longer-term,
in b a l a n c e - o f - p a y m e n t s
fund,
of
on
substantial
created
joint
protection
the
the
recently
toward
consequence
Cooperation
needed
and
financial
immediate
to
arrangements
provide
alone
the
conservation
dependence
economic
as
toward
and,
area
in
sharing
will
embargo
made
complement
the
events
doubt
and
parallel
swings
in e c o n o m i c
activity
industrial w o r l d
should
integral
an
part
be b e t t e r
of
able
ences b e c a u s e
But we
the
price
is
American
people.
I suspect
agree
that
U.S.
most
countries.
is
on
round of
Yet we
are d r i v e n
external
The
a
restrictions
could
face
to
such
positions
problems will
living w i l l
be
on
trade,
prospect
the
in
by
source
not--for
measured
economy.
of
this
the
ultimately
if oi l
an
the
to
adequate
potential
of
danger will
disappear.
by
real
our
transfers
would
served
consuming
well-being
self-defeating
actions.
countries
energy
standards
of
the
their
financing
of
on
the
of
financing.
restoration
impact
income
a price—
sustain
a
the
at
protective
importing
attempt
of
high
are w e l l
economic
and other
influ
tremendous
committee
oil
an
may
prosperity
major
and
are
We
our
only
area
our
the
economic
relatively
economic
that
absence
nature
that we
economy,
energy
destructive
that with
this p a r t i c u l a r
fact
external
our
of
the
true
policies
by
the
policies
that
transitional
problem means
in
equally
avoiding
of
throughout
developments
members
interests
energy
depends
the
own
or
external
terms
by c o o p e r a t i v e
It
of our
potential,
in
that
to
to weather
size
ignore
and t h a t
testify
many
domestic p r o d u c t i v e
le v e l .
inflation
interdependent world
than
of
and
goods
balance
The
of
and
real
4
services
in
we
will
creating
and
vulnerability
must
address
have
using more
to
supply
OECD
necessary
to
and
single
arrangement
in
the
final
to
cooperate
need
of
can
is
help
nature
of
the
into
and,
but
is
problem
in
in
involved
our
a problem we
used
an
the
Viewed
the
in
to
we
with
avoid
of
the
financial
these
it
policies.
for
need
of
No
depends
to
do
and
the
not
become
The
they
another
very
and
process
oil
exporting
there
financial
misleading
this
about
the
"recycling"
the
systems
policies
"recycling"
people,
term
the
purposes
just
another
But
that
economic
of
to
so.
misunderstanding
terms,
The
it
there,
is
the
recourse
confidence
different
represent
aggregate.
is
te rm has
face.
in
countries' ability
that
level
that
that
and effective
don't
the
things
and
to
understanding
We
surpluses
assure
result,
willingness
fact,
to
to
their willingness
recognize
raise
economic
countries.
to
problems
financial
the
to
on
participants
mechanism.
the
generally
is
economic
this
only
constructive
different
can't
costs
energy; an d
available
ensure
basic
important
facility
It m e a n s
also
provide
It
mechanism,
can
on
support
"recycling"
real
assurance
disruptive
but
the
the
be
not
that
then,is
have
analysis
to
the
expensive
problem,
countries
inappropriate
facility
the
interruptions
financing will
I believe
and
in o t h e r w a y s .
The. f i n a n c i a l
interim
to m a k e
of
is
of
channeling
countries
the
no
oil
importing
recycling
surpluses
of
the
5
oil e x p o r t i n g
in t h e o i l
The
importing
immediate
by the h u g e
caused by
surpluses
their own
and very
in th e
which
do not
and
services
this
is,
in
financial
and
guesses
magnitude
at the
of
prospect
of extreme
period.
More
imports
of
will by
in e f f e c t ,
is
unprecedented,
the
oil
price
lasting
ability
My
own
by
guess
the
large
then be
paying
in
end
an
into
to
account
increase
is
that
the
of
this
decade,
running
terms
"oil
current
for
in
the
revised
theif
shortened
deficits"
that
th6
account
account
their
is
indefinite
considerably
current
made
raised
have
collective
real
fdr
it
earliest
increases,
exporters'
services,
the
financing problem,
the oil
facing
then
situation
of
on
restricted;
governments.
imbalances
and
surpluses
of
taking
goods
of
hands
of
the
countries;
temporarily,
Many
is
financial
those
forecasts,
disappeared by
presently
the
positions
capital markets
spend
least
posed
The world
industrial
recent
this h o r i z o n .
have
at
large
the
is
payments
of o i l .
large
to
invested
problem
external
transitional*
the i m m e d i a t e w a k e
of
financial
price
have
be
a group.
in w h i c h
capacity
also t e m p o r a r y
estimates
certainty,
concentrated outside
substantially
While
as
and
situation
and whose
goods
a
countries'
increases
are
as
countries
in
a novel
in c o u n t r i e s
must,
economic
shifts
the
faced w i t h
real
countries
past
will
countries
deficits
surpluses
imports
of
6
oi l— and
that
begin
dwindle
no
to
more
than
The
the
oil
new
before
$200
to
importing
on
producers.
financing
and
form
The
complex of
on
arrangements
producer
strain.
We
continue
to w o r k
well
already
seen,
techniques
to
commerical
handle
and
individual
on
oil
reasonable
the
I believe
increased
Nevertheless,
there
importing
terms
maintain
reasonable
policies
designed
to
the
of
in
total
will
of
will
some
it
growth;
its
be
to
$60
billion
we
external
have
institutions
flowing.
able
to
resist
here
new
each
in
only
refer
see,
now
many
will
that
needs
to
not
private
certainty
financing
countries.
with
because
capital
oil
in
mechanisms
and
the
and probably
I do
country will
sustain
date
continue
of
by
and official
handled
theso
among
first
individual
systems,
volumes
economic
to
to
future.
no
the
developments,
that
flows
investments
1974,
governments
is
in
private
terms
energy
banking
developed by
the
financial
worked well
expect
in
producers
cumulative
successfully
induced by
oil
only
existing
investments
moderate
the
direction
has
have
a
depends
reasonable
more
just
reach
the
oil-related
countries
billions
to
of
of
billion.
the
funds
oil
they
$250
arrangements
channeling
in n e w
investments
distribution
instance
These
the
obtain
order
to
protectionist
position;
to
undertake
7
longer-term policies
carry t h r o u g h
the n e w
to
achieve
energy
the major
changes
of
energy
situation will
for f i n a n c i n g p r o b l e m s
in
cause
the
for
w o r l d as
concern,
a whole
Primary
financing
needs
the
and b e y o n d ,
expansion
lending
its
its
principle
to
a major
resources
is
special
Over
to
to be
longer
this
oil
to
that
potential
that
gives
importing
multilateral
placed on
to
prepared
in
19 7 5 —
and
IMF
to
International
for
extend
a
through
have
quotas
amount
in
1975
signficant
through
facility--and
of
the
official
predict what
arrangements
enlargement
the
be
resources
oil
is
the
impossible
to
structure
countries
of
and
position.
capacity
regular
of
It
the w o r l d ' s
agreed
expansion
its
its
continue
it
demand.
ability
might have
have
IMF
of
for
While
economic
individual
finance
will
IMF
we
in
utilization
to
reliance
Monetary Fund.
of c r e d i t
not
independence;
a
improved
$6 b i l l i o n
agreed
to
in
augment
term.
The new financing facility is designed not to replace
but to supplement the IMF and other sources of financing, to l
assure each participating country that needed financing' will
be available if it is not forthcoming from other sources on ‘
reasonable terms.
The novelty of the situation; the un
precedented scale of the oil-related financial flows/ and
uncertainty over the nature and direction of future oil
producer investments, make it essential that such an insurance
mechanism be in place to assure that, at the margin ■, funds do
flow in particular directions if the need arises.
8
I should
new
note
facility will
investments.
will
It
strengthen
participants'
that
serve
is
the
the benefit will
oil
importers.
can
only
to
been
of
serious
need,
be
operations
the
oil
are
a
oil
might
to
prevent
while
I know
of
the
no
getting
To
one who
oil
Here
cons
to
their
lend
a
No
even
OECD
the
is
not
one
the
by
facility
has
oil
yet
e x po rt er s
policies
if one
did
have
devise
in
have
countries
or
as
i n such
financing
agreements
alternative
to
and
with
to
unnecessarily e x p e n s i v e , or
either
implicit
a device
it
is
Certainly
the
measures
this
a
countries
OPEC
an
dependence
of
sources,
risk w o u l d
reasonable
be
improve
such
facility— whose
disruption
down.
to
the
facility
as w e l l
investment
placing
contrary,
advocates
and
require
decisions
reduce
the
from other
But
conditions
corrective
prices
of
otherwise
the
of
exporters
would
that
exporters'
of having
date.
provide
oil
markets
shifting
of
levied
alternatives.
the
balance.
financial
term
to
facility
effort
energy
longer
the
costs
policy
the
prices.
cooperative
restore
the
can
inappropriate
and
of
independent
exporters—
the
the oil
countries
position.
Similarly,
high
OPEC
the benefits
financing which
with
pros
of
financing
investments—
against
strategic
of
to
conservative
having
weighed
accrue
been
existence
formula which
risk
generally
the
obtain
against
a
has
a guarantee
that
to
the
be weighed
a means
a
But
assume high
concern
operations
ability
forward with
as
true
and
come
some
explicit.
for p e r p e t u a t i n g
integral
on
part
of
imported oil
facility
oil
importing world
as
put
the
in
may
and
the
are
course
or
place
help
,but
preferred
means
The E s s e n t i a l
The
mutual
nature
and
insurance
cooperation
most
Characteristics
of
arrangement
among
important
purpose
OECD
of
the
the
Solidarity
proposed
designed
countries
characteristics
—
to
facility
promote
have
more
Fund
a
economic
determined
or- l e s s
—
its
automatically.
Safety-Net
The
facility
is
designed
sources
of
financing
to o t h e r
It is n o t
envisaged
as
financial ma chinery.
countries w o u l d
use of o t h e r
markets,
expected
and b o r r o w e r s
of
reserves,
and
regional
would
policy cond it io ns
have
set
a
safety-net
available
turning
to make
finance
their
--
to
ability
accept
forth
by
in
private
to
appropriate
capital
borrow
credit
economic
a Governing
the world's
facility,
fullest
organizations,
to
a backstop
cog
the
the
the
—
to p a r t i c i p a n t s .
a regular, o p e r a t i n g
Before
sources
their
governments
be
as
from other
from
and
the
IMF
energy
Committee.
Credit will be provided only on market-related terms, to
ensure that countries not be induced to request loans from
the facility in lieu of other financing available on
reasonable terms, or view it as a foreign aid device.
These
recourse
provisions
to
the
the
tend
facility will
same
time,
that
in
the
final
needed,
and
by
the o p e r a t i o n s
all
facility will
analysis
doing
of
not
ensure
be
provide
financing
so w i l l
the w o rl d
to
make
that
sought.
the
is
Yet
basic
at
the
assurance
available
a major
economic
extensive
if
contribution
system:
on
the
one
to
-
10
-
hand,
by
providing
financial
positions
cooperative
investors
they must
economic
strengthening
the
governments
in
the
the
ultimate
the
integrity
strength
of
confidence
have
policies;
confidence
-
on
of
of
to m a i n t a i n
the
other
private
the
in
individual
sound
hand,
lenders
system
their
as
by
and
a whole
countries'
and
and
in
positions.
Risk-Sharing
We
are
facility
confident
to
provisions
participants
established
No
loan will
be
delayed
that we
that
be made
or
do
deferred.
not
live
in
participants
This
risk
sharing
financing
loans
to
terms,
and
this
will
regardless
or
the
ultimate
from
the
facility.
proportionate
share
of
30%
of
other
countries
the
burden.
The
OECD
facility
countries.
financed,
be
shared.
and
is
thus
However
whoever
the
any defaults.
not
loans
a U.S.
of
may
the
operate
of
the
quotas.
the
specific
distribution
In
If
pick
our
up
the
be,
be
only
share
70
to
of
is
75%
other
facility
the
of
concrete
would
"bail-out"
through
borrowers
risks
exposure
will
might
recognize
facility will
agreed
th at m a x i m u m U.S.
the
Accordingly,
to
used
to
arranged.
we must
in p r o p o r t i o n
operate
the
payment
the
our
a default,
that
world..
this
is
in
borrowings
means
loan
share
will
techniques
the
through
according
expectation
on which
operations
repaid
time
a riskless
is
facility's
made
Nevertheless,
principle
all
loans
be
the
the
fundamental
that
will
at
in
all
risk
are
will
25 to
of
-li
fe
Quotas
Country
quotas
quantitative
and t h e i r
this
will
obligations
potential
connection,
be s o m e w h a t
the
$25
confusing
of
that w o u l d
actually
of f i n a n c i n g
needs
extreme,
for
example,
might be
in a p o s i t i o n
highly unlikely,
all o t h e r s
in
theoretically
could a p pr oa ch
the
matter,
of
if u s e
capacity will
of
fall
The
Temporary
The
solidarity
international
that
lapse
its
to
of
by m u t u a l
with
a
these
fund
will
the
not
might
need
this
comes
agreement.
small
with
amount
pattern
quota
all
others
extreme,
to
case,
As
also
borrow,
it
lending
required,
with
is
capacity
a practical
its
lending
extremes.
Facility
become
machinery.
new
is
unlikely
other
billion.
is
the
may
f a c i l i t y ’s f i n a n c i n g
$25
of
to m a k e
one
the
In
this
The
on
In
quotas
that
At
f a c i l i t y ’s
Nature
total
idea
the
facility
it
At
lend.
that
between
after
the
facility
facility.
financing,
country
financial
authority
two years
extended
one
nil.
the
depend
country
case,
the
provide.
will
provide
to
limit
the
one
this
a position
possible
the
can
to
for
participants.
to
close
only
conveys
facility
only
In
from
figure
available
among
to borrow.
be
it
participants’
support
to b o r r o w
the
be
both
provide
billion
if
lending
capacity would
to
rights
the a m o u n t
needing
determine
loans
into
a permanent
There
will
is
piece
agreement
automatically
operation,
unless
-
No
new
facility.
international
It
will
rely
12
-
staff
on
the
will
be
recruited
OECD
for
any
by
the
required
secretariat.
Financing
A
Three
number
of
general
techniques
consideration:
provision
the
of
of
the
technique
well
use
of
that
to
reach
all
of
ever
in
the
facility
the
will
L e g i s 1a tive
The
number
principle,
month
was
course
of
on
by
an
decide
of
reached
-by
here
attached
to
subsequently
are
the
under
the
facility;
of
borrowings
U.S.
to
has
leave
felt
and we
allows
This
approach
does
involve
to
limit
the
and
from
it
oil
the
financing
a workable
resolved,
is
alter
system.
agreed
I
just
described
nevertheless
important
agreed.
is
the
text
The
importing
in W a s h i n g t o n ,
the
producers.
Participation
oil
How
that
U.S.
basically
for
group
of
major
from
financing
participants,
however,
by
Each
that
directly
but
are
approach
assuring
are
resolved.
"open"
characteristics
technical
be
individual
difficulties,
borrow
details
to
be
participants.
The
would
to
loans
all
support.
techniques.
to
of
participants
B u d g e t ary A s pects
at me etings
communique
Party
not
and
more
operational
ideal
issues
principle
of
some
interests
technical
by
guarantees
has
technical
have
financing
remain
countries’ guarantees
agreement
ultimately
natives
for
decision
these
difficulties
loans
joint
the
the
considerable
may
and
techniques
outset
may
direct
individual
facility;
these
technical
set
of
my
remarks
established
in
the
--
agreement
nations
out
OECD
and
which
in
last
briefly
today.
a
i n the
A Working
has
con-
firmed t h a t t h e s e p r i n c i p l e s
are
appropriate
to p r e p a r e a f u l l d r a f t a g r e e m e n t
for
and
approval
is
by
now working
governments.
This d r a f t a g r e e m e n t m i g h t b e a v a i l a b l e b y t h e e n d o f t h i s
month b u t m a y n o t b e c o m p l e t e d u n t i l
which s i g n a t o r i e s w o u l d
seek
sometime
required
in Ma rc h,
domestic
after
authority
for
their p a r t i c i p a t i o n .
With
that
schedule
in view,
let m e
turn
now
to
the
legis
lative a n d b u d g e t a r y a s p e c t s o f U . S .
participation
in
facility.
facility will
require
U.S.
participation
approval o f t h e C o n g r e s s
submitted
by
the
President
posed f o r f i s c a l y e a r
$7.0 b i l l i o n
and
for
the
in
the
has
been
earlier
1976
provided
this
recommends
facility,
and
for
month.
budget
provides
in
The
the
the
budget
budget
authority
for
the
pro
for
estimated
up
to
outlays
of u p t o $ 1 . 0 b i l l i o n t h a t y e a r .
It
is
not
possible
U.S.
amount of
participation
wi ll t a k e .
While
it
quotas w i l l
total
about
and c e r t a i n
important
st il l
negotiation.
under
which w e
in t h e
should
course
have
of
our
key d e t e r m i n a n t s
Administration
The
°n t h e
U.S.
to be more
of
is
facility
$25
The
very
agreed
of
--
specific
puts
in
it w o u l d
this
that
to
all
these
and
with
point
form our
the
the
the
participants'
quotas
operations
open
advice
are
questions
we
Congress,
legislative
on
participation
country
facility's
answers
shortly
at
individual
the
consultations
the
exact
billion,
features
indicated
that
the
generally
eventually
has
or
precise
proposals
receive
will
be
the
forward.
the
course
consider
its
of
the
negotiations
appropriate
—
-14-
share
to
be
in
the
various
relevant
imports.
This
for
the
U.S.
I mentioned
meeting
guess
of
that
mentioned
set
on
The
As
is
not
policies.
new
with
sources
cooperative
financing
date.
$7 billion
quotas
view
upon
budget
the
only
facility
if
and
have
terms,
has
a
realized;
but we
also
believe
facility
in p l a c e
if
I mentioned,
Party
on
there
certain
How
is
the
technical
have
important
bearing,
the
on
the
form
form
of
of
yet
are
to
U.S.
legislation
the
is
does
full
operational
techniques
required,
not
it
extent
needed
to
to
arise.
related
will,
of
financing
participation
never
important
in
characteristics
resolved
and
probability
agreement
issues
and
energy
worked
strong
as
financing
reasonable
economic
need
also
is
hope
financing
on
the
that
various
and
the
arrangements
the
the
I would
believe
and we
Party
criteria.
in
on
at
facility will
arrangement.
an
we
called
near
countries'
contained
a n d oil
Working
last week,
economic
earlier,
OECD
—
on
appropriate
discussions
range
other
as
new
being
Working
—
G N P , trade
this
of
As
that
based
hope
needed,
to
the
total,
We
be
the
in
other
as
I attended
up
the
regarded
from
to be
with
Existing
adapted well
Party
mechanism,
connection
such
the
outlays
from
of
Judging
I explained
available
in
criteria
appropriate
for
30%
in
wind
of
to
generally
budget
basis
insurance
have
the
25
participants
Working
we will
an
only
other
estimate
notional.
is
earlier.
the
of
economic
range
by
in
the
range
in
the
support
to
the
of
the
the
course,
is
actually
facility
U.S.
■>
participation.
We
will
in c o n s u l t a t i o n w i t h
quickly
once
the
be
the
shape
considering
Congress,
of
the
and
facility
various
techniques
hope
proceed
is
to
clear.
Conclusions
Mr.
Chairman,
essential
nations
order.
well
element
in
to de ve lo p
situation
on t h e
the
and
The
to date,
a cooperative
is
while
hope
Congress
in
time
to
proposal
by
late
March
I hope
to
complete
element
it w i l l
It
of
receive
or
response
and
to
is
have
* * *
economic
on
reliance
us
those
the
principles
common
risks.
consultations with
foreign
strong
energy
served
should
of
an
maximum
a comprehensive
U.S.
the
open world
based
early April.
your
to
that
sharing
is
importing
promote
necessary
forward
fund
oil
insurance
equitable
We w o u l d
the
mechanisms
providing
and
of
strong
inadequate.
support
embody a key
a
designed
financial
be
solidarity
efforts
to ma in ta in
existing
of m u t u a l
the
facility
arrangements
proposed
legislative
That
economic
support.'
the
proposal
policy,
will
and
l6th January, 1975*
COMMUNIQUE
OF THE MINISTERIAL 'MEETINGS,OF THE GROUP
OF TEN
in Washington on ihth and l6th January, 1975.
1.
The Ministers and Central Bank Governors of the ten coun
tries participating in the General Arrangements to Borrow met in
Washington on the l4th and l6th of January, 1975? under the
Chairmanship of Mr. -Masajpashi Ohira, Minister of Finance of Japan.
The Managing Director of the International. Monetary Fund,
Mr. H. J. Witteveen, took part in the meetings, which were also
attended by the President of the Swiss National Bank,
Mr. ,F. Leutwiler, the Secretary-General of the OECD, .Mr. E. van Lennep,
the General. Manager of the Bank for International Settlements,
Mr. R. Larre, and the Vice-President of the Commission of the E.E.C.,
Mr. W. Haferkamp.
2.
After hearing a report from the Chairman of their Deputies,
Mr. Rinaldo Ossola, the Ministers and Governors agreed that a
solidarity fund, a new financial support arrangement, open to all
members of the OECD, should be established at the earliest possible
date, to be available for a period of two years. Each participant
will have a quota which will serve to determine its obligations and
borrowing rights and its relative weight for voting purposes. The
distribution of quotas will be based mainly on GNP and foreign trade.
The total of all participants' quotas will be approximately $25 billion,
3.
The aim of this arrangement is to support the determina
tion of participating countries to pursue appropriate domestic and
international economic policies, including cooperative policies to
encourage the increased production and conservation of energy.
It was agreed that this arrangement will be a safety net, to be
used as a last resort. Participants requesting loans under the new
arrangement will be required to show that they are encountering
serious balance-of-payments difficulties and are making the fullest
appropriate use of their own reserves and of resources available
to them through other channels. All loans made through this
arrangement will be subject to appropriate economic policy condi
tions. It was also agreed that all participants will jointly share
the default risks on loans under the arrangement in proportion to,
and up to the limits of, their quotas.
2
k.
In response to a request by a participant for a loan, the
other participants will take a decision, by a two-thirds majority,
on the granting of the loan and its terms and conditions, in the case
of loans up to the quota, and as to whether, for balance-of-payments
reasons, any country should not be required to make a direct con
tribution in the case of any loan. The granting of a loan in excess
of the quota and up to 200 per cent of the quota will require a very
strong majority and beyond that will require a unanimous decision.
If one or more participants are not required to contribute to the
financing of a loan, the requirements for approval of the loan must
also be met with respect to the contributing participants.
5»
Further work is needed to determine financing methods.
These might include direct contributions and/or joint borrowing in
capital markets. Until the full establishment of the new arrange
ment, there might also be temporary financing through credit
arrangements between central banks.
6 . Ministers and Governors agreed to recommend the immediate
establishment of an ad hoc OECD Working Group, with representatives
from all interested OECD countries, to prepare a draft agreement in
line with the above principles. In their view this work should be
concluded in time to permit approval by the OECD Council by the end
of February, 1975-
theT
Department of
IfSHINGTON, D C 2 0 2 2 Ì
T E L E P H O N E W 04-2041
FOR IMMEDIATE RELEASE
February 19, 1975
DEBT LIMIT ACTION
The following statement was issued today by
William E. Simon, Secretary of the Treasury:
The Treasury is gratified that the Congress
completed action yesterday on a new debt limit. It
is expected that Congress will send the legislation
to the President today for his signature.
Since the legislation was not available
yesterday when the Treasury was committed to issue
a substantial amount of new securities sold early
this month, some emergency action was necessary.
Accordingly, the Treasury last night retired $450
million of Treasury securities held by the Exchange
Stabilization Fund in order to keep the public debt
below the existing limit of $495 billion. The
Exchange Stabilization Fund left the proceeds of
this redemption on deposit with the Treasury on a
non-interest-bearing basis.
oOo
WS-231
¡Department of th e T R E A S U R Y
IpNGTQN,
D.C. 20229
. .TEUPHONE W04-2G41
I
FOR RELEASE UPON DELIVERY
after ¿:00 p.m.
55
February 20, 1975
STATEMENT BY JOHN A. BUSHNELL
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
Before
SOUTH CAROLINA SOCIETY OF PROFESSIONAL ENGINEERS
Charleston, South Carolina, February 20, 1975
Ladies and Gentlemen, with my background as an economist,
diplomat and government official -- all professions which suffer
from a certain reputation for imprecise analysis -- I have some
trepidation in speaking to a group of professional engineers
about the costs implied by the new energy situation. I shall
not be so brave as to put any monetary values on the various
costs. Instead my objective tonight is merely to review the
various types and forms of costs that our society faces as a
result of the current energy situation. I shall deal with
these costs as they affect the U.S., but the costs for other
oil importing countries are similar.
My hypothesis is that we have a large bill to pay. We
can pick various ways and various timeframes over which to
pay this bill. But we cannot avoid it. In fact even in the
most unlikely event that the oil exporting countries were to
reduce their oil price to the 1972 level, we would still have
a large bill in the form either of the costs of developing our
own production and constraining our consumption or in the form
of permitting our economy to grow increasingly dependent on a
small group of countries for the energy essential to maintain
economic activity in this country.
I
shall outline nine different types of costs which
we are paying or may be paying in connection with the energy
situation. Some of these are costs we pay in money, but some
of the costs are none the less real for the fact that they
are not paid in monetary terms.
To illustrate this point, suppose a hurricane hits a
small town in such a way that it blows the roof off every
building but does no other damage. Probably not a likely
W S -2 3 2
2
engineering occurrence but it helps make my point» For
several months the people of the town engage in a great debate
on what they should do. Some say reconstruct the roofs in
the same way because there will never again be a similar storm.
Some say rebuild the town underground. Others favor construction
of various different types of roof0 Meanwhile the people are
living with makeshift covering for their buildings with the
result they are often cold and wet«, A reporter interviews many
of the people and finds there is only one thing they agree on.
Since they have not yet decided how to resolve their problem,
they all say the storm has not cost them anything yet.
Well, perhaps all the costs are in the town down the
road where the premium for wind damage insurance was quadrupled
and everyone signed up for the insurance.
We are already paying major costs because of the changed
energy situation. The energy situation is a major contributor
to all three of our most serious immediate economic problems of
inflation, recession, and shortage of investment capital.
Inflationary pressures are increased not only by direct
energy price increases but also by the indirect impact of
these increases in all stages of production, distribution and
consumption of most goods and services.
The sudden change in the oil price relative to other
prices, the efforts to adjust, and the accompanying uncertainty
all strengthen recessionary forces.
There is agreement in this country that we must make
massive investments to produce more energy here and to use
energy more efficiently.
To understand better why the sudden change in energy price
has such a pervasive and difficult effect on our economy, I
would like to trace a bit of history. We all welcomed and
became accustomed in the post WW II period to gasoline and
energy prices that were increasingly cheap in real terms. Our
way of life adjusted gradually and almost imperceptibly to cheap
energy and made maximum use of energy because it became cheaper
relative to labor, capital and even land.
Since oil was the cheapest source of energy, producers
and consumers found ways to use more of it and to substitute it
for other more expensive sources of energy. Oil replaced coal
in many uses. Although the U.S. has sufficient coal reserves
to last for the next 300 years, the labor and capital cost of
extracting coal made it more expensive than oil for many
uses and our coal production stagnated,, We saw no urgency
in developing relatively expensive nuclear power„
At the same time, demand for energy intensive products
and services increased as consumers switched to energy cheap
goods. We could afford larger houses because the cost of
heating and cooling were low. We indulged ourselves in pur
chasing larger, fancier automobiles because, as our real incomes
increased sharply and as the real price of oil decreased, high
horsepower, speed, pickup and tail fins were relatively cheap.
In fact energy was so cheap that engineers and even cost
accountants paid little attention to minimizing its use. For
example, at a leading university a task force examined ways to
save energy last year. They found the air in the chemist lab
was exchanged every five minutes. This was essential during
the day when many experiments were being done. But the simple
devices necessary to exchange air less frequently at night and
on weekends had not been installed. Moreover, the system had
not been designed to use the exiting air to heat or cool the^
incoming air. A relatively small investment saved over a third
of the energy cost in this building. Through similar quickfixes — all well within the range of commonly known technology -the university was able to reduce energy consumption within six
months by about 20 percent.
Oil
import prices were stable at less than $2 per barrel
through the 1960s while domestic oil prices increased only from
about $2.90 per barrel in 1960 to $3.18 per barrel in 1970.
But this domestic price was not sufficient to bring forth ever
increasing supplies of oil and gas in the U.S., especially
when oil could be produced in other parts of the world at much
lower prices. During the 1960s few prices increased as little
as the oil price. By 1970 U.S. domestic production peaked and
began to decline while consumption continued to increase at
4-5 percent per year. Imports increased sharply and by 1972 oil
imports accounted for 21 percent of total oil consumption. The
share increased to 35 percent in 1973, to 36 percent in 1974 and
will probably increase to about 40 percent this year as there
has not yet been time for investment in domestic oil to result
in increased finds and production to offset natural declines in
production from older fields.
We realized that oil would be depleted in the distant
future and that oil prices might rise as marginal world oil
became more expensive. But we expected this would be a gradual
process related to the cost of oil production, and cheap oil
4 costing less than a dollar a barrel to produce was still being
found in several parts of the world» But that distant day of
higher energy prices is arbitrarily yesterday as the selling
price of oil suddenly was completely delinked from the cost of
production. It is the suddenness and the unprecedented size
of the price increase coupled with the unreliability and
uncertainty of access to future oil supplies that generate
the major costs we now face.
A five fold increase in oil prices to about $11 a barrel
was imposed in late 1973 and early 1974 as several oil exporters
reduced production for political reasons» During recent months
the instability and unreliability of future oil prices has
been confirmed as most oil exporting countries have reduced
production to maintain the high prices.
Oil
and energy are too important to our economy for us
to be so dependent on the short-term political and economic
desires of a few other countries» To overcome our dependence
there will have to be a major structural change of our economy
and in our way of life that will require an enormous amount of
effort and investment.
I would now like to review the types of costs associated
with the energy situation.
1°
Real Income Cost
The real income cost is the decrease in the quantity of
oil that can be purchased from a given income as a result of
an increase in the price of oil. The consumer's loss becomes
a real income increase to the producer. Economists call this
the transfer of real income. If the producer is in a foreign
country, the real income cost of a higher oil import price is
the larger amount of goods and services we will have to export
to pay for the same volume of oil imports.
The simple fact is that we as a nation are poorer when
we must export more of our real goods and services to pay for
the same amount of oil. Some argue that the increased real
cost in relation to our total output of goods and services is
so small that it does not matter. At about $26 billion our
current imports of oil are only about 2 percent of our total
GNP. If the price of imported oil had risen slowly over a
number of years, we would undoubtedly have adjusted gradually
to this increased cost. But when we have an increased cost
approaching two percent of GNP in one year, the relevant
comparison is other changes in such a short time. Think of a
5
$26 billion increase in our foreign aid this year, or in
expenditures by our tourists abroad, or in our military
spending abroad.
If we place the comparison in terms of the average
American family, a reduction in income of less than two percent
does not sound too great. In effect it would mean that one
week’s income would go for oil imports. But for changes in
income we generally believe that, at least in the short-run,
such reductions must come out of discretionary income, i.e.,
the income above the basics which a household has discretion
in spending. For households at various income levels we may
then be talking about a reduction in discretionary income of
15 or even 30 percent or more. In short, after the essential
expenditures at the gasoline pump and even more important for
electricity, heating oil, and other essential energy the average
family faces a substantial reduction in discretionary income
which it might use for a new car, new furniture, a vacation
or new clothes.
2.
Financial Cost
However, like a family which has had its income reduced
but increases its borrowing, we as a nation might postpone
this reduction in our real income because of higher oil import
costs by borrowing abroad. Since many of the oil exporting
countries do not have plans or projects for spending all their
greatly increased income at home, they have little choice but
to invest it abroad.
In 1974 foreign exchange earnings of oil exporting countries
leaped to $95 billion, about $35 billion was used to purchase
imports of goods and services. This left about a $60 billion
surplus for investment in 1974 alone. Thus oil consuming
countries as a group should find it fairly easy to borrow to
avoid the sudden drop in their real incomes.
But such borrowing is not free. It too involves costs.
These financial costs are the second item on my cost list. To
the extent we borrow we shall have to pay interest. In short
such borrowing not. only requires that we eventually pay the real
goods and services but that we eventually pay even more real
goods and services.
There may also be costs in the national and international
efforts to prevent potential disruptions in financial markets
as these markets cope with a greatly increased volume of flows.
t
-
6
-
In addition, some means will have to be found to provide conces
sional loans to the poorest developing countries which cannot
meet their increased oil bills; the U.S. has suggested a special
Trust Fund associated with the International Monetary Fund for
this purpose. The result of these measures will be increased
real costs to the U 0S 0 and other countries.
The way we divide the increase in real costs between
immediate transfers of goods and services and borrowing depends
on the many factors affecting the trade of the United States.
In fact in 1974 we paid much of the cost in real terms. The
increase in our oil bill was $18 billion and our current account
deficit is estimated to be only about $4 billion, up only
about $4 billion from 1973.
Moreover, the oil exporters invested at least $11 billion
in the United States. In some respects we are the world*s
largest banker. We have a continual large inflow of investment
funds from many sources and we also continually make investments
throughout the world. In this increasingly interdependent
world this banker*s role is important for the economic stability
of the western world. By-and-large it is not a cost, like any
banker we earn more on our investments than we pay those who
invest with us.
3.
Shift of Political Power
Let me turn now to a different but none the less real
cost -- the shift of political power in the world generated by
the change in oil prices. The other side of our reduced real
income is of course greatly increased real incomes for the
oil exporting countries. For some of these countries which
have small economies and polulation the percentage increase
in real incomes is immense.
Secretary Kissinger wrote Secretary Simon the following
on January 11 this year in connection with our investigation
pursuant to Section 232 of the Trade Expansion Act. This was
the investigation which resulted in the President’s decision
to place a tariff on imported oil as a way to reduce our
imports.
"This massive transfer of wealth will greatly
enhance the economic and political power of the
oil rich states who do not share our foreign
policy objectives. It will also cause a serious
erosion of the political power of the United
States and its allies relative to the Soviet
Union and China."
7
I know of no way to put a monetary cost on such shifts
of power and their implications for us0 But when one considers
the size of annual defense expenditures even when we are not
engaged in active warfare anywhere in the world, it is clear
that large costs are involved for us in such a shift of power.
40 Beggar-Thy-Neighbor Policies
Let me turn now to a potential cost which could be the
biggest cost of all but thus far has been negligible and with
good international cooperation can stay negligible. I call
this the potential cost of beggar-thy-neighbor policies.^ Let
us suppose for a moment that all the oil consumer countries
decide they do not want to go into debt but instead they are
prepared to pay the increased cost of their oil with exports
of goods and services now. The oil exporters are not prepared
to take this volume of goods now. But each individual oil
consuming country could try to expand its exports or reduce
its imports of goods other than oil to reestablish its payments
balance.
For any individual oil importing country it is of course
possible to reach payments balance or even surplus. It is
only for the oil importing countries as a group that there
must be a large net deficit equal to the surplus of the oil
exporters. In fact in 1974 some countries, particularly
Germany, continued to have a large surplus and some, such as
Japan and the United States, had overall deficits much smaller
than, the increase in their oil costs. Other oil consumers had
deficits larger than the increase in their oil costs.
If a number of countries adopt policies such as export
subsidies and import controls in order to improve their balance
of payments, we could slide into the sort of trade war in which
all countries would have great losses. In effect the restric
tive measures of one country would largely cancel out the
restrictive measures of other countries. The deficit of the
oil consuming group would not change very much but the volume
of trade would fall. Countries would lose their export
markets for goods they produce efficiently and would pay higher
real costs to produce at home goods and they cannot produce
efficiently. Everyone would be a loser.
To avoid this problem most developed countries have
pledged not to adopt economic and financial policies which will
transfer one country’s deficit to another and thus might pre
cipitate by retaliatory actions a deflationary spiral for all
countries. Continuing close cooperation among the major trading
8
nations is essential because the threat of such destructive
policies will continue to be very real so long as the surpluses
of the oil countries are large0
5o
Inflation Cost
The fifth cost of the oil situation is an acceleration
of inflationo We estimate that the direct and indirect effects
of oil price increases have added 5 to 8 percentage points to
wholesale prices since October 1973„ With all Americans poorer,
each group tries to avoid being poorer by pushing up its
remunerationo This strengthens further the spiraling forces
of inflationary price increases since each group tends to try
to recover its income loss but this can only be done at the
expense of others who then repeat the process themselves8
6»
Security Cost
The sixth item on my cost list is the security cost,
i ce., the loss of a measure of political independence if we
continue to purchase a major part of our energy abroad0
We have reiterated repeatedly that U»S» foreign policy
will not be influenced by threats to raise oil prices or lower
supplieso But we know from our experiences last winter that
the costs of living with even a partial embargo are great
indeedo Of course, other oil consuming countries are more
affected than we are because they are more dependent on oil
importso This condition has had a dramatic effect on the flex
ibility of the foreign policies of those countries0
The U„So has taken steps to reduce the unreliability of
imported oil supplies by taking the lead in establishing the
18-member International Energy Agency consisting of most of
the major oil importing countries0 The member countries of
the IEA would allocate oil supply to any member country in the
case of embargOo This would help prevent a severe crisis,
especially if only one or two members of the group are cut
off from oil supplies, but would not of course avoid the impact
of a more general or longer lasting curtailment of supplies0
In addition it is clear our growing import dependence
means we have at least temporarily lost control over our oil
pricing policy to a few political leaders in the oil exporting
cotintries o So long as their production and exports were subject
only to normal competitive forces, the world*s consumers could
rely on reasonably stable prices and supplies» But we now
face a situation where we must either bear the costs of what
ever these few countries dictate on price and supplies or bear
the costs of producing a much greater proportion of our own
energy»
9
7.
Investment Cost
The seventh cost is the additional investment required
to find alternative sources of oil and energy substitutes and
to adjust to new price relationships0 The investment in the
research and development of new energy technology in nuclear,
solar, geothermal and in oil exploration will be very large»
Some estimate at least a trillion dollars for investments in
the U.So over the next decade. In addition, the investment
is shifted to a less efficient use in the sense that higher
cost resources will have to be exploited, i,e., the investment
to produce a barrel of oil offshore and in Alaska will be much
greater than the investment in Texas, not to mention in Saudi
Arabia» Of course, as new investments are made, as oil and
other energy are delivered from new production and as we use
energy more efficiently because it is mugh higher priced, we
will become less dependent on imported oil»
One of the main subjects now being debated in this country
is how far we need to go toward full energy independence» There
seems to be general agreement that the current security costs
are too high and that we must pay the investments costs to
reduce our dependence. The further and the faster we reduce
the security cost the greater the investment cost and the
production cost of the marginal additional energy»
8»
Environmental Cost
Along with the monetary costs of increasing our national
output of energy to reduce our dependence, there are environ
mental costs. We must assess these costs not in relation to
the ideal but in relation to the alternative costs. How much
are we prepared to pay in terms of security cost and transfer
of real resources abroad to avoid the possibilities of damage
to our beaches from offshore exploitation of oil? How do we
weigh the risks of nuclear power accidents or the distuption
of grazing land by coal mining against the continuing cost of
dependence on foreign sources for vital energy? Environmental
consideration, of course, urge as much effort as possible on
conservation of energy, but few if any experts believe energy
conservation alone will solve the security problem. The trade0
this area are particularly difficult, but delay in
making a decision means that we pay other forms of costs while
we debate.
9o Disruption Cost
The ninth and last cost item on my list is not only one
the biggest costs in my view, it is also one of the hardest
10
to explain« I call it the disruptive effect« It is a result
of the suddenness and great extent of the change in energy
prices relative to other prices and the resulting change in
the composition of demand in our economy. As a result of large
changes in the structure of relative prices, the pattern of
final demand is changed, both because consumer preferences
change when relative prices change and because consumers have
less to spend on various non-energy products when they must
spend more on energy« This in turn implies that the labor
and capital that produced products no longer demanded will
become unemployed« The obvious example is the automobile
industry« Total demand for cars might decrease to say 6 to 7
million cars while the industry has the capacity to produce
10 million or more. Moreover, consumers will desire a
different type of car which means new investment to produce
lighter and more efficient cars.
A recent Newsweek article pointed out that while new car
sales have decreased sharply, there is a boom in the repair and
maintenance business. An auto transmission repair firm reports
a 30 percent increase in business; an electrical parts and
repaid company that services appliances a 50 percent increase«
Consumers shift purchses to cheaper models or to less energy
intensive alternatives -- e.g., window fans in place of window
air conditions. Rapid changes in demand result in unemployment
of capital and labor. At the same time, they create new profitable
opportunities for investment. But investment and shifts in
labor require time. During this transition a great deal of
production and thus income is lost. This is what I call the
disruption cost. There is nothiiqgunusual about such changes
in the economy except of course that we are suddenly confronted
with so many and such large changes.
In addition, we are still uncertain about these changes
because the structure of relative prices is still vulnerable
to unknown but probable changes. If investors and producers
knew what energy prices would be in the future and what products
would be demanded, they would be able to move ahead to invest
and produce.
The costs of the relative price changes we shall
have to absorb over time. Our national income will continue
to be below the usual growth trend as wo do so. But we can
reduce these disruptive costs if we reduce uncertainties. If
we decide what emission standards for future cars are to be,
if we decide what taxes and incentives will be used to encourage
conservation and to promote energy production , if we decide
what taxes and controls we will put on producers of gas and
oil, if we decide what, if any, protection we shall give domestic
11
investors in energy production and conservation if the OPEC
countries at some point reduce the world price of oil sharply0
The future is always very uncertain» Investors always
have to assess a wide range of uncertainties and take a chance»
But the uncertainties about the details of our energy policies
with literally hundreds of different and conflicting proposals
pending in Congress make it particularly hard for investors to
make clear decisions today in the energy and many related
fields -- and most areas of our economy are related to energy
in some way»
I have finished my list of types of costs» If there
are more you do not want to hear them» What should we as a
nation do? How do we choose between these various types of
costs which are measured in such different ways? The current
national debate on energy policies is really about the mix of
the costs» But there still seems to be some wishful thinking
that somehow we can avoid these costs -- but there is no free
lunch» We can sit in the rain like those in the town I referred
to earlier and say we are paying no costs» But we shall only
fool ourselves. If we do not decide how we will pay the costs
of adjustment soon, we will pay additional costs of delay and
of future limitations. If we do not conserve and expand pro
duction at home -- expensive as that may be -- we shall have
to deliver larger amounts of goods and services to others
leaving us that much poorer and also leaving us dependent on
uncertain supplies.
Great as our problem on energy is, perhaps the oil
exporting countries have an even greater problem. Assuming we
conserve and develop alternative sources of energy and as more
countries discover and export oil, the demand for oil from
the OPEC countries will be sharply reduced. At some point
this will result in the loss of so much of their export markets
that the cartel price can no longer be held. This will mean
that oil prices will fall. Prices will be decided by demand
and supply forces in the international competitive market -- a
smaller market as most oil importing countries maximize their
own energy production. Prices will move toward the level of
supply cost, a low level in some OPEC countries.
For some OPEC countries that have relatively small
an<* now kave large °fl exports, such as Saudi Arabia,
e ^justment may not be difficult. However, these countries
ith the most oil in the ground will lose the most in the long
i0ia re^ucec* prices. For other oil exporting countries
1 n large populations which adjust their consumption standards
12
to their current oil income, the sharp drop in future income
could disrupt their societies even more than the current
situation affects ours„
From the point of view of an observer on the moon watching
man organize his affairs on this small planet, our actions must
seem ridiculous„ The U.S. and other oil importing countries
debate how much poorer they will become by investing scarce
resources in producing expensive oil and oil substitutes at
$6 or even $9 per barrel for security and other reasons while
the OPEC countries debate how much cheap oil they will leave
in the ground until some future period when there may be
little demand for their oil even at much reduced prices„ I
sometimes think that if engineers were no more cost effective
than we economists we would still be in the Stone Age0
o 0 o
Vv
DepartmentoftheTREASURY
K ington,d .c.20220
TELEPHONE W04-2041
eXiT'T'
ADDRESS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE NATIONAL GOVERNOR'S CONFERENCE
9:00 A.M. EST, Thursday, February 20, 1975
Governor Rampton, distinguished Governors, and Ladies
and Gentlemen:
It is a privilege to meet with you this morning. In my
two years in Washington, I have learned that many of the finest
leaders in America today are the Chief Executives of our States
and Territories. Last year, during the height of the energy
crisis, I had the opportunity to work very closely with most
of our Governors, and I can honestly say that I have never met
a more responsive, aggressive, and dedicated set of public
officials than I did then.
I
want all of you to know this morning that I am anxious
to continue those close working relationships as we tackle the
economic and energy challenges now before us. If you have a
problem, if you want to make a recommendation, or if you just
want to beef about what's going on in Washington, call me up,
and I will personally guarantee that I will be on the other end
of the line before the day is out. We must act just as
decisively now as we did last year, and in my opinion, the
States should and must play a vital role in shaping our over-all
policies.
In view of the gloomy economic predictions emanating from
Washington these days, there must be many people who agree with
a fellow once described by Franklin Roosevelt. This fellow was
told by his doctor that he would go deaf if he didn't stop
drinking. But he kept on drinking just the same. Asked why,
he said it was because he liked what he'd been drinking so much
better than what he’d been hearing.
I'm not sure whether the rate of drinking is increasing,
out recent economic news has not made for pleasant listening.
You know first-hand of the dimensions of the recession, and you
3-1*0 familiar with the President's proposals for dealing with it.
Bince we will have time to address your specific questions in
just a few moments, I would like to devote my introductory
remarks to a consideration of the long-range needs of our economy
WS-233
2
Perhaps one of my biggest errors in Washington is in
trying to emphasize the long-range perspective. That is not
always a popular approach, but it is one that should govern
far more of our economic decisions than it does. For too
many years, we have asked not whether our basic policies make
sense economically but whether they will sell politically.
We have insisted as a people that our Government give us
conspicuous prosperity and damn the cost. We tried to end
poverty, clean up the environment, and create a Great Society
without being willing to pay for it. We waged a war on distant
shores, and left the bills to our children. Again and again,
long-range necessities have been sacrificed on the altar of
short-term gratifications.
In a very real sense, we have been living off our
inheritance and mortgaging our future. We have transferred
more and more of our wealth out of the most productive part
of our economy, the private sector, and into the least productive
part, the Government. Our Government has become swollen and
fat, but our private enterprise system -- the system that once
gave this country the greatest prosperity and the highest
standard of living that man has ever known -- has grown weak
from undernourishment. By allowing short-term considerations
to prevail time and again, we have gradually created fundamental
imbalances in our economy.
I have no doubt that we have the wisdom and the strength
of purpose to overcome the problems of the moment. By the
end of the year we are reasonably confident that there will be
significant declines in both the rate of inflation and the rate
of unemployment. But if we want to restore true prosperity -prosperity that is not simply an interlude between still more
inflation and unemployment -- then we must correct these
fundamental imbalances in our economy. That cannot be done
quickly. The problems are too deeply embedded in our economy
and even in our social psychology. If we want to provide genuine
leadership, however -- if we want to lay solid foundations for
our third century as a nation -- then all of us have an
obligation to begin rebuilding our economy now.
Restoring Fiscal and Monetary Discipline
To me, the most glaring example of short-term politics
triumphing over long-term economics has been in our fiscal
and monetary policies.
It took 186 years for the Federal budget to reach the
$100 billion mark, a line it crossed in 1962. Only nine more
years were required to surpass $200 billion, and then only
four more years to break the $300 billion barrier.
3
%ot
At the same time, our money system was expanding at the rate
of about 2-1/2 percent a year from 1955 to 1965, but in the
decade that followed the rate of monetary growth nearly doubled
to 6 percent a year. There can be no doubt that we created
and spent far more money than our economy could absorb and thus
generated an alarming momentum in the rate of inflation.
Recognizing that there were other factors such as rising
food prices and rising oil prices which significantly increased
inflation, it is nonetheless true that irresponsible government
policies form the underlying basis of the inflation that plagues
us today. And that inflation was the hidden culprit in tipping
the economy into a recession. The housing industry, for
instance, fell into a slump when inflation drove up interest
rates and thus dried up mortgage money. Similarly, as rising
prices wrecked consumer confidence, consumer spending suffered
the biggest drop since World War II. Since housing and
consumer purchases have been two of the weakest sectors of
our economy, it seems clear to me that inflation has been a
major -- if not the major -- cause of the current recession.
That is why we can never take our eye off inflation, which
continues to be our most serious long-range problem.
Over a half century ago, John Maynard Keynes warned us
that "there is no subtler, no surer means of overturning the
existing basis of society than to debauch the currency.
The process engages all the hidden forces of economic law on
the side of destruction, and does it in a manner which not one
man in a million is able to diagnose." Unfortunately, that is
precisely the part of Keynes' teaching that we should have
remembered but have most conveniently forgotten.
We cannot escape the fact that State and local governments
have played a large part in the process of governmental growth.
As a Federal official, it would be inappropriate for me to
suggest how you should run your States but all of us must ask
how much longer State and local governments can continue to grow
at their present pace. They have been growing more rapidly,
m fact, than either the Federal Government or the economy as
a whole. Consider the statistics for the last decade:
A 204 percent increase in State and local spending,
wore than one-and-a-half times larger than the increase in
the gross national product during the same period;
A 60 percent increase in State and local employment,
almost twice the rate of increase among all wage and salary
workers; and,
A 118 percent increase in the debt of State and local
governments, twice the level of increase in the debt of the
ederal Government during the same period.
4
With States now caught in a fiscal squeeze between
rising costs and declining revenues, with the economy in need
of strong stimulation, and with millions of Americans in
need of help, this is no time for sudden retrenchment. And the
Administration intends to provide substantial assistance to you.
We recognize that Federal assistance to States now amounts
to 47 percent of the money you raise through State taxes, and
we have no intention of pulling the plug when the seas become
rough. As you know, the President is asking for an extension
of the Revenue Sharing program from 1977 to 1982 in order to
provide $39 billion to States and localities -- an extension
that we will fight hard to achieve. He has also proposed
that the revenue sharing system be used to return the $2 billion
in increased energy costs that State and local governments
would incur under the Administration’s energy plan. And, at
your specific request, he has released an additional $2 billion
in State highway funds.
As we pull out of this recession, however, I would urge
that we must restore greater discipline to our fiscal and
monetary affairs. Only then can we truly tame the demons of
inflation. That is why the President has proposed a moratorium
on all new spending programs except in the field of energy and
he has asked for firm restraints on other programs. In much
the same way, Governor Carey had the courage in his inaugural
address to tell the people of New York that "the days of wine
and roses are over," and Governor Longley, Governor Brown,
and many others are cracking down on expenditures in their
States. I applaud these Governors, and hope they will set a
trend for the entire Nation.
These are not harsh or inhumane measures. To the contrary,
we should realize by now that the poor and the disadvantaged are
always the hardest-hit victims in periods of both inflation and
recession. Common sense as well as common decency tells us,
then, that our first task for the long-run is to restore
moderation to our fiscal and monetary policies. No one here
today wants people unemployed; what we must do is not to create
illusory jobs, funded temporarily by the Government, but
permanent jobs that provide real security.
Strengthening the Economy
The second great task before us -- and one that should
concern everyone in public and private life -- is to strengthen
the foundations of our economic system, so that we can have a
better chance of smooth, steady growth in the future.
5
-o Z -—
It is a simple but compelling economic fact of life that
increases in productive performance are required over time
to support a rising standard of living. Yet our ratio of
private investment to gross national product in recent years
has been much lower than that of other major industrialized
nations. In turn, our level of productivity has been rising
more slowly than in other major countries.
A prime reason for this discouraging investment picture
has been the decline in real profits since the mid-60s. After
eliminating the effects that inflation and outmoded accounting
practices have on profits, our figures show since 1965
after-tax profits have actually declined from $37 billion to
$20.6 billion -- a drop of almost 50 percent. It is not unfair
to say that we are now in a profits depression in this country -a depression which is significantly dampening new capital
investment.
It is imperative that we make better provisions for the
future. The capital requirements of the American economy
over the next decade will be enormous. We will need up to a
trillion dollars for energy alone, and other needs will be
even larger. This means that in coming years we must place
much greater emphasis upon savings and investment, and much
less upon consumption and Government spending.
If as a Nation we fail to address these problems, we will
fail to attain the prosperity and the rising standard of living
that is within our capacity as a people.
Preserving the Free Enterprise System
The t h i r d g r e a t t a s k b e f o r e us t o d a y i s t o p r e s e r v e th e
f r e e e n t e r p r i s e s y s t e m from f u r t h e r e n cr o a ch m e n ts by th e
Government.
For too many years, Government at all levels has been
busy erecting literally hundreds of impediments to efficient
and competitive production. Many of these steps were taken
with the best of intentions, but their net effect on the
economy has been restrictive and thoroughly wasteful.
The examples are legion:
For two decades, the Government has controlled the
price of natural gas at the wellhead at levels so low that
we have created a national shortage through Government regulation
6
Long after the need had disappeared, the Government
encouraged farmers to restrict agricultural production and
thus contributed to the inflation in food prices. Only in
the last few years have we moved toward a more rational
system of agricultural production.
-- As a Nation, we built one of thè finest transportation
systems in the world and now through excessive regulation the
Government is in the process of destroying it.
Nor are the impediments to free enterprise confined
to the Federal Government, as most of you know.
In addition, of course, the Government is imposing
increasingly burdensome taxes, so high that the average worker
has difficulty making ends meet, not to speak of saving for
the future security of his family. Many of you saw the signs
of an incipient taxpayers revolt last November when the voters
turned down more than two-thirds of the bond issues on the
ballots.
Considering the severity of our economic problems today,
it is easy to understand why many people still look to the
Government for magic solutions. We have done that increasingly
for 40 years, but it is time we learned that when we give up
a bit more of our freedom to the Government, what we receive
in return is usually a hollow, empty promise of greater security.
The only sure way of creating a lasting prosperity is to remove
the heavy hand of government from the many areas where it now
cramps our economy and to rebuild the basic foundations of our
free enterprise system.
Much of this discussion may seem far removed from
concerns that you brought with you to Washington. But
suggest that the reason we face many of these concerns
we have not paid sufficent attention to our long-range
in the past.
the
I would
is t h a t
problems
In an hour of national need, our country is fortunate,
indeed, that our Governors are of such high caliber. From the
imaginative energy programs in Oregon to the environmental
progress in Michigan, from the tough, new ethics law in A l a b a m a
to the new broom-sweeping through Oklahoma, you are proving
once again that, as Justice Brandeis once envisioned, the S t a t e s
can become true "laboratories of democracy.”
I salute your spirit of innovation and your resolve to
provide strong leadership, and I renew my pledge to work as
closely as possible with each of you in the days ahead.
Thank you.
0O0
FOR RELEASE A.M. NEWSPAPERS
MONDAY, FEBRUARY 24,1975
NEW FOREIGN CURRENCY REPORTING REQUIREMENTS
ISSUED FOR NONBANKING FIRMS
Treasury officials today announced that the February 24
issue of the Federal Register will carry an amendment to
Treasury Regulations that requires nonbanking firms to report
foreign currency positions on specified forms.
The amendment applies to Treasury Foreign Currency Forms
FC-3 and FC-4. The forms and instructions, as approved by the
Office of Management and Budget, will also be published in the
Register. Advance copies of the forms have already been mailed
directly to a large number of firms.
Similar reporting requirements for banks in the United
States were published in the Federal Register on October 16 and
21, 1974.
Initial reports by nonbanking firms are required on the
new forms covering data as of the last business day of March 1975.
The new reports are prescribed under Title II of Public
Law 93-110, which amended the Par Value Modification Act and
required the Treasury to institute statistical reports of the
foreign currency transactions of banks and other business
concerns in the United States and of foreign branches and
majority-owned foreign subsidiaries of U.S. firms. The reports
will furnish information on the activities of large firms which
affect the position of the dollar in the foreign exchange market.
The reports will provide data on the foreign currency
assets and liabilities and forward positions of business firms
in the United States, including subsidiaries of foreign firms,
and of their foreign branches and majority-owned foreign
partnerships and subsidiaries. Reports will be required of
positions in nine major currencies (Belgian francs, Canadian
o lars, Dutch guilders, French francs, German marks, Italian
.Japanese yen, Swiss francs, and United Kingdom pounds)
an I
case of reports filed on behalf of foreign branches,
partnerships and subsidiaries, in U.S. dollars.
WS-234
(OVER')
2
Reporting exemptions are provided which are intended to
limit reporting to major firms which are active in the foreign
exchange market. The exemptions may be adjusted at a later
date, if necessary, to accomplish this purpose.
Proposed regulations and proposed forms and instructions
were published in the Federal Register on June 27, 1974, with
provision for written comment. The forms as adopted contain a
number of revisions to the proposed forms and instructions
which were made in response to the comments received from the
business community. The reporting system is managed by the
Office of Statistical Reports, a component of the Office of the
Assistant Secretary for International Affairs.
oOo
February
24,
1975
RESULTS OF TREASURY’S WEEKLY BILL AUCTIONS
Tenders for $ 2 . 7 billion of 13-week Treasury bills and for $ 2 . 5 billion
of 26-vaek Treasury bills, both series to be issued on F e b r u a r y 2 7 , 1 9 7 5 ,
»ere opened at the Federal Reserve Banks today. The details are as follows:
26-week bills
maturing A u g u s t 2 8 ,
lANGH OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing May 29, 1975
a/
Investment
Rate 1/
Dis count
F.ate
Investment
Rate 1/
9 8 . 6 4 1 a/
5. 3 7 6 %
5.53%
5.84%
5. 5 3 5 %
5. 4 5 5 %
5.69%
9 7 . 1 6 9 b/
97.112
5.600%
98.601
98.621
5.713%
5.96%
5.61%
97.131
5.675%
5.92%
Price
High
Low
Average
Discount
Rate
1975
Excepting 1 tender
b/ E x c e p t i n g 3 t e n d e r s
of
Price
$410,000
totaling
$1,390,000
Tenders at the low price for the 13-week bills were alio tted 98%.
Tenders at the low price for the 26-week bills were alio tted 73%.
total
TENDERS .APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRI GTS::
District
Applied For
Boston
$
41,145,000
New York
2, 7 9 6 , 3 2 0 , 0 0 0
Philadelphia
50,570,000
Cleveland
40,845,000
Richmond
30,565,000
Atlanta
45,475,000
Chicago
195,825,000
St. Louis
39,750,000
Minneapolis
18,475,000
Kansas Citv
59,215,000
Dallas
30,635,000
San Francisco 1 1 7 , 5 6 5 , 0 0 0
TOTALS
$3,466,385,000
Accepted
Applied For
Accepted
$
$
$
31,145,000
2,113,320,000
16,830,000
3,157,915,000
30,570,000
34,995,000
40,845,000
56,165,000
5,830,000
2,070,395,000
19,995,000
36,065,000
30,565,000
19,075,000
17,805,000
44,845,000
19,440,000
19,410,000
170,305,000
247,315,000
187,815,000
31,740,000
19,235,000
18,475,000
8,560,000
9/235,000
8,020,000
56,215,000
20,465,000
14,465,000
29,635,000
15,760,000
8,760,000
102,365,000
156,190,000
102,490,000
$ 2 , 7 0 0 , 0 2 5 , 0 0 0 c/$3,7 7 1 , 9 4 5 , 0 0 0
$ 2 , 5 0 0 , 2 8 5 , 0 0 0 d/
S./Includes $383,870,000 noncompetitive tenders from the public.
H ^ncludes $122,185,000 noncompetitive tenders from the public.
F' ¿qnivalent coupon-issue yield.
,
■
"
5
\
F
v
J a n u a r y 31,
UNITED STATES SAVINGS BONDS ISSUED AND R ED EEM ED THROUGH ?
1975
(D olla r amounts in m illio n s — rounded and w ill not n e c e s s a rily add to to ta ls)
d e s c r ip t io n
Ma iu r e d
Series F and G -1941 th r u 1952
¿eries J anri K-19R2 th ru 1957
A M O U N T I S S U E D —^
5003
29521
3754
AMOUNT
.
R E D E EM E D —/
AMOUNT
O U T S T A N D I N G - ^ -/
4999
29503
3749
% O U T S T A N D IN G
O F A M O U N T IS S U E D
4
17
5
.08
.06
.13
1
*
UNMATURED
[
:
Series E - ^
1940
1762
178
9.18
1967
1968
8561
13763
16083
12670
5789
5529
5738
5702
5010
4334
4545
5214
5330
5558
5369
5068
4966
4664
4698
4801
4682
5279
5144
5038
5460
5414
5094
7760
12496
14520
11303
5020
4669
kill
4666
4048
3501
3648
4111
4144
4280
4108
3834
3669
3412
3351
3314
3156
3385
1969
1970
4802
5045
2798
2685
801
1267
1563
1367
768
860
967
1036
962
832
898
1103
1187
1278
1260
1233
1297
1250
1347
1487
1525
1894
1833
1818
2095
2126
2035
2009
1971
5817
6422
6354
5572
2720
2637
2322
1182
9.36
9.21
9.72
10.79
13.27
15.55
16.85
18.17
19.20
19.20
19.76
21.15
22.27
23.00
23.47
24.33
26.12
26.80
28.67
30.97
32.57
35.88
35.64
36.09
38.37
39.27
39.95
41.84
46.76
53.26
58.92
63.47
78.79
923
206379
905
150418
18
55958
1.95
27.11
5485
10088
4159
3646
1326
6437
24.17
63.81
15573
7806
7765
49.86
221952
158224
63723
28.71
38278
38251
26
.07
63723
63749
28.71
24.50
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1972
1973
1 9 7 4 ____
-
1975
Unclassified
Total S e r ie s E
■ e rie s H (1952 th ru M ay, 1 QRQ) - i /
H (Ju n e, 1959 thru 1 9 7 4 )
Total S e r ie s H _
Total S e r ie s E and H
■ All Series
3311
3219
3365
3289
3059
T o ta l matured
T o ta l unm atured
Grand T o ta l
..
N*
F e'u* a c c r u e d d is c o u n t .
r en' ' ^ s m p t i o n v a l u e .
{ Pti°n Qi ow neT b o n d s m a y
221952
260230
158224
196475
b e h e l d a n d w i l l e a r n i n t e r e s t t o r a d d i t i o n a l p e r io d s a f t e r o r i g i n a l m a t u r i t y d a e s .
2859
*
3098
3784
4033
4390
-
1
-
,
.. ...
Department o f t h e T R E A S U R Y
« T O N , D.C. 20 2 20 11 TELEPHONE WG4-2Q41
FOR IMMEDIATE RELEASE
February 25, 1975
SIMON ANNOUNCES U .S .-SAUDI-JOINT
COMMISSION MEETINGS
Treasury Secretary William E. Simon announced today
that meetings of the U.S.-Saudi Joint Commission on Economic
Cooperation will be held in Washington February 26 and 27.
Simon, who is the U.S. Co-chairman noted that, "these
meetings are an important step in our mutual efforts to de
velop a new dimension of economic cooperation between the
Saudi Arabian and American governments and private sectors,"
The Joint Commission on Economic Cooperation was estab
lished in a joint statement signed by Secretary of State^
Kissinger and Prince Fahd on June 8, 1974, in Saudi Arabia.
Working groups on Industrialization, Agriculture, Science and
Technology, and Manpower and Education were established to
identify specific programs.
"The Joint Commission also provides a mechanism for
the growing cooperation in financial affairs between the
U.S. Treasury and the Saudis* Ministry of Finance and
National Economy," Simon added.
Minister of State for Financial Affairs and National
Economy and the Saudi Co-Chairman, Shaykh Muhammad ibn Ali
Aba al-Khail, will head the Saudi delegation during their
two days of meetings at the Treasury Department.
oOo
W S-236
Departm entofthefREASlIRY
■SHINGTON, D C. 20220
T E L E P H O N E W 04-2041
STATEMENT OF THE HONORABLE WILLIAM E . SIHON
SECRETARY OF THE TREASURY
BEFORE THE HOUSE BUDGET COfINITTEE
WASHINGTON D ,C ., TUESDAY, FEBRUARY 25, 1975
1:3 0 M
i
EST
fiR. Ch a i r m a n a n d M e m b e r s of t h e Co m m i t t e e :
I WELCOME THIS OPPORTUNITY TO APPEAR BEFORE YOU
AS YOU BEGIN YOUR CONSIDERATIONS OF THE PRESIDENT'S
PROPOSED BUDGET FOR FISCAL YEAR 1976,
T his b u d g e t is p a r t of a b r o a d e r s t r a t e g y to m e e t
THREE SEPARATE
BUT
INTERRELATED GOALS THAT WE WILL BE
DISCUSSING THIS AFTERNOON:
—
F i r s t , w e m u s t e n d t h e d o w n w a r d s l i d e in t h e
ECONOMY, PUTTING MILLIONS OF AMERICANS BACK TO WORK;
—
Se c o n d , w e m u s t c o n t i n u e our p r o g r e s s a g a i n s t
INFLATION; AND,
-
—
2
-
T h i r d , w e m u s t a c h i e v e g r e a t e r s e lf s u f f i c i e n c y
IN MEETING OUR ENERGY NEEDS, THUS REGAINING CONTROL OVER
OUR ECONOMIC DESTINY.
For m a n y m o n t h s , w e h a v e b e e n b o m b a r d e d w i t h e c o n o m i c
STATISTICS POINTING IN THE WRONG DIRECTION.
THESE
STATISTICS, ALONG WITH OUR OWN PROJECTIONS FOR THE FUTURE,
HAVE CREATED A RATHER GRIM ATMOSPHERE.
THEY CONFIRM THAT
THE AVERAGE LEVELS OF UNEMPLOYMENT AND INFLATION THIS
YEAR WILL BOTH BE HIGH.
THEY ALSO INDICATE, AS WE HAVE
SAID MANY TIMES BEFORE, THAT OUR TROUBLES ARE LONG-TERM
IN NATURE.
BUT LET US BE CLEAR ON THIS POINT:
THEY
PROVIDE NO SUPPORT FOR THE VIEW THAT THE ECONOMY IS
HEADING TOWARD ANYTHING RESEMBLING A GREAT DEPRESSION.
In d e e d , w e b e l i e v e t h a t t h e e c o n o m i c t r e n d s w i t h i n
THE YEAR SHOULD BE DISTINCTLY BETTER THIS YEAR THAN LAST.
W h i l e u n e m p l o y m e n t w a s r i s i n g a t t h e e n d of 19 74 , w e e x pec t
IT TO BE FALLING BY THE END OF 1975.
WHILE THE RATE OF
INFLATION WAS ABOVE 10 PERCENT AT THE END OF 19 74 , IT
SHOULD FALL BELOW 10 PERCENT BY THE END OF 19 75 .
THUS,
AS WE ENTER 19 76 , EVEN THOUGH OUR PROGRESS MAY BE SLOWER
THAN ANYONE WOULD LIKE, WE EXPECT THAT THE NATION WILL
DEFINITELY BE ON THE ROAD TO RECOVERY.
L et us l o o k b r i e f l y a t o u r g r o u n d s f o r c a u t i o u s
OPTIMISM.
For ONE THING, THERE ARE POSITIVE CYCLICAL
FORCES DEVELOPING WITHIN THREE AREAS OF THE ECONOMY —
HOUSING, CONSUMER SPENDING, AND INVENTORY INVESTMENT —
THAT SHOULD BEGIN TO ASSERT THEMSELVES DURING THE COURSE
OF THIS YEAR!
- - AS YOU KNOW, THE HOUSING INDUSTRY FIRST
WENT INTO A TAILSPIN WHEN INFLATION DRIED
UP THE SUPPLY OF MORTGAGE CREDIT AND DROVE UP
INTEREST RATES.
WlTH THE FEDERAL RESERVE NOW
PROVIDING GREATER MONETARY STIMULATION AND
CREDIT DEMANDS RECEDING SOMEWHAT, SHORT-TERM
- 1» -
HAS RENEWED THE FLOW OF FUNDS INTO THE THRIFT
INSTITUTIONS AND HAS PROVIDED THE ESSENTIAL
PRECONDITION FOR AN UPTURN IN HOUSING,
—
S i m i l a r l y , s o m e of t h e c a u s e s of i n f l a t i o n a l s o
LED TO THE BIGGEST DROP IN CONSUMER SPENDING
since the
S e c o n d W o r l d Wa r .
No w , w i t h t h e r a t e
OF INFLATION SUBSIDING AND WITH A PATTERN OF
HIGHER WAGE SETTLEMENTS HAVING EMERGED, THE
REAL INCOME OF WORKERS SHOULD BE ON THE UPGRADE
AGAIN DURING 1975.
As IT TURNS UPWARDS, WE
SHOULD EXPERIENCE HIGHER RATES OF CONSUMER
SPENDING.
—W
e have
also moved
LIQUIDATION.
into a p e r i o d of
inventory
CONSUMER SPENDING SHOULD CONTINUE
AT A SUFFICIENT LEVEL TO DRAIN OFF MUCH OF
THESE EXCESSIVE INVENTORIES, SO THAT BEFORE
THE YEAR IS OUT INVENTORY INVESTMENT WILL
AGAIN BECOME A POSITIVE FACTOR.
- 5 -
Th u s , w i t h i n t h e r e c e s s i o n i t s e l f , w e c a n f i n d t h e
SEEDS OF RECOVERY.
As THEY TAKE ROOT AND GROW, THE
RECESSION SHOULD BOTTOM OUT AND WE CAN BEGIN THE LONG
ROAD BACK.
*
A SECOND FACTOR THAT WILL CONTRIBUTE TO THE RECOVERY
IS THE SUPPORTIVE MONETARY POLICY OF THE FEDERAL RESERVE
Bo a r d .
Its c h a i r m a n , A r t h u r B u r n s , h a s s a i d r e p e a t e d l y
THAT THE FEDERAL RESERVE INTENDS TO ENCOURAGE ECONOMIC
RECOVERY BY PROVIDING FOR AN ADEQUATE EXPANSION IN MONEY
AND BANK CREDIT, WHILE ALSO AVOIDING AN EXPLOSION THAT
WOULD PLUNGE US INTO DEEPER TROUBLE.
♦
As I HAVE NOTED, WE
ARE ALREADY SEEING RESULTS OF THEIR POLICIES IN THE DECLINE
OF SHORT-TERM INTEREST RATES.
T he t h i r d f a c t o r w h i c h s t r e n g t h e n s o u r p r o s p e c t s for
a
RECOVERY IS THE BUDGET ITSELF.
'■
W e ARE NOT LEAVING
(
THINGS TO CHANCE BUT INTEND TO SUPPORT THE NATURAL FORCES
-
OF RECOVERY,
6
-
THE PRESIDENT HAS PROPOSED A $16 BILLION
TAX CUT, AND WE HAVE INDICATED A WILLINGNESS TO ACCEPT
A SOMEWHAT HIGHER FIGURE IF APPROPRIATE.
WE SUPPORT THIS
TAX CUT NOT BECAUSE THE ECONOMY WOULD NOT RECOVER WITHOUT
IT, BUT BECAUSE IT WILL MAKE THE RECOVERY MORE SOLID
AND CERTAIN.
MOREOVER, THE BUDGET PROVIDES AN ESTIMATED
$18 BILLION FOR EXPANDED UNEMPLOYMENT COMPENSATION AND
BIGGER PUBLIC SERVICE EMPLOYMENT PROGRAMS DURING FISCAL
YEAR 1976.
I MUST ALSO POINT OUT THAT TOTAL OUTLAYS IN
THE NEW BUDGET REPRESENT AN INCREASE OF MORE THAN $80
BILLION OVER THE LEVEL OF JUST TWO YEARS AGO.
♦
THESE SHARP
INCREASES IN SPENDING UNDERSCORE THE FACT THAT THE PRESIDENT
HAS BEEN, AND WILL CONTINUE TO BE, HIGHLY RESPONSIVE TO
PROBLEMS OF THE RECESSION.
THE PRESIDENT REMAINS COMMITTED
TO THE POSITION THAT HE WILL DO EVERYTHING HE CAN TO
ALLEVIATE THE SUFFERING CAUSED BY UNEMPLOYMENT.
T ax Cut V e r s u s H ig her S p e n d i n g
So m e M e m b e r s of Co n g r e s s h a v e a s k e d w h y t h e P r e s i d e n t
HAS CHOSEN A TAX CUT AS THE PRIMARY FORM OF STIMULATION
AND WHY HE IS RESISTING MUCH LARGER SPENDING PROGRAMS.
Let me t r y to a d d r e s s t h o s e q u e s t i o n s .
In p l a n n i n g t h e w a y t h a t f i s c a l s t i m u l u s c o u l d b e s t
BE INTRODUCED INTO THE ECONOMY/ WE CAREFULLY CONSIDERED THE
BASIC OPTIONS —
CUTTING TAXES/ INCREASING EXPENDITURES
BEYOND BUDGETED LEVELS OR SOME COMBINATION OF THE TWO.
W e d e c i d e d t h a t t h e t a x r o u t e w a s h i g h l y p r e f e r a b l e for
TWO REASONS.
FIRST/ THE STIMULUS FROM A TAX CUT WILL GET INTO
THE INCOME STREAM MUCH MORE RAPIDLY THAN A FURTHER RISE
IN FEDERAL EXPENDITURES.
So m e h a v e q u e s t i o n e d t h i s v i e w b e c a u s e t h e y b e l i e v e
.
j,
A LARGE NUMBER OF HOUSEHOLDS WILL SAVE RATHER THAN SPEND
-
THEIR TAX REBATES.
8
-
ALTHOUGH WE BELIEVE MUCH OF THE MONEY
WILL GO DIRECTLY INTO THE SPENDING STREAM, THERE ARE
CERTAINLY MANY FAMILIES WHO WILL PUT THEIR REBATES INTO
SAVINGS ACCOUNTS "OR PAY OFF DEBT.
BUT THE FUNDS THAT GO
INTO SAVINGS ACCOUNTS OR ARE USED TO REPAY DEBT WILL ALSO
BE VERY HELPFUL IN STRENGTHENING THE ECONOMIC RECOVERY.
Fo r
ex a m p l e, money that flows
into s a v i n g s a n d
lo an
ASSOCIATIONS AND SIMILAR FINANCIAL INTERMEDIARIES PROVIDES
THE GREAT BULK OF FUNDS FOR NEW MORTGAGES.
TAX-REBATE
DOLLARS FLOWING IN THAT DIRECTION WILL SURELY AID THE
HARD-HIT HOUSING INDUSTRY.
♦
It w o u l d a l s o b e w r o n g to a s s u m e t h a t t h e i n i t i a l
DESIRE BY SOME HOUSEHOLDS TO SAVE THEIR TAX REBATES WILL
MEAN THAT THE TAX CUT WILL NOT WORK TO STIMULATE CONSUMER
SPENDING,
On c e h o u s e h o l d s h a v e i n c r e a s e d t h e i r l i q u i d i t y
POSITION, EITHER BY ADDING TO SAVINGS OR REDUCING THEIR
DEBT, THEY WILL HAVE MORE CONFIDENCE ABOUT THEIR ECONOMIC
yd
situation,
T h e y w i l l h a v e g r e a t e r f a i t h in t h e i r f u t u r e
AND A MORE POSITIVE ATTITUDE ABOUT SPENDING FROM THEIR
CURRENT INCOME.
T h u s , w h e t h e r t h e t a x - r e b a t e c h e c k s go in T h e f i r s t
INSTANCE INTO SAVINGS OR WHETHER THEY GO DIRECTLY INTO
SPENDING, IT WILL NOT BE VERY LONG AT ALL BEFORE THE
GREAT BULK OF THE TAX REBATE GETS' INTO THE SPENDING
STREAM AND THEREBY CONTRIBUTES TO A RECOVERY IN ECONOMIC
ACTIVITY,
T he o t h e r s i d e of t h i s c o i n is e v e n m o r e i m p o r t a n t
TO THE ISSUE OF PROMPT ECONOMIC STIMULUS:
THE FACT THAT
WITH FEW EXCEPTIONS, ADDITIONS TO FEDERAL SPENDING PROGRAMS
FOR GOODS AND SERVICES ARE LIKELY TO BE MUCH TOO SLOW IN
PROVIDING IMPETUS TO THE ECONOMY.
THIS FACT WAS
PERSUASIVELY DOCUMENTED IN A STUDY MADE SEVERAL YEARS AGO
by
Na n c y H, T e e t e r s of t h e B r o o k i n g s In s t i t u t i o n .
-
10
-
S he a n a l y z e d t h e e x p e r i e n c e of t h e 1962 a c c e l e r a t e d
PUBLIC WORKS PROGRAM —
AND I EMPHASIZE THE ACCELERATED
NATURE OF THAT EFFORT,
*
THE PROGRAM WAS PASSED IN
S e p t e m b e r of 1962 w i t h i n i t i a l o b l i g a t i o n a l a u t h o r i t y
of $850 m i l l i o n ,
A l t h o u g h $152 m i l l i o n of t h a t a m o u n t
WAS OBLIGATED IN THAT FISCAL YEAR, ONLY $62 MILLION
WAS SPENT THEN,
THE BULK OF THE MONEY WAS OBLIGATED
AND SPENT IN FISCAL YEARS 1964 AND 1965,, WITH VESTIGES
OF THE PROGRAM STILL IN EXISTENCE IN 1971.
T hi s is s h o w n in t h e t a b l e b e l o w , w h i c h is t a k e n
from
Ms, T e e t e r s ' a r t i c l e in B r o o k i n g s Pa p e r s on Ec o n o m i c
A c t i v i t y , 1, 1971, p. 233,
- 11
-
r
New Ob l i g a t i o n a l A u t h o r i t y , Ob l i g a t i o n s , a n d Ex p e n d i t u r e s
UNDER THE PUBLIC WORKS ACCELERATION PROGRAM, FISCAL TEARS
1963-71.
^
(M i l l i o n s o f D o l l a r s )
Ob l i g a t i o n s
»
N ew
St a t e
a n d Lo c a l
Pr o j e c t s
1963
1964
::965
1966
1967
1968
1969
:.970
1971 (EST)
850.0
30. Q
9 .0
9 6 .7
3 1 3 .7
19 2 ,3
55.0
8 1.8
1 5 .7
3 .0
■
0 .6
811
SH
--
—
—
---
-ffl
—
——
—
-—
—
Total
889.0'
6 02.7
F iscal
Year
Ob l i g a t i o n a l
Au t h o r i t y
F e d e r a l Ad m i n - Ex p e n d i
Pr o j e c t s ISTRATION t u r e s
—— E.V
15 2.5
5.5
62.5
331.8
3 2 1.6
88.2
| l i
5 ,0
2 .0
0.8
3 ,0
836.0
So u r c e s : T he B u d g e t q e IH£ Un i t e d St a t e s Go v e r n m e n t ,
VARIOUS FISCAL YEARS, AND lUE aUDGEI QE IHE
Un i t e d S t a t e s Go v e r n m e n t — A p p e n d i x , v a r i o u s
FISCAL YEARS.
T he m o m e n t u m of f e d e r a l s p e n d i n g g r o w t h is a l r e a d y so
STRONG THAT IT IS HARD TO IMAGINE A DELIBERATE POLICY
DECISION TO BOOST IT STILL FURTHER.
IF, HOWEVER, WE WERE
TO MAKE SUCH A DECISION NOW IN AN EFFORT TO PROVIDE ECONOMIC
STIMULUS DURING THE CURRENT RECESSION, WE COULD EXPECT TO
-
12
-
GET ONLY A VERY SMALL PART OF THE WORK STARTED WHEN IT IS
MOST NEEDED.
REMEMBER THAT THE 1962 PROGRAM DESCRIBED
ABOVE WAS AN ACCELERATED PUBLIC WORKS PROGRAM; SPECIAL
EFFORTS WERE MADE TO GET THE PROGRAM MOV IIpG IN A HURRY.
IF THAT PROGRAM CAN BE USED AS A MODEL “
AND WE HAVE NO
REASON TO BELIEVE OTHERWISE -- WE COULD EXPECT THAT
OF THE ADDITIONAL -FUNDS VOTED EARLY IN FISCAL 1976
FOR ONE OR ANOTHER FEDERAL PROGRAM, ONLY ABOUT 7 PERCENT
OF THE EXPENDITURES WOULD BE MADE DURING THAT FISCAL
YEAR, WHEN THE ECONOMIC RECOVERY SHOULD STILL BE IN ITS
EARLY STAGES.
THE BULK OF THE SPENDING WOULD TAKE PLACE
IN FISCAL YEARS 1977 AND 1978 WHEN WE MAY WANT TO APPLY
FISCAL RESTRAINT TO WARD OFF A RENEWAL OF INFLATIONARY
pressures.
T h u s , t h e e c o n o m i c e f f e c t s of a f u r t h e r rise
IN FEDERAL SPENDING WOULD BE OF EXTREMELY LIMITED HELP
DURING AND IMMEDIATELY AFTER THE RECESSION AND COULD BE
- 13 -
SERIOUSLY INFLATIONARY A COUPLE OF YEARS FROM NOW WHEN
MUCH OF THE SPENDING WOULD ACTUALLY TAKE PLACE.
T he s e c o n d r e a s o n w h y w e f e e l t h a t c u t t i n g t a x e s is
r
A SUPERIOR MEANS OF PROVIDING STIMULUS TO THE ECONOMY,
AS OPPOSED TO FURTHER INCREASES IN GOVERNMENT SPENDING,
IS THAT TAX CUTS PUT THE STIMULUS IN THE MOST DYNAMIC
PART OF THE ECONOMY.
THE PRIVATE SECTOR STILL PROVIDES
SOME 85 PERCENT OF ALL THE JOBS IN THIS COUNTRY.
I f WE
ARE GOING TO BRING DOWN THE RATE OF UNEMPLOYMENT,
IT IS
VITAL THAT WE HAVE A VIGOROUS RECOVERY IN THE PRIVATE
sector.
*
W h i l e i n c r e a s e s in u n e m p l o y m e n t c o m p e n s a t i o n a n d
PUBLIC SERVICE EMPLOYMENT PROGRAMS ARE VERY DESIRABLE TO
CUSHION THE FALL IN EMPLOYMENT DURING THE RECESSION, THEY
DO NOT CREATE PERMANENT JOBS OR PROVIDE THE FOUNDATIONS
FOR SUSTAINED GROWTH AND PROSPERITY.
FEDERAL SPENDING
FOR NONDEFENSE PURPOSES HAS INCREASED DRAMATICALLY IN
RECENT YEARS, GROWING FROM 11.6 PERCENT OF THE GROSS
- If Na t i o n a l P r o d u c t in 1969 to 16 .0 p e r c e n t in t h e b u d g e t for
THE COMING YEAR, AND IT PROMISES TO CONTINUE GROWING AT A
RAPID CLIP IN THE FUTURE.
MOREOVER, THERE IS AMPLE HISTORY
TO SHOW THAT FEDERAL PROGRAMS OFTEN COME INTO EFFECT TOO LATE
TO ASSIST IN ECONOMIC RECOVERY, AND ONCE IN PLACE THEY BECOME
PERMANENT FIXTURES, GROWING IN SIZE EVERY YEAR ALMOST
IRRESPECTIVE OF NEED,
T he MOST EFFICIENT MEANS OF CREATING
ADDITIONAL JOB OPPORTUNITIES CONTINUES TO BE TO PROVIDE
INCENTIVES DIRECTLY TO THE PRIVATE SECTOR.
W e WANT TO
DO THAT BOTH BY INCREASING CONSUMER DEMAND THROUGH CUTS
IN INDIVIDUAL INCOME TAXES AND BY A BOOST IN THE INVEST♦
MENT TAX CREDIT TO SPUR NEW SPENDING BY BUSINESSES FOR
THE PLANT AND EQUIPMENT THAT IS VITALLY NEEDED.
N e e d for S p f n d i n g Re s t r a i n t
In t h e b e l i e f t h a t t h e b u d g e t as p r o p o s e d i n c l u d e s
A HEALTHY DEGREE OF ECONOMIC STIMULATION, THE PRESIDENT
HAS ALSO ASKED FOR A MORATORIUM ON NEW SPENDING PROGRAMS
AND FOR FIRM LIMITS. ON SEVERAL -EXISTING PROGRAMS.
As
HE
HAS SAID, HIS POSITION IS NOT SET IN CONCRETE AND WE MUST
BE WILLING TO ADJUST TO MEET CHANGING CIRCUMSTANCES, BUT
IT IS CLEAR THAT A CENTRAL EMPHASIS OF OUR ECONOMIC POLICY
IS TO RESTRAIN FURTHER GROWTH IN THE FEDERAL BUDGET.
A PRIMARY REASON FOR THIS EMPHASIS IS THE CONTINUING
THREAT OF INFLATION.
EVEN THOUGH THE RATE OF INFLATION
IS SUBSIDING SOMEWHAT, IT COULD EASILY SHOOT UPWARDS AGAIN
IF WE OVERHEAT THE ECONOMY, AS WE HAVE DONE SO OFTEN IN
the p a s t .
Fu r t h e r m o r e , it is e s s e n t i a l to u n d e r s t a n d
THAT THE FORCES OF INFLATION ARE VERY LARGELY TO BLAME FOR
THE RECESSION WE ARE EXPERIENCING TODAY.
BOTH THE HOUSING
INDUSTRY AND CONSUMER SPENDING, AS I HAVE NOTED, FIRST
J
TUMBLED UNDER THE PRESSURES OF RISING PRICES,
If WE
-
16
-
REVIVE THOSE PRESSURES THROUGH EXCESSIVE FISCAL AND
MONETARY POLICIES, THERE IS A VERY REAL DANGER THAT WE
COULD ENTER A NEW AND MORE VICIOUS CYCLE OF INFLATION
AND RECESSION.
BECAUSE OF THE CONTINUING DANGER OF
INFLATION, WE MUST CAREFULLY AVOID THE TEMPTATION OF
TRYING TO RETURN TO FULL EMPLOYMENT AT BREAKNECK SPEED.
In s t e a d , w e m u s t a t t a c k b o t h t h e r e c e s s i o n a n d i n f l a t i o n
AT THE SAME TIME, AND THAT REQUIRES A BALANCED, CAREFUL
APPROACH —
THE KIND OF APPROACH CONTAINED IN THIS BUDGET.
W e h a v e a l s o m a d e no s e c r e t of o u r v i e w s THAT THE
BUDGET DEFICITS WHICH ARE ALREADY PROJECTED WILL CAUSE
STRAINS IN THE PRIVATE FINANCIAL MARKETS.
THOSE STRAINS
SHOULD BE MANAGEABLE, BUT -- AND I WANT TO STRESS THIS —
THEY WILL REMAIN MANAGEABLE ONLY IF FEDERAL BORROWING NEEDS
DO NOT BECOME SIGNIFICANTLY LARGER AND IF THEY ARE ONLY
TEMPORARY IN DURATION.
T h e r e i s , of c o u r s e , a n o t h e r s c h o o l of t h o u g h t on
THE QUESTION OF FEDERAL BORROWING IN THE CAPITAL MARKETS,
This o t h e r s c h o o l b e l i e v e s t h a t t h e Go v e r n m e n t 's b o r r o w i n g
*
NEEDS SHOULD BE EASILY MET BECAUSE PRIVATE DEMANDS FOR
FUNDS SHOULD SLACKEN CONSIDERABLY,
It IS TRUE t h a t FINANCIAL CONDITIONS NORMALLY EASE
SUBSTANTIALLY DURING A RECESSION AND NORMALLY THEY REMAIN
EASY WELL INTO THE PERIOD OF RECOVERY,
MAIN REASONS FOR THIS:
THERE ARE TWO
FIRST, SOME PRIVATE DEMANDS FOR
CREDIT ARE CLOSELY RELATED TO THE PACE OF BUSINESS ACTIVITY
♦
AND DROP SHARPLY DURING A RECESSION.
A PRIME EXAMPLE CAN
USUALLY BE FOUND IN SHORT-TERM BUSINESS BORROWING TO
FINANCE INVENTORIES.
SECOND, THE FEDERAL RESERVE CUSTOMARILY
"LEANS AGAINST THE WIND" DURING A PERIOD OF RECESSION AND
SEEKS TO EXPAND, OR AT LEAST MAINTAIN, THE, RATE OF GROWTH
-
IN MONEY AND CREDIT.
18
-
THEREFORE, INTEREST RATES CAN BE
EXPECTED TO DECLINE AND THE AVAILABILITY OF CREDIT TO
INCREASE AS A NORMAL PART OF THE CYCLICAL PROCESS.
Co n s i d e r a t i o n o f t h i s n a t u r e h a v e a p p a r e n t l y led
SOME OBSERVERS TO CONCLUDE THAT THE FINANCING OF LARGE
F e d e r a l d e f i c i t s in t h e c u r r e n t r e c e s s i o n is a r o u t i n e
MATTER AND OF LITTLE ECONOMIC SIGNIFICANCE,
I RESPECTFULLY
DISAGREE.
AS WE
HAVE SAID ON SEVERAL OCCASIONS, THE CURRENT
RECESSION IS AN OUTGROWTH OF A LONG PERIOD OF INFLATION
THAT'HAS LEFT PRIVATE FINANCING DEMANDS MUCH HEAVIER THAN
usual.
T h e r e h a s b e e n a m a r k e d d e c l i n e in c o r p o r a t e
PROFITS IN RECENT YEARS AND A SERIOUS EROSION OF THE
LIQUIDITY BASE OF HOUSEHOLDS AND BUSINESSES,
CONDITIONS
IN THE STOCK MARKET HAVE IN MANY CASES VIRTUALLY RULED OUT
THE SALE OF NEW EQUITY AS A SOURCE OF FUNDS.
- 19 -
V i*
For THESE AND OTHER REASONS, THE NUMBER OF PRIVATE
LONG-TERM DEBT ISSUES COMING INTO THE MARKET IS UNUSUALLY
large.
O ur l a t e s t T r e a s u r y p r o j e c t i o n s s h o w t h a t n e t n e w
*
corporate bond
issues, which rose from
$12-1/2 BILLION IN
1973 TO $25 BILLION IN 19 74 , WILL ADVANCE EVEN FARTHER TO
SOME $30 BILLION OR MORE IN 19 75 .
WHILE CORPORATE CAPITAL
SPENDING PROGRAMS-ARE BEING CUT BACK, THERE WILL STILL BE
A VERY HEAVY VOLUME OF CORPORATE LONG-TERM BORROWING.
Fu r t h e r m o r e , t h e S t a t e a n d l o c a l f i s c a l p o s i t i o n h a s
CHANGED DRAMATICALLY.
WITH TAX RECEIPTS REDUCED BY THE
RECESSION, THEIR SURPLUSES HAVE MELTED AWAY SO THAT THEIR
♦
,i m . - w U . .
| 'l
BORROWING NEEDS SHOULD BE SUBSTANTIAL.
SOME SLACKENING IN PRIVATE DEMANDS FOR SHORT-TERM
CREDIT IS UNDERWAY AND MORE CAN BE EXPECTED.
YET BY ANY
PREVIOUS RECESSION STANDARDS, TOTAL PRIVATE DEMANDS FOR
20
-
CREDIT —
-
BOTH SHORT AND LONG-TERM —
ARE LIKELY TO REMAIN
MUCH LARGER THAN MIGHT ORDINARILY BE EXPECTED IN A
RECESSION.
Fe d e r a l
requirements
w i l l , of
c ourse, have
to
be
MET FIRST, AND BECAUSE OF THE SWOLLEN SIZE OF FEDERAL
deficits,
Un d e r
Fe d e r a l
proposed
borrowing
p r o g r a m s , we
demands
estimate
will
that
be
enormous.
the
Treasury
DURING THIS CALENDAR YEAR WILL BE COMING INTO THE CAPITAL
MARKETS FOR ALMOST $70 BILLION OF NET NEW FINANCING, OF
WHICH $65 BILLION WILL BE IN MARKETABLE SECURITIES.
Fe d e r a l l y
sponsored
agencies
BILLION IN BORROWING.
may
account
for
THESE ARE HUGE SUMS —
another
MORE NET
FUNDS, IN FACT THAN HAVE EVER BEEN BORROWED IN THE
CAPITAL MARKETS IN ANY SINGLE YEAR BY THE PUBLIC AND
PRIVATE SECTORS COMBINED.
$14
-
These
governmental
21
-
demands
for
money
OUTSIZED DEMANDS ON. THE CAPITAL MARKETS,
represent
As THE BUDGET
NOW STANDS, TOTAL FEDERAL BORROWING DURING FISCAL YEAR
»
1976 WILL ACCOUNT FOR 68 PERCENT OF THE NEW FUNDS BORROWED
IN THE CAPITAL MARKETS,
(SEE TABLES 2-4),
If WE ADD
TO THAT AMOUNT THE ANTICIPATED BORROWING BY STATE AND
LOCAL GOVERNMENTS/ TOTAL GOVERNMENT BORROWING DURING THE
COMING FISCAL YEAR WILL BE 80 PERCENT OF THE CAPITAL
markets.
O n l y 20
percent
will
be
left
to
private
INDUSTRY IN A FINANCIAL MARKET THAT HAS ALWAYS BEEN THE
CENTERPIECE OF OUR FREE ENTERPRISE SYSTEM,
We
should
be
fully
aware
of
the
dangers
that would
ARISE IF BUDGET DEFICITS WERE INCREASED FAR BEYOND THE
LEVELS PROJECTED,
REASONABLE FINANCING OF SUCH DEFICITS
WOULD BE POSSIBLE ONLY IF THE RECESSION IS MUCH DEEPER
-
THAN WE EXPECT.
22
-
OTHERWISE, WE COULD EITHER HAVE VICIOUS
COMPETITION BETWEEN THE GOVERNMENT AND PRIVATE BORROWERS
FOR CAPITAL FUNDS, OR THE FEDERAL RESERVE WOULD HAVE TO
*
SUPPLY FUNDS WITHOUT REGARD TO THE INFLATIONARY CONSEQUENCES,
In
any
event, despite
the
best
intentions
of
the
Go v e r n m e n t ,
A LARGER THAN EXPECTED BUDGET WOULD THREATEN ECONOMIC
RECOVERY BY CROWDING OUT MEDIUM TO LOWER-RATED BUSINESS
BORROWERS, MANY OF WHOM ALREADY HAVE ECONOMIC PROBLEMS,
AND BY ELBOWING ASIDE MORTGAGE BORROWERS AS WELL, THUS
ABORTING RECOVERY IN THE HOUSING INDUSTRY.
4The
key
to
successful
financing
of
the
large
Fe d e r a l
DEFICITS LIES IN THE DILIGENT RESTRAINT OF FEDERAL EXPENDI
TURES.
La r g e
as
they
a r e , the
deficits
projected
for
fiscal
YEARS 1975-76 CAN PROBABLY BE ACCOMMODATED, ALTHOUGH
THEY WILL PRODUCE SOME STRAINS IN THE FINANCIAL MARKETS.
Ho w e v e r ,
if
Co n g r e s s
were
to
push
Fe d e r a l
expenditures
- 23 -
MUCH BEYOND THE BUDGETED LEVELS, IT WOULD NOT BE POSSIBLE
TO RETAIN MUCH OPTIMISM AS TO THE RESULT.
EITHER THE
RECOVERY WOULD BE DELAYED OR MORE INFLATION WOULD BE
EXPERIENCED IN THE FUTURE.
In r e s p o n s e , M r . Ch a i r m a n , to t h e q u e s t i o n y o u a s k e d
IN YOUR LETTER OF FEBRUARY 5 ABOUT THE IMPACT OF DEFICITS
ON UNEMPLOYMENT,
I BELIEVE THAT DEFICITS MUCH LARGER THAN THOSE
NOW BUDGETED WOULD CARRY WITH THEM A VERY SERIOUS RISK
OF INCREASING RATHER THAN REDUCING UNEMPLOYMENT.
If , FOR
EXAMPLE, THE LARGER DEFICITS CAUSED THE CREDIT MARKETS
TO BECOME CONGESTED DURING FISCAL 1976, THE UNEMPLOYMENT
SITUATION WOULD WORSEN AT AN EARLY STAGE IN THE RECOVERY.
On t h e o t h e r h a n d , if t h e F e d e r a l Re s e r v e a c c o m m o d a t e d
THE LARGER DEFICITS BY A MORE RAPID GROWTH IN MONEY AND
CREDIT, THE ADVERSE IMPACT ON UNEMPLOYMENT COULD BE
But
the
FOR PERHAPS A YEAR OR TWO,
NOT AVOIDED
POSTPONED
consequence'
s of
that
action
would
soon
catch
up
WITH US IN THE FORM OF ACCELERATED INFLATION FOLLOWED BY
A NEW RECESSION AND HIGHER UNEMPLOYMENT.
THUS, IN OUR
OPINION, THE PROJECTED DEFICITS FOR FISCAL 1975-76 -- IN
THE CONTEXT OF OUR EXPECTATIONS ABOUT THE COURSE OF THE
ECONOMY —
ARE ABOUT AS LARGE AS OUR FINANCIAL SYSTEM CAN
TOLERATE WITHOUT DOING MORE HARM THAN GOOD FOR THE ECONOMY.
R ig D e f i c i t s
In
in a
responding
B ig E c o n o m y
to
the
points
I
have
tried
to mak e
this
MORNING, SOME OBSERVERS POINT OUT THAT DEFICITS OF THE
SIZE WE ARE FACING SHOULD NOT BE A CAUSE'FOR ALARM BECAUSE
THE ECONOMY HAS ALSO GROWN SUBSTANTIALLY.
BIG DEFICITS,
THEY ARGUE, CAN EASILY BE ACCOMMODATED IN THE ENVIRONMENT
OF A BIG ECONOMY.
LET ME ADDRESS THAT ISSUE FOR A MOMENT.
- 25 -
In f i s c a l
1975,
year
we e s t i m a t e t h a t t h e b u d g e t
DEFICIT WILL AMOUNT TO 2,4 PERCENT OF THE GROSS NATIONAL
Pr o d u c t ,
while
percent.
It
we h a v e
come
in
is
fiscal
True
close
to
year
that
on
these
1976,
some
it w i l l
occasions
deficit
come
in
levels.
to
the
Th e
3,3
past
times
MOST OFTEN CITED FOR COMPARISON ARE FISCAL YEARS 1959 AND
1968,
in w h i c h
of t h e
GNP
unsaid
in s u c h
associated
the deficits
respectively.
comparisons
with
FISCAL YEAR.
those
reached
But
is t h a t
periods
In FISCAL
what
were
2,7
and
3,0
is u s u a l l y
the
percent
left
deficits
confined
to
a
single
YEAR 1960 AND AGAIN IN FISCAL
YEAR 1969, THE BUDGET RETURNED TO SURPLUS,
THIS TIME,
HOWEVER, WE ANTICIPATE VERY LARGE DEFICITS NOT JUST
FOR A SINGLE YEAR BUT FOR THREE YEARS IN A ROW.
IF YOU ANALYZE THE HISTORY OF BUDGET DEFICITS IN
TERMS OF THREE-YEAR AVERAGES (SEE THE FINAL COLUMN OF
- 26 Ta b l e
1), y o u w i l l s e e t h a t c u r r e n t d e f i c i t s a r e g o i n g
TO BE A SUBSTANTIALLY LARGER FRACTION OF OUR GNP THAN IN
ANY PERIOD SINCE WORLD WAR II.
»
WHILE THE CAPITAL MARKETS
MAY BE ABLE TO ABSORB SUCH LARGE BORROWINGS BY THE
Go v e r n m e n t fo r a b r i e f p e r i o d , w e c a n n o t b e c o n f i d e n t
THAT A LONG PERIOD OF HEAVY GOVERNMENT BORROWING CAN
BE ABSORBED WITHOUT HIGHLY DISRUPTIVE EFFECTS.
Beyond t h e se c o n s i d e r a t i o n s , I w o ul d suggest that
THERE ARE AT LEAST THREE BASIC REASONS TO QUESTION
Go v e r n m e n t s p e n d i n g t r e n d s :
F i r s t , w e s h o u l d r e c o g n i z e t h a t t h e r a t e of b u d g e t
increases
in t h e
is g r o w i n g t o o r a p i d l y r e l a t i v e to
GNP.
increases
F e d e r a l b u d g e t o u t l a y s in f i s c a l y e a r 1975
ARE EXPECTED TO REACH $314 BILLION, AN INCREASE OF 1 7 .2
PERCENT OVER THE PREVIOUS YEAR.
In FISCAL YEAR 19 76 ,
OUTLAYS WILL JUMP TO AT LEAST $349 BILLION, AN INCREASE
- 27 -
OF 11.5 PERCENT.
THESE FIGURES REFLECT A TRULY
STAGGERING GROWTH IN THE FEDERAL BUDGET THAT HAS TAKEN
PLACE SINCE THE MID-1960's.
SINCE THEN/ AS SEEN FROM
THE FIGURES BELOW/ THE GNP HAS GROWN BY APPROXIMATELY
100 PERCENT WHILE FEDERAL BUDGET OUTLAYS HAVE RISEN
BY OVER 160 PERCENT:
FY 1966
Fe d e r a l o u t l a y s
FY 1976 (e s t ) F e d e r a l o u t l a y s
$134.7 b i l l i o n
349.4 b i l l i o n
+$214.7 b i l l i o n o r +160 p e r c e n t
CY 1966
GNP
CY 1975
GNP (e s t )
$749.9 b i l l i o n
'
$1.497.7 b i l l i o n
+$747.8 BILLION OR +100 PERCENT
S e c o n d , w e c a n n o t i g n o r e t h e i n c r e a s e d s i z e of t h e
NATIONAL DEBT MERELY BY RELATING IT TO A GROWING GNP OR
POPULATION BASE.
I n FISCAL YEAR 1975 THE INTEREST ON
THIS CUMULATIVE DEBT WILL TOTAL $33 BILLION.
A VERY SIGNIFICANT SHARE OF THE TOTAL BUDGET.
THIS IS
F o r EXAMPLE/
- 28 JT REPRESENTS ABOUT ONE-THIRD OF THE TOTAL FUNDS ALLOCATED
TO NATIONAL SECURITY.
SIMILAR COMPARISONS COULD BE MADE
TO SOCIAL SECURITY BENEFITS, HEALTH, EDUCATION, MASS
TRANSIT, ETC,
Finally,
’
by
rationalizing
Fe d e r a l
continuing
deficits
ON THE BASIS OF CONTINUING GROWTH IN THE OVERALL ECONOMY,
WE LULL THE P U B L I C ’INTO A FALSE SENSE OF SECURITY ABOUT
As
THE LONG-RUN TRENDS IN OUR BUDGET AND OUR ECONOMY.
YOU KNOW, THE BUDGET DEOCUMENTS HAVE FOR SOME TIME NOW
BEEN PRESENTING
5-YEAR
outlook.
projections
Th e s e
♦
the
Budget
simply
assume
PROPOSED
the
carefully
the
points
figures
IMPROVING PICTURE,
for
no
A-5
IN THE
useful.
are
o u t , the
continuation
programs, but
Bu d g e t
FORWARD PROJECTIONS OF THE FISCAL
new
of
outlay
existing
programs.
years
Ho w e v e r ,
ahead
projections
AND CURRENTLY-
As
a
always
CURRENT BUDGET, THE
PROJECTION IS FOR A SURPLUS OF
$25
BILLION.
as
result,
show
an
1980
- 29 -
Be c a u s e t h o s e a s s u m p t i o n s a r e i n h e r e n t l y o v e r o p t i m i s t i c ,
HOWEVER., THE BUDGET MARGINS THAT INVARIABLY SHOW UP 5 YEARS
OUT IN THE FUTURE ARE LIKE THE MIRAGE ON A DESERT HIGHWAY —
V
THEY STEADILY RECEDE AS WE APPROACH THEM,
A MORE REALISTIC WAY OF LOOKING AT THE LONGER-RUN PICTURE
MIGHT BE TO ASSUME THAT OUTLAYS WILL, IN FACT, CONTINUE
TO GROW AT SOMETHING LIKE PAST RATES.
TABLE 5 PRESENTS A
SET OF BUDGET PROJECTIONS BASED ON SUCH ASSUMPTIONS.
FEDERAL
PAYMENTS TO INDIVIDUALS, NATIONAL DEFENSE OUTLAYS, AND ALL
ot h e r
Fe d e r a l e x p e n d i t u r e s w e r e p r o j e c t e d s e p a r a t e l y on t h e
BASIS OF THEIR TRENDS OVER THE PAST TWO DECADES.
THE RESULT
IS A STRING OF PROJECTED DEFICITS, RANGING FROM $60 TO $70
BILLION, YEAR AFTER YEAR UNTIL 1980.
I WANT TO POINT OUT
THAT IN THIS EXERCISE NO ALLOWANCE WAS MADE FOR ANY FEEDBACK
EFFECT ON ECONOMIC ACTIVITY OR ON INFLATION, BOTH OF WHICH
WOULD CHANGE THE LEVEL OF RECEIPTS.
NONETHELESS, THESE
PROJECTIONS POINT UNMISTAKABLY TO THE NEED FOR MUCH GREATER
- 30 -
RESTRAINT IN FEDERAL SPENDING IF WE ARE TO IMPROVE OUR
LONG-RUN FISCAL OUTLOOK.
I CANNOT OVEREMPHASIZE THAT THE PATTERN OF EXCESSIVE
FISCAL AND MONETARY POLICIES OVER THE PAST DECADE HAVE
PLAYED A CRITICAL ROLE IN CREATING THE INFLATIONARY MOMENTUM
WITHIN THE ECONOMY-,
BECAUSE OF THE WAY THAT INFLATION
EATS AWAY AT THE INCOME OF MILLIONS OF AMERICANS AND
ULTIMATELY CAUSES WIDESPREAD UNEMPLOYMENT, IT REMAINS
OUR MOST FUNDAMENTAL LONG-TERM PROBLEM.
I DO NOT BELIEVE
THAT OUR ECONOMIC SYSTEM, AS WE KNOW IT, COULD LONG SURVIVE
♦
THE INFLATIONARY TRENDS OF THE RECENT PAST,
JOHN MAYNARD
K e y n e s o n c e o b s e r v e d t h a t "t h e r e is no s u b t l e r , n o s u r e r
MEANS OF OVERTURNING THE EXISTING BASIS OF SOCIETY THAN
TO DEBAUCH THE CURRENCY.
THE PROCESS ENGAGES ALL THE
HIDDEN FORCES OF ECONOMIC LAW ON THE SIDE OF DESTRUCTION,
AND DOES IT IN A MANNER WHICH NOT ONE MAN IN A MILLION
1
- 31 -
IS ABLE TO DIAGNOSE."
y
UNFORTUNATELY, THAT IS ONE PART OF
Ke y n e s ' t e a c h i n g t h a t w e s h o u l d h a v e r e m e m b e r e d b u t h a v e
MOST CONVENIENTLY FORGOTTEN.
In o u r
continuing
e f f o r t to h a v e
Wa s h i n g t o n s o l v e
ALL OF OUR ECONOMIC PROBLEMS, WE HAVE FALLEN INTO A
DANGEROUS PATTERN OF TRANSFERRING MORE AND MORE OF OUR
WEALTH FROM THE MOST PRODUCTIVE PART OF OUR ECONOMY, THE
PRIVATE SECTOR, TO THE LEAST PRODUCTIVE PART, THE GOVERNMENT.
Pa r t l y a s a r e s u l t , w e h a v e h a d a p r e c i p i t o u s d e c l i n e in
REAL PROFITS OVER THE PAST DECADE, WE HAVE INVESTED FAR TOO
LITTLE IN CAPITAL GOODS, AND OUR PRODUCTIVITY HAS GROWN
♦
MORE SLOWLY THAN IN ALMOST ANY OTHER MAJOR INDUSTRIALIZED
NATION IN THE FREE WORLD,
FEW PEOPLE REALIZE THAT THE
COUNTRY IS IN A PROFITS DEPRESSION.
W e ARE IN SERIOUS
NEED OF REDRESSING THE IMBALANCES WITHIN THE ECONOMY
BY SHIFTING FROM OVERCONSUMPTION AND EXCESSIVE
Go v e r n m e n t s p e n d i n g t o g r e a t e r s a v i n g s a n d i n v e s t m e n t
- 32 -
FOR THE FUTURE.
THE PRESIDENT'S MORATORIUM ON NEW SPENDING
PROGRAMS AND HIS REQUEST FOR OTHER MEASURES OF RESTRAINT
REPRESENT A SERIOUS ATTEMPT ON THE PART OF THE ADMINISTRATION
TO BEGIN REVERSING THESE TRENDS. SUCH LONG-TERM TENDENCIES
IN THE ECONOMY CANNOT BE CORRECTED IN ANY SINGLE BUDGET.
T h a t p r o c e s s w i l l t a k e m a n y y e a r s . B ut it is l o n g p a s t time
THAT WE GOT STARTED.
Fe d e r a l F i n a n c i n g B a n k
M r . Ch a i r m a n , in c o n c l u d i n g m y s t a t e m e n t , I w o u l d like
TO GIVE YOU THE BRIEF REPORT THAT YOU HAVE REQUESTED ON THE
o p e r a t i o n s of t h e
♦
F e d e r a l F i n a n c i n g B a n k . T he B a n k w a s
CREATED BY THE FEDERAL FINANCING BANK ACT OF 1973 IN ORDER
TO IMPROVE THE COORDINATION OF FEDERAL AND FEDERALLYASSISTED BORROWINGS FROM THE PUBLIC WITH THE
OVERALL ECONOMIC AND FISCAL POLICIES OF THE GOVERNMENT,
VI
11gA
- 33 Th e B a n k
also
assisted
BORROWINGS FROM THE PUBLIC AND SEEKS TO ASSURE
reduces
the
cost
Fe d e r a l
of
and
Fe d e r a l l y -
THAT SUCH BORROWINGS ARE FINANCED IN A MANNER LEAST
DISRUPTIVE OF PRIVATE FINANCIAL MARKETS AND INSTITUTIONS.
The Ba n k
is a u t h o r i z e d
under
Ac t
the
to
purchase
AND TO SELL ANY OBLIGATION WHICH IS ISSUED, SOLD OR
GUARANTEED BY A FEDERAL AGENCY.
loan
on
M a y 2A, 1974
from the
Department
acquired
by
HEW
(Hilj_ B u r t o n ).
when
of
it
THE BANK MADE ITS FIRST
purchased
$2
H e a t l h , Ed u c a t i o n
under
its
S ince
that
million
and
of
notes
Welfare
M e d i c a l Fa c i l i t i e s Lo a n P r o g r a m
t i m e , the
Ba n k
has
made
loans
TOTALLING OVER $6.4 BILLION INVOLVING THIRTEEN FEDERAL
AGENCIES AND DEPARTMENTS.
As
OF FEBRUARY 18, THE BANK HAD
LOANS OUTSTANDING OF $5.3 BILLION AND UNREALIZED COMMITMENTS
OF $4.4 BILLION.
A COMPLETE
LIST OF THOSE LOANS AND
COMMITMENTS IS ATTACHED (TABLE 6).
Le t
me
also
point
out
that
the
Ba n k
has
one
marketable
ISSUE OF $1.5 BILLION NOW OUTSTANDING AND MATURING AT THE
end
of
Ma r c h .
In t h e
future,
I
believe
that
the
E
SHOULD BORROW FR(5m THE TREASURY RATHER THAN GOING INTO
THE MARKET.
THE B a n k 's COST OF BORROWING IS SOMEWHAT
GREATER THAN TREASURY'S.
SUCH ADDITIONAL INTEREST COSTS
ARE UNNECESSARY AT ANY TIME, BUT ESPECIALLY SO NOW.
THE
ANTICIPATED LARGE BUDGET DEFICITS FOR FISCAL YEARS 1975 AND
1976 WILL PUT UPWARD PRESSURE ON INTEREST RATES.
F i n a n c i n g Ba n k
market
borrowing
would
be
likely
FEDERAL
to
put
SOMEWHAT MORE PRESSURE ON RATES THAN THE EQUIVALENT TREASURY
♦
borrowing.
Cl e a r l y , Fe d e r a l
and
federally
assisted
borrowing
SHOULD BE FINANCED WITH THE LEAST COST TO' THE GOVERNMENT
AND THE TAXPAYERS.
- 35 -
M
r.
Ch a i r m a n , I a g a i n w a n t t o t h a n k y o u fo r t h e
OPPORTUNITY TO MAKE- THIS PRESENTATION AND TO ANSWER
YOUR QUESTIONS.
W e REALIZE THAT MEMBERS OF THIS
I
Co m m i t t e e m a y h a v e d i f f e r e n t v i e w s , b u t as t h e P r e s i d e n t
HAS PROMISED, WE WANT TO WORK AS CLOSELY AS POSSIBLE
WITH YOU TO RECONCILE OUR DIFFERENCES AND TO PROVIDE
THIS NATION WITH THE STRONG LEADERSHIP IT DESERVES.
Th a n k y o u .
X
#
#
#
/
Table 1
V
Federal Budget Surpluses and Deficits
1 954-1976
*
Fiscal Year
‘ 1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975e
1976e
.
Budget Surplus (+)
or Deficit (-)
($ billions)
- 1.2
- 3 .0
+ 4 .1
+ 3 .2
- * .9
- 1 2 .9
+ 0 .3
- 3 .4
- 7 .1
- 4 .8
- 5 .9
~ 1 .6
- 3 .8
- 8 .7
- 2 5 .2
+ 3 .2
- 2 .8
- 2 3 .0
- 2 3 .2
- 1 4 .3
- 3 .5
-3 5 .
-5 2 .
Budget Surplus (+)
or Deficit (-) as % of GNTP
Three-Year
Moving Average
(Centered)
Annual
- 0 .3
- 0 .8
1 .0
0 .8
- 0 .7
- 2 .7
‘
0.1
- 0 .7
- 1 .3
- 0 .8
rl.O
- 0 .2
- 0 .5
-1.1
- 3 .0
0 .4
- 0 .3
- 2 .3
-2.1
-1.2
- 0 .3
- 2 .4
- 3 .3
- .0 •
- 0 .3
0 .3
- 0 .9
-1.1
-1.1
- 0 .6
- 0 .9
- 1 .0
- 0 .6
- 0 .5
- 0 .6
- 1 .6
1 -1.2
- 0 .9
- 0 .8
- 1 .5
- 1 .7
-1.1
- 1 .3
- 2 .0
- 2 .3
TREASURY MONEY MARKET BORROWING
( I n c lu d in g F o r e ig n n o n m a rk e ta b le s e c u r i t i e s )
( In b i l l i o n s o f d o l l a r s )
C a le n d a r
Year
Gross New
Issues 1/
F i r s t Half
Maturities . Net New
Money
2/
Peak increase in
Borrowing
Gross New
Issues 1/
Secon d H a l f
M aturities
Net New
H
Money
P'Y.'. Il
unease _n
Borrowing
$16 .
1970
$22
$24
$ -2
$ 4
$31
I $15
$16
1971
27
24
3
3
37
15
22
22
1972
13
15
-2
7
21
7
14
16
1973
17
16
1
10
20
15
5
5
1974
17
22
-5
4
32
18
14
14
1975est
45
17
28
31
48
11
37
37
1976est
49
23
24
28
•
C a le n d a r
Year
Gross New
Issues 1/
F u ll Year
Net New j Peak In
M aturities
crease in
Money
. 1!
Borrowing
e s t : e s t im a te d
1970
$53
$39
$14
$14
1/ I n c lu d e s in c r e a s e s
i n r e g u la r b i l l s .
1971
64
38
25
25
1972
34
22
12
13
1973
37
31
6
6
1974
49
40
9
9
2/ Includes paydowns
in regular bills.
■*
TABLE
3
f
1.974-
49
40
TABLE
Net
•
•
: U.S. Treas.
:£t Financing
: Bank
1954
1955
1956
1957
1958
1959
3.6
1.7
-4.3
-3.6
6.3
8.0
1960
1961
1962
1963
1564
1965
1966
1967
1968
1969
.8
2.0
8.8
6.4
2,7
I -3.1
1970
1971*
1972
1973
1974
1975e2/
197 6e2/
Funds
3
Raised in the Capital Markets by Major
( f i s c a l years,' b i l l i o n s o f d o l l a r s )
♦
•
•
..Federal & : Total
; Corp. & ; Total
• sponsored ;Federal s State & : foreign : sccur• agencies : sector ; local
f a : itics
•
%
Sector
; Federal
; sector as
;a % of total
: securities
: * Gov't.
: sector as
: % of *tota
: securities
1.7
.1
•6
.9
.8
1.4
5.3
• 1.7
-3.7
-2.7
7,1
9.3 \
5.5
5.4
4.6
4.0
5.1
5.7
3.4
2.6
3.3
5.7
6.9
4.7
14.2
9.7
4.1
7.0
19.2
19.7
37.4
17.4
|.37.1
47.5
76.0
73.1
21.0
18.6
63.9
76.4
•6
18.2
-1.9
2.0
.1
2.4
1.1
1.5
2.2
6.7
2.6
5.5
5,7
2.8
2.1
11.2
7.6
4.2
5.4
5.7
3.3 .
23.8
3.8
5.7
4.9
6.0
5.5
5.2
6.9
7.3
6.0
7.2
12.0
3.5
5.0
5.5
5.5
3.8
5.2
9.2
12.2
15.1
14.7
12.1
12.0
22.7
18.6
13.2
17.5
22.2
21.5
46.1
30.5
23.5 1
17.7
49.4
40.7
31.8
30.8
25.8
15,2
51.6
12.4
70.7
58.5
75.6
70.3
71.4
70.4
58.9
43.3
67.3
51.8
6.8
20.5
19.6
18.5
2.1
43.9
63.7
8.1 *
2.7
8,7
14.3
*21.3
17.6
14.7
WSm
.
14.9
23.2
28.2
• 32.8
23.3
61.5
78.4
9.7
15.0
15.6
12.6
16.7
12.5
14.6
.
14.8
23.0
15.8
10.5
15.6
26.3
22.7
39.4
61.3 '
59.7
55.9
55.6
100.3
115.7
Office of Debt Analysis
Source; FY 1954-1974 data based on FRB "Flow-of Funds,”
1/ Bonds issued by nonfinancial corporations.
2/ Assumes adoption of President's Budget program,
with budget deficits of $35 billion in FY 1975 and $52 billion
. in ?Y 1976.
y Inc totes State and local as part of governmer. actor.
37.9
37.9
47.2
58.6
41.9
61.3
67.8
February 7# 1975
•
62.4
62.4
73.5
81.2
•72.0 •
73.8
80.4
TABLE 4
Federal and Federally-Assisted Credit as Percent of Total Flow of
Funds in U.S. Financial Markets, by Type of Credit*
Fiscal years, 1975 and 1976 projected
»
é
NET FUNDS RAISED
Long-Term Funds
Mortgages :
Residential
Commercial
Farm
.Total
Corporate Securities:**
Bonds
Stocks
Total
: Total
: ($ bil)
35.3
7.9
4.6
47.8
29.1
5.3
34.4
.Fiscal 1975
Federal
:
Government : Percent : Total
($ bil)
: Total : ($ bil)
10.4
—
6.9
17.3
29.5
—
150.0
36.2
43.7
8.7
5.2
,57.6
8.5
— —i
3.a
rni
19.5
...
73.1
21.3
1.6
— «
1.6
5.9
—
4.6
13.9
15.0
63.7
14.7
1.9
. 80.3
100.0
100.0
13.0
86.3
7.9
.3
___
19.2
4.3
5.3
13.5
57.6
23.2
2.0 ‘
6.9
—
—
2.0
5.8
26.9
7.9
34.8
23.5
92.4
Total long-term
82.2
19.3
Government Securities
U.S. Government
Federal agencies
State & local governments
Total
43.9
17.6
12.5
74.0
43.9 '
17.6
2.2
63.7
100.0
100.0
17.6
86.1
6.1 .
.1
16.6
3.1
————
41.1
7.0
1.0
Other Funds***
Eusiness credit
Consumer credit
Security credit
Other loans, including
foreign
Total
•
36.8
3.2 •
-.4
—
4.0
10.2
210.5
24.6
9.2
58.3
197.7
93.2
47.1
243.7
* Based on Federal Reserve Flow of Funds ( t h r o u g h
C £■ E r U . S . Budget, fiscal year 3 976.
<►» tT n c l u d i n q
63.7
14.7 .
14.6
93.0
1.9
41.5
TOTAL FUNDS RAISED
O f f i c e of the S e c r e t a r y of the Treasury.
Office of Debt Analysis
third
quarter
fo r e ig n .
>
s ana
Xong—term
Fodv.
Fiscal 1976
•
Federal
•
: Government : Percent
: ($ bil)
: Federal
1 credits.
'
107.7
44.2
February 7, 1975
1974)
and
Special
Analyses
The Fiscal Outlook, 1974-ly80
(in billions of dollars)
Fiscal Years
1978
1976
1977#
1974
actual
1975
268.4
313.4
349.4
393.1
425.4
451.9
476.7
264.9
278.8
297.5
362.5
405.8
452.3
501.7
-3.5
-34.7
-51.9
-30.6
-19.6
0.4
25.0
Outlays on alternative assumptions*
268.4
313.2'
361.1
420.2
469.7
519,7
572.5
Projected receipts (same as above)
264.9
278.8
297.5
362.5
405.8
452.3
501.7
-3.5
-34.4
-63.6
-57.7
-63.9
-67.4
As published in 1976 Budget
-'
Projected outlays*
Projected receipts
Budget margin or deficit (-)
1979 .1980
oo
Budget margin or deficit (-)
1
*^1
o
As adjusted*
Office of the Secretary of the Treasury
Office of Financial Analysis
#
Level affected by transitional quarter between FY 1976 and FY 1977.
* Assumes constant program levels but makes allowance for changes in beneficiary population a
cost of living increases. Some allowance is also made for real growth in defense and energy.
j
***&*■<*
-
•
+ Outlays projected as follows: Payments to individuals are assumed to grow in real terms at an\.
8.8 percent annual rate (the 1955-19/4 average). As in the Budget, national defense manpower required
ments are assumed to remain constant, other,defense purchases are assumed to rise by 4 percent a year
in real terms. All other outlays are assumed to rise by 2-1/2 percent a year in real terms (the
1955-1974 average). Constant dollar outlays were inflated by the price changes projected in the
Budget to obtain current dollar expenditures. In this calculation, no adjustment was made to projecte
receipts to take account of the impact of the faster rise in outlays on economic growth and inflation,
and therefore on tax receipts. Thus, the budget deficits shown here are not projections in the usual
sense of the word; rather, they are indicative of the inflationary pressures that would be created
within the economy by increased budget outlays, especially during a period when the economy was moving
back toward a full utilization of resources.
^Table 6
J
FEDE RA L FI NA N C I N G BANK
LOANS A N D U N R E A L I Z E D C O M M I T ME NT S OU T S T A N D I N G
(millions of dollars)
LO AN S
OUTSTANDING ■
B O R R OW ER
UN RE ALIZED
COMMITMENTS
O U TS TA ND IN G
,
3 000.0
Farmers Home A d m i n i s t r a t i o n
*
General Services A d m i n i s t r a t i o n
45.0
General Services A d m i n i s t r a t i o n
107.0
D e pa rt me nt of Defense
F o re ig n Mi li ta ry Sales
35.0
D e pa rt me nt of Health, Education,
and Welfare (Medical Facilities
Loan Program) Series A
27.6
D e pa rt me nt of Health, Education,
and Welfare (Medical Facilities
Loan Program) Series B
13.8
565.0
16.2
83.0
D e pa rt me nt of H o us in g and Urban
De ve lo pm en t ( New Co mmunities
Administration)
R i v e r t o n Properties, Inc.
F l ow er Mound New Town, Ltd.
H a rb is on De ve lopment Corp.
103.0
4.0
4.0
7.0
13.0
National Ra il ro ad Pa ss en ge r
Co r p o r a t i o n (Amtrak)
272.2
Overseas Private In ve stment
C o rp or at io n
5.5
86.0
Postal Service
500.0
Rural El e c t r i f i c a t i o n A d m i n i s t r a t i o n
208.7
3,291.3
21.5
178.5
Small Business Investment
Companies
Student Loan M a r k et in g A s so ci at io n
220.0
Tennes se e Valley A u t h or it y
965.0
Un i t e d States Railway As s o c i a t i o n
TOTAL
Office of the Special Assist an t
to the S e c r et ar y
(Debt M a n a g e me nt )
3.4
5,338.7
4,437.0
Fe br ua ry 13, 1975
m a rtm e n to fth e fR EA S U R Y
INGTON,
D.C. 20220
TELEPHONE W04-2O41
1
FOR IMMEDiATU KcijCrtoE
r
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE HOUSE BUDGET COMMITTEE
WASHINGTON, D . C . , TUESDAY, FEBRUARY 25, 1975
1:30 P .M ., EST
Mr. Chairman and Members o f the Committee:
I welcome t h is opportunity to appear before you as you
begin your con sid eration s o f the P r e s id e n t's proposed budget
for f i s c a l year 1976.
This budget is part o f a broader s tr a te g y to meet three
separate but in te r r e la t e d goals th a t we w i l l be d is cu s s in g
this afternoon:
-- F i r s t , we must end the downward s l i d e in the economy,
putting m illio n s of Americans back to work;
and,
- Second, we must continue our progress a ga in st i n f l a t i o n ;
-- Third, we must achieve greater s e l f s u f f i c i e n c y in
meeting our energy needs, thus regaining con trol over our
economic d e s t i n y .£
For many months, we have been bombarded with economic
s ta tis tic s p o in tin g in the wrong d i r e c t io n .
These s t a t i s t i c s ,
along with our own p r o je c tio n s fo r the f u tu r e , have created
a rather grim atmosphere.
They confirm th a t the average le v e ls
of unemployment and i n f l a t i o n t h is year w i l l both be h igh .
They also in d ic a t e , as we have said many times b e fo re , th at
our troubles are long-term in nature.
But l e t us be c le a r on
this point: they provide no support fo r the view th at the
economy is heading toward anything resembling a Great Depression.
Indeed, we b e lie v e th a t the economic trends w ithin the
year should be d i s t i n c t l y b e tte r t h is year than l a s t .
While
unemployment was r i s i n g at the end o f 1974, we expect i t to
be f a l l i n g by the end o f 1975. While the rate o f i n f l a t i o n
was above 10 percent at the end o f 1974, i t should f a l l below
10 percent by the end o f 1975. Thus, as we enter 1976, even
though our progress may be slower than anyone would l i k e , we
expect that the Nation w i l l d e f i n i t e l y be on the road to recovery
WS-235
2
Let us look briefly at our grounds for cautious optimism.
For one thing, there are positive cyclical forces developing
within three areas of the economy -- housing, consumer spending
and inventory investment -- that should begin to assert them
selves during the course of this year?
--As you know, the housing industry first went into
a tailspin when inflation dried up the supply of
mortgage credit and drove up interest rates. With
the Federal Reserve now providing greater monetary
stimulation and credit demands receding somewhat,
short-term interest rates have declined sharply.
This has renewed the flow of funds into the thrift
institutions and has provided the essential pre
condition for an upturn in housing.
-- Similarly, some of the causes of inflation also
led to the biggest drop in consumer spending since
the Second World War. Now, with the rate of in
flation subsiding and with a pattern of higher
wage settlements having emerged, the real income
of workers should be on the upgrade against
during 1975. As it turns upwards, we should
experience higher rates of consumer spending.
- -We have also moved into a period of inventory
liquidation. Consumer spending should continue
at a sufficient level to drain off much of these
excessive inventories, so that before the year
is out inventory investment will again become
a positive factor.
Thus, within the recession itself, we can find the s e e d s
of recovery. As they take root and grow, the recession should
bottom out and we can begin the long road back.
A second factor that will contribute to the recovery is
the supportive monetary policy of the Federal Reserve Board.
Its chairman, Arthur Burns, has said repeatedly that the
Federal Reserve intends to encourage economic recovery by
providing for an adequate expansion in money and bank credi ,
while also avoiding an explosion that would plunge us into
deeper trouble. As I have noted, we are already seeing
of their policies in the decline of short-term interest ra
The third factor which strengthens our prospects for a
recovery is the budget itself. We are not leaving things to
chance but intend to support the natural forces of recovery.
The President has proposed a $16 billion tax cut, and we
have indicated a willingness to accept a somewhat higher
figure if appropriate. We support this tax cut not because
the economy would not recover without it, but because it
will make the recovery more solid and certain. Moreover,
the budget provides an estimated $18 billion for expanded
unemployment compensation and bigger public service em
ployment programs during fiscal year 1976. I must also
point out that total outlays in the new budget represent
an increase of more than $80 billion over the level of just
two years ago. These sharp increases in spending under
score the fact that the President has been, and will
continue to be, highly responsive to problems of the
recession. The President remains committed to the position
that he will do everything he can to alleviate the suffering
caused by unemployment.
Tax Cut Versus Higher Spending
Some Members of Congress have asked why the President
has chosen a tax cut as the primary form of stimulation
and why he is resisting much larger spending programs.
Let me try to address those questions.
In planning the way that fiscal stimulus could best
be introduced into the economy, we carefully considered
the basic options -- cutting taxes, increasing expenditures
beyond budgeted levels or some combination of the two.
We decided that the tax route was highly preferable for
two reasons.
First, the stimulus from a tax cut will get into
the income stream much more rapidly than a further rise
in federal expenditures.
Some have questioned this view because they believe
a large number of households will save rather than spend
4
t h e i r t a x r e b a t e s . A lth o u g h we b e lie v e much o f th e money
w i l l go d i r e c t l y in t o th e sp en d in g s tr e a m , th e r e a re
c e r t a i n l y many f a m i li e s who w i l l p u t t h e i r r e b a te s in t o
s a v in g s a c c o u n ts ' o r pay o f f d e b t.
But th e fu n d s t h a t go
in t o s a v in g s a c c o u n ts o r a re u sed to rep ay d eb t w i l l a ls o
be v e r y h e l p f u l in s tr e n g th e n in g th e econom ic r e c o v e r y .
F o r ex a m p le, money t h a t flo w s in t o s a v in g s and lo a n
a s s o c ia t io n s and s i m i la r f i n a n c i a l in te r m e d ia r ie s p ro v id e s
th e g r e a t b u lk o f fu n d s f o r new m o rtg a g e s. T a x -r e b a te
d o l l a r s flo w in g in t h a t d i r e c t i o n w i l l s u r e ly a id th e
h a r d - h i t h o u sin g in d u s t r y .
I t w ould a ls o be wrong to assume t h a t th e i n i t i a l
d e s ir e by some h o u se h o ld s to save t h e i r t a x r e b a te s w i l l
mean t h a t th e ta x c u t w i l l n o t work to s t im u la t e consumer
s p e n d in g .
Once h o u se h o ld s have in c r e a s e d t h e i r l i q u i d i t y
p o s i t i o n , e i t h e r by ad d in g to s a v in g s o r r e d u c in g t h e i r
d e b t , th e y w i l l have more c o n fid e n c e ab ou t t h e i r econom ic
s itu a tio n .
They w i l l have g r e a t e r f a i t h i n t h e i r fu tu r e
and a more p o s i t i v e a t t i t u d e ab ou t sp en d in g from t h e i r
c u r r e n t incom e.
T h u s, w hether th e t a x - r e b a t e ch e ck s go i n th e f i r s t
in s t a n c e in t o s a v in g s o r w hether th e y go d i r e c t l y in t o
s p e n d in g , i t w i l l n o t be v e r y lo n g a t a l l b e fo r e th e
g r e a t b u lk o f th e ta x r e b a te g e ts in t o th e sp en d in g
stream and th e re b y c o n t r ib u t e s to a r e c o v e r y in econom ic
a c tiv ity .
The o th e r s id e o f t h i s c o in i s even more im p o rta n t to
th e is s u e o f prompt econom ic s tim u lu s :
th e f a c t t h a t w ith
few e x c e p t io n s , a d d it io n s to f e d e r a l sp en d in g program s fo r
goods and s e r v ic e s a re l i k e l y to be much to o slow in providing
im petus to th e economy. T h is f a c t was p e r s u a s iv e ly documented
In a stu d y made s e v e r a l y e a rs ago by Nancy H. T e e te r s o f the
B ro o k in g s I n s t i t u t i o n .
She a n a ly z e d th e e x p e r ie n c e o f the
1962 a c c e le r a t e d p u b lic works p ro g ram --an d I em phasize the
a c c e le r a t e d n a tu re o f t h a t e f f o r t .
The program was passed in
Septem ber o f 1962 w ith i n i t i a l o b l i g a t i o n a l a u t h o r it y o f
$850 m i l l i o n . A lth o u g h $152 m i l l i o n o f t h a t amount was
o b lig a t e d in t h a t f i s c a l y e a r , o n ly $62 m i l l i o n was sp ent then.
The b u lk o f th e money was o b lig a t e d and sp e n t in f i s c a l years
1964 and 1965, w ith v e s t i g e s o f th e program s t i l l i n existen ce
i n 1971.
5
T h is i s shown i n th e t a b le b elo w , w hich i s tak en from
Ms. T e e te r s ' a r t i c l e in B ro o k in g s P ap ers on Econom ic
Activity, 1 , 1971, p . 233.
New O b lig a t io n a l A u t h o r i t y , O b l i g a t i o n s , and E x p e n d itu re s under
The P u b lic Works A c c e le r a t io n Program , F i s c a l Y e a rs 1963-71.
( M i lli o n s o f D o lla r s )
Obligations
F is c a l
Year
New
O b li g a t i o n a l
A u th o r ity
1963
1964
1965
1966
1967
1968
1969
1970
1971 (e s t)
8 5 0 .0
3 0 .0
4 .0
Total
8 84.0
Sources:
_ _
S ta te
and L o c a l
Proj e c ts
F ed eral
Proj e c ts
—
--
- -
—
152.5
5 .5
8 3 6 .0
5 5 .0
8 1 .8
1 5 .7
—
- -
—_
- -
- -
_ _
- -
—
—
—
—
-6 0 2 .7
3 .0
1 .9
0 .6
---
E x p e n d i
tu r e s
6 2 .5
3 3 1 .8
321.6
8 8 .2
2 1 .1
5 .0
2 .0
0 .8
3 .0
9 6 .7
3 13.7
192.3
_ _
A dm ini
s tr a tio n
- - -
The Budget o f th e U n ite d S t a t e s G overnm ent,
v a r io u s f i s c a l y e a r s , and The Budget o f The
U n ite d S t a t e s Governm ent- - A p p e n d ix , v a r io u s
fis c a l years.
The momentum o f f e d e r a l sp e n d in g grow th i s a lr e a d y so
strong th a t i t i s h a rd to im a g in e a d e li b e r a t e p o l i c y d e c is io n
to boost i t s t i l l f u r t h e r .
I f , h o w ever, we were to make such
a d e c is io n now in an e f f o r t to p r o v id e econom ic s tim u lu s
during th e c u r r e n t r e c e s s i o n , we c o u ld e x p e c t to g e t o n ly a
very sm all p a r t o f th e work s t a r t e d when i t i s most n eed ed .
Remember th a t th e 1962 program d e s c r ib e d above was an
6
a c c e le r a t e d p u b lic works program ; s p e c i a l e f f o r t s were
made to g e t th e program m oving i n a h u r r y . I f t h a t program
can be u sed as a m o d e l--a n d we have no re a so n to b e lie v e
o th e rw is e --w e c o u ld e x p e c t t h a t o f th e a d d i t i o n a l funds
v o te d e a r ly i n f i s c a l 1976 f o r one or a n o th e r F e d e r a l program,
o n ly ab ou t 7 p e r c e n t o f th e e x p e n d itu r e s would be made
d u rin g t h a t f i s c a l y e a r , when th e econom ic r e c o v e r y sh ould
s t i l l be in i t s e a r ly s t a g e s . The b u lk o f th e sp en d in g
w ould ta k e p la c e i n f i s c a l y e a r s 1977 and 1978 when we may
want to a p p ly f i s c a l r e s t r a i n t to ward o f f a ren ew al o f
i n f l a t i o n a r y p r e s s u r e s . T h u s, th e econom ic e f f e c t s o f a
f u r t h e r r i s e i n F e d e r a l sp en d in g w ould be o f e x tre m e ly
l i m it e d h e lp d u r in g and im m e d ia te ly a f t e r th e r e c e s s io n and
c o u ld be s e r i o u s ly i n f l a t i o n a r y a c o u p le o f y e a rs from now
when much o f th e sp en d in g would a c t u a l l y ta k e p l a c e .
The second re a so n why we f e e l t h a t c u t t i n g ta x e s i s a
s u p e r io r means o f p r o v id in g s tim u lu s to th e econom y, as
opposed to f u r t h e r in c r e a s e s in governm ent s p e n d in g , i s that
t a x c u t s p u t th e s tim u lu s in th e m ost dynam ic p a r t o f the
economy. The p r iv a t e s e c t o r s t i l l p r o v id e s some 85 p e rce n t
o f a l l th e jo b s i n t h i s c o u n tr y .
I f we a re g o in g to b r in g
down th e r a t e o f unem ploym ent, i t i s v i t a l t h a t we have a
v ig o r o u s r e c o v e r y i n th e p r iv a t e s e c t o r . W h ile in c r e a s e s in
unemployment com p en sation and p u b lic s e r v ic e employment
program s a re v e r y d e s ir a b le to c u s h io n th e f a l l i n employment
d u r in g th e r e c e s s i o n , th e y do n o t c r e a t e perm anent jo b s or
p r o v id e th e fo u n d a tio n s f o r s u s ta in e d grow th and p r o s p e r it y .
F e d e r a l sp en d in g f o r n o n d efen se p u rp oses has in c r e a s e d
d r a m a t ic a lly i n r e c e n t y e a r s , grow ing from 1 1 .6 p e r c e n t o f
th e G ro ss N a t io n a l P ro d u ct i n 1969 to 1 6 .0 p e r c e n t in the
b u d g e t f o r th e com ing y e a r , and i t p rom ises to c o n tin u e
grow ing a t a r a p id c l i p i n th e f u t u r e . M o re o v e r, th e r e i s
ample h i s t o r y to show t h a t F e d e r a l program s o f t e n come in to
e f f e c t to o l a t e to a s s i s t in econom ic r e c o v e r y , and once in
p la c e th e y become perm anent f i x t u r e s , grow ing i n s i z e
e v e ry y e a r a lm o st i r r e s p e c t i v e o f n e e d . The m ost e f f i c i e n t
means o f c r e a t in g a d d i t i o n a l jo b o p p o r t u n it ie s c o n tin u e s to
be to p r o v id e in c e n t iv e s d i r e c t l y to th e p r iv a t e s e c t o r .
We want to do t h a t b o th by i n c r e a s in g consumer demand through
c u t s in i n d iv i d u a l income ta x e s and by a b o o s t i n th e in v e s tin g
t a x c r e d i t to sp ur new sp en d in g by b u s in e s s e s f o r th e p la n t
and equipm ent t h a t i s v i t a l l y n eed ed .
Need for Spending Restraint
In the belief that the budget as proposed includes a
healthy degree of economic stimulation, the President has
also asked for a moratorium on new spending programs and for
firm limits on several existing programs. As he has said,
his position is not set in concrete and we must be willing to
adjust to meet changing circumstances, but it is clear that a
central emphasis of our economic policy is to restrain further
growth in the Federal budget.
A primary reason for this emphasis is the continuing
threat of inflation. Even though the rate of inflation is
subsiding somewhat, it could easily shoot upwards again if
we overheat the economy, as we have done so often in the past.
Furthermore, it is essential to understand that the forces of
inflation are very largely to blame for the recession we are
experiencing today. Both the housing industry and consumer
spending, as I have noted, first tumbled under the pressures
of rising prices. If we revive those pressures through
excessive fiscal and monetary policies, there is a very
real danger that we could enter a new and more vicious cycle
of inflation and recession. Because of the continuing danger
of inflation, we must carefully avoid the temptation of
trying to return to full employment at breakneck speed.
Instead, we must attack both the recession and inflation at
the same time, and that requires a balanced, careful approach—
thé kind of approach contained in this budget.
8
We.have also made no secret of our views that the budget
deficits which are already projected will cause strains in
the private financial markets. Those strains should be
manageable, but -- and I want to stress this -- they will
remain manageable only if Federal borrowing needs do not
become significantly larger and if they are only temporary
in duration.
There is, of course, another school of thought on the
question of Federal borrowing in the capital markets. This
other school believes that the Government's borrowing needs
should be easily met because private demands for funds should
slacken considerably.
It is true that financial conditions normally ease
substantially during a recession and normally they remain
easy well into the period of recovery. There are two main
reasons for this: first, some private demands for credit are
closely related to the pace of business activity and drop
sharply during a recession. A prime example can usually be
found in short-term business borrowing to finance inventories.
Second, the Federal Reserve customarily "leans against the
wind" during a period of recession and seeks to expand, or at
least maintain, the rate of growth in money and credit.
Therefore, interest rates can be expected to decline and the
availability of credit to increase as a normal part of the
cyclical process.
Consideration of this nature have apparently led some
observers to conclude that the financing of large Federal
deficits in the current recession is a routine matter and of
little economic significance. I respectfully disagree.
As we have said on several occasions, the current
recession is an outgrowth of a long period of inflation that
has left private financing demands much heavier than usual.
There has been a marked decline in corporate profits in
recent years and a serious erosion of the liquidity base of
households and businesses. Conditions in the stock market
have in many cases virtually ruled out the sale of new equity
as a source of funds.
9
For these and other reasons, the number of private long
term debt issues coming into the market is unusually large.
Our latest Treasury projections show that net new corporate
bond issues, which rose from $12% billion in 1973 to $25
billion in 1974, will advance even farther to some $30 billion
or more in 1975. While corporate capital spending programs
are being cut back, there will still be a very heavy volune
of corporate long-term borrowing. Furthermore, the State and
local fiscal position has changed dramatically. With tax
receipts reduced by the recession, their surpluses have melted
away so that their borrowing needs should be substantial.
Some slackening in private demands for short-term credit
is underway and more can be expected. Yet by any previous
recession standards, total private demands for credit -- both
short and long-term -- are likely to remain much larger than
might ordinarily be expected in a recession.
Federal requirements will, of course, have to be met
first, and because of the swollen size of Federal deficits,
Federal borrowing demands will be enormous. Under proposed
programs, we estimate that the Treasury during this calendar
year will be coming into the capital markets for almost $70
billion of net new financing, of which $65 billion will be in
marketable securities. Federally sponsored agencies may
account for another $14 billion in borrowing. These are huge
sums -- more net funds, in fact, than have ever been borrowed
in the capital markets in any single year by the public and
private sectors combined.
These governmental demands for money represent outsized
demands on the capital markets. As the budget now stands,
total Federal borrowing during fiscal year 1976 will account
for 68 percent of the new funds borrowed in the capital
markets. (See Tables 2-4.) If we add to that amount the
anticipated borrowing by State and local governments, total
government borrowing during the coming fiscal year will be 80
percent of the capital markets. Only 20 percent will be left
to private industry in a financial market that has always
been the centerpiece of our free enterprise system.
We should be fully aware of the dangers that would arise
. budget deficits were increased far beyond the levels pro
jected. Reasonable financing of such deficits would be
possible only if the recession is much deeper than we expect.
Otherwise, we could either have vicious competition between
the Government and private borrowers for capital funds, or
the Federal Reserve would have to supply funds without regard
o the inflationary consequences. In any event, despite the
intentions of the Government, a larger than expected
udget would threaten economic recovery by crowding out medium
10
to lower-rated business borrowers, many of whom already have
economic problems, and by elbowing aside mortgage borrowers
as well, thus aborting recovery in the housing industry.
The key to successful financing of the large Federal
deficits lies in the diligent restraint of Federal expendi
tures. Large as they are, the deficits projected for fiscal
years 1975-76 can probably be accommodated, although they
will produce some strains in the financial markets. However,
if Congress were to push Federal expenditures much beyond
the budgeted levels, it would not be possible to retain much
optimism as to the result. Either the recovery would be
delayed or more inflation would be experienced in the future.
In response, Mr. Chairman, to the question you asked in
your letter of February 5 about the impact of deficits on
unemployment, I believe that deficits much larger than those
now budgeted would carry with them a very serious risk of
increasing rather than reducing unemployment. If, for example,
the larger deficits caused the credit markets to become con
gested during fiscal 1976, the unemployment situation would
worsen at an early stage in the recovery. On the other hand,
if the Federal Reserve accommodated the larger deficits by a
more rapid growth in money and credit, the adverse impact on
unemployment could be postponed -- not avoided -- for perhaps
a year or two. But the consequences of that action would soon
catch up with us in the form of accelerated inflation followed
by a new recession and higher unemployment. Thus, in our
opinion, the projected deficits for fiscal 1975-76--in the
context of our expectations about the course of the economy-are about as large as our financial system can tolerate without
doing more harm than good for the economy.
11
Big Deficits in a Big Economy
In responding to the points I have tried to make this
morning, some observers point out that deficits of the size
we are facing should not be a cause for alarm because the
economy has also grown substantially. Big deficits, they
argue, can easily be accommodated in the environment of a big
economy. Let me address that issue for a moment.
In fiscal year 1975, we estimate that the budget deficit
will amount to 2.4 percent of the Gross National Product,
while in fiscal year 1976, it will come to 3.3 percent. It
is true that on some occasions in the past we have come close
to these deficit levels. The times most often cited for com
parison are fiscal years 1959 and 1968, in which the deficits
reached 2.7 and 3.0 percent of the GNP respectively. But
what is usually left unsaid in such comparisons is that the
deficits associated with those periods were confined to a
single fiscal year. In fiscal year 1960 and again in fiscal
year 1969, the budget returned to surplus. This time, however,
we anticipate very large deficits not just for a single year
but for three years in a row.
If you analyze the history of budget deficits in terms
of three-year averages (see the final column of Table 1), you
will see that current deficits are going to be substantially
larger fraction of our GNP than in any period since World War
II. While the capital markets may be able to absorb such large
borrowings by the Government for a brief period, we cannot be
confident that a long period of heavy Government borrowing can
be absorbed without highly disruptive effects.
Beyond these considerations, I would suggest that there
are at least three basic reasons to question Government spending
trends:
First, we should recognize that the rate of budget increases
is growing too rapidly relative to increases in the GNP. Federal
12
budget outlays in fiscal year 1975 are expected to reach $314
billion, an increase of 17.2 percent over the previous year.
In fiscal year 1976, outlays will jump to at least $349 billion,
an increase of 11.5 percent. These figures reflect a truly
staggering growth in the Federal budget that has taken place
since the mid-1960’s. Since then, as seen from the figures
below, the GNP has grown by approximately 100 percent while
Federal budget outlays have risen by over 160 percent:
FY 1966
FY 1976 (est.)
Federal outlays
Federal outlays
CY 1966
CY 1975
GNP
GNP (est.)
$134.7 billion
349.4 billion
+ $214.7 billion or 1601
$749.9 billion
$1,497.7 billion
+ $747.8 billion or 1001
Second, we cannot ignore the increased size of the national
debt merely by relating it to a growing GNP or population base.
In fiscal year 1975 the interest on this cumulative debt will
total $33 billion. This is a very significant share of the total
budget. For example, it represents about one-third of the total
funds allocated to national security. Similar comparisons could
be made to social security benefits, health, education, mass
transit, etc.
Finally, by rationalizing continuing Federal deficits on
the basis of continuing growth in the overall economy, we lull
the public into a false sense of security about the long-run
trends in our budget and our economy. As you know, the b u d g e t
documents have for some time now been presenting 5-year forward
projections of the fiscal outlook. These projections are u s e f u l *
However, as the Budget carefully points out, the outlay pro
jections simply assume the continuation of existing and c u r r e n t l y
proposed programs, but no new programs. As a result, the B u d g e t
figures for 4-5 years ahead always show an improving picture.
In the current budget, the 1980 projection is for a surplus of
$25 billion. Because those assumptions are inherently overoptimistic, however, the Budget margins that invariably show up
5 years out in the future are like the mirage on a desert hignw y
-- they steadily recede as we approach them.
13
A more realistic way of looking at the longer-run picture
might be to assume that outlays will, in fact, continue to grow
at something like past rates. Table 5 presents a set of budget
projections based on such assumptions. Federal payments to
individuals, national defense outlays, and all other Federal
expenditures were projected separately on the basis of their
trends over the past two decades. The result is a string of
projected deficits, ranging from $60 to $70 billion, year after
year until 1980. I want to point out that in this exercise no
allowance was made for any feedback effect on economic activity
or on inflation, both of which would change the level of receipts.
Nonetheless, these projections point unmistakably to the need
for much greater restraint in Federal spending if we are to improve
our long-run fiscal outlook.
I cannot overemphasize that the pattern of excessive fiscal
and monetary policies over the past decade have played a critical
role in creating the inflationary momentum within the economy.
Because of the way that inflation eats away at the income of
millions of Americans and ultimately causes widespread unemploy
ment, it remains our most fundamental long-term problem. I do
not believe that our economic system, as we know it, could long
survive the inflationary trends of the recent past. John Maynard
Keynes once observed that "there is no subtler, no super means of
overturning the existing basis of society than to debauch the
currency. The process engages all the hidden forces of economic
law on the side of destruction, and does it in a manner which
not one man in a million is able to diagnose." Unfortunately,
that is one part of Keynes £ teaching that we should have remembered
but have most conveniently forgotten.
■
14
In our continuing effort to have Washington solve
all of our economic problems, we have fallen into a
dangerous pattern of transferring more and more of our
wealth from the most productive part of our economy, the
private sector, to the least productive part, the Government.
Partly as a result, we have had a precipitous decline in
real profits over the past decade, we have invested far too
little in capital goods, and our productivity has grown
more slowly than in almost any other major industrialized
nation in the Free World. Few people realize that the
country is in a profits depression. We are in serious
need of redressing the imbalances within the economy
by shifting from overconsumption and excessive Government
spending to greater savings and investment for the future.
The Presidents moratorium on new spending programs and his
request for other measures of restraint represent a serious
attempt on the part of the Administration to begin reversing these;
trends. Such long-term tendencies in the economy cannot be
corrected in any single budget. That process will take many
years. But it is long past time that we got started.
Federal Financing Bank
Mr. Chairman, in concluding my statement, I would like
to give you the brief report that you have requested on the
operations of the Federal Financing Bank. The Bank was
created by the Federal Financing Bank Act of 1973 in order
to improve the coordination of Federal and Federally-assisted
borrowings from the public with the overall economic and
fiscal policies of the Government. The Bank also reduces the
cost of Federal and Federally-assisted borrowings from the public
and seeks to assure that such borrowings are financed in a manner
least disruptive of private financial markets and institutions.
The Bank is authorized under the Act to purchase and to
sell any obligation which is issued, sold or guaranteed by a
Federal agency. The Bank made its first loan on May 24, 1974
when it purchased $2 million of notes from the Department of
Health, Education and Welfare acquired by HEW under its M e d i c a l
Facilities Loan Program (Hill Burton). Since that time, the
Bank has made loans totalling over $6.4 billion involving
thirteen Federal agencies and departments. As of February 18,
the Bank had loans outstanding of $5.3 billion and unrealized
commitments of $4.4 billion. A complete list of those loans a n a
commitments is attached (Table 6).
15
Let me also point out that the Bank has one marketable
issue of $1.5 billion now outstanding and maturing at the
end of March. In the future, I believe that the Bank should
borrow from the Treasury rather than going into the market.
The Bank's cost of borrowing is somewhat greater than
Treasury's. Such additional interest costs are unnecessary at
any time, but especially so now. The anticipated large
budget deficits for fiscal years 1975 and 1976 will put upward
pressure on interest rates. Federal Financing Bank market
borrowing would be likely to put somewhat more pressure on
rates than the equivalent Treasury borrowing. Clearly, Federal
and federally assisted borrowing should be financed with the least
cost to the Government and the taxpayers.
Mr. Chairman, I again want to thank you for the opportunity
to make this presentation and to answer your questions. We
realize that Members of this Committee may have different views,
but as the President has promised, we want to work as closely as
possible with you to reconcile our differences and to provide
this nation with the strong leadership it deserves.
Thank you.
OoO
Table 1
Federal Budget Surpluses and Deficits
1954-1976
Budget Surplus (+)
;cal Y ear
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975e
1976e
o r D e f i c i t ( -)
($ b i l l i o n s )
- 1 .2
- 3 .0
+ 4 .1
+ 3 .2
- 2 .9
- 1 2 .9
+ 0 .3
- 3 .4
- 7 .1
- 4 .8
- 5 .9
- 1 .6
- 3 .8
- 8 .7
- 2 5 .2
+ 3 .2
- 2 .8
- 2 3 .0
- 2 3 .2
- 1 4 .3
- 3 .5
-3 5 .
-5 2 .
Budget Surplus (+)
or Deficit (-) as % of G\TP
Three-Year
Moving Average
A nnual
- 0 .3
- 0 .8
1 .0
0 .8
- 0 .7
- 2 .7
0 .1
- 0 .7
- 1 .3
- 0 .8
- 1 .0
- 0 .2
- 0 .5
- 1 .1
- 3 .0
0 .4
- 0 .3
- 2 .3
- 2 .1
- 1 .2
- 0 .3
- 2 .4
- 3 .3
(C en ter«
- .0
- 0 .3
0 .3
- 0 .9
- 1 .1
- 1 .1
- 0 .6
- 0 .9
- 1 .0
- 0 .6
- 0 .5
- 0 .6
- 1 .6
- 1 .2
- 0 .9
- 0 .8
- 1 .5
- 1 .7
- 1 .1
- 1 .3
- 2 .0
- 2 .3
TABLE
2
TREASURY MONEY MARKET BORROWING
(Including Foreign nonmarketable securities)
(In billions of dollars)
Calendar
Year
Gross New
Issues 1/
First Half
Maturities Net New
Money
y
Peak In
crease in
Borrowing
Gross New
Issues 1/
Second Half
Maturities Net New
Money
u
PeaK In
crease in
Borrowing
1970
$22
$24
$-2
$ 4
$31
$15
$16
$16
1971
27
24
3
3
37
15
22
22
1972
13
15
-2
7
21
7
14
16
1973
17
16
1
10
20
15
5
5
1974
17
22
-5
4
32
18
14
14
1975est j
45
17
28
31
48
11
37
37
1976est
49
23
24
28
Calendar
Year
Gross New
Issues 1/
Full Year
Maturities Net New , P e a O n - —
Money
crease in
Borrowing
y
est: estimated
1970
$53
$39
$14
$14
1/ Includes increases
in regular bills.
1971
64
38
25
25
1972
34
22
12
13
1973
37
31
6
6
1974
49
40
9
9
1975
93
27
65
65
2/ Includes paydowns
in regular bills.
Ç- e.Vnr\aa.ry l O ,
1 .975
TA B L E
3
TA B L E
3
Net Funds Raised in the Capital Markets by Major Sector
(fiscal years, billions of dollars)
•
♦
: U.S. Treas.
|i F i n a n c i n g
•
Bank
•
1954
1955
1956
1957
1958
1959
3.6
1.7
-4.3
-3.6
6.3
8.0
1960
1961
1962
1963
19 6 4
1965
1966
1967
19 6 8
1969
.8
2.0
8.8
6.4
2.7
3.1
1970
1971
1972
1973
1974
1975e2/
1 9 7 6e2/
Office
: ..Federal &
: sponsored
:
agencies
: Total
:Federal
: sector
: State &
:
local
:
:
:
Corp. &
foreign
M
: Total
: sccur: itics
: ' G o v *t .
:
sector as
:
% o f ’t o t a l
: s e c u r i t i e s JL/
1.7
.1
.6
.9
.8
1.4
5.3
1.7
-3.7
-2.7
7.1
9.3
5.5
5.4
4.6
4.0
5.1
5.7
3.4
2.6
3.3
5.7
6.9
4.7
14.2
9.7
4.1
7.0
19.2
19.7
37.4
17.4
37.1
47.5
76.0
73.1
21.0
18.6
63.9
76.4
.6
18.2
-1.9
2.0
.1
2.4
1.1
1.5
2.2
6.7
2.6
5.5
5.7
2.8
2.1
11.2
7.6
4.2
5.4
5.7
3.3
23.8
3.8
5.7
4.9
6.0
5.5
5.2
6.9
7.3
6.0
7.2
12.0
3.5
5.0
5.5
5.5
3.8
5.2
9.2
12.2
15.1
14.7
12.1
12.0
22.7
18.6
13.2
17.5
22.2
21.5
46.1
30.5
23.5
17.7
49.4
40.7
31.8
30.8
25.8
15.2
51.6
12.4
70.7
58.5
75.6
70.3
71,4
70.4
58.9
43.3
67.3
51.8
6.8
20.5
19.6
18.5
2.1
43.9
63.7
8.1
2.7
8,7
14.3
21.3
17.6
14.7
14.9
23.2
28.2
32.8
23.3
61.5
78.4
9.7
15.0
15.6
12.6
16.7
12.5
14.6
14.8
23.0
15.8
10.5
15.6
26.3
22.7
39.4
61.3
59.7
55.9
55.6
37.9
37.9
47.2
58.6
41.9
62.4
62.4
73.5
81.2
72.0
100.3
115.7
61.3
67.8
73.8
80.4
~
1.0
of the
Office
-
S e c r e t a r y of the
of Debt Analysis
Treasury
Source:
FY 1954-1974 data based on FRB "Flow-of Funds."
1/ Bonds issued by n o n f i n a n c i a l corporations.
2/ Assumes adoption of President's Budget program,
w i t h b u d g e t d e f i c i t s of $35 b i l l i o n in F Y 1975 and $52 b i l l i o n
in
1976.
Incuuces State and local as part of government Sector.
y
Federal
sector as
:a % o f t o t a l
securities
February
7,
1975
TABLE 4
Federal and Federally-Assisted Credit as Percent of Total Flow of
Funds in U.S. Financial Markets, by Type of Credit*
Fiscal years, 1975 and 1976 projected
:
NET FUNDS RAISED
Long-Term Funds
Mortgages:
Residential
Commercial
Farm
.Total
Corporate Securities: * *
Bonds
Stocks
Total
: Total
: ($ bil)
.Fiscal 1975
Federal
Government Percent
Total
($ bil)
35.3
7.9
4.6
47.8
29.1
5.3
34.4
10.4
—
6.9
17.3
29.5
—
150.0
36.2
Total
($ bil)
Fiscal 1976
Federal
:
Government : Percent
($ bil)
: Federal
43.7
8.7
5.2
57.6
3.a
lit?
1.6
—
1.6
2.0
6.9
—
—
2.0
5.8
26.9
7.9
34.8
8.5
—
-
19.5
—
73.1
21.3
5.9
—
4.6
Total long-term
82.2
19.3
23.5
92.4
13.9
15.0
Government Securities
U.S. Government
Federal agencies
State & local governments
Total
43.9
17.6
12.5
74.0
43.9
17.6
2.2
63.7
100.0
100.0
17.6
86.1
63.7
14.7
14.6
93.0
63.7
14.7
1.9
80.3
100.0
100.0
13.0
86.3
36.8
3.2
-.4
6.1
.1
16.6
3.1
41.1
7.0
7.9
.3
19.2
4.3
—
—
—
—
Other Funds***
Business credit
Consumer credit
Security credit
Other loans, including
foreign
Total
1.9
41.5
TOTAL FUNDS RAISED
197.7
Office of the Secretary of the Treasury.
Office of Debt Analysis
1 . 0
4.0
10.2
210.5
24.6
9.2
58.3
93.2
47.1
243.7
5.3
13.5
57.6
23.2
107.7
44.2
February 7, 1975
♦Based on Federal Reserve Flow of Funds (through third quarter 1974) and Special Analyses
C & E r U. S. Budget, fiscal year 3976.
Including foreign.
*** Includes bank term loans and long-term Fcdtl'al credits.
*** Includes bank, term loans and long-term Fod<rir-al credits.
Table 5
The Fiscal Outlook, 1974-1980
(in billions of dollars)
1974
actual
As published in 1976 Budget
1975
Fiscal Years
1976
1977#
1978
1979
1980
Projected outlays*
268.4
313.4
349.4
393.1
425.4
451.9
476.7
Projected receipts
264.9
278.8
297.5
362.5
405.8
452.3
501.7
-3.5
-34.7
-51.9
-30.6
-19.6
0.4
25.0
Outlays on alternative assumptionsH-
268.4
313.2
361.1
420.2
469.7
519.. 7
572.5
Projected receipts (same as above)
264.9
278.8
297.5
362.5
405.8
452.3
501.7
-3.5
-34.4
-63.6
-57.7
-63.9
-67.4
-70.8
Budget margin or deficit (-)
As adjusted+
Budget margin or deficit (-)
Office of the Secretary of the Treasury
Office of Financial Analysis
#
“
Level affected by transitional quarter between FY 1976 and FY 1977.
* Assumes constant program levels but makes allowance for changes in beneficiary population and
cost of living increases.
Some allowance is also made for real growth in defense and energy.
4- Outlays projected as follows:
Payments to individuals are assumed to grow in real terms at an
8.8 percent annual rate (the 1955-1974 average).
As in the Budget, national defense manpower require
ments are assumed to remain constant, other defense purchases are assumed to rise by 4 percent a year
in real terms.
All other outlays are assumed to rise by 2-1/2 percent a year in real terms (the
1955-1974 average).
Constant dollar outlays were inflated by the price changes projected in the
Budget to obtain current dollar expenditures.
In this calculation, no adjustment was made to projecte
receipts to take account of the impact of the faster rise in outlays on economic growth and inflation,
and therefore on tax receipts.
Thus, the budget deficits shown here are not projections in the usual
sense of the word; rather, they are indicative of the inflationary pressures that would be created
within the economy by increased budget outlays, especially during a period when the economy was moving
back toward a full utilization of resources.
Table 6
FEDERAL
LOANS
AND
UNREALIZED
(millions
FINANCING
BANK
COMMITMENTS
of
OUTSTANDING
dollars)
UNREALIZED
LOANS
OUTSTANDING
BORROWER
COMMITMENTS
OUTSTANDING
3 ,000.0
Farmers
Home
Administration
General
Services
Administration
General
Services
Administration
45.0
D e p a r t m e n t of D e f e n s e
Foreign Military Sales
35.0
D e p a r t m e n t of H e a l t h , E d u c a t i o n ,
and Welfare (Medical Facilities
Loan Program) Series A
27.6
D e p a r t m e n t of H e a l t h , E d u c a t i o n ,
and W e l f a r e (Med i c a l F a c i l i t i e s
Loan Program) Series B
13.8
16.2
83-0
D e p a r t m e n t of H o u s i n g a n d U r b a n
Development (New Communities
Administration)
Riverton Properties,
Inc.
F l o w e r Mou n d New Town, Ltd.
H a r b i s o n D e v e l o p m e n t Corp.
Postal
500.0
Rural
Electrification
Small
Business
Loan
Tennessee
United
Administration
Investment
Marketing
Valley
States
86.0
5.5
Investment
Service
$
Student
13.0
272.2
National Railroad Passenger
Corporation (Amtrak)
Overseas Private
Corporation
7.0
4.0
4.0
Companies
Association
Association
TOTAL
O f f i c e of the S p e c i a l
to t h e S e c r e t a r y
(Debt Management)
21.5
220.0
965.0
Authority
Railway
208.7
Assistant
3.4
,
4 437.0
5,338.7
February
l8,
1975
gp °
88®.41*
FOR IMMEDIATE RELEASE
February 25, 1975
TREASURY’S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
two series of Treasury bills to the aggregate amount of $5,200,000,000 » or
thereabouts, to be issued
March 6, 1975,
as follows:
91-day bills (to maturity date) in the amount of $2,700,000,000* or
thereabouts, representing an additional amount of bills dated December 5, 1974,
and to mature June 5, 1975
(CUSIP No. 912793 WM4), originally issued in
the amount of $ 2 , 1 0 4 , 0 5 0 , 0 0 0 the additional and original bills to be freely
interchangeable.
182-day bills, for $2,500,000,000, or thereabouts, to be dated March 6, 1975,
and to mature September 4, 1975
(CUSIP No. 912793 XM3)*
The bills will be issued for cash and in exchange for Treasury bills maturing
March 6, 1975,
outstanding in the amount of $4,808,400,000* of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,304,875,000 .
These accounts may exchange bills they hold for the bills now being offered at
the average prices of accepted tenders.
The bills will be issued on a discount basis under competitive and non
competitive bidding, and at maturity their face amount will be payable without
interest.
They will be issued in bearer form in denominations of $10,000,
$15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value), and in
book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
one-thirty p.m., Eastern Daylight Saving time, Monday, March 3, 1975.
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000.
Multiples of $5,000.
Tenders over $10,Q00 must be in
In the case of competitive tenders the price offered must
be expressed on the basis of 100, with not more than three decimals, e.g., 99.925.
Fractions may not be used.
Banking institutions and dealers who make primary markets in Government
(OVER)
-
2-
securities and report daily to the Federal Reserve Bank of New York their position
with respect to Government securities and borrowings thereon may submit tenders
for account of customers provided the names of the customers are set forth in
such tenders.
own account.
Others will.not be permitted to submit tenders except for their
Tenders will be received without deposit from incorporated banks
and trust companies and from responsible and recognized dealers in investment
securities.
Tenders from others must be accompanied by payment of 2 percent of
the face amount of bills applied for, unless the tenders are accompanied by an
express guaranty of payment by an incorporated bank or trust company.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.
Those submitting competitive tenders
will be advised of the acceptance or rejection thereof.
The Secretary of the
Treasury expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be final.
Subject
to these reservations, noncompetitive tenders for each issue for $200,000 or less
without stated price from any one bidder will be accepted in full at the average
price (in three decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank or Branch on March 6, 1975,
In cash or
other immediately available funds or in a like face amount of Treasury bills
maturing
ment.
March 6, 1975.
Cash and exchange tenders will receive equal treat
Cash adjustments will be made for differences between the par value of
maturing bills accepted in exchange and the issue price of the new bills,
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of
1 9 5 4 ,the
amount of discount at which bills issued hereunder are sold is considered to
accrue when the bills are sold, redeemed or otherwise disposed of, and the b ills
are excluded from consideration as capital assets.
Accordingly, the owner of
bills (other than life insurance companies) issued hereunder must include in his
Federal income tax
return, as ordinary gain or loss, the difference between
the price paid for the bills, whether on original issue or on subsequent purchase»
and the amount actually received either upon sale or redemption at maturity
during the taxable year for which the return is made.
Department of the Treasury Circular No. 418 (current revision) and this no
prescribe the terms of the Treasury bills and govern the conditions of their
issue.
Branch.
Copies of the circular may be obtained from-any Federal Reserve Bank or
Kington,
„ « -
ADDRESS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE NATIONAL ASSOCIATION OF COUNTIES
WASHINGTON, D.C., WEDNESDAY, FEBRUARY 26, 1975
11:00 A.M., EST
Pr e s i d e n t Sm o o t , D i s t i n g u i s h e d Gu e s t s , a n d La d i e s a n d
■' W
A
,W Í.
3U'/f : 1 0 ;
' ! ;w
■:-<
•■ i l H
Ge n t l e m e n :
V
It
is a p r i v i l e g e t o j o i n y o u h e r e t h i s m o r n i n g ,
La s t y e a r I h a d t h e g o o d f o r t u n e of w o r k i n g d i r e c t l y
WITH MANY OF YOU IN TACKLING THE ENERGY CRISIS, AND I
CAME AWAY FROM THAT EXPERIENCE WITH NOTHING BUT THE
HIGHEST ADMIRATION FOR THE LEADERSHIP YOU ARE PROVIDING
ACROSS THE NATION.
YOU ARE PROVING AGAIN AND AGAIN, AS
ONE OF YOUR RESOLUTIONS HAS STATED, THAT COUNTY GOVERN
MENTS ARE WBIG ENOUGH TO COPE AND SMALL ENOUGH TO CARE.1
At
the o u t s e t this m o r n i n g , let me pledge to each
OF YOU MY WILLINGNESS TO WORK WITH YOU AGAIN AS WE FACE
UP TO NEW AND MORE SERIOUS PROBLEMS.
W e RECOGNIZE THAT
-
CAUGHT IN A FINANCIAL' STORM.
2
-
WE ARE ALL IN THE SAME
BOAT TOGETHER; AND 1 CAN ASSURE YOU THAT WE HAVE NO
INTENTION OF PULLING THE PLUG ON FEDERAL AID.
THIS
Ad m i n i s t r a t i o n s t a n d s f o u r s q u a r e b e h i n d r e v e n u e s h a r i n g ,
AND WE WILL FIGHT WITH YOU IN OBTAINING ITS EXTENSION
on
Ca p i t o l H i l l .
W
e will
c o n t i n u e to w o r k w i t h y o u
in
SLASHING AWAY AT THE RED TAPE THAT NOW BURDENS MANY
F e d e r a l a i d p r o g r a m s . A nd m o s t i m p o r t a n t l y , w e w i l l
CONTINUE TO BE YOUR FIRM ALLIES IN THE STRUGGLE TO
RETURN MORE POWER TO THE LOCAL COMMUNITIES WHERE IT
BELONGS.
Fo r o u r p a r t , w e a s k f o r y o u r h e l p i n .t r y i n g to
SOLVE THREE SEPARATE BUT INTERRELATED ECONOMIC CHALLENGES
THAT NOW CONFRONT US AS A NATION!
-- F i r s t , w e m u s t r e v e r s e t h e d o w n w a r d s l i d e in t h e
ECONOMY, PUTTING MILLIONS OF AMERICANS BACK TO WORK!
-- S e c o n d , w e m u s t c o n t i n u e o u r p r o g r e s s in d a m p e n i n g
THE FIRES OF INFLATION.
W e MUST NOT CURE THE RECESSION
BY GIVING OURSELVES ANOTHER DOSE OF HIGHER PRICES.
—
A nd t h i r d , we m u s t a d o p t a n e n e r g y p o l i c y t h a t
WILL SHARPLY REDUCE OUR RELIANCE ON FOREIGN OIL SUPPLIES,
REGAINING CONTROL OVER OUR OWN ECONOMIC DESTINY.
Ea c h of t h e s e t h r e e g o a l s is w i t h i n o u r c a p a b i l i t y
AS A PEOPLE, BUT THEY CAN BE ACHIEVED ONLY IF WE ACT
TOGETHER WITH UNITY AND STRENGTH OF PURPOSE.
Ending t h e Re c e s s i o n
Fo r t u n a t e l y , w e w i l l b e a s s i s t e d in l i f t i n g o u r s e l v e s
OUT OF THIS RECESSION BY NATURAL FORCES WITHIN THE ECONOMY
itself.
Ev e r y r e c e s s i o n c o n t a i n s t h e s e e d s o f its o w n
RECOVERY, AND THIS ONE IS NO EXCEPTION.
In f l a t i o n , fo r i n s t a n c e , d r o v e up i n t e r e s t r a t e s ,
CAUSED THE SUPPLY OF MORGAGE CREDIT TO DRY UP, AND SENT THE
housing
industry
into a t a i l s p i n .
W ith i n f l a t i o n
- a GRADUALLY RECEDING NOW AND THE FEDERAL RESERVE PROVIDING
STRONGER MONETARY SUPPORT, SHORT-TERM INTEREST RATES HAVE
DROPPED SHARPLY.
THIS HAS RENEWED THE INFLOW OF FUNDS
INTO THRIFT INSTITUTIONS AND PROVIDES THE ESSENTIAL
PRECONDITION FOR AN UPTURN IN THE HOUSING INDUSTRY.
S i m i l a r l y , w e h a v e e n t e r e d in t o a p e r i o d of i n v e n t o r y
LIQUIDATION AS MANY'BUSINESSMEN IN THE AUTO INDUSTRY
AND ELSEWHERE ARE SELLING OFF THEIR EXCESS STOCKS.
As
THOSE STOCKS ARE DRAINED OFF, INVENTORY INVESTMENT WILL
END ITS DECLINE AND BEGIN TO PROVIDE POSITIVE STIMULATION
TO THE ECONOMY ONCE AGAIN.
A THIRD CYCLICAL FORCE WHICH SHOULD BEGIN TURNING
AROUND DURING THE YEAR IS CONSUMER SPENDING.
IT HAS
BEEN FALLING FOR TWO YEARS UNDER THE DECLINING REAL
EARNINGS AND BADLY SHAKEN CONSUMER CONFIDENCE, BOTH
CAUSED BY INFLATION.
WlTH INFLATION NOW SUBSIDING AND
- 5 -
WITH A PATTERN OF HIGHER WAGE SETTLEMENTS EMERGING ON
THE LABOR FRONT, THE REAL INCOME OF WORKERS SHOULD
PICK UP AND WE SHOULD SEE AN INCREASE IN CONSUMER
SPENDING.
T h u s , a s in e v e r y r e c e s s i o n in t h e p a s t , t h e r e
ARE CYCLICAL FORCES tHAT SHOULD GRADUALLY HALT THE
DOWNWARD THRUST OF THE ECONOMY.
No n e t h e l e s s , w e a r e n o t p r e p a r e d s i m p l y t o l e t
NATURE TAKE ITS COURSE.
W e CAN AND MUST TAKE ACTION TO
STRENGTHEN THE FORCES OF RECOVERY.
THE FEDERAL RESERVE
HAS ALREADY EASED MONETARY CONDITIONS SUBSTANTIALLY.
IN ADDITION, THE PRESIDENT HAS RECOMMENDED A $16 BILLION
TEMPORARY TAX REBATE, AND WE PLAN TO SPEND $18 BILLION
IN THE COMING FISCAL YEAR ON UNEMPLOYMENT COMPENSATION
AND PUBLIC SERVICE EMPLOYMENT PROGRAMS.
W e ARE NOT
TAKING THESE STEPS BECAUSE THE ECONOMY.WOULD FAIL TO
-
6
-
RECOVER WITHOUT THEM, BUT BECAUSE THEY WILL MAKE THE
RECOVERY IN THE SECOND HALF OF THE YEAR MORE SOLID AND
CERTAIN.
Much of the tax r e l i e f t h a t w i l l be a d o p t e d w i l l
BE DIRECTED AT LOW AND MIDDLE INCOME AMERICANS, THOSE
WHO HAVE BEEN HURT THE MOST BY THE COMBINED EFFECTS OF
RECESSION AND INFLATION.
W e WOULD BE TERRIBLY REMISS,
HOWEVER, IF WE DID NOT ALSO BEGIN TO CORRECT THE DOWN
WARD SPIRAL IN CAPITAL INVESTMENT AND PROFITS.
INFLA
TION AND OUTMODED ACCOUNTING METHODS HAVE HELPED TO MASK
A SERIOUS DETERIORATION IN CORPORATE PROFITS SINCE THE
m i d -1960 s
.
After
removing
those
effects, our
figures
SHOW THAT AFTER-TAX PROFITS HAVE SUFFERED ALMOST A 50
PERCENT DECLINE IN THE PAST DECADE.
It
IS NOT UNFAIR
TO SAY THAT THE COUNTRY HAS BEEN IN A PROFITS DEPRESSION.
O ne o f t h e m o s t o b v i o u s r e s u l t s h a s b e e n a d e c l i n e in
-7- .. Lyt
/v
¿s
CAPITAL INVESTMENT —
INVESTMENT THAT HAS ALWAYS BEEN
THE BASIC SOURCE OF INDUSTRIAL GROWTH AND NEW JOB
OPPORTUNITIES IN THIS COUNTRY.
INDEED., FOR SEVERAL
YEARS OUR CAPITAL INVESTMENT HAS BEEN A SMALLER PROPOR
TION OF OUR GROSS NATIONAL PRODUCT THAN IN ANY OTHER
MAJOR INDUSTRIALIZED COUNTRY, AND NOT SURPRISINGLY,
OUR INCREASES IN PRODUCTIVITY HAVE BEEN THE LOWEST
AMONG THESE NATIONS.
ING.
THESE TRENDS ARE HIGHLY DISTURB
If t h e y c o n t i n u e , t h e y c o u l d g u a r a n t e e t h a t w e
WOULD FALL FAR SHORT OF OUR ECONOMIC GOALS.
•It IS IMPERATIVE, THEREFORE, THAT WE MAKE BETTER
PROVISIONS FOR FUTURE GROWTH.
IN THE LONG-RUN, THAT
MEANS WE WILL HAVE TO SHIFT OUR DOMESTIC PRIORITIES
AWAY FROM CONSUMPTION AND GOVERNMENT SPENDING AND
TOWARD GREATER SAVINGS, INVESTMENT AND CAPITAL FORMA
TION.
In t h e s h o r t - r u n , w e s h o u l d r e l y u p o n a l a r g e r
-
8
-
INVESTMENT TAX CREDIT.;. AS THE PRESIDENT AND) MANYi'
Members iin Congress agreed
Tire gwhe beneficiaries
OF SUCH ACTION», LET US REMEMBER5« WILL NOT BE' OUR
CORPORATE MANAGERS AND SHAREHOLDERS BUT THOSE: WHO ARE
LOOKING FOR WORK, OR WANT TO; INCREASE: THEIR' BASIC INCOME,
I n cr ea se d : c a p it a l in v e st m e n t s a r e th e : k e y ' to h ig h er
PRODUCTI VITY1.,, AND; IT I S Aft SIMPLE HUT COMPEIH.ING TRUTH
THAT INCREASES IN PRODUCTIVE PERFORMANCE ARE REQUI RED
OVER TIME TO SUPPORT A- HIGHER STANDARD OF LIVING.
By
t a k in g - th e :
STEPS
II HAVE aUTUIMED)
PROVIDING
GREATER MONETARYt AND; FISCAL STIMULUS — AND. BY ALLOWING
THE NATURAL FORCES WITHIN THE ECONOMY. TO) TAKE EFFECT, WE
REMAIN CONFIDENT THAT THE RECESSION! SHOULD BOTTOM
OUT AND THE ECONOMY SHOULD BEGIN! THE LONG: ROAD BACK
TO RECOVERY DURING;THE SECOND HALF OF THE YEAR,.
SqiiFFziNG O ut In f l a t i o n
AS
WE LIFT OURSELVES OUT OF THE QUAGMIRE, HOWEVER,
WE MUST ALWAYS KEEP OUR EYE ON THE MORE FUNDAMENTAL,
LONG-RUN PROBLEM OF INFLATION,
As
ALL OF YOU KNOW,
THE WAVES OF INFLATION THAT HAVE SWEPT OVER THE COUNTRY
DURING THE LAST 20 YEARS HAVE GRADUALLY CARRIED US TO
HIGHER AND HIGHER PLATEAUS, SQ THAT IN 1974 WE BROKE THE
PEACETIME RECORD FOR INFLATION RATES IN THE UNITED STATES.
What is n o t so w i d e l y r e c o g n i z e d is t h a t t h i s i n f l a t i o n a l s o
TIPPED THE ECONOMY INTO THE RECESSION,
JHE FORCES OF
INFLATION, FOR EXAMPLE, BROUGHT THE COLLAPSE OF BOTH THE
HOUSING INDUSTRY AND IN CONSUMER SPENDING, TWO OF THE MOST
IMPORTANT SECTORS OF THE ECONOMY,
IF WE NOW TRY TO PROPEL
OURSELVES OUT OF THE RECESSION BY OVERHEATING THE ECONOMY, WE
CAN BE VIRTUALLY CERTAIN THAT PRICES WILL EXPLODE AGAIN AND
WITHIN A VERY SHORT PERIOD WE WILL BE RIGHT BACK IN
THIS SAME MESS AGAIN —
ONLY IT WILL BE WORSE.
W h a t t h i s m e a n s is t h a t w e m u s t s t e r n l y r e s i s t
THE TEMPTATION TO SPEND OURSELVES OUT OF THE RECESSION
THROUGH HUGE NEW SPENDING PROGRAMS, EXCESSIVE TAX CUTS,
OR EXCESSIVE MONETARY POLICIES.
ANY ONE OF THESE
MISTAKES COULD REIGNITE THE FIRES OF INFLATION.
Sw o l l e n Fe d e r a l d e f i c i t s w o u l d a l s o p o s e a s e r i o u s
DANGER WITHIN OUR FINANCIAL MARKETS.
WITH BORROWING
NEEDS GROWING RAPIDLY AT ALL LEVELS OF GOVERNMENT, WE
ALREADY ANTICIPATE THAT DURING THE COMING FISCAL YEAR
Go v e r n m e n t b o r r o w i n g w i l l s o a k up 80 p e r c e n t o f t h e n e t
NEW MONEY IN OUR CAPITAL MARKETS.
THAT WILL LEAVE
ONLY 20 PERCENT FOR PRIVATE ENTERPRISE, WHICH HAS
ALWAYS RELIED HEAVILY ON THOSE MARKETS FOR MUCH OF ITS
growth.
T h e s e F e d e r a l d e f i c i t s a r e h o r r e n d o u s , in m y
-11
l
/J i
-
OPINION, AND THEY ARE SURE TO CAUSE STRAINS IN THE
CAPITAL MARKETS.
W e SHOULD BE FULLY AWARE OF THE
DANGERS THAT WOULD ARISE IF BUDGET DEFICITS WERE IN
CREASED FAR BEYOND THE LEVELS PROJECTED.
REASONABLE
FINANCING OF SUCH DEFICITS WOULD BE POSSIBLE ONLY IF
THE RECESSION IS MU£H DEEPER THAN WE EXPECT.
OTHER
WISE, WE COULD EITHER HAVE VICIOUS COMPETITION BETWEEN
the
Go v e r n m e n t a n d p r i v a t e b o r r o w e r s f o r c a p i t a l f u n d s ,
or t h e
Fe d e r a l R e s e r v e w o u l d h a v e t o s u p p l y f u n d s w i t h
out r e g a r d to t h e
inflationary c o n se qu enc es.
In a n y
EVENT, DESPITE THE BEST INTENTIONS OF THE GOVERNMENT,
A LARGER THAN EXPECTED BUDGET WOULD THREATEN ECONOMIC
RECOVERY BY CROWDING OUT MEDIUM TO LOWER-RATED BUSINESS
BORROWERS, MANY OF WHOM ALREADY HAVE ECONOMIC PROBLEMS,
AND BY ELBOWING ASIDE MORTGAGE BORROWERS AS WELL, THUS
aborting r e c o v e r y
I
in t h e h o u s i n g
industry.
-
12
-
T h e s e t w o d a n g e r s of i n f l a t i o n a n d s e r i o u s c o n g e s
tion
IN THE CAPITAL MARKETS ARE BEHIND THE PRESIDENT'S
EFFORT TO CURB THE MOMENTOUS GROWTH IN FEDERAL SPENDING,
HE
HAS COURAGEOUSLY CALLED FOR A MORATORIUM ON NEW
SPENDING PROGRAMS EXCEPT IN ENERGY AND A SERIES OF
OTHER BUDGET REDUCTIONS,
I KNOW THAT EACH OF YOU AT
THE COUNTY LEVEL MAY FEEL THE PINCH FROM THE PROPOSED
BUDGET! I FEEL IT IN MY OWN DEPARTMENT IN WASHINGTON.
B ut if w e w a n t t o r e s t o r e t r u e p r o s p e r i t y in t h i s
COUNTRY —
PROSPERITY THAT IS NOT SIMPLY AN INTERLUDE
BETWEEN STILL MORE INFLATION AND STILL MORE UNEMPLOYMENT —
THEN WE MUST BE WILLING TO STEEL OURSELVES FOR THE TASK,
A c h i e v i n g S e l f -Su f f i c i e n c y in En e r g y
O ur t h i r d e c o n o m i c g o a l —
and one that
TOUCH UPON LIGHTLY THIS MORNING —
INDEPENDENCE IN. ENERGY.
I c a n only
IS TO RESTORE AMERICAN
YOU WILL HEAR FROM OTHER SPEAKERS
THAT THE ENERGY PROBLEM IS NOT URGENT, THAT WE CAN
CONTINUE TO DAWDLE ALONG WITHOUT A POLICY.
I SAY WE MUST LOOK AT THE RECORD:
-- OUR ANNUAL PAYMENTS FOR
OPEC
OIL WILL SOON HIT
$30 BILLION A YEAR, MORE THAN 10 TIMES WHAT THEY WERE
IN 1970.
— We
a r e n o w d e p e n d e n t on
35 PERCENT OF OUR OIL —
OPEC
for more than
UP FROM THE LEVELS OF 1973 —
SO THAT WE ARE INCREASINGLY VULNERABLE TO THE THREAT
OF ANOTHER EMBARGO.
-- OUR OWN DOMESTIC PRODUCTION IS DECLINING AT
AN AVERAGE RATE OF 8 PERCENT A YEAR.
-- A nd o u r a l l i e s a b r o a d a r e w a i t i n g a n x i o u s l y
to see
if w e a r e
prepared to d i s c i p l i n e o u r s e l v e s .
If
WE REFUSE TO TAKE SERIOUS STEPS, ’WE CAN HARDLY ASK THEM
TO DO MORE.
OUR BEST HOPE OF BRINGING- A REDUCTION IN
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-
OIL PRICES —
AND IN MY OPINION, OIL PRICES WILL COME DOWN
EVENTUALLY —
IS TO ACT IN CONCERT WITH OUR ALLIES TO
REDUCE OUR OWN CONSUMPTION AND SHARPLY ACCELERATE OUR
PRODUCTION.
A c t i o n , t h e n , is e s s e n t i a l , a n d t h e r e a l q u e s t i o n
IS WHAT THE NATURE OP OUR ACTION SHOULD BE.
WE HAVE TWO CHOICES.
BASICALLY,
ONE IS TO RESORT TO GREATER USE
OF GOVERNMENT CONTROLS —
ALLOCATION, AND THE LIKE.
RATIONING, IMPORT QUOTAS,
W e HAVE REJECTED THAT
APPROACH BECAUSE IT WOULD CREATE SERIOUS INEFFICIENCIES
AND INEQUITIES WITHIN THE ECONOMY, WOULD SPAWN A VAST
NEW BUREAUCRACY, AND WOULD DISRUPT THE LIVES OF MOST
A m e r i c a n s for a s l o n g a s
trols
\
10
years.
WOULD ALSO FORCE UP PRICES.
Ul t i m a t e l y , c o n
I CANNOT IMAGINE
THAT THE AMERICAN PEOPLE WOULD BE WILLING TO TOLERATE
SUCH A SYSTEM FOR VERY LONG.
T he SECOND ALTERNATIVE —
Pr e s i d e n t h a s w i s e l y c h o s e n —
SYSTEM OF THE MARKETPLACE.
AND t h e o n e t h a t t h e
is
to em plo y the p r i c i n g
WHILE THE PROGRAM MAY SEEM
COMPLEX, IT IS BASED ON THE SIMPLE FACT THAT BY RAISING
PRICES WE CAN DISCOURAGE UNNECESSARY CONSUMPTION AND
INCREASE PRODUCTION.
A t THE SAME TIME, BY RETURNING
THE EXTRA COSTS TO CONSUMERS THROUGH THE TAX STRUCTURE,
WE CAN NEUTRALIZE THE IMPACT UPON THE ECONOMY.
We
HAVE ANALYZED OUR PROPOSALS A NUMBER OF WAYS, AND OUR
BEST ESTIMATE IS THAT IT WOULD CAUSE A ONE-TIME INCREASE
OF 2 PERCENT IN THE COST OF LIVING AND WOULD NOT HAVE
ANY SIGNIFICANT DEPRESSANT EFFECT ON THE OVERALL ECONOMY.
By
comparison,
I
might note that the
Ad m i n i s t r a t i o n h a s
EXAMINED VARIOUS ALLOCATION SCHEMES AND HAS CONCLUDED
THAT THEY MIGHT CAUSE MANY THOUSANDS OF
THEIR JOBS.
WORKERS TO LOSE
O ur c o n c l u s i o n , t h e n , is t h a t t h e e n e r g y
-
16
-
PROGRAM PROPOSED BY THE PRESIDENT IS CLEARLY THE MOST
EFFECTIVE, THE MOST EFFICIENT, AND THE MOST EQUITABLE
WAY TO REDUCE OUR VULNERABILITY TO FOREIGN BLACKMAIL.
Co n c l u s i o n
B e f o r e c o m i n g h e r e t h i s m o r n i n g , I w a s r e m i n d e d of
Fr a n k l i n Ro o s e v e l t 's Ad m o n i t i o n a b o u t s p e e c h e s .
s i n c e r e ," he s a i d ,
"Be
"b e b r i e f ; b e s e a t e d ."
W ith t h a t in m i n d , l e t m e c l o s e o n t h i s n o t e :
EACH OF THE THREE GREAT ECONOMIC CHALLENGES WE FACE
WAS CREATED BY MAN, SO THAT EACH CAN BE OVERCOME BY
man.
T h e s e a r e n o t Re p u b l i c a n o r D e m o c r a t i c c h a l l e n g e s ,
NOR DO THEY REQUIRE REPUBLICAN OR DEMOCRATIC SOLUTIONS.
W h a t t h e y d e m a n d is a l l o f t h e w i s d o m , t h e s k i l l , a n d
THE UNITY OF PURPOSE THAT WE POSSESS.
AMERICA
HAS
BECOME A GREAT NATION BECAUSE OUR FOREFATHERS ALWAYS
ANSWERED THE CALL TO GREATNESS.
WHAT WE MUST NOW
I
- 17 -
DECIDE IS WHETHER ONE DAY IN THE FUTURE OUR CHILDREN
CAN SAY THAT WE, TOO, ANSWERED THAT CALL.
T h a nk y o u .
I g n i D.& 20220
TELEPHONE W04-2041
1
FOR IMMEDIATE RELEASE
FEBRUARY 26, 1975
TREASURY SECRETARY SIMON NAMES HARRY R. MARSH
SAVINGS BONDS CHAIRMAN FOR SOUTH CAROLINA
Harry R. Marsh, Vice President and General Manager,
Southern Bell Telephone and Telegraph Co., Columbia, S. C.,
is appointed Volunteer State Chairman for the Savings Bonds
Program in South Carolina by Secretary of the Treasury
William E. Simon, effective immediately.
He will head a committee of business, banking, labor,
government and media leaders who -- in cooperation with the
U. S. Savings Bonds Division -- assist in promoting Bond
sales in the state. He succeeds Robert G. Clawson, Presi
dent, The Bank of Hartsville, Hartsville, S. C., who re
ceived the Treasury Department "Award of Merit" in ceremo
nies with Secretary Simon in Washington, December 4.
Marsh joined Southern Bell Telephone in 1946, after
seeing service in the Army Air Corps during World -War Two.
After holding a variety of positions with the company in
both Mississippi and Georgia, he was appointed General
Personnel Manager for Mississippi in 1958. In 1962 -- af
ter a period on loan to the parent American Telephone and
Telegraph Co., New York - - h e was appointed General Plant
Manager for Georgia. He became Assistant Vice President
of Southern Bell, Atlanta, in 1969. On August 1, 1971, he
was elected Vice President and General Manager for South
Carolina.
Marsh is active in many business, civic and education
al activities, including --Director, United Community
Services; Director and President-elect, Greater Columbia
Chamber of Commerce; Presidents Council, University of
South Carolina; Executive Board, Central South Carolina
Council, Boy Scouts of America -- from which he has re
ceived the "Silver Beaver Award"; Trustee, Capital City
Development Foundation. .
Marsh and his wife, the former Betty Jane Randall,
have two children - - a son, Ray, 17, and a daughter,
Beth, 15.
oOo
Wednesday, 26 February, 1975
FOR IMMEDIATE RELEASE
Contact ORS Public Affairs
202-634-5248
The second publication of uses of General Revenue Sharing
funds as reported by 34,538 State and local governments was
released today in Washington by the Treasury Department's Office
of Revenue Sharing.
The report shows that national spending
patterns have remained basically the same since the beginning
of the program which was enacted October 1972, retroactive
to January 1, 1972.
The report issued today covers the 1973-74 "Entitlement
Period Four" of general revenue sharing uses, and indicates
that, as they had since the January 1, 1972 beginning of the
program, State and local governments used an estimated 60 percent
of the funds in the categories of public safety, education,
and public transportation.
(MORE)
t-2
Report of GRS Uses
General Revenue Sharing is a Federal financial assistance
program that is distributing $30.2 billion to more than 39,000
units of State and local governments for the period January 1,
to December 31, 1976.
1972
The funds are distributed on a formula
basis, and amounts received by local government jurisdictions
are determined by their population, per capita income, and local
tax effort.
President Ford has indicated he will ask the Congress,
this year, to renew the program for an additional five and
three-quarters years, basically in its present form.
In the report issued today, Graham W. Watt, Director of the
Office of Revenue Sharing, said "units of State and local
government (are required to) file two reports each year with the
Secretary of the Treasury.
One is a report on the planned use
of the funds, setting forth the amounts and purposes for which
local and state officials plan to spend or obligate the funds
their jurisdictions expect to receive during the ensuing year,
and;
"The second is a report on the use of general revenue sharing
funds, which sets forth the amounts and purposes for which those
funds were spent or obligated during the past year."
Highlights of the report issued today are:
1.
The $6.7 billion of general revenue sharing funds spent
during fiscal year 1974 represented about three percent of the
total revenues of the recipient governments.
(MORE)
t-3 Report of GRS Uses
2.
The report points out that it is a summary of expenditures,
and that the ultimate impact of the funds use on State and local
services
3.
"is beyond the scope" of the report.
The highest three categories of use were:
Public Safety,
23 percent; Education, 21 percent; and Public Transportation,
15 percent.
4.
Other reported uses, with per centages, were:
General
Government, 10%; Health Services, 7%; Environmental Protection, 7%;
Recreation and Culture, 5%; Social Services for the Poor or
Aged,
4%; General State (other) uses, 4%; Financial Administration,
2%; Libraries, 1%; and Housing and Community Development,
Corrections, Economic and Social Development, 1%.
5.
The report points out that categorization of actual uses
is a determination made by each State and local chief executive,
and therefore summaries may be inadequate.
For example, a
mini-bus service for senior citizens may be reported either as
a transportation expenditure or under the category "Social
Services for the Poor or Aged."
6.
As a separate group, State governments used 52 percent
of their GRS entitlement funds for education.
7.
As a separate group, Local governments used 36 percent
of their GRS entitlement funds for public safety, with the next
ighest use category being public transportation at 19 percent.
(MORE)
t-4
Report of GRS Uses
8.
Uses did not vary greatly among regions in the country.
9.
Fifteen state governments reported they reduced taxes
because of GRS funds, and five said the funds had prevented new
taxes.
Thirty five percent of the local governments reporting
said GRS funds had prevented new taxes.
10.
Eighty four percent of the State and local governments'
reporting actual uses during the year said GRS funds had enabled
them to avoid incurring new indebtedness, or reduce the level
of new indebtedness.
11.
State and local government recipients spent more GRS
dollars during the entitlement period than they received, due
to carryover GRS funds from prior entitlement periods.
12.
Comparisons of the 1973-74 year with prior expenditure
patterns show the same three high priority uses, namely public
safety, education, and public transportation.
These uses account
for 60 percent of the appropriations of GR S funds at the State
and local level.
13.
A comparison of State and local governments use of funds
divided between capital investments or operating and
expenditures showed:
m aintenance
State governments used 8 2 percent of their
GRS entitlements for operations and maintenance and 18 percent
for capital expenditures, while local governments used 52 percen
for operations and maintenance and 48 percent for capital
expenditures.
(MORE)
t-5 Report of GRS Uses
14.
Planned Use and Actual Use comparisons in the reporting
showed no significant differences, with the possible exception of
the public transportation category, which shows a possible three
percent decrease planned.
The General Revenue Sharing Act (State and Local Fiscal
Assistance Act of 1972), allows States to use their GRS funds
for any lawful purpose and allows local governments to use funds
for any lawful capital expenditure and in any of eight "priority
categories" for operations and maintenance.
The categories are
Public Safety, Environmental Protection, Public Transportation,
Health, Recreation, Libraries, Social Services for the Poor or
Aged, and Financial Administration.
Both State and local governments must use the funds in
accordance with non-discrimination and Davis-Bacon wage provisions
of the Act (the latter where 25 percent or more of a project is
funded with GRS monies); and neither State nor local governments
may use GRS funds to provide a required "local match" for
Federal grant-in-aid programs.
As of early January of this year, with the distribution of
the second quarterly payment of the current entitlement period,
the Office of Revenue Sharing has paid $17.3 billion (of the
$30.2 currently authorized by the Congress) to more than 36,771
recipient units of government throughout the Country.
(MORE)
t-6
Report of GRS Uses
Recipient governments include all states, counties,
cities, towns, townships, Indian tribes, and Alaskan native
villages.
The report issued today is entitled "General Revenue
Sharing:
Reported Uses 1973-1974."
It is a public document,
and is available at the Government Printing Office in
Washington, D.C.
###
|Pjgj||gj5Pg88§B!|®i®8»888w»$S»®^J»^BSSSraW
¡Departmentof th e T R E A S U R Y
OFFICE OF R EV E N U E S H A R IN G
TELEPHONE 634-5248
WASHINGTON, D.C. 20226
Thursday, February 27, 1975 ; ri:
FOR IMMEDIATE RELEASE ;
Contact:
,k; . r
fnsn&'x&a&CI ©
ir ,1 ?
ORS Public Affairs
(202)634-5248
The Treasury Department's Office of Revenue Sharing has
asked the Department of Justice to initiate a civil action
to bring the State of Michigan into compliance with the civil
rights requirement of the State and Local Fiscal Assistance
Act of 1972 (the general revenue sharing Act) .
The State's non-compliance rises out of the 1972 ruling
that the Ferndale, Michigan School District is operating a
segregated school in violation of federal law.
At that time,
the Department of Health, Education and Welfare terminated the
District's participation in the grant program involved.
Appeal
of the ruling was denied by the U. S. Supreme Court.
Since then, however, an audit shows that the State of Michigan
used general revenue sharing funds for the benefit of the State
Public School Employees' Retirement System.
The Ferndale School
District employees and thus the District itself benefit from
the State's retirement system, constituting discriminatory
use of the State's revenue sharing funds.
(MORE)
t-2
ORS Letter to Governor Milliken
Michigan Governor William G. Milliken was formally notified
yesterday by Office of Revenue Sharing Director Graham W. Watt
that the request for action by Justice was made on February 19.
The Justice Department is also engaged in direct proceedings
with the Ferndale School District to bring it into compliance
with Federal anti-discrimination laws.
In his letter to Governor Milliken yesterday, Watt said,
"I continue to share your hope that the Ferndale School District
may yet take the necessary steps to voluntarily desegregate and
appreciate the efforts of the State toward that result."
###
FOR IMMEDIATE RELEASE
/
l 'February 26, 1975
In response to continuing press inquiries, the Secretary
of State, the Secretary of the Treasury and the Federal Energy
Administrator have asked that the following statement be
made public;
In the State of the Union Message, the President stated
that to ’’Provide the critical stability for our domestic
energy production in the face of world price uncertainty, I
will request legislation to authorize and require tariffs,
import quotas or price floors to protect our energy prices
at levels which will achieve energy independence.”
Such protection of U.S. domestic energy prices is
essential in order to achieve our national energy goal of
invulnerability to economic disruption in 1985. Much of the
oil we import can be produced at very low prices. Thus, the
producers have the power of undercutting U.S. producers of
alternative energy sources and disrupting U.S. efforts to
become self-reliant in energy. If, for example, the OPEC
were to cut the price of oil from present high levels to $4
a barrel, it is estimated that U.S. import requirements would
rise from the present level of 6 1/2 million barrels per day
to more than 20 million barrels per day in 1985. Domestic
production of oil would fall sharply below present levels.
At such levels, a new embargo would deprive this country
of many millions of jobs, and possibly several hundred billion
dollars in GNP.
A determination has not yet been made as to what exact
price level should be judged likely to result in an unaccept
able level of U.S. dependence on imports, but it is clear that
we cannot permit imported oil to compete with domesticallyproduced energy in a disruptive manner. The precise instrument
that would be used to implement this policy has yet to be
chosen, but the principle is fundamental to our energy goals.
The efforts of this country to develop alternative sources
will benefit other consuming countries as well as the United
States, because they will help bring down the price of oil
from current exorbitant levels. We have the same interest in
seeing other consuming countries develop their domestic energy
resources rapidly. But it is also true that consuming countries
could offset each others’ efforts to bring down the price of
oil by restimulating consumption when prices begin to fall.
WS-237
(OVER)
-
2
-
For this reason, all consuming countries have an interest in
adopting a common policy on the levels at which they will
protect prices of their domestic energy. Under this approach,
consuming countries would adopt a common floor price or a
common tariff. The United States is prepared to adopt either
mechanism. The United States is currently seeking such an agree
ment, which it believes essential to the solution of the energy
crisis.
0O0
EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL ON WAGE AND PRICE STABILITY
^
726 JACKSON PLACE, N.W.
WASHINGTON, D.C. 20506
FOR IMMEDIATE RELEASE
Tuesday, February 25, 1975
FOR INFORMATION CALL
(202) 456-6757
STATEMENT BY GEORGE C. EADS
ASSISTANT DIRECTOR FOR
GOVERNMENT OPERATIONS AND RESEARCH
COUNCIL ON WAGE AND PRICE STABILITY
BEFORE THE
SUBCOMMITTEE ON ADMINISTRATIVE PRACTICE AND PROCEDURE
COMMITTEE ON THE JUDICIARY, U.S. SENATE
WASHINGTON, D.C.
FEBRUARY 25, 1975
Mr. Chairman, it gives me great pleasure to appear
here today to talk about a subject of interest to us all airline fares.
In particular I want to discuss the likely
effect on airline fares if regulation of the domestic airlines
is eased along the lines suggested by previous Administrative
witnesses.
We at the Council on Wage and Price Stability have been
particularly concerned with the sharp recent rise in air fares
amounting to nearly 20 percent over the last 18 months.
As I
pointed out in my testimony before the Investigations Sub
committee of the House Commerce Committee, on November 26, 1974
the Council does not and will not oppose all air fare increases
Our sole interest is to see that in reaching its decisions, the
Civil Aeronautics Board takes adequate account of the potential
inflationary and anti-competitive consequences of its actions,
and acts to minimize these consequences.
In our view, the Board has failed to do this.
This
failure was most conspicuous in the Board’s approval of the
recent fo u r percent fa re increase.
In t h i s case t h e E o a r d i n
e f f e c t announced i n advance what l e v e l o f f a r e i n c r e a s e i t
would a p p r o v e , and th en implemented t h e i n c r e a s e f o l l o w i n g
h ig h ly questionable procedures.
We b e l i e v e t h a t t h e r e were a t
l e a s t f o u r i s s u e s t h a t th e Board i g n o r e d , any one o f which
w ould have j u s t i f i e d a su sp e n s io n and p u b l i c h e a r i n g .
These
were ( 1 ) t h e q u e s t i o n a b l e b a s i s f o r t h e c o n t i n u e d use o f th e
55 p e r c e n t l o a d f a c t o r s t a n d a r d in t h e f a c e o f r a d i c a l l y changed
cost con dition s:
( 2 ) th e q u e s t i o n a b l e b a s i s f o r t h e c o n t i n u e d
use o f a - 0 . 7 f a r e e l a s t i c i t y e s t i m a t e ;
(3 ) t h e m i s t a k e n t r e a t
ment o f th e 12 p e r c e n t r a t e o f r e t u r n s t a n d a r d as a t a r g e t n o t
t o be d e v i a t e d from r e g a r d l e s s o f th e c o n s e q u e n c e s , and ( 4 )
t h e f a c t t h a t c a r r i e r s f i l e d no d a t a upon which t o j u d g e th e
e f f e c t o f th e proposed i n c r e a s e on i n d i v i d u a l
c a r r ie r rates of
return.
I f one c o n t r a s t s t h e ease w i t h which a i r c a r r i e r s
a re g r a n t e d f a r e i n c r e a s e s w i t h th e d i f f i c u l t y t h a t a c a r r i e r
has when i t v/ants t o l o w e r a f a r e ( o r even m a i n t a i n a low f a r e w i t n e s s t h e B o a r d ' s a t t e m p t t o indu ce C o n t i n e n t a l
"economy" f a r e d i f f e r e n t i a l
from f i f t e e n
t o re duc e i t s
t o te n d o l l a r s ) , i t i s
n o t d i f f i c u l t t o see one reaso n why a i r f a r e s a r e so h i g h .
A n o t h e r re ason f o r hi gh a i r f a r e s has a l r e a d y been
m e n ti on ed by s e v e r a l w i t n e s s e s .
When t h e Board s e t s f a r e s i t
|gj
3
sim ultaneously sets the q u a l i t y o f se rvic e t h a t c a r r i e r s w i ll
offer.
The mechanism has by now become f a m i l i a r t o y o u .
H ig h
f a r e s p e r m i t c a r r i e r s t o sc h e d u l e more f l i g h t s , and as more
f l i g h t s a re s c h e d u l e d , l o a d f a c t o r s f a l l .
Lowering fa re s r e
duces t h e number o f f l i g h t s t h a t can p r o f i t a b l y be s c h e d u l e d ,
ca us in g c a r r i e r s t o c u t back on f l i g h t s , r a i s i n g l o a d f a c t o r s .
Thus as D r . M i l l e r t o l d y o u , a wid e range o f f a r e s i s c o n s i s t e n t
w i t h a normal r a t e of, r e t u r n .
I f t h i s i s t r u e , why have h i gh
f a r e s r a t h e r t h a n lo w ones been t h e r e s u l t ?
T h i s has happened because i t was n o t u n t i l
very recently
t h a t th e Board f i n a l l y a d m i t t e d t h a t t h i s r e l a t i o n s h i p between
f a r e s and l e v e l o f s e r v i c e e x i s t e d .
ifU n t i l
t h i s ti me t h e Board
stood r e a d y as a m a t t e r o f p o l i c y t o r e s t o r e c a r r i e r r a t e s o f
r e t u r n t o " a d e q u a t e " l e v e l s t h r o u g h f a r e a d j u s t m e n t s , even i f
th e l o w e r r a t e o f r e t u r n v/as s o l e l y a r e s u l t o f c a r r i e r o v e r
scheduling.
A t ti me s t h e s e f a r e a d j u s t m e n t s t o o k t h e form o f
fare increases.
A t o t h e r ti m es t h e s e a d j u s t m e n t s were p a s s i v e -
th e Board m e r e l y f a i l i n g t o re duc e f a r e s s u f f i c i e n t l y t o f o r c e
c a r r i e r s t o pass t h r o u g h t o t h e p u b l i c a l l
the b e n e fit s generated
by t h e reduced c o s t s o f more e f f i c i e n t e q u i p m e n t .
Add t o
t h i s a c o n s c i o u s Board p o l i c y o f m a i n t a i n i n g f a r e s above c o s t s
on m a jo r
long-haul
c o m p e titive routes in the mistaken b e l i e f
t h a t t h i s would g e n e r a t e exces s p r o f i t s w i t h which t o c r o s s -
*7
:
1
:
C iv il Aeronautics Board, Order 7 1 -4 -5 4 a t 23.
(April
1
''
9, 1971).
4
s u b s i d i z e o t h e r l e s s l u c r a t i v e r o u t e s - a p o l i c y which t h e board
x
*/
now o f f i c i a l l y has renounced as unwo rka ble - and we have a l l the
i n g r e d i e n t s n e c e s s a r y t o move us t o th e h i g h - f a r e , l o w - l o a d f a c t o r
end o f th e sp e c t r u m .
Cut why h a s n ' t some c a r r i e r t r i e d t o r e v e r s e th e c y c l e l y
lowering fares?
Some h a v e , b u t t h e y u s u a l l y have had to f a c e an
openly h o s tile board.
Coach s e r v i c e was one e x a m p le .
I t most
c e r t a i n l y was n o t welcomed e i t h e r by t h e Board o r by the c e r t i f i
c a te d c a r r i e r s ,
f i r . L a k e r ' s proposed Sky T r a i n i s a n o t h e r such
e x a m p l e , and the r e a c t i o n o f b ot h the c a r r i e r s and th e board to
i t is a matter o f record.
C o n tin e n ta l's
v io u s ly mentioned, i t y e t a t h i r d .
’ economy" f a r e , p r e
And as you have s e e n , th e
board l o o k s upon th e examp les o f l o w e r f a r e , h i g h e r l o a d f a c t o r
s e r v i c e o p e r a t e d by t h e i n t r a s t a t e a i r c a r r i e r s i n T e x a s - a n d
C a li f o r n i a w ith undisguised h o r ro r .
an
i n n o v a t o r in t h e a i r l i n e
t o p i o n e e r i s low er f a r e s .
Y e s , i t i s n o t ea sy t o be
i n d u s t r y i f th e i n n o v a t i o n y ou want
I t i s f a r e a s i e r to engage i n n o n - p r i c e
c o m p e t i t i o n o v e r which t h e board by s t a t u t e has no c o n t r o l .
A i r l i n e f a r e s a r e too h i g h f o r a n o t h e r re ason as w e l l .
A ir
l i n e o p e r a t i n g c o s t s a r e to o high and th e f a r e s must be hi gh
enough to c o v e r th o se c o s t s .
It
is a truism th a t re g u la tio n i t
s e l f imposes e x t r a o p e r a t i n g c o s t s on r e g u l a t e d f i r m s .
Chairman, fir. C 'M c l i a ,
i m p l i e d as much i n h i s t e s t i m o n y i n b o s t o n ,
be t o l o you t h a t i n t e r s t a t e c a r r i e r s
carriers)
■
The b o a r d ' s
( i . e . , CAB c e r t i f i c a t e d
a r e r e q u i r e d t o ch arg e h i g h e r f a r e s th a n i n t r a s t a t e
See b e l o w , p p . 1 8 - 2 0 .
c a r r i e r s because t h e i r c o s t s o f o p é r a t i n g a r e h i g h e r .
He went on
to a t t e m p t t o j u s t i f y t h o s e h i g h e r o p e r a t i n g c o s t s by e x p l a i n i n g t o
you t h a t t h e s i z e and c o m p l e x i t y o f t h e systems o f t h e c e r t i f i c a t e d
c a r r i e r s impose e x t r a c o s t s as compared w i t h t h e more modest scope
o f o p e r a t i o n s by t h e i n t r a s t a t e c a r r i e r s .
He t h en sugg est ed t h a t
somehow t h o s e e x t r a c o s t s a re o f b e n e f i t t o t h e t r a v e l e r .
Put
s i m p l y , he t o l d y ou t h a t D a l l a s - H o u s t o n pa sse nge rs sh ou ld pay more
than i t c o s t s an e f f i c i e n t a i r l i n e t o o p e r a t e between t h o s e two
c i t i e s because D r a n i f f and Te x a s I n t e r n a t i o n a l
c o s t s e ls ew h er e on t h e i r s y s t e m s .
elaborate j u s t i f i c a t i o n o f inte rn a l
have h i g h o p e r a t i n g
H i s argument b o i l s down t o an
s u b s i d y , a s t r a n g e argument f o r
th e B o a r d ' s Chairman s i n c e t h e CAB has o f f i c i a l l y abandoned i n t e r n a l
s u b s i d y as a r e g u l a t o r y t o o l .
But I shall
re tu rn to th a t s u b je c t.
The t h i n g t o n o t e f o r t h e p r e s e n t i s t h a t t h e c o s t s o f o p e r a t i n g
a c e r t i f i c a t e d a i r l i n e are high er than are the costs o f o p e ra tin g
an a i r l i n e i n an u n r e g u l a t e d e n v i r o n m e n t .
F o r a l on g t im e i t was
t h o u g h t t h a t t h e s e e x t r a c o s t s were small and m e r e l y t h e r e s u l t
o f e x t r a p a p e r w o r k , th e c o s t o f f i l i n g
reports w ith reg u la tory
a g e n c i e s , t h e c o s t s o f h i r i n g Washington c o u n s e l , and so f o r t h .
In f a c t ,
t h e s e e x t r a c o s t s a r e v a s t and f a r more f u n d a m e n t a l ;
they inhere in the nature o f r e g u l a t i o n ; th ey are the i n e v i t a b l e
costs o f re g u la tio n i t s e l f .
Th e r e c e n t c e r t i f i c a t i o n o f A i r New E n g l a n d p r o v i d e s
a d r a m a t i c example o f t h e i n c r e a s e d c o s t s o f o p e r a t i n g i n a
-
regulated environment.
6
-
A i r New E n g l a n d w a s , u n t i l
January o f
t h i s y e a r , a l a r g e commuter a i r l i n e p r o v i d i n g s e r v i c e between
many small comm unitie s i n n o r t h e r n New E n g l a n d , on t h e one
h a nd , and New Y o r k and B o s t o n , on t h e o t h e r .
In a d d i t i o n , i t
o p e r a t e s an e x t e n s i v e p a t t e r n o f s e r v i c e t o t h e Cape and I s l a n d
points in Massachusetts.
I t has o p e r a t e d w i t h g r e a t success
f o r s e v e r a l y e a r s and has p r o v i d e d s e r v i c e s o f a q u a n t i t y and
q u a l i t y which were w i d e l y p r a i s e d by c i v i c w i t n e s s e s i n t h e
B o a r d ' s New E n g l a n d S e r v i c e I n v e s t i g a t i o n .
have succeeded i n g e n e r a t i n g t r a f f i c
I t s f r e q u e n t schedules
l e v e l s a t most o f t h e small
communities i t s e r v e s f a r i n exces s o f t h o s e e x p e r i e n c e d by
Northeast A ir lin e s
in i t s l a s t years o f c e r t i f i c a t e d s e r v i c e .
p
Most s i g n i f i c a n t l y , a l l o f i t s s e r v i c e s were p r o v i d e d w i t h o u t
federal
s u b s i d y o r any o t h e r o u t s i d e f i n a n c i a l
support.
In p r e p a r i n g f o r t h e New E n g l a n d S e r v i c e I n v e s t i g a
t i o n th e s t a f f o f t h e CAB u n d e r t o o k a d e t a i l e d s t u d y t o de t e r m i n e
w h e th e r A i r New E n g l a n d , o r any o t h e r commuter which m i g h t be
c e r t i f i c a t e d by t h e B o a r d , c o u ld o p e r a t e as a c e r t i f i c a t e d
c a r r i e r w itho ut subsidy.
JV
The h i s t o r y o f A i r New E n g l a n d ' s s e r v i c e i s documented by
t h e B o a r d ' s a d m i n i s t r a t i v e law j u d g e i n t h e New E n g l a n d S e r v i c e
Investigation.
See C i v i l A e r o n a u t i c s B o a r d , D o c ke t 2 2 9 7 3 ,
I n i t i a l Decision ( J u l y 9 , 1 9 7 3 ).
- 7 -
Whereas t h e e x t e n s i v e p a t t e r n o f s e r v i c e p r o v i d e d
t h r o u g h o u t t h e r e g i o n by A i r New E n g l a n d had been o p e r a t e d w i t h o u t
s u b s i d y s u p p o r t , t h e s t a f f co n c lu de d t h a t t h e c a r r i e r ' s c e r t i f i
c a t i o n would so i n c r e a s e i t s c o s t o f o p e r a t i o n t h a t f e d e r a l
f i n a n c i a l a s s i s t a n c e would be r e q u i r e d m e r e l y t o p r o v i d e t h e
same l e v e l o f s e r v i c e as had been o p e r a t e d i n t h e p a s t w i t h o u t
such a s s i s t a n c e .
On t h e b a s i s o f a d e t a i l e d a n a l y s i s o f t h e c o s t
o f o p e r a t i n g i n a c e r t i f i c a t e d e n v i r o n m e n t , t h e s t a f f con cl u d ed
t h a t t h e annual s u b s i d y f o r t h e f i r s t y e a r o f o p e r a t i o n s would be
abou t $ 2 . 6 m i l l i o n and t h a t o p e r a t i n g c o s t s w ould r i s e t h e r e a f t e r
as th e c a r r i e r ma tu re d u n t i l annual s u b s i d y on t h e o r d e r o f $ 4 . 5
t o $ 6 .5 m i l l i o n wou ld be r e q u i r e d .
Those c o s t s were n o t s e r i o u s l y
c o n t e s t e d by t h e a i r c a r r i e r p a r t i e s t o t h e New E n g l a n d S e r v i c e
I n v e s t i g a t i o n and were a c c e p t e d by t h e a d m i n i s t r a t i v e la w j u d g e
as " t h e most r e l i a b l e e s t i m a t e s o f t h e f i n a n c i a l
m i g h t r e a s o n a b l y be e x p e c t e d . "
*/
results that
On t h e b a s i s o f h i s a n a l y s i s
o f t h e e v i d e n c e , he con c lu d ed t h a t c e r t i f i c a t i o n and s u b s i d i z a
t i o n o f one o r more o f t h e commuter c a r r i e r a p p l i c a n t s was n o t
warranted.
jV
C i v i l A e ro n a u tic s B o ard, Docket 22973, I n i t i a l
47 ( J u l y 9 , 1 9 7 3 ) .
Decision a t
" C e r t i f i c a t i o n o f a system f o r t h e e n t i r e New
E n g l a n d a re a w ould r e q u i r e s u b s t a n t i a l i n i t i a l
s u b s i d y o u t l a y s and t h e s e would te n d t o i n c r e a s e
g r e a t l y over a r e l a t i v e l y s h o r t pe rio d o f time
w i t h o u t compe ns ating b e n e f i t s . "
V
N o n e t h e l e s s , t h e Board c e r t i f i c a t e d A i r New E n g l a n d , s p e c i f i c a l l y
r e j e c t i n g t h e c o n c l u s i o n o f t h e s t a f f and t h e a d m i n i s t r a t i v e law
ju d g e t h a t i t s c o s t s o f o p e r a t i o n would i n e v i t a b l y c l i m b t o
**/
unacceptable l e v e l s . On J a n u a r y 2 4 , 1 9 7 5 , t h e day a f t e r i t s c e r t i f i c a t e
became e f f e c t i v e , A i r New E n g l a n d f i l e d w i t h t h e Board a p e t i t i o n
f o r t h e e s t a b l i s h m e n t o f an annual s u b s i d y r a t e o f $ 3 . 8 m i l l i o n
a n d , c i t i n g t h e " s t a g g e r i n g c o s t s wh ich have been i n c u r r e d si mp ly
to prepare f o r c e r t i f i c a t e d o p e ra tio n s " the c a r r i e r requested
immediate a c t i o n " t o o f f s e t t h e cash f l o w d r a i n upon A i r New
E n g l a n d ' s r e s o u r c e s whic h has o c c u r r e d i n p r e p a r a t i o n f o r , and
*** /
w ill
continue in the op e ra tio n o f c e r t i f i c a t e d s e r v i c e ."
The
subsidy a c t u a l l y requested f o r the f i r s t y e a r o f c e r t i f i c a t e d
o p e r a t i o n s f a r exceeded t h e amount p r e d i c t e d by t h e B o a r d ' s
sta ff.
I n d e e d , A i r New E n g l a n d i s se e k i n g 38 c e n t s f o r e v e r y
*/
a t 63.
Id.
**/
Civil
1974).
Aeronautics Board, Order 7 4 - 7 - 7 0 a t 18-23 ( J u l y 1 7 ,
* * * / CAB D o c ke t 2 7 4 3 6 , P e t i t i o n o f A i r New E n g l a n d a t 2 , 6
(January 24, 1975).
- 9 -
d o l l a r o f p a ss e n g e r re ve n u e which i t e x p e c t s t o c o l l e c t .
W h il e
th e s t a f f f o r e c a s t s u b s i d y c o s t s i n t h e n ei g h b o r h o o d o f $5 p e r
p a s s e n g e r , A i r New E n g l a n d r e q u e s t s $10 f o r e v e r y pa ss en ge r
en p la n e d .
What caused t h e r a p i d c o s t e s c a l a t i o n ?
Part o f i t
was caused by t h e s t r i c t e r s a f e t y s t a n d a r d s imposed by t h e FAA
on t h e o p e r a t i o n s o f c e r t i f i c a t e d c a r r i e r s .
as w e l l
H/
P a r t was caused
by t h e i n c r e a s e d r e p o r t i n g c o s t s t o which I have r e f e r r e d
and some o f t h e c o s t s were o n e - t i m e s t a r t up e x p e n s e s .
Beyond
t h e s e , h o w e v e r , much o f t h e c o s t i n c r e a s e a l r e a d y e x p e r i e n c e d
and a l l o f t h o s e t o come can o n l y be a t t r i b u t e d t o t h e hidde n
co st s o f r e g u l a t i o n which we a r e d i s c u s s i n g .
s t a f f concluded:
As t h e B o a r d ' s
~
" t h e b u l k o f t h e c o s t d i f f e r e n c e i s due t o t h e
i n d i r e c t e f fe c t s o f operating in a protected
b u s i n e s s e n v i r o n m e n t i n wh ich t h e r e i s no
r e a l i s t i c t h r e a t o f new e n t r y , i n which p r i c e s
a r e s e t on t h e b a s i s o f c o s t s , and i n which
s u b s i d y i s p a i d on t h e b a s i s o f need . . .
t h e u l t i m a t e t h r e a t o f u n s a t i s f a c t o r y b u s in e s s
conduct— bankruptcy— is s u b s t a n t i a l l y s o fte n e d ,
i f not f u l l y blunted . . . .
i t s net e f f e c t is to
r a i s e c o s t s o v e r commuter c a r r i e r expenses
s e v e ra lfo ld ."
jV
I am n o t a r g u i n g t h a t t h e i n c r e a s e d c o s t s o f c o m p ly in g w i t h
s t r i c t e r FAA r e g u l a t io n o f c e r t i f i c a t e d c a r r i e r s are n ot w a rra n te d .
I t may w e l l be t h a t s t r i c t e r s a f e t y s t a n d a r d s s h o u ld be imposed
on a l l commuter c a r r i e r s .
H o w e v e r , t h i s can be d o n e , i f n e c e s s a r y ,
w i t h o u t any i n c r e a s e i n economic r e g u l a t i o n .
**/
C i v i l A e r o n a u t i c s B o a r d , D o c k e t 2 2 9 7 3 , B r i e f o f t h e Bureau
o f O p e r a t i n g R i g h t s t o t h e A d m i n i s t r a t i v e Law Ju d g e a t 49
(January 1 9 , 1 9 7 3 ).
- 10 What do consumers o f a i r t r a n s p o r t a t i o n g e t i n r e t u r n
f o r these higher costs?
Very l i t t l e ,
i f anything.
The B o a r d ' s
s t a f f c o n c lu de d t h a t t h e h i g h e r c o s t s g e n e r a t e d by t h e r e g u l a t o r y
pro ce ss " n e c e s s a r i l y means t h a t f o r e v e r y d o l l a r o f s u b s i d y
i n v e s t e d , the bulk w i l l
cated s e r v i c e .
.
.
.
be s p e n t i n t h e h i g h e r c o s t s o f c e r t i f i
Put another way, subsidy is spent la r g e ly
in increased c o s t s , not increased s e r v i c e ." * /
The B o a r d ' s
a d m i n i s t r a t i v e law j u d g e f ou nd t h a t :
" t h e commuters have d e m o n s t r a t e d t h e a b i l i t y t o
p r o v i d e w i t h o u t s u b s i d y s u p p o r t broad c o v er a g e
o f t h e i m p o r t a n t New E n g l a n d m a r k e t s w i t h f r e q u e n t
w e l l - t i m e d sch ed ul e s h i g h l y r e s p o n s i v e t o t h e p u b l i c
ne ed.
C e r t i f i c a t i o n would d i m i n i s h t h e i r f l e x i b i l i t y
and i n a l l l i k e l i h o o d would en courage them t o move
in the d i r e c ti o n o f h ig h e r -c o s t se rvic e w ith la rg e r
a irc ra ft."
**/
Some o f t h e r e g u l a t e d c a r r i e r s a r e a b l e t o escape these
r e g u l a t i o n imposed c o s t s b e t t e r t ha n o t h e r s .
In g e n e r a l , t h e y seem
t o be t h e s m a l l e r c a r r i e r s who have had t o s t r u g g l e a g a i n s t t h e
" B i g F o u r " t h r o u g h o u t most o f t h e i r c o r p o r a t e l i v e s .
During the l a t e
Continental
1950' s
P
Id.
19601s
i t was
t h a t was h e l d up as t h e paragon o f e f f i c i e n c y .
r e c e n t l y i t has been D e l t a , by a l l
airlin e .
and e a r l y
During calendar y e a r
More
a c c o u n t s , a most r e m a r k a b le
1974
D e l t a earned o v e r
$80
m illio n
a t 49-50.
**/
C i v i l A e ro n a u tic s B o ard, Docket 22973, I n i t i a l
a t 63 ( J u l y 9 , 1 9 7 3 ) .
Decision
11
i n p r o f i t s , a r e c o r d f o r any do m e st ic t r u n k c a r r i e r . f More
s i g n i f i c a n t l y , D e l t a ' s p r o f i t s d u r i n g 1 9 7 4 exceeded by a small
margin th e p r o f i t s o f U n i t e d , t h e N a t i o n 1s l a r g e s t c a r r i e r ,
which i t s e l f vías r e p o r t i n g r e c o r d p r o f i t s .
D e l t a a l s o earned
c o n s i d e r a b l y more money t h a n E a s t e r n , a member o f th e t r a d i t i o n a l
' Big F o u r , " whom D e l t a has come t o re semble c l o s e l y i n s i z e and
s t r e n g t h o f r o u t e sy st em .
D e l t a and E a s t e r n a l s o compete
h e a d - t o - h e a d on many r o u t e s .
R e c e n t l y C o l i n I . ’M c I n t o s h , C o n t r i b u t i n g Economics E d i t o r
o f th e p u b l i c a t i o n A i r T r a n s p o r t W o r l d , p u b l i s h e d a c o m p a r a t i v e
a n a l y s i s o f t h e s e two c a r r i e r s .
m
A f t e r confirm ing the s i m i l a r i t y
o f th e t w o , M c I n t o s h add res sed t h e q u e s t i o n o f e x p l a i n i n g the ;
**I
sharp d i s p a r i t y in t h e i r p r o f i t s .
He found t h a t t h i s c o u l d
n o t be e x p l a i n e d on th e reve nu e s i d e .
D e l t a 's average " y ie ld "
-
revenue p e r reve nu e p a sse nge r m i l e - was 6 . 2 4 c e n t s w h i l e E a s t e r n ' s
was C . 15 c e n t s .
evident.
D e l t a ' s c o s t s v/ere 5 5 . 4 c e n t s p e r r ev en ue to n m i l e ;
E a s te r n 's , 6 1.1
c o s ts ?
I t was on t h e c o s t s i d e where t h e d i s p a r i t y was
cents.
What a c co un ted f o r t h i s d i f f e r e n c e in
M c I n t o s h found t h a t E a s t e r n was s u b s t a n t i a l l y o v e r s t a f f e d -
by as much as 5 , 8 0 0 employees - j ud g ed by D e l t a ' s s t a n d a r d s ;
*j
“
m
\
Í
r— —
Col i n I . Me I n t o s h , " A i r l i n e P r o f i t s . . .Why D e l t a ? . . .And; Why n o t
Eastern? A i r Transport World, J u l y 1974.
**j
D u r i n g c a l e n d a r y e a r 1 9 7 3 , D e l t a n e t t e d $75 m i l l i o n on gross"
r ev en ue s o f $ 1 . 1 b i l l i o n w h i l e E a s t e r n l o s t $ 3 1 . 3 m i l l i o n
on g r o s s reve nu es o f $ 1 . 2 b i l l i o n .
12
T h i s o v e r s t a f f i n g was p a r t i c u l a r l y e v i d e n t a t h i g h e r management
le ve ls.
E a s t e r n ' s management team was f ou nd t o be 13 ti me s as
l a r g e as D e l t a ' s and t h e a v e r a g e E a s t e r n manager was f ou nd to
ear n a s a l a r y 63 p e r c e n t h i g h e r t ha n h i s D e l t a c o u n t e r p a r t .
The c o n c l u s i o n t h a t as f a r as a i r l i n e s a re c o n c e r n e d , b i g g e r
i s n o t n e c e s s a r i l y b e t t e r , a p p a r e n t l y has p e n e t r a t e d th e co n
s c i o u s n e s s o f even t h e l a r g e s t c a r r i e r , U n i t e d , which d e c e n t r a
l i z e d i t s e l f i n e a r l y 19 71
i n t o t h r e e semi-automonous s u b u n i t s .
B u s i n e s s Week r e c e n t l y c i t e d t h i s d e c e n t r a l i z a t i o n move as a key
t o t h e c a r r i e r ' s r e c e n t sharp improvement in p r o f i t p e r f o r m a n c e .
B
T h a t such a r e o r g a n i z a t i o n would im prove o p e r a t i n g r e s u l t s by
i m p r o v i n g concern f o r e f f i c i e n c y comes as no s u r p r i s e t o e i t h e r
students o f o rg a n iza tio n a l
s t r u c t u r e and i t s e f f e c t s on p e r f o r
mance o r th e b u l k o f American i n d u s t r y who l o n n - a g o ad op ted
t h e m u l t i d i v i s i o n form o f c o r p o r a t e o r g a n i z a t i o n f o r p r e c i s e l y
**j
th is reason.
Y e t as P r o f e s s o r W i l l i a m s o n n ot ed i n a r e c e n t bo ok ,
t h e r e g u l a t e d i n d u s t r i e s - i n c l u d i n g t h e a i r l i n e s - have been among
*★*j
the slowest to adopt t h i s important i n n o v a t i o n . "
Why i s t h i s ?
“ How U n i t e d A i r l i n e s P u l l e d O u t o f I t s D i v e , '
June 29 , 1974.
Bu si ne ss Week
"
**j
A c c o r d i n g t o S c o t t , by 1907 g v e r 80 p e r c e n t o f th e f i r m s i n the
F o r t u n e 5 0 0 , were o r g a n i z e d on a m u l t i d i v i s i o n a l b a s i s .
Bruce
R . S c o t t , "The New I n d u s t r i a l S t a t e : O l d Myths and New
R e a l i t i e s , " H a r v a r d B u si ne ss R ev ie w ( M a r c h - A p r i l 1 9 7 3 ) , p p . 138-139.
***j
O l i v e r W i l l i a m s o n , C o r p o r a t e C o n t r o l and E u s i n e s s B e h a v i o r .
Englewood C l i f f s , New J e r s e y : P r e n t i c e - H a l l , 1 9 7 0 . p p . 1 6 2 - 1 6 3 .
12A
I b e l i e v e t h a t nuch o f t h e blame can be l a i d a t t h e d o o r o f th e
CAD.
A i r c a rr ie rs - p a r t i c u l a r l y large a i r c a rr ie rs - recognize
t h a t t h e board w i l l
d iffic u lty.
p r o t e c t t h e n i n case' o f a l m o s t any t y p e o f
F a r e s a re s e t on t h e b a s i s o f a v e r a g e c o s t - n q t
the c o s t o f t h e most e f f i c i e n t c a r r i e r s .
*/
I n t e r l o p e r s who
might p u t p r e s s u r e on a c a r r i e r i n t r o u b l e w i l l
n o t be t o l e r a t e d
A n d , i f worse comes t o w o r s t , a f r i e n d l y
x
x
X
In f a c t , i n r e q u i r i n g t h a t t h e board s e t t h e c a r r i e r ’ s r a t e s
w i t h due r e g a r d t o each c a r r i e r s r ev en ue ' n e e d , 1: s e c t i o n
1 0 0 2 ( e ) o f t h e F e d e r a l A v i a t i o n A c t v i r t u a l l y imposes a c o s t p l u s r e g u l a t o r y scheme on th e board a n d , t h u s , p o s i t i v e l y
discourages e f f i c i e n c y .
- 13 -
merg er can be a rr a n g e d i n which t h e s t o c k h o l d e r s , b o n d h o l d e r s ,
T a b o r , and most o f t o p management w i l l
be p r o t e c t e d .
In t h i s
r e g u l a t o r y e n v i r o n m e n t i t i s n o t s u r p r i s i n g t h a t c o s t s - and
fares - r is e .
The o n l y t h i n g t h a t i s s u r p r i s i n g i s t h a t c e r t a i n
c a r r i e r s - such as D e l t a , B r a n i f f , N o r t h w e s t , and C o n t i n e n t a l ,
are able to m aintain a r e l a t i v e l y e f f i c i e n t le ve l o f o p e r a tio n .
I f r e g u l a t i o n causes a i r l i n e f a r e s t o be h i g h e r than
w ould o t h e r w i s e be t h e c a s e , what a r e t h e arguments i n f a v o r o f
price regulation?
One argument o f t e n made i s a c o n t r a d i c t i o n o f
wh at we have j u s t d i s c u s s e d .
We a r e f r e q u e n t l y t o l d t h a t r e g u l a t i o n
i s r e q u i r e d t o keep f a r e s l o w , 1_.e^., t h a t t h e c a r r i e r s w o u l d , i f
g i v e n t h e c h a n c e , charg e even h i g h e r f a r e s t h a n t h e y p r e s e n t l y
charge.
D r . J a m e s , s p ea k in g i n b e h a l f o f t h e A i r T r a n s p o r t A s s o c i a
t i o n t o l d you t h a t " i n t h e lo ng ru n .
.
. de re g u la tio n o f the a i r
t r a n s p o r t i n d u s t r y would have p l a c e d p r i c e s and f a r e s a t a much
h i g h e r l e v e l t h a n now e x i s t s . "
y
In h i s t e s t i m o n y i n B o s t o n , Chairman O ' M e l i a advanced
t h e same n o t i o n .
" P r i c e c o m p e t i t i o n i n t h e a i r l i n e i n d u s t r y , " he
t o l d y o u , "has been v i r t u a l l y n o n e x i s t a n t . "
F a r e f l e x i b i l i t y , he
a d d e d , "would be s i m p l y a l i c e n s e f o r t h e c a r r i e r s t o r a i s e t h e i r
V Geo rge W. Ja m e s , T e s t i m o n y b e f o r e t h i s C o m m i t t e e , B r i e f
version a t p. 5 (February 6, 1975).
- 14 -
fares to the t r a v e l i n g p u b lic w i t h o u t s u b m ittin g those f a r e
inc re a se s t o t h e Board and t h e r e would be no i n c e n t i v e t o keep f a r e s
below t h e maximum l e v e l p e r m i t t e d . " V
s
R e g u l a t i o n i s th u s packaged arid s o l d by t h e i n d u s t r y and
i t s r e g u l a t o r s as a consumer p r o t e c t i o n measure!
a question.
B u t l e t me ask you
Can i t r e a l l y be s o , when t h e p ro p o n e n t s o f r e g u l a t i o n
are t h e r e g u l a t e d ?
How can t h e a i r l i n e s e x p e c t t h e p u b l i c t o a c c e p t
such a p o s i t i o n when t h e y advance i t ?
I s n ' t i t obvious t h a t the
a i r l i n e s , in urging continued r e g u la tio n o f r a t e s , f e a r t h a t w ith o u t
r e g u l a t i o n p r i c e s w ould go down, n o t up?
T h i s p e c u l i a r s t a t e o f a f f a i r s , i n which r e g u l a t i o n i s
a l l e g e d l y r e q u i r e d t o keep p r i c e s down, " f l o w s i n e v i t a b l y , "
Mr. O ' M e l i a s a y s —
"from the ch ara cte r o f the a i r l i n e i n d u s t r y . . . .
C a r r i e r s do n o t engage i n p r i c e c o m p e t i t i o n because
t h e y o r d i n a r i l y c a n n o t e x p e c t any s i g n i f i c a n t a d v a n
ta g e f r o m such a c t i o n .
C o m p e tito r s , a f t e r a l l , are
a lw ay s f r e e t o match any r e d u c t i o n i n f a r e s a n d , as
a r e s u l t , a c a r r i e r cannot expect t h a t a f a r e re d u ctio n
w i l l increase i t s c o m p e titive p o s itio n or generate
s u f f i c i e n t a d d it i o n a l t r a f f i c to o f f s e t the d e c lin e in
overall y i e l d ." * * /
* 7 T e s t i m o n y o f Chairman R i c h a r d J . O ' M e l i a b e f o r e t h i s Committee
at pp. 8-9 (Fe b r u a r y 1 4 , 1 9 7 5 ) .
........
The f a c t i s t h a t t h e a i r l i n e s have o n a number o f o c c a s i o n s
v o l u n t a r i l y reduced p r i c e s i n o r d e r t o g a i n a d d i t i o n a l b u s i n e s s .
O r d i n a r i l y p r i c e r e d u c t i o n s a r e made on a d i s c r i m i n a t o r y b a s i s so
as t o e x c l u d e n o n - d i s c r e t i o n a r y t r a v e l e r s fro m t h e b e n e f i t s o f t h e
price r e d u c tio n .
The c u r r e n t wave o f new e x c u r s i o n f a r e s , l i m i t e d as
to days o f t r a v e l and l e n g t h o f s t a y , a r e an e x a m p l e .
I n a d d i t i o n , how
e v e r , t h e r e have been i n s t a n c e s o f i n d i v i d u a l c a r r i e r s a t t e m p t i n g t o
carve o u t a s p e c i a l m a r k e t n i c h e f o r t h e m s e lv e s by o f f e r i n g reduced
fares.
C o n t i n e n t a l A i r l i n e s , f o r e x a m p l e , has l o n g made use o f l o w e r t h a n - c o a c h economy f a r e s i n comp eti ng w i t h t h e f a r l a r g e r t r a n s c o n
t i n e n t a l c a r r i e r s i n such m a r k e t s as C h i c a g o - L o s A n g e l e s .
H /
Ld. at 8.
We a r e n e v e r t o l d why i t i s t h a t t h e a i r l i n e i n d u s t r y
i s d i f f e r e n t f ro m o t h e r i n d u s t r i e s - l i k e r e t a i l i n g o r t h e manufacture
o f e l e c t r o n i c c a l c u l a t o r s - i n which t h e r e i s s u b s t a n t i a l p r i c e com
p e t i t i o n , notw ithstanding the f a c t t h a t "com petitors . . .
a r e always
-«
/
f r e e t o match any r e d u c t i o n i n ¿ p r i c e / . "
The r e a l reason why t h e r e has been l i t t l e
t i o n i n a i r t r a n s p o r t a t i o n was a l s o g i v e n by
p r i c e co mp et i
M r . O I M e l i a , when he
ad ded :
"Con gre ss has s u b j e c t e d t o r e g u l a t i o n and c o n t r o l
b oth e n t r y i n t o t h e i n d u s t r y and e n t r y i n t o i n d i v i d u a l
m a r k e t s , w i t h t h e r e s u l t t h a t t h e number o f c o m p e t i t o r s
over in d ivid u a l routes is n e c e ssa rily l i m i te d .
As
l on g as Congress wi sh es t o r e t a i n a r e g u l a t e d system
w ith lim ite d e n try . . . i t is simply not r e a l i s t i c
to expect price behavior re p re s e n ta tive o f a t r u l y
c o m p e t i t i v e m a r ke t s t r u c t u r e . "
O f c o u r s e , we know t h a t t h a t i s c o r r e c t .
Where e n t r y has
been p e r m i t t e d - even on a v e r y l i m i t e d b a s i s - f a r e s have f a l l e n
dram atically.
The v e r y l i m i t e d s c h ed ul e d coach o p e r a t i o n s o f th e
l a r g e i r r e g u l a r c a r r i e r s i n t h e e a r l y 1 9 5 0 ' s h el pe d t o b r i n g about
t h e i n t r o d u c t i o n o f coach f a r e s ;
fj
t h e i n t r a s t a t e a i r l i n e s have
b r o u g h t f a r e s down i n t h e m a r ke t s which t h e y s e r v e ; a n d , as y ou
57
$e e » g e n e r a l l y , R i c h a r d E . C a v e s , A i r T r a n s p o r t and I t s
R e g u l a t o r s , a t 3 7 0 - 7 1 (C a m b r i d g e :
Harvard U n i v e r s i t y P re s s , 1962).
J u s t as t h e Board i s now t h r e a t e n i n g t o p u t low f a r e c a r r i e r s ,
such as O N A , o u t o f b u s in e s s and t o keep o t h e r s , such as L a k e r ,
f r o m e n t e r i n g s c h ed ul e d a i r t r a n s p o r t a t i o n , t h e Board s p e n t much
o f i t s e f f o r t in the 1950's in prosecuting v i o l a t i o n s o f i t s reg ula
t i o n s by t h e p r i c e - c u t t i n g l a r g e i r r e g u l a r c a r r i e r s .
know f ro m y o u r h e a r i n g s l a s t f a l l ,
t h e c h a r t e r c a r r i e r s have k e p t
f a r e s on t h e N o r t h A t l a n t i c a t l e v e l s f a r below t h o s e which t h e
scheduled c a r r i e r s want and w h i c h , s i g n i f i c a n t l y , t h e Board would
w i l l i n g l y approve.
V
-
The l a s t case i s p a r t i c u l a r l y i n s t r u c t i v e s i n c e i t
d r a m a tic a lly i l l u s t r a t e s the f a c t t h a t , c o n tra r y to Mr. O ' M e l i a ' s
r e m a r k s , t h e Board does n o t r e a l l y see i t s e l f as a consumer
a d v o c a t e , i n s i s t i n g on t h e l o w e s t p o s s i b l e f a r e s .
R a t h e r , t h e Board
a c t s i n a manner c o n s i s t e n t w i t h t h e v i e w t h a t i t s r e a l
lo y a lty is
t o th e sche dul ed c a r r i e r s f o r whom i t seeks t h e h i g h e s t p o s s i b l e
fares.
The need f o r r e g u l a t i o n o f a i r l i n e f a r e s , i t i s c l e a r ,
i s c r e a t e d by t h e e x i s t e n c e o f r e g u l a t o r y c o n t r o l o v e r e n t r y .
F r e e t h e l a t t e r a n d , a p p a r e n t l y , n o t even M r . O ' M e l i a would ur g e
con tin u ation o f the form er.
*/
The f u l l s t o r y o f t h e B o a r d ' s a t t e m p t t o r a i s e sch ed ul e d
t r a n s a t l a n t i c f a r e s by r e d u c i n g c o m p e t i t i o n fro m t h e c h a r t e r
c a r r i e r s i s s e t f o r t h i n t h e s t a f f r e p o r t o f t h i s c o m m it t e e .
See
S t a f f o f S e na te Subcomm. on A d m i n i s t r a t i v e P r a c t i c e and P r o c e d u r e s ,
Comm, on t h e J u d i c i a r y , 93rd C o n g . , 2d S e s s . , R e p o r t on P r o c e d u re s
R e l a t i n g t o Minimum C h a r t e r A i r F a r e s (Comm. P r i n t ( 1 9 7 4 ) .
- 17 The second m a jo r argument i n f a v o r o f p r i c e r e g u l a t i o n
v-'hich has been p re s e n t e d a t th e se h e a r i n g s c e n t e r s around
th e c o n c e p t o f i n t e r n a l
s u b s i d y , sometimes c a l l e d c r o s s - s u b s i d y .
The argument goes l i k e t h i s :
Each c a r r i e r has a complex r o u t e system made up o f
m a r k e t s which v a r y w i d e l y i n t h e i r p r o f i t p o t e n t i a l .
A t one
end o f t h e spectrum a re m a r ke t s which have t h e p o t e n t i a l t o
be e x t r e m e l y l u c r a t i v e i f t h e c a r r i e r ' s o p e r a t i o n s a r e p r o t e c t e d
from c o m p e t i t i o n .
A t t h e o t h e r ex tre me l i e s a gro up o f ma rkets
in which th e c a r r i e r ' s o p e r a t i o n s a re u n p r o f i t a b l e .
Un der th e
p r e s e n t r e g u l a t o r y scheme, each c a r r i e r i s p i c t u r e d as w i l l i n g l y
s h o u l d e r i n g th e burden o f s e r v i n g t h e s e u n p r o f i t a b l e m a r k e t s
because th e board a l l o w s i t ,
as a q u i d pro q u o , t o ea rn e x t r a
p r o f i t s in i t s ric h markets.
T h i s i s ac c om p lis he d by s e t t i n g
f a r e s i n th e r i c h m a rk et s a t a l e v e l
i n ex ce ss o f c o s t s ( i n c l u d
ing a normal r e t u r n on c a p i t a l ) and by ke ep ing o u t c o m p e t i t i o n .
These t r a n s f e r s o f th e f a r e s p a id i n one m a r ke t t o s u p p o r t
the services
in a n o t h e r m ar ket a r e so i m p o r t a n t , i t has been
i m p l i e d , t h a t w i t h o u t them t h e i n t e g r a t e d n a t i o n a l a i r t r a n s p o r J
t a t i o n n e tw o rk would c o l l a p s e .
Internal
s u b s i d i z a t i o n o f t h i s s o r t has been p r a c t i c e d in
c e r t a i n r e g u l a t e d i n d u s t r i e s f o r a v e r y lo ng t im e and i t can be
made to work i n t h e case o f n a t u r a l mo n op ol ie s such as e l e c t r i c
- A n r es p on se t o q u e s t i o n s from S e n a t o r Kennedy a t th e h e a r i n g s
on F e b r u a r y 6 , 1 9 7 5 , D r . James spoke o f an i n d u s t r y - w i d e
r e d u c t i o n i n s e r v i c e on t h e o r d e r o f 25 p e r c e n t .
- 18 u tilitie s.
F o r r ea so n s which I w i l l o u t l i n e , h o w e v e r, i t
d o e s n ' t work i n t h e r e g u l a t i o n o f q u a s i - c o m p e t i t i v e i n d u s t r i e s
such as a i r t r a n s p o r t a t i o n .
Moreover, although the C . A . B .
r e l i e d on c r o s s - s u b s i d y as a m a j o r el eme nt o f i t s r o u t e and
r a t e p o l i c i e s f o r many y e a r s , t h e Board has now f o r m a l l y
r e j e c t e d i t as u n w o r k a b l e .
H e n c e , i t p r o v i d e s no argument
in s u p p o r t o f c o n t i n u e d p r i c e r e g u l a t i o n .
B e f o r e I d i s c u s s why c r o s s - s u b s i d y d o e s n ' t wo rk i n a i r
t r a n s p o r t a t i o n , you sh ou ld n o t e an i m p o r t a n t f a c t - th e
premise on winch th e c r o s s - s u b s i d y argument r e s t s i n c l u d e s an
e x p l i c i t acknowledgement t h a t a i r c a r r i e r r a t e s a r e h i g h e r
than t h e y need t o be on t h e s o - c a l l e d " l u c r a t i v e " r o u t e s . T h a t
adm ission, in t u r n , r a is e s a s i g n i f i c a n t question o f e q u i t y .
Hhy should p a ss en ge rs f l y i n g from New Y o r k t o L os A n g e l e s
s u b s i d i z e p a ss en ge rs who f l y f ro m New Y o r k t o H a r t f o r d o r
from New B e d fo r d t o Boston?
As you c o n s i d e r th e f a i l u r e s o f
a i r l i n e c r o s s - s u b s i d y you sh ou ld a l s o c o n s i d e r i t s fun damental
u n f a i r n e s s , a p o i n t t o which I w i l l
return.
Why d o e s n ' t c r o s s - s u b s i d y work i n a i r t r a n s p o r t a t i o n ?
T h e f i r s t re aso n i s because t h e r o u t e s which a r g u a b l y m i g h t
r e q u ir e the in te rn a l
s u b s i d i z a t i o n a r e , f o r t h e most p a r t ,
o p e r a t e d n o t by c a r r i e r s s e r v i n g th e l u c r a t i v e l o n g h a u l , dense
m a r ke t r o u t e s , b u t by c a r r i e r s wh ic h have no o p p o r t u n i t y t o
- 19 make excess p r o f i t s and th u s earn c r o s s - s u b s i d y .
Compare
T l ' A ' s do me stic s y s t e m , which has an a v e r a g e " l e n g t h o f hop"
o f a b o u t SCO m i l e s , w i t h A l l e g h e n y ' s , a c a r r i e r w i t h which
i t competes i n many n o r t h e a s t e r n U . S . m a r k e t s , wh ich has an
a ve r a g e l e n g t h o f hop
o f a bo ut 200 m i l e s .
excess p r o f i t s on i t s l o n g - h a u l
profits
J
TWA m i g h t earn
f l i g h t s , b u t how a r e t h o s e
t c f i l t e r th r o u g h t o A l l e g h e n y ' s s h o r t - h a u l
services?
T h i s i n h e r e n t i n e q u a l i t y o f r o u t e s t r u c t u r e has now been
r e c o g n i z e d by th e Board as a p r i m a r y re as on f o r abandoning
f u r th e r attempts a t c r o s s -s u b s id y :
" S i n c e n o t a l l c a r r i e r s have an equal mix o f
l o n g - h a u l and s h o r t - h a u l r o u t e s , t h o s e c a r r i e r s
h a v i n g p r e d o m i n a t e l y s h o r t - h a u l r o u t e s , and
r e l a t i v e l y few medium- and l o n g - h a u l r o u t e s ,
do n o t have an o p p o r t u n i t y t o g a i n t h e excess
p r o f i t s fro m l o n g - h a u l r o u t e s n e c e s s a r y t o
c r o s s - s u b s i d i z e s h o r t - h a u l r o u t e s . . . u n d e r the
c r o s s -s u b s id iz a tio n t h e o r y , predominately
l o n g - h a u l c a r r i e r s a r e a l l o w e d t o ch arg e a b o v e
c o s t f a r e s in l o n g e r m a rk et s i n o r d e r t o
c r o s s -s u b s id ize s h o r t - h a u l m a r k e t s , w hich, to
a g r e a t e x t e n t , t h e y do n o t p o s s e s s .
Accord
i n g l y , th e l o n g - h a u l c a r r i e r w i l l e i t h e r
receive excessive e a rn in g s , or w i ll operate
w i t h b e l o w - a v e r a g e e f f i c i e n c y o r a t su b
s ta n d a r d loa d f a c t o r s . " _ /
T h e r e i s an a d d i t i o n a l
and v e r y i m p o r t a n t reason why t h e
e x i s t i n g c o m p e t i t i v e s t r u c t u r e o f t h e i n d u s t r y p r e c l u d e s an
e ffe c tiv e internal
s u b s i d y p ro g r a m , n a m e l y , th e system does n ot
/
C i v i l A e r o n a u t i c s B o a r d , Handbook o f A i r l i n e S t a t i s t i c s ,
P a r t I I I , T a b l e s 18 and 2 9 T i 9 7 3 * E d T t i o n ] 7
I
C i v i l A e r o n a u t i c s B o a r d , O r d e r 7 4 - 3 - 8 2 a t 71
(March 1 8 , 1 9 7 4 ) .
-
20
-
r e s u l t in t h e o e n e r a t i o n o f exces s p r o f i t s which co u ld be
used f o r c r o s s - s u b s i d y .
As I have a l r e a d y p o i n t e d o u t , t h e
present r e g u l a t o r y a r r a n g e n e n t ~ - i n which p r i c e i s d e t er m in e d
by the Hoard b ut in which t h e Board has no power o v e r
s c h e d u l i n g , e q u i p m e n t , o r c a p a c i t y - c a u s e s t h e monopoly
p r o f i t s which th e c a r r i e r s would o t h e r w i s e earn a t t h e
pres en t r a t e l e v e l
t o be l a r g e l y d i s s i p a t e d i n w a s t e f u l
scheduling w a r s , w i t h r e s u l t a n t exces s c a p a c i t y , and t o a
l es se r e x t e n t ,
in e x c e s s i v e l e v e l s o f p r o m o t i o n a l a c t i v i t y .
As the Hoard i t s e l f has s t a t e d :
' 'R a th e r than p r o v i d i n g s u b s i d i z a t i o n o f s h o r t haul r o u t e s , a f a r e s t r u c t u r e n o t based on
c o s t s nay m e r e l y s u b s i d i z e w a s t e f u l c o m p e t i t i v e
practices.
I t is noteworthy in t h i s regard
t h a t l oa d f a c t o r s g e n e r a l l y d e c l i n e w i t h d i s
ta nc e and a r e l o w e s t i n th e l o n g e s t h a u l s ;
t h a t t h e g r e a t e s t d i l u t i o n fro m p ro m o t i o n a l
f a r e s oc c u rs in th e l o n g e r h a u l s ; and t h a t
such c o s t l y f r i l l s as lou ng es and f r e e - i n
f l i g h t e n t e r t a i n m e n t a r c , o r have b ee n , p r e d o r i i n a t e l y a phenomenon o f l o n g - h a u l s e r v i c e . ' *
_/
T h u s , th e beard con c lu d ed t h a t t h e w o r k a b i l i t y o f c r o s s
s u b s i d i z a t i o n ' a s a f e a t u r e o f th e f a r e s t r u c t u r e "
been e s t a b l i s h e d .
J
I n d e e d , t h e Board o b s e r v e d ,
had n o t
" o n l y i f th e
domestic a i r t r a n s p o r t a t i o n system c o n s i s t e d o f a s i n g l e
monopoly c a r r i e r " c o u ld c r o s s - s u b s i d y be e x p ec t ed t o su cce ed.
it
at 7 1 - 7 2 .
m
at 72 .
J
~~ I d . a t 7 1 . The B o a r d ' s o f f i c i a l
abandonment o f i n t e r n a l
sub
E v en i f c r o s s - s u b s i d y c o u ld v/ork, i n t h e sense o f
p ro v id in g funds to s u b s id ize lo s in g o p e r a t i o n s , i t w o u ld n 't
work v e r y w e l l
because th e c a r r i e r s , bei ng run by r a t i o n a l
bus ine ssm en, would p r o v i d e t h e s u b s i d i z e d s e r v i c e g r u d i n g l y ,
m in im iz in g t h e i r costs ra th e r than maximizing se rvic e
q u a lity.
Here i t
/
i s i m p o r t a n t t o d i s t i n g u i s h between a i r
s e r v i c e and many o t h e r t y p e s o f r e g u l a t e d p u b l i c s e r v i c e s ,
such as e l e c t r i c u t i l i t i e s .
An e l e c t r i c u t i l i t y r e q u i r e d
to p r o v i d e e l e c t r i c i t y t o r u r a l
i t s marginal, c o s t s , w i l l
electrical
do s o .
s u b s c r i b e r s a t l e s s than
Because o f th e n a t u r e o f
s e r v i c e , th e d i s c r e t i o n g i v e n t h e u t i l i t y t o c u t
c o r n e r s i s v e r y s l i g h t a n d , f o r t h e most p a r t , t h e s e r v i c e
r e c e i v e d by a r u r a l
subscriber w ill
r e c e i v e d by h i s urban c o u n t e r p a r t .
be e q u i v a l e n t t o t h a t
The e l e c t r i c company
c a nn ot reduce t h e v o l t a g e t o t h e r u r a l cus tom er in o r d e r t o
cut costs.
On th e o t h e r hand , as each o f us knows, th e
latitu de for variation
in th e q u a l i t y
of a ir transportation
s e r v i c e s i s enormous.
Host students o f a i r tr a n s p o rta tio n
a re f a m i l i a r w i t h t h e sad s t o r y o f t h e small community s e r v i c e p r o v i d e d i n flew E n g l a n d by a r e l u c t a n t U o r t h e a s t A i r l i n e s .
_/
s i d i z a t i o n c a lls into question Mr. O 'f l e l i a 's im p lic a tio n th a t
h i g h f a r e s a re r e q u i r e d i n dense m a r ke t s i n o r d e r " t o p r o v i d e
a i r s e rvic e across the n a t i o n ."
See t e s t i m o n y o f Chairman
Richard d . O 'M e l i a before t h i s Committee, p . 9 . Feb ru a ry 1 4 ,1 9 7 6 .
/
N o r t h e a s t ' s s t o r y i s documented in George C . E a d s , Thq L o c a l
S e r v i c e A i r l i n e E x p e r i m e n t , p p . 1 7 2 - 1 7 4 . (W a s h i n g t o n :
The
Brookings I n s t i t u t i o n , 1 9 7 2 ) .
-
22
-
G e n e r a l l y , N o r t h e a s t ' s p e r fo rm a n ce i s e x p l a i n e d away by t h e
c a r r i e r 's precarious fin a n c i a l c o n d i t i o n , since a f t e r a l l , a
c a r r i e r f i g h t i n g a lo s in g b a t t l e w ith in s o lve n c y sim ply could
not be ex p e c te d t o have t h e r e s o u r c e s to;: c o n d u c t a h i g h q u a l i t y
money l o s i n g o p e r a t i o n .
What i s n ' t g e n e r a l l y known, howeveir,
i s t h a t D e l t a , per hap s t h e s t r o n g e s t o f t h è t r u n k c a r r i e r s ,
proposed t o resume c e r t i f i c a t e d s e r v i c e a t New E n g l a n d ' s
small com munities i f r e q u i r e d by t h e Board t o do s o , w i t h
s e r v i c e which would have been even worse than t h a t o f f e r e d
by N o r t h e a s t i n t h e m i d - s i x t i e s .
The C . A . B . ' s A d m i n i s t r a t i v e Law Ju d g e i n t h e New E n g l a n d
S e r v i c e I n v e s t i g a t i o n made a d e t a i l e d compa riso n between t h e
s e r v i c e p l a n which D e l t a pro posed and t h e a c t u a l s e r v i c e s
op er at ed i n New E n g l a n d by t h e u n r e g u l a t e d commuter a i r c a r r i e r s .
He con clu ded t h a t D e l t a ' s sc h e d u l e s were " f a r i n f e r i o r t o t h o s e
now being o p e r a t e d by t h e commuter c a r r i e r s . "
J
In p r o p o s i n g
s e r v i c e o f such i n f e r i o r q u a l i t y , D e l t a ' s o b j e c t i v e w a s " t o
reduce c o s t s t o t h e g r e a t e s t e x t e n t p o s s i b l e . "
7
Even s o , the
" I l l u s t r a t i v e o f t h i s i s t h e Bar H a r b o r - E o s t o n m a r k e t .
In
p la c e o f t h e e x i s t i n g commuter p a t t e r n o f y e a r - r o u n d s e r v i c e
w i t h f i v e d a i l y n o n s t o p round t r i p s i n t h e summer and t h r e e
t r i p s i n t h e w i n t e r , D e l t a would o f f e r summer o n l y s e r v i c e
w i t h a s i n g l e d a i l y F H - 2 2 7 round t r i p .
A t A u g u s ta , in l i e u
o f t h e n i n e d a i l y A u g u s t a - B o s t o n round t r i p s and d i r e c t
s e r v i c e t o New Y o r k , D e l t a ' s t o t a l s e r v i c e would c o n s i s t o f
o n l y one d a i l y roun d t r i p t o B o s t o n .
S im ila r reductions
would o c c u r i n o t h e r m a r k e t s . " C i v i l A e r o n a u t i c s B o a r d ,
D oc ke t 2 2 9 7 3 , I n i t i a l D e c i s i o n p . 4 2 . ( J u l y 9 , 1 9 7 3 ) .
- 23 A d m i n i s t r a t i v e Law J u d g e o b s e r v e d , o p e r a t i o n o f D e l t a ' s
s e r v i c e p l a n "would r e q u i r e he a vy c r o s s - s u b s i d i z a t i o n . "
Whil e D e l t a c o u l d w i t h s t a n d such l o s s e s , i t " s h o u l d n o t be
r e q u i r e d t o do so where no p u b l i c b e n e f i t s would r e s u l t . "
I n t h e e n d , he c o n c l u d e d , a r e s u m p t i o n o f s e r v i c e by D e l t a
/
"wo uld p r o b a b l y be a r e p e t i t i o n o f t h e u n f o r t u n a t e e x p e r ie n c e s
t h a t Mew E n g l a n d has gone t h r o u g h i n t h e p a s t .
pa rtie s th e m s e lv e s ...
The c i v i c
have had t o o b i t t e r e x p e r i e n c e w i t h
J
u n w i l l i n g c a r r i e r s t o see t h a t as a s o l u t i o n . "
F i n a l l y , c r o s s - s u b s i d y system i s n ' t r e q u i r e d .
T h e r e are
c a r r i e r s r e a d y and w i l l i n g t o s e r v e a l m o s t an y r o u t e now
s er ve d by an u n w i l l i n g c a r r i e r .
The l o c a l
service c a r r ie r s ,
f o r e x a m p l e , a r e ea g e r t o e n t e r t h e r e l a t i v e l y s h o r t - h a u l
m a r k e ts now s er ve d by t h e t r u n k s , such as D e t r o i t - B o s t o r t , New
York-Richmond, P h ila d e lp h ia -M ilw a u k e e , A t l a n t a - C l e v e l a n d ,
A tla n ta -D e tro it, A tla n ta -C in cin n a ti.
_/
I f the tru n ks cannot
s e r v e t h e s e m a r ke ts w i t h o u t s u b s i d y fro m t h e i r l o n g - h a u l r o u t e s ,
o t h e r c a r r i e r s a r e r e a d y t o do i t w i t h o u t s u b s i d y , e i t h e r i n t e r
n a l, or external.
These are the lo c a l s e rv ic e c a r r i e r s and,
below them i n s i z e t h e commuter a i r l i n e s who a r e ea g e r t o e n t e r
ve ry s h o r t - h a u l, ve ry lo w -d e n s ity markets.
Under t h e p r e s e n t
r e g u l a t o r y scheme, t h e y a r e f r e e t o do so and t h e r e c o r d o f
these c a r r i e r s
i n New E n g l a n d and t h r o u g h o u t t h e r e s t o f t h e
_/ Id . a t 42-43.
J In each o f t h e s e m a r k e t s t h e Board has r e c e n t l y d e n i e d ( o r
t o h e a r ) an a p p l i c a t i o n by a l o c a l
authority.
s e r v i c e c a r r i e r f o r new
refused
24
c o u n t r y d e m o n s t r a t e s t h a t t h e y a r e a b l e t o p r o v i d e h i gh
f r e q u e n c y s e r v i c e , r e s p o n s i v e t o t h e p u b l i c ’ s need and t o
do so on a r e g u l a r , r e l i a b l e basis*.
I t is t r u e , o f c o u rs e , t h a t th ere are c e r t a i n s n a il
c o m u n i t i e s w h i c h , i n t h e absence' o f o u t s i d e f i n a n c i a l
would n o t r e c e i v e a i r t r a n s p o r t a t i o n s e r v i c e .
s u b s i d y may be r e q u i r e d .
■
support,
F o r these
T h e r e i s i n e x i s t e n c e , h o w e v e r, a
s u b s i d y mechanism w h i c h , i n c o n t r a s t t o a t t e m p t s a t i n t e r n a l
s u b s i d i z a t i o n , can be made t o work e f f e c t i v e l y i n p r o v i d i n g
s n a i l community a i r t r a n s p o r t a t i o n s e r v i c e w i t h o u t bu r d e n i n g t h e
a i r t r a r i p o r t a t i on system w i t h e x c e s s i v e f a r e s .
course, to the e x is tin g federal
i s i n need o f s u b s t a n t i a l
s u b s i d y pro gra m.
i m p ro ve m e nt .
I re fe r, of
T h a t ’system :
n o n e t h e l e s s , - ' i t can
be made t o w b r k ve f f i c i e n t l y and t o wtfrk w i t h o u t ‘d ^ s t o f t ' i n g * - ,' - v‘ '
m a rk et f o r c e s in t h e ’ r e s t o f t h e a i r t r a n s p o r t a t i o n system
a nd v/i t h o u t burden i ng t h e o r di n a r y a i r t r a v e l e r w i t h t h e
expense o f s u b s i d i z i n g a l i t t l e
used s e r v i c e which i s p r o v i d e d ,
not f o r the Conveniènte o f a i r t r a v e l e r s g e n e r a l l y , but f ór
— I n my v i e w , t h e e x i s t i n g s u b s i d y program i s p o o r l y a d m i n i s t e r e d .
I t r e s u l t s i n e x c e s s i v e s u b s i d y c o s t s f o r t h e q u a n t i t y and q u a l i t y
o f service provided.
Un d e r t h e program s e r v i c e ' i s p r o v i d e d by
c a r r i e r s l o ck ed i n t o t h e s u b s i d y prpgram whose r e a l i n t e r e s t s
1 i e n o t i n small community s e r v i c e b u t i n r e g i o n a l t r u n k l in e
operations.
Th e s e r v i c e p r o v i d e d i s o p e r a t e d w i t h th e wrong a i r c r a f t , a t t h e wrong t i m e s , and o f t e n t o t h e wrong d e s t i n a t i o n s ¿
A s a r e s u l t , - i t g e n e r a t e s s u b s t a n t i a l l y l e s s than th e p o t e n t i a l
t r a f f i c . A l 1 o f t h e s e f a c t s have been de m o n s t r a t e d time and a g a i n
i n r e c e n t y e a r s by t h e commuter c a r r i e r s who a t c i t i e s t h r o u g h o u t
th e c o u n t r y have r e p l a c e d c e r t i f i c a t e d s e r v i c e s w i t h f r e q u e n t ;
w e l l - t i m e d , p r o p e r l y d e s t i ned f l i g h t s which have t y p i c a 1 1 y genera ted
t r a f f i c f a r i n ex ces s o f t h a t f o r m e r l y c a r r i ed on t h e c e r t i f i c a t e d
service.
H o s t r e m a r k a b l e , h o w e v e r , t h e commuter ' f l i g h t s have
25
re a s o n s o f n a t i o n a l p o l i c y .
In f a i r n e s s , i t seems t o me t h a t
i f Con gre ss d e t e r m i n e s t h a t i t
is o f b e n e f i t to the p u b lic a t
l a r g e t h a t some small comm unitie s which a re un a b l e t o g e n e r a t e
su fficient tra ffic
t o s u p p o r t a i r l i n e s e r v i c e on an economic
b a s i s sh ou ld n o n e t h e l e s s r e c e i v e such s e r v i c e , t h e c o s t s sh ou ld
be borne by th e p u b l i c a t l a r g e t h r o u g h t h e e x i s t i n g f e d e r a l
s u b s i d y program and n o t by o t h e r a i r t r a n s p o r t a t i o n u s e r s .
Fin a lly,
I w a n t to l a y t o r e s t t h e n o t i o n t h a t i f we
allow substantial
fle xib ility
t r o l s o v e r e n t r y and e x i t fro n
in a i r l i n e r a t e s and reduce co n
i n d i v i d u a l c i t y - p a i r mar kets
th e e x i s t i n g a i r t r a n s p o r t a t i o n system w i l l
c o lla p s e , leaving
thousands o f m ar ket s now r e c e i v i n g schedu le d no ns to p s e r v i c e
w i t h o u t such s e r v i c e and l e a v i n g hundreds o f small comm unities
t h r o u g h o u t t h e ' N a t i o n w i t h o u t an y a i r l i n e s e r v i c e a t a l l .
The p i c t u r e p a i n t e d by th e sc h ed ul e d a i r l i n e s i n which
a s c a n t ha nd fu l o f c a r r i e r s would s u r v i v e , c o n c e n t r a t i n g t h e i r
s e r v i c e s i n a small number o f t h e most l u c r a t i v e m a r k e t s i s
c o n t r a r y t o common sense and t o t h e e x p e r i e n c e o f o t h e r
industries.
Indeed, i t
is c o n t r a r y to the experience o f the
a ir transportation industry i t s e l f .
In any i n d u s t r y each f i r m would l i k e t o se r v e th e most
l u c r a t i v e m a r ke ts w i t h t h e h i g h e s t p r o f i t m a r g i n s .
Bu t t h a t
o r d i n a r i l y been s u b s i d y f r e e .
The f a u l t s o f the present subsidy
program and p r o p o s a l s f o r i t s improvement have been e x t e n s i v e l y
documented.
See George C . E a d s , The L o cal S e r v i c e A i r l i n e
E x p e r i m e n t , ( W a s h i n g t o n : - The Br oo kin gs * I n s t i t u t i o n , 1 9 7 2 T . Bureau
o f O p e r a t i n g R i g h t s , C i v i l A e r o n a u t i c s B o a r d , S e r v i c e t o Sma l l
Communities.
(March 1 0 7 2 ) .
26
is n 't possible.
Not every r e t a i l
s t o r e i n New Y o r k C i t y i s
l o c a t e d on F i f t h A v e n u e ; TV a d v e r t i s i n g i s n o t c o n f i n e d s o l e l y
to prime t i m e ; and th e garment i n d u s t r y does n o t c o n f i n e i t s
o u t p u t t o haute c o u t u r e .
d o l l a r where t h e y c a n .
R a t h e r , businessmen t r y t o make a
New f i r m s a re as l i k e l y t o seek o u t
unserved o r u n d e r s e r v e d m a r ke t s f o r e x p l o i t a t i o n as t h e y a re
to a t t e m p t to w r e s t a m a r k e t sh are fro m th e i n d u s t r y 1s g i a n t s .
Thus, to continue w ith the example, r e t a i l
s t o r e s a re opened
in small ne ig h bo rh oo d s as w e l l as on F i f t h A v e n u e .
Th er e i s no reason t o assume t h a t t h e a i r t r a n s p o r t a t i o n
i n d u s t r y i s managed by i r r a t i o n a l
the f a c t s d e m o n s tr a te th e r e v e r s e .
individuals.
The i n d u s t r y i s r e l a t i v e l y
easy t o e n t e r , e x c e p t f o r t h e a r t i f i c i a l
the r e g u l a t o r y sy st em .
I n any e v e n t ,
c o n t r o l s imposed by
I t requires s u rp ris in g ly l i t t l e
capital
to s t a r t an a i r l i n e and t h e p r i m a r y a s s e t s - - a i r c r a f t - - a r e come
;
p l e t e l y m o b i l e and e a s i l y t r a n s f e r r e d from s e r v i c e i n one m a r k e t
to s e r v i c e i n a n o t h e r , o r f ro m use by one c a r r i e r t o use by
another.
I n d e e d , t h e Board has been pl agu ed t h r o u g h o u t i t s
e x i s t e n c e by e n t r e p r e n e u r s s p r i n g i n g up on t h e f r i n g e s o f th e
r e g u l a t o r y system a t t e m p t i n g t o p i c k up sc rap s l e f t beh ind by
the c e r t i f i c a t e d c a r r i e r s .
V
T h e r e has been no s h o r t a g e o f
'
,
’
..
A f t e r World War I I , t h e Board was f o r c e d t o deal w i t h t h e nonscheduled c a r r i e r s who, a l o n g t h e way t o becoming l e g i t i m a t e as
c e r t i f i c a t e d su pp le me nta l a i r l i n e s , p r o v i d e d much o f th e impetus
f o r t h e i n t r o d u c t i o n o f Coach f a r e s i n t h e e a r l y 1 9 5 0 ' s .
A t the , >
same t i m e , t h e C a l i f o r m * a i n t r a s t a t e c a r r i e r s came i n t o be in g and
demo nstrate d t h a t f a r e s c o u l d be even 1 ower t ha n c e r t i f i c a t e d
c a r r i e r coach f a r e s . So u th w e st A i r l i n e s was a b l e t o r a i s e t h e
money i n t h e l a t e s i x t i e s t o commence o p e r a t i o n s i n T e x a s .
27
pe rs on s w i l l i n g t o e n t e r a i r t r a n s p o r t a t i o n and u n d e r t a k e the
r i s k s i n v o l v e d , o n l y a s h o r t a g e o f o p p o r t u n i t y unde r e x i s t i n g laws.
T h a t f a c t i s most d r a m a t i c a l l y i l l u s t r a t e d i n t h e commuter
c a r r i e r segment o f th e i n d u s t r y where a d e r e g u l a t e d a i r t r a n s p o r
t a t i o n system a l r e a d y e x i s t s .
Th ose c a r r i e r s a r e f r e e from r a t e
r e g u l a t i o n and from c o n t r o l o f e n t r y and e x i t so lo ng as t h e y
o p e r a t e a i r c r a f t w i t h no more than 30 pa ssenger s e a t s .
They
s er ve hundreds o f ma rk et s t h r o u g h o u t th e c o u n t r y a t f a r e s which
t h e y s e l e c t on th e b a s i s o f t h e i r own assessment o f m a r k e t co n
d itio ns.
The i n d u s t r y has been c h a r a c t e r i z e d by a h i g h r a t e
o f new e n t r y ( b o t h i n t o th e bu s in e s s g e n e r a l l y and i n t o i n d i v i d u a l
m a r k e t s ) and t y a h i gh r a t e o f e x i t ,
i n c l u d i n g a h e a l t h y number
m
o f b us in e s s f a i l u r e s .
T h a t so many f i r m s have e n t e r e d t h e bu s in e s s i l l u s t r a t e s two
p o i n t s I ' v e been t r y i n g t o make.
F i r s t , c o n d i t i o n s a r e such
t h a t , given fre e e n t r y , a s u b s ta n tia l
would e n t e r a i r t r a n s p o r t a t i o n .
number o f e n t r e p r e n e u r s
S e c on d, e n t r y w i l l
take place not
o n l y i n l u c r a t i v e m a r ke ts b u t i n v e r y s n a i l mar ket s which have
o n l y a chance o f s u p p o r t i n g p r o f i t a b l e o p e r a t i o n s by a s i n g l e c a r r i e r .
The s t o r y o f t h e commuter c a r r i e r s tea ch es o t h e r l e s s o n s as
w ell.
w ill
I t dem onstrates, f o r example, th a t unregulated c a r r i e r s
p u b l i s h sc hed ule s ( i n t h e O f f i c i a l A i r l i n e Gu i d e and el se w h er e)
— '.¡here f a i l u r e o f a c a r r i e r has been caused by management o r o t n e r
f a c t o r s u n r e l a t e d t o th e s i z e o f t h e m a r k e t s e r v e d , e x i t by th e
f a i l i n g c a r r i e r has been f o l l o w e d s w i f t l y t y the e n t r y o f a n o t h e r .
See C i v i l A e r o n a u t i c s b o a r d . D o c k e t 2 2 9 7 3 , b r i e f o f t h e bureau o f
Op er at inc i R i g h t s t o th e A d m i n i s t r a t i v e Law Ju d g e a t l u - 1 8 .
( J a n u a r y l lJ>
1973).
28
and a dh e re t o them; t h a t t h e y w i l l p u b l i s h and a d he re t o f a r e s ;
t h a t t h e y i n t e r l i n e passen ge rs and luggag e w i t h t h e c e r t i f i c a t e d
c a r r i e r s ; t h a t , v/hen n e c e s s a r y , t h e y u t i l i z e s o p h i s t i c a t e d
r e s e r v a t i o n s n e t w o r k s ; i n s h o r t , t h a t t h e y p r o v i d e r e l i a b l e and
e f f i c i e n t s e r v i c e o f t h e s o r t t o which t h e Am erican p u b l i c i s
accustomed.
I t a l s o t e l l s us t h a t , c o n t r a r y t o t h e t e s t i m o n y
o f D r . J a m e s , t h e a i r t r a n s p o r t a t i o n i n d u s t r y does n o t have any
i n h e r e n t te n d e n c y t o s e l f - d e s t r u c t i o n .
T h a t , r a t h e r th a n
e n t e r i n g b a t t l e w i t h e s t a b l i s h e d c a r r i e r s , new c a r r i e r s o r d i n a r i l y
seek o u t new m a r ke ts t o e x p l o i t .
I n d e e d , a s t a f f s t u d y by t h e
B o a r d ' s Bureau o f O p e r a t i n g R i g h t s found l i t t l e
head-to-head
c o m p e t i t i o n i n th e commuter i n d u s t r y and n o t a s i n g l e i n s t a n c e
o f t h e f a i l u r e o f a commuter c a r r i e r as a r e s u l t o f c o m p e t i t i o n
w i t h a n o t h e r commuter.
F i n a l l y , and perhaps most i n t e r e s t i n g l y
o f a l l , where c o m p e t i t i o n has o c c u r r e d , i t has g e n e r a l l y worked
to t h e d i r e c t b e n e f i t o f t h e t r a v e l i n g p u b l i c .
Frequently, fo r
e x a m p l e , t h e new c a r r i e r has p r o v i d e d s e r v i c e o f a q u a l i t y f a r
■**/.. . ...
OiKi' 031
s u p e r i o r t o t h a t o f f e r e d by t h e in cu m b en t .
y
See C i v i l A e r o n a u t i c s B o a r d , D o c k e t 2 2 9 7 3 , E x h i b i t s B O R - 140
and B O R - R - 3 0 0 , summarized a t B r i e f o f t h e Bureau o f O p e r a t i n g
R i g h t s t o t h e A d m i n i s t r a t i v e Law J u d g e , p p . 8 5 - 9 8 . A l t h o u g h ~
t h e e x h i b i t s were s u b j e c t e d t o c r o s s - e x a m i n a t i o n , no p a r t y
c h a l l e n g e d t h e B u r e a u ' s b a s i c c o n c l u s i o n which was ad op ted
by t h e B o a r d ' s A d m i n i s t r a t i v e Law J u d g e .
See th e I n i t i a l
Decision a t 7 0 -7 C .
y j See C i v i l A e r o n a u t i c s B o a r d , B r i e f o f t h e Bu reau o f
O p e r a t i n g R i g h t s t o t h e A d m i n i s t r a t i v e Lav/ Ju d g e a t 9 3 - 9 8 .
(January 19 , 19 7 3 ).
29
I n c l o s i n g , l e t me sa y t h a t w h i l e n e a r l y a decade o f s t u d y i n g
t h i s problem c o n v i n c e s me t h a t t h e N a t i o n ' s d om e st ic a i r t r a n s
p o r t a t i o n system would be v a s t l y improved i f C . A . B . c o n t r o l o v e r
rates
, e n t r y and e x i t were s u b s t a n t i a l l y c u r t a i l e d o r e l i m i n a t e d ,
I must be c a n d i d and a d m i t t h a t I c a n n o t t e l l you e x a c t l y what
t h e system would l o o k l i k e i n t h a t e v e n t .
I cannot g iv e y o u ,
f o r e x a m p l e , a cop y o f t h e 1980 O f f i c i a l
A i r l i n e G u id e under
a scenario.
nor ar.y o t h e r person
I c a n n o t , because n e i t h e r I
knows e x a c t l y what c h o i c e s ,
such
in terms o f s e r v i c e q u a l i t y and p r i c e ,
th e m a r k e t p l a c e would make i f f r e e d fro m t h e c o n s t r a i n t s o f o v e r
regulation.
I an c o n vi n ce d t h a t t h e a i r t r a n s p o r t a t i o n system would
be s u b s t a n t i a l l y d i f f e r e n t t ha n i t i s t o d a y .
I believe that
t h e r e a re so many t r a v e l e r s who would be w i l l i n g t o a c c e p t
a lower le v e l o f se rvic e a t a lower f a r e
t h a t we would see a
s i g n i f i c a n t change in t h e q u a l i t y / q u a n t i t y mi x o f a i r t r a n s
p o rta tio n services o ffe r e d .
No l o n g e r would s e r v i c e be aimed
a t t h e $6 0, 00 0 per y e a r person D r . Peck
day.
r e fe rr e d to the other
Scheduled a i r t r a n s p o r t a t i o n would be o f f e r e d , perhaps
on a somewhat l e s s f r e q u e n t , h i g h e r d e n s i t y b a s i s and w i t h
f ew er f r i l l s ,
but a t s i g n i f i c a n t l y lower f a r e s .
An i m p o r t a n t
p o i n t t o remember, m o r e o v e r , i s t h a t as a i r l i n e f a r e s come
down t h e number o f t r a v e l e r s w i l l
might well
increase.
T h u s , there
be as many, o r even s i g n i f i c a n t l y m o r e , f l i g h t s
w i t h a much h i g h e r p er c e n t a g e o f se a t s f i l l e d .
The b e n e f i t s
30
to o u r economy and t o t h e e n e r g y s i t u a t i o n fr o m such an i m p r o v e
ment i n e f f i c i e n c y would be enormous.
I am a l s o c o n v i n c e d t h a t none o f t h e i n d u s t r y ' s e s s e n t i a l
p u b l i c s e r v i c e f e a t u r e s would d i s a p p e a r .
r e g u l a r , r e l i a b l e sch edu le d s e r v i c e .
T h e r e would s t i l l
The c a r r i e r ' s own s e l f /
i n t e r e s t , n o t r e g u l a t i o n , would g u a r a n t e e t h a t .
still
be an O f f i c i a l A i r l i n e G u i d e .
be
T h e r e would
C a r r i e r s would s t i l l
pub
l i s h and honor t h e i r f a r e s .
In a d d i t i o n , i f th e demand w a r r a n t e d i t ,
t h e r e would be a
p re m iu m -p ric e d s e r v i c e f o r b u s i n e s s t r a v e l e r s whose time i s
v a l u a b l e and who, t h e r e f o r e , a r e w i l l i n g t o pay h i g h e r f a r e s i n
r e t u r n f o r an i n c r e a s e d a v a i l a b i l i t y o f s e r v i c e .
In is o la te d
cases t h e r e m i g h t even be a r e t u r n t o t h e l u x u r y s e r v i c e s
r e m i n i s c e n t o f th e e a r l i e r days o f a i r t r a v e l v/hose demise
Vermont R o y s t e r r e c e n t l y bemoaned i n an a r t i c l e on th e e d i t o r i a l
page o f t h e Wall S t r e e t J o u r n a l .
The d i f f e r e n c e would be t h a t
the d e c i s i o n s on s e r v i c e q u a l i t y and p r i c e would be made by
the con su m er s , n o t by a small group o f men, s i t t i n g
i n W a s h in g t o n ,
D . C . , a t t h e c o r n e r o f C o n n e c t i c u t and F l o r i d a A v e n u e , gu es si ng
a t what i s b e s t f o r th e p u b l i c and f o r th e i n d u s t r y t h a t t h e y
p r o t e c t so s o l i c i t o u s l y .
_
Vermont R o y s t e r , ''No More C a v i a r , " Wall S t r e e t J o u r n a l , p . 1 0 .
(February 1 2 , 1 975).
In t h i s r e g a r d ' i t i s w o r t h w h i l e n o t i n g
t h a t few p e op le c o u l d a f f o r d t o f l y a t th e p r i c e s then
charged.
EXECUTIVE OFFICE OF. THE PRESIDENT
COUNCIL ON WAGE AND PRICE STABILITY
v
726 JACKSON PLACE, N.W.
•
WASHINGTON, D.C. 20506
FOR R E L E A S E UPON D E L I V E R Y
Thur sda y, F e b r u a r y 2 7 , 1 9 7 5
For inform ation c a l l :
( 202 ) 4 5 6 - 6 7 5 7
STATEMENT OF A L B E R T REES .
D IRE C TO R OF TH E
CO UNCIL ON WAGE AND P R I C E S T A B I L I T Y
B E FO R E TH E
J O I N T ECONOMIC COMMITTEE
WASHINGTON, D . C .
FEBRUARY 2 7 , 1975
10:00 A ,M .
1/
Mr. Chairman and Members o f th e C om mi tt ee :
I am plea sed t o have t h i s o p p o r t u n i t y t o a ppe ar b e f o r e th e J o i n t Economic
Committee t o d i s c u s s t h e c u r r e n t o u t l o o k f o r wages and p r i c e s .
T h i s i s no
doubt the o n l y t o p i c an ec o n o m i st can be p l e a s e d t o d i s c u s s a t t h e moment,
f o r p r i c e s a r e t h e one r e l a t i v e l y b r i g h t s p o t i n a gloomy economy. The
s e a so na lly a d j u s t e d w h o l e s a l e p r i c e i n d e x has now d e c l i n e d f o r two months
in a ro w , and t h e r a t e o f i n c r e a s e o f t h e Consumer P r i c e I n d e x has a b a t e d .
The Consumer P r i c e I n d e x r o s e 0 . 6 p e r c e n t s e a s o n a l l y a d j u s t e d from
December t o J a n u a r y .
T h i s i s th e s m a l l e s t r a t e o f i n c r e a s e s i n c e l a s t
A p r i l , and i s l e s s t h a n h a l f th e r a t e a t which t h i s I n d e x was r i s i n g i n
August and Se pt e m b er .
R e t a i l p r i c e s f e l l from December t o J a n u a r y f o r
several i m p o r t a n t groups o f c o m m o d i t i e s , i n c l u d i n g m e a t , p o u l t r y , and
f i s h ; d a i r y p r o d u c t s ; a p p a r e l ; and c a r s .
We would be h a p p i e r s t i l l a b o u t th e m o d e r a t i o n o f i n f l a t i o n i f i t had been
brought a b o u t by an i n c r e a s e i n t h e s u p p l y o f g o o d s , r a t h e r than by an
abrupt d ec re ase i n demand.
In th e long r u n , we must s t i l l d e v e l o p ways
to a c h i e ve th e c o m b i n a t i o n o f r i s i n g o u t p u t , h i gh emp lo ym en t, and s t a b l e
prices t h a t has e l u d e d us f o r so l o n g .
Even i f a p p r o p r i a t e mo n et a ry and f i s c a l p o l i c y combined w i t h t h e n a t u r a l
r e c u p e r a t i v e f o r c e s o f t h e economy pro duces an u p t u r n i n economic a c t i v i t y
in the second h a l f o f 1 9 7 5 , I w ou ld e x p e c t th e r a t e o f i n f l a t i o n s t i l l t o
be d e c l i n i n g a t th e end o f t h e y e a r .
The s l a c k and excess c a p a c i t y t h a t
are c h ec ki n g th e r i s e i n p r i c e s w i l l n o t be i m m e d i a t e l y removed by an
upturn — i n th e g r e a t m a j o r i t y o f i n d u s t r i e s s l a c k w i l l p e r s i s t f o r some
time i n t o th e r e c o v e r y .
(more)
CWPS-28
i
-
2
-
The Bu d g et o f th e U n i t e d S t a t e s G o v e r n m e n t , 1 9 7 6 , c o n t a i n s a t a b l e g iv in g
economic assu mpt ions ( p . 4 1 ) i n which t h e r e i s a l i n e showing p e r c e n t change
i n th e Consumer P r i c e I n d e x .
I n t h e column headed 1 9 7 5 , t h e f i g u r e shown is
1 1 . 3 p e r c e n t , a number t h a t has been w i d e l y m i s i n t e r p r e t e d .
T h i s i s the
e s t i m a t e d change from t h e 1 9 7 4 i n d e x a v e r a g e t o t h e 19 7 5 i n d e x a v e r a g e , and
more th an h a l f o f t h a t change has a l r e a d y o c c u r r e d .
The c o r r e s p o n d i n g fore
c a s t f o r t h e change d u r i n g 1 9 7 5 , o r December t o December, i s below 10 per
c e n t , and was made b e f o r e some r e c e n t f a v o r a b l e p r i c e d e v e l o p m e n t ^ . Although
I have n o t engaged i n p r i c e f o r e c a s t i n g t h r o u g h t h e use o f fo r m a l econometric
m o d e l s , i t would n o t now seem u n r e a s o n a b l e t o e x p e c t th e CPI t o be r i s i n g
a t 7 t o 8 p e r c e n t f o r t h e y e a r as a w h o l e , and a t a r a t e o f 6 p e r c e n t or
l e s s by t h e end o f th e y e a r .
The improvement i n p r i c e b e h a v i o r , as measured by o f f i c i a l i n d e x e s , under
s t a t e s t o some unknown e x t e n t th e t r u e change i n t h e p r i c e s i t u a t i o n . The
w i d e s p re a d b e l i e f t h a t Congress i n t e n d s t o r e - e n a c t p r i c e and wage controls
i s s t i l l d e t e r r i n g b u s in e s s f r o m c u t t i n g l i s t p r i c e s .
I n s t e a d , p r i c e cuts
a r e coming i n l a r g e p a r t t h r o u g h s p e c i a l p r o m o t i o n s , r e b a t e s , and discounts,
n o t a l l o f which a r e r e f l e c t e d i n o f f i c i a l p r i c e s t a t i s t i c s .
Whatever
Congress i n t e n d s t o do a b o u t w a g e - p r i c e p o l i c y - - and I hope and b e l i e v e
t h a t i t w i l l n o t be t o re impose c o n t r o l s - - i t w ould be d e s i r a b l e t o do
i t q u i c k l y , so as t o remove th e dou bts and u n c e r t a i n t i e s t h a t a r e adversely
a ffe c tin g pricing p o lic ie s.
The s p e c i a l f a c t o r t o which I have j u s t r e f e r r e d r e i n f o r c e s t h e n a t u r a l
te n d en cy o f c o n c e n t r a t e d i n d u s t r i e s w i t h a d m i n i s t e r e d p r i c e s t o a d j u s t
l i s t p r i c e s s l o w l y and w i t h a l a g .
T h i s la g tends t o keep a d m i n i s t e r e d
p r i c e s l o w e r t h a n t h e i r h i g h l y c o m p e t i t i v e c o u n t e r p a r t s i n a boom, and
t o keep them h i g h e r i n a r e c e s s i o n .
The C o u n c i l on Wage and P r i c e
S t a b i l i t y i s c u r r e n t l y s t u d y i n g th e p r i c i n g p o l i c i e s and c o s t s o f several
c o n c e n t r a t e d i n d u s t r i e s , i n c l u d i n g s t e e l , a l u m i n u m , metal c a n s , ru bb er
t i r e s and t u b e s , and some i n d u s t r i a l c h e m i c a l s , and may make recommendations
based on th e se s t u d i e s .
I t i s no s u r p r i s e t h a t i n f l a t i o n i s a b a t i n g i n t h e m i d s t o f a deep recession.
The s u r p r i s e i s t h a t i n f l a t i o n has n o t a ba te d so o n e r and more s u b s t a n t i a l l y .
I s h o u l d l i k e t o add res s t h e r e s t o f my remarks t o t h e rea so n s why p ric es
a r e s t i l l r i s i n g as much as t h e y a r e .
My views on t h i s have been formed
by d i s c u s s i o n s w i t h many p e o p l e i n t h e p r i v a t e s e c t o r t o whom we t a l k in
t h e p ro c e s s o f wage and p r i c e m o n i t o r i n g .
One o f th e main f o r c e s t e n d i n g t o keep p r i c e s hi gh i s t h e need o f American
i n d u s t r y t o i n v e s t i n new f a c i l i t i e s t o keep pace w i t h t h e l o n g - r u n growth
o f demand a t a time when th e c o s t s o f c o n s t r u c t i o n and equi pm en t a r e very
h i g h , b o r r o w i n g has been d i f f i c u l t and e x p e n s i v e , and t h e s t o c k m ar ket has
been s e v e r e l y d e p r e s s e d .
C o r p o r a t i o n s t h a t q u e s t i o n t h e i r a b i l i t y t o raise
l a r g e amounts o f new c a p i t a l from the s a l e o f bonds o r s t o c k seek t o r ais e
more o f i t i n t e r n a l l y by m a i n t a i n i n g s u b s t a n t i a l p r o f i t margin s o r seeking
t o widen them.
F u r t h e r d e c l i n e s i n l o n g - t e r m i n t e r e s t r a t e s and f u r t h e r
improvement i n e q u i t y m a rk et s w i l l h e l p t o r e l i e v e t h i s c o n c e r n , as w i l l
en ac tm en t o f a l i b e r a l i z e d i n v e s t m e n t t a x c r e d i t .
(more)
- 3 -
A second sou rce o f r i s i n g p r i c e s i s th e i n c r e a s i n g c o s t o f e n e r g y , n o t a l l
o f which has y e t been passed th ro ug h t o f i n a l p r i c e s p a i d by consumers.
The c o s t o f ener gy w ould be i n c r e a s e d somewhat more by t h e a d o p t i o n o f t h e
P r e s i d e n t ' s en er gy p ro g r a m .
Ou r agency has n o t been d i r e c t l y i n v o l v e d i n
f o r m u l a t i n g o r a n a l y z i n g t h i s pro gra m.
H o w e v e r , we d i d have a s t u d y o f
i t s impact on p r i c e s done f o r us by Data R e s o u r c e s , I n c . , and a copy o f
t h a t st u d y has been f u r n i s h e d t o t h e J o i n t Economic C om m it te e .
The s t u d y
estimates t h a t by th e f o u r t h q u a r t e r o f 1975 t h e P r e s i d e n t ' s en er gy program
would r a i s e th e Consumer P r i c e I nd ex by. 1 . 6 t o 1 . 9 p e r c e n t above What i t
would o t h e r w i s e be.
An even more i m p o r t a n t so u r c e o f r i s i n g p r i c e s i s t h e c o n t i n u e d r i s e i n u n i t
labor c o st s produced by t h e c o m b i n a t i o n o f t h e s u s t a i n e d r i s e i n wages and a
substantial decline in p r o d u c t i v i t y .
I n th e f o u r t h q u a r t e r o f 1 9 7 4 , o u t p u t
per manhour i n th e p r i v a t e economy was 3 . 7 p e r c e n t below t h e f o u r t h q u a r t e r
of 1 9 7 3 , and u n i t l a b o r c o s t s were 1 4 . 0 p e r c e n t h i g h e r .
During 1 9 7 4 , p r i c e s r o s e more t h a n wa ge s, and r e a l wages f e l l .
As th e r a t e
o f i n f l a t i o n d e c r e a s e s , t h i s w i l l no l o n g e r be t r u e , and t h e r e a l wages o f
employed wor ke rs w i l l b e g i n t o r i s e a g a i n .
O r d i n a r i l y , we e x p e c t and g e t
a r i s e i n r e a l wages each y e a r , and t h i s i s t h e p r i n c i p a l way i n which o u r
economy d i s t r i b u t e s t o w o r k e rs t h e g a i n s i n p r o d u c t i v i t y t h a t r e s u l t fro m
improved t e c h n o l o g y and i n v e s t m e n t i n p h y s i c a l c a p i t a l and employee s k i l l s .
In some m u l t i - y e a r c o l l e c t i v e b a r g a i n i n g agreements t h i s i s r e f l e c t e d i n
wage i n c r e a s e s c a l l e d " ann ual improvement f a c t o r s . "
B u t i n 1 9 7 5 , we have
no inc re a se d o u t p u t t o d i s t r i b u t e .
On th e c o n t r a r y , o u t p u t ijs e x p e c t e d t o
de cl i n e f o r th e y e a r as a w h o l e , even though i t may be r i s i n g i n th e second
half.
For the urban p o p u l a t i o n , t h e s i t u a t i o n i s wo rs e s t i l l .
Not only is there
an o v e r a l l d e c l i n e i n o u t p u t , b u t a l a r g e r s h a r e o f th e reduced o u t p u t i s
going to pay f o r o i l , s u g a r , c o a l , g r a i n , and o t h e r r e s o u r c e - b a s e d p r o d u c t s
produced i n r u r a l a re as o r i n o t h e r c o u n t r i e s .
Attem pts to r a i s e the real
wages o f urban w o r ke rs i n t h e s e c i r c u m s t a n c e s must r e s u l t i n f u r t h e r i n c r e a s e s
in u n i t l a b o r c o s t s and i n p r i c e s , which w i l l f u r t h e r c u t t h e s t a n d a r d o f
l i v i n g o f th e r e t i r e d , th e un em plo ye d, and o t h e r n o n - e a r n e r s .
I am a g r e a t a d m i r e r o f t h e Amer ican system o f c o l l e c t i v e b a r g a i n i n g and
democratic t r a d e u n i o n s .
One o f t h e s t r e n g t h s o f t h i s sy stem i s i t s a b i l i t y
to adap t t o ch an g in g c i r c u m s t a n c e s .
Some unio ns a r e a d a p t i n g t h e i r demands
to the c i rc u m st a nc e s o f 19 7 5 - - b u t , u n f o r t u n a t e l y , o t h e r s a r e n o t .
In the
same i n d u s t r y , c o n s t r u c t i o n , one can f i n d examples o f bo th s o r t s .
Some uni on s
have lowered t h e i r wage r a t e s f o r r e s i d e n t i a l c o n s t r u c t i o n t o en courage more
work f o r t h e i r members, o r have renewed c o l l e c t i v e b a r g a i n i n g agreements
with no g en era l wage i n c r e a s e s .
O t h e r s , i n t h e f a c e o f w i d e s p r e a d unemploy
ment, have n e g o t i a t e d wage and b e n e f i t i n c r e a s e s o f $ 1 . 5 0 an h o u r , and $ 2 ,0 0
an h o u r , and even $ 3 .0 0 an ho.ur on t o p o f e x i s t i n g com pe ns at io n o f $ 1 0 . 0 0 t o
$15.00 an h o u r .
C o l l e c t i v e b a r g a i n i n g e n j o y s a p r i v i l e g e d p o s i t i o n under
Federal l a w , p a r t i c u l a r l y i n c o n s t r u c t i o n , b u t abuse o f such p r i v i l e g e i n v i t e s
re-examination o f i t s sources.
(more)
- 4 -
We must a l s o remember t h a t t h e r e a r e two p a r t i e s t o c o l l e c t i v e bargaining
and t h a t j u s t as r e s p o n s i b l e unions w i l l n o t make e x c e s s i v e demands, respon
s i b l e managements w i l l n o t a g r e e t o them.
T h i s i s a t i m e when hard bargain
i n g i s a p p r o p r i a t e , and i t i s more r e l e v a n t t o j u s t i f y wage inc re as es through
c o s t s a v i n g s th an by comparisons w i t h what some o t h e r group o f workers
a c h i e v e d i n v e r y d i f f e r e n t economic c i rc u m s t a n c e s s i x months o r a y ea r
ago.
The most i m p o r t a n t c o l l e c t i v e b a r g a i n i n g agreement coming up i n th e months
ahead i s t h a t between t h e U n i t e d States; P o s t a l S e r v i c e and th e unions of
p o s t a l emp loy ees .
The C o u n c i l on Wage and P r i c e S t a b i l i t y i n t e n d s to
m o n i t o r th es e n e g o t i a t i o n s i n an a t t e m p t t o i n s u r e t h a t t h e y w i l l not be
th e cause o f i n f l a t i o n a r y i n c r e a s e s i n p o s t a l r a t e s o r heavy s u bs id ie s
from t a x p a y e r s .
Many o f t h e wage i n c r e a s e s o f 19 7 5 w i l l come a b o u t th r o u g h t h e operation
o f c o s t - o f - l i v i n g adjustments or e s c a la to r c la u se s .
I t i s understandable
t h a t such c l a u s e s a re w i d e l y used i n times o f i n f l a t i o n , and t h e y are now
p r e s e n t i n more th an h a l f o f t h e m a j o r c o l l e c t i v e b a r g a i n i n g agreements
i n th e p r i v a t e s e c t o r .
The p r o t e c t i o n t h e y o f f e r a g a i n s t i n f l a t i o n is the
p r i c e t h a t o r g a n i z e d l a b o r has been demanding f o r s i g n i n g m u l t i - y e a r agree
me nt s.
B u t such c l a u s e s have t h e p o t e n t i a l f o r e x t e n d i n g t h e f o r c e s of
i n f l a t i o n beyond th e p e r i o d t h a t gave r i s e t o them.
What began as an
excess demand i n f l a t i o n c o n t i n u e s as a c o s t - p u s h i n f l a t i o n a f t e r shortages
have been r e p l a c e d by r e c e s s i o n .
The C o u n c i l on Wage and P r i c e S t a b i l i t y
w i l l u n d e r t a k e a s t u d y o f e s c a l a t o r c l a u s e s , and may wi sh t o make some
recommendations a b o u t them a t a l a t e r d a t e .
J u s t as t h i s i s a bad ti m e f o r i n c r e a s e s i n c o s t s produced by v e r y large
wage i n c r e a s e s , i t i s a l s o a bad ti me f o r i n c r e a s e s i n c o s t s caused by
new l e g i s l a t i o n , r u l e s , and r e g u l a t i o n s .
We s h a r e w i t h Congress and the
Am er ica n p e o p l e t h e d e s i r e t o a c h i e v e c l e a n a i r , p u r e s t r e a m s , s a f e
w o r k p l a c e s , and wholesome f o o d s , t o m en t i o n j u s t a few o f t h e b e n e f i t s
s o u g h t by r e g u l a t i o n .
In some cases t h e b e n e f i t s t o be o b t a i n e d by
r e g u l a t i o n a r e so g r e a t t h a t the c o s t s a r e c l e a r l y j u s t i f i e d .
In other
c a s e s , t h e b e n e f i t s may be more q u e s t i o n a b l e , o r can be a c h i e v e d i n less
c o s t l y ways.
O u r r a t e o f p r o g r e s s tow ard d e s i r a b l e g o a l s must be governed
t o some d e g re e by t h e c a p a c i t y o f t h e economy and o f p a r t i c u l a r indu strie s
to absorb the costs i n v o l v e d .
Where j o b s would be e l i m i n a t e d o r prices would
be r a i s e d by p ro po sed r e g u l a t i o n , a l t e r n a t i v e s must be c a r e f u l l y considered.
The C o u n c i l on Wage and P r i c e S t a b i l i t y w i l l be engaged i n r e v i e w i n g propose
r u l e s and r e g u l a t i o n s o f th e a g e nc ie s i n t h e E x e c u t i v e B r a n c h , usin g the
powers g i v e n t o us under E x e c u t i v e O r d e r 1 1 8 2 1 , i s s u e d by t h e P r e s i d e n t
on November 2 7 , 1 9 7 4 .
T o g e t h e r w i t h t h e O f f i c e o f Management and Budget,
we a r e c u r r e n t l y w o r k i n g w i t h t h e a ge nc ie s t o d e v e l o p a p p r o p r i a t e c r i t e r i a
f o r e v a l u a t i n g t h e i n f l a t i o n a r y impacts o f t h e i r p r o p o s a l s .
(more)
At the p r e s e n t t i m e , t h e main co n ce rn a b o u t t h e economy t h a t a l l o f us s h a r e
is how t o end t h e r e c e s s i o n .
But co n tin u in g to f i g h t cost-push i n f l a t i o n
does not c o n f l i c t w i t h e f f o r t s t o h a l t t h e d e c l i n e o f economic a c t i v i t y .
On the c o n t r a r y , e v e r y t h i n g we can do t o l ow er c o s t s and p r i c e s h e l p s t o
promote an e a r l i e r and s t r o n g e r r e c o v e r y .
I t helps to in s u re t h a t ta x
cuts and e a s i e r money w i l l g e n e r a t e i n c r e a s e d o u t p u t and em p lo y m en t, r a t h e r
than being d i s s i p a t e d i n p r i c e i n c r e a s e s .
For; t h i s r e a s o n , I hope t h a t t h e
J o i n t Economic Committee w i l l s u s t a i n i t s i n t e r e s t i n p r i c e and wage
s t a b i l i t y , which i t has shown so e f f e c t i v e l y i n t h e p a s t .
tpartmtntof th e fR E A S U R Y
February 27, 1975
FOR IMMEDIATE RELEASE
TREASURY’S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
364-day Treasury l>ills to be dated March 11, 1975, and to mature March 9, 1976
(CUSIP No. 912793 YG5). The bills will be issued for cash and in exchange for
Treasury bills maturing March 11, 1975.
Tenders in the amount of $1,130 million,or thereabouts, will be accepted
from the public, which holds $729 million of the maturing bills.
Additional amounts of the bills may be issued at the average price of
accepted tenders to Government accounts and Federal Reserve Banks, for themselves
and as agents of foreign and international monetary authorities, which hold
$1,072 million of the maturing bills.
The bills will be issued on a discount basis under competitive and
noncompetitive bidding, and at maturity their face amount will be payable without
interest. They will be issued in bearer form in denominations of $10,000,
$15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value), and in
book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
one-thirty p.m., Eastern Daylight Saving time, Wednesday, March 5, 1975.
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000.
in multiples of $5,000.
Tenders over $10,000 must be
In the case of competitive tenders the price offered
must be expressed on the basis of 100, with not more than three decimals, e.g.,
99.925. Fractions may not be used.
Banking institutions and dealers who make primary markets in Government
securities and report daily to the Federal Reserve Bank of New York their
positions with respect to Government securities and borrowings thereon may
submit tenders for account of customers provided the names of the customers
are set forth in such tenders. Others will not be permitted to submit
tenders except for their own account. Tenders will be received without
(OVER)
-
2
-
deposit from incorporated banks and trust companies and from responsible
and recognized dealers in investment securities. Tenders from others must
be accompanied by payment of 2 percent of the face amount of bills applied
for, unless the tenders are accompanied by an express guaranty of payment
by an incorporated bank or trust company.
Public announcement will be made by the Department of the Treasury of
the amount and price range of accepted bids.
Those submitting competitive
tenders will be advised of the acceptance or rejection thereof.
The Secretaryl
of the Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect shall be
final.
Subject to these reservations, noncompetitive tenders for $200,000
or less without stated price from any one bidder will be accepted in full at
the average, price (in three decimals) of accepted competitive, bids. Settle
ment for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank or Branch on March 11, 1975,
in
cash or other immediately available funds or in a like face amount of Treasud
bills maturing March 11, 1975.
equal treatment.
Cash and exchange tenders will receive
Cash adjustments will be made for differences between the J
par value of maturing bills accepted in exchange and the issue price of the
new bills.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954
the amount of discount at which bills issued hereunder are sold is considered
to accrue when the bills are sold, redeemed or otherwise disposed of, and the
bills are excluded from consideration as capital assets.
Accordingly, the
owner of bills (other than life insurance companies) issued hereunder must
include in his Federal income tax return, as ordinary gain or loss, the
difference between the price paid for the bills, whether on original issue
or on subsequent purchase, and the amount actually received either upon sa e
or redemption at maturity during the taxable year for which the return is
made.
Department of the Treasury Circular No. 418 (current revision) and this
notice, prescribe the terms of the Treasury bills and govern the
of their issue.
conditions
Copies of the circular may be obtained from any Federal
Reserve Bank or Branch.
F e b ru a ry 2 7 , 1975
Memorandum to C o rre sp o n d e n ts
The t e x t o f th e j o i n t communique, is s u e d by
T rea su ry S e c r e t a r y W illia m E . Simon and M in i s t e r
Muhammad Ib n A l i Aba a l - K h a i l , M in i s t e r o f S t a t e
fo r F i n a n c i a l A f f a i r s and N a t io n a l Economy, on th e
F i r s t S e s s io n o f th e U .S .- S a u d i A r a b ia n J o i n t
Com m ission on Econom ic C o o p e r a tio n , i s e n c lo s e d
fo r your in fo r m a t io n .
WS-238
JO IN T
C O M M U N IQ U E
O n th e F i r s t S e s s io n o f th e U. S. -S a u d i A r a b ia n
J o in t C o m m is s io n on E c o n o m ie C o o p e r a tio n
T h e U. S. - S a u d i A r a b ia n J o in t C o m m is s io n on E c o n o m ie
C o o p e r a tio n ’, e s t a b l i s h e d in a c c o r d a n c e w ith th e J o in t S ta te m e n t
i s s u e d b y S e c r e t a r y o f S ta te K is s in g e r an d P r i n c e F a h d on J u n e 8,
1 9 7 4 , c o n c lu d e d i t s f i r s t s e s s i o n .
T h e J o in t C o m m is s io n m e e t in g s ,
h e ld in W a s h in g to n F e b r u a r y 2 6 - 2 7 , 1 975, w e r e c h a i r e d b y S e c r e t a r y
o f th e T r e a s u r y W illia m E . S im o n , C h a ir m a n o f th e U . S / s id e o f
th e C o m m is s io n .
The, S a u d i A r a b ia n D e le g a tio n w a s le d b y
M i n i s t e r M u h a m m a d Ibn A li A b a a l- K h a il, M i n i s t e r o f S ta te f o r
F in a n c ia l A f f a ir s a n d N a tio n a l E c o n o m y .
H ig h l e v e l o f f ic ia ls f r o m th e U . S. D e p a r t m e n ts o f T r e a s u r y ,
S ta te , A g r i c u l t u r e , C o m m e r c e , H e a lth , E d u c a tio n an d W e lf a r e ,
I n t e r i o r , a n d L a b o r , an d f r o m th e N a tio n a l S c ie n c e F o u n d a tio n
a l s o p a r t i c i p a t e d in th e t a l k s .
M e m b e r s o f th e v is i t i n g S a u d i
A r a b ia n D e le g a tio n p a r t i c i p a t i n g in th e d i s c u s s io n in c lu d e d
o f f ic ia ls f r o m th e M i n i s t r i e s o f F o r e ig n A f f a ir s , C o m m e r c e an d
I n d u s tr y , L a b o r an d S o c ia l A f f a i r s , A g r ic u ltu r e and W a te r , an d
th e C e n t r a l P la n n in g O r g a n iz a tio n , a s w e ll a s h ig h - l e v e l S a u d i
r e p r e s e n t a t i v e s f r o m th e S u p r e m e C o u n c il of H ig h e r E d u c a tio n ,
th e F a c u lty o f S c ie n c e s , an d th p I n s titu te o f P u b lic A d m in is tr a tio n .
2
T h e m e m b e r s o f th e C o m m is s io n e x c h a n g e d v ie w s on th e
d e v e lo p m e n t of U .S . - S a u d i A r a b ia n e c o n o m ic c o o p e r a tio n s in c e
th e v i s i t of S e c r e t a r y S im o n l a s t J u ly to S a u d i A r a b ia f o r
p r e l i m i n a r y d is c u s s i o n s on e c o n o m ic c o o p e r a tio n .
A t th a t t i m e ,
th e C o m m is s io n in itia te d th e a c t i v i t i e s o f i t s f o u r w o rk in g g r o u p s
on M a n p o w e r an d E d u c a tio n , S c ie n c e an d T e c h n o lo g y , A g r i c u l t u r e ,
and In d u s tria liz a tio n .
E a c h o f th e jo in t w o rk in g g r o u p s h a s m e t
s e v e r a l t i m e s to d e fin e a r e a s o f p o te n tia l e c o n o m ic c o o p e r a tio n and a
n u m b e r of U .S . te c h n i c a l e x p e r t s an d a d v i s o r s h a v e v i s i t e d S a u d i
A r a b ia and s u b m itte d r e p o r t s to th e S a u d i A r a b ia n s id e o f th e
C o m m is s io n .
T h e J o in t C o m m is s io n d is c u s s e d f u r t h e r m e a n s
o f f a c i l i t a t i n g s u c h c o n tin u e d c o o p e r a tio n th r o u g h th e J o in t
C o m m is s io n f r a m e w o r k .
In th i s r e g a r d th e C o m m is s io n w a s p le a s e d to n o te th e s ig n in g
on F e b r u a r y 13, 1 9 7 5 , o f a T e c h n ic a l C o o p e r a tio n A g r e e m e n t
(T C A ) w h ic h e s t a b l i s h e s p r o c e d u r e s f o r th e f u r n is h in g o f m u tu a lly a g r e e d te c h n i c a l an d a d v i s o r y s e r v i c e s f r o m th e U n ite d S ta te s to
S a u d i A r a b ia on a r e i m b u r s a b l e b a s i s .
T h e T C A s h o u ld c o n tr ib u te
s ig n if ic a n tly to th e e f f ic ie n t c h a n n e lin g o f A m e r ic a n te c h n i c a l
k n o w -h o w to th e S a u d i A r a b ia n n a tio n a l e c o n o m y .
T h e C o m m is s io n e x p r e s s e d i t s in te n tio n to e x p a n d th e J o in t
C o m m is s io n O ffic e in R iy a d h .
T h is o ffic e s e r v e s a s th e p r in c ip a l
p o in t o f c o o r d in a tio n in S a u d i A r a b ia f o r th e d e v e lo p m e n t an d
3
im p le m e n ta tio n o f m u t u a l l y - a g r e e d p r o j e c t s u n d e r th e U. S. -S a u d i
A r a b ia n T e c h n ic a l C o o p e r a tio n A g r e e m e n t.
T h e U. S. c o m p o n e n t
of t h i s o f f ic e , to b e know n a s th e U n ite d S ta te s Representation to th e
J o in t E c o n o rp ic C o o p e r a tio n C o m m is s io n O ffic e , p la n s to b e g in
o p e r a tin g b y th e m id d le o f M ay 1975.
T h e S a u d i d e le g a tio n
a n n o u n c e d th a t it w o u ld a ls o b e a d d in g to th e s t a f f o f i t s c o m p o n e n t o f
th e R iy a d h J o in t C o m m is s io n O ffic e in th e n e a r f u tu r e .
A rra n g e m e n ts
f o r a c c o m m o d a tin g th e s e tw o s ta f f s a r e to b e d is c u s s e d in R iy a d h
in th e c o m in g w e e k s .
T h e C o m m is s io n n o te d w ith s a t i s f a c t i o n th e s ig n in g b y th e
C o - C h a i r m e n o f an O P IC I n v e s tm e n t G u a r a n ty A g r e e m e n t b e tw e e n
th e tw o g o v e r n m e n ts .
T h e A g r e e m e n t s h o u ld i n c r e a s e an d b r o a d e n
th e i n t e r e s t o f U .S . p r i v a t e e n t e r p r i s e in p a r t i c i p a t i n g in S a u d i
A r a b ia n e c o n o m ic d e v e lo p m e n t.
IN D U S T R IA L IZ A T IO N AND T R A D E
T h e S a u d i d e le g a tio n r e a f f i r m e d i t s i n t e r e s t in a c q u ir in g
U .S . te c h n o lo g y th r o u g h U. S* b u s i n e s s p a r t i c i p a t i o n f o r th e
d e v e lo p m e n t o f m a jo r i n d u s t r i a l p r o j e c t s in b o th th e h y d r o c a r b o n
an d n o n - h y d r o c a r b o n a r e a s ^
T h e C o m m is s io n a g r e e d on th e d e s i r a b i l i t y o f a b r o a d l y - b a s e d
b u s i n e s s c o u n c il d e s ig n e d to i n c r e a s e b u s i n e s s c o o p e r a tio n
b e tw e e n th e tw o c o u n t r i e s and, e n h a n c e th e c o n tr ib u tio n o f U . S.
4
b u s i n e s s to S a u d i A r a b i a 's i n d u s t r i a l d e v e lo p m e n t.
In v ie w o f
th e i m p o r ta n t r o l e o f g o v e r n m e n t in S a u d i A r a b i a 's d e v e lo p m e n t,
c o n c e r n e d S a u d i A r a b ia n G o v e rn m e n t e le m e n ts w o u ld jo in w ith
p r i v a t e s e c t o r i n t e r e s t s in S a u d i A r a b ia an d th e U n ite d S ta te s a s
m e m b e r s o f th e C o u n c il.
T h e C o u n c il w o u ld id e n tif y f o r s tu d y ,
p r o j e c t s w h ic h a p p e a r f e a s ib le f o r jo in t v e n t u r e s , n o te an d m a k e
r e c o m m e n d a tio n s on f in a n c ia l , f i s c a l , o r le g a l c o n s id e r a tio n s
b e a r i n g on c o o p e r a tiv e e f f o r t s , a r r a n g e b u s i n e s s s y m p o s ia and
v i s i t s in b o th c o u n t r i e s , a n d b e a c e n t e r f o r d is s e m in a tin g
in f o r m a tio n on b u s i n e s s o p p o r tu n itie s in b o th c o u n t r i e s .
T h e S a u d i A r a b ia n G o v e r n m e n t w ill c o n s id e r th e p o s s i b i l i t y
o f o r g a n iz in g a g ro u p o f S a u d i b u s in e s s m e n to v i s i t th e U n ite d
S ta te s w ith in th e n e x t tw o m o n th s to m e e t w ith U n ite d S ta te s b u s in e s s
f i r m s an d g r o u p s .
T h e g e n e r a l p u r p o s e w o u ld b e to i n c r e a s e th e
c o m m u n ic a tio n s b e tw e e n th e tw o p r i v a t e s e c t o r s .
M o re s p e c if ic a lly ,
th e g ro u p w o u ld d i s c u s s v a r i o u s i n d u s t r i a l p r o p o s a l s an d p r o j e c t s .
T h e C o m m is s io n n o te d w ith i n t e r e s t th a t t r a d e r e l a t i o n s
b e tw e e n th e K in g d o m o f S a u d i A r a b ia an d th e U n ite d S ta te s h a v e
b e e n d e v e lo p in g a t a n a c c e l e r a t e d r a t e .
U. S. e x p o r ts to S a u d i
A r a b ia n e a r l y d o u b le d in 1 9 7 1 , i n c r e a s e d b y 40% in 1 9 7 3 , an d
n e a r l y d o u b le d a g a in in 1 9 7 4 , to $835 m illio n .
E x p e c ta tio n s a r e th a t
U .S . e x p o r t s w ill c o n tin u e to g ro w p r o g r e s s i v e l y .
It i s a n tic ip a te d
th a t U. S. e x p o r t e r s w ill p la y a s ig n if ic a n t r o l e in s u p p ly in g
e q u ip m e n t, m a c h i n e r y , te c h n o lo g y a n d S e r v i c e s .
T h e G o v e r n m e n ts of th e U n ite d S ta te s a n d S a u d i A r a b ia a g r e e d
th a t p a r t i c i p a t i o n in p r o d u c tiv e v e n t u r e s in e a c h o t h e r 's e c o n o m ie s
s h o u ld b e m u tu a lly b e n e f ic ia l.
T h e y r e c o g n iz e th a t a c t i v i t i e s o f
th is ty p e in b o th c o u n t r i e s w o u ld r e q u i r e c lo s e <n n s u lta tio n to
a s s u r e c o n s is te n c y w ith t h e i r n a tio n a l p o lic ie s an d o b je c t iv e s .
C o n s e q u e n tly , th e y a g r e e d th a t e a c h g o v e r n m e n t w o u ld c o n s u lt
w ith th e o th e r r e g a r d i n g s ig n if ic a n t u n d e r ta k in g s o f t h is ty p e .
T h e C o m m is s io n a g r e e d o n th e d e s i r a b i l i t y o f U n ite d S ta te s
G o v e r n m e n t t e c h n i c a l a s s i s t a n c e in d e v e lo p in g a s t a t i s t i c a l b a s e
f o r d e v e lo p m e n t in S a u d i A r a b ia .
T h e A m e r ic a n s id e s ta t e d i t s
r e a d i n e s s to s e n d o u t t e a m s o f e x p e r t s in a n u m b e r o f p r i n c i p a l
s t a t i s t i c a l d is c i p l i n e s to a s s i s t th e S a u d i A r a b ia n G o v e rn m e n t in
d e v e lo p in g a n e f f e c tiv e s t a t i s t i c a l c a p a b ility .
T h e C o m m is s io n h e a r d r e p o r t s an d e x c h a n g e d v ie w s on th e
c u r r e n t s t a t u s o f a n u m b e r o f te c h n i c a l c o o p e r a tio n p r o j e c t s in
th e f ie ld s o f v o c a tio n a l t r a i n i n g , h ig h e r e d u c a tio n , a g r i c u l t u r e ,
w a t e r u t i l i z a t i o n a n d la n d use* s c ie n c e a n d te c h n o lo g y an d
s ta tis tic s .
A s u m m a r y o f th e s e fo llo w s :
6
V O C A T IO N A L
T R A IN IN G
T h e C o m m is s io n n o te d th e s e r i e s o f r e c o m m e n d a tio n s b y
th e A m e r ic a n v o c a tio n a l t r a i n i n g t e a m w h ic h v i s i t e d S a u d i A r a b ia
l a s t f a ll.
T h e s e r e c o m m e n d a tio n s , in s u p p o r t o f th e im p le m e n ta tio n
o f S a u d i A r a b i a 's f i v e - y e a r p la n v o c a tio n a l t r a i n i n g g o a ls , in c lu d e
U n ite d S ta te s G o v e r n m e n t a d v is o r y s e r v i c e s in v a r i o u s f ie ld s o f
m a n p o w e r d e v e lo p m e n t.
H IG H E R E D U C A T IO N
It w a s a g r e e d a t th e C o m m is s io n m e e tin g to s e n d an A m e r ic a n
t e a m to e v a lu a te th e a c a d e m ic an d a d m i n i s t r a t i v e s t r u c t u r e s o f th e
S a u d i A r a b ia n U n iv e r s ity s y s t e m , a s w e ll a s th e r e l a t i o n s h i p o f
u n i v e r s i t i e s to h ig h - l e v e l p r o f e s s i o n a l an d te c h n i c a l e d u c a tio n .
A s e c o n d a c tio n a r e a to b e e x p lo r e d w ill in v o lv e U. S. - S a u d i
A r a b ia n c o o p e r a tio n in th e fo llo w in g a r e a s :
b r o a d e n e d s tu d e n t an d
f a c u l t y e x c h a n g e s b e tw e e n th e tw o c o u n t r i e s , jo in t r e s e a r c h p r o j e c t s ,
jo in t d e g r e e p r o g r a m s , th e e s t a b l i s h m e n t o f ju n io r c o lle g e s in
S a u d i A r a b ia , a n d th e t r a i n i n g o f a c a d e m ic , a d m i n i s t r a t i v e , a n d
te c h n i c a l p e r s o n n e l in S a u d i u n i v e r s i t i e s .
A G R IC U L T U R E , W A T E R R E S O U R C E S
AND LA N D USE
T h e C o m m is s io n d i s c u s s e d U n ite d S ta te s G o v e r n m e n t te c h n i c a l
s e r v i c e s f o r jo in t a g r i c u l t u r a l , w a t e r an d la n d p r o j e c t s .
P rio rity
7
w a s g iv e n to f e a s i b i l i t y s tu d ie s o f m a j o r a g r i c u l t u r a l a r e a s in
S a u d i A r a b ia , a s tu d y o f th e C e n t r a l R e s e a r c h L a b o r a t o r y an d
A g r ic u ltu r e T r a in i n g C e n t e r o f th e M in is t r y o f A g r i c u l t u r e an d
W a te r , an d th e e s t a b l i s h m e n t o f a d e s a lin a tio n c e n t e r an d l a b o r a t o r y .
It w a s a g r e e d th a t a f o u r - m a n U. S. G o v e rn m e n t te a m w o u ld
go to S a u d i A r a b i a f o r a tw o -m o n th p e r io d to d i s c u s s a n d r e a c h
a g r e e m e n t w ith S a u d i A r a b ia n c o u n t e r p a r t s on a d e ta ile d p r o g r a m
fo r im p le m e n tin g a f e a s i b i l i t y s tu d y fo r l a r g e a g r i c u l t u r a l a r e a s ,
s u c h a s W a d i D a w a s ir .
T h e C o m m is s io n a ls o
a p p r o v e d th e im m e d ia te d e p a r t u r e to
S a u d i A r a b ia o f a r e s e a r c h m a n a g e m e n t t e a m to p la n a r e s e a r c h
p r o g r a m an d d e te r m in e o r g a n iz a ti o n a l an d m a n a g e m e n t r e q u i r e m e n t s
f o r th e C e n t r a l R e s e a r c h L a b o r a t o r y an d A g r i c u l t u r a l T r a in i n g
C e n t e r . «-i ?$
p /tn o m m i?
A U. S. G o v e r n m e n t p r o p o s a l f o r th e e s t a b l i s h m e n t o f th e
d e s a lin a tio n c e n te r, w ill b e s e n t to th e S a u d i A r a b ia n G o v e rn m e n t
in r e s p o n s e to t h e i r r e q u e s t .
P r o j e c t s in th e a r e a s o f la n d m a n a g e m e n t, w a te r u tiliz a tio n
an d a n a tio n a l d a ta b a n k w o u ld b e im p le m e n te d u n d e r th e T e c h n ic a l
C o o p e r a tio n A g r e e m e n t.
im m e d ia te ly
F u r t h e r d is c u s s io n s w ill b e h e ld
to d e c id e on th e im p le m e n ta tio n o f t h e s e p r o p o s a l s .
8
S C IE N C E AND T E C H N O L O G Y
It w a s a g r e e d th a t a S a u d i A r a b ia n N a tio n a l C e n t e r f o r
S c ie n c e a n d T e c h n o lo g y w o u ld b e e s t a b l i s h e d to c o o r d in a te th e
g ro w th o f s c ie n c e and te c h n o lo g y in S a u d i A r a b ia a n d to s u p p o r t an d
fu n d m u t u a l l y - a g r e e d u p o n p r o g r a m a r e a s o f i n t e r e s t to S a u d i
A r a b ia .
It w a s f u r t h e r a g r e e d th a t a n i n i t i a l U n ite d S ta te s G o v e r n
m e n t t e a m w o u ld b e s e n t to S a u d i A r a b ia a s s o o n a s p o s s ib le to
a d v is e on th e o b je c t iv e s a n d fu n c tio n s o f th e S a u d i N a tio n a l
C e n te r .
A d d itio n a l U. S. e x p e r t t e a m s to fo llo w w ill w o r k w ith
S a u d i A r a b ia n e x p e r t s to d e fin e th e p r e c i s e p r o g r a m s f o r th e o th e r
a g re e d p ro je c t a r e a s .
O TH ER AREAS
'
T h e S a u d i d e le g a tio n r e q u e s t e d te c h n i c a l a s s i s t a n c e o v e r a
l i m i t e d p e r io d o f tim e to i t s G o v e r n m e n t’s D e p a r t m e n t o f P u b lic
W o rk s.
T h e U. S. a g r e e d to r e v ie w th e r e q u i r e m e n t s o f th e S a u d i
A r a b ia n P u b lic W o rk s D e p a r tm e n t to d e te r m in e th e n a tu r e a n d
e x te n t o f te c h n i c a l s e r v i c e s d e s i r e d .
O V E R A L L A SSE SSM E N T
T h e C o m m is s io n e x p r e s s e d s a t i s f a c t i o n w ith th e p r o g r e s s
to d a te an d c o n s id e r e d th e d i s c u s s i o n s a t i t s f i r s t m e e tin g a
9
m a jo r s te p f o r w a r d in th e c o n s t r u c t i v e d e v e lo p m e n t o f m u tu a lly
a d v a n ta g e o u s e c o n o m ic r e l a t i o n s .
W ith a v ie w to k e e p in g c lo s e
t r a c k o f th e C o m m i s s i o n 's e f f o r t s , th e U. S. s id e d e c id e d to
e s t a b l i s h a n A c tio n G ro u p .
T h e U .S . c o o r d in a to r w ill b e G e r a ld
L . P a r s k y , A s s i s t a n t S e c r e t a r y o f th e T r e a s u r y , th e D e p a r tm e n t w h ic h
is th e U .S . c o o r d in a tin g a g e n c y f o r th e w o rk o f th e C o m m is s io n .
T he S a u d i s id e w ill c o n s id e r a s i m i l a r a r r a n g e m e n t .
T h e a c tio n g ro u p an d i t s S a u d i c o u n t e r p a r t w ill b e c h a r g e d
w ith m o n ito r in g p r o g r e s s b e in g m a d e on a r e g u l a r b a s i s s o a s
to i n s u r e th a t p r o g r a m g o a ls a r e b e in g m e t a n d to r e v ie w an d
im p le m e n t n ew p r o p o s a l s th a t m a y b e a g r e e d u p o n .
T h e A c tio n
G ro u p on th e U .S . s id e w ill c o n s i s t o f r e p r e s e n t a t i v e s f r o m th e
D e p a r tm e n ts of T r e a s u r y a n d S ta te , a n d th e fo llo w in g U. S. a c tio n
a g e n c ie s :
A g r i c u l t u r e , C o m m e r c e , H e a lth , E d u c a tio n an d
W e lf a r e , I n t e r i o r , L rabor an d th e N a tio n a l S c ie n c e F o u n d a tio n an d
o th e r U .S . G o v e r n m e n t a g e n c ie s a s m a y b e c o m e a p p r o p r i a t e .
B oth s i d e s a g r e e d to c o n s i d e r h o ld in g th e n e x t J o in t C o m m is s io n
m e e tin g in R iy a d h , S a u d i A r a b ia , in O c to b e r 1975.
Department of ^ T R E A S U R Y
« T O N , D C. 20220
=3:
T E L E P H O N E W04-2Q41
RELEASE ON DELIVERY
REMARKS OF DAVID H. STOUGHTON,
OFFICE OF THE GENERAL COUNSEL, DEPARTMENT OF THE TREASURY,
ON THE REGULATION OF GOLD AND SILVER FUTURES TRADING
utyi; .ijjyjaB at '
BRIEFING CONFERENCE ON THE
COMMODITY FUTURES TRADING COMMISSION ACT
LA SALLE HOTEL, CHICAGO
FEBRUARY 28, 1975, AT 2:30 P.M.
I am pleased to have the opportunity to take part in this Confer
ence on the Commodity Futures Trading Commission Act of 197^. I am
honored to participate with the distinguished members of this panel
in a discussion of the regulation of trading in gold and silver.
The subject is an especially timely one. Effective December 31,
197^, Congress repealed the Federal restrictions on the purchase, sale
or ownership of gold. For the first time in kl years United States
citizens are permitted to invest in gold bullion, gold futures, gold
related securities and other types of gold investments. During these
years, United States citizens have been able to hold gold only under
U.S. Treasury license for industrial, numismatic, and artistic use;
With the lifting of these' restrictions, Federal and state regulatory
agencies have had to make the adjustments necessary to regulate dealings
in gold under generally applicable statutes.
The passage of the Commodity Futures Trading Act of 197*+ is another
important development affecting trading in gold and silver. The Act
brings under Federal regulation for the first time futures trading in
all commodities, including gold and silver.
cussion with
&
I will open the panel dis
brief review of existing Federal regulation of trading
in gold and silver, and follow that with an examination of prospective
regulation of such trading under the Commodity Futures Trading Commission
Act.
Under the Act repealing the ownership restrictions on gold, Federal
and state regulatory agencies retain authority to regulate trading in
gold.
A substantial portion of direct sales and purchases of gold bullion
and coins take place through banks.
Banks possess authority to deal in
gold coin and bullion under Federal and. state banking laws* : The Federal
banking agencies are exercising their powers under the. Financial Insti
tutions Supervisory Act of 1966 and other Federal banking statutes to
regulate bank dealing in gold to avoid unsafe and unsound banking
practices.
All three Federal banking agencies have issued guidelines
to their member banks on dealing in.gold. .;
These guidelines recommend that banks dealing in'gold maintain
adequate safekeeping facilities and insurance coverage of their gold
inventories and make provision for insuring the purity of. the gold.
In addition, the banking agencies urge that banks carefully evaluate
-3 -
the risks before dealing in gold for their own accounts, including the
experience of bank personnel, anticipated inventories and positions,
safekeeping facilities, insurance coverages, audit procedures, and an
ticipated impact on earnings.
Banks are advised to insure the adequacy
of margins on loans collateralized by gold and to avoid undue risk
exposure from gold-related loans.
Finally, banks are directed to make full disclosure to prospective
investors of the risks and costs of gold investments, including retail
markups, shipping .and storage charges, and sales taxes.
Various other Federal agencies regulate gold and silver trading.
The Federal Trade Commission enforces Federal law prohibiting unfair or
deceptive trade practices in interstate commerce.
The Securities and
Exchange Commission, the Department of Justice, and the Postal Inspec
tion Service enforce Federal laws against securities and mail fraud.
The Securities andfExchange Commission also regulates public interstate
offerings of and trading; in securities involving gold, silver, and
other precious metals.
The SEC's responsibilities in this area will
be discussed by Mr. JKane.
The Federal Government does not presently regulate futures trading
in gold and silver.
The new Commodity Futures Trading Commission will
regulate trading in gold and silver futures.
Until then, such trading
will continue under self-regulation of the organized commodity futures
exchanges.
The exchanges specify the terms of the gold or silver
-u futares contract traded on the exchanges, such as the trading unit,
the standards of purity or fineness, the delivery months, and place of
delivery.
In addition, the exchanges prescribe various rules and regulations
governing trading on the exchanges in order to protect investors and
promote fair, orderly, and efficient markets.
from exchange to exchange.
These trading rules vary
As in the case of other commodities, trading
in gold and silver futures must be conducted openly and competitively by
public outcry at the trading ring on the floor during prescribed trading
hours, with, certain exceptions.
Exchange rules prohibit members from executing fictitious or wash
sales or from crossing orders away from the trading ring except in
accordance with procedures designed to protect the public customers
whose orders are crossed.
Some exchanges have rules safeguarding
against misuse customer margin deposits and other funds deposited in
connection with transactions in futures contracts.
Exchanges also establish minimum margins to assure the financial
integrity of futures contracts.
Most exchanges fix original margins
for gold and silver futures contracts at 10 percent of the contract
price•
Finally, the exchanges also have rules limiting the daily fluctua
tions in prices of gold and silver futures contracts.
For example,
Commodity Exchange, Inc., limits daily price movements of. gold futures
-5contracts to a range of $10 per ounce above or below the closing price
of the preceding business day.
The exchanges have not, however, estab
lished trading or position limits for trading in gold or silver futures.
Prospective Regulation of Gold and Silver Trading
by the Commodity Futures Trading Commission
Beginning on April 21, 1975, the new Commodity Futures Trading
Commission will regulate futures trading in gold and silver, as well
as transactions involving margin and leverage contracts in gold and
silver coins and bullion.
While the new Commission was established
immediately upon enactment of the Commodity Futures Trading Commission
Act, its regulatory authority will not become effective until April 21,
1975.
On that date, all existing authority presently delegated to the
Secretary of Agriculture and the Commodity Exchange Commission will be
transferred to the new Commission, which will operate as an independent
Federal regulatory commission similar to the SEC.
In addition, it will
exercise additional powers which the present Commission does not possess
The Administration has taken the initiative to expedite the imple
mentation of the Commission on April 21.
An interagency committee
headed by the Office of Management and Budget has been formed for the
purpose of assisting in arranging the transfer of resources from the
Department of Agriculture to the new Commission and performing admin
istrative, managerial and program planning necessary for the Commission
to commence effective operation on April 21.
It is normal and well
-
6-
precedented procedure for OMB to arrange for this type of assistance
in the establishment of a new Federal agency.
In addition, the effort
is designed tp bring together the diversity of advice and opinions from
various sources within the Government and the public for the benefit of
the new Commission.
Gold and Silver Futures Trading
On April 21 trading in gold and silver futures will become subject
to various regulatory and registration requirements generally applicable
to futures trading in any commodity under the Commodity Exchange Act, as
amended by the Commodity Futures Trading Commission Act.
Trading in
gold and silver futures will be prohibited after that date except upon
an exchange which has been designated by the Commodity Futures Trading
Commission as a contract market.
Commodity trading advisers, commodity
pool operators, futures commission merchants, and floor brokers partici
pating in gold and silver futures trading will be required to register
with the Commission and to comply with applicable regulatory require
ments of the Act.
The Commodity Futures Trading Commission will have
increased authority to oversee self-regulation on gold and silver
futures exchanges, including the authority to approve exchange rules
and regulations and to require exchanges, after notice of hearing, to
supplement or change existing rules or regulations.
The Commission
will, however, have no authority to regulate margin requirements.
nfi*)
s
-7-
The Act enunciates clear policy goals to guide the Commission in
requiring changes in exchange rules or regulations.
The Commission
must determine that the change is necessary or appropriate for the pro
tection of persons producing, handling, processing or consuming the
commodity traded for future delivery on the exchange, or for the pro
tection of traders, or to insure fair dealing on the exchange.
An exchange desiring to be designated a contract market must make,
an application to the Commission in which it demonstrates that it com
plies with certain specified requirements of the Commodity Exchange
Act, and provides sufficient assurance that it will continue to comply
with such requirements. Most of these statutory requirements are the
same as those which apply to presently regulated exchanges which have
been designated contract markets under the Commodity Exchange Act.
The Commodity Futures Trading Commission Act has introduced some
new requirements for designation as a contract market.
Exchange by
laws, rules, regulations and resolutions^ which relate to contract terms
or conditions or other trading requirement^ must be approved by the
Commission upon a determination that they are not in violation of the
provisions of- the Act and the regulations of the Commission.
Another new provision requires exchanges, as a condition of their
designation,, to permit the delivery of any commodity, on a futures
contract, "of such grade or grades, at such point or points, and at
such quality and locational price differentials as will tend to prevent
or diminish price manipulation, market congestion or the abnormal move
ment of such commodity in interstate commerce."
In addition, the new law requires that an exchange also demonstrate
that its designation as a contract market will not be contrary to the
public interest. The legislative history indicates that the public in
terest standard includes an economic purpose test. An exchange would
meet this test if it demonstrated (1) that futures prices for the com
modity in question generally serve as a basis for determining prices to
producers, merchants or consumers of the commodity, or (2) that futures
transactions in the commodity are utilized by producers, merchants or
consumers as a means of hedging themselves against the risk of fluctua
tions in price.
In addition to designating contract markets in gold and silver,
the Commodity Futures Trading Commission will have to determine whether
to impose trading or position limits on persons trading in gold and
silver futures. As noted above, the exchanges do not presently impose
trading or position limits. The Act authorizes the Commission, after
notice and opportunity for a hearing, to fix such trading and position
limits as it deems necessary to prevent excessive speculation that
threatens to cause unreasonable price fluctuations.
The Commodity Futures Trading Commission will also have to deter
mine within six months from April 21, 1975> whether floor brokers and
futures commission merchants should continue to be permitted to trade
for their own account or any managed account, and, if so, under what
terms and conditions. Another question the Commission will face is
whether to continue to permit trading in puts and calls or options in
gold and silver.
It is impossible to predict what rules and regulations the Com
mission will adopt in exercising its powers to regulate gold and silver
trading under the Act. That will he for the Commission to determine
once its members are appointed and confirmed by the Senate.'
In an effort to assist the Commodity Futures Trading Commission in
fulfilling its responsibility to designate contract markets by April 21,
the Commodity Exchange Authority has provided existing exchanges with
proposed guidelines for preparing applications for designation as a
contract market' by the new Commission. While these proposed guidelines
have no legal effect, the Authority hopes that exchanges will make
written submissions to the Commodity Futures Trading Commission based
upon the requirements contained in the guidelines. The Authority be
lieves that'proposed guidelines and the submissions of the exchanges
will prove helpful to the Commission in designating contract markets
prior to the April 21 deadline.
The Commodity Exchange Authority in its proposed guidelines has
attempted to set forth what it believes to be the requirements for
designation as a contract market under the Commodity Exchange Act, as
amended by the Commodity Futures Trading Commission Act. It has drawn
-
10 -
upon its experience and regulations in administering the existing pro
visions for designation which remain in effect under the new Act. In
addition, the^ guidelines interpret the new requirements for designation
that have been imposed by the new Act.
For example, the guidelines interpret the Act to require exchanges
seeking designation as a contract market to justify the economic via
bility of each contract term and condition affecting the value of
futures contracts, that is, that each contract term or condition con
forms with current commercial practices for the same cash commodity and
is not conducive to price manipulation or distortion.
Margin and Leverage Contracts
in Gold and Silver
The Commodity Futures Trading Commission Act also gives the Com
mission the authority to regulate transactions for the delivery of
silver or gold bullion and coins pursuant to a margin or leverage con
tract for the purpose of insuring the financial solvency of the trans
action or preventing manipulation or fraud. In addition, the Commission
is directed, if it determines that these transactions are contracts for
future delivery within the meaning of the Act, to regulate them as
futures transactions under the provisions of the Act.
The legislative history of this provision provides little guidance
as to the nature of the margin or leverage contracts in gold or silver
which are to be regulated by the Commission. One of the first tasks of
-li
the Commission will be to define its jurisdiction in thi.s area.
The Administrator of the Commodity Exchange Authority invited in
terested persons to provide their views for the benefit of the Commodity
Futures Trading Commission in considering what rules and regulations are
in the public interest to insure the financial solvency of margin and
leverage contracts in gold and silver or prevent manipulation or fraud.
In addition, persons dealing in such contracts were requested to submit
information concerning the contracts and business practices'. Responses
were received from a number of persons and these will be provided to
the new Commission for its use in exercising its authority with respect
to these contracts.
Department
ofthefREASlIRY
BHINGTON, D.C. 20220
T E LEP H O N E WQ4-2041
February 29, 19 75
MEMORANDUM TO CORRESPONDENTS:
In an appearance before the Washington Press
Club earlier this week, Treasury Secretary William E.
Simon referred to notes which he prepared on Administra
tion moves to end the recession and help the unemployed,
and to international oil developments. Copies of
these notes are attached for your information.
oOo
WS-239
EXAMPLES OF ADMINISTRATION ACTION TO END
THE RECESSION AND HELP THE UNEMPLOYED
*
1 . We a r é p r o p o s in g F e d e r a l b u d g e t d e f i c i t s t o t a l i n g
ab ou t $90 b i l l i o n i n a tw o -y e a r p e r io d even th ou gh we
r e c o g n iz e t h a t th e f in a n c i n g o f d e f i c i t s on su ch a
s c a l e w i l l s t r a i n th e c a p a c i t y o f th e f i n a n c i a l sy ste m .
2 . L a s t y e a r th e A d m in is t r a t io n i n i t i a t e d f f e g i s l a t i o n
to in c r e a s e th e d u r a tio n and c o v e ra g e o f unemployment
in s u r a n c e b e n e f i t s and to c r e a t e employment by fu n d in g
a d d i t i o n a l p u b lic s e r v ic e j o b s . As a r e s u l t , t o t a l
unemploym ent a s s i s t a n c e , in c lu d in g employment p ro g ram s,
w i l l expand 207 p e r c e n t , from $ 6 .1 b i l l i o n i n 1974 to
$ 1 8 .8 b i l l i o n i n 1976. A lm o st $30 b i l l i o n i s in c lu d e d
in th e b u d g et f o r unemploym ent b e n e f i t s in FY 1975 and
1976 com bined.
3.
S i g n i f i c a n t t a x b e n e f i t s a re p ro v id e d to unem ployed
p e rso n s by th e e x c lu s io n from t a x a t io n o f unemployment
in s u r a n c e b e n e f i t s . T h is " t a x e x p e n d itu r e " i s e s tim a te d
to r e a c h $ 3 .8 b i l l i o n i n FY 1976.
4 . Unemployment in s u r a n c e i s su pp lem ented by o th e r
b e n e f i t s a v a i l a b l e to th e needy unem ployed su ch as
fo o d sta m p s. O u tla y s f o r th e fo o d stamp program have
in c r e a s e d from $248 m i l l i o n to an e s tim a te d $ 3 .6 b i l l i o n
i n 1976.
5 . More th an $3 b i l l i o n w i l l be s p e n t on F e d e r a l manpower
t r a i n i n g and o th e r manpower program s i n FY 1976. T h is i s
in a d d i t i o n to th e amount s c h e d u le d to be sp e n t d i r e c t l y
on p u b lic s e r v i c e j o b s . T hese a c t i v i t i e s in c lu d e s k i l l
t r a i n i n g , re m e d ia l e d u c a t io n , o n - t h e - jo b t r a i n i n g , jo b
d e v e lo p m e n t, j o b m a tc h in g , v o c a t io n a l c o u n s e lin g , and
r e l a t e d s u p p o r tin g s e r v i c e s .
6.
Under th e Work I n c e n t iv e Program h e lp i n o b t a in in g
jo b s i s p r o v id e d th o s e r e c e i v i n g a i d to f a m i l i e s w ith
dep en d en t c h i l d r e n .
C o u n s e lin g , t e s t i n g , t r a i n i n g and
c h i l d c a r e a re fu r n is h e d as needed to e n a b le w e lfa r e
r e c i p i e n t s to se e k o r a c c e p t j o b s . The g o a l f o r 1976
i s to p la c e 140,000 p e o p le i n u n s u b s id iz e d j o b s .
*
*
7.
The F e d e r a l Governm ent pays 100 p e r c e n t o f th e c o s t
o f th e S t a t e o f f i c e s p r o v id in g jo b m a tch in g s e r v ic e s to
w orkers and e m p lo y e rs.
8.
I n 1974, th e P r e s id e n t 's v e te r a n s p ro g ram »p laced
6 0 9 ,0 0 0 v e te r a n s i n j o b s - - a 45 p e r c e n t in c r e a s e o v e r th e
number p la c e d i n 1971. Unemployment among V ie tn a m -e r a
v e t e r a n s was h e ld bxe low th e r a t e f o r n o n v e te ra n s i n 1974.
B oth governm ent a g e n c ie s and p r i v a t e in d u s t r y — th ro u g h
Jobs f o r V e te ra n s and th e N a t io n a l A llia n c e f o r B usinessm en -w i l l c o n tin u e to open new jo b o p p o r t u n it ie s to v e te r a n s .
I n 1975, th e g o a l i s to p la c e o v e r a m i l l i o n v e te r a n s in
jo b s o r t r a i n i n g p ro g ram s.
9 . Under th e g e n e r a l reven u e s h a r in g program S t a t e and
l o c a l governm ents w i l l r e c e iv e $ 6 .3 b i l l i o n i n FY 1976.
These paym ents a r e s u b je c t to minimum r e s t r i c t i o n s
c o n t r o ls and c o u ld be used to a id th e unem ployed.
and
10 . O n ly r e c e n t l y th e P r e s id e n t announced h i s d e c is io n to
r e l e a s e an a d d i t i o n a l $2 b i l l i o n f o r highw ay c o n s t r u c t io n
w h ich c o u ld p r o v id e some 125,000 j o b s , d i r e c t l y o r i n d i r e c t l y .
1 1 . O th e r a c t i o n we have recommended w ould c r e a t e more
p r i v a t e s e c t o r jo b s - - w h ic h a c c o u n t f o r 85 p e r c e n t o f th e
t o t a l . We h ave e x te n d e d b i l l i o n s in lo a n fu n d s to a id th e
h o u s in g in d u s t r y and recommended e x p a n sio n o f th e in v e stm e n t
t a x c r e d i t to h e lp b u s in e s s m odernize and expand p la n t
and th e r e b y b o th c r e a t e more jo b s and overcom e i n f l a t i o n
s p u r r in g s h o r t a g e s .
B a s i c a l l y , th e u lt im a t e way to t a c k le
unemploym ent l i e s in r e d u c t io n o f i n f l a t i o n , r e s t o r a t i o n
o f consum er c o n fid e n c e and a r e t u r n to sound econom ic g ro w th -and th e A d m in is t r a t io n 's e c o n o m ic -e n e rg y program s a re aimed
s q u a r e ly a t t h i s o b j e c t i v e .
INTERNATIONAL O IL DEVELOPMENTS
P re ssu re s on OPEC P ro d u cers
C o n s e r v a tio n
--
C o n s e r v a tio n m e a su re s, th e d e c lin e in w o rld
econom ic a c t i v i t y and m ild w in te r w eath er have
b ro u g h t ab o u t red u ced o i l consu m ption and some
o b s e rv e rs e s tim a te w o rld demand w i l l d e c li n e an
a d d i t i o n a l 1-3 m i l l i o n b a r r e ls p e r day by th e
summer o f 1975, b e fo r e th e s e a s o n a l r i s e in
con su m ption b e g i n s •
S u rp lu s P ro d u cin g C a p a c it y
P r o d u c tiv e c a p a c i t y in th e OPEC c o u n t r ie s
c o n tin u e s t o in c r e a s e from 3 6 .2 m i l l i o n b a r r e ls
p e r day in May 1974 to 3 8 .8 m i l l i o n b a r r e ls p er
day in F e b ru a ry 1975. C u r r e n t s u r p lu s c a p a c i t y
i s a lm o s t 12 m i l l i o n b a r r e ls p e r d a y , o r a b o u t
30% o f p r o d u c tiv e c a p a c i t y .
I f OECD n a tio n s
m eet p r o je c t e d c o n s e r v a tio n g o a ls and a d d i t i o n a l
w orldw ide c a p a c i t y comes on l i n e as s c h e d u le d ,
th e OPEC s u r p lu s c a p a c i t y c o u ld in c r e a s e by l a t e
summer to 15-17 m i l l i o n b a r r e ls p e r d a y , o r as
much as 407o o f c a p a c i t y .
Revenue Needs
Some o i l p ro d u ce rs need to m a in ta in o i l reven u es
to s u p p o rt econom ic developm ent p ro g ram s. A l g e r i a
and I n d o n e s ia , f o r e x a m p le , have la r g e program s
underw ay w h ich r e l y on an u n in te r r u p te d flo w o f
o i l reven u es a t c u r r e n t l e v e l s o r h ig h e r .
2
New Discoveries and Reserve Additions
--
S in c e th e p e tro le u m em bargo, o i l d is c o v e r ie s and
th e d r i l l i n g o f c o n fir m a tio n w e lls have r e s u lt e d
in an e s tim a te d in c r e a s e in non-OPEC o i l r e s e r v e s
o f r o u g h ly 35 b i l l i o n b a r r e l s . M ajor d is c o v e r ie s
have’ been in th e N o rth S e a , B r a z i l , C h in k , and
M e x ic o . M exico a lo n e has onshore r e s e r v e s in th e
T a b a s c o -C h ia p a s a r e a now e s tim a te d a t 18-20 b i l l i o n
b a r r e ls .
I f th e r e s e r v o ir s e x te n d w e ll o f f s h o r e ,
as seems l i k e l y , th e y w ould ap p ro ach th e d im ensions
o f la r g e p o o ls in th e P e r s ia n G u l f . E s tim a te s a re
n o t y e t a v a i l a b l e on th e p r o b a b le r e s e r v e s in th e
B a ja C a l i f o r n i a a r e a o f M e x ic o , a lth o u g h th e o u t
lo o k i s p r o m is in g .
Natural gas discoveries are being made along with
new oil finds. Discoveries have far outstripped
development and exploitation, primarily because of
the heavy capital costs involved. Some of the more
readily useable reserves are in the North Sea, the
Netherlands, and Italy. Increased Dutch and Norwegian
natural gas production can substitute for oil imports.
Norway is already committed to export up to 1.8
billion cubic feet daily and Dutch production, which
started in 1965, is expected to peak in 1980 at a
rate of about 9 billion cubic feet a day.
Examples of Softening of Oil Prices
Abu Dhabi cut its February price for government-owned low
sulphur oil by as much as 38 cents a barrel because o f
what is called a "reassessment of the quality premium".
One type of light crude is being offered at $ 1 1 .0 0 per
barrel, down from the $ 1 1 .3 8 price in effect since l a s t
November and the high of $1 1 .9 9 during the third quarter
of 1974.
Libya reduced its premium for low sulphur oil in January,
and Nigeria is reported to be ready to cut its sulphur
premium differentials.
World spot market prices for refined products were down
in February, despite refinery cutbacks» One survey
notes that spot market product prices generally continue
to decline and that many major oil companies have all
but withdrawn from spot market sales. Many companies
have acknowledged that the only way to sell fpot products
nowadays' is at prices below the cost of crude and are
refusing to do so.
Other concessions equivalent to price reductions include:
preferential oil financing offered by oil producers to
selected less developed countries; oil swap arrangements
between oil producers and potential oil producing countries
and reduced transportation differentials.
FOP. IMMEDIATE RELEASE
FEBRUARY 28 , 197 5
TREASURY SECRETARY SIMON NAMES JAMES R. THOMAS
SAVINGS BONDS CHAIRMAN FOR WEST VIRGINIA
James R. Thomas, II, President, Carbon Industries, Inc.,
Charleston, W. Va., is appointed Volunteer State Chairman for
the Savings Bonds Program in West Virginia by Secretary of the
Treasury William E. Simon, effective immediately.
He will head a committee of business, banking, labor,
government and media leaders who -- in cooperation w’ith the
U. S. Savings Bonds Division -- assist in promoting Bond
sales in the state. He succeeds William G. Powers, Presi
dent, Huntington Trust and Savings Bank, Huntington, W. Va.,
who receives the Treasury ’’Award of Merit” in recognition of
his service.
Thomas is a native of Kanawha County. After being gradu
ated from Culver Military Academy, Culver, Ind., in 1944, he
served for two years in the Army. He then attended Cornell
University, earning an AB degree in 1950.
After graduation, he joined Connecticut General Life In
surance Co., Hartford. In 1953, he returned to Charleston to
wrork for the family-owrned Carbon Industries. Thomas served as
Secretary-Treasurer, Vice President and Executive Vice Presi
dent, before assuming his present post. In addition, he is an
officer of a number of Carbon Industry subsidiaries, including
President and Chief Executive Officer, Carbon Fuel Co. and Ken
tucky Carbon Corp.
Thomas is active in numerous business, civic and educa
tional organizations, including -- Board of Directors, Banking
and Financial Institutions of West Virginia; Vice President,
Charleston. Regional Chamber of Commerce and Development;|jEx
ecutive Committee, National Council of Coal Lessors; Advisory
Board, Buckskin Council, Boy Scouts of America; Board of Trus
tees and Executive Committee, West Virginia Wesleyan College;
Treasurer and member of Executive Committee, West Virginia Coal
Association; Treasurer and member of the Board, Kanaw'ha Coal
Operators Association.
He and his wife, Clara, have two sons -- Thomas R., III,
and Robert C.
oOo
Department of th e T R E A S U R Y
HINGTÛN, Û.C.
Friday,
| | TELEPHONE W0 4 -2Q41
20220
A.M.
February
FOR I M M E D I A T E
Contact:
RELEASE
Second Annual
an d L o c a l
today b y
Treasury
Sharing
1 of
State
in O c t o b e r
ye ar ,
of
January,
than
governments
of
by
trust
not
only
transmitted
Simon
general
fund
report
Simon
the
and
for
more
Local
the
units
than
Treasury's
of
$17
said
of
1972
State
the Congress
Office
of
the
sharing
law,
Congress
he was
sending
by
a
information you
the Treasury
have
Department'
sharing.
retroactive
Act,
and
billion
of
(M O R E )
signed
to January
distribution
State
Office
to
and his
to
Fiscal Assistance
five-year
the
revenue
financial
revenue
and made
of
Watt.
the
Secretary
general
39,000
1975,
operation
a full description
1972
provides
to m o r e
Act was
G r a h a m W.
an annual
also
administration
The
Director
each year,
but
the
S e c r e t a r y W i l l i a m E.
"including
requested
on
in accordance w i t h
which r e q u i r e s
document
Report
Fiscal Assistance
Acting
March
1975
ORS Public Affairs
(202)634-5248
The
Revenue
28,
local
has
1 of
$30.2
paid
to
Sharing."
law
that
billion
government.
been
Revenue
of
into
As
those
of
t-2
Revenue Sharing Annual Report
The program, supported unanimously by policy statements of
all the national Public Interest Groups, is funded through
December 31, 1976,
President Ford has said he will ask the
Congress, early this year, to renew the program basically in its
present form for an additional five and three-quarters years.
In his introduction to the Annual Report, ORS Director
Watt said today "this second annual report'of the Office of
Revenue Sharing encompasses a year in which the still-new general
revenue sharing program passed its mid-point in returning to
States and local governments the $30.2 billion authorized by
Congress when it enacted the State and Local Fiscal Assistance
Act in October 1972.
"As envisioned by the Congress when it created the program,"
Watt'said, "general revenue sharing has become a major component
of the balanced federal approach to strengthening governmental
capabilities to serve the public throughout the nation."
Watt said the Presidents request for renewal of the legislation
this year "would assure State and local governments the predictable
receipt of shared revenues essential to effective planning of
finances, service programs and public improvements in every
community."
General revenue sharing funds are distributed on a formula
basis, and amounts received by local government jurisdictions
are determined by their population, per capita income, and local
tax effort.
(MORE)
t-3 Revenue Sharing Annual Report
Recipient governments of general revenue sharing funds are
all states, counties, cities, towns, townships, Indian tribes,
and Alaskan native villages.
The Annual Report issued today contains detailed discussions
and statistical analyses of the revenue sharing process, the status
of the trust fund, the progress of the program, and its compliance
activities.
Some highlights of the report:
—
As of September, 1974, more than 80 percent of the State
and local governments said that general revenue sharing funds had
enabled them either to reduce taxes, hold tax rates stable or
avoid new taxes.
—
The 1974 Disaster Relief Act amended the revenue sharing
law, providing that a recipient government which is within a major
disaster area, as designated by the President, may continue to have
* f ’• • $ ’ !. ,
‘
#
5*' " ,J
>¿1
i-2**
i ’V
O
'
j
' i *j
its predisaster data factors used for purposes of the GRS allocation
process if the data change is a result of the disaster.
The amend
ment, made retroactive to April 1, 1974, already will effect 6,000
recipient governments which, for five years from the disaster
may use pre-disaster data for revenue sharing allocations.
—
During 1974, the Office of Revenue Sharing responded to
6,000 written questions, 14,000 telephone inquiries, and 47*000
requests for printed information.
More than 700 Congressional
inquiries were answered, 300 written legal opinions were issued,
and ORS officials participated in 400 meetings and seminars.
(MORE)
t-4
Revenue
—
The
Office
and
operates
the
total
—
Sharing Annual
at
into
program
avoids
nearly
call
and
for
—
57
units
and
corrective
of
than
1 3 /1 00 's of
1974,
the
had,
as
agreements
audit
local
agencies
showed
1974
are
Two
"Getting
describes
233
to
efforts
audit
of
with
1 0 0 people,
1 p e r c e n t of
the
end
of
1974,
38
States.
33
State
governments
(some
audit
agreements
in
government
Office
of
State
than
Revenue
1,600
apparent
funds,
Sharing
reports
instances
and discrepancy
analysis
others
gives
of
reviewed more
rights.
—
of
less
some
This
local,
notices
of
of
staff made
audits.
These
non-compliance
were
issued
in
requiring
action.
An
and
civil
cost
Sharing
audit
audit
jurisdictions,
1973
Revenue
duplication
15,000
examinations
the
of
cooperative
During
—
employs
both).
audits
146
Sharing
distributed.
State
some
Revenue
administrative
Office
entered
and
an
funds
The
of
Report
shows
Of
popular
the
special
involvement
complaints
187
those
still
Involved
of
—
system
related
294
received
to
cases,
finance
108
have
during
and
calendar
107
been
years
related
resolved
to
and
"active."
publications
Your
and
attention
Guide
those
in d e c i s i o n - m a k i n g
produced
to General
process
to
were
of
general
aspects
about
(MOR E)
the
during
Revenue
Sharing,"
revenue
which
uses
1974.
sharing
encourage
of
GRS
and
public
funds.
t-5
Revenue
Sharing
"General
which f o c u s e s
Annual
Revenue
Report
Sharing
citizen and
government
non-discrimination provisions
corrective
Both
and t o
of
the
the
officials'
is
a publication
attention
law and explains
new publications were
to m a n y
civil
to Me mb er s
individuals
being t r a n s l a t e d
Spring o f
of
Rights,"
how
on
the
to
get
action.
government,
the m e d i a ,
and Çivil
of
rights
Congress,
on request.
into
and
Spanish
to
sent
civic
to
every
interest
state
and
1975.
###
additional
groups,
federal
Both publications
for
recipient
are
to
agencies,
currently
distribution
in
the
Department o f the T R E A S U R Y
kHINGTGN, O.C. 20220
T ELEP H O N E W04-2041
ADDRESS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE COMMONWEALTH CLUB
SAN FRANCISCO, CALIFORNIA, FRIDAY, FEBRUARY 28, 1975
12:40 P.M., PST
President Krotz distinguished members of the
Commonwealth Club, and Ladies and Gentlemen:
.It is good to be in San Francisco again, especially
among so many old friends. I am also deeply honored to
be at this podium, for every speaker who comes here knows
he is addressing one of the finest audiences in the
country.
For several months, one depressing economic statistic
after another has been pouring out of Washington, subj ecting
all of us to an exquisite form of Chinese water torture.
Back East, people are reminded of the fellow who.was told
by his doctor that he had to stop drinking or he would
become deaf* The fellow refused to follow the doctor’s
advice. Asked why, he explained: "I like what I ’ve been
drinking so much better than what I've been hearing."
Times haven’t been easy for any of us. The day after
I took this job, a close friend of mine put it nicely,,
"Bill," he said, "you’ve just become the purser on the
Titanic."
I
don’t seriously believe that, of course, Those who
take such perverse delight in proclaiming the end of the
American Dream are dead wrong, just as the touters of gloom
and doom have always been wrong in the past. We should never
underestimate either our economic system or ourselves..
Certainly, our economy has its weaknesses and certainly the
present rates of unemployment and inflation are unacceptably
high, but our economy remains the strongest and most
powerful in the world and as a people, we still have the
wisdom and the will to regain control of our own destiny.
WS-240
2
The major question before us is whether we can wake
up to the malignant forces that are subtly, quietly, but
very busily eating away at the foundations of our society.
Once we know them for what they are, I am absolutely
certain that the people of this country will rise up in
rebellion and sweep these alien forces from our midst.
Today, with your indulgence, I would like to step
back from our immediate concerns for a few moments and
address three of the long-term trends which I find most
disturbing and potentially the most destructive within
our 6conomy. What T have to say is not popular or welcome
in many quarters, but I feel that these are serious and
fundamental problems that must be addressed.
Massive Growth of Government
The first of these trends has been the massive growth
of government in this country, a growth that has sharply
accelerated since the mid-1960’s.
It took 186 years for the Federal budget to reach $100
billion, a line it crossed in 1962. Only nine more years
were required to break the $200 billion figure, and only
four more years to crack the $300 billion barrier -- a
record we are setting this year.
Government at
six members of our
single employer in
the auto industry,
goods combined.
all levels now employs one out of every
work force. It has become the biggest
the country, with more personnel than
the steel industry, and all other durable
Before the Great Depression, government took about 12
percent of our total national production. Today it soaks up
about one-third of the GNP, and if recent trends prevail,
it will consume some 60 percent of our total national output
by the year 2000. When any government taxes away more than
half of what a people produce, robbing them of their economic
freedoms, can there be any doubt that the loss of their
social and personal freedoms will follow close behind?
One of Treasury Department’s responsibilities is to
’’manage” the Federal debt and to borrow to meet the deficits
that the Federal Government continues to accumulate at a
rapid clip. We have watched with horror as the deficits
anticipated for fiscal years 1975 and 1976 climb toward
the $100 billion mark. During the next several months, we
will have to borrow a billion dollars a week to pay those
bills.
Those who tend to dismiss this problem by
making a simplistic comparison between the
growing size of the debt and the growing size of the
economy are ignoring the financial implications. Combining
Federal with State and local borrowing, we now expect that
during fiscal year 1976, government will borrow some 80
percent of the net new funds raised in our private capital
markets. The capital markets have always been the
_
-,
centerpiece of our free enterprise system, but in coming
months only 20 percent of their new funds will be available
for private industry.
We should be fully aware of the dangers that could arise
in our financial markets from these budget deficits --and
especially if Congressional action increases these deficits
beyond the levels projected. Reasonable financing_of
such deficits would be possible only if the recession i s r
much deeper than we expect. Otherwise, we could either
have vicious competition between the Government and private
borrowers for capital funds, or the Federal Reserve would
have to supply funds without regard to the inflationary
consequences. In any event, despite the best intentions
of the Government, a larger-than-expected budget would
threaten economic recovery by crowding out medium to
lower-rated business borrowers, many of whom already have
severe financial problems, and by elbowing aside mortgage
borrowers as well, thus aborting recovery in the housing industry
We have not only been spending too much money in Washington,
but we have also been creating too much of it. Froiii 1955
through 1965, the money supply grew at an average rate of
2-1/2 percent a year, and we enjoyed a period of reasonable
price stability. Since 1965, however, the rate of growth
has more than doubled to 6 percent a year, far mòre than
the economy could reasonably absorb. It is no accident that
inflation has become a chronic problem/
//
In the past several weeks, there has been considerable
debate whether the antirecessionary policies of the Federal
Reserve should be more stimulative. While I have no
intention of infringing on the independence of the Federal
Resérve, I must say that I respect the view of Dr. Burns
that monetary policy must and will contribute to economic
recovery but excessive monetary stimulation today would only
guarantee far more inflation tomorrow, as it has so oftep in
the past.
The fiscal and monetary problems of the government_are
familiar ground for most of us. What may be less familiar
has been the enormous proliferation of Federal regulations
in recent years. In a subtle but insidious way, these
regulations have spread throughout our society so that today
they encumber almost every phase of business and industrial
life and cost consumers untold billions of dollars.
4
The independent regulatory agencies of the government
exercise control over all forms of interstate transportation,
power generation, the securities market, and electronic
communications -- industries that account for more than 10
percent of everything made and sold in the United States.
Through various environmental and safety laws, subsidy
programs, contracting authorities, and other devices,
Federal regulators have also heavily supplanted the decisions
of private citizens in the maritime, auto, defense, drug,
trade, and agricultural industries.
Economist Murray Weidenbaum, in an enlightening
study published early this week, points out that the design
and manufacture of the 1973 automobile was subject to 44
different government standards and regulations involving
about 780 different tests that had to be met. As the
chairman of General Motors once observed, "Government today
has something to say about how we design our products, how
we build them, how we test them, how we advertise them, how
we sell them, how we warrant them, how we repair them, the
compensation we pay our employees, and even the prices we
may charge our customers."
Many governmental regulations serve worthy purposes and
must be continued, but there are an increasing number that
are in urgent need of review. For example:
As you probably know, it is almost twice as far from
San Francisco to Los Angeles than from New York to Washington,
and yet the air fare on the California trip is almost a
third cheaper. Why? Because airlines operating intrastate
in California are not controlled by Federal regulators.
Reliable studies show that the Government now
requires the railroads to maintain as many as 50,000 miles of
track that may no longer be needed, creating additional
financial burdens on an industry already in peril.
-- In the field of energy, the Federal Power Commission,
despite repeated warnings from experts, has been required
for more than two decades to keep the wellhead price of
natural gas at an abnormally low level in order to hold down
prices for consumers. But this has reduced the incentives
for the development of new domestic supplies, so that today
there is much less natural gas than we need. Government
regulation has, in effect, created a national shortage.
5
Or take another example: Nuclear power. This
country was a pioneer in the development of nuclear power.
Yet today it takes 11 years to build a nuclear power plant
in the United States, and only 4 - 4-1/2 years in Europe
and Japan. Why? Because of government regulation.
Private citizens are not the only people, of
course, who have reason to complain about the encroachment
of Federal regulations. Public officials at the State and
local level find themselves equally enmeshed in a thick
web of rules and regulations issued from Washington.
After only two months in office, Governor Richard Lamm
commented last week that he felt less like the Chief
Executive of a semi-sovereign state than "a federal regional
administrator for the Territory of Colorado.."
In short, we are well on the way to creating:
A government tax system that strips us pf our
wages and profits;
--' A government spending system that controls our
future; and
A government regulatory system that strangles
our free enterprise.
;•
<
Columnist George Will summed it up well. We are
"meandering mindlessly toward a serfdom that is no less
real for being bland," he said. The growing power of the/
central government "affects society the way hemlock affected
Socrates; numbing begins in the extremities and moves ;
inexorably until it extinguishes the spark of life."
Unless warned, "A society, unlike Socrates, does not know
it is dying until it is too weak to care.”
Weakening of Our Economic Foundations
A second trend that I want to address today has been
the gradual weakening of our free enterprise system.
It is a simple but compelling fact.of life that increases
in productive performance are required over time to create
new jobs and support a higher standard of living. Yet, as
a nation we are rapiclly expanding public payments to
individuals but neglecting to provide adequate incentives
for new investment. In the last 10 years, in real terms,
government transfer payments to people have more than
doubled, while economic output has increased by only a
third, and private investment expenditures -- upon which
the economic future of all of us inevitably depends -- have
risen by only a bit more than a quarter.
()
The record of capital investment in the United States
i.n recent years lias been the lowest of any major industrialized
country in the bree World. Our figures show that from 1960
through the early 1970’s, private investment in the United
States averaged about 18 percent a year of our (INI’. By
comparison, investments averaged 33 percent a year of the
(■NP in Japan, and 20 percent in (Icrmany- and franco.
High rates ol capital investment do not guarantee low
rates ol inllation, as c;in be seen from the .Japanese
experience. But they do have a close correlation with the
growth rate of productivity and therefore with the basic
strength of the economy. During the period 1 have just
mentioned, the average growth in productivity was almost 11
percent a year in Japan, 6 percent a year in brancc and
(icrmany, and in the United States -- the leader of the Free
World -- only 3 percent a year.
Why are we performing so poorly? Some of our major
trading partners, of course, have been in the process of
rebuilding from the war and arc working from a smaller
economic base. A more fundamental problem, 1 would suggest,
is that we have had policies which promote consumption and
federal spending at the expense of savings and investment.
Another illustration has been the serious deterioration in
corporate profits since the mid-1960's. The American people
believe that most corporations are raking in money by the
barrelful and, indeed, reported profits are much higher than
10 years ago. But those high profits are an optical illusion
created by the interplay of outmoded accounting practices
and inflation. When those effects are removed, figures show
that after-tax profits have dropped by 50 percent since 1965.
It is not unfair to say that we have been in a profits
depression in the United States. Consider the level of
undistributed profits. Between 1965 and 1973, undistributed
profits fell nearly 85 percent to $3 billion, even though
the economy grew by over 33 percent. And for 1974, our
latest estimate is that the figure for undistributed profits
was a minus $16 billion. Since profits are an important
source of investment funds and also enable companies to attract
even more money, it is clear that American business too often
lacks the funds to invest in new plants and equipment and
thus to create new jobs. The stock market, of course,
recognizes the depressed state of corporate profits and will
not support the companies most adversely affected. As a
result, those companies are effectively barred from obtaining
new investment funds in the equity markets. All of these
are patterns that we simply must reverse.
7
Progressively Higher Inflation
Still a third trend that is highly damaging has been
the progressive acceleration in the rate of inflation over
the past decade. From 1960 through 1964, the rate of
inflation was low and steady, averaging 1.2 percent a year..
Then for the next three years, as we stepped up our efforts
in Vietnam and also sharply accelerated the drive toward
a "Great Society," the rate of inflation doubled to 2.5
percent a year. Then it doubled again to over 5 percent a y
year from 1968 through 1970. Wage and price controls helped
to keep it below 5 percent in the next two years, but as
history amply demonstrates, controls never end inflation
they only postpone it. In 1973, prices shot up over 6
percent and last year they skyrocketed by over 12 percent
the highest figure in our peacetime history.
Nor should we deceive ourselves about the future.
Inflation may be receding today, but unless we take proper
precautions, it could easily level off on a plateau of
7-8 percent -- an easy launching pad for truly staggering
inflation later on.
A half century ago, John Maynard Keynes warned us
about the dangers of such inflation. "There is no subtler*
no surer means of overturning the existing basis of society
than to debauch the currency. The process engages all
the hidden forces of economic law on the side of destruction,
and does it in a manner which not one man in a million is
able to diagnose." Unfortunately, that is the one part of
Keynes’ teachings that we should have remembered but have
most conveniently forgotten.
How These Trends Converge
'• .
Each of these three trends --the growth of government,
the weakening of the free enterprise system, and progressively
higher rates of inflation -- are disturbing enough by
themselves. What is particularly critical, though, is how
they feed upon each other. I would suggest to you that In
the last decade they have joined together in an extremely
powerful combination and now they lie at the root of most
of our economic distress.
The huge Federal deficits of the 19 6 0's arid 1970's ,A for
instance, have added enormously to aggregate demand for goods
and services, and have thus been directly responsible for
upward pressures on the price level. Heavy borrowing by the
Federal sector has also been an important contributing factor
to the persistent rise in interest rates and to the strains
that have developed in money and capital markets. Worse still,
8
continuation of budget deficits has tended to undermine
the confidence of the public in the capacity of our
government to deal with inflation. In short, when the
Federal budget runs a deficit year after year, especially
during periods of high economic activity such as those
we have enjoyed over the past decade, it becomes a major
source of economic and financial instability.
Monetary policy has also been overly stimulative in
the past decade and must be considered as another culprit
of today’s inflation. In part, that policy has represented
an effort by the Federal Reserve to accommodate the growing
financial demands of the Federal Government. But, in turn,
the overly rapid growth of the money supply has also
contributed significantly to the rate of inflation.
Moreover, the regulatory practices of the Federal
Government have also been highly inflationary. The most
obvious example is in the auto industry, where government
studies show that costs mandated by Federal rules added $320
to the price of a 1974 car. Less obvious examples are in
other areas such as transportation, where government
regulators require many services that cannot be justified
economically. Professor Tom Moore at the Hoover Institute
estimates that just in trucking and surface transportation
alone, government regulations cost consumers an extra $10
billion a year.
v-w
Government controls have also led to shortages in
various sectors of the economy, which have in turn led to
higher prices. The acreage programs in agriculture are a
good example; fortunately, we have enacted legislation
in recent years which is helping us to restore free enterprise
on the farm. I wish we had made the same progress in
deregulating the price of new natural gas.- It is clear to
me that consumers who are now forced to buy higher-priced
foreign oil because they cannot obtain natural gas would
realize considerable savings if the price of new natural gas
were deregulated.
No one has ever been able to calculate accurately how
much the total package of Federal rules and regulations is
costing consumers, but it is certain that the figure is in
the tens of billions of dollars. To me it is also apparent
that the Federal Government in all of its fiscal, monetary,
and regulatory practices has been the underlying cause of the
chronic inflation that we have experienced for the past decade.
9
That inflation was keenly aggravated by the quadrupling
of oil prices last year, the explosion in food prices,
and by other special factors, but as those special factors
subside, we face a serious threat that continued
governmental growth will perpetuate a strong inflationary
momentum within the economy.
The discouraging trends in corporate profits and
investments are closely tied to these same phenomena.
Our government, for example, now places a heavier tax
burden on corporations than do most other major industrialized
nations, many of whom have integrated their corporate tax
systems with their taxes on individuals. This burden, of
course, effectively reduces new investments.‘ Moreover, an
increasing percentage of capital investments are now being
devoted to items required by the Federal Government.
It has been estimated that in 1973 more than 10 percent of
our capital investments were spent on pollution and safety
outlays. These are desirable goals, but let us not ignore
that such expenditures cause no measurable increase in a
company’s output, and this contributes to the miserable
productivity trends I described earlier. The fact that many
capital investments are being channeled into nonproductive
uses mandated by the government and the fact that the overall
rates of investment are low also help to explain why the
economy in 1973 lacked needed productive capacity. As we
return to full production in future years, this lack of
capacity will become a very serious problem.
Through the interplay of various forces, then, especially
those emanating from misguided government policies, we have
encouraged excessive demands on the economy and discouraged
production.
And the resulting inflation, I would submit, has not
only cut deeply into the welfare of many families but it has
also had a consequence that many people have not yet
recognized: It tipped us into our current recession.
As prices soared upward in 1973 and 1974, they drove up
interest rates and dried up funds in the mortgage market.
We all know what happened then: The housing industry collapsed
As prices shot upwards, they also dealt a massive blow
to consumer confidence. With real incomes declining,
consumers could no longer afford many items. The result was
the biggest drop in consumer purchasing since World War II.
Housing and consumer spending are still the two weakest
sectors of our economy, driven down by inflation. Until we
recognize how inflation has thus been a fundamental cause
of the recession, we are very likely to seek the wrong
solutions for the future.
10
Policies for the Future
What, then, is to be done?
Clearly, one part of the answer must be directed toward
solving the energy problem, a topic that I have not tried
to address here today. There can be no doubt that the
United States must end its excessive reliance on foreign
energy supplies that are both overpriced and insecure, and
the sooner we act, the better.
Another part of the answer must be addressed to
problems of recession and the serious human suffering
which it causes. We remain confident that the recession
will bottom out this year, and that by the end of the year
we should be definitely on the road to recovery.
To attain lasting prosperity, however, we must summon
all of the wisdom and strength at our command to attack the
more enduring and fundamental forces that are gripping our
economy:
First, we must curb the momentous growth of
Government in this country. The Government
can and must play a positive role in our
society. No one can be so empty-headed as
to denounce all the powers of government.
But the growth of government that has occurred
in the past decade exceeds all bounds of
sensibility and is alien to our whole tradition
of freedom and reward for personal endeavor.
Second, we must maintain and strengthen the
foundations of our free enterprise system by
shifting the emphasis of our domestic policies
away from consumption and government spending
and toward greater savings, investment and
capital formation. The capital needs of our
society over the next 10 years will be enormous,
easily surpassing anything we have known before.
We will ultimately be judged, I believe, not on
how we handle our short-run problems such as
recession, but on our ability to deal with the
more long-range problems of resource allocation
and capital formation. History is littered with
the wreckage of nations that have failed to
meet this challenge.
11
Finally, we must always keep our sights on the
single most destructive force within our economy -inflation. In warming up the economy now, we
must not succumb to the temptation to overheat
it again. And when we restore our prosperity,
as we will, we must not serifice it again on the
altar of Big Government.
We can no longer
afford the practice of living off our inheritance
while mortgaging our future.
Laddies and Gentlemen, if I could leave with you one
thought, it would be this:
America is still incrediby strong, powered by the
largest and most dynamic marketplace in the world. We have
the resources, and we know the way to rebuild our economy.
The central question is whether we will wake up to the dangers
we have created and rescue ourselves from self-destruction.
I submit that each of us in this room can help to lead
this country out of the quagmire. And let me direct my
remarks particularly to those of you who are leaders of
the business community. You and I share common backgrounds,
and today we also share a common sorrow. One of my saddest
experiences in public life is to see businessmen trooping
into Washington day after day, hat-in-hand, seeking shelter
from the storm under a government umbrella. Tariffs,
subsidies, quotas, handouts, bail-outs -- I've seen them all
and none of them are worth their ultimate cost. They all
lead to sacrificing our freedoms for a falsely perceived
security.
When will we learn our lesson? The promise of security
that the Government holds out to each of us is an empty,
hollow promise - - a false god. History shows us time and
again that when we surrender to the Government the power to
run our businesses or run our lives, it runs them in only one
direction -- right into the ground.
It cannot be said often enough that a centralized economy
in America is the surest means we have of killing the goose
that lays the golden egg. In the United States today we
already have more government than we need, more government
than most people want, and certainly more government than we
are willing to pay for.
12
An epitaph written for ancient Athens and attributed
to the pen of Edward Gibbon is relevant for us today.
"In the end," he wrote, "more than they wanted freedom,
they wanted security. They wanted a comfortable life and
they lost it all -- security, comfort, and freedom.
When the Athenians finally wanted not to give to society
but for society to give to them, when the freedom they
wished for most was freedom from responsibility, then
Athens ceased to be free."
Whether the same will one day be said of America is
the basic decision now before us.
Thank you.
0O0
S T A T E M E N T O F THE H O N O R A B L E WILLIAM E. SIMON
S E C R E T A R Y O F THE T R E A S U R Y
B E F O R E THE HOUSE W A Y S A N D M E A N S C O M M I T T E E
WASHINGTON, D. C., M O N D A Y , M A R C H 3, 1975
I a m pleased to be with you this morning to consider the
President's energy proposals.
When I was here on January 22, I presented a comprehensive
and detailed statement dealing with the President's energy proposals
as well as the need for stimulating the economy and controlling in
flation. On the assumption that the earlier statement can be included
in the record, I will confine m y remarks this morning to some
summary observations.
What Sacrifices are W e Willing to Make ?
There appears to be near universal agreement on the need to
conserve energy and, in particular, to reduce our imports of petro
leum. As a nation we have become addicted to cheap oil* and to a
level of oil consumption unknown elsewhere in the world. As a
consequence we are at the mercy of a small cartel, which has the
power to bring about international political and economic spasms
of the kind we have recently experienced. W e must extricate our
selves from this situation.
In the process of facing up to the problem, there has been a
growing awareness that there will be some withdrawal pains. One
result has been the emergence of a "manana" cult that says, "Yes,
we must solve the problem, but 'manana'--not today. " That is, in
m y view, a dangerous philosophy. The present level of petroleum
imports is a direct threat to our national security. I say that for
these reasons:
1. Petroleum is a unique commodity, entering into almost
every facet of our economy, either as the fuel for trans
portation of goods and people or as the raw material
for a myriad of products like fertilizer and petrochem
icals. It is hardly an exaggeration to say that petroleum
has become the lifeblood of our economy.
WS-241
-
2
-
2.
B e c a u s e o u r d e m a n d s f o r e n e r g y h a v e b e e n o u ts tr ip p in g
th e g ro w th in d o m e s tic p r o d u c tio n , w e h a v e b e c o m e
i n c r e a s i n g l y r e l i a n t u p o n f o r e ig n s o u r c e s of o il. We a r e
no w im p o r tin g a b o u t 40% of o u r to ta l p e tr o le u m c o n s u m p
tio n ; b y 1985, if p r e s e n t t r e n d s c o n tin u e , w e w o u ld b e
d e p e n d e n t on f o r e ig n n a tio n s f o r m o r e th a n h a lf of th e
o il we c o n s u m e .
3.
O n ly a s m a l l p o r tio n of th e s e i m p o r t s c a n b e d e e m e d to
b e s e c u r e f r o m i n t e r r u p t i o n in th e e v e n t of a p o li t i c a l
o r m i l i t a r y c r i s i s , an d r e c e n t h i s t o r y s tr o n g ly in d ic a te s
th a t s u c h a c r i s i s i s b y n o m e a n s a r e m o te p o s s i b i l i t y
in a n a r e a w h e re tw o - t h i r d s of th e w o r ld ’s know n p e t r o
le u m r e s e r v e s a r e lo c a te d .
4.
M o s t of th e c o u n tr ie s w h ic h e x p o r t th e o il th a t w e i m p o r t
a r e o r g a n iz e d in to a c a r t e l w h ic h h a s m a n a g e d to r a i s e
i n t e r n a t i o n a l o il p r i c e s to a le v e l f o u r t i m e s a b o v e th a t
w h ic h p r e v a i l e d p r i o r to th e 1 9 7 3 -7 4 e m b a r g o .
5.
T h e o u tflo w of U. S. fu n d s to th o s e o i l - r i c h c o u n tr ie s
g r e a t l y e n h a n c e s t h e i r e c o n o m ic an d p o l i t i c a l p o w e r a n d
w e a k e n s o u r ow n a n d th a t o f o u r a l l i e s .
In 1970, o u r
t o t a l b i l l f o r f o r e ig n o il w a s $ 2 . 7 b illio n .
In 1974, th a t
f ig u r e s h o t u p to a p p r o x im a te ly $24 b illio n , a n d u n le s s
w e a c t to r e s t r i c t i m p o r t s , th e b i l l w ill r i s e w ith in a
s h o r t t i m e to o v e r $3 0 b illio n a y e a r .
I b e lie v e th e A m e r ic a n p u b lic u n d e r s ta n d s th is t h r e a t to o u r
s e c u r i t y a n d th e n e e d to a c t d e c is iv e ly .
W e a r e o fte n a s s u r e d b ^
p u b lic s p o k e s m e n th a t th e A m e r ic a n p e o p le a r e w illin g to " s a c r i f i c e
a n d a r e o n ly w a itin g f o r l e a d e r s h i p . I b e lie v e th a t, to o .
W e a r e th e w e a lth i e s t n a tio n th e w o rld h a s e v e r k n o w n .
O ur
c i t i z e n s a r e th e m o s t a f f lu e n t.
In th e l a s t 15 y e a r s , o u r p e r c a p ita
in c o m e h a s r i s e n b y 50%.
W e p a y l e s s f o r o il an d o il p r o d u c ts
th a n a l m o s t a n y o th e r m a j o r i n d u s t r i a l n a tio n .
A ro u n d th e w o rld ,
g a s o lin e s e l l s f o r tw o to t h r e e tim e s a s m u c h a s h e r e .
If th is
c o u n tr y c a n 't f a c e u p to th e p r o b le m , w h ic h c a n ?
T he P r e s i d e n t h a s p r o p o s e d a p r o g r a m w h ic h w ill, b y th e e n d of
th e f i r s t y e a r , r e d u c e o u r c o n s u m p tio n o f o il b y a b o u t 5%. T h a t w ill
b e a c c o m p lis h e d p r i n c i p a l l y b y p r i c e i n c r e a s e s of r o u g h ly 10£ a
g a llo n . T h a t is a b o u t th e s a m e p r i c e i n c r e a s e f o r o il th a t w e h a d l a s t
- 3 y e a r . O il w a s o n ly o n e of m a n y i n c r e a s e s l a s t y e a r , a n d w e liv e d
th ro u g h th e m a ll. T h e d if f e r e n c e t h is tim e i s t h a t w e p la n to g iv e
it a ll b a c k .
W e: s im p ly m u s t k e e p a s e n s e o f p e r s p e c t i v e .
W e a r e ta lk in g
a b o u t 10£ a g a llo n , a n d m o s t p e o p le w ill g e t i t a l l b a c k .
F o r th e
m a j o r i t y , i t w ill n o t e v e n b e a n in c o n v e n ie n c e , l e t a lo n e a s a c r i f i c e .
F o r a g r e a t m a n y — p a r t i c u l a r l y in lo w e r in c o m e c l a s s e s , t h e r e w ill
b e a n e t b e n e f it.
It w ill b e a t r a g e d y if f o r f e a r of p u b lic r e a c t i o n to 1Q£ a g a l l o n - w h ic h w ill b e g iv e n b a c k — we f a i l to ta k e t h e s e c r i t i c a l m e a s u r e s .
A nd i t w ill b e e q u a lly t r a g i c if w e i n s i s t on b u ild in g in to th e s o lu tio n
a s e r i e s of b u r e a u c r a t i c c h a n g e s w h ic h a r e w h o lly d is p r o p o r ti o n a te
to th e s iz e of th e p r o b le m an d w h ic h w ill p e r m a n e n tl y d is a b le th e
e f f ic ie n t o p e r a tio n o f o u r e c o n o m ic s y s t e m .
T he P r o p o s a l s .
T he b a s ic p r o p o s a l i s to r a i s e th e p r i c e o f o il r e l a t i v e to o th e r
c o m m o d itie s . T h a t w o u ld b e a c c o m p lis h e d b y a n i m p o r t fe e on
im p o r te d o il a n d b y th e d e c o n tr o l o f th a t p o r ti o n of o u r d o m e s tic
p r o d u c tio n w h ic h i s a r t i f i c i a l l y h e ld to a p r i c e l e s s th a n h a lf th e
p r i c e p a id b y o th e r n a tio n s .
T o g e th e r th o s e a c tio n s w ill r a i s e th e
a v e r a g e ' p r i c e of o il b y a b o u t $4 a b a r r e l , w h ic h t r a n s l a t e s in to 1 0£
a g a llo n . , G e o g r a p h ic a l d i s c r i m i n a t i o n s w ill b e e lim in a te d , a s w e
w ill no lo n g e r h a v e r e g io n s w ith d if f e r in g m ix e s o f a r t i f i c i a l l y c h e a p
o il. C o n c u r r e n tly , we w o u ld d e a l w ith n a t u r a l g a s .
A n e x c is e ta x
w ould b e le v ie d on a l l n a t u r a l g a s , to k e e p i t s p r i c e in lin e w ith th e
i n c r e a s e d p r i c e of o il an d e n d th e c a r e l e s s u s e o f t h i s f u e l b y th o s e
fo r w hom it is ch eap a t p r e s e n t p r ic e s .
A n d n e w n a t u r a l g a s w o u ld
b e d e r e g u la te d , to b e g in to u n d o th e a r t i f i c i a l an d jo b d e s t r u c t i v e
s h o r ta g e w e h a v e c r e a t e d w ith m o r e th a n 20 y e a r s of r e g u la tio n .
A t th e s a m e t i m e t h e s e p r i c e i n c r e a s e s a r e o c c u r r i n g , th e
g o v e r n m e n t w ill c o lle c t a d d itio n a l ta x e s in e q u a l a g g r e g a te a m o u n t
a n d r e t u r n th e m t o c o n s u m e r s th r o u g h th e ta x s y s t e m .
A p p r o x i
m a te ly $30 b illio n in e x t r a p r i c e s w ill b e p a id .
A n d approximately
$30 b illio n w ill b e r e t u r n e d to c o n s u m e r s - - $ 2 5 b illio n to p r i v a t e
p u r c h a s e r s , $2 b illio n to s t a t e a n d lo c a l g o v e r n m e n ts an d $3 b illio n
to th e f e d e r a l g o v e r n m e n t.
T h e fo llo w in g c h a r t * s h o w s
r e t u r n e d to c o n s u m e r s .
how t h e s e
a d d itio n a l p r i c e s
a re
President’s Energy and Tax Package
Pay $30 Billion more for
Oil and Gas (Decontrol,
Fees, Excises)
Receive $30 Billion more
for Oil and Gas,
And
Pay $30 Billion
More Taxes on Oil
and Gas
Federal Government
Collects $30 Billion More
Taxes on Oil and Gas,
And
Returns $30 Billion
to Economy (Income
Tax Cuts, etc.)
Receive $30 Billion
More from Income Tax
Cuts, Revenue Sharing,
etc.
Individuals
$ 19 Billion
Theré is not much sacrifice in such a program. Some individuals
won’t get back quite as much as they paid. But, in general, lower
income persons will get more back than the extra they spend. Most
will come out ahead. It is not possible for everyone to come out
ahead, but the only ones who will not come out at least even are
those who are exceptionally high energy consumers or who are in
higher income brackets.
The proposals would eliminate discomfort for the great majority
and keep the pain at the lowest possible level for the remainder.
Will It Work?
It is a fact, long known to economists, that "a rise in the price
reduces lie use"; that is if prices of a product are increased relative
to other commodities, the consumption of that product will be less
than it otherwise would be. And that is true even if the incomes
of the consumers rise at the same time. Some laymen are puzzled
by the proposition that a price increase can cause consumption, to
falHif Consumers are concurrently returned an amount of money
equal roughly to the price increases they paid.
But think about it this way. Suppose you were spending $50 a
year on apples and the price of apples were to double, while at the
same time- your take home pay were increased an additional $50 a
year. Would you still buy the same amount of apples? Or would
you perhaps í at least to some extent, substitute pears and bananas
for the apples you previously bought?
The evidence is incontrovertible that a relative change in price
will cause a relative change in consumption. The degree to which
that happens Is referred to by economists as the "elasticity” of
demand, and the experience of the last 18 months provides dramatic
proof that price greatly affects demand for oil and oil products.
You can see that from the chart which follows:
Comparisons of Total Product Demand
The ch a rt show s th at th e 'c o n s u m p tio n o f p e tro le u m h a s g re a t
s e a s o n a l v a r ia tio n , but has in c r e a s e d s te a d ily fo r som e y e a r s .
H o w e v e r, the m a jo r p r ic e in c r e a s e s w hich o c c u r r e d la s t y e a r help ed
a r r e s t that upw ard c lim b and ca u se d co n su m p tion to be s u b s ta n tia lly
le s s than it would o th e rw ise have b e e n .
T h e r e w as so m e ab so lu te
drop in co n su m p tio n , and a v e r y s u b s ta n tia l r e la t iv e d ro p fr o m what
co n su m p tion would o th e rw ise have b e e n ,
,,
Jn the lo n g e r r u n , the re d u c tio n i n e n e r g y u se fr o m the p r ic e r is e s
w hich have a lr e a d y o c c u r r e d w ill be, s t ill g r e a t e r , .g s th e re a r e m an y
ad ap tation s w hich ta x p a y e r s can and w ill m a k e .o ver tim e . B u y in g
b e tte r m ile a g e c a r s , in s u la tin g „h o m e s and sw itc h in g fa c to r ie s fr o m
o il to c o a l a re ju s t a few e x a m p le s . S im ila r r e s u l t s , nave, o c c u r r e d
in o th er c o u n tr ie s . T h u s , the W a ll S tr e e t Jo u r n a l fo r Ja n u a r y 29
r e p o r ts :
'
y
|
?
" B r it a in , W est G e r m a n y and a m a jo r ity of c o u n trie s
depend upon , r is in g p r ic e s to e n to u r a g e cu ts in e n e rg y ,
' u s é ..I T he P e tr o le u m E c o n o m is t, an. o il w e ek ly p u b lish ed
. . in L o n d o n , e s tim a te s that in the f i r s t h a lf of la s t y e a r ,
fu e l co n su m p tio n dropped fr o m a y e a r e a r lie r b y 14% •.
. in \Vest G e r m a n y , b y 9% in B r it a in ,. b y 6%:in F r a n c e .. , f ....
U
^ S e v e r a l e c o n o m e tr ic s tu d ie s have b een m a d e , in s id e the g o v e r n
m ent and o u t, to m e a s u r e the e la s t ic it ie s of dem and fo r e n e rg y
p r o d u c ts . The e x p e r ie n c e of t h e la s t y e a r p ro v id ed a unique la b o r a to r y
to te s t the r e lia b ilit y o f th e s e m e a s u r e s of e la s t ic it y , and as a r e s u lt
w;e-have }co n fid e n ce in our e s t im a t e s - - k e e p in g in m in d that ¡they, a r e
s t ill on ly e s tim a tp s . !,..
;; y .
,-ir,
,,
Do we know e x a c tly how’ m u ch 100 a g a llo n w ill re d u ce c o n su m p
tio n ? The an sw e r is n o .
Do we need to, know e x a c tly how m u ch
co n su m p tion w ill be r e d u c e d ? , T h e ",a n sw e r again is n o .
The
im p o rta n t th in g is th at we m o ve in the .rig h t d ir e c tio n and that our
e s tim a te s be .r o u g h ly c o r r e c t o v e r ,a p e rio d of, s e v e r a l y e a r s . . If
it T u rn s put th at we a r e too high o r , too lo w , a d ju s tm e n ts can be m ad e
in the im p o rt fe e s and. e x c is e s . ^
:
, m P ,.. S S S
..3
A r e we r e a s o n a b ly s u re that we. a r e in the. b a llp a r k ? . The an sw er
to that is y e s .
W e b e lie v e that the e c o n o m e tr ic d a ta , updated by.
the e x p e r ie n c e of la s t y e a r , p ro v id e s a r e a s o n a b ly r e lia b le b a s is fo r
e s tim a te s .
*Mk
Q u o ta s as an A lt e r n a t iv e .
T h e re has been c o n s id e r a b le d is c u s s io n about
g r a d u a lly m o re r e s t r ic t iv e quotas r a th e r than p r ic e
im p o rt r e d u c tio n s .
P ro p o n en ts of quotas s e e m
is c r it ic a l to know p r e c is e ly how m u ch im p o r ts
and a rg u e that quotas would p ro v id e that a n s w e r .
B ut m o s t of the a rg u m e n ts fo r quotas
a i r , and do not c o n s id e r what happens
quota is im p o s e d .
One o f two th in gs is
r is e ju s t as in , the" c á s e of an im p o r t f e e ,
an d /o r ra tio n in g w ill o c c u r .
u s in g a s e r ie s of
ch a n g e s to a c h ie v e
to a s su m e that it
would be red u ced
I have seen le a v e o ff in m id
a fte r the q u an tity r e d u c in g
p o s s ib le : p r ic e s of o il w ill
o r , a lt e r n a t iv e ly , s h o r ta g e s
Q uota w ithout fu r th e r c o n tr o ls .
If a quota is im p o se d tó r e s t r ic t im p o r t s , the p r ic e of o il w ill
r is e u n le s s fu r th e r a ctio n is taken to p re v e n t that r i s e .
If we knew
fo r s u r e that a lOp a g a llo n p r ic e in c r e a s e would re d u ce c o n su m p
tion b y 1 m illio n b a r r e l s , we co u ld be e q u a lly s u r e that an im p o rt
quota th at re d u ce d co n su m p tio n b y 1 m illio n b a r r e ls would in c r e a s e
U . S . p r ic e s by the s a m e lO p .
W e a r e d e a lin g with the sa m e s u p
p lie s and the sa m e dem and and th ey w ill b a la n c e out at the sam e
p la c e .
T hus,
an* im p o r t fe e and a quota have id e n tic a l p r ic e
im p lic a tio n s .
A quota s y s t e m , h o w e v e r, has tw o d is a d v a n ta g e s . F i r s t , a quota
le a v e s the a d d itio n a l p r ic e in c r e a s e in the hands of im p o r te r s and
p ro d u c e rs r a th e r than in the hands of the g o v e rn m e n t, u n le s s an
e la b o r a te quota a u c tio n in g ,s c h e m e is d e v e lo p e d .
S e c o n d , a s e r ie s o f quotas would be m o re d is r u p tiv e of e c o n o m ic
a c tiv ity b e c a u s e the e x p e c ta tio n of quota re d u c tio n s would c r e a te
b u s in e s s u n c e r ta in tie s as to how p r ic e s would r e a c t . It is m u ch
b e tte r to have c e r ta in ty about p r ic e s (and be le s s c e r ta in about the
s iz e of im p o rt r e d u c tio n s ), b e c a u s e it is p r ic e data th at b u s in e s s m e n
need in o rd e r to m ak e in te llig e n t d e c is io n s about running th e ir b u s i
n e s s e s and m a k in g th e ir c a p ita l in v e s tm e n ts . F o r a co m p an y
a s s e s s in g t h e r is k s of go in g in to the o il- s h a le b u s in e s s , fo r e x a m p le ,
the c r it ic a l data a r e o il p r ic e s .
Quota with controls.
Some proponents of quotas would prohibit the price increases that
would normally follow from a quota. That could be accomplished by
a system of price controls, and would in turn, create shortages. At
artificially low prices the quantities demanded will exceed the supply.
The shortages could then be distributed across the population by a
system of allocation or rationing. W e would be embarked on an era
of chronic shortage and maladjustment, without the efficient incen
tives provided by the price system for producers to develop additional
sources of supplies and for consumers to accept substitutes. Ido
not think the public would stick with such a system.
An allocation program is sometimes cited as a Solution--prima
rily, I think, on the mistaken notion that it would avoid rationing.
But allocation is itself a system of partial rationing which occurs
at the business level rather than at the consumer level. An alloca
tion program would deny busines ses some of the supplies they need to
Continue functioning, and would lead to business dislocations and the
loss of jobs. The same kind of thing would happen that we have seen
this winter when plants have closed because they could not get a
sufficient "allocation" of natural gas.
W e estimate that several
hundred thousand jobs would be lost. At the retail level, quantities
would be rationed by queueing, as was gasoline last winter. Nor
would all of this necessarily prevent consumer prices from rising.
To fully ensure that prices will not rise due to restrictive supplies
of oil, the ultimate requirement is rationing of gasoline, fuel oil,
fertilizer and petrochemicals.
In sum, if prices were not permitted to rise, a major bureauc
racy would have to be created and permanently maintained to decide
how the resulting shortages would be allocated. I cannot imagine
that many citizens who lived through the rationing experiences of
World War IIwould willingly elect the massive interference with their
freedom of choice which rationing entails--certainly not in prefer
ence to a price increase of 10£ a gallon which they get back. Those
who are too young to remember the rationing experience of World
War II would be quickly disenchanted.
10
-
E ff e c t on the E c o n o m y .
The e ffe c t o f the p r o g r a m on the eco n o m y w ill in b ro a d outline
be n e u tr a l.
$3 0 b illio n is taken out of the p r iv a te eco n o m y and $30
b illio n is put b a c k in .
T he m e r e e n a ctm e n t of a c le a r e n e r g y p o lic y
should have a b e n e fic ia l e f f e c t , r e g a r d le s s of d e t a ils , fo r it w ill
re m o v e m an y u n c e r ta in tie s that p r e s e n tly in h ib it e c o n o m ic and
b u s in e s s p la n n in g . In a few in d u s tr ie s , s u b s ta n tia l re a d ju s tm e n ts
w ill be r e q u ir e d . T h at is in e v ita b le i f we a r e to cut b a c k co n su m p
tio n , and is a p r o c e s s w hich m u s t get u n d e rw ay .
H o w e v e r, m o st
b u s in e s s e s w ill p a ss m o s t of the in c r e a s e s th ro u gh to c o n s u m e r s .
(The p r o je c te d 2% in c r e a s e in p r ic e s a s s u m e s that a ll s u c h in c r e a s e s
a r e p a s s e d th ro u g h . )
M u ch debate h as fo c u s e d on w h ether p r ic e le v e ls w ill in c r e a s e .
W e h ave e s tim a te d th at th e r e w ill be a 2% in c r e a s e in the C P I . But
ev en th at is a s t a t is t ic a l m ir a g e , fo r m o s t c o n s u m e r s w ill get the
m o n ey b a c k th ro u gh ta x re d u c tio n .
T h e a v e r a g e c it iz e n w ill have
the sa m e w h e re w ith a l to buy the sa m e am ount of p e tro le u m p ro d u cts
as b e f o r e - - i f he c h o o s e s to --w ith o u t r e d u c in g h is o th er p u r c h a s e s .
T h e C P I is im p o r ta n t, even i f it h as m a n y in a d e q u a c ie s in co n
v e y in g the tru e s ta te o f a f f a i r s , b e c a u s e p e o p le 's th in kin g and actio n s
a r e o ften shap ed by it .
B u t, it should be e m p h a siz e d that w h atever
e ffe c t the p r o g r a m h a s on the C P I o r on p r ic e le v e ls g e n e r a lly , it
w ill be a o n e -tim e e ffe c t . O n ce d ig e s te d , p e tro le u m p r ic e in c r e a s e s
w ill not in c r e a s e the o n go in g , fu tu re r a t e s of in fla tio n .
W ould a G a s o lin e T a x be B e tte r ?
W e have p ro p o sed a ta x on cru d e o il b e c a u s e we b e lie v e it w ill
do the jo b m o st e ffic ie n t ly , c r e a te the fe w e st m a jo r d is lo c a tio n s
and s p re a d the b u rd en of m o d e st a d ju stm e n ts a c r o s s e v e r y o n e , r a th e r
than im p o se m a jo r a d ju stm e n ts on a fe w .
A ta x on g a s o lin e alon e does ju s t p a r t# of the jo b .
G a so lin e
a cco u n ts fo r le s s than h a lf of e a ch b a r r e l of c r u d e .
We need to
c o n s e r v e the o th er h a lf e q u a lly as m u c h .
The fa c t is that g a s o lin e is not the m o s t p r ic e r e s p o n s iv e elem e n t
in the b a r r e l of o i l - - p a r t i c u la r ly in the lo n g e r r u n . T h e r e has been
a te n d en cy fo r m o s t of us to th in k that g a s o lin e is the e a s ie s t th in g
fo r so m e b o d y e ls e to g iv e up or to fin d a s u b stitu te f o r .
B u t the
s u r e s t way to id e n tify the th in gs that the p u b lic can g iv e up m o st
e a s ily is to lo o k at the r e s p o n s e to ch a n g e s in p r ic e .
T h in g s w hich
people find most difficult to give up are the least responsive to price
changes, because people continue to buy almost the same amount
even when the price rises sharply. Things which people value the
least are the most responsive to price changes. When people are
willing to do without them or can easily find acceptable substitutes,
even a small increase in price can produce a large falloff in demand.
Thus, the price system provides a kind of automatic "polling
system" which tells us the public's relative preferences. There are
a variety of products that come from a barrel of crude--including
gasoline, residual fuel oil, jet fuel, kerosene, ordinary residential
heating oil and petrochemical feedstocks. The evidence on hand is
that it is no "easier" for people to give up gasoline than other
products in the short run, and harder to do so in the longer run.
It seems to m e hard to argue against the proposition that the public
should be permitted to decide for themselves which particular
petroleum products they are willing to cut down on.
It would take a gasoline tax of 45£ to 50£ per gallon to achieve
the same ultimate reduction in consumption as the roughly 10£ per
gallon tax which the President's proposals would put on all petro
leum products. If the present proposals raised the CPI by 2% then
by the same reckoning, substitution of a 45£ a gallon increase in the
price of gasoline for a 10£ a gallon increase in the price of crude
would cause the CPI to go up by about 3%.
Tax Reductions for Individuals.
The Treasury will collect about $3 0 billion in taxes under the
proposal, which is roughly equal to the aggregate price increase that
will result from the proposal. The private sector will bear an
estimated $25 billion of that in the form of higher costs of energy
related items they buy, and federal, state and local governments
will bear the remainder.
For individuals, the proposals include an income tax reduction
of $16-1/2 billion:
. By increasing the Low Income Allowance
from its present level of $1,3 00, to
$2,600 for a couple and $2,000 for single
taxpayers, which will provide benefits of
$5 billion
12
.
-
And by cu ttin g in h a lf, fr o m 14% to 7%,
the ta x ra te fo r the f i r s t ta x a b le in co m e
b r a c k e t and m a k in g s u b s ta n tia l, but
s m a lle r , re d u c tio n s in ta x r a te s in the
next fo u r b r a c k e t s , 1_/ w hich w ill p ro v id e
a d d itio n a l b e n e fits o f --------------------------------------$11-1/2 b illio n
The e ffe c t of th e se p ro p o sed re d u c tio n s is v e r y p r o g r e s s iv e , as
th ey a r e p ro p o rtio n a te ly g r e a t e r , both in d o lla r s and p e r c e n ta g e s
fo r lo w e r -in c o m e ta x p a y e r s .
The fo llo w in g ta b le show s the d eg ree
to w hich th at is tr u e .
1975 L e v e ls
A d ju ste d
G r o s s In co m e
C la s s
($000)
0 - 3
3 - 5
5 - 7
7-10
10 - 15
15 - 20
20 - 50
50 -100
100 and o v e r
T o ta l
P e r c e n ta g e
R ed u ctio n in
In co m e T a x
R ed u ctio n a s a P e r
cen t of P r e s e n t
A f t e r - t a x In co m e
(P e r c e n t)
-8 3 .3 %
-6 6 . 7
-4 9 . 0
-3 8 . 0
-2 1 .6
-1 1 .8
- 4 .8
- 0 .8
- 0 .2
8. 9 2/
4 .6 2/
4. 2
3 .9
2. 6
1 .7
0. 9
0 .3
0 .1
-1 2 . 6
2. 0
The la s t co lu m n is e s p e c ia lly s ig n ific a n t in a s s e s s in g the exten t
to w hich the ta x re d u c tio n s m o re than o ffs e t any p r ic e in c r e a s e s
r e s u ltin g fr o m the e n e rg y p r o p o s a ls .
We e s tim a te that co n su m e r
p r ic e le v e ls w ill in c r e a s e 2% if a ll e n e r g y c o s ts a r e f u lly p a ss e d
th ro u g h to c o n s u m e r s .
In d iv id u a ls w hose a f t e r - t a x in c o m e s go up
m o re than 2% w hile th e ir liv in g c o s ts go up o n ly 2% a r e o b v io u sly
ahead o f the g a m e .
1 / Illu s tr a te s ra te ch a n g e s fo r m a r r ie d p e rso n s f ilin g jo in tly .
— C o m p a r a b le ch a n g e s a r e m ad e in o th er ra te s c h e d u le s .
2/ In clu d e s e n e rg y ta x e q u a liz a tio n p ay m en ts to low in co m e a d u lts .
13
The next
fa m ilie s .
ta b le
te lls
a
s im ila r
s to ry
in t e r m s
o f in d iv id u a l
IL L U S T R A T IO N S O F P E R M A N E N T TA X R E L I E F AND
Of
i n c r e a s e d e n e r g y C O STS a t v a r i o u s l e v e l s
h C u Se h O l d i n C 6 m e ~
;
H o u se h o ld
In c o m e
$
2 ,0 0 0
3 ,0 0 0
5, 000
8, 000
1 0, 000
1 2 ,0 0 0
15, 000
1 8 ,0 0 0
2 5 ,0 0 0
3 0, 000
T o ta l
In c re a se d
E n e rg y
C o s ts 1 /
$
85
110
150
188
228
253
296
318
3 93
420
P e r m a n e n t T a x R e lie f
P lu s $80 S p e c ia l P a y m e n ts
f o r A d ju s te d g r o s s In c o m e s E q u a l
to H o u s e h o ld In c o m e s Show n
F a m ily of
S in g le
F o u r P e rso n s
P e rso n
. $ -8 0
-1 2 0
-2 5 0
-2 9 7
-2 5 4
-1 9 0
-1 9 0
-1 9 0
-1 9 0
-1 4 8
$ -1 6 0
-1 6 0
-1 7 8
-3 3 7
-3 4 9
-3 1 6
-2 2 1
-2 1 0
-1 9 2
-151
It i s t r u e , of c o u r s e , th a t a n a v e r a g e s t a t i s t i c d o e s n o t f i t e v e r y o n e . S o m e p e o p le h a v e g r e a t e r th a n a v e r a g e e n e r g y c o s ts j u s t a s
s o m e p e o p le h a v e l e s s th a n a v e r a g e c o s t s . B u t in a n o v e r a l l , ro u g h
w ay th e ta x r e d u c tio n s a r e m o r e th a n c o m p e n s a tio n s f o r lo w e r in c o m e
p e rso n s.
It i s n o t th e p u r p o s e to c o m p e n s a te e v e r y o n e e x a c tly an d
t h e r e w ill s u r e l y b e p e r s o n s f o r w h o m th e p r o g r a m c r e a t e s s ig n if ic a n t
a d d itio n a l e x p e n s e a n d o t h e r s to w hom it g iv e s w in d f a lls . T h e r e
is no w ay to p r e v e n t s u c h in d iv id u a l w in d fa ll g a in s an d w in d fa ll l o s s e s
u n d e r th i s o r a n y o th e r p r o g r a m of e n e r g y r e d u c tio n w ith t e e t h in it.
T o th o s e in d iv id u a ls w h o se in c o m e s a r e s o lo w th a t th e y do n o t
b e n e f it s u f f ic ie n tly f r o m in c o m e ta x r e d u c tio n s to o f f s e t g r e a t e r
a d d itio n a l e n e r g y c o s t s , th e p r o p o s a l w o u ld d i s t r i b u t e a n a d d itio n a l
$2 b illio n in th e f o r m of a n $80 p e r a d u lt c r e d i t a s e x p la in e d in m y
p r i o r t e s t im o n y .
F in a lly , to b r i n g th e b e n e f its f o r in d iv id u a ls up
to a t o t a l of $19 b illio n , a s p e c i a l ta x c r e d i t w o u ld b e a llo w e d f o r
e x p e n d itu r e s on t h e r m a l - e f f i c i e n c y im p r o v e m e n t f o r h o m e s , s u c h a s
s t o r m w in d o w s a n d d o o r s , in s u la tio n a n d w e a th e r s t r ip p in g .
T h ree f o u r th s of th e to t a l r e v e n u e i s th u s d e d ic a te d to in d iv id u a l an d u n in
c o r p o r a t e d b u s i n e s s ta x r e d u c t i o n s ,
l y A s s u m e s th a t a l l e n e r g y p r i c e i n c r e a s e s a r e fu lly r e f l e c t e d in
p r i c e s of f in a l p r o d u c t s .
M
S ta te a n d L o c a l G o v e rn m e n ts »
S in c e s t a t e an d lo c a l g o v e r n m e n ts a r e im p o r ta n t c o n s u m e r s of
e n e r g y , th e y to o w o u ld g e t $2 b illio n of b e n e f its th r o u g h th e re v e n u e
s h a rin g s y s te m .
W h ile d is t r i b u t i o n s u n d e r th e e x is t in g f o r m u la s
w o u ld no d o u b t b e e a s i e s t to im p le m e n t, t h e r e h a s b e e n s o m e fe e lin g
th a t it w o u ld n o t a d e q u a te ly p r o v id e f o r s c h o o ls , w h ic h a r e m a jo r
en erg y u s e r s .
W e b e lie v e f le x ib ili ty in th is r e s p e c t is d e s ir a b le
and W ould b e h a p p y to w o rk w ith y o u in w o rk in g o u t s a t i s f a c t o r y
a d ju s tm e n ts to th e d i s t r i b u t i o n f o r m u la , if you b e lie v e th a t to be
a p p ro p ria te .
C o r p o r a te T a x R a te A d ju s tm e n t.
T h e b a la n c e of th e $25 b illio n to b e r e t u r n e d to th e p r i v a t e s e c t o r
w o u ld go to c o r p o r a t i o n s in th e f o r m of a r e d u c tio n in th e c o r p o r a te
ta x r a t e .
In m y p r i o r te s tim o n y , I e x p la in e d in s o m e d e ta i l o u r c o n c e rn
o v e r th e d e t e r i o r a t i o n o f b u s in e s s p r o f i t s , w h ic h is f u r t h e r e x a c e r
b a te d by th e c u r r e n t r e c e s s i o n .
T h e i n c r e a s e in e n e r g y c o s ts w ill
p r o v id e s t i l l f u r t h e r b u r d e n s to th e e x te n t n o t p a s s e d on in p r i c e s .
T h u s , w e b e lie v e it e s s e n t i a l th a t c o r p o r a t i o n s , a s w e ll a s in d iv id
u a l s , b e a c c o r d e d s u b s t a n t i a l ta x r e d u c tio n s . T a x r e d u c tio n s fo r
c o r p o r a t i o n s a r e s e ld o m p o litic a lly p o p u la r , b u t d e c lin in g b u s in e s s
p r o f i t s m e a n d e c lin in g p r o d u c tiv ity an d i n c r e a s i n g u n e m p lo y m e n t,
w h ic h a r e e v e n l e s s p o p u la r .
F a i r n e s s an d c o m m o n s e n s e r e q u ir e
th a t b u s i n e s s e s s h a r e in th e d i s tr ib u tio n o f th e s e r e v e n u e s .
T h e r e a s o n s f o r r e c o m m e n d in g r e d u c tio n in c o r p o r a t e ta x e s by
m e a n s of a r a t e r e d u c tio n in s te a d of by s o m e o t h e r m e a n s a r e as
fo llo w s .
R a te r e d u c tio n is th e m o s t n e u t r a l w ay of r e d u c in g c o r p o r a te
ta x e s .
N e u tr a lity m e a n s th a t a ll c o r p o r a t i o n s now p a y in g a t a 48%
r a t e w ill s h a r e in th e ta x r e d u c tio n , w ill h a v e m a x im u m f le x ib ility
in m a k in g b u s i n e s s a n d in v e s t m e n t d e c is io n s , and c a n th e r e f o r e
o p e r a te m o s t e f f ic ie n tly w ith o u t r e g a r d to ta x c o n s e q u e n c e s .
R e d u c tio n of th e p r e s e n t l y h ig h c o r p o r a t e ta x r a t e w ill b e the
m o s t m e a n in g fu l an d s y m b o lic s ig n a l to b u s i n e s s , to i n v e s t o r s , and
to th e m a r k e t of a s e r i o u s in te n t to a s s i s t b u s i n e s s .
R a te r e d u c t i o n h a s a c h a r a c t e r of p e r m a n e n c e . We h a v e p ro p o s e d
to m a k e th e p e r m a n e n t ta x r e d u c tio n f o r in d iv id u a ls in l a r g e p a r t
b y r a t e r e d u c tio n . W e s h o u ld do th e s a m e f o r c o r p o r a t i o n s .
15 C o n c lu s io n .
T h e p r o g r a m w h ic h w e h a v e p r o p o s e d w ill b e e f f e c tiv e in r e d u c in g
e n e r g y c o n s u m p tio n an d o il i m p o r t s .
W h ile t h e r e a r e c o m p le x itie s
to b e p o n d e r e d b y th o s e w ho d e s ig n an d th o s e w ho e n a c t it, it w ill
b e s im p l i c i t y i t s e l f in o p e r a tio n .
T h e o r d i n a r y c i t i z e n w ill b e
e n t i r e l y u n a w a r e o f a n y th in g e x c e p t th e c h a n g e in r e l a t i v e p r i c e s , f o r
w h ic h he w ill h a v e m o r e m o n e y to s p e n d .
He w ill c o n tin u e to h a v e
c o m p le te f r e e d o m o f c h o ic e .
N a n ew b u r e a u c r a c y w ill b e s p a w n e d .
A nd th e to ta l ta x b u r d e n on O ur l e a s t a fflu e n t c itiz e n s w ill h a v e b e e n
s ig n if ic a n tly r e d u c e d .
o 0 o
Average Increases in Energy Costs ■ I for Households
at Specified Income Levels Compared to
Proposed Income Tax Reductions [
W for Family of Four
420
393
400
Increased Energy Costs
349
337
316
300 —
318
296
Income Tax Reduction
253
228
200
178
160
188
160
151
100
Income Levels
' I n c l u d e s e n e r g y t a x e q u a liz a t io n p a y m e n t s t o low in c o m e a d u lt s .
G a so lin e P ric e s a nd E x c is e Taxes Around the World
■
I
I W I V t
I I I W
I
I IV /
L -V ^
V U I O
^ I n c l u d e s e n e r g y t a x e q u a liz a t io n p a y m e n t s t o low in c o m e a d u lt s .
G a s o lin e P r ic e s a n d E x c is e Taxes Around the World
January 1975
Cents per
Gallon —
Retail Price
H
Excise Tax
167
Product Price
150
144
142
139
138
130
129
124
120
100
114
94
64
54
54
50
v*
\
42
35
63
40
0
\3s
IÜ
CP
B N
^
Source: Richardson Associates. New York.
77
55
60
48
53
m.Ijjjll ÿ
v
<&'
77
52
59
67
f
Dipartmenl of the T R E A S U R Y ^
SHINGTON, D.C.
20220
I
ifI
TELEP H O N E WÛ4-2041 ■ ¡ H i
1
T
FOR IMMEDIATE RELEASE
MARCH ^3, 1975
BRECHT NAMES FOUR NEW FIELD OFFICE HEADS
TO STRENGTHEN TREASURY’S REVIEW OF EQUAL OPPORTUNITY PROGRAMS
Warren F. Brecht, Assistant Secretary (Administration),
today announced the appointment of four new field office
heads to administer the Treasury Department’s bank and
savings and loan contract compliance review programs in
Chicago, Atlanta, Houston, and Los Angeles.
The appointments and the added delegation of
responsibilities to the field offices are an outgrowth of ;
an internal management study conducted by the Treasury
Department for the purpose of improving Treasury’s Equal
Opportunity Programs.
'
“■ * d*j
In making the appointments*,' Brecht said, "While the ,n I
banking community has been responsive in many ways to the
employment needs of minorities and women, much still remains
to be done especially in the area of upward mobility.
These new appointments and the talent they represent ‘will
strengthen Treasury’s contract compliance review program.
Decision making will be decentralized, thus, permitting
more immediate action in the field. All four appointees are
proven managers with varied backgrounds in contract compliance
activities.”
The four new office
heads are:
(Chicago) George H, Fisher, 42, of Des Plaines,
Illinois, formerly with Department of Defense contract
compliance office in Chicago, the Michigan Civil Rights
Commission, and a former clergyman and pastor. A graduate of
Capitol University, Columbus, Ohio, he also holds a master’s
degree from the Evangelical Lutheran Theological Seminary.
(Atlanta) Millard F. Rutherford, 43, of Rochester,
New York, where he was chief of the Defense Supply Agency’s
contract compliance field office, and formerly worked for
the New York State Division of Human Rights and the Monroe
County Human Relations Commission. He is a graduate of A§T
State University, Greensboro, North Carolina.
(more)
2
-- (Houston) Kenneth Gene Patton, 43, of Burleson,
Texas, formerly assistant regional director for contract
compliance with the General Services Administration,
covering investigation and enforcement in discrimination
and compliance reviews. He holds a bachelor’s degree from
the University of Texas and is working towards his master’s
degree at Texas Christian University.
(Los Angeles) William G. Thomas, 43, of Cleveland,
Ohio, where he was chief of the Department of Defense's
Office of Contract Compliance, a Navy Department industrial
and equal employment policy specialist, and director of job
development and employment for the Urban League of Cleveland.
He holds a bachelor's degree from John Carroll University,
Cleveland.
Under Executive Order 11246, the Treasury Department
has been delegated responsibility for equal employment
opportunity compliance for banks and savings institutions.
Until now the four field offices have operated as part of a
departmental-based program. Under the new program each of
the offices will operate on a completely decentralized basis
with responsibilities to assure compliance by financial
institutions in their respective geographic locations and
to assure strict enforcement of Federal and Treasury
regulations.
Plans are under way to open a fifth field office in
New York City to cover that major financial center. It is
currently being serviced by the Washington headquarters office.
oOo
N
-
i^TRUS|
Departmentof
bilNGTON, D.C. 20220
TELEP H O N E W04-2041
U 'J
17 89
March 3, 1975
R RELEASE 6:30 P.M.
RESULTS OF TREASURY’S WEEKLY
Tenders for $2.7 billion of 13-week Treasury!
jof 26-week Treasury bills, both series to be issii
¡were opened at the Federal Reserve Banks today.
jr
S<V'T-i"
[RANGE OF ACCEPTED
13-week bills
(COMPETITIVE BIDS: maturing June 5 > 1975_______ __
Price
High
Low
Average
la/ Excepting
|b/ Excepting
Tenders
Tenders
ce.
Discount
Rate
98.595 a/
98.567
98.575
S* t 7 i ‘
Investment
Rate l7
5.558%
5.669%
5.637%
5.73%
5.85%
5.81%
S, ¿3 7
To
2 tenders totaling $620,000
2 tenders totaling $45,000
at the low price for the 13-week bill
at the low price for the 26-week bill
[TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESj
District
/
Received
Boston
$
57,965,000
2,982,175,000
New York
Philadelphia
97,625,000
Cleveland
49,205,000
Richmond
34,810,000
Atlanta
30,430,000
Chicago
180,325,000
St. Louis
36,285,000
52,860,000
Minneapolis
54,230,000
Kansas City
22,650,000
Dallas
San F r a n c i s c o
197,790,000
T0TALS$3,796,350,000
Accepted
$
32,545,000
2,147,375,000
76,915,000
47,110,000
31,795,000
29,690,000
132,325,000
26,265,000
47,860,000
41,420,000
22,650,000
64,635,000
$2,700,585,000 c/
Rec
5 ^ Ÿoo
T
/0/ 7 S ~
s'.
3,
jo,oyu,U00
191.825.000
25.825.000
29.435.000
17.400.000
15.900.000
593.820.000
16.390.000
79.825.000
8,600,000
5.465.000
12.105.000
8.900.000
451,770,000
$2,500,610,000 d/
Includes $394,835,000 noncompetitive tenders from the public.
-'Includes $112,140,000 noncompetitive tenders from the public.
1.1 Equivalent coupon-issue yield.
Zo
FOR RELEASE 6:30 P.M.
March 3, 1975
RESULTS OF TREASURY’S WEEKLY BILL AUCTIONS
Tenders for $2.7 billion of 13-week Treasury bills and for $2.5 billion
of 26-week Treasury bills, both series to be issued on March 6, 1975,
were opened at the Federal Reserve Banks today. The details are as follows:
26-week bills
maturing September 4, 1975
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing June 5 > !975
Price
High
Low
Average
Discount
Rate
98.595a/
98.567
98.575
Investment
Rate 1J
5.558%
5.669%
5.637%
5.73%
5.85%
5.81%
Price
97.128b/
97.091
97.097
Discount
Rate
5.681%
5.754%
5.742%
Investment
Rate11/
5.95%
6.03%
6 . 01%
F. ExcePting 2 tenders totaling $620,000
b/ Excepting 2 tenders totaling $45,000
Tenders at the low price for the 13-week bills were allotted 100%.
Tenders at the low price for the 26-week bills were allotted
1%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
Boston
$
57,965,000
New York
2,982,175,000
Philadelphia
97,625,000
Cleveland
49,205,000
Richmond
34,810,000
Atlanta
30,430,000
Chicago
180,325,000
St. Louis
36,285,000
52,860,000
Minneapolis
Kansas City
54,230,000
Dallas
22,650,000
San Francisco 197,790,000
T0TALS$3,796,350,000
Accepted
$
32,545,000
2,147,375,000
76,915,000
47,110,000
31,795,000
29,690,000
132,325,000
26,265,000
47,860,000
41,420,000
22,650,000
64,635,000
Received
$
28,875,000
3,549,115,000
119,175,000
132,200,000
28,210,000
35,890,000
191,825,000
25,825,000
29,435,000
17,400,000
15,900,000
593,820,000
$2,700,585,000c/ $4,767,670,000
Accepted
$
7,445,000
1,870,545,000
15,175,000
12,690,000
11,700,000
16,390,000
79,825,000
8,600,000
5,465,000
12,105,000
8,900,000
451,770,000
$2,500,610,000 d/
■7/ ^ncludes $394,835,000 noncompetitive tenders from the public,
F Includes $112,140,000 noncompetitive tenders from the public.
— Equivalent coupon-issue yield.
FROM THE RIO GRANDE TO THE POTOMAC
Hello, I am delighted to be here with all of you
today.
C .P .A .* s and their spouses just happen to be
my favorite group of people, and of course it*s won
derful to be home in Albuquerque with my dog and cat
and husband —
not necessarily in that order.
Hus
bands are hard to come by, and in this past year I
have been grateful for every opportunity to be with
mine.
Never in my wildest dreams did I imagine that
I would have to arrange travel schedules so carefully
just to see my husband.
Oh —
I've gone through years
of semi-widowhood due to the tax season, year—end audits,
and periods of week-end inventory supervision.
That's
all part of being married to a Certified Public Account—
.Silt«
Also, I've suffered through football seasons, Mon
day, Wednesday, Saturday and Sunday T.V. football,
football bowl games, super bowl games, and super-super
bowls.
That's all part of being married to any man.
Remarks by the Treasurer of the United States, Francine I.
Neff, to the CPA wives luncheon, January 28, 1975.
—2-
But during all of these lapses in our marital rela
tionship, at least I was with him in person, if not in
spirit.
Now, I find I am with him more in spirit than in
person.
T w e n t y - seven
years ago when Ed, who was born in
New Jersey, married me, he made loud pronouncements
about how much he admired the American Indian male.
After all, according to Ed, the Indian man —
chief or merely brave —
whether
spends his time in hunting
and in contemplation while the squaw builds the house,
tends the garden, the goats and the children —
actually
doing most of the work.
According to Ed, he’s been looking, all these years,
for a job for me so that he could live in leisure and
comfort like the Indian man.
got a job —
Finally he succeeded.
a rather splendid job at t h a t —
thing went wrong with Ed's grand design.
I
but some
Instead of leisure
he finds himself, for the very first time, making his own
bed, cooking his own breakfast, and taking out the garbage.
C ’est la vie.
Many of you already know how I came to leave -- tem
porarily —
my husband and hacienda on the Rio Grande for
my lovely office back in Washington.
But perhaps you may
be interested in hearing a few of the details.
-3-
Well ;—
' \
more or less ~
' h o ' V
it happened like this.
Early last March, I received a call here at 1509
Sagebrush Trail.
Some unknown voice asked that I come
to Washington to be interviewed for the position of
Treasurer of the United States.
I was certain it was a
mistake, so I asked that she repeat her message.
When
it came out the same way the second time around, I thought
I understood and I said, brightly
husband, the CPA —
"Oh, you mean my
because I barely understand the dif
ference between a debit and a credit."
Well, many interviews and trips later —
forth between Washington and Albuquerque —
back and
I was sworn
in as the 35th Treasurer of the United States, having
promised to support and defend the constitution of our
country against all enemies, foreign and domestic.
If
I've done nothing else on receiving this eminent position,
I have proved to my friends that you don't have to be
super smart, super educated, or super rich to have dreams
come true.
I*ve been Treasurer of the United States for seven
months and six days —
and I like itl
It*s challenging,
stimulating and very exciting to live in the Nation's
capital and work on the problems which come to my office
at Treasury.
Somebody once asked if my job wasn't largely
ceremonial and I replied that if getting to work before
eight in the morning and leaving after seven at night was
ceremonial I suppose it was —
but that wasn't my idea
of what ceremonial meant.
As the 35th Treasurer of the United States —
the seventh woman —
and
I am responsible for reviewing and
endorsing United States currency, for coordinating our
Treasury Department's Bicentennial Program, and for
representing the Secretary of the Treasury, Mr. William
Simon, as a departmental spokesman —
or is it woman? —
helping to communicate the Department's policies and
programs.
In addition to my job as Treasurer, last December I
received another set of responsibilities -- another hat
when I was appointed National Director of the United
States Savings Bonds Division, which is also located
within the Department of the Treasury.
I thereby be
came a certified Washington bureaucrat, and my staff in
creased from a modest seven to a considerably larger
group of 470 people.
With this appointment, I also be
came the first woman director in the history of the
Savings Bonds Division.
Life as a Treasurer and National Director is a big
change from my years as an Albuquerque housewife.
I've
temporarily left my much-loved New Mexico home for a
small Washington apartment.
I miss my cat, my dogs and
our beautiful Southwestern sunshine, mountains and mesas
I miss old friends like all of you, and of course I very
much miss my son Eddie and my husband Ed —
both of whom
-5-
So
manage to come East from time to time.
You may be wondering how I made the transition from
housewife to our Nation's Treasurer —
it’s my first full-time paid job.
especially since
Well, I feel like
I've been in training for this opportunity for a quarter
of a century as a professional volunteer.
What is a professional volunteer?
One who devotes
time to unpaid work because she believes in a cause, a
candidate or a party.
One who offers her services fully,
freely, intentionally, and deliberately, because she is
motivated and dedicated to a cause or an ideal.
Some women consider volunteer work slave labor.
I
don’t feel that way at all since it was my route to a
career, as it has been for many women.
The volunteer,
in fact, has become so important that several bills have
been introduced into Congress to provide the volunteer
with a tax deduction for the time he or she donates to
others.
My own unpaid work activities span many years.
I
have been president of a local P.T.A. chapter; president
of our auxiliary to the New Mexico Society of C.P.A.'s
and president of the Albuquerque Mortar Board A.lumnae
group.
I also had many years —
and a few gray hairs -—
invested in the period when my son and daughter were
growing up, and I was a Boy Scout Den Mother and a Camp
fire Girl leader.
In 1964, I b e g a n w o r k i n g a c t i v e l y w i t h i n t h e p o l i t i c a l
p ro c e s s , rin g in g
E v e n tu a lly ,
d o o r b e lls and a s s i s t i n g
a t e le c tio n
p o lls .
I b e c a m e a m em b er o f t h e New M e x ic o R e p u b l i c a n
S t a t e C e n t r a l C o m m itte e a n d a m em b er o f t h e E x e c u t i v e Com
m i t t e e o f t h e N a t i o n a l C o m m itte e — a l l
and,
in
fa c t,
u n p a id p o s i t i o n s ,
j o b s w h ic h c o s t Ed m o n e y f o r t r a v e l i n g
and
o th e r e x p e n se s.
I m e n tio n t h e s e
a c tiv itie s
u n u su a l o r im p re s s iv e ,
w h en I
b u t to
s a y I ’v e b e e n " i n
v o lu n te e r to
career
n o t b e c a u se th e y a r e
illu s tra te
tra in in g "
s ta tu s
to
w om en.
g a in e x p e rie n c e s n o t o th e rw is e
O fte n ,
tra n s fe r
fro m
f o r m an y y e a r s .
W o rk in g a s a d e d i c a t e d v o l u n t e e r
w ay t o
w h a t I m ean
is
a w o n d e rfu l
a v a ila b le
to
f o r e x a m p le , u n p a id v o l u n t e e r w o rk e rs
h a v e m o re o p p o r t u n i t i e s
th a n p r o f e s s io n a l s t a f f
p e o p le
t o w o rk o n m a j o r p r o b l e m s a n d t o m e e t t h e p e o p l e who
m ove a n d s h a k e t h e s e p r o b l e m s .
enough h ead ach es
w h e t h e r we w o rk f o r
to
And b e l i e v e m e ,
th a t h u rts
lo v e o r m oney o r b o t h .
P r i c e s a r e u p a n d e m p lo y m e n t i s
is
I
and
dow n, and
a ll of us.
My b o s s ,
S e c r e t a r y o f t h e T r e a s u r y W illia m
d e e p ly in v o lv e d
i n w o rk in g o u t s o l u t i o n s .
s a y t h a t we a r e a l l
fo rtu n a te
a re
keep e v ery o n e o f u s busy
Two o f t o d a y ’ s m a j o r p r o b l e m s a r e r e c e s s i o n
in fla tio n .
th e re
to
S im o n ,
A nd m ay
h a v e a m an l i k e
'
Mr. S i m o n —
;-
‘
hardworking, dedicated, super-smart —
spending his 12 to 16 hour work days on this job.
May I further add that we are fortunate to have
a Secretary of the Treasury who speaks English.
Some
of the more learned economists with whom he deals speak a
kind
of Potomac patois —
a Washington word-game —
in which they look you squarely in the face and tell
you that a slowing-up of the slowdown is not as good
as an upturn in the down-trend.
But even this is bet
ter than a speed-up of the slowdown or a deepening of
the down-curve.
And they further suggest that the
climate is right for an adjustment to the readjustment,
which in turn will mean a letting up of the letdown.
I've spent more years than I care to confess talk
ing English —
sometimes at the top of my voice —
I cannot understand this kind of eco-English.
but
However,
I'm convinced that, while economists may often be wrong,
they are never in doubt.
More seriously, no one doubts that our economy to
day isn't exactly in Charles Atlas shape.
We're not a
97-pound weakling by any means, but the past year has
been a grueling period.
Our national productivity may
continue to decline into the summer months, and unem
ployment may rise, although at a slower rate.
The bet
ter news is that there should be a slackening in the
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8-
rate of inflation in the next few months.
All of us have read and heard President Ford's
recent State of the Union address, and I won't repeat
it now.
But I would like to emphasize a few points.
First, let's face the fact that our country has
reached the end of an era of cheap energy.
The time
has come to conserve and to economize on this vital
resource.
We can do it if we all recognize the genuine
long-term need to do so.
It's a new ball game,and we'd
better learn the rules.
In terms of the general economy, President Ford
is moving quickly to help the Nation recover from the
recession while not resorting to the kind of excessive
stimulation that will mean even more inflation and worse
unemployment.
The President's program provides a shot
in the arm for our slumping economy.
It should help
to yield the revenues needed to provide better breaks
for low and middle-income groups, as well as a better
climate for business investment.
vigorous business community —
And business —
a strong,
is the we11spring of our
Nation's jobs and good economic health.
Now, what can all of us here today do to help the
President —
and even more, the Nation —
dragons of recession and inflation?
fight the twin
You already know several of the answers.
conserve energy.
You can
If you are in business, you can work
to increase productivity.
And you can vote to elect
public officials who are fighting recession and infla
tion by intelligent means.
In addition, there is a longer-range project which
we, as women, are particularly equipped to handle.
that is to understand —
And
and to help others to understand -
more about how the free enterprise system actually operates
here in America.
Let me cite a personal experience.
When I was work
ing with the New Mexico Teenage Republicans a few years
ago, I talked to many groups of junior and senior high
school students.
These were bright, attractive boys and
girls, but when we discussed business and profits, the
young people would heap verbal scorn on these words.
I began to ask them, "What do you think are the profits
of most businesses?"
And invariably their answer would
be that business profits were 40, 60, or even 70 percent
of a sale.
The young people were amazed —
is a more accurate word —
unbelieving
when I pointed out that the
average businessman's profit was only about 5 percent,
and in some industries it was as low as one percent.
Now, there must be something wrong when our children
are so totally uninformed about their country's economy.
We teach youngsters more about the solar system a mil
lion miles away in space, than we do about the business
system right here on earth which provides them with the
highest standard of living in the world.
The fact is that much of the new capital needed for
more productivity must come from the profits earned by
business and industry.
In today’s environment, however, many people seem
to see profits not as a legitimate return on investment,
but as the presumably immoral rewards of corporate greed.
One opinion survey shows that adult Americans think
profits account for 28 percent of the sales of American
corporations while, as I indicated earlier, the real
figure is less than 5 percent.
To siim up:
Profits fuel the train of American
business and industry — * a train that carries as cargo
the jobs of two-thirds of the working men and women of
this Nation.
I personally would like to see more infor
mation about the ABC's of our business system put into
the lower grades of our schools.
The economy affects
everyone one of us, every day, and surely we should
study it as much as we do music, art or literature —
and I speak as a former English major.
Finally —
there is one last thought I would like
to leave with you*
And that is my own very strong feel
ing that the Federal Government of the United States is
-1
m
^
not some mysterious entity existing in a vacuum 2,000
miles away from Albuquerque.
really people —
The Federal Government is
all kinds of people *—
contributing
their time and talent to the job of improving America.
Likewise, the Federal dollar is not something
manufactured in Washington.
It is the taxpayer's dollar
and all of us have the duty to monitor how these dollars
are spent.
It really is our government and our money, and I
strongly urge you to become as personally involved as
your lifestyle permits.
You may not have the opportunity,
as I do in middle-age, to serve your country in Washington.
But, as a longtime volunteer, and now as a full-time
worker, I recognize more strongly than ever that the
contributions we citizens make to our Nation's life are
important.
Here in the United States, it truly is we,
the people, who govern.
It's a pleasure to be here today and to have this
opportunity to meet with all of you.
When Mr. Pribyson
called my office a month or so ago, he asked if I believed
in free speech.
Of course I said I did and in fact waxed
e l o q u e n t o n the subject while the telephone bill went
up and up.
When I finally paused for breath, he said,
"Mrs. Neff, since you feel so strongly about this, I'm
inviting you to make a free speech this February in
Hartford."
So you see, I was made an offer I couldn't
refuse.
Yes, I am a believer in freedom.
I like free speech,
free enterprise and terrific free lunches like this one.
Economists keep telling us there is no such thing as a
free lunch, but economists tell us a great many things
I don't really believe even when I understand them.
What
can you say, for example, when .a practioner of the "Dismal
Science" looks you straight in the bifocals and says that
a slowing-up of the slow down is not as good as an upturn
in the down-trend.
But even this is better than a speed-up
of the slowdown or a deepening of the down-curve.
And they
further suggest that the climate is right for an adjustment
Remarks by the Honorable Francine I. Neff, Savings Bonds
volunteers in Hartford, Connecticut on February 3, 1975.
to the readjustment, which in turn will mean a letting up
of the letdown.
Economists have been part of my life only since I
came to Washington, D.C. about 7 1/2 months ago to become
Treasurer of the United States.
But for 26 years before
and after that I have been the wife of a CPA who owns
his own business.
And this long and close exposure to
the business world reinforces my very strong belief in
the free enterprise system.
For some time now I have felt that the free enterprise
story —
the whole story of how business is run in 20th
century America —
should be more widely told.
told in many ways —
It can be
but the important thing is that it
be told.
Businessmen have many obligations.
—
In addition to making a good product;
—
To performing a good service;
—
To taking care of their clients and customers;
—
To paying taxes and to just plain staying afloat
in business today —
—
Businessmen have the further obligation of telling
»
their story to the public.
They must quit feeling defensive about the free
enterprise system which has brought the American people
the greatest mass prosperity in the world.
They must
point out that profits are not indications of corporate
greed, but are a legitimate return for capital risk and
-3-
endeavor.
Businessmen have worn their hair-shirt of a guilt
complex long enough.
you will —
selling.
Free enterprise —
capitalism if
is more than a suspect system of buying and
It is, as C. Jackson Grayson, Jr. points out,
"A system of values and attitudes, a way of life that
permits individual excitement, personal freedom, variety
and excellence."
Of course, businessmen aren't the only ones who
should talk about business.
The economy today has re
placed sex as topic number one —
at least in Washington — -
and newspaper writers have the obligation and challenge
to understand and tell the whole dollars and sense story.
Media people must dig into the ramifications and show all
sides of the picture -- not just the side they understand
the best.
Writers do a good job in showing the viewpoint of
consumers —
down.
and consumers are interested in keeping prices
There are news stories that show the labor union
and the worker's point of view, with its legitimate emphasis
on maximizing wages and on job retention.
standable.
That's under
But where is the third part of the picture?
Where is the reasonably informed insight into the business
man's views, expectations and difficulties by T.V. and the
newspapers?
When was a businessman —— not a super corporation
giant, but a more-or-less common businessman —
of any story you read?
the hero
Where, in fact, is the story of
:
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a
v..
the enormous interdependence of the consumer and the worker
and the businessman of each other?
It seems to me that what
separates us is constantly stressed, while our vital need
to cooperate is often ignored or belittled.
"United we
stand, divided we fall" is much more than just a pious
or bicentennial slogan.
The housewife —
who is also a consumer —
has some
responsibility too, for she must have a more realistic
understanding of business.
most people —
education —
Most housewives —
receive little or no
in fact
formal economic
and this lack continues in our schools today.
Let me cite a personal experience which affected me as a
housewife, mother and citizen.
When my daughter and son were teen-agers, I was
New Mexico State Chairman of the Teen Age Republicans.
I had occasion to speak to many junior high and high
school students.
These were bright, alert kids, but
whenever the talk turned to business and profits, the kids
would heap scorn on these words.
During the course of my talks I would always ask
what they thought the average business, whether wholesale
or retail, made in the way of profits.
would answer 30 to 80 per cent.
unbelieving is the word —
Invariably they
The kids were astonished —
when I told them that the actual
profit percentage on sales was closer to 5 per cent —
and in some cases was below one per' cent.
What's wrong with our schools and parents today
when we teach our kids more about the solar system thousands
of miles away than we do about the business system right
here at home that affects them closely —
the business
system that has provided them with the highest standard
of living of any large nation on earth!
Government, of course, has a strong concern with the
free enterprise system.
My boss, Secretary of the Treasury,
William Simon, and his boss —
that other Mr. Ford who
lives in the big white house down the road —
are both
true believers in the free enterprise system and in reducing
the role of government.
Over and over, Secretary Simon has warned that the
Government's share of our gross national product is growing
too fast —
it is now 30 per cent of our national output
and, if present trends continue, it could be 50 per cent
in 25 years.
Recently, Secretary Simon said:
"I know there are people who think it's a good idea
to have more government, that government is more capable
of making decisions for Americans.
"Well, I am sorry? this is not a philosophy that this
administration, or our President, or I can abide in.
"When I talk about freedom, that is not just an idle
term.
It means you are free to do as you wish to do, and
this great freedom is inextricably linked with economic
freedom.
If the government takes away your economic freedom,
your social and political freedoms will not be far behind."
That's my boss speaking, Treasury Secretary Bill Simon *
and I'm with him 100 per cent.
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6-
When I went to Washington and to my present position
last June, my idea of what a real, live United States
Treasurer did was very vague.
was mopping kitchen floors —
My real forte at the time
which was, in fact, what
I was doing in my Albuquerque home when the call from
Washington came with my appointment.
Since then, I've found my duties at Treasury fall
into four general categories:
My most glamorous job is reviewing and endorsing
our United States currency.
My name is on your money,
and I still get a thrill out of pulling "Francine I. Neff"
out of my pocket when I buy something —
which, as my
husband points out, is all too frequently.
As Treasurer, I am also a spokesman for the Treasury
Department and the Administration.
I’ve traveled some
60,000 miles to 17 states partly for this reason.
ItIs
stimulating to watch government policy being made in
Washington and it's challenging to help translate that
big-view policy into everyday language and then to help
explain it to people —
particularly this year when the
economy affects all of us profoundly.
My third job is so special it happens only once a
century.
I am Chairman of the Treasury Department’s
Bicentennial Program.
I ’m excited by this opportunity to
tell the Treasury story —
both the history of Treasury and
its vital functions in our lives today.
My fourth and final job is so special it has its own
separate title.
Since December —
Treasurer’s hat —
in addition to my
I have been National Director of
the United States Savings Bonds Division —
woman ever to hold that position.
the first
With that appoint
ment, my office staff increased from 7 to 470 people and
I became an instant Bureaucrat.
So my job in Washington involved considerably more
than signing and endorsing currency.
buy bonds, and by gosh speak out!
It's bicentennial,
It's a 10-hour day,
but I like it.
Telling the Savings Bonds story is a happy job be
cause I believe in them thoroughly.
them for 30 years —
I ’ve believed in
ever since, as a teenager, I sat
in front of the post office in my little home town of
Mountainair, New Mexico, on Saturday mornings to help the
American Legion sell World War II Bonds.
I believed in
those bonds when my father bought them for me after Pearl
Harbor, and I believed in them ten years later when, as
a young bride, I cashed them in to help buy our first home.
Savings Bonds are good for America and good for
Americans.
A great many other people feel the same way,
because more bonds were sold last year —
in 1974 —
than
have been sold in any year since the end of World War II.
Nationally, last year we achieved 108 per cent of
our goal by enrolling more than 2,600,000 new or increased
savers who bought more than 6.5 billion dollars in bonds.
Here in Hartford you certainly did your share with
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8-
sales of almost 7 million dollars more in 1974 than the
previous year.
That's super, and your Mr. Ford must have
had a number of better ideas.
■' j
Nationally, this year's goal is another 6.8 billion
dollars worth of bonds.
It will be a challenge to meet
this goal, and the year is starting out very well.
During
the first working days of January 1975, the sales of
Series E Bonds were $45 million more than the same period
last year.
So there is a need for Savings Bonds? there is
a market and there is a desire by millions to buy.
Your 1975 Savings Bonds campaign will have the
benefit of a number of sales tools, including a canvasser's
film featuring Telly Savalas? various booklets and brochure
suitable exhibits? and an exciting series of new television
radio and newspaper public service advertisements featuring
the bicentennial slogan "Take Stock in America? 200 years
at the same location."
Sales tools are highly valuable, but the real, notso-secret weapons of Savings Bonds will always be the
nationwide network of dedicated, hard-working volunteers
that form the heart, hands, and backbone of the program.
One of the reasons I truly enjoy the Savings Bonds
program is the opportunity to meet terrific volunteers
like yourselves.
For 25 years, I, too, was an unpaid
volunteer in programs ranging from the Cub Scouts and
Camp Fire Girls to the New Mexico Republican Party.
know first-hand what volunteers can do —
I
and you're doing
-9-
it right.
You are giving the gift money can't buy —
your time and your personal involvement in the future
of America.
When people ask us, "Why buy bonds?"
them many reasons.
We can give
Bonds provide the individual with a
safe, secure investment.
The six per cent rate of interest
is competitive, and it's a rate that has never been
lowered even when market rates were below Savings Bonds
rates.
Bonds are a convenient way to save.
a number of tax advantages.
They also have
Holders of "E" Bonds pay no
income tax on the interest until they redeem their bonds —
unlike a market instrument where taxes must be paid as
interest is received.
Bonds help keep the nation fiscally fit.
They are
a major, noninflationary way to help pay our public in
debtedness.
When ordinary bonds are sold to a bank, the
bank creates a deposit in the Treasury's name, the Treasury
check flows back into the banking system and both Treasury
and the banking system, in effect have use of the money.
But when an individual puts part of his or her income
into U.S. Savings Bonds, they are putting in money already
earned or saved, which is noninflationary.
It's good to
know that 23 cents of every dollar of the publicly held
debt is in E and H Bonds.
Savings Bonds and notes are not only a sizeable
chunk of the total debt, they are also the most stable
-
10m
element.
The average maturity of privately held marketable
debt today is under 3 years.
By contrast, the average
Savings Bond*s retention is six years —
or more than twice
as long as the dollars obtained through marketable issues.
Savings Bonds simply do not turn over as rapidly, and this
is another significant factor in the fight against inflation.
Savings Bonds also teach the habit of thrift to
millions of Americans.
They are the only savings for
many people whose alternatives may be saving nothing at
all or putting cash in a closet drawer where it earns
no interest.
The old saying that "thrift is the hand
maiden of free enterprise" is true.
As individuals we need to save, and as a Nation W e
need to shift more of our money and other resources out
of daily consumption and into capital investment to
revitalize the economy and provide more jobs for people.
Over the long run our best hope for increasing capital
lies in greater personal savings and investments.
Finally, Savings Bonds are a significant way to
reaffirm conf id;®frce in America.
We are not a washed—up,
has-been, 97-pound weakling of a country.
We are the
country that gave the world its highest standard of living —
that pioneered universal education and that has been a
mecca for generations of people.
No o t h e r N a t i o n i n
t h e w o rld c a n m a r s h a l l o u r m a n p o w er,
b ra in p o w e r an d te c h n o lo g y .
T h e o r d i n a r y A m e r ic a n k n o w s
th is
h e a r on te le v is io n
— yet a ll
h e seem s to
and
in
th e
-
11-
newspapers is the bad —
3
the inhuman side of the news.
I’m reminded of what one man said to a reporter seeking
to find out the State of the Nation.
Said the man, "I'm
as good as I am bad, but nobody speaks to the good in
me."
Savings Bonds speak to the good in people —
to their
care for their families and their love of country.
Bonds are an idea whose time has come again.
Savings
Today, with
huge federal deficits, and with a simultaneous war on
recession and inflation, 1975 may be the most important
year for the payroll savings program since the Second
World War.
I 'm
h a p p y I w as p a r t o f t h e S a v in g s B onds p ro g ra m
d u r i n g my a d o l e s c e n c e .
to b e an a c t i v e
I 'm
p a r t o f th e
h a p p y now ,
p ro g ram
i n my m i d d l e s c e n c e ,
a g a in .
t o d a y a r e m uch m o re e l e g a n t •— a n d t h e
The s u rro u n d in g s
fin a n c ia l
a r e m uch h i g h e r t h a n my d a y s i n M o u n t a i n a i r ,
fig u re s
New M e x ic o .
But the patriotism of my neighbors then and now is the
same —
and the need for our country is as great today.
So let us here reaffirm faith in our country and our
way of life via the free enterprise system.
Let's help
our country pay its bills and let's encourage our fellow
American to develop financial independence via the U.S.
Savings Bonds Program.
It's a pleasure to be with you here today in your
beautiful city.
When Bob Grayson called my Washington,
D.C. office a few months ago, he asked me if I believed
in free speech.
Of course I said I did and in fact waxed
eloquent on the subject while his telephone bill went up
and up.
When I finally paused for breath, he said, "Mrs.
Neff, since you feel so strongly about this, I'm inviting
you to make a free speech next February in Portland."So, this was an offer I couldn't refuse.
Yes, I am a believer in free speech, in'the free
enterprise system and in most of the other freedoms we
take for granted.
I would even be a believer in the free
lunch if I didn't have to stand up now and pay the bill
by talking.
At Treasury they keep telling me there's
no such thing as a free lunch in our economic system,
but then I hear a great many things I'm not really sure
that I believe.
What can you say, for example, when an
earnest economist looks you straight in the eye and says
that a slowing-up of the slow-down is.not as good as an
upturn of the downtrend.
But even this is better than a
speed-up of the slow-down or a deepening of the down-curve.
Remarks by the Honorable Francine I. Neff, "TSIA", in Portland, Oregon on February 18, 1975
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2-
And they further suggest that the climate is right for an
adjustment to the readjustment, which in turn will mean
a letting up of the letdown.
free speech —
I suggest to you that's not
That's total confusion.
I am here today to help kick off the 1975 Portland
Area United States Savings Bonds Campaign.
We call it
"Take Stock in America."
But I am also here to remind us to take Stock of
America —
to look around and see what's really happening
in our country today.
If.we looked solely at newspapers and television to
find out "what's happening" then, like Chicken Little,
we could expect the sky to fall next Thursday.
Sometimes
it seems like Armageddon all the way in our daily papers
and our nightly newscasts.
But there is more to America than rising unemploy
ment lines and falling Dow-Jones averages.
Let's look
at a few basics.
There is the American land —
your Oregon hills,
lakes and forests and my New Mexico mountains and mesas,
and all of the other places Americans call home.
There are the extraordinary ideas and beliefs that
produced our national Constitution and that made America
such a special, end-of-the rainbow country to millions
of immigrants.
There are the many freedoms we take for granted,
including the freedom —
yes, the freedom —
to work hard
and to do it for yourself.
new challenges —
There is the freedom to accept
look at me, a housewife for 26 years,
taking care of a husband, raising two children, doing
volunteer work for many years, and now, in my middlescence,
Treasurer of the United States and afforded a wonderful
opportunity to work full-time for the country I love.
If you ask me, what's right about the American economy.
I can mention recent history.
—
Since 1950, the country has constructed new homes,
roads and other public facilities for 35 million people.
—
Since 1960, the number of Americans going to college
has more than doubled.
—
And in the past 25 years, the medium income of
American families has doubled —
into account.
even taking inflation
This is probably the greatest increase
in financial well being ever recorded by a nation in any
similar period of time.
another freedom —
And it was done basically by
free enterprise.
Even today, with a simultaneous —
and serious —
inflation and recession, we are certainly not a down-andout, 97-pound weakling of a nation.
Great Depression of the 1930's.
We are not in another
Unemployment is somewhat
over 8 percent, while it was 25 percent in the thirties.
Further, we now have a comprehensive program of unem
ployment benefits that never existed in my —
and your —
childhood, when my own family had no indoor plumbing until
I was 13, and my father often had no work.
In addition, our country has
knowledge and tech
nology that are th8e envy of the world, the Vietnam war
is over for Americans and our cities are not burning.
Even in the field of energy, we are the most nearly indepent major nation in the world, and our own gas tanks are
full fe for a price.
So, while today may not be the best of times, it is
certainly not the worst of times either.
Yet we keep
hearing that America is going to hell in a handbasket —
or at least to purgatory in a pushcart.
Why?
I suppose
because it's human nature to accept the good things as our
natural right, and to yell, kick and scream at the unpleasant
things in life.
It's our right to yell —
unpleasant realities.
maybe even our duty —
at
But when we look at our land and
our lives this-year, let's do it in perspective.
Some people may accuse me of loving my country, and
I hope they do, because they're right.
small town of Mountainair, New Mexico —
I grew up in the
on a good day
they could scrape together 12-hundred people —
and I
was raised on a diet of pinto beans and patriotism.
The
patriotism was always there, but the beans were sometimes
scarce.
I was taught to love your family, your community
m.
and your country, and that whatever you do in life —
your best.
do
-5 -
' *
As a teenager in World War Two, I sold war bonds at
the Mountainair Post Office on Saturday mornings and rolled
Red Cross bandages in the afternoon.
I thought then that
partiotism was a willingness to die for your country.
Today I'm a lot older and a little smarter.
Now I
think that partiotism often means a willingness to live
for your country —
a willingness to say "yes" to America,
in sickness and in health, till death us do part —
and to
accept the resulting obligations.
What are those obligations?
Well, my office at the
Treasury Department in Washington is next door to the
White House.
From my windows, I see and hear the picketers
and marchers along Pennsylvania Avenue as they parade
past to promote many different causes.
The opportunity to demonstrate for a belief is a
basic right.
But I wonder.
Who speaks —
who marches ■—
for a society as a whole?
Who supports or defends our
society —
when it is attacked, as it seems
as a society —
to be, almost daily?
The angry young among us may think that society is
made of granite.
But you and I know that any modern civili
zation is enormously intricate.
It holds together only
because thousands of spoken and unspoken acts, and beliefs,
and forms of cooperation are repeated daily.
Even strong
societies are vulnerable to their own citizens.
society —
no social contract of any kind —
And no
can hold
forever if the centrifugal forces that beat on it are too
strong and too long.
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6-
pip
After a long era of divisiveness, our country is in
need of a reaffirmation of the social contract that binds
us.
The heart of this contract is a measure of voluntary,
restraint —
an implicit agreement among major groups in
our society that none will use their powers to the fullest,
and that all will support certain basic concepts.
The ultimate fate of any viable society does not rest
on its formal laws.
It rests on the willingness of its
citizens to voluntarily give to their society some part
of their time, their money and their trust, and to agree
that certain norms of behavior will be followed .
. _ by the great majority of people.
Rotarians understand this very well.
the cement that holds society together.
You are part of
I hope that you
sense, as I do, a desire among many Americans to once
again realign themselves with the larger society.
This feeling was a major reason why I accepted the
job of National Director of the United States Savings
Bonds Division two and a half months ago.
I do not earn
one extra penny because I am the Director *—
United States Treasurer.
I was already
But I do receive the great satis
faction of feeling that I am making another contribution
to my country.
Why do I feel that Savings Bonds help the country?
To begin with, they provide more capital for the government
at this critical time —
way.
and they do it in a noninflationary
-7-
Further, the $63.9 billion invested in Savings Bonds
nationwide is 24 percent of the privately held portion
of our national debt, and is a very stabilizing factor.
Savings Bonds have been called our "friendly national
debt" because they are so
stabilizing.
In fact. Savings
Bonds sold today remain outstanding for close to 6 years,
while the rest of the marketable debt has an average life
of less than 3 years.
Savings Bonds are also good —
very good —
for the
average American.
Bonds can
way for
—
and do —
provide a safe, secure convenient
Americans to save money.
These are the only savings
many people have.
Bonds can *— and do —
promote the thrift habit.
Bonds can —
have important tax advantages.
and do —
Much of the interest on bonds can be deferred —
sometimes for a lifetime.
Most important *— at 6 percent, bonds can —
provide a good rate of return.
and d o —
Buying bonds is not a
handout to your favorite charity, but an excellent investment.
Did you know that $100 put into Savings Bonds monthly
for the last six years is worth more today than the same
amount of money invested monthly in most stocks? Anyone
who followed your advice to buy Savings Bonds last year
is ahead of the game.
•
hrY
Last year, in fact, the sale of bonds nationwide
was the highest since World War Two —
$6.8 billion?
the Wall Street Journal, taking note of these sales com
mented:
"An old maid of the investment world has become
a glamour girl."
I could cover a whole.set of hands with reasons to
buy Savings Bonds.
—
Safety
—
Convenience
—
Regularity and thrift
—
Competitive rates of return to the individual
—
And help to the Nation.
Nineteen-seventy-five begins America's bicentennial
celebration year.
Let's make America's bicentennial a
"buy bonds" year as well.
Some of you may ask if it's good for the country
to save money in 1975.
The President, after all, has
asked for a tax rebate to promote consumption, not savings.
My answer is brief:
Yes, we need to increase con
sumption and yes, government officials hope that you will
spend more during the coming year.
But we also want to
maintain and encourage greater habits of thrift.
The wise consumer will ¡Spend some of his tax rebate —
and save some.
When we pull out of this recession, and
we will, the country and the consumer will be better off
if we have strengthened the patterns of thrift and frugality
that were more common.
The saying that "thrift is the
-9handmaiden of free enterprise" is a cliche, but it'is
also the truth.
About 60 percent of all series E and H Savings Bonds
are sold through the Payroll Savings Plan.
Nationwide,
the 1975 goal is to sign up at least 2.4 million new or
increased payroll savers.
And I'll tell you a semi-secret,
I hope they can sign me up.
As United States Treasurer,
I am one of only two people in the United States forbidden
by law to buy Savings Bonds.
But I'm working on special
legislation to make me eligible.
And when that day comes,
I will put my money where my mouth is and join you at the
bond-buying counter.
Your Oregon statewide goal for Bond sales in 1975 is
20,082 new or increased payroll savers.
In your three-county Portland Metropolitan area, the
goal is 7,800 new or increased savers.
Both your state and regional goals this year are
higher than last year —
when you had a terrific record.
In 1974, you topped your state goal by 115 percent and
your regional goal by 125 percent.
Bond sales for 1974
in and around Portland were more than 30 million dollars.
Congratulationsl
It is clear that super leaders have been at work.
Last year, and again this year, the chairman of the
Portland Area Take Stock In America campaign
Harry Surles, Vice-President of Burlington
is
-
10-
• ' '
■ . Spl
Northern Incorporated, and I don't need to tell you how
great he is.
The .nicest part of my job as National
Director is the opportunity to personally thank people
like Mr. Surles for their help.
In the last few months I ’ve traveled over 65,000
miles in 19 states telling the Savings Bonds story.
I
am impressed over and over by the fact that 95 percent of
Savings Bonds work is done by volunteers.
Everywhere I
go, I meet wonderful people like Mr. Surles, who are giving
their time and enthusiasm —
to the Bond program.
their most precious possesions —
When people like Mr. Surles —
his counterparts in the thousands —
and
when they continue
to volunteer for this program, I cannot be too downhearted
about the future of America.
As you begin your "Take Stock in America" Savings Bonds
Campaign for 1975, I am reminded of the reply that Theodore
Roosevelt gave to a young man who asked what he could do
for his country.
The President replied, "Do what you can
with what you've got, wherever you can, but do it."
Action
is still what moves and shakes the world.
Thank you for inviting me today, and for letting me
talk about taking stock ojE America —
have a beautiful state —
people.
here.
and in America.
a -lovely city —
You
and wonderful
I can understand why so many people want to live
Your Governor has urged people to visit instead.
I'm following your Governor's advice, but I hope to visit
again and again.
I've enjoyed today, I feel I'm among friends
and I want you to know that you and your tax money have a
friend
back
i n TaJs cth i ncrhnn
Hello, I'm happy to be here with you today,
your city, your people and your enthusiasm.
I also like
the subjects you've asked me to talk a b o u t —
women and Savings Bonds.
which are
That's variety:
Variety is what women are ail about.
To be a bit
dramatic, we women are no longer only sex symbols, fer
tility figures or typing toilers in the basement of the
business world.
We are half the human race.
Where do you find us?
Just about everywhere.
We
are mopping kithcen floors, raising families, living in
communes, robbing banks, trying for the executive suites,
and in general being as good, bad, smart, silly, and can
tankerous as men.
To be a bit more precise:
—
Nine out of ten American women will work outside
of their home sometime in their lives.
—
Fifty percent of women between 18 and 65 are
currently working.
We're as well educated as men but, on
the average, we earn only three-fifth's of a man's salary.
There are many reasons for this and one —
the main reason
is that many women work only on a part-time basis.
Many
leave jobs to take out time to raise families and then re
turn later to the labor force.
For many women, jobs are
secondary to their careers of being wives and mother.
medium age of women workers is 38 years.
The
We have higher
unemployment, but we are coming into the job market in
Remarks by the Honorable Francine I. Neff at the Federal
eeu^ive Board Meeting in Portland Oregon on Feb. 19, 197
ui w
greater numbers.
It's pretty obvious the big question isn't shoulc
dulcí
women work —
question is —
because half of us already do.
The real
how do women prepare themselves for their
fair share of good jobs, and how does society accept them
in their newer roles?
One of these newer roles is politics.
About 3,000
women made a bid for city, state or national office last
year.
The results are that —
Connecticut has a woman
governor in Mrs. Ella Grasso.
New York State has Mary
Ann Krupsak as Lieutenant Governor; Janet Hayes is Mayor
of San Jose, California; and Susie Sharp is chief justice
of the Supreme Court of North Carolina.
Five new women came to Congress this January for a
total of 17 women legislators in Washington.
A good friend
of mine, Mary Louise Smith, is the first woman chairman of
the Republican National Committee.
And last week, President
Gerald Ford nominated a woman, Mrs. Carla Hills, as the new
Secretary of Housing and Urban Development.
Women have also scored gains in other fields.
Con
gress outlawed credit discrimination based on sex last
year.
The Bank of America settled a class action suit
on behalf of its female employees, which will mean about
$10 million in additional income to the women.
The Bank
also agreed to increase its proportion of women officers
to 40 percent.
7
And in the field of education, the number
of women in medical schools doubled in the past three
years.
They are now 15 percent of all students.
Women in Federal Civil Se rvice careers are also
moving up.
ury —
In my own agency -- the United States Treas-
/
in the last twenty months, the number of women in
higher grade civil service ranks of GS-13 to GS-15 has
increased 38%.
I am Treasurer, and another woman appoin
tee, Mrs. Mary Brooks, is head of the Bureau of the Mint.
That’s the good news.
But everything isn't sunshine
and roses for working women.
either.
It isn't for working men
We'll all have to pull together to improve life
for everyone —
if we believe in democracy, then we must
believe in the maximum sharing of power and responsibility
among all qualified men and women.
many problems —
hands —
Our society has too
needs too many good hearts and minds and
to exclude anybody willing to pull their share of
the load.
I've been talking about power and work —
matically we think of salaries.
and auto
But I'd like to put in
a good word for volunteer work, because it is terribly
important to our society.
Some 70 million people volunteer
their time and talent for a multitude of causes.
One
expert* estimates that volunteers contribute $50 billion
a year to America's "gross national product".
*John Dixon, Director of the Center for a Voluntary Society,
Washington, D.C.
I am a wife, mother and dedicated believer in thee
value of volunteers.
i
For the first 26 years of my adul'
life, I was an unpaid volunteer for everything from the
PTA tc the GOP.
the volunteer.
My route to a career was via the way of
I have been privileged to learn many tech
niques and skills while serving as a volunteer that I'd
probably never have learned doing a regular job for pay.
As
a volunteer,
and m o v e r s
and
I have
to
been
observe
able
how
to w o r k w i t h
they get
things
top
planners
done.
Today,
I am the United States Treasurer and National Director of
the Savings Bonds Division.
And I am well aware that 99
percent of our bond program work is being done by dedicated
volunteers.
I like working with volunteers, because I know how dedi
cated they are*
In a way I, too, am still a volunteer.
Treasurer, I receive a handsome salary.
As
But I do not receive
one additional penny because I have also accepted the additiona
duties of National Director.
What I do receive from this job
is the great satisfaction of working with people like your
selves for a cause we all believe in.
I have believed in the value of Savings Bonds since I
sold them as a teenager back in my hometown of Mountainair,
New Mexico, during World War Two.
I believed in them when
my parents bought them for me and later when my husband and
I cashed them in to help buy our first house.
are good for America and good for Americans.
Savings Bonds
More bonds were
sold in 1974 than in any year since the end of World War Two —
a total of 6.8 billion dollars.
Here in the Portland metro-
politan area you did your share —
and morel
Your 1974 sales
Our national
goal
for 1975 is
billion dollars worth of bonds.
during a period of recession.
to sell 6.8
This will be a challenge
But the year is starting
out well.
More than 700 million dollars worth of Series E
bonds were sold last month, which is well above the
same period last year.
Payroll savings plans account for 60 percent of
all bond sales.
This year, we want to sign up at least
2.4 million new or increased bond savers.
In your Portland area, the goal is 7,800 new or
increased savers and a dollar goal of about $31.4 million.
I know you*11 succeed.
You*11 have some excellent sales tools.
These include
a new canvasser's film featuring Telly Savalas, the Kojak
of T.V. fame, and an exciting series of public service
advertisements featuring the Bicentennial slogan "Take
Stock in America: 200 years at the same location."
As you go about our job, let's not ignore the
minority groups
in our community.
I'm fortunate to come
from New Mexico with its three cultures of Spanish,
Indian and Anglo, so I'm very conscious of this.
Black,
brown, red or white, we all need green money for future
security.
«f'
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6-
Let's also use our imagination in telling the
V
Savings Bonds story.
)
A former American Indian dancer
from my hometown in New Mexico began his career touring
the country for the Bond program with Indian dancers.
There must be dozens of equally imaginative ways to
get the message across.
Our basic message, of course, is "buy bonds".
When people ask us "Why?", we can give them many reasons,
—
Bonds are a safe, secure investment.
The six
percent interest rate is competitive, and it's a rate
that has never been lowered, even when market rates
were below Savings Bonds rates.
—
Bonds are convenient. They're as painless a
way to save as there is.
—
Bonds have tax advantages.
Holders of "E"
series bonds pay no state or local tax, and no federal
tax is due until they redeem
their bonds.
By contrast,
taxes must be paid on a market instrument as it is
received.
—
Bonds help
the nation stay fiscally fit.
Bonds
are an important, noninflationary way to help pay our
purlib indebtedness. It's good to know that 24 cents
of every dollar of the publicly held debt is in E and H
bonds.
Savings bonds are also the most stable^e^mlnt
in our debt structure.
Most of our marketable debt today
matures in under three years.
But Savings Bonds are
held for an average of six years —
as long.
or more than twice
Savings Bonds simply do not turn over as
rapidly, and this helps to fight inflation.
Further, Savings Bonds teach the habit of thrift to
millions of Americans.
The old saying that "thrift is the
handmaiden of free enterprise" is still true.
Finally, Savings Bonds are a significant way to
reaffirm one's confidence in America.
We are not a washed-up, has-been 97-pound weakling
of a country.
We are the country that sets world standard
in education, in living standards, and in pioneering new
fields.
No
other nation has our manpower, our brainpower
our technology.
on the bad —
Yet, our newspapers seem to concentrate
the inhuman side of the news.
I'm reminded
of what one man in Kansas said to a reporter seeking to
find out the state of the nation.
Said the man, "I'm
as good as I am bad, but nobody speaks to the good in me."
Savings Bonds speak to the good in people —
to their
care for their families and their love of country. Savings
Bonds are an idea whose time has come again.
Today, with
huge federal deficits, and with a simultaneous war on
recession and inflation, 1975 may be the most important:
year for the payroll savings program since the Second
World War.
The last four letters of the word "American"
spell "I can".
deal
Together, all of us can do a very great
for our country.
Let's begin the campaign with the
knowledge that we have a good product —
vital cause —
J «
we have a
and together we can and will succeed.
0
It's a pleasure to be here today.
When Jim Gray
called my Washington office a few weeks ago, he asked
me if I believed in free speech.
Of course I said I
did and in fact waxed eloquent on the subject while
his telephone bill went up and up.
When I finally
paused for breath, he said, "Mrs. Neff, since you
feel so strongly about this, I'm inviting you to make
a free speech this February in Springfield."
So how
could I refuse?
Yes, I am a believer*in free speech, in the free
enterprise system, and in all of those other freedoms
we take for granted.
I would even believe this was a
free lunch if economists didn't keep saying there's no
Remarks by the Honorable Francine I. Neff, "TSIA"
Springfield, Mass., February 25, 1975.
2
such thing.
But, then, economists say a great many
things I'm not sure I believe even when I understand
them.
What can you say, for example, when an economist
tells you that a slowing-up of the slow-down is not as
good as an upturn of the downtrend.
But even this is
better than a speed-up of the slow-down or a deepening
of the up-curve or a letting up of the letdown.
not free speech —
That's
it's total confusion.
I am here today to help kick off the 1975 Springfield
Area United States Savings Bonds Campaign.
We call it
"Take Stock in America."
“But I am also here to remind us to take Stock of
America —
to look around and see what's really happening
in our country today.
If our only view of America is through newspapers
and television then, like Chicken Little, we can expect
the sky to fall tomorrow at one o'clock.
It's Armageddon
all the way in the daily papers and nightly newscasts.
But there is more to the United States than rising
unemployment and falling Dow-Jones averages.
Let's look
at a few basics.
There is the American land itself —
your Massachu-
setts mountains and seashore and my New Mexico mesas
and valleys, and all of the other places we call home.
There are the American people —
212 million of us —
working at jobs, taking care of our families, going to
3
school and volunteering an estimated $50 billion yearly
in time and talent to public causes.
There are the American ideas and beliefs that
produced our National Constitution and made this
country such a special, end-of-the-rainbow place to
millions of immigrants.
And all of these —
the land, people, and ideas —
gave us our freedoms, including the freedom to accept
new challenges —
as I did when I took this job as
United States Treasurer.
I am a wife, mother and dedicated believer in the
value of volunteerism.
For the first 26 years of my
adult life, I was an unpaid volunteer for many causes,
ranging from the PTA to the GOP. Today, I am the
United States Treasurer and the National Director of the
Savings Bonds Division.
This latter job especially
pleases me, because most bonds division work is done by
volunteers and I know how effective volunteers can be.
In a way I, too, remain a volunteer.
very handsome salary as the Treasurer.
I receive a
The position of
National Director of the Bonds Division carries a
comparable salary.
However, I do not receive one
additional penny for the Director's job.
getting two for the price of
You are
one, and I_ receive the
satisfaction of working for a cause that I strongly
believe in.
I believe in the Savings Bonds program for three
good reasons.
First, bonds are a sound personal investment.
They are secure in a troubled world.
They are a
painless way to save for a home, education or retirement.
They can’t be destroyed, and they pay a 6 per cent
interest rate.
The interest is exempt from state and
local taxes, and you can defer federal taxes until the
bond is cashed in.
Bonds are a savings program but they do very well
from an investment standpoint.
In the last six years
they have been ahead of the stock market. Banker Tom
Prideaux of the National Bank of Oregon notes that
$75 invested in Savings Bonds monthly since December of
1968 is worth more than $75 invested monthly in stocks
making up the Moody’s Industrial Index.
So you're
ahead in many ways if you buy bonds.
The second benefit of our program is that it
helps the government.
Savings bonds are a noninflationary
way to help pay off public indebtedness.
When the
Treasury sells other bonds to a bank, the bank creates
a deposit on its books in the Treasury's name.
But
Treasury checks flow back to the banking system, so both
the Treasury and the banking system have the money.
In
effect, new money has been created and this can be infla
tionary .
5
But when an individual puts part of his income
into savings bonds, that is a real, noninflationary
savings.
It's good to know that 24 cents of every
dollar in the publicly-held portion of the federal
debt is in E and H bonds.
This is far and away the
most stable part of the debt —
part of the debt.
the so-called "friendly"
Specifically, E and H bonds remain
outstanding for more than 6 years compared to less than
3 years for other marketable instruments.
Finally, buying and holding savings bonds is a
vote for America. • And voters are turning out in record
numbers.
More than 6.9 billion dollars worth of bonds
were bought in 1974 —
the largest number in 29 years.
Hamden County did its share with 1974 sales of
$16,434,000.
This was 104 per cent of your goal —
and
that's super.
Selling millions and billions in bonds doesn't just
happen. It's the work of a very small handful of
Treasury people and a very large handful of volunteers.
The savings bonds program is done 99 per cent by unpaid
volunteer help.
Volunteerism is as American as apple pie —
much better for the waistline.
and
During my 8 months as
Treasurer, I've traveled 65,000 miles to 19 states in
behalf of the bonds program, and I've met hundreds of
terrific volunteers.
They —
and you —
are standout
people in your communities who give the program stature
and respect.
There is Dr. Kurt Debus, the space scientist and
former head of the Kennedy Space Center who is chairman
of his area1s savings bonds program.
There is the
President of Standard Oil in Kentucky who heads that
state's -bond program.
There is a terrific woman —
Anne
Simpson, wife, mother of five, career woman and chairman
of the Honolulu, Hawaii savings bonds volunteers.
And
today, I am meeting other wonderful volunteers such as
James Martin and Bill Brunei.
Volunteers like you help Americans to save for a
better future.
You improve the nation's debt structure.
And you add to our confidence in the future.
Let's talk
a little about confidence.
Recession is a big topic today, when we have an
8 per cent unemployment rate.
no coincidence —
It's interesting —
and
that U. S. Savings Bonds first went on
sale 40 years ago this week when we were in the middle
of —
not a recession, but the Great Depression.
Nineteen thirty-five was a hard year for many of us
One out of every four breadwinners was out of work.
7
My father was one of those men, and we lived on pinto
beans and the patience of our local grocer in Mountainair
Most of you too, I'm sure, have special memories of that
time.
The decision of Treasury to put Savings Bonds on
the market on March 1, 1935 was at least partly
to
help restore confidence in the country's financial
system. - For the first time, the so-called "little man"
could invest directly in his country, with a bond that
was very very safe.
I'm sure one hope.was that this
would help to rebuild the faith and trust damaged by
the Depression period.
Our modern
program has come a long way from
those baby bonds of 1935.
But confidence in the United
States is still a vital part of our stock in trade.
And
helping to promote that confidence today is just as much
our business as selling bonds.
We can promote with pride.
America in 1975 is not
a washed-up, has-been 97-pound weakling of a country.
We are a nation that sets world standards in education,
in living standards and in pioneering new fields.
No
other nation has our manpower, brainpower, or technology.
Even our much-maligned economic system has doubled the
medium income of American families in the past 25 years and yes, that does take inflation into account.
This is probably the greatest increase in financial
well-being ever known by a nation.
much about it.
But we don't hear
Our news tends to be negative.
I'm
reminded of one man who was being interviewed by a
reporter, and he said, "I'm as good as I am bad, but
nobody's speaking to the good in me."
As volunteers in this program, you do speak to the
good in people —
to their care for their families and
their love of country.
You can show your feelings — you
can say "Yes" to America and "yes" to confidence, and
"yes" to the movement back to bonds.
As I travel across the country in behalf of this
program, I hear many people complain that Big Brother
in Washington wants to do everything.
And I point out
that the Savings Bonds program is something only volunteers
in their own community can do.
Only they and you can
make it succeed.
As a Savings ponds volunteer, you have an excellent
message.
You have a ready market.
from government and business.
You have support
Our Savings Bonds staff
will help, and the National Advertising Council
has done a super job.
.
A clever new
canvasser's film, featuring Telly Savalas of TV Kojak
fame, has just been released, and a series of public
service ads will feature our bicentennial slogan "Take
Stock in America —
200 years at the same location."
f
9
This is all necessary.
But the savings bonds job
will never be done in Washington or Madison Avenue.
It
is a grass roots project all the way.
Your Hamden County goal this year is to enroll
6/255 new or increased savers and to sell $24,751,000
in bonds. Your success will be directly related to your
personal involvement of time, effort, and enthusiasm,
w ith
the present ; economic climate, this can be the most
important year for the payroll savings program since
1935.
I'm glad to be
part of it and I hope you are,
too. »
Thank you for inviting me here today, and for helping
me to take stock of America —
and in America.
I feel
I'm among friends, and I want you to know that you have
a friend in Washington.
Let all of us exert our uncommon
efforts on behalf of our common bond.
«%
Statement of
The Honorable Jack F 0 Bennett
Under Secretary of the Treasury for Monetary Affairs
Before the
Subcommittee on Securities
Senate Committee on Banking, Housing and Urban Affairs
March 4, 1975
Foreign Investment in the United States
M r 0 Chairman, I appreciate this opportunity to present
to your committee the Administration's views on foreign
investment in the United States«
Within the Executive Branch we have been engaged in
an extensive inter-agency review of Governmental policy
toward such investment«
We felt that such a review was
appropriate in the light of the pace of change in inter
national economic affairs,, including in particular the
rapid growth in the hands of a few governments of funds
available for investment abroad«
In summary the basic conclusion of our review was to
re-affirm the traditional policy of our Government as stated,
for example, by the President in October when he signed the
Foreign Investment Study Act of 1974«
He said, "We continue
to believe that the operation of free market forces will direct
worldwide investment flows in the most productive
way«
There
fore my Administration will oppose any new restriction on
2
foreign investment in the United States except where absolutely
necessary on national security grounds or to protect an essential
national interest."
An important underlying reason for the
reaffirmation of that policy was our recognition that we shall
need all the investment we can appropriately attract to assist
in restoring the productivity growth of our economy.
Our review confirmed that existing laws, regulations, and
practices provide extensive information with respect to foreign
investments as well as safeguards to deal with particular
investments.
We concluded, however, that, in addition to
enforcing rigorously the existing laws and regulations which
control the activities of foreign investors, we should take
administrative action to supplement present arrangements:
-- by establishing a new continuing high-level,
inter-agency committee to report to the President’s
Economic Policy Board and to serve as the focal
point within the Executive Branch.for insuring
that, foreign investments in the United States
are consistent with our national interest;
-- by creating a new office to serve that committee
and all other parts of our Government by
monitoring foreign investment and producing
analyses both of developing trends in various
categories of investment and of the prospective
impact of significant individual investment proposals;
— - by using the new office to centralize and improve
the gathering of information on foreign invest
ment and its dissemination to appropriate parts
of the Government; and
-- by negotiating procedures with the principal
foreign governmental investors for advance
consultation with the U.S. Government on
prospective major direct investments in the
United States.
It is our belief that the policy and arrangements we
are proposing will simultaneously safeguard our national
interest and, by clarifying the situation, actually enhance
the attractiveness of the United States for foreign investors.
We do not believe that there is at this time a need
for any new legislation, apart from the possible desirability
of legislation now being studied by the SEC to impose more
effective requirements, on both domestic and foreign
investors, to reveal the beneficial owners standing behind
investments held in nominee names.
At the outset of the Administration review just completed
we took a look at trends in foreign investment over the last
several years.
Although the term "investment" sometimes
covers all types of financial claims, in this particular
study we concentrated on investments in relatively long-term
assets, such as stocks and bonds, rather than short-term
4
assets such as bank deposits and Treasury bills«
We
distinguished between direct investment and portfolio
investment«
Until recently, foreign equity holdings
of 25 percent or mor
@FedFRASER