PAGENO="0001"
TI~ b
THE 1968~'ECONOMIC REP~RT
OF THE PRESIDENT
HEARINGS
BEFORE THE
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
NINETIETH CONGRESS
SECOND SESSION
FEBRUARY 16, 19, 20, AND 21, 1068
PART 2
Printed for the use of the Joint Economic Committee
~1E
COLLEGE O~ SOUTH JERSEY L4BR
CAMDEN,~J~ 08102
0
SI
7 U.S. GOVERNMENT PRINTING OFFICE
90- 91 WASHINGTON : 1968
c 7 ~ ocU Government Printing Office
PAGENO="0002"
`I
SENATE
JOHN SPARKMAN, Alabama
J. W. FULBRIGHT, Arkansas
HERMAN E. TALMADGE, Georgia
STUART SYMINGTON, Missouri
ABRAHAM RIBICOFF, Connecticut
JACOB K. JAVITS, New York
JACK MILLER, Iowa
LEN B. JORDAN, Idaho
CHARLES H. PERCY, Illinois
WILLIAM H. MOORE
HOUSE OF REPRESENTATIVES
RICHARD BOLLING, Missouri
HALE BOGGS, Louisiana
HENRY S. REUSS, Wisconsin
MARTHA W. GRIFFITHS, Michigan
WILLIAM S. MOORHEAD, Pennsylvania~
THOMAS B. CURTIS, Missouri
WILLIAM B. WIDNALL, New Jersey
DONALD RUMSFELD, Illinois
~W.E.~BROCK 3D, Tennessee
Joux B. HENDERSON
DONALD A. WEBSTER (Minority)
(H)
GEORGE R. IDEN
JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 5(a) of Public Law 304, 70th Cong.)
WILLIAM PROXMIRE, Wisconsin, Chairman
WRIGHT PATMAN, Texas, Vice Chairmam
Joli~R. STARK, Executive .D irector
JAMES W. KNOwLES, Director of Research
ECoNoMISTS
PAGENO="0003"
CONTE NTS
STATE1V[ENTS
FEBRUARY 16 1968
Page
Graham, Harry L., legislative representative, the National Grange 339
Prepared statement 342
McDonald, Angus, director of research, National Farmers Union 346
Prepared statement 349
Shuman, Charles B., president, American Farm Bureau Federation 3~7
Shafer, Gordon, chief negotiator, National Farmers Organization 363
FEBRUARY 19, 1968
Machiup, Fritz, Walker professor of economics and international finance,
Princeton University 394
Prepared statement 399
Butler, William F., vice president and director of economic research, the
Chase Manhattan Bank, New York .416
Prepared statement 417
Behrman, Jack N., professor of international business, University of North
Carolina 420
Prepared statement 424
AFTERNOON SESSION
Cook, Edward W., president, Cook & Co., Memphis, Tenn 467
Prepared statement 468
Hamilton, Lyman C., treasurer, International Telephone & Telegraph Co - 470
Norris, Robert M., president, National Foreign Trade Council, Inc., New
York, accompanied by Melville H. Walker, vice president, National
Foreign Trade Council 477
Roth, Hon. William M., President's Special Representative for Trade
Negotiations, accompanied by Theodore R. Gates, Chief Economist, John
Rehm, General Counsel, and William Kelly, Coordinator for New Trade
Policy Study 497
FEBRUARY 20, 1968
Wirtz, Hon. W. Willard, Secretary of Labor, accompanied by Arthur Ross,
Commissioner of the Bureau of Labor Statistics 519
Prepared statement 527
FEBRUARY 21, 1968
Olsen, Leif, senior vice president and economist, the First National City
Bank, New York 607
O'Leary, James J., chairman of the board and chief economist, Lionel D.
Edie & Co., Inc 615
Prepared statement 620
Hart, Albert G., professor of economics, Columbia University 626
Prepared statement 629
AFTERNOON SESSION
Saulnier, Raymond J., professor of economics, Barnard College, Columbia
University 662
Schultze, Charles IL., senior fellow, The Brookings Institution, and former
Director of the Bureau of the Budget 669
(III)
PAGENO="0004"
Iv
Ture, Norman B., director of tax research, National Bureau of Economic Page
Research, Inc 677
Weston, J. Fred, professor of business economics, University of California
at Los Angeles 687
ADDITIONAL INFORMATION AND EXHIBITS
Graham, Harry L.:
Where they are-Geographic analysis of Grange membership (dues
paid) 371
McDonald, Angus:
Membership list-National Farmers Union 372
Shuman, Charles B.:
Farm Bureau membership 374
Table: CCC sales of feed grain in relation to utilization 378
Table: CCC sales of wheat in relation to utilization 378
Regaining control of Federal expenditures 388
Behrman, Jack N.:
Alternative approaches to reducing expenditures: responses to ques-
tions put forth by Representative Boggs 440
Letter responding to Senator Jordan's question on overkill through
too much taxation 443
Wirtz, Hon. W. Willard:
Information re updating of "Dictionary of Occupational Titles" 536
"Moonlighting-An Economic Phenomenon," reprinted from Monthly
Labor Review, October 1967 542
Information relating to number of persons not in current labor force_ - 553
"Reasons for Nonparticipation in the Labor Force," Special Labor
Force Report No. 86 555
Supplemental statement containing answers to questions by Rep-
resentative Curtis re Human Investment Act, and Employment
Incentive Act bills 580
Table: Neighborhood Youth Corps summer jobs funded in 50 selected
cities, fiscal year 1967 590
Reply to questions concerning cost-effectiveness study of manpower
training programs 593
Possible effect of surtax upon personal income 598
Table: Percent change and contribution to total change, selected
Consumer Price Index components, December 1966 to December
1967 600
Table: Wholesale Price Indexes in the United States and other major
industrial countries, 1955-67_ 601
Table: Unemployment rates of eight industrial countries adjusted to
U.S. concepts, 1965-67 602
Curtis, Hon. Thomas B.:
H.R. 13777, a bill to increase employment opportunities, etc 576
Proxmire Hon. William:
"War, Inflation and Taxes," editorial reprinted from Washington
Post February 21, 1968 660
Questious subsequently supplied to Department of Labor and responses
thereto
PAGENO="0005"
THE 1968 ECONOMIC REPORT OF THE PRESIDENT
FRIDAY, FEBRUARY 16, 1968
CONGRESS OP THE UNITED STATES,
JOINT ECONOMIC COMMIrPEE,
Waslthigton, D.C.
The committee met at 2 p.m., pursuant to adjournment, in room
S-228, the Capitol, Hon. William Proxmire (chairman of the joint
committee) presiding.
Present: Senators Proxmire, Javits, and Jordan.
Also present: William H. Moore, senior staff economist.
Chairman PROXMIRE. The Joint Economic Committee will come
to order.
We are honored and delighted to have such an impressive panel
of witnesses representing the great farm organizations of our Nation
before us.
As I have said to some of you gentlemen, many of us on the coin-
mittee are concerned about the lack of adequate expressions of policy
with regard to our farm economy in the message of the President and.
the statement of the Council of Economic Advisers.
That is why the committee decided it would be desirable to have
both the Secretary of Agriculture and the leading farm organiza-
tions appear before us this afternoon.
The Secretary of Agriculture appeared Wednesday and you gentle-
men, of course, are here today.
One difficulty is that as we stated-the staff state~d in the letter
which I sent out, and I take responsibility for it-that statements
should be confined to 25 minutes. As you can see, we have a four-
man panel, and we want to have time for questions; so I would
appreciate it very, very much if you could possibly abbreviate your
statements as much as you can; and if you could confine your state-
ments to 15 minutes, it would be most helpful.
Without question, your full statements will be printed in the record
and will be made available, of course, to members of the committee
and to Members of the Congress.
So, we will proceed as the witnesses are listed, with Mr. Harry
Graham, the legislative representative of the National Grange, first.
Mr. Graham.
STATEMENT OP HARRY L. GRAHAM, LEGISLATIVE REPRESENTA-
TIVE, THE NATIONAL GRANGE
Mr. GRAHAM. Thank you, Mr. Ohairman.
I will be delighted to `try to hold this `to 15 minutes, and I will try
to watch the clock. It probably is handier for me than for you to watch
it, and if I do not, you know what your gavel is for.
(339)
PAGENO="0006"
340
We appreciate the opportumty that you have given us for the
`Grange, and I am sure this is shared by the rest of the Grange orga-
.nization, to appear before this distinguished committee of the Con-
`gress and the Senate, and we appreciate the concern which you have
had which motivated the panel meeting; of the graciousness which
you have extended to us in this invitation to appear before you.
There are many parts of the President's report that we would like
to talk about, but none of them, obviously, we can go into in detail in
this time limitation which, I think, is very reasonable.
I would say, first, though, that the letter of transmittal which the
President sent along with the report of the Council, that. the President
pointed out some very substantial and spectacular gains in the general
prosperity of the Nation during the last 7 years.
They show up in almost all areas, with the highest number of em-
ployed people with the highest average earnings on record.
It shows an unemployment rate of 3.8 percent, a rate that has not
been lower except twice in 169 months. WTith total employee coinpen-
sa.tion up $33 billion, and total consumer income after taxes up $35.5
billion, combined with an ailtirne high in industrial production with
a. yearly rate of growth in the gross national product of 4.5 percent,
this is a; continuation of the longest period of uninterrupted growth
in our history.
We see undistributecl profits in the nonf arm corporate businesses
of $20.5 billion, and net. working capital of $196.3 billion. This is after
bond yields have increased for the triple A bonds by 38 cents, and for
the triple B bonds by 60 cents during the last year. with total hiquicT
a.ssets up $47.1 billion.
These are solid economic accomplishments, but. they leave some
problems.
One is the relaxing of, in our opinion, the wage-price guidelines
which were solidly based on productivity.
In the farm sector, we are concerned because the agricultural sector
has not shared equitably in the returns for the contribution that they
have made toward the total growth of our economy, both in GNP and
a.lso almost of as much importance to the contribution we make to the
net balance of trade by the extremely high level of agricultural ex~
ports, which have been based primarily on the ability of the American
farmer to produce in competition, through their tec.lmology, with
almost. any country in the world.
This, in turn, gives us another concern. If I go back for a minute
in the relationship of the farm dollar to the rest of the economy, that
is one of our concerns. Only the dairy indusfty showed au improvement
in their parity ratio last year. it being up from 114 to 119. The Senator
from Wisconsin, I am sure, is interested in that one. From ~
experience I know of his concern.
Poultry and eggs were down from 102 to 84; food grains were down
from 87 to 84; feed wa~s down from 112 to 108, while toba.cco was up
to 114, its highest level.
The result was that cash receipts were clown 17 points and net farm
income was down $283 million, while the output was up from 113 to
117, with output ier man-hour up 6 points to 167.
I wanted to particularly emphasize this one because if we are going
to talk about income on the basis of production and the increase in
PAGENO="0007"
341
production, then certainly agriculture has a claim that is not less than
other parts of our economy, and certainly greaterthan some.
We noted with approval the deletion of the reference to farm in-
come last year which proposed no interference with the law of supply
and demand as the determinant for the allocation of the resources in
agriculture. We hope that the statement previously referred to that
Federal economic policy no longer relies primarily on the "automatic
stabilizers" built into our system or waits for a recession or serious
inflation to occur before measures are taken, includes agriculture with
the rest of the economy.
In the international picture with which the report deals at some
length, we have a very great concern because of the development of the
protectionist attitude in the United States, and because this protec-
tionist attitude, in our judgment, is based on some rather unsound
economics.
I spent 2 weeks in Germany in November as a member of a delega-
tion from the United States studying the effects of the Marshall plaii
after 20 years of their history. While we were there, there was a great
deal of dissatisfaction in the coal area because of their closing down of
a great share of their production because of inefficient and not needed
production-dropping their coal production as quickly as they can,
from 143 million tons down to somewhere around 80 million tons, and
importing coal from the United States. With our technology we can
produce it and ship it to Bremen cheaper than they can ship it from
the iRuhr to Bremen, which is economic efficiency working as it should.
At the same time, the steel workers and the steel industry, along with
the Government, were pounding out an agreement whereby they were
not going to increase wages nor profits during the coming year or dur-
ing the term of their contract that they were working on, because they
felt that this would be an adverse factor in their attempt to maintain
the markets that they already developed in the world. Over against
this we are concerned, as I think everybody has to be concerned, about
the threat of a rather serious increase in steel wages, and with the con-
tinued high level of profits that the steel industry is making, to the
point where they can no longer compete in some types of steel right in
their own area with the steel coming in from Japan and Germany. The
failure of our American industry to plow back its profits into the
industry, with the exception of National Steel, which has the only
really modern steel complex in the United States, comparable to those
in Germany and Japan, means that we are simply pricing ourselves out
of our own market by maintaining an inefficient system.
In our judgment, protectionism that is being talked about today will
put the burden of this upon the most efficient part of our industry,
which is agriculture, and by this method the burdens which properly
should be borne by the industry, are unreasonably shifted to agricul-
ture and to the consuming public.
This is a matter of more than casual concern, and I will leave it at
that, having more completely expressed it in the statement.
In terms of the budget and taxes, we have consistently stood in the
Grange for enough taxes to pay the cost of government, especially at a
time when there is still a substantial threat to inflation. We believe we
have waited longer than we should to pass the surtax bill, but we believe
it still should be passed, if not from the standpoint of stopping infla-
PAGENO="0008"
342
tion, at least for the purposes of restoring confidence in the dollar
among our trading partners around the world.
If there is consistency in the advice we have been getting from our
ftnancial friends, it is that if we are going to restore confidence in the
dollar we are going to have to do something about balancing our
domestic budget. These people are perfectly candid with us, and I do
not think that we can just ignore the advice of the people who have
taken part in the International Monetary Fund, the agreements in Rio,
and the other action that has been taken to stabilize the dollar, espe-
cially after the devaluation of the pound.
I found in Europe a very great concern about this part of our Ameri-
can financial situation at the present time especially as it relates to
Government finances and in balancing the budget.
We have the resources to produce enough goods to pay our debts
to other countries. This concern is not expressed. What they are afraid~
of is our liquidity wifi get to the point where we will have difficulty
even in maintaining this kind of productive system and I share the
concern, and I know there are a gTeat many people who share that
same concern.
This, in general, Mr. Chairman, is a quick summary of the major
concerns which we have, as we have expressed in this statement which
the committee has, and which I am sure you are going to consider dud
maybe you already have.
Thank you.
(The prepared statement of Mr. Graham follows:)
PREPARED STATEMENT OF HARRY L. GRAHAM
In his letter of transmittal of the Annual Report of the Council of Economic
Advisers to the Joint Economic Committee of the Congress, the President pointed
out some very substantial and spectacular gains in the general prosperity of the
Nation during the last seven years. These show up in almost all areas with the
highest number of employed people at the highest average earnings on record.
The Report showed an unemployment rate of 3.8 percent, a rate that has not
been lower except twice in 169 months. With total employee compensation up
S33 billion, and total consumer income after taxes up $35.5 billion, combined with
an all time high in industrial production with a yearly rate of growth in the
Gross National Product of 4.5 percent, this is a continuation of the longest period
of uninterrupted growth in our history.
On the industrial side, we see undistributed profits on the non-farm corporate
businesses of $20.5 billion and net working capital of $196.3 billion. This is after
bond yields have increased for the Aaa bonds by 38~ and for the Bbb bonds by
GOçl during the last year with total liquid assets up $47.1 billion.
These are solid economic accomplishments, brought about by the reluctance
of the Administration to "rely primarily on the `automatic stabilizers' built into
our system or to wait for a recession or serious inflation to occur before measures
are taken." However, all of these gains have not been without some losses, and
there are some danger signals which have been hoisted into the air and possible
gale warnings are ahead of us. One Of these is the relaxing of the w-age-price
guidelines which were solidly based on increases in productivity. While average
earnings of factory workers were increasing by $4.80 per week, the automotive-
industrial production index was down 13.7 percent and the machinery index
was down 0.4 percent.
These figures, connected with the ones previously given concerning bond yields,~
indicate that both industry and labor are engaged in profit-taking actually
beyond their real earnings in terms of production, and that these increased
profits and wages are being passed on to the consumer in the form of higher
prices-the underlying cause of the present inflationary pressure.
PAGENO="0009"
343
Tun FARM SECTOR
This is particularly pertinent to the problems which beset American farmers
trying to retain some senThiance of equity with the rest of our economy when
the economy is expanding at a relatively rapid rate. In this regard, last year's
accomplishments were not spectacular. The index of prices paid by farmers for
their production inputs increased from 114 to 117 last year. Only feed and
fertilizer held steady, and feed holding steady was the result of steady to down-
ward prices on feed at the farm level. The higher non-farm wages and profits
were reflected in the index for the cost of motor vehicles, a major item on every
farm, increasing from 117 to 122, up 5 points. Machinery, the major item neces-
*sary in a technogically advancing agriculture, was up from 124 to 130, or 6
points.
Interest went up from 232 to 259 on the basis of the interest paid per acre of
farm. Taxes were up to 178 from the previous level of 166. Wage rates rose from
135 to 146, all based on a 1958 figure of 100.
The increase in the index of assets of 11.7 was largely accounted for by the
increase in real estate of 9.5. This is a classical pattern of investment and hedging
when there is a possibility of inflation. Another way of saying the same thing
is that in the consumer indices, durables were up 1.6 and non-durables 3.4, and
the services up 6.1.
With the increased interdependence of farmers on the rest of the economy, the
increase in the services as well as in automobiles and machinery were a prime
reason for the decline in net earnings. Although no breakdown is given for the
increased costs of medical services in rural areas, for city wages and clerical
workers, medical services were up 11.7 points in the index. For the rural people,
this simply means that the medical service is not available in many rural areas,
the doctors requiring the patient to go to the city and their costs, therefore, are
greater than their city cousins because of the cost and added expense of trans-
portation, whether it is the patient going to the city, or occasionally, when a
physician is found who is willing to make house calls, an increased charge for
house calls in the country. Thus, the area which is at the bottom of the list in
terms of medical services available is at the top of the list in terms of the
costs of these same services. The President has properly pointed this out as
one of the areas of major concern.
In terms of the relationship of the farm dollar to the rest of the economy,
only the dairy industry showed an improvement in their parity ratio last year,
it being up from 114 to 119. Poultry and eggs were down from 102 to 84, food
graills down from 87 to 84, feed down from 112 to 108, while tobacco was up
to 114-its highest level. The result was that cash receipts were down 17
points and net farm income was down $283 million for the farmers
while the output was up from 113 to 117, with output per man hour up 6
points to 167. The most dramatic increase in output, explaining some of the
drop in prices, was the 22 points increase in the output per man hour for crops
and the 6 point increase in output of livestock. This also helps to explain the
decline in farm population of 595 thousand people last year, down to 11 million.
Thus, we see the familiar pattern of lower farm population, increased inputs
into machinery to replace hand labor, followed by migration into the cities with
many of these people having no saleable skills and contributing to the unrest in
our cities.
Had it not been for the dramatic increase in exports, with a total increase
of $4126 billion, of which agriculture apparently contributed more than $2.5
billion, the picture would have been even worse. This not only prevented a
further decline in agricultural prices, but it made a major contribution to our
balance of payments. The Administration, especially the U.S. Department of
Agriculture, deserves a big vote of appreciation for its export program.
We did note with approval the deletion of the refernce to farm income last
year which proposed no interference with the laws of supply and demand as
the determinant for the allocation of resources in agriculture. We hope that
the statement previously referred to that federal economic policy no longer
relies primarily on the "automatic stabilizers" built into our system or waits
for a recession or serious inflation to occur before measures are taken, includes
:agricultijre with the rest of the economy. Indeed, as we look at the action taken
by the Department of Agriculture this year to shore up farm prices-32 separate
actions in all-we are confident that the previous policy has been reversed and
we are pleased to note this change. To leave agriculture subject to the vagaries
of the market and the inelasticity of the demand for food over against a number
PAGENO="0010"
344
of variables in production from weather to price, and to impose over it a con-
trolled economy in the field of wages and profits and government policy, is to
sentence agriculture to bankruptcy and then see the decline in the major market
for American industrial products due to the decline in purchasing power seriously
and adversely affect our total economic structure.
Only an expanding economy can hope to absorb the growing number of people
who are coming into the employment age. This is particularly pertinent when
we have estimates of an increase in our population of 50 percent in 23 to 32
years. New wine can no longer be poured into old goatskins in terms of our eco-
nomic life, and the answers of 50 years ago, when we had a more stable population
and economy, simply do not fit the expanding population picture which we have
today.
THE INTERNATIOcAL PICTURE
If we may return to the expanded profits and wages to which we previously
referred, we would like to discuss it in a different context. This is its effect upon
our international trade and the rise of protectionism in the United States. With
labor contracts expiring in the steel industry this summer, and with already
announced goals of increases of 8 percent or more being sought, it is pertinent
to relate this to the attempts to impose import quotas on foreign steel.
This would simply lock-in our inefficiencies in the competitive steel business
and charge these inefficiencies to the consumer. While agriculture has been at
the head of the technological revolution, producing its products to sell on world
markets at competitive prices, making the greatest contribution to our net balance
of payments of any industry, the steel industry by and large is still engaged in
producing by the Bessemer process of the last century.
I spent two weeks in Germany in November of last year surveying the results
of the use of Marshall Plan money for rebuilding the German economy. I was
particularly interested in the pragmatic economic decisions being made by the
Germans. These include reducing their yearly coal output from 143 million tons
to 80 million tons, increased dependence on U.S. coal which is cheaper to import
into Bremen than German coal is from the Ruhr, and the development of tech-
nically advanced steel production as a means of maintaining their share of the
world market and increasing their growth, if possible. At the time we were there,
the German Federal Republic laborers in the steel industry and the owners of
the steel mills were pounding out an agreement under which they would freeze
wages and profits at the present level in order not to undermine their competitive
advantage overseas. They have been bringing into production new steel mills with
the most advanced production techniques in the world. The same is true of Japan.
As a result, these two countries are able to deliver their steel to automobile
plants which are within two hundred miles of our basic steel complex at a cheaper
price than U.S. steel can be delivered.
One of the main reasons is that most of the U.S. companies have been more
interested in expande~l profits, as previously noted, than in modernization of
their plants. Although integrated steel production is relatively well advanced in
both Japan and Germany, in the United States there is only one facility which
has incorporated into a single large-scale operation the basic oxygen furnace,
vacuum degassing and continuous casting-the latest and most important ad-
vances in steel making technology.
The National Steel Corporation will soon open its new $100 million fpcility in
West Yirginia, following hard upon the first basic oxygen furnace and the first
80 inch computerized hotstrip mill in the Nation. The last two gave National a
three year jump on its competitors and the new facility is suppose to trim
production costs by S10-$12 a ton.
This is the proper way to meet the competition from Japanese and German
steel, not by restrictive tariff laws which serve to reduce our international trade
and. at the same time, reduce the possibility of maintaining an expanding econ-
omy to serve the needs of a rapidly growing population.
We interject this into our testimony by way of stating our support for the
treaty which the Senate must consider establishing tariff cuts during the Ken-
nedy Round of Negotiations in the GATT.
Without discussing textiles which are basically in the same situation as steel,
we w-ould recommend the November 1967 issue of "Textile World" for information
relative to textiles.
We use the example of the German steel industry to suggest to our friends in
the rest of the U.S. economy that, at this time of intense competition, some
statesmanship is in order. This includes both the willingness to accept lower
PAGENO="0011"
345'
earnings and lower targets for salaries for a temporary period while our indus-
trial plants adopt the modernized method's of integtated production in the case
of steel, and the modern technologies in other, industries which are going to be
necessary to preserve the competitive advantage which we have previously
enjoyed, or to maintain a competitive balance with our trading partners around
the world.
The abandonment of the previous wage-price guidelines do not make any con-
tribution to a satisfactory solution to this problem. We would, therefore, urge
this committee and the Council of Economic Advisers, to most seriously consider
the ways in which we may place some type of control's over the tendencies toward
inflation which the `President and the Council `both have noted in their message
to this committee-not only so that the consumers may be benefited by products
at reasonable costs, `but simply `because the long-term `basic interest of our indus-
tries are intimately bound u'p in the `solution to `this problem.
THE BUDGET AND TAXES
At a time when our economy was threatened' with a mild recession, the Admin-
istration and the Congress properly passed legislation resulting in rigid `tax cuts
in 1964 and 1065, equivalent to about $23 billion in today's economy. This re-
sulted in :b;ringii~g federal revenues into balance with federal spending. We
would comment that it `was precisely this approa'ch which wa's recommended by
Andrew Mellon `to President Hoover in the depression of 40 yea'r;s ago. Where
this `so-called "new economies" gets into trouble is when it is necessary to
reverse the pro'cOs's in order to restrict inflationary p'res's'urOs and to balance a
budg,e.t which has gone out of `balance partly as a result of inflation.
We do not agree with those who believe that it is too late for a tax boost to
be valuable in the present situation. Although it might not be able to bring the
necessary restraint upon the tendencies of inflation, it certainly has one basic
validity, and that is the restoring to the money markets of the world confidence
in the dollar.
T'he success of the `policy just noted would be more certain if we could super-
impose it upon an economy which did not have the `extremely heavy drain which
we are having today because of the effort in Vietnam. However, it is precisely
just thi's effort t'hat is still making an increase in federal income necessary.
At the s'ame time, it should be noted that at the time the gold pool n'ations
took their action under the International Monetary System to support the price
of gold, `and at the time the Special Drawing Rights Plan was agreed on in Rio
de Janeiro in September, we w'ere warned by our friendly allies, especially
by the members of the international gold pool, that this program could be effec-
tive only if the U.S. began to balance its budget. In almost eve'ry instance where
our friends from overseas have discussed the problem of maintaining the Amer-
ican dollar, which certainly is to `their inte're:st as well as our own, `they have ad-
vised us that we should increase our taxes.
We were very free to advise the french to do the same `thing some years
back when they were in difficulty, `and we have advised a number of the na-
tions who are recipients of our unilateral aid to do the same. The time has now
come for us to take a dose of our own medicine, and substitute statesmanship
and responsibility for political considerations which might be arrived at with
great expen'se to the `long-term economic welfare of our country.
The President ha's submitted a "hard-nosed" budget. Some of the items left
out `raise a question as to the good judgment used. The failure to enact an acle-
quate tax structure will mean that other items, no longer in the field of the
luxuries which an expanding economy `should be able to afford, `but in the
area of the `absolute necessities for a strong economic and political and social
system must be laid by the board.
The advice of the Chairman of the CEA, Mr. Ackley, should have been heeded
a year ago. Despite the fact that we are late in coining `to grips with this prob-
1cm, we are still well advised to pursue this policy, if not to halt inflation at `least
to restore some confidence in the dollar which has been shaken by the events
of the past few months.
This committee, the Congress and the Nation should also be extremely wary
of acc'epting the suggestions that we should not have `any `tax increase, even in
the midst of a w'ar, but rather a further reduction of expenditures. These, most
of the time, represent those who would dismantle our Federal `System and this
is an excuse to do through the `back door exactly what could not be accom-
plished through `the front door. It seems `to us that it is beyond `the realm of
PAGENO="0012"
346
rational thought to expect a nation of 200 million people to get along with the
same service level of its people as it did when it had only 100 million people.
With the prospect of a growth to 300 million by the 1990's, it is obvious that
the responsibilities of the Federal Government, instead of decreasing, will prob-
ably be increased. The major reason for this increase, in our judgment, will be
the stresses put on our institutions at the state and local level-stresses which
will result in a continuing demand for increased assistance from the Federal
Government.
Grange member~ do not like to pay taxes any more than anyone else. How-
ever, if it becomes a choice between the irresponsible evasion of present duties
which will result in simply postponing the "day of judgment", or accepting
our responsibilities like mature citizens of a great country, then we stand at the
side of those who propose a responsible course, and we are prepared to support
the actions to accomplish the objectives of a responsible national policy.
In conclusion, the 1968 Report of the Council of Economic Advisers and the
statistical information accompanying it, indicate a strong and vigorous economy.
The Report indicates the points of weakness in our economy as well. If we
have enough wisdom and vision to base our judgments upon sound economic
conditions, instead of on irrelevant political concepts and irresponsible parti-
sanship, then the future of this Republic is indeed bright. If we are going to
bog down because of our reluctance to make the necessary difficult economic
decisions, if `are are afraid to take the political consequence of an economically
responsible attitude, then this weakness and vacillation shall inevitably be re-
flected in the kind of life we live and the levels of prosperity we fail to attain.
Chairman PROXMIRE. Thank you very much, Mr. Graham. You set
a~ fine example of brevity and conciseness, and we appreciate it a great
deal.
Our next witness is Mr. Angus McDonald, director of research for
the National Farmers Union.
Mr. McDonald.
STATEMENT OF ANGUS McDONALD, DIRECTOR OF RESEARCH,
NATIONAL FARMERS UNION
Mr. McDONALD. Mr. Chairman, we, too, appreciate the invitation
to appear here a.nd express our views on the President's Economic
Report and, particularly, on the views of the President's Council.
In past years we have been very critical of some of the reports of
the Council of Economic Advisers and, unfortunately-perhaps it is
unfortunate-we continue to be very critical of this Report because we
think it is entirely inadequate. It does not get to the roots of the farm
problem, and it neglects certain areas such as high interest and the
lack of bargaining power of the farmers.
It also does not seem to be aware of the managerial revolution that
is going on at the present time in regard to agriculture.
The Council in the very few pages which it devotes to agriculture
concentrates on supply and demand and on the poverty situation. There
is little that the commercial farmer can find which would indicate that
the Council has any awareness of Ms problems.
The Council is under the illusion, I believe, that we have a free
market in agriculture. This is an inference, but it is lacking, it is
lacking in the problem, for example, of economic concentration which,
I believe, is responsible for many of the problems which the farmers
face today and have faced for many yea.rs.
The Federal Trade Coimnission reports once more that there are
about a thousand mergers, acquisitions, which have been made in the
last year or so.
PAGENO="0013"
347
It reports that conglomerate corporations, the corporations which
have two or more unrelated functions, are expanding by leaps and
bounds into agriculture.
It reports, and the Department of Justice has given some attention
to this problem, the fixing of prices by various groups. The price-
fixing or price leadership, whatever you want to call it, is not restricted,
of course, to the durable goods industries. We have been aware of that
situation for many, many years, but it now extends to the food industry,
and the result of that situation is that the farmer must take what he is
offered in the marketplace, and the consumer and the farmer both
suffer.
In regard to the invasion of agricutlure by corporations and wealthy
individuals, the Farmers Union has made some brief studies based on
Internal Revenue Service statistics published by the Treasury Depart-
ment and I would just like to run through, Mr. Chairman, a few of
these statistics which indicate why so many wealthy individuals and
corporations are going into the farming business.
On page 16 of this 1965 report of the IRS on income of individuals,
it reports that individuals with $1 million or more income, there wer~
119 engaged in farming, reported farm investment. It reported that of
that 119, only 16 reported a profit.
In the category of income between $500,000 to $1 million, it reported
202 were engaged `in farming, and only 32 showed a profit; 170 a loss.
In the $100,000 to $500,000 category, it reported 3,914 involved in
farming; 1,040 showed a profit; and so on.
I have in my statement a complete list~ almost complete-I did not
give all the statistics down to the $1,000 category-but we find that
these stati'stics are very revealing because as you go down into the
lower income groups, you find a much `higher percentage reporting
a profit to IRS.
Now, it seems to us, and in regard-let me interrupt myself just
a moment-in regard to corporations, IRS in another document re-
ported in the year ending July 1, 1964, there were 16,277 corporate
farms reporting to the IRS in regard to their farm activities, and
only 7,861 of these farm corporations reported a net profit.
Now, these facts, and particularly the fact's regarding individuals,
indicate to us that these people are going into farming not to make
a profit-perhaps they are inefficient, too-but they are going into
farming to escape taxation, in order to get into a lower tax `bracket in
regard to transfer of their farm losses to other income. That. seems
fairly obvious.
Now, in regard to the farmer himself, what is his economic situation
today? We all know that income is supposed to go down $1 billion
this year, and, last year it went down, and the `year before was fairly
good.
Today, according to the President's Council, the per capita. income
of those on farms, I believe that is in table 79 in this book, the per
capita income was, if you go to their figures, amounted to $1,200 per
capita. That is in 1967. `
There were about, the Council estimates, 11 million people, on farms.
Despite the drastic decrease in farm population, over half, everyone
knows `that, it is reiterated `again and again, per capita income on
farms continues to fall and per capital income of those'off'farms or
PAGENO="0014"
348
the total average per capita. income of all the people continues to rise
for reasons which Mr. Graham has just set forth.
It amounted last year to $2,787.
The farmer is-as Mr. Chairman, you pointed out, I believe on
several occasions during the hearings before. this committee-the
farmer constitutes the No. 1 economic shame of America. The farmer
is a second-class citizen.
Giving another example, the Department of Agriculture periodi-
cally puts out some very interesting sta.tistics on the market basket,
and we look back to 1947 to see how the farmer was doing that year
on the market basket, that is, about as much food as a family of four
would consume in a. year, and it amounted to $870, and the farmer's
share was $441 .of that.
Now, according to TJSDA in September 1967, t.he market basket cost
the consumer $1,089. The farmer only got. $417 of t.his or $24 less than
he got. in 1947.
WTheii it is considered that the farmer's dollar or, I suppose, anyone's
dollar in 1965, was worth only 71 cents, these figures become doubly
significant.
One of the problems which the Farmers Union has been concerned
with ha.s been the problem of bargaining power.
The Food Marketing Commission spent a great deal of time, we
thought, and on the whole did an excellent job of studying farm food
marketing over a period of a year and a half or so. Apparently the
President's Council never heard of this report or at least. it has not
taken cognizance of it in its explanation of agriculture.
The Food Marketing Commission was very much concerned with
the lack of bargaining power. lYe have recently seen a bill intro-
duceci-Senator Mondale, my office tells me, introduced the bill yester-
day. and it is reported, Mr. Chairman, that you are one of the sponsors
of this legislation. I have not checked t.hat one out. Someone just told
me they thought you were on the bill, and we appreciate that very
much. lYe have not had time to study the bill, but on the face of it
something should be done about farm bargaining po~ver. lYhether this
is the bill which Congress should enact, I am not prepared to say.
Our National President has indicated in a. press release that., in
general, he favors this proposal to let the producers decide when prices
are too low and bargaining power is needed; to let producers decide
through coinmoditywide referendum when they want a bar~ainiug
committee for a particular commodity; to let producers dec.ide in a
referendum who will represent them on bargaining committees; to
provide expanded authority for producers t.o strengthen prices under
the provisions of t.he Agricultural Marketing Agreements Act of 1937:
and, finally and very importantly, to provide penalties to be imposed
upon those who conspire to intimidate, discriminate against or other-
wise coerce producers or any producers association in their efforts to
increase prices and strengthen bargaining power.
During the last 2 years I spent a great deal of time on what. was
originally S. 109 introduced in two separate Congresses and sponsored
by both Republicans a.nd Democrats. Unfortunately~ this bill has not
developed in the way that we thought that it should he developed, hut
this point which I mention is very important, particularly because
farmers in the marketplace need protection and they need to organize
PAGENO="0015"
349
and the right to bargain for their products in the same way that labor
bargains for its labor.
I mention finally, Mr. Metcalf, in regard to the tax situation on
farms. Senator Metcalf has introduced 5. 2613, which would close
one of these tax loopholes by prohibiting those who gain most of their
income off farms from taking tax losses. The farmer himself would
not be affected. The farmer who is a working farmer or who derives
his income from agriculture, from the farm, would be exempt under
this bill.
But it would, we hope, check this vast invasion of agriculture which
is going on at the present time, due to other segments of the economy
apparently have so much money they do not know what to do about it.
The profits, as Mr. Graham pointed out, are at an all-time high, and
I think it was around $25 billion instead of $20 billion, as you said,
which industrial corporations had left over after they paid their
taxes, distributed their dividends, and so forth.
My point is that agriculture should be allowed to deal with those
to whom it sells its products in the same way t1~at other organizations
and unions, and others, in the same way that the gigantic food chains
get together and work together at getting the prices down.
If the farmer had some kind of countervailing power backed up
by legislation, such as the NLRB Act-and I am not comparing this
proposal with the Labor Relations Act, it has certain similarities,, but
there are certain other parts of it which are quite, quite different, as
agriculture is different.
One final point, Mr. Chairman, with regard to Mr. Graham's state-
ment. MTe are completely in accord with the. importance of farm ex-
ports. I believe, in cash, there were over $5 billion last year, $7 billion
if you count the soft currency and the giveaways and so forth.
The gold situation about which everyone seei s to be worried, would
be worsened if the protectionists were able to keep out other products.
~\Te are not in favor, of course, of the substitute products for cheese
and various gimmicks that have been used to let down the bars and
let vast quantities of all kinds of dairy products and other products
come into this country, and we were instrumental `in, at least. we
presented our views to the Tariff Commission and to the President
in rega.rd to that, and we stand firmly behind the President, in reducing
t.o some extent the amount of these products which were coming in.
But we believe that the last round, the Kennedy Round, was greatly
successful. Our National President was in Geneva, and lie reports
great progress was made, which would benefit not only the American
farmer but the American people as a whole.
I think, Mr. Chairman, I have just about used up my time.
(The prepared statement of Mr. McDonald follows:)
PREPARED STATEMENT OF ANGUS McDONALD
Mr. Chairman and Members of the Committee, we appreciate very much the
opportunity to present our views on the Economic Report of the President and
the Annuai Report of the Council of Economic Advisers. We have appeared here
over a long period of years along with representatives of other farm organizations.
Our organization is particularly interested in the functioning of the Employment
Act of 1946.
Our interest was manifested in the period 1944-1946 when our then National
President, James G. Patton, participated actively in the formulation of legis-
lation. One of the by-products of this activity, was a book by Stephen Kenip
PAGENO="0016"
350
Bailey entitled, "Congress Makes a Law," published by the Columbia University
Press in 1950. The activity of the Farmers Union in bringing about the enact-
ment of the Full Employment Act is outlined in this volume.
Over the years the Farmers Union has generally been critical of the Council
since we believe it failed to fulfill the policy set forth in the statute. For example,
in Section II the Council is, in effect, directed to consult with agriculture and
other groups in the formulation of its policies and its recommendations to the
Congress. For a few years after passage of the Act representatives of the
Farmers Union were invited to confer with Council members `along with `other
farm organizations. However, this practice has been discontinued over a long
period of years. As I recall, the last time that we were invited to confer with
the Council was during the period when Harry S. Truman was President and
Leon Keyserling was Chairman of the CounciL
This witness has pointed out to this Committee and to other Congressional
Committees the failure of the Council to fulfill the function w-hich the Congress
undoubtedly intended both in conferring with interested organizations and in
legislative recommendations to the Congress. We have appreicated very much
over the years the reports of the Joint Committee on the President's Economic
Report which repeatedly pointed out that the Council was failing in its duty and
that it also was neglecting certain economic situations in its discussions without
which it was impossible to make valid recommendations or to even explain certain
economic trends.
In 1965 this witness appeared `before the Joint Committee and pointed out that
under the Chairmanship of Gardiner Ackley vital economic areas had been neg-
lected and that emphasis was on matters which did not go to the root of eco-
nomic maladjustments, particularly in regard to agriculture. We pointed out in
our 1965 discussion that argiculture was treated as `a sick industry rather than
an industry which had out-produced other segments of the economy and had
become so efficient that it had flooded the market with commodities resulting
in unduly low prices. There was no attempt in Mr. Ackley's 1965 report to get at
the roots of the agricultural problems.
In the 1966 report, the Council ceased to speak of agriculture as a sick in-
dustry, but rather by inference concluded that it was only reacting to certain
economic laws which inevitably pushed off the farm producers w-ho were in-
efficient. There was, as I recall, a brief discussion about the dairy industry
which was in a very depressed condition because of low milk prices. Dairy
farmers were leaving the industry by thousands and economists predicted that
if this trend was not checked, milk would have to be rationed in the not too
distant future. The Secretary of Agriculture wisely increased the support price
of milk so that farmers would be enabled to stay in production. The comment of
the Council was that dairy farmers had moved to towns and cities because of
excellent employment opportunities.
In past years the eminent Chairman of this Committee has rebuked the Chair-
man of the Council on at least two occasions because of the Council's neglect of
agriculture which he called the number one shame of America. He also spread
upon the record certain figures indicating that farmers were economically second
class citizens who did not obtain from their investment, management and labor
a sufficient income to enable them to continue production. This is the crucial
problem which agriculture has faced for a long time and is facing today.
Certain questions were also raised by this Committee in regard to the lack
of attention to economic concentration and to the monetary activities of the
Federal Reserve Board.
The 1968 report, it seems to us, almost completely ignores, or gives only a
passing glance to agriculture. On pages 116 and 117 only about one-half page is
allocated to discussion of farm and food prices. It is apparent from this brief
discussion that the Council is primarily interested in the laws of supply and
demand and consumer prices and not at all interested in the economic problems
of the farmer.
Although several pages of the report are devoted to monetary policy during
the 1966-67 period, no real attempt is made to grapple with fundamental eco-
nomic problems as affected by the mistaken policies of the Federal Reserve
Board. For example, the Council merely notes that in 1965 the Federal Reserve
Board raised the discount rate one-half of one percent and that the ceiling rate
on certificates of deposit was also raised. It does not sufficiently expose this
mistaken policy and connect it with the housing debacle which it caused in
1967. Farmers paid heavily for the 37i~ percent increase in the time deposit rate
since interest rates skyrocketed not only in housing, but in all kinds of real estate
PAGENO="0017"
351
and short term loans. The country has paid dearly for the ill-advised policies
of the Federal Reserve Board.
The Farmers Union has repeatedly condemned these policies and was instru-
mental in bringing about a national Tight Money Conference in Washington, D.C.,
in January 1967, sponsored by may organizations. We attempted in this con-
ference and in other ways to bring the facts to our members and to all those who
were consumers of credit.
We are aware that the policies of the Federal Reserve Board are controlled
by no one unless it be the bankers who seem to have a decisive voice in the
formulation of its policies. Several members of this Committee have pointed
out this fact over a long period of years and have suggested remedies to be put
into effect by the Executive Branch and the Congress, but nothing has been
done. It seems to us that the President's Council should act in the interest of all
the people and, as the President said on page 27 of the report, "This Admin-
istration will never forget that the purpose of our economy and of our economic
policies is to serve the American people-not the reverse." It would appear that
monetary policies during the past few years have not served the American
people, but have served primarily one vested interest group. Interest rates at
the present time are higher than they have been at any time since 1873. We
suggest that the Council should have challenged the policy of the Federal Reserve
Board and attempted to bring the best information policy on monetary matters
to the attention of the President who has a multitude of problems and who finds
it impossible to acquaint himself with the details of monetary policy.
I would like to take this opportunity to bring to the attention of the Com~
mittee certain studies that the Farmers Union has made during the last several
months in regard to tax evasion by weathy individuals and corporations and
the efflc~ency of the family farm. Our study on the relationship of non-farm
individuals and the use of farm investment as a tax haven was published in
our Washington Newsletter of September 15, 1907, and is primarily based on a
report of the Internal Revenue Service of the U.S. Treasury Department, entitled
"Statistics of Income 1965." The results of our study based on this document are
as follows and is the record from individual income tax returns, broken down
by income groups, on "farm" operations:
Millionaires-Of the 119 engaged in farming, only 16 reported a profit
on their income tax returns.
$500,000 to $1,000,000.-Of the 202 in farming, 32 showed a net profit and
170 showed a loss.
$100,000 to $500,000-Of 3,914 involved in farming, 1,040 showed a profit
and 2,874 reported a loss.
$50,000 to $100,000.-Of 12,398 involved in farming, 4,974 showed a profit
and 7,424 reported a loss.
$20,000 to $50,000.-Of 69,132 involved in farming, 38,752 showed a profit
and 30,380 reported a loss.
$15,000 to $20,000-Of 66,003 involved in farming, 42,160 showed a profit
and 23,843 reported a loss.
$10,000 to $15,000.-Of 211,673 involved in farming, 132,109 reported a
profit and 79,564 reported a loss.
$5,000 to $10,000.-Of the 793,689 involved in farming, 473,948 reported
a profit ~nd 319,741 reported a loss.
We also made another brief study based on Statistics of Income for the period
July 1964-June 1965, entitled "U.S. Tax Returns-Sole Proprietorships, Partner-
ships, Corporations," also published by the Internal Revenue Service. The partial
results of our study of this document were published in the December 1, 1967,
Washington Newsletter. This study showed that only 7,861 of the 16,227 corpo-
ration farms filing 1963 returns showed a net profit. The profit added up to
$235.5 million, about $49 million more than the losses reported by the other
8,366.
These facts indicate a widespread situation in which thousands of wrealthV
individuals and corporations made use of certain loopholes in our tax laws
to escape taxation. The wealthy individual, under existing law, may subtract
his farm losses from off-the-farm income and thereby get into a lower tax
bracket and pay less taxes than he otherwise would have paid. Senator Metcalf
has introduced a bill (S. 2613) which would remedy this situation and would,
we hope, discourage the invasion of agriculture by off-farm interests.
We have various reports in our files which indicate that corporations and
individuals are buying up millions of acres of farm land as a hedge against
inflation and for tax loss purposes. The South Dakota Farmers Union has con-
90-191-68-pt. 2-2
PAGENO="0018"
352
ducted a survey of corporate ownership in that State and has found that more
than 30 corporations have acquired over 1,600,000 acres in South Dakota. Our
members tell us that the same process is going on in other states.
conglomerate corporations. A conglomerate corporation, economists tell us, is a
During the last few years we have seen an increase in the number of so-called
corporation which has two or more economic activities functionally unrelated to
each other. One of the most notorious of these corporations is Textron which
was originally in the textile business. At the present time, Textron is engaged in
the manufacture and distribution of over 10 diverse products. Its holdings in-
clude a huge broiler and poultry feeding operation in the State of Maryland.
The incentive for the corporation buying up defunct and shaky businesses is
perhaps the same as the incentive of the wealthy individual who invests in a
farm to escape taxation. According to the Wail Street Journal, Textron, during
a period of years, was exempted from paying 875 million in taxes to the Federal
Government because of the "tax carry-forward" provision in our tax laws.
According to the Federal Trade Commission, merger activity which includes
the acquisitions of both conglomerate and other kinds of corporations, continues
at a high level. Almost 1,000 mergers were reported by Moody's Investor Service,
Inc., and Standard and Poors Corporation for the year 1966.
Our interest in merger and corporate activity is not academic. We strongly
feel that economic concentration is a primary cause of the excessively high costs
of variOus items necessary to farm production. Significantly, although farm in-
come, according to the Department of Agriculture, is due to remain at a very
low level this year, farm receipts may increase by $1 billion. This decline in
farm income can only be explained by an increase in farm costs. Farm prices
have declined drastically during the last year. The parity index a month or two
ago had dropped to 73-the lowest point since the `30's. Agricultural Prices in
its last issue, reports that it has increased by one point. This simply means, of
course, that farm prices in relation to the purchasing power of the farmer's
dollar were lower than they had been in more than 30 years.
Low farm prices and low farm income represent a contradiction in our econ~
omy. National income is at an all time high. We have made various calculations
based on figures taken from tables in the back of the Economic Report, Economic
Indicators (published by the Council of Economic Advisers) and the November
9th issue of Marketing aimd Transportation Situation.
It is estimated that 11 million people are now living on American farms; that
their farm income in 1967 amounted to $13.2 billion. This is equivalent to a per
capita income of $1,200. According to the President's Council, per capita income
of the total population amounted to $2787 annually during the period October-
December 1967. It is seen that even with the drastic decline of farm population
that per capita income from farm activities lags far behind income derived from
ether activities.
According to Marketing and Transportation Situation, the typical market bas-
ket of farm foods cost $1,089 in September 1967. The farm value of this food was
$417. This indicates a spread of $672.
The year 1947 was considered a fairly prosperous one for farmers. In that
year the market basket cost consumers $890; the farmer got $441 of this amount.
In other words, the consumer in September 1967 paid $199 more for food pur-
chased by a typical family of four and the farmer got $24 less.
The significance of these figures is seen when it is realized that in 1965 the
farmer's dollar was only worth 71 cents. We do not have at hand a calculation
for the 1947 purchasing power of a dollar for a later date.
There has been a great deal of propaganda to the effect that the family farm
or medium-sized farm is inefficient. This allegation has been disproved many
times. However, the myth of family farm inefficiency persists despite the fact
that the family farm produces most of the commodities which are consumed in
this country and which are exported.
A recent study made by Farmers Union which is based on a study of the De-
partment of Agriculture which in turn is based on 138 other studies, indicates
that a family farm is relatively efficient over wide areas of the United States
and in the production of many different commodities. (See Exhibit A,
attached.)
Farmers Union periodically attempts to assemble as iuuch information as pos-
sible in regard to actual income and expenses of farm operations, both in regard
to current statistics and in regard to prices which farmers paid in a relatively
prosperous period. We have in our file a list of actual farm operating costs as
reported on Schedule F tax forms. Here are siatistics taken from actual Minne-
sota farm reports:
PAGENO="0019"
353
SELECTED FARM EXPENSES ON ACTUAL MINNESOTA FARMS (BASED ON 1966 FEDERAL INCOI~E TAX RETURNS
Acres farmed
Gas and fuel
Feed purchased
Fertilizer and
chemicals
Real estate
taxes
Interest
payments
200
322
148
320
350
400
$111
907
540
1,000
2,500
825
$1,798
3,500
1,100
1,350
$98
3,508
1,150
1,800
1,647
950
$672
1,795
600
2,425
2,127
1,250
$1,378
2,304
1,100
2,050
1,609
3,400
We have also compiled figures of relative costs of farm implements. Farm
machinery prices of 1967 are compared with farm machinery prices of 1941
(see Exhibit B attached).
In conclusion, we would hope that the Committee would find it possible to
inaugurate a study of the corporate farm invasion and wealthy individual in-
vasion of agriculture. We consider this one of the most inimical trends which
farmers now face.
We would hope that the Committee would continue to emphasize the impor-
tance of a monetary policy which pays some attention to the wishes of this expert
Committee and to other Members of Congress. We hope you will continue to
advise the President in regard to the necessity for a healthy agriculture. What
happens to agriculture will in a great measure be dependent on action taken by
the Congress.
We also hope the Committee will use its great prestige and influence to bring
about the enactment of the Metcalf bill which `will discourage the trend toward
sion-farm control and ownership of agriculture, as well as bringing in additional
taxes to the Treasury, of the United States which heretofore have been avoided.
EXHIBIT A
THE FAMILY FARM Is THE MOST EFFICIENT UNIT OF AGRICUlTURE PRoDucTIoN
(Prepared by Angus McDonald, Feb. 5, 1968)
Over the years there has been a vast propaganda `campaign designed to con-
vince the American people that the gigantic factories-in-the-field which exist
iii California and several other states should be models for all farm units. This
campaign to discredit the `Farmers Union idea that `the family-type farm is the
most desirable unit of `agricultural `production has `been aided and abetted by
economists in land grant colleges and in agriculture departments of universities.
Editors of magazines, newspapers and no doubt many `millions' of' people have
been brainwashed and `have consequently accepted without question the idea
that the family farm is inefficient and that super-farms, owned and operated by
millionaires and conglomerate corporations, represent the wave of the `future.
`Sw-e'pt under the rug, ignored and suppressed are many studies which have
been made which prove without `any reasonable doubt that the small or medium-
sized unit is more efficient than the large corporate unit. A number of economists
apparently have been quietly working, gathering information in many parts of
the United States. A recent publication of the Department of Agriculture repre-
sents summaries of these studies made in various areas of different ty'pes of farm-
hag under a variety of `conditions. The overwhelming conclusion of this study,
a composite of 138 `studies which have been made in the last few years, leads to
the inescapable `conclusion that big farming is inefficient.
These studies, `based on solid facts, are not wishful thinking. They are the
result of hundreds of `analyses of the `costs and the gross profit's which go into
many types of fanning including fruit, grain, livestock, cotton, vegetables,
alfalfa, and dairy. T'hese studies put the finger on the point of diminishing returns
which is soon reached when the farm is unduly expanded or too large for efficient
operation. Here are a few examples:
1. FRUIT FARMS IN CALIFORNIA
On the non-mechanized peach farms in Yuba City in the Maryville area of
California, average production cost per ton of peaches declined up to a produc-
tive unit of about 60 acres (average `production was 715 tons of peaches). Beyond
that size slight reductions in harvesting costs and machinery investment per
acre were realized, `but these were offset `by increases in costs of `hired supervision.
On the mechanized peach farm the average cost declined up to a farm size of
PAGENO="0020"
354
between 90 and 110 acres. After that point there was no reduction in cost on
larger units.
2. IOWA CASH GRAIN AND CROP-LIVESTOCK FARMS
(a) Sout1ieri~ Iowa
The hilly farm in Southern Iowa showed lowest costs for a unit of about 320
to 360 acres. This represented a 2-man operation and a 3-plow tractor. The
cost revenue ratio was 0.95. This figure means that the livestock-grain farmer
had to spend 95 cents for every dollar of gross income.
On upland farms in Southern Iowa the cost revenue ratio was much lower.
A 1-man, 3-plow tractor farm of 160-acres produced $1.00 of gross income for
every 62 cents in costs. Two-man farms show-ed a little better ratio-a 320-acre
farm with two 3-plow tractors only bad to spend 57 cents for every dollar of gross
income. However, cost advantages in larger units were less than the 320-acre farm.
(b) Western and Yortheast Iowa
A 280-acre farm with a continuous corn program came out with a cost revenue
ratio of 0.42. Under a 5-year rotation the lowest cost on a farm of 320-acres w-as
0.46. Under current cropping practices a 400-acre farm also resulted in a cost
revenue ratio of 0.46. For Western low-a costs w-ere considerably higher. This
study showed little difference in costs (only 2 cents per $1.00 of income) in North-
east low-a between 400 and 800 acres.
3. ~RIGATED COTTON FARMS IN TEXAS AND CALIFORNIA
(a) Tecoas High Plains
This particular study concluded that a 1-man farm with adequate capital
could be as efficient as any of the larger farms. A 1-man farm of 440-acres, with
102 acres of cotton and 6-row machinery resulted in an expenditure of 71 cents
for every dollar of gross income. None of the larger farms could go below this.
Here is a summary of the Texas High Plains farm statistics:
Cost revenue ratios
1 man, 120 to 240 acres 0. 732
1 man, 240 to 680 acres . 708
2 man, 560 to 920 acres . 73
3 man, 880 to 1,280 acres . 709
4 man, 1,200 to 1,520 acres . 711
5 man, 1,480 to 1,800 acres . 712
(b ) Fresno Connty, California
On heavy soils in Fresno County, California, costs of producing cotton proved
to be lowest on a 4-man farm of 1,134 acres. The cost revenue ratio was 0.85. On
a 1-man farm of 270 acres, the cost revenue ratio was 0.91.
How-ever, on light soils in Fresno County a 710-acre, 4-man farm proved to be
most efficient. A 1-man, 193-acre farm had a cost revenue ratio of 0.83, the 4-man
farm had a cost revenue ratio of 0.76. There was no increase in efficiency after
this point. The study included farms up to an 8-man operation.
4. CALIFORNIA CASH CROP FARMS
This study, based on farms in Yolo County, included sugar beets, tomatoes,
milo, barley and safflower. Cost per dollar of revenue on these farms declined
sharply up to about $100,000 of revenue. The cost revenue figure on these farms
w-as 0.70. On farms of 1,400 acres which produced on the average about $240,000
worth of products, the cost revenue declined to 0.65. After that point the cost
revenue statistic increased to 0.72 at ~440,000. There was no decrease after that
on larger units.
Conclusion of the author of this study was that there was no economic in-
centive to operate extremely large farms-600 to 800 acres could compete with
larger farms. The difference in cost was slight and risks pertaining to manage-
ment on larger farms were considered greater.
5. IMPERIAL VALLEY VEGETABLE CROP FARMS
This particular study concluded that with contract services longrun costs are
constant from very small farms up to 2400 acres. Another conclusion w-as that
the Imperial Valley farmer achieves no advantage in owning equipment and
actually has advantages over larger farms which own equipment used at less than~
full capacity. This assumes that contract facilities are available for the smalL
PAGENO="0021"
355
and medium-sized farms. The general conclusion is that there are no significant
economies based on size.
6. KERN COUNTY CASH CROP FARMS
In this area the 640-acre unit was most efficient. After that point costs per
revenue dollar began to climb. The following table indicates the economies
based on size:
CASH CROP FARMS, KERN COUNTY, CALIF-TOTAL COST PER DOLLAR OF CROP REVENUE FOR
3 CROPPING PROGRAMS
Farm size (acres)
Cost-revenue ratio for-
Cotton-alfalfa
farms
Cotton-alfalfa-potato
farms
Cotton-alfalfa-barley-milo
farms
80
1.06
1.06
1.00
160
.96
.94
.93
320
.92
.91
.91
640
.91
.89
.89
1,280
3,200
.94
.96
.93
.93
.91
.92
Source: Calculated from data in Fans and Armstrong study. California Experiment Station; Giannini Foundation Research
Report No. 269.
7. WHEAT FARMS IN THE COLUMBIA BASIN OF OREGON
In Oregon, 1-man wheat farms achieve lower average costs than the two or
three man farms. However, on farms smaller than 1,000 acres the costs were
slightly higher. The following table indicates that increases in size beyond 1,000
acres resulted in increased costs.
COLUMBIA BASIN WHEAT FARMS: AVERAGE COST AND OPERATOR EARNINGS FOR SELECTED FARM PLANS USING
THE MOLDBOARD FALLOW OPERATION
Farm size
Basic resources
Full-ut
ilization far
m plan
Men
Tractors
-
Acres
Operator
income
Cost-
revenue
ratio
Small
Medium
Medium-large
large
1
1
2
3
1 30 to 40 horsepower
1 50 to 60 horsepower
2 50 to 60 horsepower
2 50 to 60 horsepower, 1 25 to 35 horsepower
1,000
1,600
2, 500
3,600
$3,669
5,629
5, 429
5, 252
0.85
. 86
. 91
. 94
8. DAIRY FARMS
(a) New England
The most efficient unit on dairy farms in New England was a 2-man operation
with 70 cows and costs estimated at $2,000 a year for labor and management.
However, if no charge is made for labor, the 1-man operated farm with 35 cows
achieved lower costs.
(b) Iowa Dairy Cash Grain Farms
On farms in Iowa in this category there was only a slight reduction in costs
as herds were expanded from 34 to 58 cows. The cost revenue ratio was relatively
iiigher-90 cents expended for $1.00 of gross income.
(c) Arizona Dairies
Average costs declined sharply up to a herd of 150 head. However, management
difficulties typically occurred when the herd reached a size of 150 to 175 cows.
This problem resulted from (1) feed waste increases with herd size; (2) dif-
ficulty in varying the level of grain feeding relative to each cow's production be-
cause of variation among cowS, and (3) management, supervision and coordina-
tion duties became more difficult with resultant decline in efficiency of operation.
(d) Minnesota Dairies
A study based on dairying in Minnesota indicates that the 2-man dairy with
87 cows and a farm of 490 acres achieved a cost revenue ratio of 0.82. A 1-man,
48-cow, 290-acre operation was slightly less efficient. The cost revenue ratio was
0.84 on this farm Size.
PAGENO="0022"
356
9. PEEDLOTS
Several studies have been made to determine the maximum efficiency of feed-
lots based on size. According to one Colorado study, feedlots with between 1,700
and 4,000 head on feed at a time with a 15-ton feed mill were most efficient. The
feedlot with 4,000 to 9,000 head on feed at a time with a 50-ton mill w-as most
efficient. This study indicates that economies of size obtained by feedlots feeding
over 1,500 head are too small to have any appreciable effect on the average cost
of producing beef.
A USDA Study concludes that economies of size are attainable in a size range
of 1,500 to 5,000 head. Beyond this point the cost curve declined slightly, but the
savings were insignificant. All of these studies indicate that there is no economy
resulting from the gigantic feedlots such as those operated by the National Tea
food chain and the Gates Rubber Company. These feedlots are apt to he much
lesa efficient because they are not operated at full capacity. Consequently the
percentage of fixed costs are greater than in the small feedlot.
EXHIBIT B
PRICE INCREASES OF FARM MACHINERY AND EQUIPMENT
Piice increases of farm nmacl~in cry since 1947
The w-holesale price of a 3 rnoldboard plow- increased from $254 to $530.
The wholesale price of a drawn corn planter increased from $200 to $45S.
A larger type drawn corn planter increased from $493 to $1120.
The w-holesale price of a grain drill increased from $391 to $901.
A larger type grain drill increased from $725 to $1.670.
Tl~e w-holesale price of a manure spreader increased from $509 to $928.
The wholesale price of a 4-row- cultivator increased from $363 to $811.
Percent price increase since 1947
Farm and garden tractors:
Row Crop or general purpose, 30-49 HP 79. 70
Tricycle, row-crop. 40 or over max. HP ST. 70
4-Wheel. Diesel. 75-92 max. HP 74. 20
Tracklaying Type. under 60 D. HP 161. 30
Motor Tiller. 3-4 HP 92 SO
Agricultural machinery:
Excluding Tractors 95. 40
Plow-, Moldboard, Draw-n, 4 Bottom 146. 60
Plow-, Moldboard, Mounted, 3 Bottom 128. 10
Harrow, Draw-n 102. 90
Corn Planter, Drawn 127. 10
Grain Drill, Fertilizer Type 130. 20
Manure Spreader, PTO Driven 82. 30
Hydraulic Loader 29. 10
Cultivator, Mounted. 4 Row 123. 30
Rotary Hoe, Pull Type 26. 50
Hand Sprayer 98. 98
Cotton Picker, 2 Row Self Propelled 31. 70
Combine, Self Prop., Under 15 ft. cut 33. 00
Corn Picking Attachment for Combines 11-1. 55
Corn Picker, Mounted 57. 60
Forage Harvester, Draw-n 104. 60
Mow-er. mounted 126. 40
Rake. Draw-n 117. 20
Hay Baler, Drawn 56. 60
Farm Elevator, Portable 70. 00
Wagon, Chassis Only 4T. 40
Agricultural Equipment 44. 40
Stock Tank 100. 70
Brooder, Gas 67. 70
Barn Cleaner 24. 10
Water System, Shallow Well. Jet 77. 70
Motor trucks 4~. 10
Composite for agricultural macli inery and equipment 81. 40
PAGENO="0023"
357
Chairman PR0xMIRE. Thank you very much, Mr. McDonald.
Our next witness is Mr. Charles B. Shuman, president of the Ameri-
can Farm Bureau Federation.
Mr. Shuman.
STATEMENT OF CHARLES B. `SHUMAN, PRESIDENT, AMERICAN
FARM BUREAU FEDERATION
Mr. SHIIMAN. Thank you, Mr. Chairman and members of the com-
mittee.
I appreciate this opportunity to comment on the President's Eco-
nomic Report for 1968.
I will read parts, and I do appreciate if this entire statement will be
incorporated in the record.
Our comments will be based on policy resolutions adopted by voting
delegates of the member State Farm Bureaus at the annual meeting
of the American Farm Bureau Federation in December 1967. The del-
egates represented more than 1,750,000 families who are members of
Farm Bureau in 49 States and Puerto Rico. We shall confine our com-
ments to a few major national issues and to those aspects of the Presi-
dent's Economic Report which are of particular interest to farm and
ranch families.
At the outset, let us make it clear that the overall fiscal policy which
this Nation chooses to follow is of major importance to farmers. Gov-
ernment policies which have caused large budget deficits have led to an
inflationary spiral which has compounded the cost-price squeeze on
farmers. The resulting tightening of credit has become a serious con-
cern to farmers attempting to meet sharp increases in capital require-
ments.
The fundamentals of the inflation problem are well described in the
following extract from a newspaper report of a recent speech by W.
Allen Wallis, a distinguished economist who is now president of the
University of Rochester, and I quote from Dr. Wallis:
Inflation can be generated only by the Government. Business firms, labor
unions, or consumers with excessive market power can do many objectionable
things that are contrary to the public interest; but one objectionable thing they
cannot do is to cause inflation-or, for that matter, prevent it.
The overriding economic issue confronting the United States today
is whether we are going to be fiscally responsible. Our domestic fiscal
policy determines our ability to avoid an inflationary binge which
would work a serious hardship on many people and lead to a pamful
readjustment at some future time. It is also the key to the balance-of-
payments problem which threatens the stability of the dollar as the
most widely used international currency.
It should be noted that the President's proposal for the elimination
of the gold reserve requirement now applicable to Federal Reserve
notes is merely an accommodation to the necessities of our balance-of-
payments problem and not a solutioii for this problem. Unless we can
correct the imbalance i11 our international accounts, we will dissipate
the gold now used to back our currency-just as we have depleted the
gold previously released by removing the requirement for a gold re-
serve against Federal Reserve deposit liabilities.
PAGENO="0024"
358
U.S. exports-industrial and agricultural-can and must be ex-
panded. American farmers are already making a major contribution
to U.S. export earnings. Last year U.S. agricultural exports reached
a. new high, totaling $6.8 billion. This accounted for 22 percent of total
U.S. exports. But, as the world's largest exporter and most efficient
producer of farm products, American farmers can play a larger role.
\Ve have set our sights on annual agricultural e.xports of $10 billion.
This goal is attainable if we are permitted to price competitively and
market. efficiently. This requires vigorous trade negotiations designed
to reduce restrictions on world trade with nations which are prepared
to offer reciprocal benefits to U.S. exports. Such negotiations not only
must include-they must emphasize-trade iii agricultural products.
At the same time, Government supply management features of clonies-
tic farm programs should be abandoned.
The proposed International Wheat Trade Convention, which has
been sent to the U.S. Senate for ratification, is contra.ry to these ob-
jectives. This convention fails to liberalize world wheat trade; in fact,
it tends to legitimize trade restrictions. It would restrict export oppor-
tunities for U.S. wheat farmers and significantly limit their ability to
contribute further to solving the balance-of-payments deficit.
We agree with the President that the present situation calls for
action to C'* * * accomplish a sharp reduction in the Federal defi-
cit * *~~; however, we believe that the reduction must be achieved
by placing major emphasis on reductions in Federal spending before
consideration is given to increases in Federal taxes.
Our policy on this point, reads in part as follows:
The current fiscal situation calls for action to eliminate strong inflationary
pressures. At this time we oppose any increase in taxes which is not matched by a
prior and equivalent reduction in government expenditures for the duration of
the tax increase. Increases in federal receipts as a result of any tax increase
should be used in future years to reduce or eliminate annual deficits rather than
to justify higher expenditures.
We urge the Executive Branch to make significant reductions in current ex-
penditures and in future budget requests for both defense and nondefense
programs.
At the same time, Congress should take steps to make changes in basic legis-
lation enabling effective evaluation and control of government spending within
annual appropriations.
In practice, this means that before we would support a. tax increase
`of $5 billion, for example, and we say in that resolution that we oppose
a tax increase, unless a comparable and lrior reduction in spending
wa.s made. In practice, this means that before we would support a tax
increase of $5 billion, for example, a spending cut of at least $5 billion
must he achieved. This would result in a net reduction of $10 billion
in the budget deficit. We reject outright the contention that no sizable
reduction can be made in nondefense spending. Nondefense spending
Imas been swollen in recent years by a tremendous expansion of new
Federal programs. Regardless of any differences of opinion that may
`exist with respect to the merits of individual programs, it should be
crystal clear that the Federal Government has been trying to do too
much at once.
~\Te must not overlook the fact that we are engaged in a major war in
`Southeast Asia. To assume that sacrifices in nondefense spending are
unnecessary is folly. It is obvious that the Nation's security must have
priority, and diomestic spendling must. `be adjusted accordingly. Con-
PAGENO="0025"
359
tinned expansion of expenditures at a rate greater than tax revenues
cannot be tolerated.
We understand that Gardner Ackley, former Chairman of the Coun-
cil of. Economic Advisers, has ridiculed the idea of matching tax in-
creases with budget cuts by calling it a "strange proposal" and by
suggesting it could lead to fiscal "overkill."
Recognizing as we do the built-in pressures for more and more Gov-
ernment spending, we. do not think there is any danger of an "over-
kill." All we are proposing is that Congress determine the amount by
which the deficit should be reduced and then divide this amount
equally between reductions in expenditures and increases in taxes.
We in the Farm Bureau are determined to do our part in getting at
the root cause of inflation-excessive Government spending. Conse-
quently, Farm Bureau will submit specific recommendations for budget
cuts to appropriate committees of. Congress-and these will include
proposed cuts in Government expenditures of special interest to farm-
ers and. ranchers.
~ shall make specific proposals to remove the drain on the Federal
Treasury resulting from passage of the Food and Agriculture Act of
1965, which caused the Commodity Credit Corporation in 1967 to make
expenditures of nearly $3. billion to compensate, in part, for Govern-
ment-depressed market prices. When other price .support functions of
CCC are added to these direct payments, net losses of the Corporation
have risen to nearly $4 billion annually. In spite of this, net farm in-
come has continued to decline during 1967.
Much of the recent growth in nondefense Federal spending is the
result of Federal assumption of responsibilities that properly should
be discharged by State and local governments.
With this in mind, our delegates at our recent convention adopted
a policy favoring the use of Federal income t.ax credits.
With this in mind, delegates to .the AFBF annual meeting in Decem-
ber 1967, adopted the following policy:
In order to increase local control of tax resources and responsibility fo.r edu-
cational and welfare programs, we recommend that the federal government
return the responsibility for these programs to the states through, the use of
federal income tax credits.
We ur~e passage of legislation which would provide that individual taxpayers
be given dollar-for-dollar credits toward federal income tax liabilities for indi-
vidual income, corporate income and general sales taxes paid to states. With the
return of this tax base to the states should go the authority and responsibility for
costs and administration of welfare and elementary and secondary educational
programs now carried on by the federal government.
A Federal credit for income and sales taxes paid to States would
permit the States to increase their, taxes `sufficiently to raise revenue
necessary to . replace the Federal grants they are now `receiving for
welfare and for education at the primary and secondary school levels.
We believe this proposal to replace existing "grant-in-aid programs"
with `tax `credits is far superior to the various proposals made in recent
years for a sharing `of Federal revenues with the States.
The tax-sharing approadh `requires `that tax money be sent to Wash-
ington for redistribution to the States. T.his could increase-rather
than reduce-the dependence of the States on Federal appropriations.
Such handouts could `be reduced, eliminated, or made subject to new
Federal requirements at any time.
PAGENO="0026"
360
The tax-credit approach does not separate the responsibility for
spending tax receipts from the responsibility for levying taxes as the
tax-sharing approach would do. Instead, it gives each State a prior
claim on the tax resources of its own taxpayers and thus provides a
greatly expanded opportunity to develop a revenue system based on
local needs.
~\Te recognize it will take some time to work out~in detail a procedure
to substitute Federal tax credits for existing grant programs; however,
we urge Congress to give this approach careful study as a means of
achieving two worthwhile objectives: (1) reducing fiscal demands on
the Federal Government and (2) increasing the revenue available to
State and local governments without which it is impossible to have
effective local control.
Agriculture, as such, received only a brief mention in the President's
Economic Report and only a little more attention in the state of the
Union message.
In recounting 1967 developments in the Economic Report, the Presi-
dent. noted that ~* * * farm proprietors' net income clipped, but by
yearencl had returned to the level of a year earlier * *~" It should
be noted that this dip in net farm income was at least partly due to
Government efforts to increase grain production. The fact is t.hat the
Government over-reacted to hysterical evaluations of the world food
situation and encouraged farmers to expand grain production in ad-
vance of effective demand. Food aid shipments under Public Law
480 actually were reduced during the fiscal year 1966-67, particularly
in the case of wheat and flour. The. inevitable result of this combination
of factors was lower grain prices.
IVe agree with the President's recommendation that. Congress ex-
tend Public La.w 480: however, we favor changes which will make
certain that needed supplies are produced in response to market
pi~iCeS and are purchased in the market. It should be made clear that.
this program is a part of our foreign aid commitment, not a subsidy
to domestic producers.
In the state of the Union message, the President said that lie will
recommend actions to establish "a security commodity reserve" and
"programs to help farmers bargain more effectively for fair prices."
Practically everyone agrees that some reserves of agricultural prod-
ucts are desirable to meet unforseen variations in Prodluctiomi. In our
opinion, however, Government-held or controfleci reserves are un-
necessary for the protection of domestic consumers, bad from the
standpoint of producers, expensive fromñ the viewpoint of -taxpayers,
and not necessary for exports or foreign relief.
Then I go into some detail here in the statement on the reasons why
we believe that. these are bad for consumers, are not desirable for con-
sumers, are bad for producers, and had for taxpayers.
We also pomt out that. these reserves come back as any Government-
held stockpile to fall on the market and are disruptive to a market
system since there is a constant danger that. the Government will break
the market by releasing its stocks.
We point out that the heaviest. Commodity Credit sales of stocks
have been made in order to first force farmers into so-calledi voluntary
programs by penalizing noncooperators and, second, to attempt to
counteract the effect of Government inflationary policies on food
prices.
PAGENO="0027"
361
Farmers are seriously and increasingly interested in finding ways to
develop greater market power through strengthening their bargaining
power.
There are two ways to organize farmers to obtain greater bargain-
ing power-voluntary and involuntary-only two ways. Farm Bureau
believes the voluntary, method of organization offers greater oppor-
tumty foi success Tiuly effective power comes through the `willing co
operation of informed, conscious, loyal, and active members; and this
*type of power far exceeds that which flows from compulsory grouping.
The only power which can compel farmers to bargain together
nationally is the Federal Government, and its authority must come
from an act of Congress. The Congress, as well as the executive branch
of our Government, must be concerned with justice and equity for all
~itizens-not farmers alone. Since 94 percent of the voters are con-
sumers, not farmers, Congress and the administration necessarily must
be more interested in low food prices than high farm income. Any
Federal Government direction or enforcement of farmer bargaining
most certainly would include rules or devices to "protect comisurners"
or the authority to issue cease-and-desist orders any time prices
threaten to go higher than some `Washington bureaucrat thinks they
should. Obviously, farmers do not want Government as a "partner"
in their bargaining `efforts.
Farmers are painfully trying to- crawl out of the cheap food trap
-created by existing Government-supply-management programs. It
would be a tragedy if their current interest in bargaining were to lead
them into a similar Government-price-management trap. Government
supervised marketing is not the way to get better income for farmers.
There is, however, a proper role for Government in improving the
marketing of farm products. Legislation currently before Congress
-would prohibit unfair trade practices designed to discourage farmer
participation in voluntary marketing programs. Congress can play its
proper role in this matter by guaranteeing farmers the right to volun-
tarily join a marketing association without fear of reprisal.
Thank you very much, Mr. Chairman.
(The balance of Mr. Shuman's prepared statement follows:)
* * *
Let us examine these considerations point by point.
(1) The idea that the maintenance of a government-held stockpile is a good
idea for' consumers developed, at least .in part, out of a desire, to justify the
existence of the large stocks already accumulated-under pi~iéesii~iport' programs.
Now that `surpluses of semé commodities have been rèduced'by increased ex-
ports and domestic utilization, the alleged need for government-held stocks is
being used to justify the continuation of government intervention in the produc-
tion and pricing of farm products.
In the absence of government reserves, the willingness of farmers and agri-
cultural industries to carry stocks constitutes a reliable defense against short-
ages of consumer goods. In addition, our agricultural economy contains many
other built-in safeguards against shortages.
The consumers' real assurance of adequa;te supplies of farm products is in the
productive capacity of American agriculture, the geographic dispersal of major
areas of farm production, the fact that we have a livestock economy, and the
capabilities of our processing and transportation industries.
The United States has never experienced a famine-even in the years before
the government began carrying `large inventories as a by-product of efforts to
support farm prices.
It is difficult to understand why we have so much public discussion about con-
surners' need for government-held stockpiles of commodities produce,d in great
PAGENO="0028"
362
abundance here in the United States when there is so little about the need for
government reserves of commodities which are imported in substantial quantities.
(2) Government-held reserves are bad from the standpoint of producers for
a number of reasons.
A policy of encouraging production in excess of consumption for the purpose
of accumulating government reserve stocks thwarts, or at best delays, efforts to
bring production into line with consumption. Difficult adjustment problems are
created-which may lead to burdensome controls when stocks reach the point
where the government decides that further accumulations are undesirable.
The release of reserve stocks inevitably depresses the price for current produc-
tion. This compounds the effects of a short crop on farm income. When production
falls below normal, farmers need to receive increased prices for what they have
produced in order to maintain their incomes. Also, a price increase is necessary to
spur greater production the following year.
A government-held stockpile is highly disruptive to a market system since there
is a constant danger that the government will break the market by releasing its
stocks.
On the basis of the record, it is clear that the exercise of administrative discre-
tion with respect to the release of stocks always will be heavily affected by poilti-
cal considerations.
For example, heavy sales of COO stocks have been made (1) to force farmers'
into so-called voluntary programs by penalizing noncooperators and (2) to
attempt to counteract the effect of inflationary government fiscal policies on food
prices.
From the standpoint of producers, government reserves of agricultural com-
modities constitute a device to manipulate markets politically, to coerce partici-
pation in government supply-management programs, and to impose price ceilings
on farm products.
(3) Strategic reserves would be costly. It has been estimated that acquisition
of the reserve could cost as much as ~1 billion. This would only be the beginning
cost. Storage of farm products is expensive. In a relatively few years storage and
interest costs can easily exceed the original cost of government stocks. Thus, in
conjunctiOn with the relatively remote possibility of a real need for such stocks.
makes government stockpiles a bad bargain for taxpayers. If a policy of accu-
mulating stocks leads to the need for expensive control programs, the injury to
taxpayers is compounded.
(4) It has been argued that government-held reserves are needed to assure
that the United States will be able to relieve famine conditions anywhere in the
world. In answer to this, we say that the characteristics of our agricultural
economy which make reserves unnecessary for domestic consumers, also provide
us a very great capacity to extend food aid to other countries-without the neces--
sity of maintaining government reserves for this purpose.
Free world consumers abroad-whether customers or aid recipients-have a
vital stake in our having a dynamic, progressive, market-directed agricultural
economy rather than a stagnant, government dominated agriculture.
Farmers do not want to compete with CCC in the market place. They very much
oppose any program-strategic reserve or otherwise-that will tend to rebuild
stocks of farm commodities under government ownership or control.
Farmers are seriously and increasingly interested in finding ways to develop
greater market power through strengthening their bargaining power.
There are two ways to organize farmers to obtain greater bargaining power-
voluntary and involuntary. Farm Bureau believes the voluntary method of
organization offers greater opportunity for success. Truly effective power comes
through the willing cooperation of informed, conscious, loyal, and active mem-
bers; and this type of power far exceeds that which flows from compulsory
grouping.
The only power which can compel farmers to bargain together nationally is
the federal government, and its authority must come from an Act of Congress.
The Congress, as well as the Executive Branch of our government, must be
concerned with justice and equity for all citizens-not farmers alone. Since 94
percent of the voters are consumers, not farmers, Congress and the Administra-
tion necessarily must be more interested in low food prices than high farm
income. Any federal government direction or enforcement of farmer bargaining
most certainly would include rules or devices to "protect consumers" or tlìe
authority to issue cease and desist orders any time prices threaten to go higher
than some Washington bureaucrat thinks they should. Obviously, farmers do not
want government as a "partner" in their bargaining efforts.
PAGENO="0029"
363
Farmers are painfully trying to crawl out of the cheap food trap created by
-existing government supply-management programs. It would be a tragedy if their
-current interest in bargaining were to lead them into a similar government price-
management trap. Government supervised marketing is not the way to get better
income for farmers.
There is, however, a proper role for government in improving the marketing
of farm products. Legislation currently before Congress would prohibit unfair
trade practices designed to discourage farmer participation in voluntary market-
ing programs. Congress can play its proper role in this matter by guaranteeing
farmers the right to voluntarily join a marketing association without fear of
reprisal.
Chairman PROXMIRE. Thank you, Mr. Shuman.
Our last witness is Mr. Gordon Shafer, chief negotiator, National
Farmers Organization.
Mr. Shafer.
*STATE]~TENT OF GORDON SHAFER, CHIEF NEGOTIATOR, NATIONAL
FARMERS ORGANIZATION
Mr. SHAFER. Thank you, Mr. Chairman and members of the corn-
mittee. I would like to take this opportunity to thank you on behalf
of the organization, the National Farmers Organization, which I
represent here today for inviting us to participate in this discussion.
As a preface to my remarks, I would like to remind this committee
that agriculture is still the Nation's biggest single industry. Farming
employs about 5.2 million workers, more than the combined employ-
ment in transportation, public utilties, the steel industry, and the
* automobile industry.
Agriculture's assets total some $273 billion or an amount of money
equal to about two-thirds of the value of the current assets of all cor-
porations in the United States or about three-fifths of the market value
- of all corporation stocks on the New York Stock Exchange.
The value of agriculture's assets represents about $36,000 for each
farm employee. Agriculture, of course, with this much invested is a
* good customer. The farmer spends over $33 billion a year for goods
and services to produce crops and livestock; spends another $12
billion a year for the same things that city people buy-food, clothing,
drugs, furniture, and other products.
Each year the farmers' purchases include over $4.6 billion in farm
tractors, other motor vehicles, machinery, and eguipment.
About $1.4 billion was spent in 1963 in the primary metals indus-
try for equipment in new plant-it has increased somewhat since
then.
About $3.4 billion is spent for fuel, lubricants, maintenance of ma-
* chinery, motor vehicles. Farming uses more petroleum than any other
single industry; uses about 320 million pounds of rubber; 28 to 30
billion kilowatt-hours of electricity or, in other words, more than the
cities of Baltimore, Chicago, Boston, Detroit, Houston, and Wash-
ington, D.C., combined.
We use about 5 million tons of steel in the form of farm machinery,
cars, trucks, fencing, and so forth.
In addition to this, farmers are the suppliers of the world's food
-supply. The United States is the largest exporter of agricultural
products. We have already heard some testimony here today, some-
thing about the extent of our exports, but in 1966 we exported nearly
PAGENO="0030"
364
$7 billion worth of farm products. Actually we are pretty much the
world market.
In 1966, the United States exported, as I said, some $6.7 billion of
farm commodities, making up about 23 percent of the total of the
U.S. exports.
The United States is now supplying approximately 90 percent of
the world's, of the free world's Supply of soybeans, about 57 percent
of the free world's supply of corn, about 50 percent of all the feed
grains in world trade.
Of the U.S. exports, approximately 75 percent of the exports, are
sold for cash, and the other 25 percent, roughly, are sold for soft
currency.
Now, this, I believe, will give us some sort of an idea. about the
importance of agriculture, and, when we remember a few of these
figures, we see that farming is a business, and its productive assets.
must yield a return, as must the capital of any other business.
A farmer's productive assets are his real estate, livestock, crops
stored on and off the farm, machinery, vehicles, equipment, furnish-
ings, and other financial assets.
The Federal reporting of the farm income seems to make no al-
lowance for return on the. capital invested.
The ier capita mcoine-we have already heard some testimony on.
this, too-the ~er capita. income of farmers from all sources, and this
includes work off the farm as well as the farm income, for 1966, the
last year that complete figures are available-was $1,717 a year as
compared to t.he per capita income of the nonfarmers at $2,636 per
year.
Of. course, this is a year, 1966, when agriculture was supposed to~
be comparatively prosperous in relation to other years.
So this gives us an idea of the serious situation in which farmers.
find themselves.
In 1950 the net farm income was only $13.5 billion, and the aver-
age net farm income from 1951 to 1966 was only $13.1 billion. Ac-
tua.lly the average was less than the 1950 net income, and by contrast.
the national, annual national, income 1951 through 1966 averaged~
1671/2 percent of the 1950 national income.
In 1966 each farm family's weekly recompense for the manage-
ment and labor which they expended in their farming operations.
was less than $50 a week per family.
Now, when we stop to think about this in relation to~ expenses as -
we find in our economy today, and compare this to the average wage~
of the balance of the economy, we begin to see just how serious this.
farm situation really is.
For 1950 each farmer's share of the national total farm debt was.
$2,798, and by 1966 it had risen to $20,286.
Putting this on a per-acre-harvested basis, thinking now of the
farm debt., t.he per-harvested-acre in 1950, $36.65 was the debt, and.
in 1966 per-harvested-acre, the debt had risen to $143.58, an increase
of 291.8 percent.
We hear much today about the poverty situation, and this is of~
much concern to everyone in the Nation. But I think most of us..
are, perhaps, mistaken about where our chief problem in this pov-
erty area exists. It may surprise most Americans to know that there
PAGENO="0031"
365
is. more poverty in rural America, proportiollately, than there is in
our cities.
In the metropolitan areas, one person in eight is poor by our stand-
ards. In the suburbs the ratio is 1 to 15. But in the rural areas one
in every four persons qualifies under the same standard for the pov-
erty program.
Some 30 percent of our total population live in rural areas, but 40
percent of the Nation's poor live there.
We can no longer permit the public policy to ignore our rural poor,
or, if we do, we shall see a continuing movement of rural people to our
central cities.
As the summer of 1967 illustrated, the slums and ghettos of the
city breed hatred and violence, which is no solution to the problems
of either city or country and, of course, when the farm people are
forced off the farm, as they are being, rapidly, then, of course, there
is no place for them to go but to the cities where they swell the slum
areas and become unemployed.
We could carry this a bit further, and we could say, I think, that
world poverty is primarily brought about because of underpayment
to agriculture, and the loss in trade in the world in terms of the gross
farm dollar.
Now, this leads me to one other conclusion, and that is that our
Nation is in serious, jeopardy from an economic standpoint unless
something is done to raise farm prices.
Then the next logical question, of course, is: Well, now, if this is the
case, what do you propose as a solution to the problem-and we~think
that the problem has to have a duai solution? We think that Govern-
ment has to have a share in the responsibility for creating a climate,
at least, where our economic situation can be improved. We believe
that our present Government program should be extended. We believe
that the general public has a responsibility to farmers as well as to
themselves, to assist in working through the problem which we have.
In addition to this, we believe that farmers themselves must take
a major share of the responsibility for the condition in which they
find themselves, and we believe that it is only through organizing and
bargaining collectively that the farmer can change his economic status.
Now this, of course, is the purpose of the National Farmers Orga-
nization. We are a relatively new farm group so far as the general farm
organizations are concerned. But we believe that what must be done,
we think that farmers must band themselves together in sufficient
numbers under the protection of the Capper-Volstead Act so that they
can bargain and sell together for a cost of production plus a reasonable
profit price on their commodities.
We do no~ think you can limit this to just the minor commodities.
Some bargaining has been done, mostly in local areas, in the minor
commodities. But we believe that this is not the real problem in trying
to bargain for agriculture. We think that you must bargain for the
major commodities and, of course, there is only one way that you can
effectively bargain, and that is to bring together enough of the total
production over the entire Nation of not just one commodity but of
any and all commodities so that the purchasers of our production can-
not bypass the organization of farmers and supply their needs.
PAGENO="0032"
366
With this in mind, the National Farmers Organization is organizing;
we are now organizing, in some 35 States, with a little organization
begimdng in about five or six more. We have not completed the job,
but we think that farmers owe it to themselves and to the Nation
to band themselves together and bargain and sell together.
I think the alternative to solving our problem could very well lead
to serious disaster for this Nation as a whole-not only for farmers
but for this Nation as a whole.
We are now at about the lowest parity ratio that we have been
in the United States since the middle 1930's and, of course, some of
you gentlemen, I am sure all of you know, and many of you remember,
the days of the 1930's so far as farming was concerned, and you know
what happened to the rest of the Nation.
In other words, what I am trying to say is that depressions in this
Nation have always been farm-bred and farm-led.
With the depressed state of agriculture as it is now in this country,
I believe that we could very well be heading for the same type of
problem, and I hesitate to predict, but I wonder if it would not `be
worse than anything we have ever seen before, unless something is
done to right this situation, because with the extra `assets of the Nation,
the extra debt, I sometimes wonder if the Nation, as we know it today,
can actually survive another serious depression.
So I believe that this is a concern of the Nation as well as a concern
of the farmers, and we believe that the responsibility for correcting
this situation will have to be shared by the farmers and by the people,
and, of course, by that I mean Government action.
With this, I believe that I will terminate my remarks, and if there
are any questions I will try to answer them.
Chairman PROXMIRE. Thank you very much, Mr. Shafer. I would
like to ask each of you gentlemen to get out your pencils and maybe
jot a note or two and remember these questions. I would like to have
each of you in turn comment on them.
The point `has been made by several of you this afternoon, and I
do believe wholeheartedly, that farm income is too low. In fact, the
statistics given by Mr. `Shafer at the end, I think, would `be most im-
pressive. Farm per capita income in 1966, the good farm year, $1,700
or something like that; average nonfarm per capita income in 1966,
was $2,600. My questions are. these: Do you support or oppose each of
the following measures to improve farm income?
1. The Mondale approach, and let me very quickly say what that
is. It has two parts. The first part would provide for a national agri-
cultural relations board to administer bargaining between farm com-
mittees and processors. ..
The second part of it would extend the marketing agreement system
to all commodities.
2. A la.nd retirement program; do you support or oppose such a
program?
3. Additional credit facilities for farmers provided by additional
Federal credit action.
4. The next is expansion of the food-for-peace program.
5. Finally, the kind of proposal which was described-I think, by
Mr. McDonald-Senator Metcalf has introduced, that would sub-
PAGENO="0033"
367
stantially limit or eliminate using farm losses to offset income from
other sources in computing income taxes.
Mr. Graham?
Mr. GRAHAM. Mr. Chairman, in regard to the Mondale bill, we would
support the second part in preference to the first.
I should tell you that there have been a number of meetings between
most of the farm organizations, and there is pretty general agreement
among them on this point. This group includes the Grange, the
Farmers Union, the NFO, the Missouri Mid-Conference Farmers
Association, and the National Council of Farmer Cooperatives.
The approach generally of the second section of the Mondale bill-
as I understand it has been introduced-is something that we would
all support.
Chairman PRoxMIns. Your position, Mr. Graham,, is that you would
not support the first part; you would support the second part?
Mr. GRAHAM. Basically; yes. I think this is basically the position of
most of us.
The second one on land retirement programs, if we were to believe
what we hear or what we read, that we have a continued capacity for
overproduction that is substantial, and according `to Iowa State studies
that it is going to continue `for the foreseeable future, we cannot see
any alternative except to continue some type of land retirement
program.
If we would bring out 7 or 9 million acres out of a CAP program
during. the next couple of years, and they are going to come out unless
something is done about it, and throw that on top of the surplus lands
we have at the present time in terms of effective demand for the prod-
ucts, we are going to be in real trouble. I do not see any way around
that one.
For additional credit, I think, generally, we have enough credit
facilities if we just have enough cash to go into them. But, they are
bidding against everybody else, including the Goverurnent, for a lim-
ited amount of available cash, and, so, the problem is not necessarily
the amount so much as it is the cost at the present time. This is one of
the reasons why we think there ought to be a tax increase that would
take the money for the Federal Government out of taxes rather than
bidding in the marketplace against all the private needs.
On expansion of Public Law 480, we favor very definitely an expan-
sion of that. The Metcalf bill which you have asked about, and which
Angus talked about is well within our policy, and we will support that
also.
Chairman PROXMIRE. Mr. McDonald?
Mr. MODONALD. Mr. Chairman, we will support title II, the market-
ing order part, as `I understand it. I have not had time to read the bill
as introduced. We are in favor, in other words, of keeping the working
programs and building on them. This is an extension.
Chairman PROXMIRE. It means you will not support title I, that is
the National Agricultural Rel~tions Board.
Mr. MCDONALD. We will support title I also.
Chairman PROXMIRE. You will support both?
Mr. MCDONALD. Yes, sir. We will support both titles of the bill. I
would not say in every detail, but in principle, we will support the
90-49i-68-pt. 2-3
PAGENO="0034"
368
bill as indicated by our President's press release which caine out
just a few minutes before I got here.
Chairman PROXMIRE. Thank you.
Mr. MCDONALD. On land retirement, we have supported land re-
tirement, but not retirement of whole farms which Ezra. Taft. Ben-
son brought. about, as I remember, where you had the abandonment
of rural communities, and t.he taking of whole farms out. Parts of
farms. yes, for land retirement.
Xdejuate credit, facilities, and I cut off part of what I have got in my
statement with regard to the Federal Reserve Board credit and high
interest, and so forth, certainly an expansion of credllt we are ~n sup-
port of it.
Senator Moss' bill, S. 1971, which would give credit, to small co-
operatives not available to them under the Farmers Home Administra-
tion. and not availabie to them under the Farm Credit Administra-
tion, these little cooperatives were left out in the cold.
~\Ve also would favor utilizing parts of the Federal Reserve Act.
which are not yet used. Section 13. part 3, 1 suppose. section 13-3. pro-
vides that. in an emner~encv the Federal Reserve banks may make avail-
able under the Home Owimers Loan Act of 1933-they could have done
it in 1966 when we had a crisis. they did not use that authority, which
was reaffirmed in this bill which was passed by the Congress in 1906. So
we especially want more credit and not high interest, credit at. a rca-
sonabl~ rate for farmers and others.
Of course, expansion of the food-for-peace program under Public
Law- 480, we favor that., and we favor the Metcalf bill.
Chairman PRox~rInr. Thank you.
Mr. Shuman ?
Mr. SHUMAN. Thank you. On the Mondale bill it is our understand-
ing that these t.wo titles, the National Agricultural Relations Board
and marketing agreements, both would involve Government super-
visedi bargaining and marketing, and we a.re unalterably opposed.
We think that it would result in having a. marketing board appointed
on which would be, of course-you could not dlelly it-consumer and
labor union representation, and we would be right, back in the same
trap we are in now, where we have had the Government farm pro-
grams used to hold farm prices diown. We are for better farm prices
and not for any device, that keeps farmers from negotiating for the
best price possible. So we are opposedl to the Mondlale bill, andl will
fight. it in every way we can.
Second, the landl retirement proposals, many of them, some of them
have been useful in the past, perhaps.
WTe do not believe, and I was pleased to hear Secretary Freeman,
yesterchi.y, in De.s Moines, indicate that there is some question in his
mind as to whether or not you can adjust production through acreage
controls. }-Ie said tha.t this is open to question, andi wechallenge that
you can. -. .
In fact, the signing up in the wheat program was for an 8-percent
cut in production for the year of 1968, and the latest USDA flgtire says
that it. is cut any it. won't be over 1 percent. This illustrates the
fut.~lity of trying to adiJust production through land retirement..
However, we believe that a land retirement type of program in
connection, andl only in connection, with the ending of these present
PAGENO="0035"
369
unworkable and unsuccessful control and payment programs might
be a helpful thing. It could provide a transition program while farmers
were adjusting to the market system again for these crops that are
under controls.
I was glad to see Mr. Shafer point out that the parity ratio is the
lowest it has been since 1937, and I emphasize that what we need are
less Government programs.
Every time we have had a Government program in the~ last 30 years,
the cost of farming has gone up, and the net income of farmers has
gone down as a result of these~ programs.
During this last period of time, in the last several years, we hav~e
had the most expensive and the most extensive Government controls
and subsidies in agriculture's history in effect, and we have an admin-
istration in charge of them that is pledged to make them work, and
yet we are now near the depression level as far as farming is con-
cerned. So we do iiot favor a. land retirement program except in con-
nection with ending the program we now have.
As far as additional credit facilities are concerned, we have got
facilities running out of our ears. One of our biggest problems in agri-
culture is that farmers' indebtedness is going up. The total farm
indebtedness in the last few years, particularly in the last 5 or 6
years, has skyrocketed, and so I do not, we do not, believe that we
need new facilities.
We need to check inflation, which Mr. McDonald mentions as in-
creasing interest rates. Well, the cause of increased interest rates is
primarily inflation, and that is caused by the policies of this aciminis-
tration, which have been to spend more than we take in; and there is
only one way to correct that, and that is to balance the budget and
do it as quickly as we can.
So we do not favor additional Federal action in the credit field.
As far as expansion of the food-for-peace program, the Farm Bu-
reau originated the Public Law 480 idea. We think it served:a purp'ose,
but we think it has largely served that purpose, and that it ought to
be phased out as rapidly as possible. We want to sell for dollars and
not to be in the business of export dumping, and so that is why we
suggest tha.t the needs for food for peace be met by purchases in
~he market,
I am not too familiar with the Metcalf bill, but we would not -favor
any bill which would cause farmers to lose any of their tax rights.
We are not opposed to looking for loopholes which may be used by
some to take unfair advantage of losses on farm operations. But we
are very suspicious that any attempt to close these loopholes would
take away some rightful privileges which farmers have under the
tax laws.
That pretty well covers it.
Chairman PR0xMIRE. Thank you very much, Mr. Shuinan.
Mr. Shafer?
Mr. SnArER. In regard to your first question on the Mondale pro-
posal, which I have not seen as yet, but I think Mr. Grah~nx pretty
well stated the position that ~ve would support on this proposaL We
are in favor of any additional legislation which would* enhance our
bargaining Position.
PAGENO="0036"
370
Question No. 2, land retirement, it is beyond me how anyone can
figure that taking all of our land out of our retirement programs,
phasing this program out, and expecting to put all of this land back
into production, how in the world we can think this is going to cause
higher prices, I cannot figure that out.
This last year is a- good example of what increased production can
do to farm prices; and without some way of keeping the added pro-
duction from coming on to the market, I fear that prices would be
much, much lower than they are today.
As far as additional credit is concerned, with the cost-price squeeze
that has been on the farmers now for several years, and continues to
get worse every year, the more money we can make available to the
~armer-and the cheaper the rate of interest-the better position he
is going to be in. Certainly this would help.
Sure, we are in favor of Public Law 480. We think it ought to be
expanded to take up some more of the additional surplus, particu-
larly in wheat, some of the feed grains, and so on, that this country
is able to produce. Why not feed it to a hungry world? It seems to
me that this is the logical approach.
No. 5, I am not acquainted with the Metcalf bill, but from what I
have heard here today, we would be in favor of this approach, yes, to
eliminate the tax writeoff of some of our other segment-s of our
ecoiiomy that come into farming.
Chairman PRox~r'RE. Thank you. My time is up. I want to come
back to that question.
Before I do, if Senator Jordan will permit, I would just like to ask
Mr. Shafer-1 missed because I was getting something from a mem-
ber of the staff-did you say you are in support of both titles of the
Mondale bill?
Mr. SHAFER. I said that I was not familiar with the Mondale bill,
the proposal, yet. I believe that our position would be similar to the
position expressed by Mr. Graham. I think that-
Chairman PRoxi~nRE. In favor of two but not one.
Mr. SHAFER. From what I understand. I would not say we would
not- support No. 1, but we are strongly in favor of No. 2, let us put
it that way, from what I understand of the bill.
Chairman PROXMIRE. Senator Jordan?
Senator JorwAN. Thank you, Mr. Chairman.
I, too, have severa-l quest-ions, if you will use your scratch pads
again, please, and I will not have to ask them of each one separately.
First of all, would you please supply for the record a list of your
membership; that is, total membership in the United States a-nd by
States, if you will, please, for the record. You do not have to reply
to that now.
Do you believe that Federal spending should be cut, and if so,
where and how much?
Do you believe that we need a surtax and, if so, how much?
Do you believe we should remove the gold cover?
Most of you spoke briefly about land retirement, but you did not
get into what incentives should be offered for further land retire-
ment, if further land should be retired, and how should this he imple-
inenteci.
PAGENO="0037"
371
These are my questions, Mr. Graham.
Mr. GRAHAM. Yes; we will furnish the first for the record.
(In answer to Senator Jordan's first question, Mr. Graham later
supplied the following table:)
WHERE THEY ARE-GEOGRAPHIC ANALYSIS OF GRANGE MEMBERSHIP (DUES PAID)
Members
Granges
Members
Granges
New England:
Maine
Vermont
New Hampshire
Massachusetts
Connecticut
Rhode Island
37,238
12,105
18,504
28,245
27,158
5,071
426
191
259
302
186
55
West Central-Continued
South Dakota 360
Nebraska 1,701
Kansas 26,213
Montana 1,486
Wyoming 1,064
Colorado 7,487
21
37
220
29
31
144
Total
128,321
1,419
Total 52,549
816
Middle Atlantic:
New York 78,866
New Jersey 11,823
Pennsylvania (except western) 46,184
Delaware 1,816
Maryland 2,008
District of Columbia 200
-
Total 140, 897
East Central
Michigan 11,262
Ohio 106,414
~
Western Pennsylvania 23,092
Total 145,537
West Central:
Illinois 6,674
Wisconsin 1,663
Minnesota 1,720
Iowa 1,993
Missouri 2, 188
1, 110
131
618
29
47
1
1,936
310
1,126
~
309
-
1,840
160
34
56
48
36
Southeast:
North Carolina 11,031
South Carolina 4,056
Florida 1,461
Tennessee 435
Virginia 1,139
Total 18,122
Southwest:
Arkansas 641
Oklahoma "e°96
exas
Total 3,620
Pacific:
Washington 55,941
Idaho 9,409
Nevada 87
Oregon 26, 062
California 40,122
Total 131,621
Grand total 620,668
194
79
35
25
30
363
20
~
86
522
168
1
360
363
~-
724
7, 184
Note: In addition, the Grange has an unknown number of members who are classified as honorary members, mostly
those who have a long membership record, from whom no dues are requested. These probably number in 6 figures.
Mr. GRAHAM. In terms of Federal spending, we have some concept
of the budget in terms of agriculture. But, as we testified before the
House Ways and Means Committee, we do not set ourselves up as
experts in the total budget of the U.S. Government. I do not think
there are many people who are. We have areas in which we do have
some expertise.
Frankly, we think that the cuts in agriculture at the present time
have gone to the bone, and taken out some of the bone. There are sub-
stantial problems that we cannot answer at this budget: level. One of
them has to do with the proper funding of the Packers and Stockyards
Act which, at least, guarantees some honesty in the marketplace. This,
we think, ought to be increased, so at this point we do not see where
you can cut more.
Frankly, I think that we have got some problems in doing any
substantial cutting anywhere else. This has been a pretty rugged
budget cutting session in the last 2 or 3 years.
If we are not going to eliminate military cuts, I do not conceive of
how it is possible to equate cuts with tax increases.
If we would start from a year ago we might do that, or 2 years ago.
But if we were to cut half of $23 to $29 billion we would practically
dismantle a substantial amount of the Federal Government, if we
do it outside of Defense.
PAGENO="0038"
372
We prefer, rather, a surtax. We have been in favor of this for a year.
It puts the tax burden where it properly belongs-on those who have
benefited from the inflation. `We think it should have been passed at
the time it was asked for. Our criticism before the House Ways
and Means Committee was that we did not think it was enough. There
is enough money in the Lnited States today, and without substantially
hurting anybody, because we are living in a. pretty affluent society,
after all. There is enough money to take care of most of this need
which we have, at least to the pomt that we do not have to do quite so
much deficit financing.
\Ve would support the removal of the gold cover.
In terms of incentives for the land retirement, I am not sure what
they need to be. I am not sure anybody has made a study which
indicates what these incentives should be. But what we would say is
that the incentive should be adequate to get the land retired, and it
may be that the present incentives are sufficient. I have my doubts
that they are, because of the added costs, taxes, and the like. Even
idle land has taxes, and there has been a substantial increase in taxes
of about 70 percent or so, and this would indicate to me that it would
take a little more incentive than we have at the present time.
Senator JORDAN. Thank you.
Mr. McDonald ~
Mr. McDoNALD. We will furnish. Senator Jordan, for the record,
our membership of our States.
(The following list was subsequently received from the National
Farmers Union:)
~"ationai Farmers Un ton-Paid family mem.bersli ip, 1967
Arkansas 11. 0.92 Ohio 3. 138
Illinois 1. 021 Oklahoma 50. 010
Indiana 1. 000 Oregon-Washington_ 1. 150
Idaho 400 Pennsylvania 803
Iowa 3. 401: Rocky Mountain 0. 602
Kansas 7, 142 South Dakota 14, 612
Kentucky 420 Tennessee - 118
Michigan 841 Texas 6. 482
Minnesota 27. 018 litah 1. 050
Montana 12, 695 Virginia 638
Nebraska 7,085 Wisconsin 7.058
New Jersey 571 Miscellaneous 302
New York 441
North Dakota 40. 734 Total 212, 388
Mr. MCDONALD. In regard to spending and where to cut, frankly, I
inn not an expert. on these matters and I do not know if we have resolu-
tions to cover this or not.
But, in regard to some of these adventures, such as going to the
moon, would it not be possible to cut off a few billion there? It is $5
billion, as I remember.
It would appear that the war effort. and someof the~e things we have
been talking about today are more important. ..
I agree with Mr. Graham. I do not l~now where you would cut
a2ricult.ure even more than it has been cut. There is a super airplane
which is supposed to carrythôusands of people they have been work-
i1~ on to 1 çl~ noL 1 now `ion 1 v~u~ e't s ~nd I `nil not sine it will
fi~ ~ et ~tncl li indiecis o~ nllio is I belies e Mi Ch'uin ~n h~i~ e been
squandered oil that project. .
PAGENO="0039"
373
As far as I am concerned, the airplanes go too fast now.
We kiav~ supported, in principle, a taxing program. The farmers
w `mt to p'my their tixes But oui Bo'mrd, l'mst September, p'mssed a resolu
hon that if we are going to have taxes which the middleclass is pay-
iiig-~-parentheticafly, this is the first war since I have been in Wash-
ington, `md I h'mve been heie since 1935, where the middleclass is
l)aylllg for the war. General Motors and these. other people. with bil-
lions of excess profits, with their war contracts are-profiting from this
war, and I do not see why the phrase "excess profits"has not been.
used a little bit up here around the C'mpitol
I do not see why Representative Ullman's plan of 2 or 3 years ago
to put a tax on those people whose profits were excessive since the war
started, that I think would be a sensible tax program.
I belie~ e th'tt covers the questions
Senator JORDAN. I asked you, Would you remove, the gold cover; and
do you have a plan for land retirement? .
Mr. MCDONALD. For land retirement, well, I thought I answered that
a few minutes ago. We would be for a modified system of land retire-
ment. We think it was a mistake-of course, the Secretary could not
know-to add 30 million acres to increase wheat production.
Chairman PROXMIRE. Would the Senator yield? As I recall, you said
you preferred not to take whole farms out of production.
Mr. MCDONALD. That is correct.
Chairman PROxM1RE. But. you would save the land retirement short
of that.
Mr. MCDONALD. That is correct; to make ghost towns out of rural
communities.
Senator JORDAN. How about the gold cover? Would you remove t.he
goTd cover from the Federal Reserve notes, the 25-percent gold cover?
Mr. MCDONALD. Yes, sir; I believe I would.
It reminds me of a story. Someone got into Fort Knox one time and
stole all the gold, and they did not find out about it for 20 years.
Senator JORDAN. Mr. Shurnan?
Mr. SHUMAN. Thank you. .
On the first question, A list of the members by States and total for
the United States? We will be glad to furnish that for the committee.
(The membership list promised by Mr. Shuman was subsequently
supplied as follows:)
PAGENO="0040"
1 Farm Bureau memberships are reported by families. The number of individuals is not
reported; however, if it is assumed that the average member family includes three persons
14 years of age and over, the total number of individuals would be in excess of 5,250,000.
Mr. SHUMAN. The second one was: Should spending be cut, Federal
spending be cut, and how much? WTe definitely favor a very heavy cut
in Federal spending, and we believe it can be made.
It is absolutely ridiculous to take the attitude that you cannot cut
spending `because Congress keeps adding to it. They can take it off
the way they have been putting it on.
Some of the things that could be cut, we are ready, willing, and
have suggested cuts in Federal fa.nn program spending of $1 billion
or more. We believe that the poverty program, much of the poverty
program, is money down the rathole. It has been wasted and squan-
dered throughout the country, and it is not effective in the objectives
which could be attained in different ways. Much of the poverty pro-
gram expenses could be eliminated.
We think the foreign aid programs have had a lot of water in them,
and a lot of waste, and that they can be cut down very drastically.
We agree with Mr. McDonald that the moonshot and some of these
things could wait to a time when we were not in as drastic a situation
as far as the fiscal survival of this Nation is concerned.
There is no question but what the rivers and harbors appropria-
tions can be drastically cut. This is the pork `barrel type of thing, a
kind of make-work project for the Army Engineers, in which billions
of dollars have been spent on these projects throughout the United
States that ought to be curtailed, postponed, or eliminated.
374
FARM Buna&u MEMBERSHIP
Member families by States as of November 30, 1967 (audited report for the end
of the American Farm Bureau Federation's 1967 fiscal year).
State
Alabama
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Total
100,024
4,051
54,024
60, 380
13, 478
2,492
1, 500
35, 069
51, 733
815
11,406
190, 477
153, 162
110, 019
83, 697
87, 839
26, 657
2, 003
9, 412
4,052
52, 144
29. 407
66,462
41, 365
4,486
15, 693
State Total
Nevada 1,630
New Hampshire 3,487
New Jersey 3,199
New Mexico 9,557
New York 14, 591
North Carolina 59,814
North Dakota 15,736
Ohio 50, 875
Oklahoma 52,785
Oregon 8, 367
Pennsylvania 12, 624
Puerto Rico 5,960
Rhode Island 227
South Carolina 28, 760
South Dakota 3,943
Tennessee 87, 956
Texas 105, 653
Utah 8,636
Vermont 5, 255
Virginia 20, 360
Washington 4,064
West Virginia 4, 088
Wisconsin 25, 311
Wyoming 7,928
National total 1 1, 753, 532
PAGENO="0041"
375
As I said previously, we would oppose an increase in taxes until
such time as the Congress is ready to make an equivalent cut in
spending.
We think this cut can be at least $5 billion. With a $5 billion tax
increase there would be a $10 billion reduction in the deficit, and it
could be much more, without any question.
As far as that goes, we believe the military expenses should be scru-
tinized, and probably some of them can be cut without endangering
the defense effort.
As fa.r as removing the gold cover: No; we are not in favor of remov-
ing the gold cover. We. think that if the Congress and the administra-
tion recognize the gravity of the situation, and take appropriate action
to reduce expenditures, it will not be necessary.
If appropriate action is not taken, very likely, before the year is up,
we will be forced to do the same thing that Great Britain was forced
to do. The situation is desperate, but it is not a time to start taking
actions to remove the gold cover. It is time to meet and to treat the
problem, not the symptoms.
As far as incentives for land retirement: We favor land retirement
on a competitive bid basis and, as I said before, its use only as a means
of transition while we are dismantling the control and direct subsidy
programs.
Senator JORDAN. Thank you.
Mr. Shafer?
Mr. SHAFER. In answer to your first question, it has been our policy
not to release our membership. We are a farm organization organized
primarily for bargaining purposes, and it has been the belief of our
membership, at least, that we should not release to those that we are
trying to deal with the areas in which we are strong and the areas in
which we may be weak or just exactly what our total membership is.
In other words, we believe that this is a part of bargaining; because
of this, our membership asks, that we do not release our membership
totals.
Regarding the next question: Should Federal spending be cut?
Again, let me say that we are a farm organization, and we try not to
get involved too much in things that do not pertain to agriculture.
So far as agriculture is concerned, we do not see any way that you
could successfully have the agricultural expenditures and still expect
to accomplish as good a job as we are doing now.
We have taken no stand on the gold cover, as far as our organiza-
tion is concerned, or on the need for more taxes.
My personal opinion, so far as taxes are concerned, I cannot see how
we can continue forever to go into debt to take care of all of our
problems. So, it appears to me, personally, that probably we do have
a need for more taxes.
The land retirement question: We believe that whatever incentives
are necessary to get whatever land is needed out of production should
be used. I am hopeful that the present feed grain program will siphon
off sufficient production to be of great help.
I would agree with Mr. McDonald in his statement that we do not.
favor the retirement of whole farms where communities could be
drastically affected.
PAGENO="0042"
376
* So far as our land retirement program is* concerned, we think it
* should be done more generally from individual farms rather than
trying to close clown entire communities.
Senator JORDAN. Thank you.
Thank you, gentlemen. I am sorry, Mr. Chairman, that I took so
much time. I got some good answers.
Chairman Peox~rIRE. Do you want to make a comment, Mr. Graham?
Mr. GRAHAM. Yes, indeed.
Chairman PROXMIRE. Please go ahead.
Mr. GRAHAM. I think just from the standpoint of accuracy we ought
to catch a couple of things here.
The statement was made that net farm income has continued to
decline, and in table 77 of the CEA report. it. shows that farm income
did decline from 1952 to 1960 from $15.1 billion to $11.5 billion.
But, beginning in 1960, it went up, and with the exception, there
have been only two times when it went down under the previous year,
hut the increase has been from $12 billion to $14.9 billion this year,
even after the drop of income.
In terms of net income per farm, by 1967 dollars there. was a drop
from 1950 to 1960 of $42.; but from 1960 to 1967 there was an increase
of $1,314.
There is another statemnent that. was made that the release of farm
stocks inevitably depresses prices.
Chairman PRox3rmE. Let me just ask you at that point, Mr.
Graham, because I agree with your figures, you are right: but. No. 1.
the most recent figure shows that farm income ha.s gone down in 1967
* as compared to 1966, and gone down-
Mr. GRAHAM. $283 million.
Chairman PRox3rIe~. And drastically.
Mr. GRAHAM. Right.
Chairman PROXMIRE. In the second 1)lace, we know the value of
the dollar has diminished somewhat during this period. We also know
that what has really happened is a statistical trick. What has hap-
pened is that many, many farmers-literally millions of farmers-
have dropped out of farming.
Mr. GRAhAM. Of course.
Chairman PROXMIRE. These are the farmers with low incomes, by
and large-not entirely-but by and large. The farms that remain
are bigger, have a larger investment. Whereas they do have a higher
per capita. income, the reason they have a higher per capita income is,
as I say, because the farmers with lower incomes have disappeared,
are no longer in farming.
Mr. GRAHAM. That is correct: no question about it. But the net
farm inventory, I mean the net, including inventor changes, has
gone up even with the loss of farmers. I mean, this is total. This does
not break it down to per farmer base.
It has gone up historically, and it. has not gone steadily clown as
the statement was macIc. This was the onl point I was making. It
went clown this last year by $283 million, but this dlOe5 not indicate
a steadly dlechine.
Chairman PROXMIRE. Yes. We raised~ this point the day before
esterdlay when Secretary Freeman appeared before us, andi I think
the conclusion that. the Secretary of Agriculture made was that
PAGENO="0043"
377
whereas he argued that per capita farm income has gone up over the
past few years, he agreed that it was still less than two-thirds of the
income of those Off the farm.
Mr. GRAHAM. I will agree with that.
Chairman PROXMIRE. Whether it has gone up or down, the point
is that it is still too low on the basis of comparison with nonf arm
income, particularly when you recognize the investment the farmer
makes-which most people off the farm do not make-the enormous
increases in efficiency, and the great risk involved in farming. When
you put these elements together, together with the hours the farmer
works, it would seem that the injustice is most conspicuous.
Mr. GRAHAM. I am not arguing about this relative-
Chairman PROXMIRE. I am sure you are not. But I wanted to put
it in as much context as possible.
Mr. GRAHAM. The relative position is obviously not good, and we
made that point in our testimony. The point I am making is that
you cannot honestly say it has steadily gone clown.
Another statement was that the release of CCC stocks inevitably
depresses the price. Well, the fact is that the price went up steadily
during the time we were dropping the supplies of wheat from 1
billion 400 million clown to about 400 million, and we were dropping
corn stocks from 85 million tons to 45 million tons. During that time
the price did go up, and it is a strange thing that the price ceased
to go up and started declining after the stocks had disappeared. This
is a matter of historical record.
Chairman PROXMIRE. As the stocks diminished.
Mr. GRAHAM. I mean as the surplus stocks diminished. The over-
powering surpluses were gone by the time prices began to go down.
And furthermore, farm prices are at a low level of parity, but when
the certitficates and program payments are added, the parity level
is up except for nonsupported crops.
Chairman PROXMIRE. Mr. Shuman.
Mr. SHUMAN. Mr. Chairman, I just want to challenge that last
statement, that it is not a matter of historical record, and we will
submit figures to show it. I do not have them right here.
(Information later supplied, follows:)
PAGENO="0044"
Marketing year
Total utilization CCC sales CCC sales as a per-
cent of utilization
Season average price
Corn:
Millions of bushels Millions of bushels Percent
Per bushel
1961
1962
1963
1964
1965
1966
3,962.0 975.0 24.6
3,895.0 736.0 18.9
3, 848. 0 170. 0 4. 4
3,875.0 391.0 10.1
4,392. 0 398. 0 9. 1
4.244.0 `22.0
$1.10
1.12
1. 11
1.17
1. 16
1.29
Sorghum grain:
1961
1962
521.0 221.0 42.4
516.0 241.0 46.7
Per hundredweight
$1.80
1.82
1963
591.0 122.0 20.6
1.74
1964
573.0 144.0 25.1
1.88
1965
848.0 240.0 28.3
1.79
1966
Oats:
911.0 `37.0
1.86
Per bushel
1961
1962
1963
1, 059. 0 7. 0 . 7
1,019.0 6.0 .6
931.0 3.0 .3
$0. 642
.624
.622
1964
891.0 13.0 1.5
.631
1965
891. 0 18. 0 2. 0
. 622
1966
869. 0 14. 0 1. 6
. 669
Barley:
1961
4~1.0 40.0 9.1
.979
1962
410.0 11.0 2.7
.915
1963
420.0 30.0 7.1
.897
1964
430.0 15.0 3.5
.947
1965
395.0 12.0 3.0
1.02
1966
383. 0 3. 0 . 8
1. 06
CCC SALES OF WHEAT IN RELATION TO UTILIZATION
Millions of bushels Millions of bushels Percent
Per bushel
1961
1962
1963
1,329.8 254.6 19.1
1,226.0 207.8 16.9
1 439.7 341.7 23.7
$1.83
2.04
1.85
1164
1965
1966
1,375.3 310.8 22.6
1,598.6 379.1 23.7
1,438.0 147.2 10.2
1.37
1.35
1.63
`Oct. 1, 1966, through July
14, 1967.
Mr. SHUMAN. I also want to point out that I would hate to try to
tell any farmer today that his income situation is better today than
it was before 1960. This just is not true. The income situation of the
average farmer is best depicted by the pa.rity ratio, and it is at the
lowest point it has been since 1937.
The income situation, net income, and the points you brought out
about the total, the fact that the improvement in individual farm in-
come is up, is due largely to the tremendously large migration out of
agriculture that has happened not only in the last 6, 7 years, but
before that, and it has been about. the same rate for the last 20 years. It
does not matter which administration is in power, farmers are still
being forced out of agriculture.
Chairman PRox~rIRE. I would like to ask you, Mr. Shuman-and
the other gentlemen, if you would like to comment on it-that I think
some of you have already indicated your position, but Wednesday
a.fternoon Secretary of Agriculture Freeman, when I asked him
what would be the consequences of a $1 to $2 billion cut in the agri-
cultural budget, said tha.t in his view he would have no alternative
except to virtually dismantle much of the farm support program.
On the basis of studies that he had seen, this would result in a
very sharp drop in farm income. At the same time, there are many m
Congress-and many outside of Congress-who feel if there are fewer
378
CCC SALES OF FEED GRAIN IN RELATION TO UTILIZATION
PAGENO="0045"
379
farmers, with greater reductions we have had over the years, at least
in surpluses, that it is hard for them to understand how our agricul-
tural budget is still so very big. `What is your response to this, Mr.
Shuman?
Mr. SHUMAN. Well, I would respond by saying that any study as to
what would happen by the dismantling of the present very expensive
and ineffective farm program would depend upon who made the study,
No. 1, and there have been studies made by people who did not want
to see these programs dismantled; and, No. 2, by the assumptions that
you make in such a study.
I think, without question, if you just simply jerked out the controls
and the almost $3 billion subsidy, this would reduce farm income., if
you did not do anything else.
We have made proposals and suggestions that, if implemented in
connection with this dismantling process, I am sure would result in
increased, not reduced, income as we got rid of these programs.
The purpose of the program, particularly the feed grain program,
was to reduce farm production, and yet the average production of feed
grains during the years since the feed grain program has been in ef-
fect has been considerably higher than it was in the 5 previous years.
The program did not get any reduction in production. It assured
farmers of a certain price, and they increased their production.
The proposals that we have made include such things as an expan-
sion of the land retirement, a prohibition against the sales of surpluses
by the Government to depress prices; expansion in our purchases for-
purchases rather than direct aid-purchases of the commodities on
the market for the aid programs. Other ideas could be implemented
and a transition could be made very quickly without any great dis-
ruption.
Chairman PROXMIRE. I take it, then, you would directly disagree with
the Secretary?
Mr. SHTJMAN. Yes, sir.
Chairman PRox~rIRE. And argue that you could reduce the farm
program by a substantial amount, $1 billion or $2 billion without a
disastrous effect on the farmer's income?
Mr. SHUMAN. Yes, sir. I believe that this could be done very
rapidly, with some protections adopted by the Congress.
Chairman PROXMIRE. Would all of you gentlemen disagree? I do
not want to put words in your mouth.
Yes, Mr. Graham.
Mr. GRAHAM. I do not see how anybody can say that you can take
$3 billion away from farm income without any assurance that there
is going to be a substantial increase in farm prices, which simply
is not there, and say the farm income would not be hurt. It would be
hurt obviously by $3 billion to start with.
If the feed grain program at the present time was taken out, we
would obviousl produce more feed grain. WThat would we have pro-
duceci without it? This is the real problem.
If all of this land went back into production, whether it be feed
grain or wheat, obviously we would have a continuous pressure upon
us in terms of prices. Look what we had last year in tern-is of wheat.
Mr. Shurnan point~s out in his testimony that this increase in wheat
acreage caused a price problem that resulted from the evaluation of
the world food situation. So, if that increase caused the price break
PAGENO="0046"
380
this last. year as stated by Mr. Shuman~ and incidentally, the Govern-
ment did not demand that or insist on increases, but those farmers
who could prothice this extra wheat efficiently were permitted this
extra increase, and they did produce enough in the light of the exist-
ing world situation so that the prIce of wheat. was depressed; not
the sli~hfest question about it.
if i~f did increase acreage when the controls were loosened, what
reason is there to believe that it. would not happen again? If the
acreage increased, would not the price decline again?
I just do not. follow this business that the Government can increase
acreage and cause prices ~o go clown. But. if they took off the con-
trols and the acreage increased then ~ would go up. I see no
validity in that kind of an argument at all.
Chairman PROXMIRE. Mr. McDonald?
Mr. MCDONALD. Mr. Chairman, we have ~ilways been Puzzled in a
friendly way by the. reasoning of our friendly rival organization,
and I am still very puzzled.
If you take controls off, we know that farmers like, to work, they like
.to produce. History loves that. if the. farmer has an opportunity to
make an extra dollar by putting in an extra acre, he is going to put it
in. If his income is low he will put. in a few more acres. He will clear off
some land he had not been using so as to make up for his less income.
If you take off controls, Mr. Slniina.n, you will have the. worst debacle.
It will be much worse than the. depression, it will be much worse than it
was under Ezra. Taft Benson. It would be a catastrophe. It would be a.
catastrophe not only for agricuJture but for the whole country, and the
little fellows who could not get credit at the bank would go out. The
big guys, the insurance companies and these off-farm interests, would
buy up the bankrupt farmers, and you would eventually have consumer
prices controlled by a few giant corporations.
Chairman PRox~IIRE. Mr. Shafer?
Mr. SI-L~FEn. I just wanted to say that Mr. Shuman points out that
the amount of production has continued to increase even though the
number of acres is being decreased through the Government programs.
I cannot see any reason to believe that farmers are going to quit using
the fertilizer and they are going to quit using the increased technology
which they have gained in producing to cause yields per acre to go
down, and if you increase the number of acres it appears to me you have
got to increase the amount of production.
A2ain Mr. Shmnan told us that our problem last. year was increased
production. This is what caused the lower prices, and I agree with him.
This is what. caused the lower prices.
So, following the same line of reasoning, it appears only logical to
me that if you decrease the number of acres that are in retirement, in-
crease the amount. of crop, I cannot see anything but lower prices for
farmers.
Actually, t.he total gross income would probably be less, much less,
than before when you consider what it costs to produce these extra
acres, why the net has gone down. I cannot see it an other way.
Chairman PROXsflRE. I would like to ask Mr. Shafer-when we get
back to Mr. Shuman we want a rebuttal-but I would like to ask you,
in connection with this, your organization has an appeal to many non-
farmers as well as farmers on the ground that it would provide a collec-
PAGENO="0047"
381
tive bargaining substitute for some of the costs of the farm program.'
In other words, if the farmers could negotiate for a better price, the
feeling of many people is that they would not have to rely on some of
the many expensive programs we have now.
I take it from your remarks at least for a transition period you would
want both. You would want both the present farm programs pretty
much as they are, maybe expanded somewhat on the basis of what you
said a little earlier, pills the opportunity to bargain under title II of
the Mondale bill, for example.
Mr. SHAFER. Mr. Chairman, this is correct.
We are organizing farmers to bargain and sell collectively for cost
of production plus reasonable profit prices, but we are not there yet,
and until such time as farmers are organized so that they can accom-
plish this by themselves, I think that it would be disastrous to-
Charmain PRoxi\IIRE. At that point, however, you feel we could
begin to cut back the farm program?
Mr.. SiL~FrR. At that point I think we may be able to cut hack on
farm programs; yes
But; I think that we possibly will still need all the help we can get
in the way of enabling legislation to assure us the necessary protec-
tion to bargain. We have the Capper-Volstead Act which gives us the
authority, the farmer in the United States, to join together into one
organization and price his commodities. But some other legislation
which, as I understand it, will be offered, if the Mondale proposal is
adopted, could be very helpful.
Chairman Pflox~[IRE. Mr. Shuman wanted to say something.
Mr. SiIUMAN. Mr. Chairman, just a minute of rebuttal. The best
proof that there would be no disaster in the way of overproduction
and price collapse is the fact, the experience that we have had in these
35 years, and that is that these control programs never reduced pro-
(luction and, therefore, removing them would not be expected to in-
crease production.
There have been made many studies of this, and it is quite evi-
dent that the real cause of the surplus problem has not been the acre-
age either, whether it was what normally farmers put in or what they
take out. The real cause of the surplus problem in the last few years
has been the maniptilation of prices and the assurance before the
planting time that; the price was going to be a certain level. It might
have been a lower price than it wouldi have been under the market,
but it increased prodluction because they knew ahead of time and they
got the payments. Half the payments are made in the spring in time
to buy fertilizer.
Now, proof that there would be no disaster? The best proof is that
two-thirds of agriculture has b&en operatiiig without Government
subsidies, without any control programs, and under the handicap of
having these programs transfer production and other disruptive ef-
tects into their production and markets as a result of the programs.
Chairman Piioxl\IIRE. Was not a significant part of the purpose of
supporting the 30 or 40 percent of the farm production which is under
the program, to help support the other part of agriculture?
For example, as I understand it, beef and poultry, and so forth,
a re not directly controlled; they are not under the program. But, at
the same time, the feed grain program would have a ~ery direct in-
PAGENO="0048"
382
fluence on the price of beef, on the price of pork, on the price of poll1-
try, and so forth.
Mr. SHu~rAN. This has been the popular argument. But it has been
a negative influence, because if you take a look at. the facts, the feed
grain program caused a greater average production than was
produced in the 5 previous years without any feed grain program.
Of course, the additional feed you have produced, which was stiniu-
lated by the feed grain program, very seriously disrupts the livestock
markets.
The soybean situation is another story. The cotton program has
forced the transfer of resources from cotton into soybeans. The same
is true, to some extent., with wheat in the feed grain programs.
So, I say the success of two-thirds of agriculture which has never
had any programs, never had any subsidies, never had any price
supports, despite the fact that these programs have channeled all these
resources over to them, proves beyond any question of doubt that
the cause of our serious trouble with agriculture today can logically
be laid to the farm programs. The way to improve prosperity in agri-
culture is not to continue to do the thing that has got us into trouble.
After all, we have been trying to do that in the last. 35 years, and
particularly in the last `7 years we have gone. all out for farm programs,
a.nd look where we are-73 percent of parity. It is time for a. change.
Chairman PROXMIRE. My time is up. I will yield to Senator Jordan.
Before I do, Mr. Shafer wanted to make a. comment., if that. is all
right with you.
Senator JORDAN. Yes.
Mr. SHAFER. I want. to give an actual illustration from an ac.tual
farmer's standpoint a.s to why I think doing away with the programs
would increase production.
The farm that I presently farm, my father farmed before me, and
30 years ago the average corn production on this farm was in the
neighborhood of 35 bushels to the ac.re. Now, this did not happen over-
night, but. b using the increase in teclmology between then and now,
my farm presently produces about 90 bushels of corn to the acre. on the
average. Just the fact that we do away-let us say, I am producing
100 acres of corn. I have 100 acres that I can produce corn on. If I put
50 percent of that. into the feed grain program, I am going t.o grow
50 acres of corn.
If I have no feed grain program I am very likely going to grow
maybe not. 100 acres but way up toward 100 acres of corn, and I do
not. think it is going to make 1 bushel ner a.cre difference in the pro-
duction on my farm if I do not have a feed grain program, or if I do,
per acre.
So, it appears to me that on my farm there is going to be almost
twice as much production of corn without `a. program as there is with
a. program. I just wanted to make this point as a. farmer actually
farming on a. farm.
Chairman PROXMIRE. Senator Jordan?
Senator JOrWAN. Thank you.
I would like to find something that you would all subscribe to here.
You have all stated, I think, the precarious position of agriculture in
today's economy and implied that the farmer is the forgotten man in
a.n affluent society.
PAGENO="0049"
383
This is a question I put to you: Do you know of any time in the entire
history of the United States when so small a percentage of consumer
disposable income is required to buy food for that consiuner's family?
Chairman PROXMIRE. Mr. Graham?
Mr. GRAHAM. Not only in the history of the United States but in the
history of the world. The production miracle of all time is here in the
United States. It is the result of our technology. We have literally
made cheap food available. It is not a cheap food policy, necessarily.
It is a cheap production policy on the part of farmers and, thank God,
they can do it.
The only problem is whether they should get paid on what they
produce. The consumer never had such a break in all the history of
the world. They have the highest quality of food, in the greatest
variety, and at the cheapest prices that they have ever had and, frank-
ly, I do not think the average consumer would raise very many ob-
jections to farmers getting a decent price, either.
Senator JORDAN. Mr. McDonald?
Mr. MCDONALD. Well, I am completely-I am just trying to think
of what to add to Harry's statement. I am in enthusiastic approval of
what lie has said.
I might add that food could be even cheaper if the middleman was
not taking such a huge slice, and if you did not have, as you have in
every market area in the United States, just about, the control of
wholesale food prices by food chains.
Here in Washington, six chains control 90 percent of the food that is
sold, and I am told that the direct buying now is taking the place of
competitive terminal markets all over the United States. So that if the
farmer had some kind of bargaining power, the consumer need not
suffer.
The farmer could get a better price for his product, and slice off a
little of this unnecessary middleman profit.
Chairman PRox~iIRE. Mr. Shuman?
Mr. SHUMAN. I think you did hit on something we could all agree
on and brag about, and that is the fact that in terms of the purchasing
power of the consumer, in other words, measured on the basis of fac-
tory wages, average factory workers' weekly wages, the consumer
spends less of his take-home income on food today than any time in the
history of the country. I think it is around 17 or 18 percent. It has been
dropping steadily.
I would want to point out that this is due primarily to the increased
research and efficiency, due to the fact we have stayed competitive.
There is no question but what the law of supply and demand still
operates despite attempts to nullify it or do something else.
In fact, when programs are used to try to ~tablish prices arbitrarily,
whether by bargaining or by Government, you destroy markets, and
the consumer will determine the price.
We might think as farmers that the housewife ought not to worry
ubout a little increase in price of butter or milk or cotton goods, but
when those prices do increase she looks for substitutes, and if we are
going to continue to produce for consumers, we are going to have to
meet competition. You cannot arbitrarily fix a price.
The cotton industry has lost about a third of its market because it
decided to price cotton through Government edict without regard to
90-191-68-pt. 2-4
PAGENO="0050"
384
competition. Within 10 years there will be no cotton industry in this
country if we do not get rid of the cotton program.
Chairman PnoxMIP~. Mr. Shafer?
Mr. SHAFER. I would agree that statistics show that food is cheaper
in this country than it has been any time in the history of this eountry~
and not only in the history of this country. but. it is also cheaper in
terms of time spent earning it. here. in our Nation than it is anywhere
in the world or in the history of the world.
So far as I am concerned, I think that this is another place that
the farmers have been partly asleep. I see no reason why we should
let. the nonessential industries of the country take over the spendin~
po~ver of the consumer. Ac.hma.llv it. appears to me that the serious
situation in aeric.ulure and. as I have tried to outline earlier in my
remarks, the ~eriousness tI~at I believe is involved for the entire
Nation, I believe that the entire. Nation could well afford to move this
percentage of their consumers' time that is spent for food back up a
little to keep the family-type farming operation alive in this country.
I realize that the substitutes, and so forth, are somewhat of a prob-
lem. But. I would like to state that. food is food, and if you move from
one commodity to another von may have a problem. But when you are
cleaTing with all food items, the elasticity of the human consumnption
in this country is pretty constant..
In other words. we do not have much up and down in the amount
of food that we as people eat.. There. is some change in which food
items we might eat., according to price. But this gets back to our
philosophy of bringing all prices up more or less in balance.
If t.his can be. accomplished, I think we can reclaim some of the
dollar market. that we farmers have lost..
Senat.or JORDAN. Tha.nk you.
Chairman PRox:~rIRE~ That was a very good question, and I think
the answers were excellent, and I am delighted to see this kind of
consensus.
I would like to follow this up with a very closely related question.
because it is one that I think is very troublesome for this Joint Eco-
nomic Committee in recommending policy for the coamtrv.
Many of the witnesses who have come before us. administration
and otherwise, have said the principal problem facing this country
is inflation-rising prices. We know that one reason why prices did
not increase more rapidly last year than they dlidl was because farm
prices were depressed. The farmer, in a sense, was kind of a hero in
keeping prices down, but an unwilling hero andi an unjustified one.
Mr. GRAHAM. Reluctant.
Chairman PROxMIRE. We do not want him to continue in that hero's
mold.
My question is, To what extent in your view would more just prices
for time farmer increase the cost. of living for the American consumer?
Mr. GRAHAM. Well, that is taking a shot in the. dark, I think. Would
von mind if I would interject, here something to say to Senator Jor-
dan, that there is another area. of agreement, and that. is in opposi-
tion to increasedi protectionism. I think we are all in agreement. on
that one.
Chairman PROXMIRE. Yes~ im~deecT. I went over that much too fast,
but I think that is an excellent point. All four of you are agreed that
PAGENO="0051"
385
we should have the freest possible trade, and you are opposed to
restrict~on.
Mr. GRAI-IAI%I. Yes.
It depends on how much markup there is on the farm products. If
we could get a markup on the basis of the actual increase in cost,
there would be some increase in the cost of living, there is no question
on this. But what is happening is that when we increase the price
of milk by 3 ceiits, we increase the price of milk to the consumer by
5 cents, because the markup is on a percentage of the total instead
of on the basis of the increase in cost. This is a traditional markup
system on the part `of most industries. Everybody uses it but agricul-
ture, and we caimot do it very well.
T~e question really becomes n~ore acute when we ask the question
as to whether the rest of the increases in wages and profits are going
to be based on any productivity standard whatsoever.
If we could have this kind of a relationship like the Council tried
to have before where wage increases were tied somewhere to produc-
tivity, then this would not necessarily be extremely bad.
But, where we get into trouble is, each segment of the economy wants
not to have equality but wants to have an advantage, and as long as
this happens, then we are in trouble. If we go up to get any kind of
equality, and labor and industry both are increasing their wages
and their profits, then we just go around and around in a spiral. How
we can dlo this is the great question in the world.
I hstenedl in the FAO to the 120 nations reporting, and if there
was one single thing they said over and over again it was that the
major question was how do the farmers in their countries gain an
equitable income in countries with expanding economies. Over audi
over the same thing is said.
Chairman PRoxiuluE. Do you find, Mr. Graham, an inconsistent sit-
uation in which labor is organized, militant, effective, experienced audi
able to negotiate for a good wage; business, with some exceptions, is
organized, effective, powerful politically, is able to get a price; the
farmers are not organized at all, andi one of the things-the impres-
sion that I got audi, perhaps Senator Jordlan did to some extent-
while you gentlemen do agree on two points, you disagree on just
about everything else, and we find this is so common among farmers.
It is hard to get agreement, and if you do not get agreement it is
hard to get organization, and if you do not have organization it is
hard to have effective power, andi if you do not have that it is hard
to get a price.
Mr. GRAHAM. We have more agreement than this, really, with one
exception, and all of us are out of step `but Mr. Shuman.
Mr. SHUMAN. And we have got more members than all the rest of
you combined.
Mr. GRAHAM. They may have better insurance salesmen than we
have.
Mr. SIJUMAN. That is part of it.
Mr. GRAHAM. But the fact is that we are in agreement. All the rest
of the farm organizations, as far as I know, are in agreement with the
continuation of the present farm program. We are all in agreement
for a reserve, even to the point of agreeing on the exact language of
the bill, andi this is something when you get that kind of agreement,
andi agreement with the administration at the same time.
PAGENO="0052"
386
Now, this maximizes agreement-. We are basically in agreement in
terms of the bargaining bills, very little difference there. So, there
are vast areas of agreement, except for this one point.
The problem is even if we could arrive at nirvana where we had,
everybody was in agreement-, and all belonging to the same organiza-
tion, I do not Imow whether it would be Mr. Staley's or Mr. Shuman's,
but someone would have to give at that point, and even if we did that,
and could come effectively into a bargaining situation, I doubt that
we could get public support to allow us -to do the things that la~bor
now can do, a-nd whether we can even get legislation that would give-
us the power that labor has at- the present time-. I doubt it because I
think there is enough opposition to some of the use of power that labor
has at the present time that I doubt if the Congress would give us this
kind of power.
So we are talking in terms of a never-never land to which I do not
think we can get.
Chairman PROXMIRE. We will find out. This is t-he first time we
have got a bill before us, to my imowledge, and it is a bill to which
some of you have agreed; and Mr. Shuman, as a very significant- and
highly respected voice disagrees with, but I think there will be a real
deba-te in Congress, a-nd it is possible that some of it may be -at least,
in part., legislated.
Mr. McDonald?
Mr. MCDONALD. Mr. Chairman, I would like to address myself to
your original question about increasing prices to the farmer and how
it- would affect- the consumer, and I am in agreement- with Mr. Graham
that there would be some increase, and there would be not a. propor-
tionate increase.
We have an example of tha-t, or we had, a few years ago, 2 or 3 years
ago, when dairymen were going out. of business so fast that it was
feared milk would have to be rationed during the next few years, due
to low dairy prices and for other reasons.
So the Secretary of Agriculture increased the price on 100 pounds
of milk, $1, a.bout 2 cents a quart-.
And over here in Baltimore the price of milk was increased about ~
cents a quart. The Federal Trade Commission made a survey and study
showing that the price of milk-it wa-s a. situation on bread, too-the
prices were just. about doubled. The. increases were just about doubled
and tripled.
Whenever the farmer gets 2 cents, he gets incidentally 2 or 3 cent-s
out of a bushel of wheat.: whatever it is, very little, why, the bakers
would go ahead a-nd double and triple the wholesale price increase.
In regard to inflation, it seems to me that the last few years it is a
profit inflation. It seems to me that the interest c-risis is a wa-r inflation.
The war-affected industries have chased after dollars and goods
on that side of the economy so that- they have caused inflation.
Over here you ha.ve poor agriculture a-nd housing in a state of depres-
sion, who could not benefit from this increased prosperity.
When Ralph Nader conies up here a-nd gets sa-fety provisions in the
bill-at least lie was import-ant-, I guess, in the propaganda- that led to
this-the automobile industry now is ref using to sell automobiles to
the Government, according to Drew Pea.rson this morning. At least th~
Big Three are refusing to sell automobiles, because of the safety
PAGENO="0053"
387
features required. They have to reveal certain facts if they sell these
automobiles and trucks to the Government.
So you have sort of a conspiracy `in the~ durable goods industry.
They raise their prices disproportionately.
When labor gets-this has been proved over and over-when wages
increase, when labor gets their wage increase, then they are doubled,
they are pyrarnided; and, getting back to the point I made a while ago,
ii think we should have these profits, the highest in history, exorbitant
profits up to 25, 30 percent after payment of taxes, and I think we
should have excess profits legislation. I do not think that the people
sitting in this room should have to pay almost entirely for this war.
I think big industry should have to bear a large part of the burden.
Chairman PRoxi~iim~. I just have one more question, and this is to
Mr. Shuman.
Mr. Shuman, you make a very interesting proposal for dollar-for-
dollar tax credit to the States for their income taxes, sales taxes, and
corporation income taxes.
I compute that, on the basis of the present taxes paid by the States,
this would mean a credit of $30 billion. Maybe it would be somewhat
less than that, because some people would not be in a position to claim
it. Total Federal grants are only $15 billion.
It seems to me if you go through with that resolution, and I presume
you might agree to some refinements or limitations on it, you are pretty
much asking the States just to back up their trucks to Fort Knox or
the Treasury and cart off as much as they want; because what they
can do is to have an income tax that wouTd match the Federal income
tax, which would be fantastically burdensome, of course. It would not
increase the taxes paid by any of the residents because the residents
would get a dollar-for-dollar offset through the income taxes they
would not then pay to the Federal Government.
But this, of course, would tremendously diminish revenues to our
Federal Government. In fact, it would wipe out corporate and per-
sonal income tax, and then some, because in addition to that, of course,
you would have sales tax off sets.
I just wondered if there should not be some limitation on the en-
thusiastic resolution that the Farm Bureau has.
Mr. SrnJMAN. Well, I think there would be in practical application.
Certainly we would not advocate a tax credit without a. matching
amount of transferred spending responsibilities. In other words, if the
congress aprpoved a tax credit then we would, of course, expect
Congress to discontinue, the appropriations for welfare, education,
any anything else which they thought was, could be, cover~d by this
corresponding gain by the States.
Ohairman PROXMIRE. But, as I pointed out, your tax credit right
nOW, if it is on a dollar-for-dollar basis, would be $30 billion, and the
grants-all grants-are only $15 billion.
Mr. SHUMAN. That is right.
Well, there are other grants besides education and welfare, and
undoubtedly there would be limi~bations placed on it by the Congress
as to whether or not they were going to transfer more of the Federal
grants in aid or other programs besides the $15 billion of basic grants.
That comes to around $15 billion, I think.
PAGENO="0054"
38S
Chairman PRox:~rIRE. Y\Tell, perhaps the figures we have are in-
complete.
(The following supplemental explanatory information on the pro-
posal was subsequently received for the record from American Farm
Bureau Federation representatives:)
REGAINING CONTROL OF FEDERAL EXPENDITURES
One of the most urgent problems facing America today is the question of
how to deal with the ever increasing federal budget.. For a number of years
Farm Bureau has felt that the financing and control of welfare programs and
public education should be returned to state and local governments. Recent
expansion of welfare programs and federal aid to elementary and secondary
schools underscores the need for a change in direction. With federal funds goes
federal control-more federal funds. more federal control.
With this in mind, delegates to the American Farm Bureau Federation annual
meeting in December. 1967. adopted a policy calling for taxpayers to receive
dollar-for dollar credits against their federal income tax liabilities for state,
corporate. and individual income taxes and general sales taxes paid. The policy
calls for these credits to be used by tltc states to provide the tax base necessary
for state and local governments to assume the I all authority and responsibility
for costs and administration of basic welfare and elementary and secondary
educational programs.
Using 1966 figures. the latest available, this is how the proposal would work.
111 1966 more than S14.2 billion was paid to states in the form of individual
income taxes, corporate income taxes and sales taxes. Federal support for l)aSic
welfare and elementary and secondary school programs amounted to $5 billion,
which is approximately 35 percent of these state taxes. For states to assmne this
~5 billion in costs, a 35 percent credit for state taxes paid would be needed ($5
billion is approximately 35 percent of 814.2 billion).
The foflowing table shows the program's effect on an individual now- paying
82.500 in federal and state taxes. By taking a credit of $175 against his federal
liability (35 percent of $500) he would reduce his present $2,000 federal tax
payment to $1,825. At the same time, his state taxes could be raised to $675
($500+8175) to fully support basic welfare and elementary and secondary
school programs at state and local levels. His total tax liability would still
be $2.500.
New
Present
system-
New
system-
Taxes
Federal
credit,
system-
Taxes
paid
higher
State
taxes
paid
Individual State income and salns taxes paid $500 $500 )~ ~
State tax increase to pick up 35 percent credit None +175
Individual Federal income tax liability (grow) 2.000 2.000 1 825
35 porcent Federal credit for State income and sales taxes None -175
Total individual tax bill 2, 500 2, 500
PAGENO="0055"
389
FEDERAL PAYMENTS TO STATE AND LOCAL GOVERNMENTS, AND INDIVIDUALS AND PRIVATE INSTITUT1ONS,
BY STATE, FOR 1966, FOR ELEMENTARY AND SECONDARY EDUCATION, AND GENERAL WELFARE
State Education 1 Welfare 2 Total
Alabama $45,393,394 $98,509,446 $143,902,840
Alaska 12, 491, 740 3,035,141 15, 526, 881
Arizona 21,701,301 23,336,124 45,037,425
Arkansas 23,932,648 58,913,692 82,846,340
California 132,840,505 583,055,676 715,896,181
Colorado 22,382,239 55,375,715 77,757,954
Connecticut 12,410,346 41,458,627 53,868,973
Delaware 2,395,680 5,307,520 7,703,200
Florida 41,320,409 90,342,762 131,663,171
Georgia 47,690,499 100,366,922 148,057,421
Hawaii 11,347,729 8,982,728 20, 330, 457
Idaho 5,986,728 10,571,785 16,558,513
Illinois 49, 173, 001 164, 211,175 213, 384, 176
Indiana 26,681,970 33,663,110 60,345,080
Iowa 20, 343, 929 41, 180, 146 61, 524, 075
Kansas 19,675,384 36,523,607 56,198,991
Kentucky 25,297,234 76,761,242 102,058,476
Louisiana 12, 444, 133 148,332, 345 160,776, 478
Maine 8,320,108 17,336,383 25,656,491
Maryland 29,812,986 47,013,765 76,826,751
Massachusetts 23, 740, 016 115, 151, 578 138, 891, 594
Michigan 37,264,863 112,490,931 149,755,794
Minnesota 14,385,315 77,448,590 91,833,905
Mississippi 22, 722, 553 51, 438, 598 74, 161, 151
Missouri 28,586,077 103,496,333 132,082,410
Montana 7,096,066 9,492,008 16,588,074
Nebraska 11,744,445 20,100,719 31,845,164
Nevada 5,859,751 5,165,496 11,025,247
New Hampshire 4,230,427 5,581,229 9,811,656
Newiersey 41,524,780 63,962,317 105,487,097
New Mexico 19,899,205 22,829,204 42,738,409
New York 80,582,544 376,953,071 457,535,615
North Carolina 45,831,935 84,848,088 130,680,023
North Dakota 7, 195, 705 12,390, 373 19, 586, 078
Ohio 46,165,553 123~832,005 169,997,558
Oklahoma 31,264,094 114,789,897 146,053,991
Oregon 11,773,284 30,902,009 42,675,293
Pennsylvania 43,632,992 180,885,488 224,518,400
Rhode Island 8,071,820 18,528,852 26,600,672
South Carolina 24,520,645 29,545,372 54,066,017
South Dakota 8,838,389 10,958,490 19,796,879
Tennessee 41,077,781 65,307,868 106,385,649
Texas 89,832479 192,590,261 282,422,740
Utah 11,096,056 16,476,664 27,572,720
Vermont 2,278,581 7,565,318 9,843,899
Virginia 36,744,585 33,599,219 70,343,804
Washington 21,130,945 62,140,239 83,271,184
West Virginia 20,028,510 48,085,308 68,093,818
Wisconsin 13,498,394 49,533,895 63,032,289
Wyoming 3,610,676 3,995,568 7,606,244
Adjustments or undistributed to States 229,250 -4,320,704 -4, 091,454
U.S. totals 0 1,365,279,348 3,725,644,201 5,090,923,549
1 The figures in this column represent total Federal aid payments to State and local units of government under programs
tor assistance to public school construction, defense educational activities, elementary and secondary educational ac-
fivities, equal educational opportunities, maintenance and oporation of schools; and Federal aid payments to individuals
and private institutions in the States under programs for defense educational activities.
2 The figures in this column represent Federal aid payments to State and local units of government under programs of the
Vocational Rehabilitation Administration and for public assistance from the Welfare Administration's Bureau of Family
Services; and payments to individuals and private institutions in the States through the Vocational Rehabilitation Ad-
ministration.
Includes District of Columbia, Puerto Rico, Virgin Islands, American Samoa, Guam, Trust Territory of the Pacific, and
certain foreign countries.
Source: 1966 Report of the Secretary of the Treasury, table 84, plo. A and B.
PAGENO="0056"
390
STATE REVENUES FROM SELECTED TAX SOURCES, BY SOURCE AND STATE, 1966
[In thousands of dollarsi
General sales or Individual income Corporation net Total, 3 sources
gross receipts I income
All States 7,893, 187 2 4, 302, 842 2 2, 036, 550 14, 212,579
Alabama 166,729 53,294 22,890 242,913
Alaska 19, 238 4, 105 23,343
Arizona 96,171 21,702 13,379 131,252
Arkansas 84,415 27,423 20,848 132,686
California 1,099,383 454,313 433,825 1,987,521
Colorado 98,735 70,287 24,759 193,781
Connecticut 136,389 67,959 204,348
Delaware 49,934 12,991 62,925
Florida 283,050 283,050
Georgia 227,205 80,291 59,288 366,784
Hawaii 93,499 47,349 9,950 150,798
Idaho 28,399 29,204 8,493 66,096
Illinois 669,508 669.508
Indiana 282 318 143 678 14 248 440,244
Iowa 114.027 86,802 7,793 208,622
Kansas 113,406 72,805 22,736 208,947
Kentucky 126,880 69,747 36,253 232,880
Louisiana 139,425 30,455 31,766 201,766
Maine 52.315 52,315
Maryland 127,277 159,910 32,729 319,916
Massachusetts 16, 534 253, 893 3 49, 830 320, 257
Michigan 657,708 657.708
Minnesota 221,276 75,298 296,574
Mississippi 121,039 9,710 15,849 146,598
Missouri 243,756 82,149 11,161 337,066
Montana 21,111 6,958 28,069
Nebraska
Nevada 23,419 23,419
New Hampshire 2,289 2,289
Newiersey 9,731 42,916 52,647
New Mexico 66,977 219,051 (2) 86,028
New York 298,437 1,285,881 392,358 1,976,676
North Carolina 188 246 165, 070 90, 481 443, 797
North Dakota 23 561 9 222 3 054 35, 837
Ohio 354,221 354,221
Oklahoma 74, 129 30, 344 22,323 126, 796
Oregon 147,367 31,076 178,443
Pennsylvania 599,329 229,088 828,417
Rhode Island 45,719 14,715 60,434
South Carolina 106, 119 52, 928 36,483 195, 530
South Dakota 26,915 586 27,501
Tennessee 177,717 8,216 38,032 223,965
Texas 240 823 240,823
Utah 53,774 38,031 8,008 99,813
Vermont 21,574 4,116 25,690
Virginia 165,171 47,864 213,035
Washington 384,362 384,362
West Virginia 120,564 23,729 144,293
Wisconsin 92,132 319,667 92,342 504,141
Wyoming 18, 575 18, 575
1 Excludes motor fuel and other selective taxes.
2 For New Mexico, combined corporation and individual income taxes are tabulated with individual income taxes.
3 Excludes portion paid on corporate excesses.
Source: "Compendium of State Government Finances in 1965," Bureau of the Census, U.S. Department of Commerce.
Mr. SHui\IAN. Could I make one comment further on the previous
question which the other two gentlemn discussed?
Chairman PROXMIRE. Yes.
Mr. SHTJMAN. It is not particularly different. It is true, of course,
that an increase in farm prices, a fairly significant increase in farm
prices, if directly transferred to consumer prices, would be rather
small.
But the point, the main point, that most people miss in making this
argument is that farmers in most cases do not sell directly to the
consumer. We sell to manufacturers and to processors, and when we
sell corn or cotton or wheat to a manufacturer, we are selling in com-
petition with other products which many times can be substituted.
PAGENO="0057"
391
This is what happened with the cotton farmer. All over the South
I saw these little demonstrations where they held up a man's shirt and
said the cotton in this shirt only cost so many cents. If cotton is raised
from $20 a bale to $30 a bale it will only increase the price of that
shirt by 2 or 3 cents. I am sure Senator Jordan remembers those
demonstrations.
It was this kind of philosophy, it is this kind of philosophy, that
is destroying the cotton industry, because you do not sell cotton di-
rectly to consumers, you sell it to shirt manufacturers, and when they
found the price of cotton went up compared to the synthetics, they
bought the synthetics.
Chairman PROXMIRE. It is a very good point, but you are picking
the nonfood segment of agriculture.
Mr. SHUMAN. You can take the food section and take milk, because
today if we insist on pricing milk without regard to competition we are
going to find synthetic milk made out of soybean protein or some-
thing else replacing the natural product, not because the consumer-
Chairman PROXMIRE. You touch me in a tender spot, Mr. Shurnan,
I must say.
Mr. SHUMAN. Well, thank you.
Chairman PROXMIRE. I want to thank you gentlemen for being a
very, very stimulating panel. It has been a most interesting after-
noon and a fine contribution to the Joint Economic Committee's study.
We thank you very much.
The committee will stand in recess until Monday morning at 10
o'clock.
(Thereupon, at 4 :10 p.m., a recess was taken in the hearing to re-
convene a.t 10 a.m., on Monday, Feb. 19, 1968.)
PAGENO="0058"
PAGENO="0059"
THE 1968 ECONOMIC REPORT OF THE PRESIDENT
MONDAY, FEBRUARY 19, 1968
CONGRESS OF THE TJNITED STATES,
JOINT EcoNoMic COMMITTEE,
Washington, D.C.
The Joint Economic Committee met at 10 :05 a.m., pursuant to
recess, in room S-228, the Capitol, Hon. William Proxmire (chairman
of the joint committee) presiding.
Present: Senators Proxmire, Miller, Jordan, and Percy; and Repre-
sentatives Boggs, Curtis. Wiclnall, Reuss, and Rumsfeld.
Also present: John R. Stark, executive director; and John B.
Henderson, staff economist.
Chairman PROXMIRE. The Joint Economic Committee will come to
order.
Th.e committee devotes this morning and afternoon to hearings oii
the international economic position of the T.Jnitecl States, one of the
most serious and perplexing issues of the time. Our witnesses this
morning are three outstanding students of the subject. They are dis-
tinguished in their achievement aiid distinguished from each other
by the diversity of their experience. First., Fritz Machlup, Walker
professor of economics and international finance, Princeton Tjniver-
sity. Professor Machlup's own writings in the notable papers written
-for his international finance sect-ion of the Princeton Economics
Department have brought him woridwicle renown. He has recently
held the presidency of the American Economic Association. With his
wit and wisdom, and Viennese gaiety, economics can never be a dismal
science.
Next, Prof. Jack N. Behrman, professor of international busi-
ness, University of North Carolina. Professor Behrman had close ex-
perience with the problem of international development when lie was
Deputy Assistant Secretary of Commerce for International Affairs
in the early 1960's. 1-us challenging views on the payback process aris-
ing from U.S. investments., abroad ai~e well known and most appro-
pr~ ate.
Third, Mr. WTiiliam F. Butler, vice president and director of eco-
nomic research at the Chase Manhattan Bank. Mr. Butler enjoys a.
well-deserved reputatiOn as one of the wisest of commentators in eco-
non-nc affairs in the banking community; His range is. far wider than
today's topic. Most recently he has given his views oh the role of gold
in world monetary affairs in a. brilliantly writtefi article in "Foreign
Aff airs." ` . .,. .
We will begin with Professor Mac.hlup; lie has been invited by the
committee to ~ e `t bio'id `is~essrnent of the intein'ition'd situ'ttion
(393)
PAGENO="0060"
394
STATEMENT OF FRITZ MACHLUP, WALKER PROFESSOR OF ECO-
NOMICS AND INTERNATIONAL FINANCE, PRINCETON UNIVER-
SITY
Mr. MAOHLtTP. Thank you, Chairman Proxmire.
Chairman PROXMIRE. I might interrupt by saying, Professor Mach-
lup, I have not had a chance to see your statement. I understand you
put it in the mail on Friday. But I would appreciate it if you gentle-
men would confine your statements to 15 or 20 minutes, if you could.
Of course, your entire statement will be filed in the record in full and
made available to members of the committee and the Congress. `We
would like, if possible, to have as much opportunity as we could for~
questioning and discussion.
Mr. MACHLUP. Yes, sir; I have a prepared statement which I here-
with offer for the record. I prefer not to read it to you, but to speak
freely. I shall try to summarize in 15 or 20 minutes the highlights of
my analysis.
Chairman PROXMmE. Very good.
Mr. MACHLuP. We have become accustomed to discuss the problems
before us under three headings: the problem of liquidity; that is, the
adequacy of an annual increase in reserves; the problem of adjust-
ment, that is chiefly the balance-of-payments problem of the Unitecl
States; and the problem of confidence, which is essentially the prob-
lem of switches between dollars and gold.
The problem of liquidity, I think, ha.s been nicely and neatly solved.
through the agreement in R.io de Janeiro. Unfortunately, the prospects
of early activation do not seem to be too good, and for that we must
blame partly our own tactics. I think it was a tactical error to give
priority to the ~prc~blern of liquidity and not discuss, or not include in
the discussion, the problems of adjustment and of confidence.
We brought the other countries to the negotiating table by telling
them: "Of course, this is only a contingency plan and we will first
solve our adjustment problem." But we have never made any real
efforts to do that; and this is quite easy to explain, for we cannot
alone and unilaterally by politically accepted methods succeed in.
achieving adjustment. Yet it was a. tactical error. Good strategy
would have been to discuss all three Problenis at the same time..
Perhaps, if any one probleiii should have gotten priority, it would
have been the problem of confidence, the problem of avoiding the
destruction of reserves. After all, it is illogical to t.ry to devise a sys-
tem by which reserves ca.n be increased, but not devise a safeguard
against the wholesale destruction of reserves-and the problem of
confidence is exactly that.
I would like to congratulate the men who have contribut.ed to the
solution of the problem of liquidity. They did a. spendid job. TJnfor-
tunately, it does not help us now in our predicament.
I propose to discuss first the problem of adjustment. To my regret,
I must be highly critical of what our administration has been trying
to do. As a matter of fact, we have done nothing toward solving the
problem of adjustment in the strict, sense of the word. There is wide-
spread misunderstanding: The terms "adjusting something" and "tin-
kering with something" are being confused. We have been tinkering
all along, but have done nothing that deserves to be called adjustment.
PAGENO="0061"
395
Let me explain what adjustment means. It is an econon'lic term, and
it needs explanation. Otherwise we do not understand one another.
Adjustment means that the deficit countries reduce their income and
price levels relative to the surplus countries. This can be done in three
ways: One, by deflation in the deficit country, which I believe no man
in his senses will propose.
Secondly, by inflation in the surplus countries, which these countries
do not want to do-and I doubt that they will do us this favor.
Thirdly, by an adjustment of the exchange rates, the rates by which
price and income levels, expressed in different currencies, are being
compared.
There are no other ways of adjustment. Everything else is tinker-
ing, or expressed more politely, attempts to correct the balance of
payments. All sorts of measures are used as correctives. We must dis-
tinguish, before all, measures that work only temporarily, and meas-
ures that work in the long run. None of the measures that we have
taken or are proposing can work in the long run. They are all tem-
porary measures. It is as if a pipe were leaking and we take our thumb
and hold it over the leak. As soon as we remove the thumb, the leaking
goes on.
This is not to be confused with adjustment. Perhaps we can clarify
this by another example. If you see that you are bleeding from your
finger and you put a bandaid over it, you stop the bleeding and there
is hope that the skin will heal. .And, if you remove the bandaid after
awhile, maybe you* won't bleed any more. But, what we have been
doing to the balance of payments is not of that self-healing type. It
is only of the thumb-holding type. This is why I say that no attempt
at adjustment has been made or proposed.
Let me read a quotation from someone who understands a good
deal of these things, about the problem of restrictions on capital move-
ments. I read it first and shall name the source afterwards.
Imposition of capital controls by the United States would not be a satisfactory
Solution. It would be contrary to all that we have been striving for in freeing
trade and payments bet~veen countrieS. It would not be in keeping with our special
responsibilities as custodian of a reserve currency, and it would be contrary to
our long-run interest in ensuring that funds move to where they will be used
most productively.
This statement is by Secretary Dillon, and it was made in 1962. He
was right then and he still is right. I shall explain ~presently why
restrictions on capital movement are probably ineffectual and, to the
extent to which they are effectual, why they are not of the type that will
bring about an ad]ustment. They amount to holding the thumb over a
leak.
But there is also the idea of restrictions on foreign travel. On this
I have more to say, though it may be a bit emotional. I have been
brought up in Central Europe, and I know this type of restriction. I
would never have believed that this country could sink so low ~s to
restrict foreign travel. Whether a tax on travel expenditures will be
effective or not, I cannot tell. It can be easily evaded. It will probably
lead to reduced tax morality, and this can then spread to the income
tax. This country has much higher tax morality than practically any
other country, perhaps, with the exception of Britain. But tax morality
~can be undermined, and if y~u introduce a ta:x that is considered un-
PAGENO="0062"
396
ethical, or immoral, then the peoples tax morality may be perma1~e1~tly
lowered.
Moreover, if you do restrict foreign travel and the restriction is
successful, it will be successful only while the restriction is in effect. As
soon as you take it. off, you are back where you were. This is not a
method of curing a balance-of-payments deficit. This is not an adjust-
ment measure.
lou will ask me why restrictions on capital movements may be in-
effective. They may be ineffective for several reasons. First, there. is
always the question of substitution, substituting one kind of capital
movement for another. Every economist ou~ht to know it. and I said it
when we introduced the int~rest. equalization tax, the t~.x on buying
foreign securities. It was quite clear that. capital outflow would simply
take ~notlier form. and sb it did. Thereafter we introduced the vol-
untary program restraining bank lending. Then we. introduced the
voluntary program restraining direct. investment.. There are always
ways of substitution. Thus, if you really are successful in restricting
the outflow of American cal)ital, you cannot. restrict the outflow of
foreign capital from the United States, and this is exactly what will
happen.
This is an easy way of substihition. If, for example. our own firms
borrow in Europe. the rates of interest there will increase, and
Europeans take back their capital from the United States. It can be
done in various ways. Assume that. an American flrm issues seciirit.ie~i
in Europe.. These s~curities will have to be offered at somewhat. favor-
able irices. Otherwise you cannot sell them. Foreigners will subscribe
to these issues, but sell at the same time some of their holdings of
American securities in the New York stock market, and bring back the
proceeds from their sales. In other words, American funds, not
European funds, will have financed our sa.le of securities in Europe.
There are always many Possibilities of substitution. But even if
there is no substitutiom them is aiway~ the possibility of repercus-
sions on other items of the balance of payments. If total spending in
Europe is reduced-and after all, a. firm that doe.s not receive capital
will spend less-Europeans will buy less and import less. If total
spending in America. is increased-and, after all, a firm that does not
invest in Europe will probably invest a little bit more in the United
States-we shall find that t.his increases our imports and reduces our
exports. As a result a part of the whole effectiveness will be whittled
away by offsetting changes in the balance on current account. We shall
find our exports reduced and our imports increased.
I do not say that this will be 100 percent of the amount. saved di-
rectly by the restraint, but it may he a large part of it. With both
substitution and repercussion at work, it is quite possible that you will
find t.ho results quite disappointing, apart from the fact that the whole
thing is only ttanpora.ry, and as soon as you lift, the restrictions, you
will be back where you were. In other words, this is not a program of
a.d~ustment. This is only tinkering and, unfortunately, tinkering with
little hope of success.
I would like to conunent. on one type of corrective that has become
quite custom arv in the United States; namely, disguised partial cle-
vahlat.ion8 of the dollar. We have used this technique three or four
times in the last. few years. We started in 1960, when we deiahiecl, in
PAGENO="0063"
397
effect, though not formally, the military-expenditures dollar. The iDe-
partrnent of Defense told the military that they must buy American
whenever the cost of buying here, calculated at the fixed exchange
rate, is not more than 25 percent, later raised to 50 percent, higher than
what they would have to pay in Europe. The effect of this is that the
Armed Forces must calculate as if the exchange rate were really 25
or 50 perceiit different from what it actually was; that is, a disguised
* devaluation.
The next disguised partial `devaluation was that of the foreign-aid
dollar. it was clone by our forcing the aid recipients to buy in Ainer-
ic.a, even if the prices here were higher than elsewhere; they had to do
that even if they lost up to 30 percent. So we have devalued the for-
eign-aid dollar.
Then we had the partial devaluation of the dollar tha.t was used for
buying foreign securities, the 15 percent tax. And now you consider
introducing the partial devaluation of the tourists' dollar. I hope you
won't introduce it, but will reject this plan. And there are proposals
that we should have still other Partial devaluations through surcharges
on certain import duties, and through similar arrangements.
All this is very inefficient and partly ineffectual. It is cl~scrimina.tory.
it distorts the allocation of resources. it is a poor way of doing things.
If it were possible to make these devaluations general, even if it
were in the form of taxes, you might say that is all right. If all im-
ports were taxed by the same. percentage, and if all exports got a
subsidy by the same percentage, the same for all foreign transactions,
then yOu would have something. But this is technically not practicable,
and the only practical way of doing it is to change the. exchange rates
between the dollar and the currencies of the surplus countries.
Let me come to the problem of confidence. This problem seems
now almost insoluble.. I shall quickly mention five approaches that
have been proposed'or may be proposed.
The first, approach is to make the dollar so scarce that people no
longer want to switch'from dollars into gold. This is out of the ques-
tiOn, because the expect.ed scarcity of gold is so much that, in order
to make the dollar equally scarce we would have to adopt a deflation-
ary program that would be `a catastrophe for the United States as
well as for foreign countries.
The second possibility is to `raise the price of gold by 100 percent
or something like `that. I think it `would be most dishonest `if we did
this, and it wOtild' also be most injurious for the whole `world, be-
cause the inflationary consequences would be serious. Even if the
profits made by central banks and other monetary authorities could be
sterilized, you cannot sterilize the profits made by the speculators.
They would sell their gold at the increased prices to the monetary
authorities. There would be an avalan~he of new money all over the
world, with prices and incomes rising everywhere. I must warn
against this approach, and I hope that our Congress will never think
of doing anything of the sort.
Approach No. 3 is the so-called harmonization of reserves. This
m~ans to negotiate with monetary authorities th~it they `agree not
to convert the dOllars they hold. The dollars would be locked-in `by the
monetary authorities agreeing to hold dOllars in `certain proportions
or in' certain minimum amounts. `However, this could not `work unless
PAGENO="0064"
398
you have at the same time also a really workable gold pool, which
you do not have now. The present gold pool, with seven countries
participating, operates at the expense of the U.S. gold holdings. I
doubt that effective harmonization agreement can be negotiated now.
It would have been possible 2 or 3 years ago. Unfortunately, that
opportunity was missed.
Approach No. 4 is the one that I regard as the best one, from an
economic point of view. The most workable plan would be to pooi all
gold holdings and all foreign-exchange holdings in an international
pool, perhaps maintained by the International Monetary Fund. The
present danger is that dollars will be exchanged into gold, and the
dollars thereby wiped out. I want to safeguard against this by an
agreement under which all countries deposit their gold and their
dollars and pounds in a central pool, maintained by the International
Monetary Fund, and replace their reserve assets with the new deposits
with the fund. These deposits would then be international reserve,
and the central banks would hold no gold, no dollars, and no pounds.
This plan could not be negotiable except with certain provisions
reassuring to some distrustful nations. First, the gold must not be
held entirely on American soil. Otherwise the plan would not be
credible. You would have to deposit some of the gold on French
soil and perhaps some on other countries' soil.
Secondly, there must be no increase in dollar holdings or pound
sterling holdings either by the new account of the International Mone-
tary Fund or by any central bank. That means we must give up any
attempt to finance a future payments deficit by accumlations of dollars
by monetary authorities.
Well, whether this plan would be negotiable or not I do not know.
I believe it could be negotiable if. we proceeded skillfully. But if it
proves not to be negotiable, I see only one way out, and that is the fifth
and last approach, to cut the link between dollar and gold.
The aim is to avoid that, in a series of gold rushes and dollar crises,
too many dollars are turned in against gold. If we cut the link, it would
be a meaningful way of achieving the aim. Of course, the Europeans
won't like it. but we should first offer them a chance to accept a better
alternative. My plan No. 4 would be much better, and it is oniy with
genuine regrets that we should resort to No. 5. But if No. 4 is fiot
negotiable, then No. 5 is the only way out.
The other countries would have three possible reactions that we
would accept with equal plea.sure. They could say, "We stick to the
present exchange rates, we do not want the dollar to be devalued." In
this case, they would have to purchase and hold dollars, and we should
have no objection to that if the dollar is no longer convertible into gold.
The second type of reaction-some countries could devalue the dollar
in terms of their own currencies. They could say, "No, we do not want
to buy too many dollars. Hence, we shall pay less for the dollar. We
devalue the dollar by 5 percent, 8 percent, perhaps 10 percent." This
would be all right for the United States, since it would help adjust
the balance of payments. We should have no objection to that.
The third possibility is for countries to say, "We do not want to buy
any more dollars and we do not want to fix the new price for the dollar.
We do not know what the right price would be. We shall, therefore, let
the exchange rate float." Again, I think this would be a. very good solu-
PAGENO="0065"
399
tion, and we certainly should not mind. Perhaps they would prefer not
to let the dollar float without any limits, but they could arrange for
upper and lower limits if they so desired.
These are the three attractive possibilities, but unfortunately there
is a fourth possibility, which they could choose. They could say, "We
shall keep the dollar rate fixed for current-account dollars. We shall
devalue the dollar or leave it float if it originates from capital transac-
tions." Such a multiple-rate system could be enforced only through for-
eign-exchange restrictions on their part. Such a raction would be
deplorable. I wouldn't like it, but I would rather have other countries
impose foreign-exchange restrictions than the United States. Hence,
from our point of view, this reaction would still be preferable to our
own program of restrictions.
Senator, I think I have exceeded the time that you have allotted
me, and I can only hope that your questions will give me an opportu-
nity to expatiate on some of these issues. I thank you very much for
your attention.
(Professor Machlup's prepared statement follows:)
PREPARED STATEMENT OF DR. FRITZ MACHLUP
Mr. Chairman and Members of the Joint Economic Committee, you have
invited me to present, in these hearings on the 1968 Economic Report, my views
on the international position of the United States. I have accepted with pleas-
ure and especially appreciate that you encouraged me to include in my testi-
mony historical as well as analytical aspects.
THE THREE PROBLEMS
It has become customary to divide discussions of the international monetary
situation into three problems: liquidity, confidence, and adjustments. All three
have to do with international monetary reserves.
The problem of liquidity is concerned with the adequacy of the combined
total of reserves held by all national monetary authorities and with the capac-
ity of the international system to provide for sufficient annual increases in
total reserves.
The problem of confidence is concerned with the danger that holders of mone-
tary reserve assets alter the composition of their holdings and in the process
destroy large parts of the existing reserves.
The problem of adjustment is concerned with the distribution of reserves
among various countries and especially with the reversal of such imbalances of
payments as would result in persistent losses of reserves in particular countries.
Experts have for years debated the relative importance of the three prob-
lems. My own view has been that they should all be taken care of at the same
time. Our Government, regrettably, has insisted on giving priority to the
problem of liquidity. A very neat solution has been found for it. The agreemei~t
signed in Rio de Janeiro last September provides for a novel, but well-designed
mechanism for creating and distributing new reserves in~ the form of Special
Drawing Rights. We hope that this agreement will be ratified soon and then
activated without delay.
Unfortunately, there is some danger of considerable delay in its activation.
Our own declarations of intentions have contributed to this danger in that we
have repeatedly stated that the creation of new reserves can be postponed until
we have solved our balance-of-payments problem. If this has seemed to be clever
tactics in order to get other nations to negotiate on the contingent creation of
additonal liquidity, it probably was poor strategy. For it is difficult and perhaps
impossible to remove our payments deficit in the near future. Yet, postponing the
activation of the new scheme for the creation of liquidity will make it more diffi-
cult to restore balance in international payments. We should have tried to
negotiate on all aspects of international monetary arrangements so that we
would not be fouled up 110W in this vicious circle.
The worst part of the vicious circle lies in the problem of confidence. Too
many people believe that there will be a scarcity of gold and an abundance of
OO-191--GS-pt. 2-5
PAGENO="0066"
400
dollars. Of course, nothing can be scarce or abundant except at a given price
ratio. If expectations concerning relative scarcities change, but a fixed price
ratio is maintained, an untenable situation arises. This is a very old experience,
commonly known as Gresham's Law. (Gresham died in 1579.
If any of the three problems deserved priority, it would have been the problem
of confidence. How illogical it is to design a ~ystem that provides additional
reserves but makes no provisions to safeguard against the destruction of existing
reserves.
I shall present my views on the positiol1 of the Fnited States regarding all
three problems. I shall follow the example of the Council of Economic Advisers
and begin with the problem of adjustment.
TIlE ADJUSTMENT PROBLEM
The Report of the Council discusses this problem under two headings. `Ad-
justment Process" and "The ITS. Balance of Payments." Their analysis of the
problem suffers from a failure to distmguisn different kinds of approach to the
problem of reducing or removing an imbalance of international payments.
They do distinguish "temporary measures" from polictes that are long term
in character," but this leaves open the question whether the temporary measures
have only temporary effects or long-lasting effects. If I discover a leak in a pipe
and press my thumb against the hole, this is a temporary measure with only
temporary effect: as soon as I remove my thumb, the leaking resumes. If I dis-
cover a bleeding cut on my finger and put a band-aid over it. this temporary
measure may have lasting effects, because the wound may heal. the lesion of my
skin disappear. The difference between these temporary measures is essential; to
call both of them "leak-stopping policies" and be silent on the question whether
they are palliatives or cures is not very helpful.
For some 250 years economists studying international finance have know-n
the process of economic adjustment that would remove imbalance and restore
balance. This adjustment involves changes in relative prices and incomes in the
countries concerned, resulting in changes in the allocation of productive resources
and in the international flow of goods and services. The process had originally
been conceived as an automatic one, but it can be fully automatic only under
monetary institutions that no longer exist. Hence, deliberate adjustment policmes
are now required to produce the effects which the conceivably automatic mecha-
nism would have produced. These policies do not, however, include every type of
measure, including direct controls, that may be instituted for the purpose of
removing a payments deficit.
In medicine, no one would doubt for a moment that there is a difference be-
tween a surgical operation or some other painful treatment and a disappearance
or removal of the need for it. There may be some alternative therapeutic tech-
niques that could remove the need for the painful one; or perhaps the afihication
may disappear all by itself. The same possibilities exist for balance-of-payments
troubles: w-ith luck, the troubles may go aw-ay or some other thera~)y may make
it unnecessary to go through the operations which economists have called the
adjustment process. I use the term "compensatory corrections" or `correctives"
to indicate those things that are considered as alternatives to the adjustment
process.
REDUCING THE PAYMENTS DEFICIT: ALTERNATIVE METHODS
We need even more distinctions. There are measures that do not remove deficits
but facilitate financing them. For example, if an increase in interest rates attracts
short-term capital from abroad, one may not w-ant to regard this as a credit
item in the balance of payments that removes a deficit, but may prefer to regard
as a temporary stopgap, a way of financing an existing deficit for a n-hue. (As
soon as the attractive interest differential is terminated, the inflow of short-term
capital n-ill stop and what has been received will flow back.) In addition, w-e
sl~ould separate measures that work on the flow of goods and services from those
that w-ork on the flow of capital funds. The adjectives "real" antI financial" can
be used for this nurpose.
We thus distinguish real adjustment, real correctives, financial correctives,
corrective management of government transactions, and external financing.
To fin once a deficit is to pay for it by reducing the net monetary reserves or by
increasing liquid liabilities to foreigners incurred just for this purpose. (If an
increase in foreign liabilities arises from an increased foreign demand for dollar
balances and other dollar assets, it should be treated as an autonomous capital
PAGENO="0067"
401
inflow, as a debt incurred in order to finance a deficit. Unfortunately, we usually
lack the information required for this distinction.)
To reduce or remove a deficit by real adjustment is to induce such changes in
relative prices and incomes as will alter the allocation of real resources and cause
such changes in the international flows of goods and services as will improve the
current account to match the balance on capital account and unilateral payments.
We distinguish aggregate-demand adjustment, cost-and-price adjustment, and
exchange-rate adjustment.
Real correctives influence the international flow of goods and services through
selective impacts on particular goods, industries, or sectors. Financial correctives
influence the international flows of private capital funds. Corrective management
of government transactions may affect government expenditures, loans, and grants
to other countries.
REAL ADJIJ5TMENTS
Economists trained in the classical or neoclassical tradition-the present writer
included-have a deep-seated prejudice in favor of real adjustment: (1) It relies
largely on market forces rather than selective "interventions" by the state; (2)
it is more likely to operate without discrimination, avoiding differential treat-
ment of particular industries or firms; and (3) the chance of its w-orking, of
achieving its objectives, is greater.
On the other hand, practical-political considerations militate against real ad-
justment: (a) Policies to check the expansion of aggregate demand are apt to
reduce business activity and employment; (B) policies to check increases in wage
rates and prices are resented by some of the strongest groups in society; and (c)
policies to adjust foreign-exchange rates are opposed by leaders in business and
finance, here and abroad, for reasons good and bad; most understandable is the
opposition abroad to a successful adjustment in the flow of goods and services,
since it would hurt the business of sonic of the industries abroad.
Aggregate-demand adjustment is not w-itbout advocates among practical men:
some highly respected bankers here and abroad advise the United States to "put
its house in order" and "halt inflation ;" and they intimate that this can be done
by means of higher interest rates, higher taxes, and economies in government
programs.
Their practical advice is unexceptionable if it refers merely to avoiding infla-
tion of incomes and prices. As a matter of fact, high interest rates, higher taxes,
and budget cuts are badly needed to prevent a further deterioration of the im-
balance of payments. But it would be far too optimistic to expect that contain-
ment of further expansion would restore external balance, especially since the
major industrial nations of Europe are likewise pursuing anti-inflationary pol-
icies, some even more successful than the United States.
If the conservative advice goes beyond mere avoidance of inflation and sug-
gests in effect that aggregate demand in this country be reduced to such a level
that our imports fall and exports rise sufficiently for the export surplus to match
all other outflows of dollars-then the advice is not acceptable. A deflation of
such force could have well-nigh catastrophic consequences for domestic employ-
ment and world trade.
Real adjustment by means of demand deflation in the United States is out of
the question; adjustment by means of demand inflation abroad is not likely to
be accepted, nor would it be advisable. Now, if the adjustment of levels and
structures of costs and prices cannot be expected to occur either through reduc-
tions in the United States or through increases abroad, the only remaining pos-
sibility of real adjustment lies in alignments of foreign-exchange rates. Yet, the
resistance to any moves in this direction seems too strong to allow it to be con-
templated. I shall, however, iiot be inhibited and w-ill return to this only chance
for a workable adjustment.
PARTIAL DEVALUATIONS
Among real correctives the policies most appealing to advocates of selective
measures are what I have for years called "disguised partial devaluations of the
dollar." Open amid uniform devaluation being ruled out, measures are reeom-
mended to reduce the value of the dollar for particular purposes or in chosen
sectors of the economy.
The United States has resorted to su'ch makeshifts several times. For example,
it devalued, not formally but in effect the dollar used for foreign military expend-
itures. This was done by trying to save foreign exchange whenever the cost of
buying at home was at first not more than 25 per cent, later 50 per cent, above
PAGENO="0068"
402
the cost in foreign currencies calculated at the official exchange rate. In other
words, in decisions whether to buy abroad or at home, foreign currencies were to
be given a higher value than would correspond to the official parity.
Through tying foreign aid to purchases of our products, the United States re-
duced the value of its foreign-aid dollar. Countries receiving aid had to buy in
this country even if they could have bought at lower prices elsewhere. It cost
some of them about 30 per cent more, whicli corresponds to a devaluation of the
aid-dollar by about 23 per cent.
In July 1963, the United States began taxing purchases of foreign long-term
securities at a rate of 15 percent. This is the equivalent of devaluing the dollar
used for buying foreign securities. This partial devaluation, designed to reduce
capital outflows, is a financial, not a real, corrective.
Last month, in January 1967, the administration proposed a tax on foreign
travel and tourism, w-hich would be the equivalent of devaluing the tourist's dol-
lar. In addition. there are nonofficial proposals for taxes or tariff-surcharges on
imports-the equivalent of devaluing the dollar for imports-and for subsidies
or tax-refunds on export-s-the equivalent of lowering the price of the dollar to
foreign buyers of our exports.
If these disguised devaluations of the dollar w-ere uniform. affecting propor-
tionally all imports, all exports and all other international transactions, they
might work indiscriminately and perhaps efficiently. As it is, however, they are
selective, disproportionate, and inefficient. They discriminate against some sec-
tors and in favor of others, distort the structure of prices and the allocation of
productive resources, and are usually incapable of effecting their purpose.
Partial devaluations can improve particular items in the balance of payments,
but may worsen others in the process. partly because of the substitution of pur-
chases for which the dollar is not "devalued," partly because of foreign and
domestic repercussions to the reduction of purchases for which the value of the
dollar is reduced.
DIRECT COxTROLS
Partial devaluations have at least one advantage: they work through price
incentives and disincentives, and leave the markets essentially free. The bureau-
cratic mind, however, prefers a more direct approach, a more direct attack
on the "item" that has been found irritating or insalubrious: it prefers direct
controls, which give to some governmental authority the power to prohibit, to
restrict, to license, or to permit, according to its unfailing judgment of what is
or is not warranted in the national interest.
Direct controls can be employed as real correctives or as financial correctives
of the payments deficit. As real correctives they may involve discretionary sub-
sidies to exporters, quotas and other nontariff restrictions on imports, licensing
of foreign travel or fixing the amounts that travelers may spend abroad. As fi-
iiancial correctives they may restrict bank credits to foreigners, direct foreign
investment, portfolio investment and foreign loans of various types.
The effectiveness of controls that are not comprehensive, not all-inclusive (as
general foreign-exchange controls, comprising all foreign transactions would be)
is limited by the possibilities of avoiding, evading, and circu~nventing the re-
strictions. The elasticity of substitution among different forms of capital outflow,
for example, is not sufficiently appreciated; there are also those offsetting changes
in other items that are classed as repercussions, though in some instances sub-
stitutions and repercussions shade into one another.
It should be easy to understand that portfolio investment, bank loans, trade
credit, and direct investment may be substituted for one another. Restrict one
and you will see the others expand. Yet, many overlook that there is also sub-
stitution between foreign and domestic funds. Restrict the outflow of American
capital funds and you will see foreign funds withdrawn from the United States.
This is not retaliation or an unfriendly act, but the operation of normal market
forces: if American funds are kept from going abroad, interest rates abroad
will rise and, naturally, foreign funds will "go home." Or, if American firms
are forbidden to use their own money for direct investment abroad. but are
permitted to raise foreign funds in foreign markets, foreigners holding American
securities may decide to sell them in Xew York and buy the more attractive new
securities offered by tl1e American subsidiaries abroad. Thus, a legitimate out-
flow of capital takes the place of a forbidden one. Call it repercussion or call it
substitution, it severely limits the effectiveness of the financial correctives.
If financial correctives are effective in reducing the outflow of capital, they
may induce offsettthg reductions in the trade surplus These repercussionS or
PAGENO="0069"
403
feedbacks may be small or large, but will rarely be zero. They can be zero only
if the reduction in the flow of `capital does not affect the use of funds either in
the domestic or in the foreign markets. Assume that an American, A, is pre-
vented from lending his money to *a foreigner, F; only if A then decides to sit
on his money and not to. spend, lend, or invest it at all, and if F manages to
disburse abroad exactly the same amount of money that he would have disbursed,
thanks to the receipt of A's funds, only then will imports and exports be un-
affected by the financial corrective. In `all probability, A will use some of his
funds at home and F will have less to spend abroad, and the United States will
have larger imports and smaller exports as a result.
FOREIGN PROGRAMS OF THE GOVERNMENT
In the search for "guilty items" in the balance of payments, foreign disburse-
ments by the U.S. Government are the most popular targets. According to one's
political philosophy, one will argue for cutting military expenditures abroad or
for cutting foreign aid. The question whether these funds for fighting wars and
fighting poverty abroad are desirable expenditures is often confused with the
question whether the reduction of these funds would cure the imbalance of
payments.
Both hawks and doves are inclined to exaggerate the effects which a reduction
of expenditures `for military operations in Viet-Nam would have on the payments
deficit. If the war ends and military expenditures in Viet-Nam are reduced, there
will probably be an increase in economic aid to Viet-Nam, in an effort to rebuild
w-hat has been destroyed and to show `the world that our intentions all along had
been to help the country maintain its freedom and develop its economy. If, none-
theless, total expenditures abroad are reduced when military operations cease,
then the Vietnamese will have less money to purchase goods and to import from
abroad. The reduction of their i'mports may not always directly reduce exports
from the United States, but through triangular trade and multilateral reper-
cussion our exports may still be affected.
In addition, there is the pro'bability that defense expenditures in the United
States will be replaced by expenditures for other purposes. Programs in our
domestic war against poverty have been cut because of the rising cost of the war
in the Far East. If, with the end of military operations, we escalate expenditures
for domestic programs, imports from abroad are likely to increase above the
volume they would have otherwise. Hence, with all these repercussions on the
flow of goods and services, one must not count on an improvement of the balance
of payments by anything near the full amount by which our military expenditures
are reduced.
THE INEXORABLE DE~[OIT
I may well be accused of undue pessimism. Is there any historical or theoreti-
cal support for my warnings about the ineffectiveness of the various corrective
measures adopted or proposed? Is the deficit really impervious to all efforts to
deal with it through corrective measures?
Our actual experience can really make us rather fatalistic. Year after year,
at least since 1960, we have done all sorts of things to work on the balance
of payments; we have picked one item after another for special treatment; yet,
we have failed. I have prepared a list of quotations from statements by our
Presidents `and Secretaries of the Treasury expressing their assurances and con-
fident expectations that `balance was just `around the corner, that the deficit would
disappear within the year, or the next one. Yet, the deficit is still with us and
one cannot even say that it is `substantially smaller than it used to be.
I am not including this list of `assurances in my testimony, because to do so
would not be charitable. After all, the President and the `Secretary of the
Treasury were courageously battling a Hydra: they did not realize that for
every head cut off two grew in its place. They did not know that you cannot
decapitate a Hydra; you h'ave `to dehydrate her if you want to get rid of her.
(Incidentally, the metaphoric dehydration need not 1)0 an absolute reduction of
domestic liquidity. It suffices to reduce liquidity relative to foreign countries,
calculated at current exchange rates.)
I am, however, offering you a tabulation of statistical figures illustrating the
problem. In Table 1, some of the strategic items of our balance of payments are
so arranged that we can see a't a glance the remittances that can give rise to a
transfer problem. The table shows side by side our military expenditures abroad,
remittances and pensions, grants and net capital exports of the U.S. Govern-
PAGENO="0070"
404
ment. and net outflows of private capital of U.S. residents. Ordinarily, military
expenditures abroad are reported as part of the balance of goods and services.
I took them out of there, because this is one of the items that are usually re-
garded as autonomous or disturbing factors. I wanted to show it as part of the
financial transfers which, if all goes well, induce matching flows of goods and
services.
The table indicates that the financial tranfers, in the 17 years from 1050 to
1966, varied from a low of $5.6 billion in 1953 to a high of $13.9 billion in 1964.
The balance of goods and services (exclusive, of course, of military expenditures)
varied in the same period from a low of $2.4 billion to a high of $11.4 billion. By
and large. the years of high financial transfers were also years of high export
surpluses. For example, the year with the lowest financial transfers, 1953, was
the year with the second lowest export surpluses. The year with the highest finan-
cial transfers, 1964, was also the year of the highest export surpluses. The
difference between financial transfers and export surplus I have called "transfer
gap." This transfer gap varied between $1 billion and $5 billion. In the last
six years it varied only between $2.2 billion and $3.2 billion.
My table, partly to make it less clumsy, omits inflows and backfiows of foreign
capital, private and official. The net inflow of foreign capital, inclusive of un-
recorded transactions and inclusive of the dollar accumulations by monetary
authorit~s, is equal to the difference between the transfer gap and the change
in our gross reserves. Another reason why I omitted figures for foreign capital
was the impossibility of separating autonomous inflows and those that w-ere
merely accommodating (that is. financing the deficit).
If we succeeded in achieving full adjustment, the surplus in the balance of
goods and services would match the net deficit on the other accounts. Why full
adjustment has not been attained and why, therefore, a transfer gap has re-
mained throughout the years is a controversial question. Probably several
factors have accounted for the lack of adjustment.
Virtually all theoretical analyses of the transfer problem include as necessary
conditions for full adjustment relative price and income deflation in the paying
country and relative price and income inflation abroad. Perhaps these conditions
have not been met, chiefly because we have, for very good reasons, been unwilling
to allow production and employment in the United States to be sufficiently de-
pressed to "push out" enough of our products to achieve an adequate export
surplus. Likewise, foreign nations have been unwilling to allow a rate of in-
flation sufficient to "suck in" enough goods from the United States.
Another important factor in `the incomplete working of the adjustment process
may have been the policy of some countries to offset the external effects of their
price and income inflations by devaluations of their currencies. France. for
example. devalued the franc in 1957 and 1958 with the result that the franc
became undervalued and France could within a few years accumulate a gold
reserve of almost $6 billion.
TIlE TRANSFER rROBLEM
It is sometimes said that the theory of the adjustment mechanism-a theory
explaining how the trade balance adjusts to remove imbalances of payments-
w-as not designated for countries or periods in which large amounts of financial
transfers disturbed the balance of payments. This is not so. The classical debate
of this problem of adjustment started when Britain had extraordinarily large
military expenditures on the Continent during the Napoleonic Wars.
The discussion of the adjustment to large financial transfers was resumed when
France had to pay indemnities after the Franco-Prussian War, and again when
Germany had to pay reparations after the First World War. It was in connection
with the discussions of the German transfer problem that some economists
raised doubts as to whether the balance of goods and services could ever be
flexible enough to allow adjustment to large transfer commitments.
In Table 2, some of the dollar figures of Table 1 were transformed into per-
centages of gross national product. It is significant that all the figures in question
are minute fractions of our GNP. Exports of goods and services, in the period
of 17 years, varied from 4.7 to 6.0 per cent of GNP. imports (excluding military
expenditures) varied from 3.6 to 4.6 per cent. The export surplus is, of course, a
still smaller fraction. It varied from 0.7 to 2.0 per cent, of GNP.
`The fiaancial transfers varied from 1.5 to 2.3 per cent of GNP. It may be worth
pointing out that there has been no consistent increase in financial transfers
relative to GNP. On the contrary, from 1964 to 1966 they declined from 2.2 to
PAGENO="0071"
405
1.5 per cent of GNP. The transfer gap varied only between 0.3 per cent of GNP
(in 1951, 1957, and 1966) and 1.2 per cent (in 1950).
The smallness of these figures is most impressive. For it shows what minimal
transfers of productive resources in the economy from domestic industry to export
industry would suffice to achieve full adjustment. That we should have been
incapable of achieving it seems to indicate that anonymous forces involving
market prices and incomes can be strong enough year after year to frustrate
the aspirations and expectations of this wealthy nation. I hope my observation
will not be mistaken for a plea to restrict the forces of the free market. It is
meant, on the contrary, as a warning that these forces should be treated with
more respect.
TIlE NEW BALANCE-OF-PAYMENTS PROGRAM
After seven years of unsuccessful corrective measures, the Government has
now embarked on a new program. It is, again, not a program to promote real
adjustment in the economic sense; instead, it relies on selective correctives operat-
ing on hand-picked items of the balance of payments. The President, the Secretary
of the Treasury, and the Council of Economic Advisers hope that the country will
save at least $1 billion by a "mandatory program" to restrain direct investment
abroad and to bring home larger parts of foreign earnings from past investments;
another $500 million by a "tightened program" to restrain foreign lending by
banks and other financial institutions; another $500 million by discouraging "non-
essential travel outside the Western Hemisphere"; and again another $500
million by reducing the foreign-exchange cost of keeping troops in Europe.
In summary, $1.5 billion are to be saved by financial restrictions, $500 million
by a corrective measure operating on the private demand for foreign travel, and
$500 by corrective management of government disbursements abroad. The last
of these may turn out to be the only continuing saving, if troops are brought
back from Europe or if compensating payments are received from NATO allies.
The other $2 billion are nothing but stop-gaps.
Even if the three stop-gap measures succeeded in improving the balance by the
full $2 billion, and even if this improvement eliminated the deficit for the time
the restrictions are in force, it w-ouid not restore balance; it would only suppress
imbalance. As soon as the restrictions are lifted, the deficit will reappear, for
their is nothing in the program that has any adjusting, remedial or curative
effects. The demand for foreign travel will not be reduced over a long period by
restricting for a few years the chance of satisfying it. The flow of capital funds
from this country to Europe is determined by relative incomes, prices, profit rates,
interest rates, and saving ratios. None of these underlying conditions is altered
by the restrictions. The flow is likely to resume, perhaps eveii to broaden, when
the restrictions and prohibitions are taken off.
But that these selective controls are only temporary, and that they have no
lasting effects, is not all. An additional question arises concerning the effects
that they will have even temporarily. The possibilities of substitution and of
repercussions must not be disregarded. Permitted outflows may be substituted for
the prohibited ones, and repercussions in the trade balance may offset some of
the savings achieved in the selected items. I shall presently provide explana-
tions for these warnings. But I must first deliver myself of an observation on the
principle of restrictive measures.
As one who has lived many years in Central Europe under all sorts of prohibi-
tions, restrictions, and controls, I have always admired and loved the supposedly
indomitable spirit of freedom in this great country. It is a traumatic experience
to see the lighthearted sacrifice of several freedoms with the adoption of the
program of payments restrictions. I would never have thought that this wonderful
country could sink so low as to impose restrictions on foreign travel.
SOME THEORETICAL EXPLANATIONS
But now I must make good on my promise to present explanations for my
skepticism concerning the effectiveness of the corrective measures. The explana-
tions are theoretical, but I hope they will not appear esoteric or specious.
I shall use as illustration the restriction of direct investment, which is intended
to save $1 billion a year.
There are two extreme positions concerning the effectiveness of such a correc-
tive measure. At one end is the opinion that a reduction of a financial transfer,
say by $1 billion, w-ill leave all other items in the payments balance unchanged
PAGENO="0072"
406
and merely reduce the financing item, that is. reduce the loss of gold or the in-
crease in liquid foreign liabilities.
At the opposite end is the opinion that a reduction in financial transfers by
Si billion will reduce the export surplus by the same amount and hence will
leave the deficit, and the need to finance it, unchanged.
I propose to regard the first theory as naive and the second as oversophisti-
cated; both are wrong. The truth lies in the middle, and whether it comes closer
to the naive or to the over-sophisticated theory will depend on circumstances.
What kind of circumstances control the outcome can be briefly indicated, still
with reference to the same illustration, the reduction in direct investment abroad.
If American firms that have for several years been making direct investments
abroad are now barred from doing so unless they can raise new capital in foreign
markets, it is possible that the increased demand in the foreign capital markets
leads to a backfiow of foreign capital from the United States. It may be short-
term capital or it may be long-term capital that returns to Europe. To repeat
the example used before, American firms issuing new securities in a European
market may find foreign buyers w-ho secure the needed funds by selling in the
New- York stock market some of the American shares they have been holding.
The incentive for such a sw-itch from old to new- securities is clear: newly issued
securities have to be offered at slightly reduced prices. To the extent that this
w-ay of financing is used, the restrictive measure by the United States will be
ineffective.
Let us assume that the American firms reduce direct investment in Europe but
make. within the limits stipulated by the new- mandatory restrictions, some
investments in Canada which they might not have made otherw-ise. The addition
to the investible funds available in Canada may make it possible for Canadians
to engage in the purchase of European securities. This w-ould again constitute
substitution of another form of capital flow- from the United States to Europe.
Let us assume next that direct investment abroad is in fact reduced by the
full $1 billion and that there is no replacement by any other funds going from
the United States to Europe. Investment in Europe in preceding years has un-
questionably contributed to effective demand and. directly or indirectly via third
countries, to purchases of goods and services from the United States. The amount
so used may have been relatively small: if so. tl~e feedback from the reduction
in investment, resulting in a reduction of American exports, may be small, too.
But it will surely be greater than zero.
The next repercussion to he considered is connected w-ith the use the American
firms make of the funds which they. hut for the restriction, would have invested
in Europe. If they use any of these funds for increased investment in the United
States. this will amount to an injection of additional funds into the strenm of
effective demand. Some fraction of any addition to effective demand is likely to
show- up as an increased demand for imports. The fraction may be small, but
not zero.
To the extent that the domestic market. because of the increase in effective
demand, becomes more attractive than foreign markets. American firms will be
less eager to seek foreign outlets and will divert some of their production from
export to domestic sales. It is unlikely that the amounts involved would be very
large, hut it is just as unlikely that they would be zero.
We have seen in the tabulation of financial and trade statistics that increases
in our financial transfers to foreign countries have for many years failed to
produce equal increases in our export surplus. The same conditions that cnn
explain the incomplete adjustment of the trade balance to increased financial
transfers can explain also why reductions in our financial transfers are unlikely
to be matched by equal reductions in our export surplus. On the other hand,
just as our increased financial transfers have increased our export surplus sig-
nificantly. so reductions in financial transfers can be expected to reduce our
export surplus.
CONCLITSIONS REGARDING THE PAYMENTS DEFICIT
I shall not be so hold as to present my conclusion in the form of a numerical
forecast. It is not possible to predict a result determined by so many unknown
variables. At this point we do not even know whether the Congress will pass the
proposed surcharge on the income tax. This one factor alone can make a clif-
ference of about $1 billion in the payments deficit. That is to say, if we get the
surtax, and thereby reduce the spending power of individuals and corporations.
imports will be smaller and exports larger than if no tax increase is imposed.
PAGENO="0073"
407
But there are too many other factors in the picture to permit anyone to come
up with a reliable forecast. Nobody knows, for example, what will happen coil-
cern~ng movements of foreign capital. This item can change either way and in
very substantial amounts.
None the less, I believe that conclusions of a qualitative sort can and should
be `drawn. The two conclusions on which I feel pretty sure are the negative and
regrettable ones concerning the effects of the restrictive program. There will not
he an improvement of the payments balance by $2.5 billion, as the Administration
seems to hope. And whatever improvement will be achieved by the program, it
will be only temporary and will not contribute to the adjustment process, will
not bring us closer to a solution of ou.r problems.
The widely believed excuse that our military expenditures abroad, chiefly
those connected with the war in Viet-Nam, are too large to permit balance in
our payments to be achieved, is not justified. Our total financial transfers, in-
clusive of military expenditures, have been between 2.3 and 1.5 per cent of our
GXP. This is a modest drain on our resources. There is no reason why a nation
should be unable to accomplish a real transfer of* ~such magnitude.
Adjustment of the balance of goods and services to make the real transfer
match a financial transfer of around two per cent of GNP is not `an impossible
task, provided the adjustment process is allowed to work. I `agree that we must
not try to do it by depressing domestic incomes and prices. I am afraid that we
must not expect our major trading partners to help u's sufficiently by means of
infla:tions of their income and price levels. But I see no reason other than super-
stiti'on and timidity why we should not try to achieve the required relative
reduction of our income and price level through adjustments of foreign-exchange
rates. The rate adjustment that would achieve the needed adjustment of the trade
balance is quite niodesit and should be negotiable.
I must safeguard myself against misinterpretation. If I speak of adjustment
of exchange rates, this does not mean devaluation of the dollar in terms of gold.
I do not believe either the desirability or the inevitability of an increase `in the
price of gold, and I shall explain this position presently. So let no one confuse
exc'hange rate and gold price.
I shall not make the mistake of discussing the problem of adjustment inde-
pendently of the problem of confidence.' This, I am sorry to say, is hardly dis-
cussed in the Economic Report. Let us turn to it.
THE CONFIDENCE PROBLEM
I have stated what is meant by the confidence problem: it lies in the danger
of massive `switches from holdings' of dollars to holdings of gold, with a destine-
than of monetary res'erves' in the process.
The first distinction required for analysis of this problem is that between
private and official holders.
HOLDERS AND 5~ITCHER5, PRIVATE AND OFFICIAL
The distinction is important chiefly because of differences in motivation. Pri-
vate holders of assets make their decisions mainly in their own interest-which
includes, of course, the interest of their firm or their family. Official holders
make their decisions in what they conceive to be the interest of their country;
by `definition, they are politically motivated, which may imply that their con-
siderations of the putative national interest are fused with consideration of their
own chances for re-election, re-appointment, or popular acclaim.
The differences in motivation can mean that official holders may refrain from
sw-itching from dollars to gold while private holders decide to switch, or the
other way around, even if their expectations of future events' are the same. On
the other hand, massive gold purchases by `private dollar holders can induce
monetary authorities to act similarly even if their expectations differ. For when
private purchases of gold result in losses of gold and in accumulations of dollars
by central `banks, the authorities may convert these dollars into gold merely
to restore the previous composition of their reserves. And if these conversions
make a `heavy dent in the gold stocks `of the United States, some official holders
may find it prudent to increase the metallic portion of their reserves.
The virulence of private speculation in gold became apparent in December
1967, when the United States within four weeks lost almost $1 billion of its gold;
and this despite the fact that other monetary authorities gave up some of their
gold and increased their dollar balances. There is nothing under present arrange-
PAGENO="0074"
408
ments that would preclude frequent recurrences of such gold rushes. One wonders
how many similar scrambles for gold we are able or willing to endure.
Official switches from dollars to gold have sometimes taken place without any
provocation from private speculation. The most conspicious moves were, of
course, those of the two largest European owners of gold, Germany and France.
In the years 1964 and 1965, Germany reduced her foreign-exchange holdings by
almost one half and increased her gold stock. France did the same thing in 1965
and 1966. Not all but most of their accumulations of gold cut into the gold re-
serves of the United States. There has been none of such official switching in re-
cent months, if we disregard the action by Algeria. On the contrary, the major
monetary authorities have realized t.hat they had better stabilize the boat
rather than join in rocking it. Germany. especially, has cooperated with the
United States as the Bundesbank accumulated large amounts of dollars. Similar
accommodation has been received from Italy.
This kind of bilateral accommodation, however, is no solution to the problem
of confidence. A viable situation can exist only if massive raids on official gold
holdings are excluded by institutional changes.
THE PRIVATE DEMA?~D FOE GOLD
There exists widespread ccnfusion concerning the increase in private demand
for gold. Observers often confuse speculative purchases with long-run demand.
They also fail to distinguish increases in the demand for gold that are associated
with decreases in the demand for dollars from gold purchases that do not involve
reductions in private dollar holdings.
When the Council of Economic Advisers observe that our "deficit may have
been increased further indirectly by the flurry of private gold purchases." they
probably assume that these gold purchases were financed, directly or indirectly
by capital outflows from the United States. This is only a very small part of the
picture. Perhaps they mean that many foreigners would be more interested in
American securities if they were not so crazy about buying gold. In this sense
it is true that our balance of payments is worsened by the gold rush. 011 the
other hand, when private foreigners use their dollar balances to pay for the
gold, both our dollar stocks and our liquid liabilities are reduced. and the
balance is unchanged.
I believe the Council also overestimate the industrial use of gold when they
figure that it was about 87.50 million last year. Since even industrial processors
of gold may be speculators in their inventory policies, it is possible that industrial
purchases in 1967 were unusually high. But that the current use of gold for in-
dustrial purposes, including jewelry, is much less, can be gathered from the
known figures for the United States. In 1965 industrial users of gold in the
United States purchased $18.5 million worth of gold. Statistics are available for
only eleven other countries; the rest has to 1)e guessed, and the total was esti-
mated at $300 million. I doubt that the total for the world reached $500 million in
1967-which still would have been less than one-third of the gold production in
the western world.
The remainder was probably divided between traditional gold hoarciers and
speculative gold buyers. The difference between them is that the traditional
buyer acquires gold regardless of its price and of expectations concerning in-
creases in the price, whereas the speculator buys because he expects the price
to increase. He would probably sell again after the expected increase has taken
place or after he has resigned himself to the fact that his expectation had been
wrong.
The stupidity of persistent gold speculators is incredible. If a speculator bought
his gold in 1954, his investment by the end of 1965 would have been w-orth less
than one-third of what be would have owned had he purchased an average
portfolio of American industrial stocks. A speculator who bought his gold only
in 1960, would have found at the end of 1965 that his investment was worth less
than one-half of what he could have had if he had purchased a Dow Jones mix-
ture of industrial stocks. Even if his hope of a doubling of the price of gold haT
come true at the end of 1965, he still would not have made as much as an investor
in American stocks.
I have not carried my calculations to December 1967, but they would ui~-
questionably put the gold speculator still further behind the average investor in
the New STork Stock Exchange; the gold buyer of 1954 probably has now only
one-fifth of tile shareholder's present w-orth.
PAGENO="0075"
409
If speculation on a rise in the price of gold were to stop, in the sense that no
further speculative purchases would take place but that those who have bought
gold for speculative reasons were (foolishly) holding 011 to their not so pre-
cious possession, the private demand for gold by industrial users and by tradi-
tional hoarders would fall substantially short of present gold production. Thus,
the present price of $35 an ounce could be maintained only if the price support
extended by the United States and other monetary authorities is continued.
It is true that this situation would change after a few years. As incomes rise
and as other prices increase, private demand for gold, quite apart from specula-
tion, increases. And since gold production is expected to decline in coming years,
the time will come when private demand catches up with new production, and
thereafter overtakes it.
Whether this will be the time for an increase in tilC price of gold will depend
on what happens to tile monetary stocks of gold. They are now in a magnitude
of about $40 billion. Even if all gold production stopped completely ansi even if
the industrial use and traditional hoarding of gold were to double, the present
monetary gold stock would suffice to feed private demand for about 20 years.
Since the monetary gold stock serves chiefly to satisfy 01(1 superstitions, there
is hardly any reason against using this enormous buffer stock for gradually sup-
piylng all that private users might demand in tile foreseeable future.
MEANS OF PAYIvIENT FOR PRIVATE GOLD PUP.CIIASES
The effects of private purchases of gold upon tile flnancial pOsitiOfl of tile
United States depend to some extent ~n what funds tile buyers use to pay for
tile gold. it is one thing if tile purchases are made out of current incomes in all
sorts of currencies; it is another if they are paid for out of dollar balances no
longer demanded by their holders.
Tile United States is to some extent involved no matter how tile private gold
purchases are financed. If the present gold pool-United States, United Kingdom.
Germany, Italy, Belgium, Netherlands, ansi Switzerland-supplies the gold, tile
share of the Tjmijteci States in tile loss of gold will initially be 59 per cent. Even-
tually, however, it is not unlikely tllat under present arrangements tile United
States will have to shell out all of the gold, beaause the other monetary authori-
tiea may not be willing to have the metallic part of their reserves reduced.
if tile purchase of gold is at the san~e time as a fiigilt out of dollar holdings, tile
effects UPOfi tile United States position are more serious. Paradoxically, they need
not show ill any change of the liquidity balance, sInce both tile gold steak and the
lmqumd liabilities to foreigners decline part passe. (Tile reduction in iiai)llities
to private foreigners leads first to an increase in liabilities to official foreign
holders of dollars; their increase in dollar holclingsis then cancelled when tney
use tile dollars to pay for the gold sold by tile United States.
The erosion of the United States gold stock occurs in any case. it is, therefore,
necessary to change international arrangements so that not all private gold
purchases, even those not connected with reductions ~ll tile demand for dollar
balances, cut into tile reserves of tile United States.
DOLLAR OVERHANG AND DOLLAR OVERFLOW
It would not be difficult to deal with speculation against the dollar and with
speculation on an increase in the price of gold if the excess supply of dollars
were not constantly replenished by our continuing payments deficit. In other
words, one could deal with tile overhang from past accumulations of dollar
balances if there were not always an overflow of dollars pouring into foreign
markets. (The opposite, incidentally, is also true. It would be easier to deal with
tile current overflow were it not for the overhang that threatens to come down
on the exchange markets in a crisis of confidence.)
In view of this predicament and in view of tile impossibility of stopping the
overflow in the near future, action to seal, brace, or otherwise secure tile over-
hang of dollars is of utmost urgency. It is sufficient to confine this action to the
dollar lloldlings of monetary authorities since only they can present their dollars
in New York for conversion into gold.
Let us then consider what kinds of action might be taken with regard to
official dollar holdings.
PAGENO="0076"
410
FIVE APPROACHES
In principle, five approaches can be used to solve the problem of confidence
and, in particular, the problem of conversions of official dollar holdings into
gold. All have been recommended in some quarters. They are
(1) To make the dollar scarcer;
(2) To increase the price of gold;
(3) To `lock in" the official dollar holdings under so-called harmonization
agreements;
(4) To "take out' the dollars from official reserves by having them ex-
changed for deposits in an international conversion account (settlements ac-
count) ; and
(5) To cut the link between the dollar and gold.
I may be quite brief in disposing of the first, the most orthodox approach. It
is practically impossible to make the dollar sufficiently scarce. Scarcity is always
relative and, with present expectations of a future scarcity of gold, Ofli~ a very
drastic deflation in the ~nited States would do the job. Such a policy is out of
the question.
The second approach is the one most w-idely discussed. The "gold lobby" seems
to be getting increasing popular support. I reject the recommendation of an
increase in the price of gold, chiefly for two reasons. One is noneconomic: it would
I)e morally indefensible to hurt those who have helped us by carrying large dollars
holdings and to reward those who have hurt us by converting them into gold.
The other reason is an economic one: a sharp increase in the price of gold would
lead to large, highly inflationary profits. Even if the profits of official holders of
gold could somehow be sterilized, those of private holders of gold would be
monetized and the consequent increase in the reserves of commercial banks and
in the cash balances of countless speculators would drive up prices and incomes
everywhere.
The third approach calls for an international agreement on "harmonization of
monetary reserves." The monetary authorities would have to commit themselves
to hold certain minimum ratios or minimum amounts of their total reserves in
the form of dollar assets. They would probably be more agreeable to such a
plan if the limits were stated in absolute terms and if it were agreed to that
there must not be any further accumulations of dollars in official reserves. The
plan would provide a solution of the problem only if it were combined with firm
arrangements about joint sales of gold. (The present gold pool, as we have seen,
does not distribute losses of gold reserves in a way that would be tenable in
the long run. Speculators, therefore, cannot expect the present arrangement
to last.)
The fourth approach calls for an isolation and concentration of all official
dollar holdings in one central pool. Earlier plans to this effect, such as those
proposed by Keynes, Triffin, Bernstein, and Maudling, have not found official sup-
port. One of the objections has been that these plans allowed for continued ac-
cumiilations of reserve currencies (dollars snd pounds) either by the central
reserve agency or by national authorities. There can be no solution to the prob-
1cm of confidence if continued accumulation of gold-convertible dollar assets by
monetary authorities is permitted.
The fifth approach is recommended chiefly by those who have given up hope for
a cooperative or collective solution. To cut the link between dollar and gold.
that is, to stop the practice of the LTnited States of buying gold when it is offered
and selling gold when it is demanded, would be an action vehemently opposed
by most foreign governments.
The implications of this approach must be examined carefully. because it may
turn out to be the only one that is really practicable. But, before I undertake such
an examination, I wish to describe a plan which I regard as feasible and much
more desirable. It is a plan that pursues the fourth approach in a more compre-
hensive fashion than has previously been proposed.
A GOLD-AND-EXCHANGE CONVER5IOX ACCOUNT
My proposal combines features of the plans proposed by Keynes, Triffin. and
Bernstein, but it differs from these plans in various respects. Instead of discuss-
ing similarities and differences, I shall confine myself to u description of the
essentials.
The Tnited States deposits oIl its gold reserves in a new Conversion Account
(or Settlements Account) of the International Monetary Fund and will treat
PAGENO="0077"
411
its deposit with this account as a reserve asset (its largest, under present
circumstances).
Other countries, especially those. in the Group of Ten, deposit all their gold
reserves and all their holdings of reserve currencies (dollars and pounds), ex-
cept for small working balances, in the new conversion account of the IMF and
will treat their deposits with this account as part of their monetary reserves.
The monetary reserves of the participating countries will thereafter consist
only of deposits in the conversion account, reserve positions in the General Ac-
count of the Fund, and special drawing rights recorded in the Special Drawing
Account of the Fund. Neither gold nor national currencies will be carried as
monetary reserves of the participants. Working balances in foreign countries
will be strictly limited to amounts needed for transactions and intervention
purposes.
The conversion of gold and reserve currencies into deposits with the con-
version account is a one-time procedure (at the time of its establishment or of
joining the group of participants) and is irreversible. The deposits with the
the conversion account may have gold-value guarantees but will not be con-
vertible into gold. These deposits can be held only by national monetary au-
thorities which undertake to accept transfers of such deposits in settlement of
payments balances and in payment for their own currencies (or for currencies
of third countries in day-to-day transactions).
The conversion account gives no credit, it makes no loans or investments, and
it acquires no currencies beyond the amounts deposited by countries at the time
they open their accounts.
The conversion account will keep its gold stock in vaults on the soil of different
countries, so that participants need not be apprehensive concerning emergencies
in time of war.
The future of gold need not be determined at the outset. In principle, it would
be possible to leave the gold market entirely free, the Fund neither selling nor
buying gold, regardless of the price gold might fetch in the free market. (Any
gold-value guarantee of deposits would be in terms of the official accounting
price of gold maintained by the Fund.) Alternatively, the Fund might be author-
ized to stabilize the price of gold by purchasing gold when it is iii excess supply
and by selling gold when an excess demand exists. It would also be possible to
set a pair of prices for bids and offers, allowing the Fund to make a profit from
the spread between selling and buying prices.
The Fund would receive income from interest on the dollar and pound assets
acquired when the accounts were set up. These assets would preferably be in
the form of consols. If some governments negotiating these arrangements should
be unwilling to give up their anachronistic view-s concerning the repayment of
debts that serve as a monetary base, gradual amortization may be conceded. In
this case, provision must be made for replacing reserves destroyed in the process
with reserves deliberately created (perhaps in the form of Special Drawing
Rights).
All deposits in the conversion account carry interest. The income of the Fund
from interest earned on its dollar and pound assets. and from eventual profits
through transactions in gold should be adequate to cover the interest paid on
its deposits.
The Fund should facilitate the process of adjustment not only by advice and
admonition given in connection, with conditional drawing rights on its General
Account under present rules and practices, but also by greater adjustability or
flexibility of foreign-exchange rates. In. order to prevent, power politics from
interfering with this function, a more mechanistic system should be considered.
For example, it might be provided that any country that persistently loses inone-
tary reserves at a conspicuous rate will have its exchange rate reduced by small
monthly steps; and that any country gaining reserves persistently and at a fast
rate will have its exchange rate increased. By limiting these adjustments to
steps not larger than, say, one-fourth of one per cent per month-except in
instances of serious inflation which would require faster adjustment-the fears
of disequilibrating speculation would be allayed. .
The elimination of gold convertibility would make such a system of flexibility
or increased adjustability of exchange rates possible. However, certain govern-
ments might so strongly resist this recommendation, that one should not insist
on its being made a necessary part of the arrangement from the beginning.
While it can hardly he denied that we have at present no effective adjust-
ment mechanism, and that the problem of adjustment demands solution, one
PAGENO="0078"
412
may concede that the problem of confidence is more urgent. Hence. we should
not block collective solution of the confidence (convertibility) problem by insist-
ing on solving the adjustment problem at the same time.
Fortunately, if the adoption of a plan to establish a gold-and-exchange coii-
version account stops speculation on the rise of the price of gold. and thus stops
the gold rush, the present imbalance of payments will be alleviated. This sup-
ports the argument that, if the inclusion of greater exchange-rate flexibility
should not be negotiable at this time, postponing a solution of the adjustment
problem may not cause excessive harm.
We learn slowly, and older people usually learn more slowly than younger
ones. In most countries, the men in charge of monetary affairs are mature
persons. whose ideas have hardened and have become unchangeable. It may take
some time, until the old guard retires and younger men takeover, before it w-ill
be recognized that greater flexibility of exchange rates is indispensable for a
workable international monetary system.
CUTTING THE LINK BETWEEN DOLLAR AND GOLD
A comprehensive plan to solve the problem of confidence, or indeed any new
plan requiring collective action on international monetary arrangements, may
not be negotiable at the moment. To resign oneself to this fact of life, shrug
one's shoulder, and do nothing-is possible, is easy, is realistic. But it is
irresponsible.
There are those who believe that temporizing is the only intelligent conduct,
simply because anything else is "politically impossible." What this means is,
before all, that in an election year no administration likes to press for the
adoption of unpopular measures. It means also that the politician prefers to
wait until the need for action is more widely understood. And, in terms of the
concrete case, it means that we must wait until we lose another three or four
billion dollars worth of gold.
I am not a politician and I believe I have a responsibility to advise against
temporizing. I recommend that we take action when action can do most good.
It is useless and wasteful to wait until we have dissipated several more billions
of gold. Not that we need the gold but, if we dispose of it, we ought to give
it to those who have a moral claim to it. That is, not to speculators, not to
hoarders, hut to governments to whom we have said in effect that they would
not regret it if they held dollars rather than gold.
Thus, if we cannot get the governments of the Group of Ten to negotiate an
agreement for a comprehensive plan, I propose the following course of actions:
(1) We announce that within a few months-say, three or four months-we
shall stop selling gold to anybody, including foreign official holders of dollars.
(2) We announce to all official holders of dollars that, if they want to pur-
chase some or all of our gold, they are welcome to it, but they must take it
within the period indicated. Just as a caution, we shall limit the offer to any
one country to the amount of dollars it held on a certain day prior to the
announcement.
(3) We announce that we shall not purchase any gold now or in the future,
or repurchase any gold that we sell, either at the present price or at any other
price. In short, we are through with gold as a monetary base.
(4) We announce that we shall have no objection to any country (a) con-
tinuing to maintain the present, fixed exchange rate between its currency and the
dollar, (b) reducing the exchange value of the dollar at which the country is
pegging its currency, or (c) allowing the exchange rate to float.
In other words, we shall not undertake to influence other countries regarding
their policy vis-a-vis the dollar. We shall leave it to them to decide what they
think is best for them.
If any country decides to keep the exchange rate unchanged, this will imply
that its monetary authority stands ready to sell and buy dollars at the present
exchange rate. If, because of our payments position, the dollar remains in ex-
cess supply, the foreign monetary authority will have to increase its holdings of
dollars.
Any country that decides to adjust the exchange rate so that at a reduced
price of the dollar its monetary authorities have to acquire only smaller amOunts
of dollars, or none at all, will thereby avoid extending "involuntary loans" to the
United States; its decision will contribute to the adjustment required for restor-
*ing balance in international payments.
PAGENO="0079"
413
If a country decides to let the exchange ratefloat, it evidently has concluded
that it will neither accumulate dollar balances nor dispose of any that it owns,
and that it will let the price of the dollar be determined in the free market. This
excludes the possibility of further deficits and surpluses in its transactions with
the United States (if the balance of payments is calculated on the basis of
"reserve transactions"). It does not exclude the use of fixed exchange rates
vis-a-vis the currencies of other countries (some of which may be more significant
in the trade relations of the country concerned).
The three possibilities do not exhaust the range of options open to a country.
Another option involves the use of multiple exchange rates. A country may
decide to maintain the present fixed exchange rate for current-account dollars,
that is, for dollars arising from, or used for, trade in goods and services, but to
let dollars arising from inflows of capital depreciate. The execution of this
decision to split the market would probably require foreign-exchange controls
of the most stringent sort, because capital transactions can be disguised as
payments for goods and services. The introduction of such controls would be
regrettable, but from the American point of view one may say that controls
abroad are less objectionable than controls at home. Still, this outcome would
be deporable and one can only hope that most foreign governments wOuld realize
how much harm can be caused by suchmeasures.
The chief purpose of the link-cutting action would be achieved no matter what
other countries decide to do. For, convertibility of dollars in gold having been
abolished, the confidence problem as a threat of reserve destruction would no
longer exist.
The use of the dollar as an international transactions currency would not
be impaired by the action. Banks and trading firms hold dollar balances be-
cause they need them in their business and because the reservoir of goods which
the dollar can buy at relatively stable prices is larger than that of any other
currency. With the fear of "convertibility crises" removed, the usefulness of
the dollar in international trade may even increase.
Some traditionalists fear that the abolition of gold reserves and of a firm
link between dollar and gold would invite inflationary policies; they believe
some monetary discipline is exercised by the link to gold. In fact, gold-reserve
requirements and gold-convertibility rules do not give us more discipline-
we do what w-e would do in any case--they only create guilt feelings.
One genuine drawback of this solution of the confidence problem is that the
link-cutting action is unilateral and, therefore, offends the spirit of international
monetary cooperation. For this reason, this approach should be regarded as in-
ferior to a negotiated, multinational arrangement. Some economists though,
believe that, in the absence of convertibility of dollars in gold, the United States
would have less need for international cooperation.
Tun LIQUIDITY PROBLEM
We now come to a much happier subject. While we still grope for solutions
of the problems of adjustment and confidence, we have found and agreed on a
solution of the liquidity problem. And a very neat, most satisfactory solution it is.
I have just completed a long study-over a hundred pages-of the Rio Agree-
ment with all its details and implications. I have concluded that the scheme is
superior to any of the alternatives that have been discussed in the last ten years,
and that it should work well once it is activated.
NEW PRINC~LES
The system of Special Drawing Rights embodies novel features based on sound
principles of monetary economics.
The Special Drawing Rights (SDR) are deliberately created and distributed
among participants in agreed proportions. They will be owned reserves-not
borrowed reserves. They can circulate only among the participating monetary
authorities-hence, cannot go outside the group of participants. They cannot
be extinguished or destroyed-what one holder loses another gains.
The SDR's are not created by acts of lending or investing, nor by decisions to
borrow or to make use of an overdraft facility. They do not constitute anybody's
debt, indeed, the Special Drawing Account owns nothing and owes nothing, but
acts merely as a bookkeeper and a source of information. Finally, the age-old
myth of "backing," which economists for hundreds of years have vainly tried to
exorcise, has at last been punctured. There is no asset that could be said to
PAGENO="0080"
414
"back" the SDR's. Their acceptability rests entirely on the participant's com-
mitments to accept them and on their knowledge that all other participants will
actually accept them in payment for convertible currencies, their own or that of
the payor or that of a third country.
If the plan is ratified and activated, it can provide for adequate annual in-
creases in total monetary reserves. The international monetary system will 110
longer depend on uncertain gold production, unreliable gold supplies from the
Soviet Union, or erratic private demand for gold, nor on deficits of reserve-cur-
rency countries, reserve needs of other deficit countries, or the willingness of
surplus countries to accumulate reserve currencies. At last, there will be some
rationality in the creation of reserves. Contrary to some misgivings that inflation-
ist attitudes will prevail in the decisionmaking about the creation of SDR's, it
seems more probable that decisions w-ill err on the side of excessive caution.
Tile future of SDR's-assuming ratification and activation of the scheme-
looks bright. Whether gold and reserve currencies remain ingredients of national
monetary reserves or w-hether they will be replaced by deposits with a Conversion
Account, the share of SDR's in total reserves is going to increase from year to
year. It may not be long before SDR holdings will be the most important part of
thee monetary reserves of the world.
ONE DOWN, TWO TO GO
Tile new- scheme has not been developed as a boomi to any particular country or
group of countries. It is a truly cooperative and collective arrangement to help
all. The men who have long labored on it, and have patiently and skillfully steered
the negotiations to a happy end, deserve our thanks.
My only regret is about the smgle-rnindedness with which the experts have
devoted themselves to solving the problem of liquidity, leaving the other tw-o proJ~-
lems, of adjustment and confidence, unsolved and almost untouchable. This
single-mindedness has left the international monetary system in a terrible mess.
PAGENO="0081"
415
~+T' `~T~'~'
~
~cr~
F-
v)
F-
F-
(I,
F-
w
0
C.,
>.-~_
~ ~
LU ~Ev
Cl)
E
> =
~ ~-~C~.-C)c,c,r-~
~ ==.~
F- O~C'JC~4(~)
CD
C.)
CD
0
-J
C-
E
0 -
F-
C/)
C/I
0
CD
F-
>..
OO-491-OS-pt. 2-G
PAGENO="0082"
416
TABLE 2.-FOREIGN TRADE AND VARIOUS FOREIGN BALANCES AS PERCENT OF GROSS NATIONAL PRODUCT OF
THE UNITED STATES, 1950-66
Year
GNP
Goods and services, excluding
military expenditures
Financial
transfers
Transfer
gap
Liquidity
deficit
Exports Imports Balance
1950
100
4. 8 4. 0 0. 8
2. 1
1. 2
1. 2
1951
100
5.7 4.2 1.5
1.8
.3
0
1952
100
5.2 4.0 1.2
1.8
.6
.3
1953
100
4.7 3.8 .8
1.5
.7
.6
1954
100
4. 9 3. 6 1. 2
1. 8
. 5
. 4
1955
100
5. 0 3. 7 1. 2
1. 7
. 5
. 3
1956
100
5.6 3.9 1.6
2.2
.5
.2
1957
100
6.0 4.0 2.0
2.3
.3
ħ.1
1958
100
5. 2 3. 9 1. 3
2. 1
. 9
. 8
1959
100
4.9 4.2 .7
1.7
1.0
.8
1960
100
5. 4 4. 0 1. 4
2. 1
. 7
. 8
1961
100
5.5 3.9 1.6
2.0
.4
.5
1962
100
5.4 4.0 1.4
1.8
.4
.4
1963
100
5. 5 4. 0 1. 5
2. 0
. 5
. 5
1964
100
5. 9 4. 1 1. 8
2. 2
. 4
. 4
1965
100
5. 7 4. 3 1. 4
1. 8
. 4
. 2
1966
100
5. 8 4. 6 1. 2
1. 5
. 3
. 2
Chairman PRox3moE. Thank you, Professor Machlup.
Mr. Butler?
STATEMENT OF WILLIAM P. BUTLER, VICE PRESIDENT AND
DIRECTOR OF ECONOMIC RESEARCH, THE CHASE MANHATTAN
BANK, NEW YORK
Mr. BUTLER. Dr. Machlup has made many of the points that I have
made in n~ paper.
It seems to me that our balance-of-payments situation is an ex-
tremely serious one at the moment, that we have to move to deal with
it. In my terms I think there are four ways one can move. The first way
is through the rule of controls, which is the rule we have adopted. I
agree with Dr. Machlup that controls do not solve balance-of-payments
problems. At best they buy time t.o work on more fundamental prob-
lems. I think if we use this time wisely to adopt responsible monetary
and fiscal policies, to check inflation at home, which I think we need
to do for both domestic and balance-of-payments reasons, then the price
paid through these direct controls may be justified, and the so-called
temporary controls may prove truly temporary. There is an old saying
that there is nothing so permanent as a temporary tax, but I hope that
these balance-of-payments direct controls can be made temporary.
I think that the best course for the United States and for the world
is for us to cure domestic inflation by holding down spending, raising
taxes, and reducing the increase in the supply of money and credit to
viable proportions, and in addition reviewing and reducing our over-
seas Government commitments. I think that if we pursue these policies,
we would help ourselves domestically and one could see an end to our
balance-of-payments difficulties, with a cessation of fighting in
Vietnam
I think this is by far the best course for the United States to pursue,
and a key element of this proposition is that we should maintain the
price of gold at $35 an ounce.
If we do not pursue these policies, we have some other alternatives.
One is more controls, which I think would be only putting the finger
PAGENO="0083"
417
on the pipe that Dr. Machiup talked about, and would lead sort of
inevitably to successive crises and perhaps even to a world financial
collapse at some pomt. I think this would be the worst possible thing
to do.
Another alternative would be to raise the price of gold. This has
been suggested by various sources. I think again I would agree with
Dr. Maclimp that this wouid~be a great mistake. It would flood the
world with liquidity. While in theory central banks could sterilize
this, it seems to me that the temptation to inflate further would be
irresistible. This would apply to the United States as well as to other
countries that hold a lot of gold. A rise in the price of gold would
reward some people whom I do not think it is in the interests of the
United States to reward, and possibly penalize in some sense some
people who have supported us.
I think there is no way to be completely sure that an increase in the
price of gold might not set off a set of competitive devaluations, and
beggar-thy-neighbor policies. I doubt that this would happen, but one
cannot rule out the possibility.
Another alternative is to suspend our commitment to buy and sell
gold at $35 an ounce. While, as I have said earlier, I think the best
alternative is to do what we have to do to defend and develop and
perfect the present system, keep the price of gold at $35 an ounce, I
think if we do not pursue these policies, the best alternative would be
to suspend our commitment to buy and sell gold at $35 an ounce. I
think this would put the question to other countries as to what their.
policy should be. If they chose to let `the dollar float or to let it de-
value against their currencies, they would give our exporters a very
great advantage, and would hamper their own exporters. I think their
decision would have to be that they would peg theii~ currencies to the
dollar, to present exchange parities. I think this would be a viable
system for the world financial structure. However, I think it is a less
good system and a more risky system than the one we have now. I
think again about all it does is to buy us some time. It does not relieve
us from the charge of getting our balance of payments back into bal-
ance at some point.
I think this is the essential thing. I think we can do this. If we do
it, we can contribute incredibly to the future prosperity, growth, and
high employment of the world economy. If we do not do it, whatever
gimmicks we invent are going to be very harmful to `the cause of high
employment and prosperity throughout the world.
Thank you very much.
Chairman PROxMIItE. Thank you, Mr. Butler. Thank you for your
concise statement.
(The prepared statement of Mr. Butler follows:)
PREPARED STATEMENT OF WILLIAM F. BUTLER
Mr. Chairman and members of the committee, I appreciate very much this
opportunity to appear before you to discuss the balance of payments and policies
with respect to gold.
Let me try to make it completely clear at the outset that I believe firmly that
the existing gold-exchange standard is the most efficient, equitable and powerful
international monetary system in the world's history. It has served the world
well, and has made a most significant contribution to the unprecedented growth
in world productioil, trade and investment in the postwar era. I believe our objec-
tive should be to preserve the present system, while working to improve it by
PAGENO="0084"
418
gradually supplementing it with some new source of international liquidity. The
key to this proposition is that the official dollar price of gold must be held at
$35 an ounce.
Holding these beliefs, I am deeply concerned by recent policy developments
at home and abroad. The world is in the process of turning full-square away
from the policies of liberalizing trade, investment and travel which have con-
tributed so importantly to prosperity and growth during the postwar period.
The road we and other industrial nations are now traveling can lead only to
successive, and cumulative, policies of restriction which will surely jeopardize
our prospects for prosperity, economic growth and high employment.
Yet I believe there is still time to turn back to the high road of liberalism.
The most urgent requirement is that the United States pursue policies which
will deal effectively with the fundamental causes of our balance-of-payments
deficit, and make the temporary set of direct controls to which w-e have resorted
truly temporary. At the same time, we need to seek the cooperation of other
nations, particularly those in persist.ent balance-of-payments surplus. It will he
extremely difficult, if not impossible, for the United States to eliminate the deficit
if other nations cling to policies which bring them payments surpluses. And we
must avoid actions on our part, such as quotas, border taxes and other devices,
which provoke retaliatory actions abroad.
In the situation as it existed at the close of 1967 the United States had to come
up w-ith a program strong enough to reverse the deterioration in our external
payments. To be convincing, the program probably had to include direct controls
over private investment as well as restrictions on overseas travel. But controls
of this character are in no way a lasting answer to our real problems. They do buy
time. at a heavy cost. If this time is used w-isely to mount programs w-hich deal
effectively with the basic causes of our deficit, the cost may be justified. But if
the temporary improvement they are bound to produce is used as an excuse for
inaction on fundamental matters, the consequences for the United States and the
world economy could be extremely serious.
Our balance-of-payments problem stems from two basic sources: domestic
inflation and heavy government overseas commitments. It is our failure to face
up to these problems that underlies the erosion in confidence in the dollar. While
there is no questioning of the vast w-ealth and strength of the United States.
there is a growing feeling abroad that we will take the easy w-ay out, through
an increase in the price of gold, rather than making the hard choices required
to get our domestic house in order and tailor our international commitments to
our ability to finance them.
I believe that, for both domestic and international reasons. the United States
must move to contain inflation. From the end of 1958 to the end of 1905 we had
a remarkable period of price and cost stability. Our competitive position in world
markets improved, and our basic trade surplus w-idened. In contrast, we slid
back into inflationary habits in 1966 and 1967. and the inflationary spiral is
accelerating this year. As a result, our trade surplus shrank from $6.7 billion
in 1964 to less than $41/c billion last year. Unit labor costs in manufacturing.
which on the average had been stable in the years 1959 through 1965, have gone
up more than 7% since the end of 1965.
The root-cause of this inflationary upsurge lies in the enormous rise in federal
defense and non-defense spending after mid-lOGS-an increase at annual rates
of over $45 billion in cash outlays, of which defense accounts for $24 billion.
In the absence of a major tax increase, the federal cash deficit soared into the
$20 billion plus range. The process of financing these huge deficits without push-
ing interest rates even higher involved Federal Reserve policies which supported
an increase in the supply of money and credit of some 15% last year.
Under the precepts of both the new and the old economics. the combination of
large federal budget deficits and rapid increases in the supply of money and.
credit, at a time of low- unemployment, will yield inflation. And the inflation wifi
be aggravated, and made more intractable, by an upward spiral in wages and
salaries. Postwar experience shows clearly that the average of w-ages and salaries.
goes up at a rate equal to the advance in productivity plus the increase in the
cost of living. So the initial demand-pull inflation leads to an upward cost-push~
spiral which will keep spinning so long as it is financed.
If this process is not halted it threatens to undermine both domestic prosperity
and our balance of international payments. Inflationary policies involve heavy
risks of creating a boom that could lead to a severe slump. As inflationary
psychology spreads, it enhances the incentives to build inventories, expand.
PAGENO="0085"
419
capacity, go along with large wage increases and speculate in goods, land and
securities. Such a boom would come to an end at some point, as booms always
do. But with the erosion of confidence, the ensuing slump might prove quite
difficult *to deal with. If we fimd federal deficits of $20 billion or more in a
period of high employment, it seems to me that we are seriously constricting our
ability to deal with any recession by applying the procedures of the new
economics. The long-run costs of inflationary policies in terms of unemployment
seem to me to be far more serious than any short-term effects from policies
directed toward price stability.
The international costs of a failure of the United States to bring domestic
inflation under control and correct the imbalance in our international payments
could prove even higher. The stability of the w-orld financial structure rests
essentially on confidence in the dollar. This confidence is engendered in part by
our commitment to buy and sell gold at $35 an ounce, and in longer part by
the stability and strength of `the dollar. Dollars are held and used widely around
the world because their purchasing power has dro'pped less in the past decade
than any other major currency. The only international asset that can compete
w-ith the dollar is gold, and gold can compete only because of the speculative
possibility of an increase in its price because of a failure of the United States to
put its house in order.
If confidence in the dollar should be severely `shaken, and I do not believe it
has been as yet, my fear is that we might run into a world-wide economic crisis.
There could be a world-wide rush to liquidity which could only lead to a down-
ward spiral of production, employment and trade. The results could be a return
to the controls and restrictions which contributed so much to the stagnation of
the 1930's.
It is my firm belief that we can `avoid these undesirable consequences if we
move to deal decisively with the problems we confront. I believe we need to act
on three broad fronts:
First, we must reduce the federal deficit sharply by a combination of rigorous
restraint on spending and a `tax surcharge;
Second, we must restrict the rise in money and credit to a rate which is in line
w'ith the potential real growth of the economy;
Third, we `must reduce our overseas military expenditures.
These are not easy steps to take. Yet I believe the costs and travail involved
in taking them will prove incomparably less than will our failure to do so.
Prompt and resolute pursuit of these policies can get domestic inflation under
control and pave the way for an end to our balance-of-payments deficit, once there
is an end to the fighting in Vietnam. I do not believe such policies need lead to
an intolerable increase in the unemployment rate. Nor need they lead to any
abatement in the war against poverty-with resolution, there is ample room
to cut back government programs of lesser priority.
In short, of all the alternatives facing the nation, I believe the course I have
just outlined is far and away the best one. Let me try to embellish that con-
clusion by discussing some of the alternatives.
One, which I have considered above and rejected, is to slide further down
the path of direct controls and restrictions. This is, in my judgment, the clear
path to worldwide stagna'tion.
A second alternative which is receiving wide attention is that of increasing
the price of gold. It is argued that such action would bring a quick and easy
solution to our current problems. The speculators would cash in their gold and
re'tire to the wings awaiting another crisis. Confidence in the dollar would
he restored as the nominal value of our gold stock increased. No one would be
upset, the argument runs, since all major nations would follow our lead in
marking up the price of gold.
My personal view is that there are a number of serious drawbacks to any
increase in the price of gold:
(1) It would take a big increase-possibly a doubling of the price as
many have suggested-to convince speculators that the new price would
be held for many years.
(2) A doubling of the price of gold would acid at one stroke a plethora of
liquidity to nations holding large gold reserves, a category which includes
the United States. While in theo'ry central banks could sterilize this liquidity,
I fear that the temptation given sovereign governments to inflate would prove
irresistible. If the United States continued to follow inflationary policies, it
would only be a matter of time before the dollar came under pressure again.
(3) An increase in the price of gold would reward Soviet Russia, South
PAGENO="0086"
420
Africa, the leading gold-producing nations, as well as central banks which
have shifted from dollars to gold, and speculators and boarders. It does
not seem to me to be in the interests of the United States to give such na-
tions or individuals a windfall gain. Moreover, those nations which have
cooperated by holding dollars would be penalized-certainly a most unjust
reward.
(4) There is no way to be completely sure that an increase in the price
of gold would not set off a round of competitive devaluations and beggar-
thy-neighbor trade restriction policies.
It seems to me that an increase in the price of gold is another palliative,
like direct controls. rather than a solution to our basic problems.
A third alternative would be to go off the international gold standard by
suspending our commitment to buy and sell gold at ~35 an ounce. if we do not
display the wisdom and fortitude to deal with our problem of domestic inflation
and curtail our international commitments, we may be forced to contemplate this
alternative.
As I have said earlier, I hope things will not come to such a lJretty pass. it 15
my firm belief that the best course for the nation, both domestieally and in-
ternationally, is to do what is required to set our balance of Payments right.
If we do not pursue the responsible fiscal and monetary l)olicies necessary
to work back to a viable balance-of-payments position. I would argue that we
should choose the third alternative I mentioned-suspending our commitment
to buy and sell gold at ~35 mi ounce. Since it is not in the interest of the United
States to raise the price of gold, and since no one can force us to take such
action, I believe we should, and would, cut loose from gold. Ia that unfortunate
event, we could maintain the present exchange parities with other currencies.
We could use IMU credits, swap arrangements or sales of part of our remaining
gold stock to finance any payments deficits. Other nations would have a power-
ful incentive to keep the dollar from depreciating in terms of their own
currencies.
The main point I am trying to makeis that the United States has alternatives
other than simply raising the price of gold, a move which to me cTo~s not appear
to be in the best interests of the nation or the w-orld. Our best alternative in
my view is to do what is necessary to bring our balance of payments back
into balance, and I believe we can do this with policies which are also needed
to ensure domestic prosperity. Lacking such responsible policies. I would main-
taiii that it would be better to suspend gold purchases and SCICS and maintain
the present parity of the dollar than to raise the price of gold.
Finally, it seems to me to be in the best interests of the United States and
other industrial nations to cooperate in the task of preserving the present
system of international finance and adapting it to the ftture requirements of
supporting world prosperity and progress.
Chairman PROXMIRE. Our last witness this mornine is Professor
Behrman.
STATETRENT OP $~ACK N. BEHEMAN, PROFESSOR OF UTTERNA-
TIONAL BUSINESS, UNIVERSITY OP NORTH CAROLINA
Mr. BEI-nt~iAx. I appreciate this opportunity to give to tile ,Joint
Economic Committee some of my views and partrcu~rly the control
schemes which have been worked out. on capital investment. While I
am interested in the other aspects I will focus on this~ if you will,
Senator.
By way of introduction I see five contradictions which have devel-
oped in U.S. economic policies over the past several years. The first
is that we have been talking about. temporary solutions to problems
which we have not identified the temporary causes of, and I think
this is the point Mr. Machlup was making.
~We have stated that the controls would be temporary, but as I
indicated in 1965 when the voluntary controls caine out. nobody was
PAGENO="0087"
421
identifying those temporary causes that we were going to remove
and how we were to remove them. That still remains the case.
The second contradiction is that we have just gotten through an
e~tensivo and difficult negotiation on the liberalization of trade, a
major element in the balance of payments, aiid have been moving in
the past several years in exactly the opposite direction on other aspects
of the balance of payments through restriction of capital and now
travel.
A third contradiction I see is a shift in the U.S. posture toward the
adjustment process, depending on its own situation vis-a-vis the
rest of the world, and that is the responsibility which we now say the
surplus countries have to correct our deficit. This was a responsibility
which we foisted on them and in fact. continued for the first 20 years
after World Wa.r II: to say that the deficit count.ry had the major
responsibility, and that we would help them out under certam cir-
cumstances if in fact they were pursuing policies which we approved.
In fact, we gave conside.rabl.e aid as von know, Senator, to the
European countries including aid to France during its pursuit of the
war in Vietnam. In other words, we were willing to help though we
were a surplus country, if in fact we approved of the policies of the
other countries.
What some of them have been saying to us in effect is: "We are un-
willing to help you because you are pursuing policies which we do
not approve."
The fourth contradiction I see is that. as the Council report states,
countries whose competitive position ~tnd domestic demand levels are
satisfactory may have deficits due to excessive capital flows. This is a
phrase, "excessive capital flows," which Secretary of the Treasury
Fowler has used in the past. I know no way of determining' what an
excessive capital flow is as compared to an excessive element in any
other of the balance-of-payments items. That is, th.e balance of ay-
ments is a mixture of economic factors which meld together in a
single balance, and I dlo not know precisely how one can be excessive
as compared to another. This is a contradiction in the treatment of
the elements of the balance of payments.
Finally there is a contradliction in what we say we want to dlo andi
what we are doing. As the report of the Council of Economic Advisers
states, the United States must carry out its responsibilities as the major
world bank. It reiterates again that the U.S. dollar i.s the key inter-
national currency, and yet it has been moving repeatedly to weaken
the role of the dollar as Professor Machlup indicatedi with successive
partial devaluations and now controls.
In fact, what we are saying is that the dollar is not strong enough to
bear the burdlens which it must bear if it is to be an international
currency.
May I make one footnote on the controls, and that is that I hope
that the committee has asked for the legal justification for the con-
trols. They were imposed under the 1917 Tradling With the Enemy
Act. Incidentally there should be a correction there. My copy says
1947, it is the 1917 act which permits control of U.S. persons, com-
panies, or subsidiaries involving financial transactions with an enemy
country. I know no particular way, myself, how we can dieclare that
all the banks outside the continental United States are enemy banks,
PAGENO="0088"
422
but I urn sure that the Attorney General has made such determina-
tion which is satisfactory to the ~administrat.ion. I hope the committee
asks for that justification.
Let me turn now to the adjustment process, and how we apparently
are handling it, as compared to the ways in which Professor Machiup
pointed out.. One of the ways of handling a deficit is to employ reserves,
and by employing reserves I mean permitting them to flow out. to meet
the deficit.
This is a role which we have almost denied ~oid. We have stated
that we would use t.he gold t.o meet deficits, but have acted repeatedly
to indicate to the rest of the world that we feel very very badily if we
use gold, if we lose it, and. therefore, have signaled to the rest of the
world that- we ourselves consider that gold is more valuable than the
dollar.
Now, of course, Congress has before it a bill to remove gold from
the dollar, and again in a sense we are contradicting ourselves. We are
saying we really do not need it to hack the domestic currency, but we
do need somehow to hold it-not- to be given up but to be held in order
to strengthen the dollar internationally. Not even the Europeans accept
this particular construct of the relationship between gold and the
dollar; and, in fact, the reason why they have voted for gold and
against the dollar is not because there is any particular relationship
between the two, but because they distrust the United States handling
of the dollar more than they distrust the value of the gold in the world
market.
Let me turn now to some of the specific factors which the Council
mentions as being the- cause of the deficit and, therefore, subject to some
kind of correction. They indicate some special factors, the $500 million
loss for Expo 67; they mention the cost of the Middle East crisis. They
do not, so far as I could find anywhere in the report, mention the copper
strike and its effect of $300 million to $500 million cost. of additional
imports on an annual basis. It has not run to that yet. It has not been
a full year but on an annual basis it wouldi run between $300 million
audi $500 million of imports of copper.
They dlo go on to blame, however. direct investments, asserting that
there ha-s been a diisa.ppointing performance on the part of the return
of earnings, in 1966-67, particularly; but so far as I couldi read in the
report, they do not mention that- the return of earnings was affected
by the voluntary constraint program. In fact, the earnings themselves
a-re diictated more- by foreign factors than by anything the companies
ca-n do.
Additionally, they indicate that there are- cyclical forces which
contributed to an md~cated total drop in U.S. direct investment out-
flow during 1967 of about $500 million. I have been studying dilrect
investmen~s non- for about 15 years, and I know of no evidence which
indicates that there is a cyclically affected flow of direct investment
from the United States to the rest of the world.
On the contrary. our experience is too short. We have onl about 15
ears of experience in outflows, audi this is not enough to tell us about
the eve-heal effects on direct investment. and we certainly know noth-
ing about the shifts from one country of destination to another accord-
ing to economic cycles, and we know very little about- the cyclical effects
of the U.S. economy itself on an outflow of direct investment. So, I
wouldi like- to throw some doubt. on that- proposition.
PAGENO="0089"
403
Turning now to the controls, the Council's report states that the new
mandatory controls are necessary for the purpose of injecting equity
into a control scheme; that is, voluntary controls were not equitable,
but mandatory controls will be equitable.
But the mandatoi~y controls are themselves based on 2 years of
experience under voluntary controls-1966 through 1967-and, there-
fore, compound the very inequities which are supposed to be avoided.
I~fany companies tried to do their best to meet those control levels. In
fact, they operated ill such a way that there was a zero-net outflow
of funds for some, who contributed to the U.S. balance of payments
through a reduction of capital abroad; that is, they actually decapi-
talize~d in some cases. They, therefore, are left under the mandatory
control system with a zero base, and even if you are permitted to
export capital equal to 65 percent of your base, that is still zero from
any companies.
In addition, there are some companies who were standing in the
wings in 1964-65 planning investment who were literally cut out
through the voluntary controls, because they had no base, and are still
in a position of having no base. Although exceptions are permitted,
these exceptions have to be given authorization by the Department of
Commerce, and as you know, Mr. Chairman, if exceptions have to be
granted, you begin immediately to remove equity. Therefore, I see no
particular way in which the controls will operate to gain the one major
thing which they say mandatory controls will gain over voluntary
controls.
As to the effect of the controls themselves, I have worked out a table
which I will not go through in this presentation, but will only indicate
that the best that we can tell, an outflow of dollars in a normal pat-
tern, a normal aggregate pattern of investment, will be paid back in
the balance of payments within about 2½ years. Now this is an aggre-
gate experience taken from the data of the Department of Commerce,
and is not a specific investment project. But, if that is true, I think
we are already now in 168 bearing the burden of 1965 restrictions
in a loss of exchange, to meet our balance-of-payments deficit.
Each year, of course, as the controls proceed, we are continuing to
lose the payback from past investments which were not permitted.
Now then, the average, as I quite well admit it, is made up of a variety
of specific projects, and, therefore, of varying financial outflows and
inflows. I have tried to detail in the table a few examples and as many
of the complex factors as one could get an even estimated grasp of.
They show that even a direct acquisition might well be repaid in 2½
years, and any expansion of investment after that 2½ years might very
well give rise to an immediate payback.
For example, General Motors has reported that over the past 20
years no dollars have flowed out to support its investments abroad. If
that is in fact the case, all of the returns, which normally run about
60 to 65 percent of earnings have been on top of a zero base of outflow;
that is, they are a net contribution to the balance of payments.
This is largely the case for an expansion of existing investments,
which occurs largely without any outflow dollars. Theref ore, in order
for us to get the largest paybacks, what we need is to expand existing
investment. That, however, means that there must have first been a
base somewhere, and, therefore, we are now beginning to pay addition-
PAGENO="0090"
424
ally for the fact that we have discouraged investment literally since
1962. not since 1965. but since 1962. with the Revenue Act of 1962.
which displayed, at least. an aura of disapproval by the Government
of foreign investment not only for balance_of_payments reasons, but,
because of tax reasons. tax inequities and so on.
We are, therefore, I think, now beginningS to pay fairly seriously for
our follies in the way in which we looked at foreign investment out-
flows.
There is another aspect which I wish to close on, and tha:t is that our
handling of the investment controls, including the. portfolio on direct
investment, particularly now-, indicates to European and other coun-
tries that. we are willing to slap them very hard for the purpose of
showing them that they are in fact dependent on the United States.
It is, in my view, almost a spite action, an action which says to them,
"If you do not really understand how important we are, we will show
you by pulling the props out from under you." That, to me, is an irre-
sponsible action for a countr as strong as we are.
Not only that, but that and the various devaluations we have gone
through, the control schemes, feed even more the growing desire in
the United States for a type of economic isolation, for a type of
wlt.hdrawal from economic responsibilities which I see growing in
magnitude. and which I regret greatly, since they may turn us back
toward the thirties.
That. is all. Mr. Chairman. Thank you ver much.
(The prepared statement of Professor Behrman follow-s:)
PREPARED STATE~IENT OF J. N. BEHRMAX
U.S. DIRECT INVESTMENT RESTRAINTS, 1965-68
196T was a year of contradictions for U.S. international financial policy, and
early 1968 has seen an intensification of the basic conflict between the principles
of a free society and controls which are appropriate only with a wartime economy.
These controls have not been justified as necessitated by war financing but as
required by the economic forces. The Government has, moreover, insisted that the
controls are temporary, without indicating the temporary causes which may later
be altered or offset. Without an identification of the temporary factors justifying
departure from free economic institutions, it is difficult to assess the ability to
generate measures to terminate the controls.
A further contradiction arose in the successful negotiation of the Kennedy
Round, liberalizing trade, while controls were imposed on capital flows. There is
rio clear justification for interference in these aspects of international payments
rather than or exclusive of interference in the area of trade. One fears that the
only justifications for differential policies on trade and investment is that of
administrative nicety-that is, it is easier to turn on and off controls over capital
than controls over goods.
These comments are directed at the present control policies which are carrying
the U.S. not towards but away from those "broad economic objectives that all
nations hold-such as high employment, sustained worldwide economic growth,
a high degree of freedom of international trade and capital movements, and
an adequate flow of capital to the less developed nations." (Boon. Report, p. 165.)
The Econoniic Report asserts that "there was no choice but to move, in part, in
ways that are restrictive and thus not fully compatible with the long-run aims of
expansion and efficiency in the world economy." (p. 166.) This is the washing of
hands by the deficit country in the face of an asserted lack of responsibility
on the part of the surplus countries. The Report cites the OECD Report on the
Adjustment Process which calls on the surplus countries to assume a special
responsibility to maintain their pace of economic growth. But the OECD does not
impose upon the surplus countries the responsibility for deficits in international
PAGENO="0091"
425
payments. Such a concept of causation is too simple and one which the U.S.
Government has refused to accept since 1945, throughout the Marshall Plan, and
during its aid to developing countries.
While the U.S. accepted the burden of relieving the pressures of reconstruc-
tion, recovery, and more rapid growth from many countries over the world, it
not once agreed that the pressures were generated in part by its own economic
policies-even though at times U.S. growth rates were low and nearly stagnant.
For it now to claim that others should assume some responsibility for U.S. deficits
is a tactical switch and highly unrealistic politically. No government is yet
ready to assume responsibility for what is happening in another economy or to
the others international payments. The causes are too complex and the remedies
difficult to accept when they involve "donations" to another country. While they
may agree not to fight to maintain their surpluses, even this agreement will be
contingent on the circumstances, But the U.S. Government has been asking for
more-a sharing of its burden, though there are no principles of burden shar-
ing yet accepted.
The reason why the U.S. Government assumed the earlier responsibility of
assistance to relieve others' deficits was that it approved of the objectives of
those countries-including the French pursuit of the Viet-Nam war in the 1950's.
Had it disapproved-as it sometimes did with the developing countries-it would
have (and did) withhold aid. Other countries are saying the same thing to the
U.S. now: "while payments are obviously two-way, we do not approve of the
purposes of your expenditures."
Consequently, we have selected an element of payments to control-capital
flows-which Europe has at times complained about and concerning which there
is some question within the U.S. as to its usefulness. The rationale is that even
"countries whose competitive position and domestic demand levels are satisfac-
tory may have deficits due to excessive capital outflows." But where are the
criteria of "excessive"? What capital flows are referred to ?-short-term? flight
capital? portfolio? direct investment? No distinction is made in the argument,
and all are tarred with the same brush. I know of no reasoning that shows how
capital movements may be "excessive" while outflows of funds on other accounts
in the international balance are all "reasonable," and no effort is made in the
report to explain the culpability of capital for the deficit.
But having asserted that capital movements are an appropriate subject of
restriction, especially when other countries do not behave properly, the Report
turns to the record of U.S. international payments and the impact of the deficit.
In brief, the policies to treat the deficit are aimed at making the dollar sound
nnd returning it to that position of strength which will permit "the United States
to carry out its responsibilities as the major world bank . . ." This role, however,
is undercut by the necessity felt by the policymakers to achieve balance. They are
going to demonstrate that "The dollar is a world currency" by prohibiting it from
performing the functions of such a currency. At the same time, the Government
proposes creation of SDR's which will supplement the role of the dollar, interna-
tionally. There is an underlying current that somehow the U.S. dollar can both
be an international key currency and yet not have to bear the burden of being
one-even permitting the authorities to place controls over its use, at times, de-
spite the fact that such action denies it an effective role as a key currency. Thus
we come into a strange world of controls for the purpose of strength-a tactic
we strongly opposed on the part of others-and of a "world bank" which seeks
to give up that role.
ADJUSTMENT PROCESS
Among adjustments to a deficit examined by the Council, little attention is
given to the use of reserves. (Its discussion of removing the gold cover is in a
later section of the Report.) There is even an implication that reserves should
not be used in the statement that "every nation-particularly the one that serves
as the world's bank-needs an adequate margin of liquidity" (p. 167). Further,
the U.S. Government has tried for 8 years to prevent others from asking for gold
w-hile saying that the entire gold stock is there to back the dollar.
el must raise a question concerning the legal basis of the present restrictions. They are
imposed under the 1917 Trading With the Enemy Act, which grants power to control finan-
cial acts of US. persons, companies or subsidiaries involving "enemy" banks. I suggest that
it is a strain of the word to declare all banks outside the continental u.S. as in enemy hands.
~nd I hon*~ that the Congress has asked the Attorney General for a copy of his opinion on
tIllS matter which lie undoubtedly provided the President.
PAGENO="0092"
426
Historic'ally, the role of reserves performed the fu~etion of providing an alter-
native to currency (mCI goods. If the former was uncertaii~ of value (lack of coii-
fidence) and goods were not desired. gold provided the alternative. Gold, then,
was an acceptable import or exiort when goods were not and when some cur-
rencies were weak. Countries with weak currencies needed to hold gold for con-
tingencies. Contrarily, as long as the British poui~d w-as considered sound. tile
level of reserves needed by England was quite small. And. if the B.S. dollar were
`as good as gold" there would be little demand for gold save from private board-
ers. So long as the dollar is sound and more desired than any other competing
currency, the gold reserves needed by the U.S. are practically nil-witness the
decade 1945 to 1955 when gold reserves were little called for. When tile dollar is
weak and there is lack of confidence, large reserves are needed-more than tile
U.S. can command without drastic shifts in economic policies which would be
detrimental to all. Thus, the crux of the matter lies in the policies directed at
maintaining the strength of the dollar, which cannot include controls, for they
automatically attest to its weakness.
The pressure of the U. S. deficit, therefore, is intimately related to the domes-
tic strength of the dollar, which is recognized by the Council in its stress on tile
necessity for firmer fiscal and monetary policies and its statement that the easing
of monetary conditions in 1967 widened the deficit. If adequate domestic measures
had been taken in 1966 and 1967, if the export drive had been expanded in 1965.
rather than relaxed, and rather tilan w-aiting until 1968 to re-emphasize it; and
if the gold reserves had been let go freely, rather than attempting to hoard them,
tile situation would be much improved today. Rather than make certain to main-
tain stability of the dollar and use the gold, we cried the weakness of the dollar
u-hen in fact it was strong. The U.S. Government has acted for 8 years as though
the dollar would be weakened by a loss of gold, as though the gold were more
precious than the dollar. and as though holding gold would somehow strengthen
the dollar. It has been obvious to the rest of the world that these supposi-
tions are not correct. The projected untying of tile dollar from gold domestically
is our own recognition of the fact that gold does not give strength to the dollar.
Rather, the rest of the world voted for gold against the dollar, when it did, on
the ground that the U.S. did not know how to mnamiage its own economy so as
to maintain the value of the dollar.
The Council attests to this point itself in noting that the worsened deficit in
1966 u-as a result of the foreign exchange costs of the Viet-Narn u-ar, and `time
strains placed on our domestic economy." (p. 109) These strains were exem-
plified in the increased import demand in 1966 and particularly in the last of
1967. It is interesting to note that among the "special factors" explaining tile
deficit are a $500 million loss because of Expo 67 and costs of the Mid-East
crisis, but no mention is made of the S300-$500 million (annual) loss from tile
copper strike, which occurs from greatly expanded imports. But the Councii does
blame direct investment for an increase in the deficit on the grounds of only a
slight increase in income from investment ill 1966 and an inadequate return in
1967: "This disappointing performance reflected an actual decline in income
from investments in Western Europe during the last two years, despite the fur-
ther substantial buildup of assets there." (p. 170)
There is in the above statement a lack of recognition of the fact that voluntary
controls existed on direct investment in 1965-67 and that companies retained earn-
ings abroad in order to expand production rather than send dollars for new
investments. This action built up assets but the return of earnings was determined
first by factors abroad. which were not favorable, and is not the whole story on
the payments accounts of direct investment. The avoidance of emphasis on the
voluntary controls is evident also in the statement that direct investment out-
flows dropped in 1967 because of cyclical forces: "Along with other influences
[not named], the cyclical forces contributed to an indicated total drop in U.S.
direct investment outflow during 1967 of about $500 million." (p. 170). We
have not had enough experience with large direct foreign investment outflows
since World War II to know whether they are cyclically affected and whether.
if so, they are affected more by the parent country cycle or that of the host
country-and whether they shift among countries of destination according to tlme
pattern of econonlic growth cycles. The ertdenee of the past decade provides little
evidence of cyclical behavior, and to claim such a correlation at a time u-bell
companies were responding strongly to constraints by the Government w-hich
forced a reduction in outflow is certainly to focus om~ the w-rong factors.
PAGENO="0093"
427
Controls
This voluntary program is now substituted by a mandatory one, despite ad-
mitted "excellent business cooperation" with the former. Besides the stated
necessity to curtail outflows, a justification for the new controls is "to insure
equality of burdens among all direct investors." Such an objective Is hardly
accomplishable. Not only have inequities already been built in, but the history
of foreign investment precludes equal treatment now. Inequities have been built
in by assuming a given base period as appropriate-one under which voluntary
controls existed. But, some companies tried to do more than their share and even
paid out dividends greater than earnings, taking funds from surplus, and mak-
ing no new investment. Their base is thereby restricted to zero and 65% of zero
is still zero. A company which delayed investment, as requested, in 1965-67, also
reduced its base; only those that invested to the liumit are not discriminated
against.
Companies that were projecting their first foreign investment abroad have no
base at all, while companies having invested over 20 or more years have long
since stopped sending dollars overseas and need no base; having established a
policy of returning 60 to 65% of earnings anyway and borrowing locally as
needed, the 35% limitation on the "moratorium" countries is no constraint. Nor
can the medium and smalbsize businesses borrow readily abroad to make their
investment. Thus, there is discrimination based on who was abroad first and how
long. And exceptions granted by Commerce merely intensify the possibility of
inequities, for administrative judgments are seldom equal nor circumstances
similar.
The effect of controls whether under the voluntary or mandatory system is
always discriminatory; it is impossible to determine whether situations are
equal or to treat the new--entrant equitably. Further, what is equitable among
companies may not be the best policy for the economy, if it must reduce outflow
and increase inflow. Such an objective would argue for a careful selection of
projects to be approved which would require the least outflow and provide the
largest and most prompt retura to the U.S. of funds. The discrimination which
will result from present procedures will produce a warping of the foreign invest-
ment flows and future returns which will certainly be different from that without
controls, but with what precise damage we cannot now tell.
Both government and business officials have said since 1965 that the controls
should not be continued for long and that the damage to company operations and
the U.S. balance of payments would be large if restraints remained. We cannot
know precisely the impact of the past constraints on the present payments posi-
tion, but the longer they remain the better we can estimate for the impacts to
begin to fit the average pattern of investment flows and returns. Thus, we may use
the aggregate statistics to show the effect of continued controls over foreign
investment.
As recognized in the Council report, capital outflows account for between 30
and 35% of capital outlays abroad, 20% comes from re-invested earnings, long-
term borrowing abroad about 8%, with short-term borrowing and depreciation
alioivs-ances constituting the remainder. Thus, on the average and including ex-
pansions of existing plant and new enterprises, expenditures for plant and equip-
ment abroad of $1 million require no more than $350,000 of outflow. This outflow
is immediately reduced by sales of capital equipment and I)ateflts owned by the
parent, as well as technical assistance, to the affiliate. These will amount on the
average t:o $50,000 each-often higher for countries outside of Europe. Thus, the
net outflow will be on the order of $250,000. Exports may have been stimulated by
realization in the market that a local supply would soon be available, but some
exports may also be substituted by foreign production. Apart from these shifts,
the affiliate will soon return income from earnings and sometimes management
and R&D fees.
The accompanying table illustrates data from different investment situations.
The first, relying on the aggregate data on manufacturing investment abroad,
demonstrates that the payback period for outflows of U.S. dollars is about 2~/~
years-on the average. But this average is made up of different projects-some
returning funds immediately to the U.S. and without any outflow and others
draining dollars for several years before they are offset by earnings and exports
through the affiliate. The extreme unfavorable situation is that of a company
mnaking a mis-calculation as to whether its exports would decline and investing
abroad when it did not have to in order to maintain its market. It is unlikely
that it would ever repay the lost exports.
PAGENO="0094"
EXAMPLES OF PAYBACK FROM U.S. DIRECT PRIVATE FOREIGN INVESTMENT
Aggregate
Item ---
0 1
data (period)
Acquisition a
ad expan
sloe (period)
New facility
--
6 0 1
and lo
as of e
xports 1
(period)
------- -- --------
2 3 0 1 2
---~
3
------------
4 5
2
3
4
5 6
(I) Capital expenditure of which $10y $100 $50. 0 $100. 0
(2) Local borrowing or depreciation 45 65 40. 0 30. 0 $30. 0
(3) Retained earnings 20 $3. S $3. 5 $3. 5 10. 0 $7. 5 $7. 5
(4) Dollar outflow of which -35 -35 -20. 0 -20. 0
(5) Eciuipmoist 5 5 2.5 2.5 2.5
(6) Patents, technical assistance, and man-
agenient 5 5 5. 0
(7)Netoutflow(-) -25 -25 -17.5 -12.5
(8) Income (3 percent of book value)5 $4.5 $4.5 $4.5 3.0 3.0 3.0 4.0 5.0 5.0 $3 $3 $3 $3 $3 ~
(11) Enporfs: direct 10. 0 10. 0 -20 -20 -20
(10) Exports to affiliate:
Products 4.0 4.0 4.O...._... 40 4.11 5.0 6.0 6.0 6.0 5 5 10 10 11)
(11) Components 2.1) 2.0 2.0 _.. 2.0 2.0 2.0 3.0 3.0 3.0 5 5 5 5 5
(12) Exports: Others 2.0 2.0 2.0 1.0 1.0 1(1 1.0 1.0 1.0 2 2 2 2 2
(13)Imports -2.0 -2.0 -2.0 -2 -2 -2 -2
(14) Not eflect in year -25 10.5 10.5 10.5 -25 10.0 10.0 11.0 14.0 15.0 15.0 -7.5 -2.5 -5 -7 -2 18 18
(15) Cumulative l)aYhacls (-) drain -25 -14.5 -3.0 7.5 --25 -15 -5.0 1.0 20.0 35.0 50.0 -7.5 -10.0 -15 -42 -24 -6 21
1 Assumes that esports of $50 wnuld have cnsiinued it thero had heeii so iiivesi~seni; in years 1 :: Ass'jiiios a marginal income propossity to impart lay ths linst country 011/10 and a U.S. share of
and 2, exlssrts rixo in anticipation of local supply. 20 percent--or, 2 Isarceat of marqin il insnnie; in the acquisitba case, it is assuisiad that former sales
Book value equals U.S. dollar outflow plus retained earnings. In the "new facEity" example, are doulslad, ss that oaly half of sales are new income.
there are no earnings to retain for invealment to begin with.
PAGENO="0095"
429
But, this last result is highly unlikely because U.S. businesses are basically
reluctant toinvest abroad unless they are losing the market or stand in grave
threat thereof; or, unless a company has not entered the market as yet and
fears never to be able to enter through exports. In such cases, the substitution
of local production for exports merely holds a market and gains some return
when export earnings would have fallen to zero or never arisen. We can feel
fairly certain that exports are not completely substituted by foreign investment
by the fact that exports in the areas of high investment activity have not de-
clined. They have not risen as fast as foreign production, but some categories
have risen faster than the average of all industrial export. In the main, it is
the technically~ advanced sectors which supilly both exports and investment.
Thus, in the aggregate, what is occurring is either an expansion of market
opportunities by investment, raising the level of former exports through the es-
tablishment of selling affiliates or manufacturing and selling units, or widening
the types of goods sold by the company as a result of extensive promotion
of the company name and line. One cannot know from existing data whether the
situation could have been more favorable with less investment and more ex-
port promotion. But, given the freedom of companies to decide which is the
more profitable route, it seems highly unlikely that they would take the invest-
ment route if the export channel were effectively open on an intermediate or
long-term basis.
As noted above, these conclusions from the aggregate data-and we shall
have much better data from the current census on foreign investment-can
be contradicted on either the optimistic or pessimistic side by reference to
specific cases. The other cases in the accompanying table show that the pay-
back period for an acquisition might well be 2% years also but that of an
expansion (which involves frequently no U.S. funds at all) provides a payback
immediately. And, of course, a prior investment is necessary to reap the gains
of an expansion of outlays on facilities.
The case in which exports were significant but expected to decline provides
more Complexities but still can be estimated to pay back the outlays as well as
the loss of exports within a period of 41/2 years from start-up of operations and
5% years from the first outflow of capital, assuming a 2-year construction period.
The conclusion rests heavily on several assumed relationships, and any alter-
ation of these can produce quite different results. It is necessary to keep one's
estimates relevant to business practice and expectations, however, if policies are
to be made on the expectations of gaining returns for the payments deficit.
Restraint of investment in the case concerning a loss of exports provides a
significant gain for the payments deficit over 3 or 5 years. But, prevention of the
others will damage U.S. payments within 3 years. And, if one may assume that
exports are often generated by expectations of the market of a continuous
supply, the payback may have actually been achieved before start-up of foreign
production-even if earnings are not gained for some years.
Another aspect w'hich is quite hypothetical but significant is that concerning
the indirect impacts of economic growth resulting from foreign investment on
export and import patterns and volumes and on interest rates and thereby
again on growth rates and trade and investment flow-s. The outflow- of capital
from the U.S. will tend to slow down its own growth through a reduction in
capital supply (and demand for capital goods), raising the interest rate; this
in turn reduces Import demand and improves the balance of payments. The
converse occurs abroad; in addition, the differentials in interest rates tends to
draw short-term capital to the U.S. and out of Europe and other countries-
unless offset by monetary policy. These secondary and tertiary impacts are
not quantifiable but must be considered in determining the effects of capital
restraints.
Given the adimissiOn that some countries, need the inflow of U.S. capital and
the fact that even European countries have come to depend in part on repeated
infusions, despite the heavy local borrowing by foreign enterprises, there is
something of a "spite action" in the capital controls. It is almost as though the
U.S. were saying-"We'll show you how dependent you are on us and then you'll
recognize how much you need to hold dollars, even if you don't want to." This
is hardly the way for the most powerful country in the world to behave: it is
petty rather than responsible. It demonstrates an eagerness to toss off the burdens
of leadership, which is precisely one of the causes for lack of confidence on the
dollar, for that leadership requires monetary and fiscal rectitude on our part as
well as maintenance of a strong economy.
PAGENO="0096"
430
Some economists argue, however, that the U.S. must look to its domestic
problems first, maintaining full employment even by inflation. Yet this prescrip-
tion will tend to remove the dollar from its role as the international currency,
for continued U.S. inflation relative to others will bring strong pressure to
devaluation. But the key currency-if the dollar so remains-cannot be the
subject of devaluation; others will merely follow, and the consequent disruption
from such an attempt would be a firm signal that the U.S. has abandoned its
role of world leadership in economic affairs. Not only will it have abandoned that
role, it will have done so through the route of controls and the abolition of trade
and capital movements, pushing the world back to the 1930's.
Chairman PROXMIRE. Thank you, Mr. Behrman. Thank you, gentle-
men, for your most stimulating presentations.
Mr. Behrman, I would like to start with you. Your analysis mdi-
c.atecl that a. $1 million investment abroad may, on the average, require
a capital outflow of only about $250,000, as I recall it.
Mr. BEni~rAN. That is correct, on an aggregate basis; yes.
Chairman PROXMIRE. And you conclude that the payback period
of U.S. investment abroad is about 2½ years in an average or normal
situation?
Mr. BEmOTAN. Yes, sir.
Chairman PROXMIRE. If this is true, it is obvious that. some invest-
ments must pa.y back in 12 months or 18 months or you have some
examples of very, very big and important areas where you have no out-
flow at all in the payback?
Mr. BEURMAN. Yes, sir.
Chairman PRox~rIRE. In view of this would it be possible to aclmin-
ister a program tha.t follows up on your interesting suggestion on
page 8 when you say, "A careful selection of projects be approved
which would require the least outflow and provide the largest and
most prompt return to the United States of funds."
In other words, would it be possible to say that you would make
investments that would pay hack in 18 months or 24 months or maybe
even 12 months? Is this a. feasible alternative or not?
Mr. BEHP3IAN. No, sir; I would not think so, for this reason: The
decision of a company to pursue an investment project takes about 2
years in gestation. I am talking about a new project, an acquisition
or an establishment of a new project, not an expansion of an existing
one.
If the company had any idea at the end of a year and a half or 2
years with the cost of investigation being several hundred thousand
~iollars. tha.t the Government~would say'~"No~" the initiative on the
part of the board or any other official is going t~ be seriously damaged.
Chairman PRox~nRE. Are you saying that you simply cannot deter-
mine in advance?
Mr. BEITRMAN. You cannot determine quickly in advance.
Chairman PRox~nRE. You cannot deterlnine what?
Mr. BEHRMAN. Quickly in advance, what the payback will he. In
fact, some of the pa.yback which I have indjcatcd-t.hat is, an expan-
sion of exports before construction-comes only after an announce-
ment of the fact tha.t the investment will take place. You cannot be
sure of that., that the demand for imports in the foreign country will
go up until the announcement is macle.You can guess it, but you could
not nreve it. to the Department of Commerce.
Chairman PROXMIIiE. Then I take it that. in view of your very con-
vincing argument-you have had an enormous amount of experience
PAGENO="0097"
431
in this since you have been studying it for 15 years, and I doubt if
any competent expert or economist has macic the kind of exhaustive
studies you have-would you conclude that it would be wise not to
approve the President's proposal. I do not know if we can do anything
about it except, as you say, examine the legal authority, because the
PresidentS does not come to Congress asking to restrict investment. As
I understand it, he is acting under a law passed many years ago.
Mr. BERIIMAN. In 1917.
Chairman PiioxMInE. At any rate, as far as your position is con-
cerned, do you think it is an unwise policy on the part of the President
to impose this restraint? If this is true, would you go further and re-
peal the interest equalization tax and would you go further and
repeal the Commerce Department's so-called voluntary program, and
would you also repeal or rather reverse the Federal Reserve BOard's
restraint on banking institutions as to lending abroad?
Mr. BEHRMAN. Senator, if we were in 1965 I would have said--
as I said at the time, or in 1962 or 1963, when the interest equalization
tax went on-we should have done none of those things at that time.
Representative RUMSFELD. Would you repeat that? I am having
trouble hearing you.
Mr. BETIRMAN. I am sorry. I say if we were in 1965 when the volun-
tary controls went on or if we were now in the period when the inter-
est equalization tax was imposed-was it 1963, Fritz? I have for-
gotten-I did say then that we should not have done any of those
things. On the contrary, what we should have done, having a strong
dollar as we did at that time and a strong economy with an inflation
rate much lower than anyone in Europe, instead of crying the weak-
ness of the dollar, which we did officially all over the world, have
declared the strength of the dollar and used our gold reserves to
meet the deflcit, and continue to maintain the dollar strength, we
would not be in the position we are in now.
Chairman PROXMIRE. What would you do now?
Mr. BEHRMAN. Now? All right. Now you can save by constraints,
as we are now doing on controls, an amount of money from a capital
outflow, let us say $1 l)ilhion or whatever else, which is what they
are after, you can save $2 billion, 1 year at a time. To me this will
not solve any of the problems which Fritz Machlup laid out very
nicely. What we are saying is that somehow $2 billion can do some-
thing to solve fundamental problems of confidence. I do not think it
can.
On the. contrary, we are building up problems for the next few
years which, in my view, are equally or more serious, because we will
not get back the plus flow we would normally get back in 1970-1971,
and additionally we are telling the rest of the world that we are some-
how not strong enough to maintain our responsibilities. My answer,
Senator, is "Yes ~" I would ask that these not be continued.
Chairman PRox~rIirE. Not be continued?
Mr. BEHRMAN. Not be continued.
Chairman Pnox~IniE. All right. You say you could not quantify it,
but could you give us any bail park estimate on. your very interesting
observation that the outflow of TJ.S. capital tends to SlOW down our
economy and speed up the economies abioad., and, therefore, seems to
have sometI~ing of a counterbalancing effect on our balance of pay-
SO-191-GS--pt. 2-T
PAGENO="0098"
432
ments. This would be most helpful if you. or any of the other gentle-
men here, could give us some notion of those dimensions.
You have already made a very strong case. There is a payback of
21/2 years in our investment abroad. If you can also make a case that
this is somewhat equalizing.
Mr. BEIIRMAN. I am not sure that Fritz had the paper earlier. Let
me just brief a point. Fritz, you probably have been working on it
much more than I, but what we are getting into now are the secondary
and tertiary effects of capital flows among nations. This has not been
thoroughly studied, I think, even on the theoretical basis.
Chairman PROXMniE. Doesn't it assume a rigid monetary policy?
Mr. BEHRMAN. Yes; it assumes a given monetary policy.
Chairman PROXMIRE. `Which is not realistic?
Mr. BEHRMAN. Which is not realistic.
Chairman PROXMIRE. In other words, it can be offset?
Mr. BEHRMAN. Yes, sir; it can be offset on either side.
Chairman PROXM~E. Yes.
Mr. BEHRMAN. But as long as the United States is not itself inflat-
ing, a capital outflow is advantageous to tile United States, initially.
Now, what happens with it in the various flows and in the various.
offsets, as you say, becomes quite complex, and that is why I cannot get
into the ball park, because it does yield to varying monetary policies
in various places, various countries and there is also a possible flow of
funds among foreign countries.
Chairman PROXMIRE. I wa.nt to ask Mr. Ma.chlup about this, in just
a minute, but I would like to ask you one more point in connection
with this, and that is, what you are telling us is that on the assump-
tion that the so-called temporary factors will last more than a couple
of yea.rs, then the action taken is unwise. It is only on the assumption
that the tempora.ry factors might evaporate within a year or so that
you can justify the kind of temporary action that is being taken; is
that correct?
Mr. BEHRMAN. Yes, sir. That was the a.dirnmstration position, itself,
in 1965, but what I asked then and what I ask now, Senator, is, `What
are the temporary factors?
Chairman PROXMIRE. You list the copper strike. North Vietnam is
another one-perhaps temporary we hope-and there are others. I
would like to ask Professor Machlup to comment.
Mr. MACHLtT. I would invite you to turn to table 1 of my prepared
ent (p. 415). In the fourth column you find the balance. of goods
audi services excluding military expenditures. I show military expend-
itures separately in the next column, as one of the financial transfers.
I have arra.nged all financial transfers to foreign countries nuder
four headings: Military expenditures abroad, remittances and pen-
sions, U.S. Government grants and capital (net), and private U.S.
capital (net). If you add up these four items, you get the total which
I show in the next column and which I call total of financial transfers
to foreign countries. Now, we can compare this total with the fourth
column previously mentioned; namely, tile balance on goods audi serv-
ices excluding military expendlitures. This balance may be called real
transfer to foreign countries. I invite you, now, to compare the lows
and the highs. . .
In 1953, tile total of our financial transfers was $5.6 billion.
PAGENO="0099"
433
Chairman PROXMIRE. What year is that again?
Mr. MACHLUP. 1953. The total of the financial transfers in 1953.
Chairman PRox~Inu~. Yes.
Mr. MACHLUP. $5.6 billion. Our financial transfers then increased,
and the high was in 1964, of $13.9 billion. Now, if you look at the real
transfers, the net transfers of goods and services, shown in the fourth
column, you find that these were $3 billion in 1953, but $11.4 billion
in 1964.
This indicates to me that the financial transfers created, so to speak,
the real transfers. There was, to some extent, an adjustment taking
place, a self-adjustment.
Most of the financial transfers were independent of the state of the
balance of payments. Military expenditures were surely not increased
because of an improved balance of goods and services; likewise, capi-
tal movements, governmental or private, were not induced by the
trade balance. They were autonomous transactions. But these finan-
cial transfers, through economic forces, created their own offset, the
improvement in the balance of goods and services. Unfortunately,
these improvements were never big enough. They always left us with
a transfer gap. The third column from the right shows you the
transfer gap.
I want you to note, the transfer gap in 1953 was $2.6 billion, and
in 1964, despite the enormous increase in financial transfers, the trans-
fer gap was still only $2.5 billion. This indicates, at least to me, that
the rise in financial transfers brings with it. a rise in real transfers,
and likewise, and-this is the point that Mr. Behrman has been mak-
ing-a reduction in financial transfers is likely to bring with it a
reduction in real transfers. So, if we transfer less to foreign countries
in the form of dollars, they will also buy less from us and we will buy
more from them.
Representative BOGGS. May I ask you a question about those figures?
Mr. MACHLnP. Yes.
Representative BOGGS. I notice you do not have 1967.
Mr. MACHLUP. That is right. They are not yet available in full
detail.
Representative BOGGS. Obviously, one of the big items in your whole
table are military expenditures abroad. How much increase was there
in 1967 over 1966?
Mr. MAcm~Jp. I called Walter Lederer this week, and he could not
yet give me the final figure. There was an increase.
Representative BOGGS. I-low much?
Mr. MAOHLup. I could not tell. I think the increase was less than
$1 billion.
Representative BOGGS. That is probably what is wrong with your
figures. They do not reflect the increase in Vietnam, which is certainly
a most significant element.
Mr. MACHLUP. These figures come from the Department of Com-
merce, and 1967 is not yet included. The Economic Report has a figure
which is only for the first three quarters of 1967. Taking the first
three quarters at an annual rate, you see an increase of between $500
and $600 million for 1967 over 1966. It was from $3.7 to $4.2 billion,
hence, a little over $500 million. There may have been a further increase
in the fourth quarter.
PAGENO="0100"
434
Chairman PJ~ox~iInE. Mv time is up.
Congressman Rumsfelch you are next. WTe will come back to Con-
gressman B oggs.
Representative ItUMSFELD. Let me clarify one thing, Mr. Machiup.
In your statement, page. 2T. where you discuss these five approaches
to solve the problem.
Mr. MACHLrTP. 1es.
Representative RrMSFELD. I take it from the remark you made ear-
lier in your statement, it couJcl almost be said that liquidity and adjust-
ment are to be considered together?
Mr. MACHLvP. The problems, you mean?
Representative Rv~ISFELD. Yes, the problems.
Mr. MACIILUP. The three problems. Unfortunately they were not
considered together in official negotiations. They should have been con-
sidere.d togeti~er.
llepres~htative RvMSFELD. This is your posit.~on with respect to your
recommendations?
Mr. MACHLUP. At. this stage. we must. take it for granted that. we
have not dealt with the adjustment problem and the confidence prob-
lem, and hence, we must now ask what we can do. On page 27, I have
listed the five approaches to solve the confidence problem. The con-
fidence problem means the danger of massive changes from dollars
into gold that threaten to wipe out a large amount of world monetary
reserve.
Representative RF~ISFELD. First, let. me say, I thought a.ll the state-
meiits were excellent, and I appreciate the time you gentlemen have
taken. In each case your statements have been properly on a. broader
subject than the one I am going to raise, but I would like to have
each of you comment on the proposal for removal of the gold cover,
and with specific reference to what the possible results might be in the
event, it is done or it is not done, once it comes before the Congress.
What. I am asking is, do you see any particular impact in the event
that Congress considers it and decides against it?
Mr. MACHLIP. If you want me to start the ba.ll rolling, I think
the removal of the. gold cover for the Federal Reserve notes is an
absolute necessity, if we are all looking at the problem intelligently.
I'Ve shouidl have dione it years ago. It is a complete anachronism to
hold gold behiiicl banknotes. It is something which people in the 19th
century insisted upon. For that period it was a. proper requirement.
In the 20th century, or at the present time, for anyone to insist on a
gold cover for banknotes is ridiculous. WTe should send him back to
school. it.. is absolutely silly, this whole thing, and I do pray you, sir,
that von convince your colleagues that they should not prolong some-
thing t.ha:t. belongs, from our point of view, to the Dark Ages.
If gold is of any use, it is to send it. to foreign countries when they
want it. This is the main use of gold. There is, of course, also an indus-
trial uSC, and I hope the time will come when t.l~e governments will
be willing to hand all their goldi over for indlustrial uses.
C1uairi~uan Pnox~rIRE. Mr. Butler?
Mr. BvTLEIu. I would say that I agree completely with that state-
ment. To the extent. we can trade gold for us~ful things, I think we
ShOil~d diO it.
PAGENO="0101"
435
I do not see any great psychological repercussions abroad. I think
it is assumed abroad that. we will do this. And I would certainly agtee
that we should do it and do it with the greatest dispatch and the least
argument possible.
Mr. BEmn\IAi~T. Yes. I would only add that from the domestic. stand-
pomt we have, already made the largest step, and that is the. removal of
gold from the credit liabilities of banks. Gold does have a role to
play internationally. Unfortunately what we have been saying for
the past 8 years is that it is too precious to permit it to play that role.
That, I think, is the big contradiction. We should release it, and we
should let it play its role.
Representative RUMSFEDD. Then none of tue three of you see any
ie.giLnnate arguments in opposition to this proposal? Could I ask Mr.
Behrma.n and Mr. Butler to comment on Mr. Machlup's proposal on
page 27 where he, as you will recall, recommended the fourth ap-
pioaci~, and in the event that the leverage from the threat. of the fifth
was insufficient to achieve the fourth, then his position that the fifth
should be the course of action for this country.
Mr. B1iI-IR~iAN. Let me say that I agree m principle with the value
of this fourth proposal, that is that the best way to USe the gold that
we do have, and to shore up its international strength, is to put it in
a common fund.
The thing which has caused gold to give us so many problems in
terms of the rise in price is its redirection over the past several years
and its sources of new suppiies-Sout.h Africa and Russia. The fact
that some countries have piled it up has made it even more difficult for
us to adjust the price, because it creates inequities for countries that
went along with us and did not demand the gold. Therefore, to remove
this type of problem, the only thing to do with it is to put it 111 a com-
mon fund. It is even possible in my view to divorce official gold from
private gold and, as I think Fritz was implying, not to increase the
supply of official gold but just to leave it as a lump behind the inter-
national liabilities.
If that were done, it were put in a common fund, it seems to me at
least that these special drawing rights would not have been needed, and
would not now be needed, if you adopted Professor Ma.chlup's fourth
proposition. Having it in a common fund, and having no shifts between
official and private gold, it would be even possible to raise the price of
gold and, therefore, to provide additional international liquidity if
and when it were needed, because then you would have none of the
repercussions which we now face.
I would strongly agree that we should not raise the price of gold
now.
As to the fifth point, as to whether we should use that threat, I
myself would pref er a different tactic which I think is feasible, and
that is to try to get ourselves back in the position ivhich we held in
1i164, of a very strong economy with a rate of inflation much less than
in the other industrialized countries of the world. Make it quite clear
that we intend to maintain the strength of the dollar, for it is really
an internal strength that provides the external strength. What Euro-
peaiis are saying is, "We do not think the dollar is going to be strong
internally and, therefore, how can it pla3T a strong role internation-
ally?"
PAGENO="0102"
* 436
If we demonstrate that, and then use the gold to meet the deficits
from time to time, indicating that the dollar is as strong or stronger
than gold, then the preference for gold begins to die out. The prob-
lem is that nobody is quite sure that our economic policies even from
one ad1ninistration to the next will be stable enough and strong enough
to maintain that commitment. That I think is the burden of an inter-
national currency, that the country sustaining that international cur-
rency must handle its domestic policies in a way to maintain that
strength. That is a burden which some economists say t.hey do not want
to hear. They would rather have creeping inflation and let the inter-
national dollar go.
In a sense that is what Professor Machlup's final proposition is.
WTe will just untie it. We will let it go and let it flow. To me, from
a business standpoint, and a financial standpoint, that is a very harsh
alternative, and I would hope we would find the other one easier
to follow.
Representative RUMSFELD. Thank you.
Chairman PROXMIRE. Mr. Butler?
Mr. BULTER. You will find very little disagreement on this panel on
these matters. ~`1 only disagreement with Jack Behrman would be
that a generation is somewhat longer than 4 years.
Mr. BEHRMAX. Yes; I would accept that.
Mr. BUTLER. You will find very little disagreement on this panel on
I think Dr. Machlup has indicated, it would have to be negotiated.
The chances of negotiating it, your point 4, are fairly slim at the
moment. So, I think we have to pursue other alternatives, and the
best one to my mind is to do what we have to do to defend the dollar,
to check domestic inflation, validate the argument that the dollar is
better than gold. The dollar is better than gold so long as we run our
domestic affairs properly. We have less inflation than any other coun-
try in the world. Then gold is better than dollars only under the
assumption that we will double its price at some point, which I do not
think we should or would do.
Representative H ISFELD. Because of your judgment that the pros-
pects to achieve No. 4 are very slim, you, as a fifth alternative, would
prefer Mr. Behrman's approach?
Mr. BUTLER. Yes.
Representative RUMSFELD. To the ones indicated in the statement?
Mr. BUTLER. I think that all of these things dlo nothing more than
buy us time; that we have to do the things required at some point to
check domestic inflation, to maintain the integrity of the dlollar. That
all of these gimmicks that have been recommended do really nothing
more than give us a little more time, and they run the risk always,
and the very great risk, of at some point leading to some sort of
international collapse of possibly frightening proportions. I do not
think this country or the world should run these risks. I think it is
far better to dlo what we shouldi do andi to do it quickly, properly,
with resolution.
Representative RUMSFELD. Thank you, Mr. Chairman.
Chairman PROXMIImE. Congressman Boggs?
Representative B0GG5. Thank you very much, Mr. Chairman. I
appreciate Mr. Rurnsfeld asking the questions about gold cover, be-
cause as members of the panel might know, that bill will be con-
PAGENO="0103"
437
siclered by the house of Representatives tomorrow. The Democrats
have a meeting on it.
I would like to state the question negatively. What do you think
the impact would be if the Congress did not pass the bill that is now
pending?
Mr. MA0IILUP. Well, no one can know for sure, but there may be an
impact on gold speculation. We cannot know what the gold speculators
think and whether there will be another gold rush, another wave of
gold buying as we had in December. As you know, in December,
$900 million of gold were lost within 4 weeks. It is quite possible that
another such wave would come in February and March, if Congress
turned that bill clown. I do not forecast. I merely say it is a pos-
sibility.
On the other hand, if Congress were voting against the bill, and
refused to pass it, I `believe there is a way around it. The Federal
Reserve banks woUld simply pay the penalty and allow the banknotes
not to be covered by 25 percent in gold. They would have no practical
alternative. We will not refuse to sell gold under present circum-
stances nor will we refuse to increase the amount of Federal Reserve
notes if there is a demand for banknotes in the economy.
Now, since these two things are quite clear, there simply is nothing
else that they can do. Of course, you could say that we should stop
selling gold. That would be an alternative, and it might be a good
alternative.
Representative BOGGS. Would any of the other members of the panel
care to comment on the negative aspects of failing to pass the bill that
we are to vote on tomorrow?
Mr. BUTLER. Again, I would agree. I think it does run the heavy risk
of leading to another gold rush. As Dr. Machlup said, you cannot be
sure of this, but I think the assumption in Europe, the assumption
on the part of people in Europe with whom I have talked, is that we
will remove it. Now if we do not remove it, then this changes their
view of the future, and I think it could very well acid to speculation
against the dollar.
I think it is a provision that should have been removed at least 10
years ago. But having not cione it then, I think we should do it now,
and we should not run the risk of losing another $1 billion of gold
merely because of that anacronistic provision.
Mr. BEHRMAN. I would like to add that in a sense not acting on
the bill, that is refusing to pass it, may encourage a run on the dollar
as well.
Chairman PRox~rIRE. Would you say that again? I did not hear it.
Mr. BEHRMAN. It may encourage a run on the dollar as well for
this reason. It is widely recognized that gold is not needed for the
domestic cover. What will be assumed, therefore, abroad, in my esti-
mation, would be that Congress considered gold more valuable than the
dollar; that is, we should not sell it. Not to remove the cover is saying
in effect, "Congress says, `Do not sell it'" period! "We need it more
than we need dollars and it is too valuable to let you have."
Since the Federal Reserve can, in fact, go ahead and sell it anyway,
it appears to me the reaction might very well be, "If it is that valu-
able, we want it," and, therefore, accelerate the demand for it.
The reason why there would be a run on the ciollar now, if the
PAGENO="0104"
438
bill is passed, is that, relatively, the dollar is weak compared to gold.
We are not taking the cover off at a time of strength. and I want to
add a. caution that we should have done it when the'~dollar was stronn.
WT0 are now doing it when it is weak and, therefore, we run son~.
risks.
Representative BOGGS. None of you can see any happy results if the
Congress fails to pass the bill?
Mr. BUTLER. That is right.
Mr. BEHRMAN. Correct.
Representative BOGGS. Mr. Chairman. I want to congratulate you
for having this hearing today. I came here specially because the very
subject that we are discussing is now being considered before the leg-
islative committee which has jurisdiction, the Ways and Means Com-
mittee. The committee is meeting now, so after my little time is over
I am going t.o have to make my departure, but I would like to ask a few
questions about the balance of payments, because, as I say, the. legis-
lative committee has the subject before it right at this moment.
I want to talk to my good friend Professor Behrman. I have worke~l
very closely with him for many years and have great. respect for him.
I do not. quite understand what you recommend.
In the testnnon that. I have heard so far, I have heard a great many
witnesses against the regulations which have been issued relative to
capjtal investment abroad. Already the mail is coming in in great
volume on the proposal with respect to travel in the developed coun-
tries. Tariff barriers are being erected to American exports all over
the world. I went into this subject very closely last summer in my sub-
committee on this committee, meeting with all kinds of protests every-
where. What. alternatives do you give?
If I may say so myself no person has worked any harder for freer
trade between the nations of the world. Yet., I must. say, I am terribly
concerned by these artificial barriers that our European parti~ers are
erecting to American goods. and I am not. certain that. this total invest-
ment abroad, which certainly does have an impact upon domestic em-
ployment, is the answer to this question. so what I would like you to do
is to tell what you are for. I think I know what you are against.
Mr. BEllMAN. As far as where we should move from right now~
Representative BOGGS. That is where we are.
Mr. BEllMAN. Right. I agree. Let. us take it. from there.
Representative BOGGS. Politics is always the possibilities of the
present.
Mr. BEHEMAN. Yes. The first thing which we need to do is to lay
out a program domestically.
Representative BOGGS. What. program?
Mr. BEHRMAN. Including the ones which Congressman Mills has
insisted on.
Representative BOGGS. That means reducing expenditures ?
Mr. BEllMAN. Yes, sir.
Representative B0GG5. \\Tlmere?
Mr. BEHRMAN. In the total budget.
Representative BOGGS. I know; but what programs?
Mr. BEllMAN. You want to know exactly which items in the total
budget?
Representative Boocs. Surely: and how much.
PAGENO="0105"
439
Mr. BEI-TR:~rAN. How nmch? That is a difficult thing for me to say.
I would have to study that, Mr. Boggs.
Representative Bones. I know, but we are right up against it right
now, today, so you tell me where.
Mr. BEHRMAN. All right. If you will give me a little time to study
the total budget and exactly where it has been increased-
Representative BOGGS. I thought maybe you had done that before
you came.
Mr. BEIIR~1AN. No; I did not come to talk about the domestic budget.
Representative B0GG5. I-low can you separate them when you say
the domestic economy is the answer to these foreign problems?
Mr. BET-huMAN. Simply because the dollar strength is determined
domestically, Mr. B eggs.
Representative BOGGS. OK, then give me the answer domestically.
Mr. BEI-IRMAN. All right; the answer domestically is to reduce the
inflationary pressure, the expansion of credit and the Government ex-
penditure and to raise taxes, all four of them. Now, it has to be done
to the point where the result is a rate of inflation under that of Euro-
pean countries, and that point is not determinable in advance; it has
to be done by several methods; the piano has to be played with sev-
eral notes and continuously-not one at a time.
Representative Bones. Let me understand exactly what you are say-
ing. You are saying that travel restrictions, capital restrictions, with-
drawing troops abroad, reducing foreign aid commitments will have
no impact?
Mr. BEnri~rAN. No, sir; I did not say all of those. I am saying that
the capital restraints will have a minor impact, much less than has been
claimed.
Representative BOGGS. What about travel restrictions?
Mr. Brum~i~~x. Travel restrictions; I do not think we will get more
than $200 million or $300 million out of that and it is at very heavy
cost in terms of restrictions and-
Representative BoGGs. What about-
Mr. BEHRMAN. Withdrawing troops.
Representative BoGes. Just a minute-the growing percentage of
the, export-import gap?
Mr. BETIRMAN. I am sorry, I do not get the question.
Representative B0GG5. The fact that our exports relative to our im-
ports are now showing a considera'ble decline, almost alarmingly so in
the fourth quarter of 1967.
Mr. BEHIIMAN. Well, the gap has been cut largely by a. rise in im-
ports, Mr. Congressman.
Representative Bones. Of course.
Mr. BET-IIiMAN. Right. Well, not "of course." It could have been a
drop in exports as well. But exports have continued up, not as much
as-
Representative Bones. Not proportionately.
Mr. BEHIiMAN. Right, and this is exactly what Professor Maclilup
is pomtmg out.
Representative Bones. I did not hear his full statement.
Mr. BET-huMAN. WTell, the drop in our financial outflows has been
matched by a Partial drop in exports.
Representative B0GG5. Let me ask you this question because my time
is so limited. Assuming that Congress reduces all of these items that
PAGENO="0106"
440
you will recommend to us later, and we still do not pass the surtax,
will we strengthen the economy ?
Mr. BEHRMAN. No, sir; I would not think you would strengthen the
economy sufficiently.
Representative B0GGS. In other words, you are saying that the
cornerstone of the whole problem is passage of the surtax and reduc-
tion wherever possible of domestic expenditures?
Mr. BETIEMAN. Expenditures and financial rectitude as well; that is,
a reduction of financial pressure, inflationary Pressures.
Representative BOGGS. What?
Mr. BEHRMAN. Reduct.ion of inflationary pressures from the mone-
tary system as well. These things have to be played together. But, Mr.
Congressman, you cannot strengthen the dollar by playing around in-
ternationally. You must strengthen the dollar domestically.
Representative BOGGS. I am afraid you do not help us very much,
professor.
Mr. BEHRMAN. The choice is a difficult one, Mr. Congressman.
Representative Boons. Unfortunately, you are dealing, as so many
of us are trying to do in generalities. You have to spell these things
out. You have to say where you are going to make these cuts. You
know, you have had a lot of time to study this. If this is your position
you should have given US some recommendations on where to cut, not.
just say "Cut." Anybody can say "Cut.." It is like being for peace.
Everybodoy is for peace, but the question is how you get it. That is all,
Mr. Chairman. Thank you.
(Mr. Behrman later submitted this material for the printed record:)
In response to questions by Representative Boggs, I would like to offer three
alternative approaches to reducing expenditures, in order of my own preference:
(1) Congress should promptly place a ceiling on total government expendi-
tures for FY6O-say, ~2 billion above FY68. It should then appropriate only
the FY68 levels for each agency, giving the increase wholly to DOD.
But. to assist the administration to expand programs which it considers
highly desirable and to cut the less desirable ones. authority should be granted
to shift funds from one Department or agency to another. up to (say) 5% of
the agency's funds-that is, any one could obtain a 5% increase or sustain a
5% decrease. If military spending were to rise more, some other agencies would
have to sustain a cut.
Further, a 10% shift of funds among bureaus of any given Department should
be permitted so that higher priority projects could be expanded-but only at
the cost of cutting elsewhere.
Finally, I would insist on a 5% cut in personnel levels (not payroll), within
each agency, to be taken at the discretion of the agency head.
The objective of this technique is to provide a quick decision so that the
public, business, and foreign countries can know promptly that the Government
is acting strongly to reduce inflationary pressure. Most critics care less where
the cuts come than that they come promptly. The transfers authority would
reduce public criticism, as would the cuts in personnel. Of course, the admin-
istration might cut programs strongly desired by Congress, but this is a risk
the Congress must take if it cannot determine itself where to make the cuts.
(2) As an alternative. I would insist that the Budget Bureau have all agencies
rank their programs as to priority and then that the Bureau do the same for
all programs. Congress could then focus on those of lowest priority, cutting
sufficiently to keep total expenditures to only ~2 billion over FY68. Again, the
administration might select for down-grading the projects more widely supported
by Congress, but such an action would nearly force the Congress to accept the
first approach above.
The problem with this approach is that it takes time to make the determina-
tions. I would. therefore, urge the Congress to agree quickly to a range within
which total expenditures will fall-say 82 to S3 billIon over FY08. so that all
can see that the final result w-ill be anti-inflationary.
PAGENO="0107"
441
(3) If the Congress feels it must select the specific programs to sustain cuts
in order to raise military spending, two principles should be followed: one, that
no cuts be made in those programs directed toward meeting social ills-poverty,
health, slum clearance, urban renewal, etc.-but the Congress should give strong
guidance toward the specific goals it expects to be achieved by these; two, that
the primary cuts should be in programs which can be delayed without serious
damage to any vital area of the economy in the short-run: highway construc-
tion, rivers & harbors, subsidies to shipbuilding, space exploration, SSP, and
oceanographic research and development.
If these are insufficient to cut the proposed budget by $8-$1O billion, Con-
gress should accept that the quasi-wartime situation demands a delay in some
longer term programs of educational assistance and should insist also on a
careful husbanding (if not reduction) of military support programs which are
not closely related to the effort in South Viet-Nam.
Chairman PROXMIRE. Senator Jordan?
Senator JORDAN. Thank you, Mr. Chairman.
Gentlemen, I want to commend you all for very constructive state-
ments. It seems you all agree, No. 1, that the gold cover should be re-
moved, No. 2, that the measure taken by the administration to stabilize
our balance of paayments are ineffective, actually, and only borrowing
time.
I refer, Mr. Butler, to a statement that you make on page 2. You
are speaking about controls of the character-you say, "Controls is
in no way a lasting answer to our real problem. They buy time at
a heavy cost."
You go on to say that the root cause of our troubles is inflationary
pressures, inflationary upsurge due to the enormous rise in Federal
defense and nondefense spending after 1965, and so on.
I have the same question, of course, that all of us must face here in
the Congress: What do we do to reduce these inflationary pressures?
The question has been put by Mr. Boggs about the reduction in taxes.
I wish the rest of you would address yourself to that. Do you believe
that the Budget can be reduced, that spending can be reduced, and if
so, where?
Mr. BUTLER. Well, I believe that it can be reduced. Certainly, the
increase in spending can be held down. One way to do it is just to
put a ceiling oii the rise in expenditures and a ceiling on every Gov-
ernment agency. I think you have to pay for whatever rise there is in
the cost of fighting in Vietnam. You probably have to pay for the
rise in interest costs. But I think it is perfectly feasible to set a ceil-
ing on other Government expenditures, and I think a. rise of $2 bil-
hon in spendmg would cover what is now contemplated in Vietnam,
and interest, and that Government agencies could live with a ceiling.
I think a more sophisticated way to do it would be to go through
each Government program, item by item, looking at the cost versus the
benefits. I think this a very time-consuming and difficult process,
but I do not see any reason why you cannot just impose a ceiling for
a year, and I think this would be extremely beneficial.
I think in addition you probably need a tax increase. WTe have a
deficit of $20 billion plus. This is what is raising questions around
the world as to the integrity and viability of the dollar. We, in my
opinion, iiecd to take action to get this deficit worked down perhaps
not to zero but down to a very small figure.
The *comb~nation of tax increase plus some ceiling on spending I
think would bring this about. There has been a tremendous increase
in Government employment in the past 2 years. I wonder whether-
PAGENO="0108"
442
Senator JORDAN. Would you care to put a dollar figure on it? 1\That
are you talking about when you talk about cutting expenditures?
What kind of dollar figure?
Mr. BUTLER. The Budget has gotten so complicated that I must
confess I do not understand it any more. But, if you take in effect the
old aclmmist.rative budget., which comes, under one line in the new sort
of budget. I would say a $2 billion increase for fiscal 1969 over fiscal
1968.
Senator JORDAN. $2 billion is your estimate of what could be-
Mr. BUTLER. I would hold the budget, the spending increase to that
figure.
Senator JORDAN. 1-loki the spending increase to that figure over the
prior year?
Mr. BUTLER. That is right. This, as I understand it, would be $8
billion less than the administration is asking.
Senator JORDAN. Yes; it would be an $8 billion cut ?
Mr. BUTLER. That is right.
Senator JORDAN. Of the amount of the President's requested budget
of $186 billion?
Mr. Br~mru. That is right.
Senator JORDAN. Mr. Machlup, what would be your estimate of the
amount that could be cut, if any, from the Federal expenditures, and
where would you cut?
Mr. MACIILUP. I must beg off on the question of where to cut. I am
not really a student of the Federal budget. What I do know is that it
usually takes a long time for such measures to become effective. If
we need quick action, then I think the tax increase is the only remedy
that can be applied on the fiscal front.
I know that our chairman has expressed himself very much in oppo-
sition to it, but I must beg his pardon if I disagree with him on this
questIon. We (10 needl this tax increase very quickly, if for no other
reason than for the effec.ts on the balance of payments. Calculations
have been madle to show that, even if the. tax increase should not reduce
the rate of price inflation, it would have a balance-of-payments effect.
of about $1 billion. This $1 billion wouldl be very helpful. So, even
without. any dampening effect on the wage-price spiral, the t.ax in-
crease could lead to a $1 billion relief for foreign payments.
But there is in adldlition the effect on the wage-price spiral. The
point is that, if business corporations are weakened by higher taxes,
they are strengthened in their hoidling out against t.rade union de-
mandls. In other words, a business that has to pay a. higher tax will
have less funds andi will be less capable of making concessions in the
next wage negotiations. So, we actually retard the inflationary up-
drift of money wages. The best wage-price guideline would be to show
business that it. will not have a. chance to pay the higher wages. I
am strongly in favor of the increase in the income tax surcharge, be-
cause that is where quick andi dlecisive results can be achieved.
Seiiator JORDAN. Professor Behirman, would you ca.re to address
yourself to the business of cutting the budget?
Mr. BETiRMAX. Well. Congressman Boggs put that monkey on my
back a. few minutes ago. I tried when I was in Government to cut. the
bud~ct or parts of it. As far as the details go, again. Mr. Jordan. that
I think has to be worked out. in the bargaining of Congress with the
PAGENO="0109"
443
Executive. I would only say that the objective which we have before
us is to make certain that the combination of fiscal and monetary
policies pulls the inflation down to about 11/2 to 2 percent a year.
Now, that may mean more of a cut or more of a tax or whatever,
but it is the combination that has to be worked out with the Execu-
tive and Congress for that objective. To specify any one cut is to me
not necessarily the answer.
Senator JORDAN. Administration witnesses appeared before the com-
mittee last week and said that a combination of tax increase and spend-
ing cut would result in overkill. Would you care to address yourself
to that?
Mr. BEI*IRMAN. That in my view would depend on the magmtucle of
each, Seiiator. I do iiot know exactly what magnitudes they were testi-
fyiiig to at the moment, but it is certainly conceivable to me that a
small increase in the budget as Mr. Butler indicated with a. tax increase
is not an overkill, but if you have a larger t.ax increase, 14 percent or
wllatever, and a substantial cut in the budget, you might have over-
kill. But this has to be played in an orchestration.
Senator JORDAN. Would you say that your suggestion of an $8 bil-
lion cut in the President's proposed budget plus a 10-percent surtax
charge would result in overkill, Mr. Butler?
Mr. BUTLER. No; I certainly do iiot think so. I think it. is a pretty
big moose that we are shooting at, and that you need a fairly large-
caliber weapon to deal with it.
Chairman PROXMIRE. Did you say "moose" or "mouse"?
Mr. BEHRMAN. Moose.
(Tile following letter was subsequently received from Mr.
Behrman:)
TIlE UNIVERSITY OF NORTH CAROLINA,
SCHOOL OF BUSINESS ADMINISTRATION
Chapel lull, NC., February 22. 1068.
Senator WILLIAM PROXMIRE,
Chairman, Joint Economic Committee, New Senate Office Buikiin.q, TVashi'ngt on,
D.C.
DEAR SENATOR PRox~lIRE: I would like to respond more fully to Senator Jor-
dan's question as to the possibility of an overkill through too much taxation or
too heavy a cut in expenditures, and to Congressman Boggs' questions on where
to cu.t expenditures.
What is needed to meet the problem of overkill is to introduce, through the sur-
tax, some flexibility in the fiscal techniques. This could be done by passing a
surtax of, say 8 percent, imposing 2 percent each quarter. Then, if evidence
developed that the tax was acting too harshly on the economy, it could be removeJ
or reduced the second quarter, and reimposed or left in abeyance the third, etc.
It would be better, however, to provide for automatic response in the tax to
the economic changes, so that the imposition, reduction or removal of the tax
for each quarter did not have to be debated each time by Congress and the
administration. Automatic removal or adjustment could be stipulated according,
for example, to the rate of inflation ; thus, removal of the surtax could be
provided if the price level remained stable for a quarter; or the surtax could
be cut to 1 percent in a succeeding quarter if the inflation fell to an annual rate
of merely 1 percent during a quarter. The surtax would be at its maximum if
inflation occurred at an annual rate of over 2 percent in the preceding quarter.
With such flexibility, it is conceivable that Congress could be persuaded to pass
a larger surcharge, say 12 percent, with 3 percent added in each quarter, leaving
the law on the books for a longer period than a year. This would avoid the
necessity of determining now wheim the surcharge should be revoked, and a higher
surtax would assure the doubters that the U.S. Government fully intended to
make the dollar internally sound.
I hope these comments may be useful to the committee in writing i.ts report,
and I would be glad to discuss them with you or the staff if desirable.
PAGENO="0110"
444
Senator JORDAN. Mr. Butler, would you be concerned with the Jan-
uary report that industrial production showed a decline of six-tenths
of 1 percent~ indicating that the economy is not so buoyant as has been
anticipated by some of the people who have prepared the budget?
Mr. BUTLER. I think one can never take a 1-month change in the
index of industrial production, or any of these other economic statis-
tics as making a trend. Our view is the gross national product in the
first half of the year will rise, a somewhat slower rise in the second
half, but nonetheless, a rise. I think that one of the basic reasons for
seeking fiscal responsibility here is in addition to its repercussions
on confidence abroad, which I think are very important, but also this
would get the Federal Reserve out of the business of financing infla-
tion. With the size of the deficits that we face and we have had in the
past year, the Federal Reserve has had to make it possible for the
Government to finance the deficit, and in doing so, the Federal Reserve
has increased the supply of money and credit in a very inflationary
fashion.
One of the main reasons for asking for restraint on spending plus
a tax increase is to enable us to slow the rise in money and credit to
tolerable and reasonable proportions.
I think there is plenty of what new economists call aggregate demand
around to keep business moving ahead, even with these measure of
fiscal restraint and with proper monetary policies, I think you could
slow down, over time, the rate of inflation, while not, hopefully, bring-
ing on any recession.
I think the danger in not taking these fiscal measures is that at some
point you will have to jam on the monetary brakes, and run very
great risks of a recession which could be more difficult and intractable
than the ones we have had recently.
In particular, if you run into a recession, with a $20 billion budget
deficit, I think your ability to deal with the recession through fiscal
measures is severely restricted, and I do not like t.o see our country
running these risks.
Senator JORDAN. Thank you.
Chairman PROXMIRE. Congressman Reuss?
Representative REUSS. Thank you, Mr. Chairman. I, too, want to
express our gratitude to these three excellent witnesses for the help
they are giving us. I think a lot of the public may not realize that
witnesses like this are very busy men, that the papers which they pre-
pare for us are a labor of love, and I am very grateful.
Chairman PRox~rIRE. If the Congressman will yieM, I join in that
wholeheartedly. I know they have spent a lot of time on their excellent
papers; they are most useful.
Representative REUss. I want to state that Mr. Butler and Mr. Behr-
man, particularly, have indicated their belief that it is essential that we
keep our domestic economy from becoming inflated, and I certainly
agree. I am ready to spend less, tax more, create less money, or what-
ever is necessary to do it, and I gather that Mr. Machlup agrees with
that, too. I-Iowever~ I guess I may have the same minor quarrel with
Mr. Behrman and Mr. Butler that I think Mr. Machlup has. Suppose
we do all these things. Let us just stipulate that from here on out,
domestically, it is going to be full employment without inflation. We
are just not going to have any more 3- and 4-percent increases in the
PAGENO="0111"
445
indexes. Do you gentlemen really think that we can keep on running
a $4 billion external military deficit in our balance of payments, and
make it all up on our composite of our conventional accounts, that we
can be mercantilist enough to run that kind of a trade surplus, and
that somehow American tourism patterns are going to change and
A~mericans won't want to go abroad any more, and, hence that we are
going to get our tourism in kind of a balance somehow, or that Ameri-
can investors won't want to invest abroad?
I just cannot see how in the long run or in the short run we are
going to get our balance of payments into shape just by pursuing the
sound internal spending, taxing, and money policies that we all stipu-
late we need to start pursuing.
In other words, aren't we overlooking the biggest thing, namely
our meddlesome propensities in the world, and as long as those propen-
sities continue at the level which they are now at, aren't we in bad
trouble on our balance of payments? Mr. Butler?
Mr. BUTLER. If I could speak first to this, hopefully briefly, I think
you have a real point. WTe put out, as I remember it, $8 billion last year
in economic aid and overseas military expenditures. I think we cannot
conceivably, no matter how good our domestic policies are, support at
this time $8 billion of overseas Government spending.
Now, $1.5 billion of this, or something like that, was directly related
to Vietnam. Some of it was offset by tying aid to exports or foreign
purchases of military things here, but, nevertheless, it seems to me
that, short of greater agreement on the part of other countries to aid
in the support of the defense and economic development of the free
world, we cannot afford $8 billion.
I think if we could get an end to the conflict in Vietnam, we would
save roughly $1.5 billion. I think if we were to review our other over-
seas commitments, that we might find some way to reduce them by, say,
a half billion dollars. In balance-of-payments terms every billion dol-
lars counts, obviously. I think we could probably assume that we could
support $6 billion of military expenditures plus economic aid at the
moment. I think this could increase, over time, in a very useful way.
I think this does not necessarily mean reduced support on our part of
economic development. I think it can increase the flow of private in-
vestment, and that you can improve the efficiency of the moneys we
would then spend under economic aid. But I would agree that prereq-
uisite for getting our balance of payments under control is some
review a.nd reduction in what we are trying to do overseas.
I do not think that this need means a reduction in travel or interna-
tional investment. Our international investment, I think, pays off very,
very handsomely. I would like to support what Jack Behrman said.
We did an extensive study of the balance-of-payments impact through
the operation of international oil companies which showed a very
big and very quick payoff for t.he moneys that we put out in terms
of investment in international oil. I think we can support the travel
drain. I think we need to do what we can to encourage people from
other countries to travel here. As their incomes rise I think this will
naturally increase. I do not think we have to, as you put it, reduce our
propensity to invest in travel overseas. But, I think we have to reduce,
at least for the time being, some of our military and perhaps economic
aid commitments.
PAGENO="0112"
446
Representative R.ELTSS. Mr. Behrmaii, would you agree that, though
you manage the domestic economy ever so well, nevertheless the trade,
investment, and tourism accounts-the conventional accounts, so-
called-are not likely to yield a sufficient. surplus to enable us to live
in the imperial military style to which we are currently accustomed?
Mr. BEHRMAN. Mr. Reuss, I would say that if that volume of ex-
penclitures continues to increase as it has in the short term recently,
that we could get into serious trouble. I would argue, however, that we
could sustain some pressure had we done what your prescription states,
that is, to maintain inflationary levels in the lJnitecl States less than
had occurred in Europe in the past 2 years, 1966-1967, as the impor-
tance of which was stressed even b~ the Economic Report of the Presi-
dent; the inflation had a very strong impact on the balance of
paymeiits.
Representative REUSS. Although you yourself did a pretty good ~Oi)
of debunking that when you pointed out the effect of the copper strike
and the effect of steel purchasing and so on?
Mr. BEIIRMAN. Certainly, they had an effect, but there is also an
inflationary impact in the sense that the export surplus declined be-
cause of imports.
Let me put it this way. My first point is that even if we are in trou-
ble, controls won't do the trick.
On the second point, I have to agree with you, we can get. ourselves
in deeper trouble if we continue to accelerate Government expendi-
tures which have no paybac.k whatsoever.
But the third point, is that, if the United States were doing what you
prescribe, and I think this is an absolute necessity, the dollar would
be held abroad in larger amounts than it has been in the. past, the
dollar would have supplied international liquidity which the SDR
was to supply, we could afford assistance to less developed coun-
tries-private investment has a quicker payb~ck there than my table
indicates-and the gold outflow would have been less because the
dollar would have been a stronger dollar.
Further, I would say that we would be in an even stronger position
today had we not cut back the export drive in 1965-1966 which we
did, and had we not been giving signals to business all along that. you
may export but you may not follow it with an investment. But the
data show quite clearly I think that. investments pull exports and that
in fact the same industries a.re both high exporters and high investors.
They are the technologically advammcecl industries. There is almost a
cyclical development as an industry goes overseas with exports: as your
new items begin to die a. bit in terms of their usefulness in the United
States, you begin to pic.k them up in im-estments abroad, so that there
is a. pull two ways. Exports will mean investments later, if exports dlO
go up; and investments pull exports.
So expansion would put us in a better position than the. controls
have. dione and will do; even if we have the pressures you talk about.
from military expenditures, we would be in a better position to re-
verse our current policy.
But I would have to agree with you that we can put ourselves into
great difficulty if we continue public expendlitures abroad with fiscal
irresponsibility at home.
Representative R.EUSS. Thank you. Now, let me turn to Mr. Machlup,
who like myself does not believe that merely ridding our dlomestic
PAGENO="0113"
447
economy of inflation, desirable though that is, will in and of itself
cure our balance-of-payments troubles, and I gather that Mr. Butler
and Mr. Behrman do not hold out that hope either.
Let me ask Mr. Machiup this. Even if we went to your fourth alter-
native of a gold conversion account in the IMF, and thence to less
rigid exchange rates, wouldn't the United States still have a problem if
it persisted in its grandiose, swollen, meddlesome, costly political-mili-
tary adventurism around the world? If we are going to spend $4 bil-
lion-plus in military adventures alone, do you think that we are
likely to be able t.o recoup offsetting surpluses in our conventional
balance-of-payments account?
Mr. MACI-ILUP. Yes, sir; I believe this is possible. Don't forget that
$8 billion is only 1 percent of our gross national product. For a long
time this 1 percent figure has been mentioned as the minimum foreign
aid that a nation should grant. So, I definitely believe that we ought
to be able to afford it. It is only a question of the relation between the
income and price level here and the income and price levels abroad.
That relation will be the strategic variable in allowing the adjustment
of the trade balance to the financial transfers.
Representative REuss. Aren't you advocating something awfully
mercantilist though? Here you want the United States to run stupen-
dous surpluses on trade.
Mr. MACHLUP. Yes, I do; but it would not be mercantilist.
Representative REUSS. You said in your paper that the Europeans
are iiot going to do idiotic things, that they are pursuing anti-infla-
tionary policies, some even more successfully than the United States.
But let us assume we all manage our economies successfully and do not
have inflation at home. Do you really expect that the United States can
run trade surpluses of almost infinite amount?
Mr. MACHLUP. This is not so much of a trade surplus compared with
the gross national product.
Representative REUSS. Is that the proper thing to compare it with?
Mr. MACHLUP. I think it is.
Representative REUSS. I should think it is the amount of trade clone
in the world.
Mr. MAcIILUP. I think it is the proper thing, and I think it is likewise
for the rest of the world to make these comparisons. It is quite true that
some other nations have not made enough appropriations for foreign
aid, though others have been doing better than we.
Now, there is no doubit that some nations of Europe have been very
much in surplus on current account, much more than they should have
been, compared with their outflow of capital. So, I think they will
have to get used to smaller current-account surpluses. But they may
continue to have current-account surpluses because, after all, it is the
developing world that will have the current-account deficits.
Mr. BUTLER. Could I add a point which may be useful ? I mean this
is not a sort of mercantilistic approach. We are trying to run a sur-
plus to finance what we give away in support of the defense and
economic development of the free world. If we ran a surplus to pile
up gold or to pile up reserves then it would be mercantilistic, but what
we are trying to do is to run a surplus big enough to support this out-
flow. This does not necessarily, well, it dloes iiot rethice world produc-
tion and trade. It iiideed enhances world production and trade, so
00-191-OS--pt. 2-S
PAGENO="0114"
448
that I think it is a perfectly viable sort of situation. The problem
really is the level at any one time. My argument would be that it is
a little too big at the moment. But I would hope it would he as big
very shortly as it is now, in a viable sort of way.
Representative REUSS. Could I have another minute or two
Chairman PROXMmE. Without objection, go right ahead.
Representative REUSS. To all this I say "Yes" to Mr. Butler and
Mr. Machiup, but it seems to me you do not sufficiently differentiate
between the mirror image of our deficits; that is, somebody else's
surpluses. Foreign a.id to Ecuador comes baci~ to us. That is great.
I am all for that. But keeping troops in surplus Germany? Just talk-
ing economically, I do not see how that bread on the water comes
back to us in balance-of-payment terms.
Mr. MACJILUP. I think, sir, we should not decide our foreign policy
in terms of balance-of-payments considerations. It would he a very
severe restriction on our foreign policy if we always said "before you
do anything, look whether our present balance of payments can
afford it."
I cannot say as an economist. whether it is the right policy or the
wrong policy to keep troops in Germany. But if it is i~iglit for other
reasons to keel) troops in Germany, we should not say that the bal-
ance of payments is such that we cannot afford it.
It is a question of the foreign-exchange rate or, alternatively, it is
a question of the rate of inflation here and the rate of inflation abroad,
and these things can be adjusted.
Representative REUSS. While you may not want to stop doing a
thing otherwise determined to be wise and necessary~
Mr. MACHLUP. Right.
Representative REUS5. From the standpoint of foreign policy be-
cause of its balance-of-payments impact, certainly the statesman mak-
ing this decision should know what the balance-of-payments impact
is; should he not?
Mr. BEHRMAX. Yes, sir.
Mr. MACHLUP. He should know what the impact is, but still he
should also know what it is in relative terms. The p~esent deficit in
our balance of payments is only one-fifth of 1 percent of the gross
national product. This makes a difference.
Mr. BUTLER. Somebody said it is a small thing but like an inch on
the end of your nose.
Representative REUSS. In large part the recent proposals of the
President seek improvement through measures `involving private in-
vestment and private travel. In addition, the President has promised
renewed negotiations with our NATO allies to minimize the foreign
exchange costs of keeping our troops in Western Europe and in an
altered context., dollar expenditures in Asia as well. The results of such
negotiations will depend upon the cooperation of our allies; but if
the private sector is to be asked to reexamine and curtail its plans
there is an even greater obligation on Government to put its own part
of the international `accounts `in the best possible order.
Dr. Joseph Aschheim, of George Washington University, has pre-
pared a memorandum entitled "The Dollar Deficit and German
Offsetting." His memorandum cannot help but throw light on the
Government's place in the foreign exchange picture and thereby con-
PAGENO="0115"
449
tribute to the discussion of remedies for the overall balance of pay-
ments problem. I, accordingly, ask that it be included in the record.
Chairman PRox~iniE. Without objection, it is so ordered. (The
memorandum referred to appears as part 4 of these hearings.)
Senator Miller?
Senator MILLER. Thank you, Mr. Chairman. Professor Machlup,
you stated that there are some who believe that 1 percent gross
national product ought to be about the amount of foreign aid. Do
you share that belief?
Mr. MAOHLUP. This is a normative statement, sir, and the question
is whether, for humanitarian reasons and from a world outlook, we
believe that more should be done for the development of backward
nations.
Economists usually eschew taking such a normative point of view
and confine themselves to analyzing the implications.
If you ask me, as a citizen, whether I believe that a rich person
should give to the poor and that a rich country should give to poor
countries, I would say "Yes." As a citizen, I approve of such policies.
And, as an economist, I can say that the economy can make it possible
to pursue such policies.
Senator MILLER. Well, as an economist you certainly recognize that
there might be other fa'ctors to be taken into account in determining
whether in one particular year this should be 1 percent or 5 percent
or 3 percent or possibly even none, wouldn't you?
Mr. MACI-IL-UP. As an economist I wouM say that the reduction of
such items will not necessarily lead `to a reduction in the balance-of-
payments deficit. Sir, this is similar to what we hear now, constantly,
about the effects of our Vietnam expenditures. As a citizen, personally,
I am not happy about the whole Vietnam situation, and probably few
people are. But, as an economist, I would not expect that a termination
of our military operations in Vietnam will lead quickly to an improve-
ment in the balance of payments. There may be strong offsetting
changes. If we spend less in Vietnam for military purposes, we may
spend more for economic aid. But, if we spend neither for economic aid
nor for military purposes, then the Vietnamese will buy less, and
other people will `buy less, and our exports will decline. In addition,
we will probably increase expenditures at home, and our imports will
increase. So there may be offsetting changes in our balance of trade.
Thus, while the administration and others have great hopes that a
cessation of our operations in Vietnam will quickly lead to an im-
provement in the balance of payments, I do not share this hope. I ex-
pect some slight improvement, but the improvement will probably be
only a part of our reduction in military expenditures.
Senator MILLER. Do you have any figures on how much the Vietnam
war means in terms of the balance-of-payments deficit?
Mr. MACHLUP. No, sir; and no one can have exact figures. We have
figures for direct expenditures. That we do know. But we do not have
the figures for the indirect effects for all that the military expendi-
tures abroad and the defense expenditures at home do to other ac-
counts of the balance of payments. These indirect effects we can guess,
but we cannot know them.
Senator MILLER. It seems t.o me I have heard a guess by some admin-
istration officials that the figure of $2 billion is the impact on the bal-
ance-of-payments deficit of our expenditures in the war in Vietnam.
PAGENO="0116"
450
Assuming the validity of the guess, it would appear that if the cessa-
tion of hostilities would mean almost. a complete drop or a very large
drop-let us say over half of the outflow of funds to Vietnam-that
this would perhaps have a $1 billion impact, which would be rather
substantial; would it not?
Mr. MAOIILUP. I do not. know whether the guess of $2 billion is a
good guess.
Senator MILLER. I know. That is why I said assuming the validity
of that.
Mr. MACHLLrP. Assuming the validity means trusting the guesses of
the feedback effects, and this makes it all so hazy. We do not know the
feedbacks. We do not know, if we spend $2 billion, how much of it
comes back in the form of payments for American goods and services.
On all these things we are very much in the clark, and we could not say
what the impact of a cessation of military operations will be.
I would like to repeat t.hat I very much hope for a cessation, even if
I do not think that this would have such an enormous effect on the
balance of payments.
Senator MILLER. You are covermg your statement by saying "such
an enormous effect," and in all fairness i do not know of anybody in tile
administration who has made the claim of an enormous effect. The only
point I want to bring out is that it could be a substantial effect, in the
neighborhood of $1 billion, and if it would be in tile neighborhood of
$1 billion this would certainly be a substantial impact 011 our balance-
of-payments deficit.
Mr. MAGHLUP. You are quite right; $1 billion is a. lot of money.
Senator MILLER. You stated that there are other nations that are
doing better than 1 percent of GNP. They are doing better in relation
to their economies than the United States.
Mr. MAOHLUP. Yes.
Senator MILLER. Are any of those nations involved in a. war?
Mr. MAcm~ur. ~o, sir.
Senator MILLER. Well, then you recognize that tile impact of a war
on the economy of a country can make a lot of difference in whet.her
it can do as well or better than this 1 percent, do you not?
Mr. MACHLUP. I agree fully with that.
Senator MILLER. Another question: In the last. 7 years, according to
the figures from the Treasury Department, the purchasing power of
the dollar has declined from approximately 47 cents to approximately
40 cents. Woulcl this not have an impact on the desirability of foreign
dollar holders to turn their dollars in for gold?
Mr. MAGHLnP. To answer this, we would have to make certaill dis-
tmct.ions. First of all, between official diollar holders and private dollar
holders, and secondily, among different reasons for which these private
dollar holdiers hold their dollars.
Most of the private dollar holders would not be greatly concerned
by price increases within tile limits that we have had during the last
few years, because their own countries have had much greater price
increases in terrn.s of their currencies. In other words, they wouldi not
have faredi better if they had held French francs or if they had held
Italian lire. Tile pomt here is aga1n~
Senator MILLER. Wouldn't they have fared better if they had held
gold?
PAGENO="0117"
451
Mr. MACHLUP. They would not. The people who have held gold have
macIc the most terrific loss. I have macic calculations which show that
someone who bought gold in 1954 holds now approximately one-fifth
of the amount of wealth that he would have if he had bought American
stocks on the New York Stock Exchange, of an average composition,
the one used for the Dow-Jones index. So, anyone who bought gold
was an absolute idiot. I cannot take it back. He was just an idiot.
He has now only one-fifth of what he would have had, had he invested
in the American stock market.
I do hope and pray that he will be an idiot also in terms of the
future, because that depends only on you, gentlemen. If you will not
raise the price of gold, then the price of gold will not be raised, and
the gold speculators will turn out to have been very stupid indeed.
Senator MILLER. I do not want to interrupt your thinking, but you
were talking about a foreign dollar holder.
Mr. MACHLUP. Yes.
Senator MILLER. Who in 152 had invested in American stocks as
distinguished from his investment in gold?
Mr. MAGHLUP. Yes.
Senator MILLER. Now, what about an American dollar holder who
had invested in stock? Would he have been as idiotic as his fo*re~gn
counterpart?
Mr. MACHLUP. No. The American dollar holder would have been
very right to invest iii American stock.
Senator MILLER. Well, instead of that, suppose he transferred funds
to Switzerland and ended up owning gold bars in Switzerland?
Mr. MAOIILUP. He is a capital idiot.
Senator MILLER. WTould he have been just the same as your foreign
counterpart?
Mr. MACI-ILUP. He would have been not only an idiot but he would
have broken the law of the IJnitecl States at the same time.
Mr. BUTLER. Even if he had invested in Treasury bills, which are
sort of the lowest yielding assets, again I made some computations. For
the past 10 years, had you held gold, the value of your holdings would
have gone down something over 20 perceiit. 1-lad you invested in
Treasury bills, ~it would have gone up by some 20 percent.
Mr. BEHRMAN. I would like to get into calculations, too, Mr. Miller,
if I may. I made a few about what would have happened ill the United
States, if we had sold our gold right after time war to the rest of the
world audI held francs and lire and pounds. We would have come out,
even with the revaluations, now holding $20 billion worth of assets
and could have met all of our deficits out of the interest.
Mr. MAcrnJur. In other words, to get rid of gold is the best business.
Senator MILLER. You made a comment which indicated that we
ought to have, as a target, the management of our ecnorny so that we
would have inflation of 1½ to 2 percent a year, I believe.
Mr. BEHRMAN. Yes, sir. I picked that figure simply because that
would put us below the rate of inflation of the European countries and
that is the comparative level that is important internationally.
Senator MILLER. You are thinking in terms of the balance-of-
payments dleficit proper when you make that. statement?
Mr. BEHRMAN. Yes, sir.
PAGENO="0118"
452
Senator MILLER. That does not mean that you would advocate as
far as our own citizens were concerned an economy that would result
in a 11/2~ to 2-percent inflation rate a year: does it?
Mr. BEHRMAN. It is not that I suggest that we ought to have that
high a degree of inflation for domestic purloses; no. I am saying that
even that high a degree of inflation I think would put us internation-
ally safe because it would be lower than the others.
~ enator MILLER. Wouldn't it be preferable just not to have any
inflation at all?
Mr. BEHRMAX. Well, as an economist I like a stable price level.
Senator MILLER. Sir ?
Mr. BEHRMAN. As an economist, and as a citizen, I like a stable
price level. I recognize at times it may be economically desirable to
inflate a little to move the economy along, but this is a policy decision
which is against the principle of a stable currency; yes.
Senator MILLER. That is one thing that bothers me when you say
at times it might be desirable, because to me the Federal Govern-
ment can take purchasing power away from the people either by in-
flation or by taxes.
Mr. BEHRMAX. Yes, sir.
Senator MILLER. And I am wondering why there would be times
when it would be better to take it away by inflation than by taxes,
especially in light of the statement by the President of the United
States that inflation is the crue~1est tax of all. Why would it be desir-
able to use the cruelest approach of all?
Mr. BEHRMAN. Well, this goes back to the impact of monetary and
fiscal policy in a situation of relative depression or of stagnation where
you want to move it up, and if one. of the reasons why you are having
a stagnat.ion or a slight recession is people's desire for money, just plain
liquidity, then one thing you want to do is to give them that liquidity,
which means an inflating in the money supply, and that itself may lead
at times to some inflation just to sop up the liquidity. IVe see the same
thing internationally now.
Senator MILLER. What you are really saying it that there are times,
in a situation like this, when we should use the cruelest approach of all.
Mr. BEHRMAX. I am suggesting that taxation at that time will not
solve the same problem. In fact you are removing liquidity at that
time when you should be supplying it.
Senator MILLER. Do we have any other choice except to use the
cruelest tax or the cruelest approach at all? Is that the only alter-
native?
Mr. BEHRMAX. What I am sayii~g is that. in times of a depression,
Mr. Miller, that the inflation is not a cruel tax, taxation might be even
crueler at. that time.
Senator MILLEE. In other words, the statement by the President
that it is the cruelest tax of all does not mean that there might not be
occasions when we should use the cruelest tax of all approach; is that
what it gets down to?
Mr. BEHRMAX. I am suggesting that the "cruelest" adjective applies
to certain situations, not to all situations.
Senator MILLER. I see. Well, I do not remember that the President
qualified that..
PAGENO="0119"
453
Mr. BEHRMAN. No; I am sure he might not have in this circum-
stance.
Senator MILLER. My time is up, but I hope I can ask a few more
questions and I do appreciate the fine answers.
Chairman PROXMIRE. Congressman Widnall?
Representative WIDNALL. Thank you, Mr. Chairman. The few ques-
tions that I will ask I propose that all of you answer. I think they are
pretty much in point. WTould you support imposition of a temporary
import surcharge or a system of border taxes?
Mr. MAcTILUP. No, sir; I would certainly not. I would say that this
could even increase the deficit in our balance of payments, because it
could lead to retaliation. Except, of course, if you can, in advance,
secure agreements from our major trading partners. If they agree
through GATT that we will be permitted to do this as a balance-of-
payments measure, and the other nations accept it and will not retal-
iate, then it might be of temporary use. But let me immediately
add that it would be a most inequitable and most unfair measure to
take, because it would increase the protectionist effects of our tariffs
and, therefore, the distortions in the use of our productive resources.
If you were saying you would like to have a tax on all imports, that
would be something else, but a surcharge on import tariffs is very
different, because there you change the differences between prices of
differ&nt imported goods and homemade goods, and the products
that already have protection would get more protection. So that
would be a very harmful thing to do, and I would hope that the Con-
gress would never consider such a move.
Representative WIDNALL. Mr. Butler, what is your reaction?
Mr. BUTLER. I agree completely. I think it would be a great mistake.
Mr. BEHRMAN. I also agree.
Representative WIDNALL. What would be the impact of the curbs on
foreign investment on U.S. interest rates and on interest rates abroad?
Mr. MAGHLur. The impact of our curbs on capital outflows?
Representative WIDNALL. On U.S. interest rates and on interest
rates abroad.
Mr. MACBLUP. Well, there is no doubt that any reduction in the
outflow of American capital must make interest rates abroad higher
than they otherwise would be, and if these interest rates should rise
substantially, that would lead to an outflow of foreign capital from
the United States, which would partly defeat the purposes of the
initial restraint.
Mr. BUTLER. Interest rates in Europe have not risen since the im-
position of these controls. Euro-dollar rates are down from the level
that they were. I think this is important because foreign central banks
have been feeding money into the Euro-dollar market. I would agree
with the longer term impact that Dr. Machlup suggested, and there
has been an increase in American companies borrowing in Europe,
and in time I think this will lead to higher interest rates, but it has
not to date.
Representative WIDNALL. Mr. Behrman?
Mr. BEIIRMAN. There is an ancillary impact, and maybe Mr. Butler
will indicate agreement in the same analysis, but there is an impact
through the diversion of flow of capital. For example, Canada sus-
tained a substantial outflow after our recent mandatory controls,
PAGENO="0120"
434
which the Secretary of the Treasury indicated came to the United
States, but. it also is indicated by the reduction in European interest
rates that it flowed to Europe. This increased their su~pply substan-
tially, keeping the interest rates down, but this put a terrific burden
on Canada. So what we did was to say capital shall not flow from the
Untied States, causing it to flow out of Canada, and now causing us
to be concerned with the Canadian balance of payments. So these
things have various repercussions which need to be traced out.
Representative WIDNALL. How much of a serious decline in our
trade surplus during the fourth quarter of 1967 do you think is
accounted for by deterioration of our competitive position in the
world? What. were the key factors?
Mr. MACITL~TP. I would attribute it chiefly to two things. First to
the increase in business activity anti employment in the United States,
the increase in incomes and spending within the United States, which
increases our inWoi'ts.
I attribute it, secondly, to the slack business activity in some of our
European markets: especially Germany had a very bad year and,
therefore, their purchases, their imports, fell, which means that our
exports could not. rise as much as they would otherwise have. So I
attribute the recent decline in our export surplus less to a permanemmt
deterioration of the competitiveness of our industry, and more to the
changes in business activity here and abroad.
I must, however, add immediately that we have had a rate of wage
increases during 196T. and expect a. rate of wage increases for 1968,
which may actually lower our competitiveness relative to foreign
countries.
Representative WIDNALL. Mr. Butler, the figures that you have been
compilmg show enough to indicate where our competitive position
has deteriorated. There are a number of items as aoainst where cur
competitive position has held firm or has improved. Do you have any
fi~ures on that?
~Mr. BuTLER. I am afraid I do not have them in mind. I think there
has been a clear deterioration in steel, for example, in shipbuilding,
some lessening of our competitive position in the general machinery
area. I think it has not as yet affecte.di th~ngs such as business machines.
In the so-called high technology areas I think we remain very
competitive.
Pa.rt of our problem in the fourth quarter was the copper strike audi
to some lesser extent the forthcoming labor-management dliscussions in
steel which led to an increase in steel imports, but these two things can
be fairly big in a. fairly short time.
I think our roblemn is not that our competitive position has e.rodedl
so very greatly so far. It. is that if we continue these policies andi
continue the rise in our costs, our competitive position in a few years
will be very seriously erodled. If we could check it now, then I would
have quite good confidence in the future. But, if we dio not check it,
I think we are clearly hieade.di for trouble, amid the time to dleal with
it is now amid not 2 or 3 years fromn now.
Representative IXIDNALL. Isn't there almost an alarming increase
in the amount of services furnished as against goods prodhicedi? IVith
the production of goods gomg diown in many areas but balance.dl to
some exte.mit. by the furmmishing of services, that part of our economy
is the healthiest as against. the production of goods?
PAGENO="0121"
455
`Mr. BUTLER. I do not know. I engage in production of a service
which I think is quite valuable.
I think one can go too far in making this distinction. I mean, I think
services can be as valuable as goods, that services we perform overseas
bring us, in many cases, very good returns. I have never found this a
very useful sort of distinction. 1 think what you want to produce are
the things that contribute to your material well-being and your
quality of life, and that many of these are services. I do not find it at
all uncomfortable to see the relative production of goods decline while
the relative production of services increases.
Again to some extent we are into statistical problems. One can never
be quite sure what a goods is as opposed to what a service is. But I do
not see any way in which this contributes to our basic, say, balance-of-
payments difficulties or other difficulties.
Representative WIDNALL. Hasn't a lot of our trade surplus in the
last few years been dependent upon the sale of airplanes?
Mr. BUTLER. Yes.
Representative WIDNALL. The sale of agricultural products, some-
times at subsidized prices?
Mr. BUTLER. Yes.
Representative \~TIDNALL. As I look at the figures, 1 am just worrjed
that we seem to be getting ourselves out of the market in more than
one field. We just concentrated and depended upon just one or two
items for our trade surplus.
Mr. BUTLER. Yes. I think the sale of airplanes is a perfectly com-
petitive deal. We produce better aircraft than other industrial coun-
tries. We sell these aircraft for dollars.
Now, we have given away a lot of argicultura.l products, and we
continue to give away some. In looking at our trade surplus, and I
think one has to take account of this and in effect take out what we
give away fi'orn the real surplus, and to the extent that one does not
do this, the overall figures can be misleading. A friend of mine in the
Agricultural Department said that the problem now is to give it away
cheaper than anybody else.
Representative WIDNALL. That is probably true. My time is up.
Chairman PROXMIRE. I would like to ask each of you gentlemen to
take a crack at what is my bias perhaps, but one which is, I believe,
shared by the overwhelming majority of the American people and by
many Members of the Congress; it is that we shoi~lcl not pass the
surtax; but I would like to ask you to confine your remarks strictly
to the balance of payments. I feel that the argument is especially sharp
and clear against the surtax on this issue.
I want to say why. No. 1, the sure and swift impact of a surtax
would be to reduce the profitability of American investment.. Ob-
viously, if you imposed a surtax on corporations of 10 percent. of tile
Present tax, it sharply and directly and immediately cuts their
profit.ab~lity and discourages investment here andl encourages invest-
ment abroad and results in an outflow of capital.
In the second place, the argument. has been made that the one thing
the surtax will accomplish-it was made here by Mr. Butler I think
andl it is often made by bankers-that the one thing the surtax would
hope to accomplish would be to reduce our interest rates.
PAGENO="0122"
456
This may be true and it may be very beneficial and desirable but
from the standpoint of balance of payments I cannot see why that
would be an advantage. If our interest rates were lower than they are
abroad, obviously capital tends to flow out. People would be less in-
clined to invest here, and more inclined to invest abroad.
In the third place, I think there is a. clear case that to the extent
that profitability is not reduced-that is, that the tax is passed on to
the consumer-it will increase the cost of American goods, and, there-
f ore, tend to diminish our advantage in competition with goods pro-
cluced abroad and imported here; so, it will tend to discourage our
exports and encourage imports.
Now just one other aspect to this question, and that is, let us see
what it seems the surtax is designed to do. No. 1, the administration
witnesses always say it is going to cut our imports. Is it? It will only
cut our imports, it. seems to me, if it reduces spending by our con-
sumers. It will reduce their income but will it reduce their spending?
Spending patterns are stubborn. They are hard to change. They change
only over a period of time. The propensity to save was great last
year. It is perfectly possible that the reduction in spending is gomg
to be slow and gradual and not very sure.
But I think that the weakest part of the argument that you need a
surtax in order to hell) our balance of payments is the kind of inflation
the surtax is supposed to slow dowii. How is the pricing made on coin-
modities that we sell overseas? Many of them are foodstuffs. In fact, a
very large portion that we sell overseas is food. You are not going to re-
duce the price of wheat or the price of feed grain `by any kind of a
surtax. We all know it is not going to have any effect on that.
You take chemicals and machinery; there, I think, you caimot make
a very strong case that the surtax is going to reduce the price in view
of the `pricing practices that we have found in those industries.
As far as imports are cQncerned, with steel, and the kind of foods
we take in-coffee, tea, and so forth-the others that we d'o not have
in this country-paper base stocks-which we are going to import in
greater amoi.rnt without much regard, really, to small change in price-
rubber, minerals, fuel-and, of course, machinery and autos tha.t come
in; here again you have, it seems to me, a very weak argument that
our surtax, by stemming our inflation, is going to have a retarding
effect on imports or a. beneficial effect on exports. Now, what is the case
in favor of the surtax from the standpoint of balance of payments?
Let us start off with Mr. Behrman.
Mr. BEHRMAN. Wefl, may I start off with encouraging investment
abroad, your first point? Reduction of the profit rate here by surtax
will certainly make a. comparative difference in the profit rates. But,
from my own investigation, Senator, I caimot find any good or clear
correlation between the profit rates in the United States and Europe~
and the flow of direct investment.
Most companies look at investment oii a very long-term basis, andi iiot
at the ilnmedllate, this year or next. year, profit return. There are even
those who would indlicate that a tax on their investments wouldi not
slow it down significantly. It is too important a long-term objective to
get there to worry about differences in profit rates for any definite
given Period of time. I do not. think it wouldi have a ver serious effect
PAGENO="0123"
457
one way or the other on the outflow of investment. It might cause some
companies to look at it.
Chairman PiioxMnm. If I could interrupt at this point-isn't it true,
however, that the deterioration of the profit ratio by European firms
in the last year or so dropped from 1966-the 1967 figures apparently
are not available-and the increase in investment here tended to be
a good, natural free enterprise factor in encouraging more investment
here and somewhat slightly perhaps discouraging investment abroad?
Mr. BEI-IRMAN. Sure. This is a free enterprise reaction. What I am
suggesting is that we do not have enough information about the com-
mitments of companies and what caused them to go to say that the
decline of profit rates in Europe causes a decline in investments in-
Chairman PROXMIRE. Yes; I was not talking so much about the Ford
Motor Co. or United States Steel. I was talking about an investor,
sophisticated enough and so forth to invest here or abroad?
Mr. BEHIIMAN. A portfolio investor looking at stock? Certamly,
this would have an effect. Now, as to the reduction of interest rates:
certainly, the increase in interest rates abroad and the decrease in
interest rates here is going to pull capital out of the United States into
Europe. By the same token, if-and this gets to the heart of your
presentation-if the inflationary impact of the surtax or rather the
deflationary impact of the surtax is adequate this would bring the
money back in terms of export sales, services, or whatever else. The
real question, as I see it, is one that you pose, and that is, Can the surtax
itself have an adequate dampening effect on the inflation of items winch
affect the balance of payments?
Let me address myself to the two: the exports and the imports. I
would tend to agree with you that our export structure, given the fact
that there is a heavy element of agriculture and on the other hand a
heavy element of technologically advanced goods which are priced on
almost a tailormade negotiated basis dampens the significance of in-
flation or deflation on exports of the United States; that is, United
States prices. What is more significant are the foreign prices, and the
competitor's prices vis-a-vis the United States itself. If their prices
are going up rapidly vis-a-vis the United States then there is pressure
to look at the U.S. supplier. I would count that more significant from
the selling sta.ndpoint than the U.S. price level, because, as you say, it
is often an administered price.
But, by the same token, reverse it and put the United States in a
situation of having inflation. This creates a pull on imports, on a
variety of things which are not in the raw material area alone nor even
in the agricultural area, but are in the consumer line; and this is why
I think we have, besides this copper strike, a substantial increase in
imports, notably even in December, as a result of successive inflation.
Now, if you could dampen consumer spending by the surtax, then
this would also have an impact on the imports particularly. This is
where I think the balance-of-payments effect is more likely.
It is also likely in terms of inflationary effect on tourist spending.
If you can have a reduction of prices in the cost of vacation here, as
compared to the other areas, then there is an impact on tourism. I would
like the others to go on from there, or contradict me if they wish.
Mr. BUTLER. Again, I agree in general. I think that if you continue
the sort of inflationary policies that we have run for the past 2 years,
you are bound to have unfavorable impacts.
PAGENO="0124"
45S
Chairman PRox~iIRE. If I could interrupt at that point, Mr. Butler.
I am refering to your pi~epared statement which I thought was very
interesting because you have really suggested four proposals: (1)
to cut spending sharply; (2) to pass the tax surcharge; (3) to restrict
the rise in money and credit; and (4) to reduce our overseas military
expenditures. I agree with three out of four with great force, but it
is the surtax as far as the balance of payments is concerned that seems
to me to be pecuharily unadapted to meeting our problem.
Mr. BUTLER. Well, I do not necessarily insist on the surcharge. I
mean if you could do enough through cutting Government spending
to get our deficit clown to manageable pro~ortioiìs, then I think you
would iiot need the surcharge. I think the important thing in terms
of our balance of payments is the rate of inflation which will be neces-
sarily associated with the size of the deficits that we are running and
will continue to run unless we take action on cutting spending, raising
taxes, or some combination. But it is the size of the deficit that I think
is the critical thing.
If you can find ways to cut it down by reducing spending, then I
would say that. you do not need the surcharge. I am enough of a skep-
tic about our ability to cut spending that it is my personal belief
that you need both, but ou need them to reduce the overall deficit, the
inflationary pressure that is inevitably generated by this deficit, and
its longer term effeds on the balance of paymeiits. I think it does not
hit the balance of paymeiits very quickly, although there is some
evidence in the figures of last year that it had an impact. I think if we
could stop the inflation fairly quickly, that we would not suffer perma-
nent damage, but I think if we (10 not stop it, we will have perma-
nent damage, and it will not take very much longer to lead to this
damage.
Looking at the surcharge itself, and there are many ways that. one
can raise taxes, at the moment I suppose that an across-the-board
increase is perhaps the simplest and clearest way to do it. It. will have
effects in many ways, and in some of the areas you mentioned it will not.
I mean I do not. think it will have any immediate effect on foreign
prices as you indicate.
On the other hand, I think it will, in combination with other meas-
ures of reducing the deficit, so reduce overall demand and overall infla-
tion as to have a beneficial effect on our balance of international pay-
inent.
Chairman PROXMIRE. Mr. Machlup?
Mr. MACHLUP. Let me first pay you my respects, Senator, for the
openmindledlness and scholarly attitude with which you invite criticism
of your ow-n position. I think this is really most fair, and I bow to
you.
But let me then proceedl to that criticism. I agree with Jack Behr-
man about the rate of profit or profitability of American industry,
and it.s effect upon capital movements.
We have had experience with such matters in the past, when we
arguedl for a tax cut in 1963, and in 1964, when we actually cut. taxes.
Then it. was argued that the tax cut would increase American prof-
itabilitv relative to that abroad. and that this would invite capital
flows to the United States, which would offset the effect.s upon the
trade balance. This was said hr two Presidents and by their Secretary
PAGENO="0125"
459
of the Treasury, and several advisers-but, it was palpably wrong. It
did not do it in fact, and I think it was a poor argument in theory.
Chairman PROXMIRE. Were you able to isolate that -factor? How do
you know it was wrong? The balance of payments improved when
taxes were cut. He was right then. I-Ic must be wrong now.
Mr. MAcTILUP. WTe1I, we have seen that capital out-flow increased
after the tax cut.
Chairman Pnoxi~iinn. But there are always so many elements
111 ~olve.d.
Mr. MACIILUP. That is correct; but they said they would expect
capital outflow to decline and capital inflow to increase, and we know
that on both accounts the opposite took place. American capital had a
b~gger outflow and foreign capital had a smaller inflow, so we have
definitely seen that the argument was at least not supported by the
experience that we had soon thereafter. I would say, moreover, that
on theoretical grounds the argument was not too strong.
Chairman PROXMIRE. That coincided at the time with a number
of other things.
Mr. MACI-ILUP. I grant you that.
Chairman PR0xMIRE. Inciudin~ the Vietnam escalation, including
a tremendous boom in plant and investment here, and so forth.
Mr. MACHLUP. Exactly. The investment boom here ought to have
attracted foreign capital according to the argument, but it did not. I
would say one should never rely on these supposed probabilities. Take
your point about interest rates. The argument that interest rates will
rise if we do not get an increase in taxes is correct, but you say, "all
the better, the higher interest rates will invite an inflow of capitad."
I would say that this would be a help in financing the deficit in the
bal ance of payments for a very short period. We cannot, through short-
term variations or differentials of interest rates, reduce the deficit.
They may temporarily lead to movements of capital which, however,
have no longrun influence on the balance of payments.
Your third point was about the incidence of the tax increase. We
know so little about that. We know not enough about whether there
will be a shifting of the increased corporate income tax onto the con-
sumer. We do not know. I am doubtful about it, but I could not pos-
sibly take a strong position on this question.
Mr. BUTLER. In the short run?
Mr. MACHLUP. In the short run, certainly not. In the long run,
shifting would be likely. But new comes the main point against which
you argued. You questioned that the tax increase would really cut
imports, that it would really cut domestic spending. I cannot see how
it could fail to do that. if you take billions of dollars away from
md~viduais and corporations, at least the individuals have no way
of recouping that. They camiot all go to loan associations and get all
the money that they are paying out as taxes. Hence, the effect upon
individuals is practically certain. The effect upon corporations-
Chairman PRox~mmE. At that point, just recall the fact that up
until 1966 people had been saving at a rate of about 5.2 percent. Last
year they saved at 7.1 percent. If they go part way back to the 5.2-
they went back to, say, 6 or even 6.5-it would wipe out virtually all
of the diminution in their incomes from the surtax. The surtax would
have no deflationary effect.
PAGENO="0126"
460
Mr. MACHLCrP. Yes.
Chairman PR0x3IIRE. And the spending would be the. same. There
is a strong argument that one of the reasons why people have been
saving as much as they have, according to the Michigan Survey of
Consumer intentions, is because they anticipate inflation. Iii doing so,
they think they might not be able to have the income they need to
meet their most important needs. If this is assuaged by a tax increase,
then they would be more likely to relax and spend more.
Mr. MACHLUP. If they can. You see, there is the willingness to save
and spend, on the one hand, and there is the ability to save and spend,
on the other hand. If you take away more tax money from the people,
the consequent changes in their saving will not equal the changes in
their disposable net income. WThen disposable net income falls, there
may be some decline in saving, but there will certainly be a larger
decline in spending. So, the effects on saving are not likely to offset
the effects of the decline of disposable income upon consumer spending.
Now, as far as corporations are concerned, it would, of course, be
conceivable that they borrow all the money that they have to pay out
in additional taxes. The question is whether they can get it and
whether they want to. This is not very likely, because they will, at
the same time, feel a decline in the demand for their products, which
is precisely what they ought to feel if we really want to stop inflation.
Your last point was about the small likelihood of price cuts. I agree
with you fully, we cannot expect price cuts, or at least not substantial
cuts and not many price cuts, to be effected by the tax increase. But
what we can expect is that price increases that would otherwise have
come about will not come about, thanks to the siphoning off of money
and the reduction of potential expenditures. If taxes take away money
from people and firms, we avoid an increase in effective demand that
would almost certainly lead to increases in prices. One purpose of the
tax increase is to avoid that increase in prices, or to make that increase
in prices somewhat smaller than it would otherwise be.
The same thing is true with increases in wages. I think we will get,
this year, an increase in wages, hi wage rates and employment costs, of
at least 4 or 5 percent, perhaps more. The tax increase could save us
from some of that in further contract negotiations.
Chairman PROxMIRE. My time is up. I would just like to say that
the University of Michigan indicated `that the surtax would reduce
inflation from about 4.1-percent increase to about 3.8-percent increase.
The Council of Economic Advisers argues it would reduce it from 4
percent to 3 percent. I just cannot see that either one of these-and
especially the University of Michigan model, which I think is more
likely to be precise because they have no ax to grind, they are not
trying to push for or against a surtax-would have any very sig-
nificant effect on the balance of payments.
Mr. MACHLur. The effects on the balance of payments are not en-
tirely price effects. They are chiefly income effects. So, even if prices
were not affected at all, the mere fact that you take away some dis-
posable income will have an effect upon the balance of payments.
Mr. BUTLER. These models are wholly misleading.
Chairman PR0xMTRE. I know they are.
PAGENO="0127"
461
Mr. BUTLER. Neither of them give as much influence to the monetary
factor. We have a model that we have developed which gives-if you
give more emphasis to the monetary factor-almost no inflation.
Chairman PRox~IIRi~. The principal money manager of the Nation
told us a few days ago that the monetary policy would be much
easier if we had a tax increase than if we did not have a tax increase.
Mr. BUTLER. That is right.
Chairman Pnox~xIRE. If monetwry policy is easier it means that you
get your expansion from ease in monetary policy instead of an expan-
sion from fiscal ease.
Mr. BUTLER. But you also get-
Chairman PRoxl\Inm. And it is perfectly possible in other words
that these would tend to balance out. So monetary policy it seems to
me would be a factor that would tend to remove the deflationary ele-
ment of a tax increase. Is that right? It would tend to?
Mr. BUTLER. Yes; to some extent. On the other hand, if you take
our model and you put in a reduction in the deficit of $6 to $8 billion,
then you put in the monetary policy that would be consistent with such
a reduction in the deficit, we come out with substantially less infla-
tion for this year than without the fiscal policy. But more importantly
we come out with virtual price stability for next year. I think what
we are talking about is not so much this year as next year. A lot of
* these wage increases are going to go on, regardless of what you do, other
than great depression.
Chairman PROXMIRE. You are right when you talk about the model.
That is right. You cannot prove anything with a model. You are
absolutely correct about that. I yield to Senator Miller.
Senator MILLER. Thank you. I would like to ask any one of our
witnesses this: The point has been made that our apparent favorable
balance of trade is really nonexistent; that for 1967 the balance of
trade, favorable balance of trade, is listed at $3.8 billion, but that in-
cludes $1.6 billion of agricultural exports under Public Law 480, soft
currency donations, so that that would reduce the balance down to
$2.2 billion.
Further, that the figures on imports of $26 billion do not include the
cost of freight, whereas our figures of $30 billion on exports do include
the cost of freight, and that if we were to take a reasonable figure of
10 percent to add to the price of the imports, there would be another
$2.6 billion which would eliminate the $2.2 billion adjusted figure in
the balance ending up as a deficit rather than as a surplus. Do you have
any comments on that observation?
Mr. BEHRMAN. It has been that way for years; what is important is
yearly changes, so long as we understand what is in the figures.
Mr. MAOHLUP. Concerning the cost of freight, may I ask, Do you
mean the balance of merchandise or do you mean the balance of goods
and services?
Senator MILLER. I am talking about the cost on the merchandise.
Mr. MAOHLUP. Just on merchandise. Well, regarding the freight,
whatever you do not put in merchandise appears in service. Hence, one
really ought to, in order to compare exports and imports, take goods
and services together. If you take goods and services together, then
PAGENO="0128"
462
the payments for freight are included. So I think it is wiser not to
separate the two.
Senator MILLER. I would think so, too. But, the criticism is that we
take into account freight on our merhcandise exports, but we do not
take into account freight on our merchandis imports, and, therefore,
the mercliand' se imports should be increased to reflect, comparatively,
the freight bringing them in just as we include the freight ih carryiii~
our exports out, and this would eliminate our favorable balance of
trade.
Mr. MACIILLT. We have to clist~nguish domestic and foreign freight,
the freight paid within the Lnitecl States and tile freight paid between
the Tnitecl States border and the pomts of origin or destination. WlliciI
one of the two freights is that criticism concerned with?
Senator MILLER. I cannot answer that question, but I infer from
the c.rit.ic~sm that the freight is not equalized. In other words, the
freight is not equalized in terms of its effect on the outflow of our dol-
lars, and it should be equalized.
If I am not mistaken, I think both exports and imports are recorded
on an fob. border basis, arid that would make them comparable. That
means tile merchanchse crosses tile border, the value that it has in
going out or coming ill at the border. So I believe tilat equalization
is done.
Now to exclude an item like tile agricultural exports ullder our
support program would be quite arbitrary, because we could exclude
many other things also with equal justification. We can exclude mili-
tary expenditures abroad from our current. balance. I have done exact-
ly tills in my statistical tables, because I felt they are better visible
together with our financial transfers.
But, I do not think we can reasonably make tile statement tha.t
we do not have an export surplus, sir.
Senator MILLER. Well, I take it from what you ilave said that you
have, done some experimenting on this, and from the staildpofllt of
true balimce-of-pa ments impact, there certainly should be some adl-
justment macIc ill these figures that we receive from the Commerce
Department; shouldn't there? If we are going to look at our balance
of trade from tile standpoint of its impact on outflow of dollars aildl
inflow of dollars, tilere should be some adjustments made; shouldl there
not?
Mr. MACTILER. I think the. detailed figures are all available, and I
am sure, sir, all figures that you request from tile Department of
Commerce, inciudllng the subgrouping of these figures, will become
available to von.
Senator MILLER. I am sure the figures are available. The thing
that bothers me is that when we ask for a favorable balance-of-trade
picture, we are given a figure of $3.8 billion for last year. No backup
detail; no adjustment apparently reflected in these figures alOllg tile
lilleS winch you ilave just mentionedl. I was just wollderilig if it
would be possible for somebody like yOU to give us an analysis in
terms of the true impact oii the dollar of these net figures with the
adjustments, so that we would have some basis for evaluating those
figures ?
Mr. MACTILER. From mv reading of tile quarterly reviews in the
Suivey of Ovirent Businese, I have conciudledl that tiley present a
PAGENO="0129"
463
fairly complete picture, with: figures sufficiently detailed for me to be
qtiite satisfied with the present statistics. Not satisfied in the' sense that
I would not like them to show more favorable results, but satisfied with
the information that they reveal.
Senator MILLER. Then as far as you are concerned, when we receive
a figure of a favorable balance of trade of $3.8 billion for 1967, you
think that net figure has been refined enough for purposes of cliscussmg
the impact of the balance of trade on the outflow and inflow of dollars?
Mr. MAOHLUP. Yes; I think so.
Senator MILLER. Is it possible that in order to make sure that spend-
ing would be reduced by a~ surtax, that there should be some kind of
credit controls to accompany this?
Mr. MACHLUP. We do have credit controls by the Federal Reserve
System all along.
Senator MILLER. I am talking about retail credit, for example.
Mr. MAOHLUP. I do not believe very much in selective credit controls.
I think the most general controls are more efficient, the one through
Federal Reserve policy-through open market policy `and interest
rates-and the other through fiscal policy, particularly taxation.
Senator MILLER. I understand that, but if I gage Senator Proxmire's
concern correctly, he suggests that even though a taxpayer's incOme
is reduced by a surtax, that that would not necessarily prevent him
from either going into his bank account to get the money or going
to some credit agency to get the credit to engage in purchases, and if
you want to cover that base, would it not be important to consider
credit controls of some kind with respect to the individual consumer?
Mr. MACI-ILUP. I would warn against such a policy, which would
lead us to more and more restraints and Government interventions. I
would rely on the tax increase to do its job without being remforced
by selective credit controls.
Senator MILLER. You see we have received some intimations from
some people of concern over the tremendous expansion of consumer
credit, and at a time when we are trying to reduce spending and hold
clown inflation. This kind of a suggestion naturally is something that
should be considered. I do not say it should be followed, but I would
like to get your evaluation of `it. I think at least we ought to give the
tax surcharge a chance to work.
Mr. MACHLUP. Right.
Senator MILLER. Before we go to something else.
Mr. MACHLIJP. Yes, sir.
Senator MILLER. Thank you. Now, Mr. Butler, quoting from your
statement, you say:
* and we must avoid actions on our part such as quotas, bord~r taxes
and other devics which provoke retaliatory actions abroad.
Do I infer from that statement that you would be agreeable to say-
ing that we need not avoid actions on our part such as quotas, border
taxes, and other devices which do not provoke retaliatory action? I
mean, is the converse of this statement applicable to you?
Mr. BUTLER. I am not sure I would go along with that. In revising
the text I took out border taxes, I would have to say, which, is a very
difficult and complicated question. But, what I am trying to say is, that
if we do what we have to do to deal with our don-mestic problem of in-
flation, which I think we need to do for domestic reasons as well as
90-191--OS--pt. 2-9
PAGENO="0130"
464
international reasons, that if we review our governmental overseas
expenditures and commitments, I think we can get our balance of
payments back into balance, and this is the real way to do it, and that
such policies would not provoke retaliatory actions on the part of those
abroad.
Now, if instead we continue down this road toward more and more
elaborate controls, one of my fears is that foreign countries will re-
taliate, that the world will move back toward a system of controls
and restraints which I think would be extremely damaging to the
world. I mean, that is what I am trying to say.
Senator MILLER. You see, your statement is the kind of a statement
which certain individuals in the administration might seize upon to
quote when they come over to testify before the Finance Committee
with respect to some quota bills which are pending in the Finance
Committee, of which some of us happen to be cosponsors, and they
might cite that statement as evidence that the Chase Manhattan
Bank, at least one of its officials, does not think that these quota bills
should be considered.
Now suppose t.hat these quota bills are designed to offset discrim-
inatory action on the part of some countries. WToulcl that change
your view a little bit?
Mr. BUTLER. No.
Senator MILLER. Let me give you a classic example. Feed grains im-
ported into the Common Market are subjected to a tariff. The money
from the tariff is then used to subsidize exports of canned hams to the
United States. There are a few of the producers of canned hams in
the TJnitecl States who think this is a one-way street, and they would
like to have countervailing duties imposed against the imported ham,
cam~ecl ham, from these countries. Not that it is a matter of inviting
retaliation on their part but as a matter of retaliation, or, if you do not
like that word as a matter of offset on our part. Are you opposed to
that kind of action?
Mr. BUTLER. Yes; I am.
Senator MILLER. In 1960, the dairy imports into the United States
amounted to 600 million pounds. By 1965, they had increased to 900
million pounds; in 1966, they had increased to 2.8 billion pounds; as of
June, last year, there were at the rate of 4 billion pounds, whereupon
the President did take some action to cut them down in the year 1967,
to approximately the 1966 figure of 2.8 billion pounds. I take it. that
you would be opposed to this, and would feel that the President made
a mistake in that action?
Mr. BUTLER. I am not aware of all the details, but I will stand on
the general position that it is to the advantage of the United States and
the world to have the maximum amount of free trade.
Senator MULER. May I interrupt you at that point to tell you that
general proposition is shared by, I think, every Member of Congress.
Mr. BUTLER. May I just continue. I think there are circumstances
under which you can get disruptive effects from, in effect, free trade,
et cetera., and that I would agree that there should be provision to
make orderly adjustments in these areas. I have always thought that
one of the geniuses underlying the idea of the Common Market was the
idea that you went to it over a period of time, say, 10 years, or whatever
period, and I would support measures to promote orderly adjustments
PAGENO="0131"
465
in these areas, but with clearly the idea that you would not get pro-
tection forever, that you would have a period to make an adjustment.
Senator MILLER. Well, I think that I certainly would subscribe to
a mechanism for orderly adjustment, but when you do not have that
mechanism, and, when, as a matter of fact, you have the discriminatory
treatment in some countries overseas, which is causing serious impact
on American ii~dustry, what are you supposed to do? Are you supposed
to tell the affected industry in this country, "WTe are sorry we do not
have any mechanism for reciprocal lowering of nontrade barriers.
You will just have to get along in the name of good old free trade
even though it happens to be a one-way street in this particular case."
It seems to me, Mr. Butler, that prudence indicates that if quotas
are needed to `offset discriminatory treatment, if a country is going
to levy a tax `on our export's of fee'd grains to them `and `turn right
aroun'd and take the money that they collect on that to subsidize their
imports into this country, we cannot stand still in the name of so-called
free trade.
I recognize the desirability of free trade. T'his cOmmittee just put
`out a report on the future of foreign trade to the United Sta'tes, point-
ing out that nontrade barriers which the Kennedy Round of negotia-
tions had absolutely nothing to do wi'th can `be just as~harmful and even
more insidious than tariff barriers. So; I am just trying to elicit from
you a recognition of `the fa'ct that while `the general proposition of
free trade is fine, we have to get down to cases and facts before we
can determine whether a particular incidence of quotas not to pro-
voke retaliatory actions but to offset actions, you might say, which
are designed to provoke retaliation on our part are taken.
Mr. BUTLER. I would say only this. First, I would hope that whatever
we did would be in this category of cushioning `an adjustment and
not moving in the direction of our erecting a `lot of barriers. It seems
to me `that wh'at we need is to negotiate on nontrade barriers around
the world, and that that is the route that will lead to the greatest good
of ourselves and other countries.
If we react to these measures, `and I `agree with you that we have
been `much `more "simon pure" than other `countries, `although our
record is tarnished in some areas, we are so powerful in this world
that if we take this route there is the greatest danger that other
coun'tries will take it, that we will go back into `systems of quotas and
controls that will be extremely damaging.
Now, `having said this, I recognize the problem of some particular
industries, but I would support reasonable `measures to ea'se their
transition. I would support every possible measure on the part of our
Government to try `and reduce foreign nontariff `barriers to trade. I
do not kn'own whether that is helpful.
Senator MILLER. I `must say that I sh'are your attitude. But what do
you do in the `meantime'? What do you do during 2 or 3 years that it
might take `to negotiate? Do you let the plants close? Do you let the
people become unemployed? Or during the interim `do you establish
some kind of a countervailing offs'et with `the clear understanding that
during negotiation's you `hope that these can both be eliminated?
Mr. BUTLER. First, it seems to me we carry a fairly `big stick in the
world, and I think we `ought to get at the business of negotiating reduc-'
tion of these barriers on `the part of other countries. And, I think one
PAGENO="0132"
466
stick we carry is our ability to retaliate, if you like, if they do not
agree. I tdiink this is the next. order of business in world trade
negotiations.
Senator MILLER. Of course, when you talk about retaliatory action,
let me make one last observation. Our position before the Common
Market of our negotiating team during the Kennedy Roirncl was that
the Common Market should give us access for our grains based upon
a base period percentage. That. was our request.
Now some of these quota bills, vis-a-vis the Common Market, would
establish a quota-guaranteeing access based upon a certain percentage
of our market. according to a base period. There is something that if
the Common Market, if we should do this, should retaliate, we
might end up getting exactly what we asked them for during the Ken-
nedy Round of negotiations. Might this not be a desired result? This
was our position. This was Ambassador Roth's position. They turned
us clown on it~ but mabe this might be one way of obtaining what
we asked for by way of retaliation.
Mr. BUTLER. Well, one of the great problems is that world trade
polic3T in agricultural products ha.s made no economic sense for many
yea.rs, arid I doubt that it will, so this becomes a completely political
matter of negotiations, and this being the case, you try and get the
best deal you can possibly get in the best way you can get it. But, I
think, to go down the road of increasing quotas and industrial products
would be a tremendous backward step in the development of the world
economy, and I hope we would not get it, and I would argue this is
true even if we do guarantee access based on a. certain base period in
the past. It is a bad route to embark upon, and I think the consequences,
over time, will be extremely damaging.
Senator MILLER. Do you think it is a bad route to follow until such
time as we are able to get into reciprocal lowering of nontradle bar-
riers, which as the committee has found can be just as effective and even
more insidious tha.n trade and tariff barriers?
Mr. BUTLER. That is right.
Senator MILLER. You think that until such time that it would be
better not to follow any quota route?
Mr. BUTLER. I made a calculation once which is very hard to docu-
ment that something like 20 percent of the world's production of in-
dustrial products of movable goods as some economists call them enter
into international trade, and the fact that they do so in view of the
difficulties, the obvious difficulties of selling something in another
cOuntry, I think, is a great tribute to the forces that make trade move.
The fact that they do so despite these restrict.ions, again, I think indi-
cates the tremendous propensity on the part of the world to trade and
the very great advantages in trading.
Now, to the ext~nt you can reduce the barriers, you can increase
trade and the well-being that goes along with it very significantly, and
my only plea. would be that we move in this direction and not in the
direction of enmeshing trade in control restrictions which I t.hink
would not be to the advantage of the world.
Senator MILLER. Thank you, Mr. Butler. I share your policy views
in the long run. But, I must say, I think that looking a.t the hard facts
we have to sometimes recognize certain situations which may delay
the change of that policy but I do believe that we have a duty to the
PAGENO="0133"
467
people who are paying the tax bill in this country not to permit them
to suffer under discriminatory duties and nontrade barriers overseas
just in the name of the overall policy which you have enumerated.
rfhat policy should be a long-range objective and obtained as soon as
we can, but in the meantime, I must say, I have to think of some of
the people who are paying the bill on this side of the ocean. Thank
you very much.
Chairman PR0XMIRE. Thank you, gentlemen, for a most competent,
stimulating, and provocative morning. I must say that the questioning
at the end blends right into what we have this afternoon when we
have four experts apearing on trade and investment followed by Mr.
William Roth, the President's. Special Representative for Trade Ne-
gotiations. This has been an excellent morning. Your papers were
fine and your responses were most helpful to us.
The committee will recess now, and reconvene at 2 o'clock this
afternoon.
(Whereupon, at*1 :10 p.m., the committee was recessed, to reconvene
at 2 p.m. on the same day.)
AFTERNOON SESSION
Chairman PROXMIRE. The Joint Economic Committee will resume
its deliberations. We are honored this afternoon to have four out-
standing experts on trade and investment. I have had an opportunity
to look at most of these statements-two of the three. They are very
good and helpful statements. We will be delighted to have you gentle-
men go ahead. We have the President's Representative for Trade Ne-
gotiations who is scheduled to come before us at 3 :30. That can be
somewhat delayed, but I anticipate there will be other members of
the committee here to question you gentlemen a little later, and we
would appreciate it if you could keep your remarks to 15 minutes
or so.
At least one of the statements is extremely short, which will be
helpful. And if you other gentlemen hold your remarks down, it will
leave us more time for discussion. Your full statements will be
printed in the record in their entirety and made available to all mem-
bers of the committee and to the Congress.
We will start off in alphabetical order with Mr. Cook. Go right
ahead, Mr. Cook.
STATEMENT OP EDWARD W. COOK, PRESIDENT, COOK & CO.,
MEMPHIS, TE1~N.
Mr. CooK. Mr. Chairman, do you want me to read this or dispense
with it? it is hopefully the shortest one. Shall I read it?
Chairman PROXMIRE. Yes; you have a very concise statement. You
can handle it in any way you wish: If you want to read it, or sum-
marize it, or whatever you want.
I1\ir. CooK. In the interest of time, I will just summarize it, if I may.
Chairman PROXMIRE. Fine.
Mr. COOK. I think the thing that disturbs those of us who are en-
gaged in agricultural exports is the discoordination that is apparent
in policy, particularly as it concerns the International Grains Agree-
merit, on the one hand, which might require us, under certain condi-
PAGENO="0134"
468
tions, to impose an export tax on the exports of wheat, while at the same
time, on the other hand, we are engaged in the exploration of export
tax incentives and import tax barriers and travel disincentives.
This curious disparity of the two positions is disturbing to those of
us who are engaged in international trade, for the simple reason that
it seems to us that any effort to impose import tax ba.rriers and export
tax credits or incentives of a direct nature will result in retaliation
and the climate for world trade would be substantially damaged inso-
ħar as ability to carry on volume of business is concerned.
I would like to suggest a possible tax incentive. I think the thing
that induces most businessmen to work hardest. is that money which
they can keep. So, if I may make a businessman's approach to tax
incentives, I have in my paper a suggestion that we expand more or
less the idea of the Western Hemisphere trade tax provisions to a
worldwide basis, so that if a man has $100 of gross sales, and $25 is
export sales, and $75 is domestic sales, that the 75 percent would be
taxed at the normal applicable income tax rate, be it a corporation or
a partnership or whatever type of enterprise. The 25 percent of the
profits would be taxed at, say, 5 percentage points less.
One of the problems encountered in the regional export expansion
council work, and in the national export expansion council work, is
the number of the export inquiries which are not answered. The reason
that they are not answered is because if a man is highly engaged or
involved in domestic business and lie sits down to budget an export
department, he is immediately faced with a sizable sum of money, and
lie says, "Well, I am doing pretty well as it is. Why should I chase
a shadow when I really don't know anything about this business?"
`With the proper incentive, I think lie would be properly motivated
to pursue our goals of expanded export trade, and thus build on the
advantages which we have in our economy vis-a-vis the rest of the
world.
Chairman PRox~rniE. Thank you very much, Mr. Cook. You have
abbreviated a concise statement and have set a fine example.
(Mr. Cook's prepared statement follows:)
PREPARED STATEMENT OF EDWARD W. COOK
Mr. Chairman and members of the committee, I am Edward W. Cook. Presi-
dent of Cook and Co. of Memphis, Tennessee. Our company is specialized in the
export of United States agricultural commodities, primarily wheat. cotton, feed
grains and soybeans.
Elliot Janeway in his recent book, The Economics of Crisis, wrote, "The double
base on which the American economy stands, combining world leadership in
[arm production with world leadership in industrial production. has from the
beginning given it a distinctive advantage in world competition."
Without going into great detail let me further dramatize the importance to
United States agriculture of world trade by quoting from a synopsis of "Agri-
cultural Trade and Trade Policy." 1)y Oscar Zaglitz, published by the National
Advisory Commission on Food and Fiber in August 1967:
"(1) U.S. agriculture is one of the Nation's largest export industries. The
degree to which it can use its resources depends on the extent to w-hich it can
supplement its domestic sales by sales in foreign markets.
"(2) Its dependence on exports has increased since World War II because,
stimulated by technological progress and structural improvements, its produc-
tive capacity has grown faster than domestic demand for its products.
"(3) A major expansion of 15.5. agricultural exports was achieved after
World War II and particularly during the last dozen of years. Food aid has
been an important foreign outlet for U.S. agriculture in the postwar period.
PAGENO="0135"
469
But the great expansion in its exports had its basis in the growth of foreign
countries' commercial import of agricultural products.
"(4) Full use of the resources of U.S. agriculture will require further ex-
pansion of its exports. This will also be in the interest of our Nation; and it will
he helpful in improving the U.S. balance of payments.
"(5) The future prospects for the agricultural exports depend largely on our
foreign trade policy. In view of the frequent calls from some sectors of the U.S.
economy, and also from some agricultural sectors, for more protection, Amen-
can agriculture must not forget that the spiralling protectionism in the period
after World War I, which culminated in the "beggar my neighbor" policies of
the Depression, played a decisive role in the decline of the agricultural exports
(luring the late Twenties and early Thirties and in the collapse of agricultural
prices which resulted, and which brought distress to many thousands of farmers
in all parts of the United States. Government price supports and other govern-
mental measures, under such conditions, could not do more than mitigate the
distress."
These observations by Dr. Zaglitz have greater relevance today than when
they were written-only a few months ago. Our international balance of pay-
ments has worsened. Protectionism in the form of higher tariffs and import
quotas is once again being vociferously sought by many segments of the Ameri-
can economy, and there are signs that such policies could rapidly spread to many
countries that are important markets for American goods, particularly agri-
cultural commodities.
The Kennedy Round of GATT negotiations failed to make any significant
progress toward freer world trade for agriculture. Indeed, in one respect, thr
results of those negotiations are, in fact, a step backwards in trade liberaliza~
tion for one of the largest U.S. farm commodities-wheat. I make specific refer-
ence to the proposed International Grains Arrangement, which would be an
internally self-balanced commodity treaty.
For some 17 years world trade in wheat was in part influenced by the now
expired International Wheat Agreement. That agreement sought quite ration-
ally, at least during its early years, to stabilize short-run international wheat
prices around the long-run world wheat price equilibrium. Its fault was that,
of among the more than 50 member countries, the entire burden of carrying
world w-heat stocks was left to North America. This inordinate burden of world
wheat price stabilization, falling heavily upon the United States, was the one
principal reason why the International Wheat Agreement fell from favor.
Now we have proposed a new wheat agreement called the International Grains
Arrangement, which sharply departs froth the price stabilization objectives of
the old International Wheat Agreement. The proposed IGA would raise the
minimum world trading price for wheat by 23 cents a bushel from the previous
TWA level. Many professional agricultural economists calculate the long-run
world wheat price equilibrium as not rising at all, but rather slowly falling,
based upon rapid increases achieved in farm productivity in the form of higher
yields in response to fertilizers and new hybrid dwarfed wheat varieties. Clearly,
the proposed IGA seeks to raise and hold world wheat prices above their long-
run levels based upon the dynamics of world supply and demand. Secretary of
Agriculture Orville L. Freeman himself, in his remarks before this committee
on February 14, observed, "World trade is still an absolute necessity to a healthy
U.S. agricultural plant, and world trade and world prices cannot he established
by fiat."
Indeed, "The Annual Report of the Council of Economic Advisors," which is
an important part of the Economic Report of the President, being studied by this
committee, states on page 193, "Primary producers sometimes attempt through
commodity agreements to raise prices above the long-term equilibrium level.
They rarely succeed. Maintenance of a price above long-run cost requires restric-
tions on supply; the necessary export quotas are extremely hard to negotiate and
to enforce."
So we have before us an almost unbelievable anomaly. This government, in
struggling with a very serious balance of payments problem, is considering a tax
rebate incentive program on exports; while at the same time proposing an inter-
national wheat treaty that would require us to raise our export wheat prices,
perhaps, if necessary, by the use of an export tax on wheat. We can only lose
our export markets by this type of inconsistency.
It is my personal judgment that any consideration, much less enactment, of
export tax rebates and import border taxes is ill-advised. The proposed rnA
is even more ill-advised.
PAGENO="0136"
470
Consideration might be given to some type of income tax forgiveness on exports.
Au export tax rebate merely reduces prices, by and large, but provides little
real incentive to export. We have advantages which are not being fully utilized
to reach our goal of more exports. Income tax forgiveness on export earnings
might work this way: Assume an enterprise had total sales of ~1OO, ~25 being
export sales and ~75 being domestic sales. The enterprise's profits would be
taxed at the normal applicable tax rate on 75% and 5 percentage points less on
the 25% of profits attributable to exports. Exports need incentive more than
anything else, and given appropriate incentives business will do an adequate job.
Thank you.
Chairman PRox1~rIRE. Our next witness is Mr. Lyman C. Hamilton,
Treasurer of the International Telephone & Telegraph Corp.
STATEMENT OF LYMAN C. HAMILTON, TREASURER, INTERNA-
TIONAL TELEPHONE & TELEGRAPH CORP.
Mr. HAnILT0N. Mr. Chairman. if von don't mind I would rather
stay rather close to the text.
Chairman PRox~IIRE. All right, it is a relatively short statement. Go
right ahead.
Mr. HA3IILT0N. Yes~ sir.
My name is Lyman Hamilton, I am treasurer of International Tele-
phone & Telegraph Corp., ITT, and in that capacity I sit on top of
the flow of funds from the United States and to the United States.
Happily, there is more of the latter. I welcome this opportunity to
appear before this distinguished committee, and 1 hope to be able to
contribute in a positive and constructive manner toward a solution
to the serious balance of payments problem in which we find ourselves.
I might begin by saying just a few words about ITT for the benefit
of those who may not be familiar with the corporation.
ITT is an American-owned international corporation whose prin-
cipal business, despite its recent acquisitions, which are somewhat
publicized, is the manufacture, sale, service, and operation of electronic
and telecoimnunication equipment and systems on a global basis.
At the time of its founding in 1920, ITT had a total of 1~400 em-
ployees and in 1921, it.s first full year of operation, reported revenues
of slightly less than $4 million.
Today ITT is a system of more than 100 affiliated companies and
divisions located throughout the world. The system has a total of over
204,000 employees in 62 countries including the United States and
Canada.
It will report total sales and revenues approaching $3 billion for
1967.
ITT also, is one of the 700 American companies which took a leading
role in the Commerce Department's voluntary reporting program.
ITT is fully aware of the serious financial problems which have led
to the regulatory program and we are prepared to do everything in
our power to improve the balance of payments.
However, there is one key point regarding the balance-of-payments
regulations that should be noted in the national interest. Productive
foreign investments are not expendable. They are the very core of our
ability to wage war or maintain peace. We assume that the import-
ance of these investments is realized in the highest policymaking circles
of our Nation. And, we assume it is also realized that the long-
PAGENO="0137"
471
range* security of the United States and its allies is very much depend-
ent upon the preservation of those investments. If you curtail invest-
ments over a ieriocl of time, you limit your external income, and. with
that your ability to sustain political and military positions abroad.
U.S. private investments and services abroad have been adding about
$2 billion a year, net, to our cash receipts; and to relate that to the num-
bers that- have been discussed with the committee that is about $5 bil-
lion of income offset by about $3 billion of outflow. In more under-
standable terms, this amounts to a net inflow to the positive side of the
U.S. balance-of-payments ledger of about $5 million a day, every day,
365 days a year. If we allow this to be whittled away, we are going to
find that we will be unable to maintain our commitments for collec-
tive security and economic development around the world.
There is a classic example of the "u~hittling away" process. Contrary
to currently accepted theories of Great Britain's difficulties, the sole
reason for the deterioration of the British balance of payments was
not the trade deficit. While Great Britain has generally had a trade
deficit, she was able to make up the difference through income on over-
sea investments and services. Twice-after World War I and again
after World War IT-British investments were liquidated in the
amount of £1 billion or more each time. Her external debts increased
at the same time for Government expenditures abroad soared. As
a result, the income on her investments was insufficient to meet in-
creased costs. The inadequacy of foreign investment income was a
basic cause of Great Britain's recent fiscal retrenchment.
are concerned now that the administration's short-term solu-
tions to our problem do not cause irreparable damage to American
companies and their ability to continue to repatriate earnings in the
future.
Two areas concerning foreign direct investment covered by the
regulations are:
(1) Restrictions on transfers of capital abroad; and
(2) The repatriation of earnings as fixed by the formula in
regulations.
The first of these, the transfer of capital abroad, is directly with-
in our corporate control and we can and will operate fully within
the regulations. For example, just last Thursday, an ITT American
subsidiary completed the borrowing of $50 million in Europe, which
we especially negotiated with no sinking fund for 10 years, with the
balance-of-payments problem in mind.
According to the Survey of Current Business for September 1967,
compiled by the Department of Commerce, American companies in
1966 incurred outflows of over $3.5 billion of which $1.8 billion was to
Europe. Since much of this was for new projects, there clearly would
be room to achieve the Commerce Department's $1 billion 1968 im-
provement target through restraints in this area.
Mature companies like ITT, which have long operated abroad, are
able to remit earnings to the United States without having to send
large amounts overseas. So that there will be no question as to their
moral right to this position, let it be remembered that such com-
panies have at times during war and as a result of confiscation suf-
fered as much as 70 percent of the loss of their company in order to
remain overseas today. Certainly, the sacrifices which have been n'iade
PAGENO="0138"
472
by these stockholders will warrant treatment to enable them to con-
tinue to compete in a normal way with their oversea foreign competi-
tors, particularly when, as noted earlier, they have not been send-
ing capital overseas.
Instead of concentrating solely on restraining outflows, the drafters
of the regulations understandably attempted to close any loopholes
by which earnings retained abroad could be increased above previ-
ous levels to offset reduced outflow. However, the regulations over-
reached this objective and prescribed repatriation at an increased
and inordinately high level, particularly in Europe. Here again ma-
ture companies already have been repatriating at high levels like
ITT's 54 percent, and have been financing their growth mostly
through local borrowings. This compares with 42 percent paid as
dividends, as an average, for example, by the top 100 U.S. companies
to their shareholders.
On the other hand, the regulations on foreign direct investment an-
nounced by the Department of Commerce, January 3, imposed severe
restrictions on U.S. companies operating abroad and, if applied liter-
ally and over a long period, might well prove detrimental to the na-
tional interest.
The regulations are especially harsh on companies that have, over
many years, contributed regularly to the surpluses in the United States
balance-of-payments account.
ITT has been a large annual net contributor to the U.S. balance-of-
Pa3~me11ts position for the l)ast 20 years. Based on our 1967 perform-
ance, we are at present repatriating to the United States at the rate of
$1 billion every 10 years. Based upon our past experience, this figure
could double in the next 10 years.
A direct investor, according to the regulations, is required to repa-
triate annually an amount representing earnings from its affiliated na-
tionals in the various schedules. The amount which nmst be repatriated
from schedule C countries (Western Europe, South Africa, and the
Communist countries), for example, is the greater of, and I repeat, is
the greater of:
(1) the same percentage of total earnings from schedule C affiliates
as was repatriated during 1964, 1965, and 1966, or
(2) any earnings of schedule C affiliates in excess of 35 percent of
the direct investment, and note that that includes reinvested earnings,
in schedule C countries during 1965 and 1966.
\\There dividends have been substantial and capital transfers have
been low in prior years, what we call the base years, as in the case of
ITT and as called for by the voluntary planning during those. same
years, application of this second test for repatriation of earnings can
force repatriation of so high a. percentage of current earnings as to
make it difficult for such subsidiaries to compete with foreign com-
panies. Such subsidiaries also would encounter difficulty in borrowing
locally because, with forced repatriation of earnings at an abnormally
high rate, they would not accrue sufficient equity to support additional
borrowings.
Mr. Chairman, if I may, I would hke to refer you to the table at.
the back of the testimony.
In this table we have provided an illustration of three companies:
X. Y, and Z, all foreign affiliates of an American direct investor. and
PAGENO="0139"
473
to make it simple, we have assumed each is the sole such affiliate. Each
of these companies had 1968 earnings of $1 million.
If we start with Company X, whose situation most reflects the sub~
sidiary of a mature company in the United States, a mature direct in-
vestor, we find the company had earnings, without any growth, averag-
ing $1 million in the base period, but was paying dividends of 50
percent of distributable income.
By definition, 50 percent also was being reinvested. It is assumed
that the U.S. parent was not sending money abroad to that affiliate,
and this again would be typical of ITT and other mature companies.
However, by virtue of the requirements for repatriation as they
are written, in 1968 that company can only retain 35 percent of the
amount. it remvestecl during the base period. That is, 35 percent of a
half million dollars, which is $175,000, as shown lower in the column.
By definition, if you earn $1 million and you retain $175,000 you
have to distribute $825,000, that is an 821/2-pe.rcent dividend pay-
out rate, and I submit that, with this rate, it would be difficult to sus-
tain operations. Nobody in the United States, anxious to continue in
business, would consider a distribution at that level, and certainly not
if they were going to compete and grow.
Obviously, if the 1968 earnings, instead of being $1 million, hope-
fully had grown to $1.5 million, then that 821/2-percent payout could
only increase accordingly.
We have also shown Company Y, just like Company X, except that
instead of paying out 50 percent and bringing it back to the United
States year after year, it completely reinvested the earnings in expan-
~" and new })rojects in Europe. Accordingly, Company Y had no
dividends, so it. retained earnings of $1 million. As with Company X,
nothing was sent abroad by way of a direct transfer of capital.
Applymg the same formula to the base which is now $1 million, 35
percent of $1 million is $350,000. Therefore, under the program, Com-
pany Y, assuming it is the only foreign affiliate of the direct investor,
can pay out $650,000, or 65 percent.
Now we come over to Company Z, which is really another case of
Company Y, paying out nothing and retaining all. However, during
the 1965-66 base period, we assi~me it received a yearly average of $1
million in additional capital.
Applying the formula provided by the regulations, 35 percent of
$2 million is $700,000. Now Company Z has earned, in 1968, the same
$1 million. Therefore, simple arithmetic tells you that if it. can re-
tain $700,000, it has to pay out only $300,000 of that $1 million, or
30 percent.
Chairman Pnox~miE. At this point, will you clarify Compai~y Z?
What capital transfers could be and could not be? Would they be
transfers from foreign accounts or from dome.st~c?
Mr. HAMILTON. Well, the most classic example, I think, would be an
increase in equity in the foreign affiliate by a U.S. investor or a long-
term loan to that affiliate. WTe are not sure exactly what the regula-
tions mean, but. we think it could also mean increases in the current
account between the parent and the subsidiary.
Chairman PRox~IIRE. Does it make any difference whether it is from
this country or from abroad?
PAGENO="0140"
474
Mr. HAMILTON. Oh, yes; these capital transfers-category (d)-
shown in the schedule, would be transfers of capital from the TJnitecl
States by the direct investor to its foreign affiliate as defined in some
detail in the regulations. However, transfers to this affiliate from other
affiliates of the [J.S. investor outside the schedule C area. would be
similarly treated.
But the point I was leading to is that if capital transfers, during
the base years, had been $5 million instead of $1 million, obviously
not. in compliance, with the spirit, of the voluntary program, then you
can see that. the required dividend actually decreases and could ap-
proach 10 percent, or in certain cases it could be zero.
We felt- from the. beginning that- this was a helpful way of explain-
ing the. effect. of the regulations as they are written.
I believe there has been considerable misunderstanding of these
regulations. Many persons, in and out of Government., believe they
require, on the one hand, repatriation only at the rate existing during
the. base period, or, on the other hand, a~ the maximum rate of 65 per-
-cent. This latter figure is one that is usually reiortecl in the press.
Because the regulations are complex and difficult to understand,
their actual effect has been overlooked. The facts are that., in many
-cases, they could lead to the extreme results I have described.
It is recommended that, as an alternative, companies be allowed in
Europe a target of the equivalent, of a 65-percent payout, to be
achieved by divicieiicls at a rate iio less than the prior dividend rate
mentioned in clause 1, plus repatriation through other means avail-
able to the. company, . such as foreign borrowings. Consideration also
`should be given to bringing all companies at least to the present aver-
age level of dividend payout and remittance for foreign subsidiaries
of U.S. manufacturing companies.
Gentlemen~ these regulations are also being read in Europe and an
increasing number of examples are finding their way into the Euro-
pean public press, reflecting mounting irritation for needlle.ss inter-
fereiice regarding repatriation of earnings.
Iml)ortanth-, and as evidenced by the data from the Commerce Be-
pa.rtment. referred to earlier, there is no need to interfere with -any
comnpa.n that- is repatriating earnings at a reasonable rate. Neverthe-
less, because of the high repatriation rate reqmredi by time regulations
as they now stand, it is essential that they either be modified or ad-
ministered with extreme flexibility if the reactions in Europe are not
to jeopardize the earnings themselves, to say nothing of their
repatriation.
Already, the French have warnedl that if U.S.-owned companies
there-which are organizedi undier and subject to French law-are corn-
pelledi to pay out a disproportionate amount of earnings, the French
(i-overnment may regulate the amount of payout. The French Govern-
ment has already cliscussedi this subject with its partners in the Com-
mon Market, audi if relief is not. grantedi on a judicious basis, it can
be expected that not- only France but the rest of the Common Mar-
ket-certainly to be followed by the. rest of Europe-may impose re-
strict-ions on the amount of earnings that may be returnedi to the
United States.
We have. also learned that the Spanish Government is preparing a.
brief for a change in its classification undier the regulations so as to
PAGENO="0141"
475
receive the same treatment as Greece and Finland. If not granted,
there is danger it may take retaliatory measures.
Tfie foreign governments take the understandable position that the
United States has no more right to tell them how companies in their
countries should be operated than those governments have to tell the
United States how to run companies in the 50 American States.
The European governments, on the other hand, are willing to co-
operate within reason.
ITT's oversea affiliates, like many others, are run by foreign na-
tional citizens. Our boards of directors are almost wholly foreign
national citizens who are often distinguished leaders of busmess and
finance in their respective countries. In carrying out their duties they
have and are obliged to follow the rules and laws of the countries in
which they are domiciled, in corporated, and operated. These boards
are also composed of representatives from labor and minority stock-
holder interests. It should be noted that in some places in Europe em-
ployees by law participate in profits and management.
Because ITT has been reasonable in its manner of operation, these
directors have been fair in their manner of dividend declaration. This
is shown by their record of 54 percent dividend distribution which is
almost one-third better than the average level of domestic dividend
declaration in the United States.
In short, in managing these companies we cannot be unaware of
local laws, local boards and long-standing supply commitments to
their own Government. Indeed there is reason to believe that many
of our friends would consider such disregard morally wrong and per-
haps indefensible.
The regulations themselves, therefore, if applied literally, would
be self-defeating. They would not solve the problem at which they
were aimed . . . unless revised and amended on the basis of justice for
all concerned.
Under repatriation regulations U.S. companies in Europe, for ex-
ample, will not be able to expand and grow and compete effectively
in the marketplace. They will be under extreme pressure just to stand
still-to maintain their previously hard-won positions-while their
competitors take over the market. Eventually, U.S. companies may be
unable to send back dollars at all. Thus, an absolutely vital source of
dollars flowing into the United States-from the American business
investment abroad-could be dried up at a time when the dollars are
most needed.
If the regulations are to stand, then we believe they should be admin-
istered with flexibility so as to alleviate the harsh results I have de-
scribed. We believe further that companies that historically have
contributed to a favorable balance of payments should be the first to
receive selective treatment for the practical assurance of continuing
their inward cash flow.
ITT has requested an exemption from the repatriation formula
from the Departn'ient of Commerce on the basis of just this logic. We
are asking for permission to continue to contribute to the overall bal-
amice-of-payrnents gain in 1968 through all the means available to us
without the damagmg consequences which would result from the
repatriation targets of the present regulations.
I would like to add that the able staffs of the Office of Foreign Direct
Investment of the Commerce Department and the members of the
PAGENO="0142"
476
Inter-Agency Committee have already demonstrated a genuine inter-
est m helping us to solve these problems, including those that would
be created by the literal application of the regulations regarding
repatriation.
U.S. private investment overseas has generated a continuous surplus
for the balance of payments. I hope you will agree that such invest-
ment as is already in place especially should not be penalized, nor
deprived of the capability to continue generating a net dollar flow into
the United States.
A reasonable dividend flow from U.S. earnings in Western Europe
would recognize the need for balance between today's dollar inflow
and tomorrow's growth and ability to compete, and, therefore, tomor-
row's dollar inflow.
There are many searching questions about the new balance-of-pay-
ments regulations that have yet to be answered publicly, and in closing
I would like to point out just a few today. Gentlemen, what specific
changes occurred in the last several weeks of 1967 which caused the
administration to impose severe restrictions, in the private sector, and
to recommend further restraints to the Congress? What will happen
after the overseas reservoir of private earnings is dried up through
forced high repatriation if the gold flow problem still exists'? Will we
repeat the history of the British Empire? Will we lose our position of
world leadership because of our inability to pay our way? Lastly, is
there a plan-a plan that includes drastic cuts in public spending-
in existence now? All the options should be considered before em-
barking upon a premature and possibly dangerous course of action.
Finally, I would like to say that ITT's interest to strengthen the
dollar is just the same as the administration's. This is everyone's dol-
lar-it is a public dollar, a irivate dollar-it is your dollar, and mine.
It would make good sense, then, to give the private sector some en-
couragement and some leeway while it helps to defend this U.S. dollar.
Thank you.
(The chart referred to follows:)
Company X
Company Y
Company Z
1968 earnings
Base pnriod averages:
(a) Earnings
(b) Dividends
(c) Retained earnings
(d) Capital transfers
1968 requirement:
Retained earnings (35 psrc~nt cf (c) plus
(d))
Dividend amount
Dividend rote (percent)
$1,000,000
1,000,000
500, 000
500,000
0
175, 000
825. 000
$1,000,000
1,000,000
0
1,000,000
0
350, 000
650, 000
$1,000,000
1,000,000
0
1,000,000
1,000,000
700, 000
300, 000
823~
65
30
Chairman PROXM~E. Thank you.
Our last witness is Mr. Robert M. Norris, President of the Foreign
Trade Council of New York. We are delighted to have you, Mr.
Norris.
PAGENO="0143"
477
STATEMENT OP ROBERT M. NORRIS, PRESIDENT, NATIONAL
FOREIGN TRADE COUNCIL, INC., NEW YORK; ACCOMPANIED BY
MELVILLE H. WALKER, VICE PRESIDENT, NATIONAL FOREIGN
TRADE COUNCIL
Mr. Non~is. Mr. Chairman, I think we can live within the bounds of
our time requirements, and we attach sufficient importance `to our
statement that we would like to go over ~it with you in full.
We appreciate, of course, the opportunity to appear here in behalf
of the council. I think most of the members of your committee and
other members of the council comprises a broad cross section of the
U.S. companies engaged in all major fields of international trade and
investment, including manufacturers; exporters and importers; com-
panies engaged in rail, sea, and air transportation; bankers; and in-
surance underwriters.
It `is my understanding that the emphasis, this afternoon, is upon
that part of the President's Economic Report `dealing with the balance-
of-payments program announced on January 1, 1968, and its implica-
tions with relation to our foreign trade and investment policy. T'he
need to correct the `recurring `deficit position is manifest.
Among the specifics under the programs with which we thus far have
had t'o deal are the foreign direct investment regulations issued by
the Department of Commerce, pursuant to Executive Order No. 11387,
and the travel tax program proposed by the Secretary of the Treasury
in his statement before the House Ways and Means Committee hear-
ings on February 5. Consequently, within the basic framework of our
position on the balance of payments, my statement deals primarily
with these two matters'.
`The Council and its membership have long been concerned with the
U.S. balance of payments `and have been reviewing balance-of-pay-
ments data annually since 1951. For some time we have stressed the
paramount need for the United States to take meaningful measures to
restore a sustainable balance `in the U.S. international payments and
to assure the integrity of the dollar. In this connection, the Council,
since 1914, has annually sponsored and con'ducted the National Foreign
Trade `Convention. At these conventions U.S. business executives
examine important issues in our foreign economic policy and develop
recommendations related thereto.
The 54th National Foreign Trade Convention, in its declaration
adopted on November 1, 1967, included the following resolution con-'
cerning the bal'ance `of payment's:
BALANCE OF PAYMENTS
Notwithstanding the encouraging steps toward strengthening the international
monetary system, the need remains paramount for the LTnited States Government
to take meaningful measures to restore a sustainable balance in the United
States international payments and to assure the integrity of the dollar.
The need fundamentally is for the United States to orient its balance-of-pay-
ineiits policies to expansion of both world trade and investment. Remedial incas-
ures should be derived basically from an overall integration and consistency of
monetary, fiscal, taxation, export financing, trade promotion and investment
policies. The Convention regrets the harmful lack of consistency in sonic meas-
ures taken in recent years.
Primary requirements for strengthening the United States balance of pay-
ments at the present time are the restraint or offsetting of inflationary pressures,
PAGENO="0144"
478
from whatever source, and the preservation of cost-price levels in the United
States, compared w-ith other countries, which will enable the products and serv-
ices of American industry to compete in world markets.
To this end, the Convention emphasizes the importance of collective bargain-
ing settlements and pricing policies which are consistent w-ith price stability,
and the reduction of Federal spending that is not absolutely required to support
the war in Viet-Nam and other needs of national defense or for domestic pro-
grams of urgently high priority.
A particular requisite for the longer run strengthening of the United States
balance of payments is the increased availability of export financing and of
capital for expansion of the facilities abroad which are required for holding
and expanding the United States position in world markets.
When the "voluntary program" was initiated in 1965, the United States Gov-
ernment acknowledged that over the longer term United States investments
abroad created substantial net receipts-that inflows from incremental exports,
interest and dividends, royalties and fees more than offset the dollar outflow
from initial and continuing investments. The Convention holds that these more
significant long-term benefits should no longer be penalized and recommends the
termination of the "voluntary program" without further restrictive controls.
The Convention urges the United States Government to continue to explore
possibilities for export expansion through tax and credit incentives, competitive
terms for export financing, and for greater access to foreign markets through
further trade liberalization, particularly by removal of nontariff barriers.
The Convention urges continued efforts by the United States Government to
persuade other developed countries to assume a greater share of the payments
burden of providing military and economic assistance to nations of the free
world. It points to the desirability of attracting foreign investment in the United
States and to the need for continued action by business and the Government to
this end. It supports efforts of intergovernmental cooperation which will assist
in bringing about a lasting reduction of the United States balance-of-payments
deficit.
Foiuiiox DIRECT INVESTMENT REGULATIONS
~Thile fully recognizing the emergency impact of international
financial develop1nentS in late 1967 upon the U.S. balance-of-payments
position and the need for the U.S. Government to take prompt. steps
to meet the situation, the National Foreign Trade Council is seriously
concerned with that pa.rt of the balance-of-payments program which
imposes mandatory controls on foreign direct investments as pro-
vided in the regulations issued on January 3, 1968, by the Depart-
ment of Commerce. lYe have communicated to the Secretary of Com-
merce the main problems and areas of immediate concern which these
regulations pose for U.S. direct investors and their foreign affiliates,
and have suggested certain amendments and changes in administrative
procedure to mmimze as far as possible adverse effects on the normal
conduct of international business and the balance-of-payments earn-
ings of the United States.
The points covered in our coinnnmication to the Secretary of Com-
merce on January 15 are:
1. REPAYMENTS OF OUTSTANDING LOANS AND FUTURE BORROWING ABROAD
Many companies, particularly in their efforts to cooperate under the "volun-
tary program" since 1965, have had their foreign affiliates raise their capital
requirements through borrowing abroad. Many of these arrangements have pro-
vided that such borrowings would be repaid out of the foreign affiliate's rev-
enues. Many foreign affiliates will be placed in difficult cash positions when they
are mandated to repatriate earnings and also obliged to repay borrowings ex-
pended for capital requirements.
This pressure on the cash position of foreign affiliates will be intensified in
those instances in which repatriation of earnings, as urged under the "voluntary
program," was at high levels during 1965 and 1966, and will be accentuated
u-here companies in order to comply with the "voluntary program" guidelines
PAGENO="0145"
479
on repatriation borrowed for that purpose. Under Section 1000.202 a corporation
is required to remit at the same percentage as it remitted under the "voluntary
program" when that percentage is higher than the prescribed percentage under
the mandatory program, whereas a company that did not remit under the "volun-
tary program" is limited to the percentage prescribed under the mandatory
program.
The effect of these provisions, together with the moratorium on new capital
inflow into Schedule C countries, will be to force foreign affiliates int.o further
borrowing. Their capacity to borrow, however, will be seriously impaired by
Section 1000.312 (e) (1) and (2) of the regulations which provides that any
satisfaction of an obligation of a direct investor incurred as a result of a guar-
antee of an obligation of an affiliated foreign nation, or the assumption of a
liability of an affiliated foreign national, is deemed to constitute a transfer of
capital. Such transfers are prohibited to Schedule C countries and are otherwise
limited for countries in Schedules A and B. Thus, since a U.S. parent would no
longer be able to guarantee the loans of its afhhiated foreign nationals in con-
tinental Europe, these affiliates will be forced to obtain their short and medium
capital requirements in the increasingly expensive long-term money markets.
this will diminish future earnings available for repatriation to the United
States.
These provisions reduce both the capacity of foreign affiliates to repay loans
and to secure further borrowings, thus weakening their competitive position and
closing the door for required capital to meet their normal grow-th needs. Accord-
ingly consideration should be given to permitting ihe net long-term portion of
borrowings expended in direct investment to be included in calculating the in-
vestment :base. In addition, an amendment of the regulations is urgently required
to permit U.S. parent companies to perform under their guarantees of the loans
of foreign affiliates and to offer guarantees of the loans of foreign affiliates that
would be acceptable to foreign lenders. We welcome indications that clarifica-
tion on this point may shortly be expected.
We take cognizance of the fact that there was an amendment to the
regulations on January 23 and a general authorization issued which
does permit the entering into and performance under guarantees in
accordance with that general authorization. Of course, that is a wel-
come step to overcoming some of the problems.
Turning now to the next item:
2. PRiOR CONTRACTUAL COMMITMENTS
The regulations present serious problems with respect to work in process and
commitments under investment programs which were entered into prior to
January 1, 1908. Such commitments, for example, can involve purchase of addi-
tional shares of capital, the requirement `to supply industrial property, services,
equipment, raw material, parts and components. Basically the question is how
such commitments and contractual obligations can be honored, particularly in
respect of Schedule C countries in view of the limitations imposed by the mora-
torium on new investments, the limit of 35% of earnings for reinvestment, the
requirement for repatriation of earnings and of short-term assets, and the pro-
hibition against satisfaction of an obligation of a U.S. parent company as a result
of a guarantee.
The only relief for the foregoing problems afforded by the regulations is by
exemption on a ease-by-case basis. Is this administratively feasible? Any delays
and uncertainties will unduly penalize and disrupt companies in the conduct of
international `business. Could not some of these issues better be miset on a broad
policy basis either by revision of the regulations or by issuance of instructions
under which companies would have `assurance that, under specified conditions
or limits, exemptions would be granted to permit carrying out prior investment
commitments.
3. REPATRIATION OF DIRECT INVE5TMENT EARNINGS
In addition to the adverse effects of the repatriation requirements referred
to above, U.S. direct investors are confronted with problems under the follow-
ing situations:
(a) A direct investor is defined under Section 1000.304 as a U.S. person who
owns or acquires 10 percent or more of the voting power or a right to 10 percent
OO-i91-GS-----pt. 2-iO
PAGENO="0146"
480
or more of the earnings and profits of any foreign national and is subject to
the mandatory requirements of the regulations. It is impossible for a U.S. direct
investor, owing as little as 10 percent of the stock in a foreign corporation where
the remaining stockholders are foreign nationals, to repatriate funds against
the will of the foreign nationals. In this connection it should be pointed out that
the ability to average out repatriations within a particular schedule of countries
will prove of little benefit to U.S. corporations with limited operations overseas
or within a given schedule of countries.
(b) A U.S. investor having a majority position in a foreign national who is
required to and does repatriate the amounts prescribed in Section 1000.202 of
the regulations may be liable to a stockholder's suit by an aggrieved minority
shareholder. This problem is aggravated where the U.S. investor can not repatri-
ate all or part of the earnings of a wholly owned foreign subsidiary and, in an
attempt to average, repatriates funds from an affiliated company within the same
schedule of countries to the detriment of the minority interests.
(c) Many countries prescribe partial or complete restrictions on any remit-
tance from such countries. For example, in Finland dividends may be remitted
currently only to the extent of 25 percent of capital stock with the balance being
remitted over a 5-year period. In Brazil, there is an excess remittance tax rang-
ing upward to 00 percent of any remittance exceeding a prescribed limit. Other
countries prohibit repatriation of current year's earnings until some time after
the close of the year in which earned, while other countries may block the re-
patriation of funds where capital has been impaired in prior years but w-here
the company does have a profit in the current year.
In these situations, the regulations should also provide relief from the man-
datory repatriation formulas. Here, too, it should he pointed out that averaging
within a particular schedule of countries will, in many instances, prove of little
benefit to U. S. corporations.
4. OPEN ACCOUNT SALES TO AFFILITATED FOREIGN NATIONALS
Expansion of U.S. exports is a fundamental objective of the U.S. program for
strengthening the balance of payments. U.S. exports to foreign affiliates con-
stitute a substantial percentage of our total exports and have increased sig-
nificantly in recent years. However, Section 1000.312(d) provides that a net in-
crease in advances upon open account to an affiliated foreign national constitutes
a transfer of capital.
Limitations on net increases in open account as governed by the limitations
on traasfers of capital under the regulations, will inhibit the growth of U.S.
exports to affiliated foreign nationals. Provision, therefore, should be made for
some growth in outstandings on open account, for example, by allowing such
outstandings to grow commensurately with the rate of increase in the value of
exports.
Clarification is needed also as to whether advances on open account between
affiliated foreign nationals are excluded under Section 1000.312(d).
Our communication was acknowledged by the Secretary of Coin-
merce with appreciation for its clear statement of the problems raised
by the regulations, advising that it would be carefully studied and con-
siclereci by the Department in the management of the new program.
As you have already seen, it has done this with respect to guaran-
tees. We again emphasize that the recurring deficits of the U.S.
balance-of-payments position cannot properly be attributed only to
direct foreign investments or to any other single item or class of
transactions. Nor can restriction upon the outflow of any one item or
class of items in itself assure reduction in the overall U.S. balance-
of-payments deficit. Even in the short run, as under the voluntary
program, gains from restraint of foreign direct investment will be
offset by subsequent losses. Strains on international capital markets
as well as retarded exports and diminished inflows of investment in-
come will reduce receipts on the credit side of our international ac-
counts. In conmiec.tion with stemming outflows, action to reduce Gov-
ernment expenditures overseas is a vital element in the program.
PAGENO="0147"
481
Efforts should continue to be maximized to this end and to assure that
governmental procurement requirements are met as far as possible
from U.S. sources.
Historically, international trade and private oversea investment
have been favorable factors in our balance-of-payments. Over a 10-
year period through 1966, the cumulative capital outflow for direct
investment was $21 billion, whereas, from investments the cumulative
income to the United States was more than $29 billion, and fees and
royalties have amounted to more than $5 billion. Exports to affiliated
companies, and here I am referring to exports of finished goods
and services, represent approximately 25 percent of all U.S. ex-
ports. There has been a steady growth in the export of goods and
services. The controls which have been placed on the direct investor can
serve only to make it more difficult for business to make a positive
contribution to our admittedly critical balance-of-payments situation.
We are concerned with the indications that these controls will lead
to retaliation by other countries against the best interests of the United
States.
PRoPosED TRAVEL TAX PROGRAM
The National Foreign Trade Council as well as the Declarations
of National Foreign Trade Conventions have long emphasized the
constructive force of travel in the expansion of foreign trade, and
have supported positive efforts both of Government and of the travel
industry in promoting travel to and within the United States. Meas-
ures intended to restrict or curtail international travel as a means of
narrowing the balance-of-payments gap have been opposed as short-
sighted since any meaningful curb on tourist expenditures abroad can
only constrict exchange receipts and consumer incomes in many of our
most substantial export markets which rely on these earnings to
balance their own accounts.
The Council is most seriously concerned with the proposals now
under discussion by the Treasury Department with the Congress, as
described by Secretary Fowler, on February 5, in testimony before the
Committee on Ways and Means.
The proposed plan would place upon that section of the business
community which is contributing to the positive side of the balance-
of-payments ledger penalizing additional taxation on the necessary
work of doing business. The inclusion of business travel in any pro-
posed travel tax program would be clearly self-defeating in that it
would hamper the efforts of businessmen and companies to increase ex-
ports and would increase the costs of maintaining market positions
already established and of managing foreign investments which are
contributing favorably to the Nation's balance of payments.
CoxoLusIoN
Mr. Chairman, in concluding my statement may I revert to our
basic position regarding the balance of payments and the paramount
need for our Government to take remedial measures to restore a sus-
tainable balance in our international payments and to assure the
integrity of the dollar. It is our conviction that the basic overriding
task in a balance-of-payments program is to assure that all of its es-
sential related elements involving monetary and fiscal policies will be
PAGENO="0148"
482
carried out so as to check inflation, reduce governmental spending, ancT
strengthen the competitive position of U.S. industry in world
markets.
\\Te have emphasized to the Secretary of Commerce, and again
toda we stress to you that the significant longer term benefits of ex-
panchng trade and investment should not be peiialized by any undue
prolongation of controls.
Chairman PROXMIRE. Thank you, Mr. Norris.
Congressman Boggs?
Representative BOGGS. Mr. Chairman, I think these gentlemen have
all macIc very fine statements. I have just one or two questions, be-
cause I have a meeting in just a few mimites. Mr. Cook, what meas-
ures do you suggest for the expansion of exports?
Mr. COOK. Well, I think the first thing that we should do as far as
exports are concerned is to not enter into something like the Inter-
national Grains Agreement which, as you will note, will raise the trad-
ing limits to a point which is out of kilter with the long-range price
equilibrium as the professional economists have calculated it.
I think we get into a residual supply position. We are in that area
in cotton anyway. We get even more in a residual sup~ily position,
and I am afraid that in view of what is being discussed in New
Delhi right now at UNCTAD II that this is the beginning of another
series of international commodity agreements, such as the famous
coffee agreement which has cost us, I believe, something like $500
million to $800 million in excess prices. And I am doubtful that the
money ever got exactly where everybody hoped it would get.
So, I would say that the current policies of the administration are
excellent insofar as cotton, wheat, corn, and perhaps even soybeans,
but anything that tends to restrict trade and step backward rather
than look ahead, is a great mistake.
So, to be specific and responsive, do what we are doing, but let's
don't turn the clock back.
Representative BOGGS. I don't quite follow you. The coffee agree-
ment., for instance, I believe, was supported by every participating
country. ~\Thile it may have had some small effect upon the price to
the consmners of the United States, it in turn has had a tremendous
effect upon bolstering the economy of the affected countries, particu-
larly in Latin America. What substitute would you have for that;
foreign aid?
Mr. Coox. Well, I don't know that it really has had quite as much
effect as you imply, because they are engaged now with a tremendous
coffee surplus, and in Brazil they are plowing up coffee trees and
putting them in cotton. So, I would argue, Mr. Boggs, a little bit with
the statement that it has done quite as much good as it looked like it
was going to do on paper, although I hast.en to say I am not an expert
on the International Coffee Agreement. It has cost. us $500 million to
$800 million over the life of the agreement in excess c.offee payments.
Representative Boacs. Aside from some of these international agri-
cultural agreements, what other suggestions do you have?
Mr. CooK. WTell, as I said before, the thing that g'ives incentive to
a businessman more than anything else is his ability to keep money
in his company or in his pocket., and an export tax re.bate~ which has
been discussed, seems to me to be the wrong way to go about it.
PAGENO="0149"
483
What we would be more interested in is getting more people into
the act, and taking advantage of the natural advantage we have, which
is in the balance of trade, and in agricultural commodities. I think they
amount to 22 percent of the total and 50 percent `of the net on our
favorable balance of trade, and I think the policy is fairly successful
as it is. I have no suggestion that it be changed. Rather, I am suggest-
ing that it not be changed as we are threatening to do under the Inter-
national Grains Agreement.
Representative BOGGS. I don't want to put any words in your mouth,
but doesn't it seem logical that we should continue in rather hard
negotiation with the import countries? We tried to do that in the
Kennedy Round. We succeeded very well in the nonagricultura~l com-
modities in the Kennedy Round. I know it wasn't in the agricultural
commodities, but it was the question of either negotiate, or erection of
new barriers and retaliation. Isn't that just about what it was?
Mr. COOK. Well, I think that is true. Insofar as the GATT negotia-
tions of the Kennedy Round, I really think that nothing was achieved
for agriculture.
Representative B0GG5. Nothing was achieved?
Mr. CooK. No, sir.
Representative BOGGS. That is a pretty broad statement.
Mr. Coow. I would be willing to repeat it, but maybe I should say
"very little" rather than "nothinQ."
Representative BOGGS. Mr. Hamilton, I would like to ask you a
question or two. First, let me congratulate you on the very fine job that
your company has done all over the world for so many years. I would
be terribly distressed if anything that is done by our Government
would have an adverse effect upon the continued expansion of your
company.
But, what really gives me concern is that both before this committee
and before the legislative committees which have responsibility in
these `areas, the `Ways and Means Committee, for example, I can't find
anyone other than the administration advocating any positive
programs.
There is a dollar drain, and the last quarter of 1967 witnessed one
of the heaviest balance-of-payments deficits that we have had. 1\Te
are beginning, it seems to me, to lose in the relative position of ex-
ports with respect to the imports.
WThat I am interested in is what do you recommend to curtail dol-
lar outflows? I know your company has a big dollar inflow, so may-
be you haven't thought about it from that aspect, but when confronted
with these problems, you always have to have some kind of a solu-
tion. What would your solution be?
Mr. HAMILTON. Mr. Boggs, I would really rather not try to deal
with all of the aspects of the balance-of-payments problem. You
have had far greater experts advising you in other areas.
But, clearly, where you have a source that is contributing regularly,
the last thing you would want to do is take shortrun measures, which
may or may not be helpful, and in the process actually jeopardize
the source. That $2 billion has been very important, and this is not
just in 1966 and 1967, but going back quite a few years you find in the
Commerce Department statistics the same contribution.
PAGENO="0150"
484
Representative BOGGS. Maybe I should ask you a specific question.
Do you know any practical way of resolving the problem that seems
to be almost unique with ITT in light of these regulations ? Have
you gotten any relief from the Commerce Department?
Mr. HAMILTON. Well, obviously, I have gotten to know the ad-
ministering staff quite well since the first of the year, and there is a
general recognition by them that as they apply in any one case these
regulations may have some rather unusual and harsh consequences.
In effect, they say this merely gives them the right to ask us to come
in and sit down and talk about our entire program. What are we go-
ing to do during all of 1968 with respect to our net flow abroad?
We are perfectly willing to do that. In fact, the exemption that I
mentioned we had filed is an application to do just that and to agree
on a level of inflow that shows some progress over last year's, but to
1)erinit us to bring it back in all the ways available to US, SO that we
don't have, to rely so heavily on dividend repatriation. Their ~OSi-
tion is that we should come in and talk about it and they will try to
be understanding. I think our complaint-
Representative BOGGS. Try to do what?
Mr. HAMILTON. To try to be understanding about the peculiar prob-
lems of ITT. I must say these are able and hard-working men, and
they have had a very difficult time since the first of the year. Person-
ally I am grateful that I am not put in their position where I am
supposed to have the wisdom to review the international programs
of 700 or 1,000 or eventually 3,000 or 4,000 companies, many of whom
have the complexities of ITT, and make judgments about them in such
a wa that there is equity, that there is an understanding of the needs
of the companies and their shareholders, and that the l'ong-range inter-
ests of the ilLS, balance of payments are properly served.
Frankly, this is taking on a tremendous responsibility.
Representative BOGGS. Do you feel under the existing circumstances,
with special reference to your own organization, that. you may incur
some degree of retaliation from some of these other countries?
Mr. HAMILTON. I think ITT is not alone in this. I think any time
that seasoned companies in Western Europe which are. not now re-
ceiving additional financial support from their parents, but. are mere-
lv repatriating a fair portion of dividends every year, are asked to
go from a level of repatriation from, let's say, as in my example, 50
to 80 percent, then I think it is clear that you would be jeopardizing
the long-range interests of your company. Part of it would be the
relationship of the affiliate with its Government, part of it would be
the relationship with its creditors and, finall, with its competitors.
Representative B0GG5. You have built up a great deal of capital,
have you not, in these otlìer countries, that you are able to use with-
out any recourse to American capital?
Mr. HAMILTON. This is correct. In our particular situation, these
subsidiaries have been over there for 40 and 60 years. As I mentioned,
the~- are staffed almost. entirely by nationals. The boirds are almost
entirely nationals, audi their relat~onships with the local banks are
intimate.
These are good hank relationships, audi this is why these com-
panies can grow and expand without asking for assistance from the
Tjnitecl States. When we do borrow at a. senior level as we did in the
PAGENO="0151"
485
case of last week's issue that I just mentiOi1ed, this is mostly so that
we can do new things such as acquisitions and new ventures.
Representative BOGGS. Mr. Norris, I would like to contmue with
you for a while, but we have a rule on this committee limiting each
member to 10 minutes.
Mr. Hamilton, I must congratulate you on a fine statement.
I do have a question that I would like to address to Mr. Norris. I
might say, Mr. Norris, as you know, as chairman of the Subcommit-
tee on Foreign Trade Policy of this committee, that I have, I think.
worked as hard as anyone to make trade freer between nations of
the world. I gather that you are opposed to most of these recommen-
dations, including the proposed travel tax and the others, and in the
last paragraph here of your statement, or the second to the last para-
graph, you say:
It is our conviction that the basic overriding task in a balance-of-payments
program is to assure that all of its essential related elements involving mone-
tar~~ and fiscal policies will be carried out so as to check inflation, reduce gov-
ernmental spending and strengthen to competitive position of United States
industry in world markets.
I notice you don't say anything about a tax increase.
Mr. NORRIS. There, again, I think it is a part of a basic overall inte-
grated program, Mr. Boggs. I am not here as an authority on fiscal
matters.
Representative BoGos. You know what you are talking about.
Mr. NORRIS. I realize that, but I say this: My basic concern is the
fact that we must take steps to halt an increase in the deficit.
Representative BOGGS. Let me ask you specifically, do you think it.
is possible, to use your own language, to assure "that all of its essential
related elements involving monetary and fiscal policy will be carried
out so as to check inflation," and so forth? Do you think that is pos-
sible without a tax increase?
Mr. NORRIS. I don't think it is possible without a tax increase, sir;
but, what I am trying to say is, I think that in invoking a. tax sur-
charge, I think there must be other things clone as well.
Representative BOGGS. Spell out exactly, if you don't miiicl, what we
have to do.
Mr. NORRIS. I think there should be every effort made to reduce our
Government expenditures abroad-
Representative BOGGS. Excuse me for interrupting, but will you spell
out where we should do that?
Mr. NORRIS. I think this can be done by bringing back unnecessary
troops from abroad.
Representative BOGGS. From where?
Mr. NORRIS. I would think from Germany.
Representative BOGGS. You think they are unnecessary in Germany?
Mr. NoRRIS. I think to the extent that they are maintained there
along with their families they probably are.
Representative BOGGS. How many do you think are unnecessary
there?
Mr. NoRRIS. I don't have that.
Representative BOGGS. I am trying to figure out how much this
would save. You see, we are confronted with specific problems, and
it is very easy to give generalized answers. I think when you appear
before these conimittees that you should be prepared to give specific
PAGENO="0152"
486
suggestions. Now, you say return troops. How many troops and how
many dollars would you save?
Mr. NORRIS. I am not in a position. Mr. Boggs-
Representative BOGGS. Then, let me spell out others. Where else
would YOU save money?
Mr. NORRIS. I think we could reduce the number of people we have
abroad on behalf of the State Department and certain Government.
agencies.
Representative BOGGS. They have reduced them considerably. How
much more would you reduce them?
Mr. NoRRIs. I am not in a position to give you figures because I
haven't studied it, sir.
Representative BOGGS. Do you have any specific recommendations on
domestic expenditure reductions?
Mr. Nonnis. As we say in our basic position, we think that domestic
expenditures should be maintained only for those of high urgent
priority.
Representative BOGGS. Do you have any suggestions a.s to priority?
IJnderstancl, we. are confronted with legislating on these proposals.
Mr. NORRIS. Yes; and I am well aware tha.t this is a problem right
within the Congress today.
Representative. BOGGS. It certainly is.
Mr. NORRIS. In attempting to reconcile some of the things that the
administration would like to do with what the Members of Congress
feel should be done, I realize this is a problem. I am not in a position
to deal with the specifics. I think that. this is a matter of basic policy
that we should adopt.
Representative BOGGS. But. von are dealing with specifics. You are
talking about sound fiscal policy. You are talking about balanced
budgets. You are talking about monetary restraints. You are talking
about no tax on travel abroad, the removal or modification, at least,
of the regulations with respect to investment abroad.
Do you have an recommendations, specific recommendations, in
respect .to increasing our export position?
Mr. NORRIS. Yes. I think that we must always dlO everything .to
increase exports. but we should not curb investments unnecessarily.
I recognize at the same time that we are faced with an emergency
situation. that we must take immediate steps to do whatever we can
to correc.t. our payments imbalance.
At the same time, I think that there should be a full recognition
within Government of the very positive inflow and contributions which
these investments make, and the fact that these investments do gen-
erate considerable exports. Consequently, I wouldi be very reluctant to
see any substantial curbing of these direct investment programs. I
think tha.t there can be certain tax incentives adlopted to promote
exports.
Representative BoGos. Spell that out. a little bit. What kind of tax
incentives?
Mr. Nonnis. I think that. this can be dione lerhals by particularly
encouraging those who have not entered the export field-to encourage
them by allowing some tax credit based upon their export busmess.
That. is one approach to the subject.
PAGENO="0153"
487
Representative BOGGS. `Would you try to balance that off with some
kind of a restriction on imports?
Mr. NORRIs. I think when you talk about restricting imports, you
get into all sorts of questions such as quotas, protectionist measures,
and so forth.
Representative BOGGS. Of course, that is the other country's exports.
Mr. NoRRIs. Sure. I would like to see some specific proposals on it.
I have none to make, actually, at this stage of the discussion.
Representative BOGGS. Mr. Chairman, I have consumed my time.
I want to thank you gentlemen for being so courteous, and I thank
you for your testimony.
Chairman PROx~rniE. Senator Jordan?
Senator JORDAN. Thank you, Mr. Chairman.
Gentlemen, I appreciate the statements you have given here before
the committee. They are very helpful to us, I assure you.
Mr. Cook, I just returned from out west, and when I was out there
I had a meeting with some of our wheatgrowers, and they complained
to me that the world price of wheat was too low, that they could not
grow wheat and survive at present world price of wheat.
The International Grains Agreement, as you said in your state-
ment, would raise the minimum world trading price of wheat by 23
cents a bushel. Yet, in your opinion, the way I reacT your statement,
we would only lose our export markets by this type of inconsistency.
Is that you position?
Mr. CooK. Yes, sir.
Senator JORDAN. And you believe that it would be self-defeating,
if we were to raise the minimum world trading `price of wheat by 23
cents, that it would be self-defeating because you believe we would
lose our world markets by so doing.
Mr. Cooic. Well, sir, I would like to say that it is probably true that
the western wheatgrowers cannot survive at the world wheat price.
The `current loan, as you know, is $1.25, the base loan, and they get a
cash *subsidy payment of approximately 45 or 46 cents a bushel, so
they are not growing wheat at the world level. They `are getting paid
in excess of that, as you know, I am sure.
That is the problem if we are to keep pressure on the common agri-
cultural policy of the European Economic Community, in particular,
France. They sold 500,000 ton's of wheat to Red China on credit last
week at $47 a t'on f.o.b., against an internal support price of $2.87 a
bushel, or a lit~~~t~le over about $100 a ton. Now this is considerably less
than we can sell wheat at, even at $1.25.
I would say that France is probably contributing 25 percent of the
`funds to the CAP, and getting, say, 75 percent of the benefits, and I
think it is against our national interest to take the heat off in this area
and induce the production of wheat in other parts of the world where
they are relatively inefficient, and run into the same thing in wheat that
we have run into in cotton, where we have seriously diamaged our world
markets.
This is my position on the raising of the levels.
Senator JORDAN. Thank you.
Mr. Hamilton, you made a good case for your company and the
effect of these regulations on your foreign operations. What do you
PAGENO="0154"
488
think will happen to the competitive position of U.S. companies
abroad, if the investment regulations are not modified?
Mr. HAMILTON. I would like to make it clear, Senator Jordan, that
I don't think ITT is completely unique in this regard. I think there
are a number of mature companies that may fall into the same
category.
But, when you have a situation which I have described, where we
have really had many benefits of having a foreign national character
in terms of our ability to borrow, our ability to sell, and for other
aspects of our business, and then apply these repatriation requirements~
we would begin to appear like a mainly American corporation pulling
out undue portions of our earnings. This would invite retaliation from
the governments, perhaps in the form of controls which, in turn, would
concern our creditors. It would give our competitors an advantage.
In short, you would begin to whittle away and erode what really is an
unusual national asset.
But, I repeat, while ITT in many ways is unique, I think there are
other mature corporations, operating particularly in Western Europe~
that represent the same kind of asset for the United States, and should
be protected, really, in the same way.
Senator JORDAN. How do these repatriation requirements affect your
compan. taxwise? Do you pay more or less taxes?
Mr. HAMILTON. There aren't many countries that have a witlthold-
ing tax on dividends of less than 15 percent. As Mr. Norris mentioned,
many of them operate progressively, so that by the time you get into
high percentages of payout, you are not dealing at the 15-percent level,
but, rather, at. the 35-percent or higher level.
In summary, if you bring more dividends back, not because it is
desirable either for affiliates or to the parent but solely to accommo-
date a regulation, then you will leave, at the very minimum, 15 cents
of every dollar on the counter of the foreign government.
Senator JORDAN. Something was said by one of you-and I don't
recall who-about. the effect of the Tl.S.-owned production facilities
abroad on our balance of payments. Do they tend to reduce exports
and increase imports or vice versa?
Mr. HAMILTON. I happened to attend this morning's session, and I
heard the. comments at that time. I know there was a study made at
the time Mr. Behrman was in the Commerce Department that inch-
cated that probably 24 or 25 percent of all American exports were
affiliate related. I think, in your testimony, Mr. Norris, you used the
same percentage.
When you consider the net contribution of these foreign invest-
ments. including the income from dlividlendls, and the income from
royalties and fees, less the net outflow, you shouhdl consider, also in this
arithmetic, the additional plus that comes from the affiliate-related
exports.
Senator JORDAN. From the adldhitionah exports?
Mr. HAMILTON. The incremental e~cports; yes.
Senator .JORDAN. By the affiliate operation in the foreign country.
Mr. HAMILTON. Correct.
Mr. NoRRIs. I would certainly subscribe to that. I think that the
figures do demonstrate it is about 25 percent. There is also the very
fundamental position that it is the only way very often that Amen-
PAGENO="0155"
489
can companies can get their market positions abroad. Experience dem-
onstrates that often the only way to get these positions is to start
some assembly or manufacture abroad, and once you establish a mar-
ket position for your so-called run-of-the-mill products, this in turn,
leads to the ability of the U.S. company to export its more sophisti-
cated products as they are developed and they certainly are developed.
Senator JORDAN. Mr. Norris, you have a very fine paragraph on
page 8 of your statement starting, "Historically, international trade
and private overseas investment have been favorable factors in our
balance of payments."
I think in that paragraph you speak about the exports to affiliated
companies representing approximately 25 percent of all U.S. ex-
ports. It looks to me like these regulations are killing the goose that
laid the golden egg. Mr. Hamilton, do you think that the regulations
will be effective in stemming the balance-of-payments deficit?
Mr. HAMILTON. Well, there is no question that as they are con-
structed that they would have some effect. I must say that-
Senator JORDAN. Short run or long run?
Mr. HAMILTON. They may have a shortrun effect of curtailing the
outflow. The question is whether they will have the longrun effect
of actually damaging something that is much larger, and, therefore,
more important, and that is the inflow.
I must say that I don't envy the position of our friends who have to
administer the program. As I understand it, they were handed the $1
billion target, and the regulations, with two hands at the same time.
I think good administrative practice might have dictated that they
be handed the target and then asked to develop the regulations that
are designed to meet it.
At the moment, I don't think anybody, either in the corporate world,
or in the agencies, knows exactly what the shortrun effect of the pres-
ent regulations would be, whether they would generate savings less
than the $1 billion target or whether they would generate $2 billion.
This frankly, makes the administrators uneasy, because they can't
afford to be too understanding of any one company's problems, be-
cause they are afraid that they thereby may miss the target.
I must admit if I had been handed the assignment of saving
$1 billion in 1968 over 1967, from this private sector, I would have
done it somewhat differently, although I am encouraged by Professor
Behrman's view that new investment abroad is really returned on a
net basis in the balance-of-payments statistics very quickly. I think
he said in about 21/2 years.
Senator JORDAN. Yes; I remember that figure.
Mr. HAMILTON. It should have been easier to take up slack there,
and maybe reduce the $3 billion outflow to $2 billion, without, at the
same time, requiring a greater return of income, the $5 billion figure
I mentioned.
They had their choice of attacking either the $5 billion coming in
and the $3 billion going out, or both. I think it might have been
sounder to draft the regulations to reduce the $3 billion down to $2
billion to reach the target.
Senator JORDAN. Thank you, gentlemen. My time has expired.
Chairman PIIOXMIRE. Gentlemen, all of you seem to disagree, more
or less, with the President's balance-of-payments program. Mr.Cook
PAGENO="0156"
490
concentrated on one specific limited element of it, but, certainly, Mr.
Norris and Mr. Hamilton, you most emphatically disagree with much
of what he has proposed.
I would like to ask you to tell me whether or not on each of the ele-
ments in the President's program you think, No. 1, his estimate of
savings is about right or exaggerated. or even in the wrong direction
for the first year; and, then if you care to do it, how long before you
think this kind of a program, if persisted in, would become perverse.
In the first place, the mandatory investment program. As I under-
stand it, mandatory investment restraints, the President said. would
save $1 billion, or he wants to save $1 billion; that is the goal. The
Federal Reserve restraint would have $500 million additional re-
straint; the travel restraint a half billion dollars; the repatriatedi
earnings, which I guess is about a half billion dollars; and the Govern-
ment expenditures overseas, a half billion dollars.
I presume there is no argument on the last part. That is Pretty sim-
ple. So, let's take the $2.5 billion of the program other than the Gov-
ernment expenditures overseas. Mr. Hamilton.
Mr. H~rILToN. With your permission. Mr. Chairman, I will stick
to the aspect I know best, the mandatory progr~im.
Chairman PROXMIRE. There is no reason you should stick to the
parts you know best. We don't do that in the Congress. Give me 3-our
impression on all of them. It. would be helpful.
Mr. HAMILTON. On the mandatory program. the savings of $1 billion
could be made by either controlling the outflow or asking companies
to increase the inflow, not necessarily through the repatriation of clivi-
dencls, with all of the consequences I have mentioned, but., if necessary,
bringing it back through other sources, including the proceeds of
borrowing.
Chairman PRox~rIRE. So you think that the estimate may be in the
right amount? I am just asking whether you do?
Mr. HAMILTON. I think the $1 billion would be achievable. Obvi-
ously, if only 50 companies bring back $20 million more in 1968 than
in 1967, the target is achieved.
Chairman PROXMILE. Hpw long before it has a perverse effect for
reasons that you have so well spoken of?
Mr. HAMILTON. If you are doing this through new investment, then,
of course, I think we have to rely on Mr. Behrman's estimate that it is
probably 2 or 3 years before this begins to-
Chairman PROXMIRE. Within 2 or 3 years. In other words, this will
contribute a negative element to our balance of payii~ents.
Mr. HAMILTON. R.ight.
Chairman PROXMIRE. Not a positive element.
Mr. HAMILTON. But, if this is attemptedi through the repatriation
route, audi you get the kindi of retaliatory and competitive problems
which I have referredi to, then, of course, the consequences would be
much quicker.
Chairman Pnox~rmn. IVell then, the repatriated earnings you
would agree could be a half billion dollars. It would be deter~orat-
ing more rapidly than the investment..
Mr. HAMILTON. The question is, rather, whether you bring it back
solely from native companies by having to have them declare and
pa~~ out extremely high dividends, or whether the Department. gives
PAGENO="0157"
491
us some flexibility as to whether we bring it back from the vari-
ous sources available to us.
`We think we can generate the same plus for the balance of pay-
ments, and by that I mean an improvement in 1968 over 1967, but
without the damaging consequences of having to do it through di-
vicleci declarations.
Chairman PR0XMIRE. How?
Mr. I-IAMILTON. Purely by bringing back more. Please don't mis-
understand me. As I said earlier in the testimony, we want to do
everything we can, not only to continue-
Chairman PRox~iIRE. I am sorry; maybe I missed somethmg ear-
lier. You said just by bringing back more. If you don't bring it back
by dividends, and you don't bring back repatriated earnings, how
does the Federal Government administer a program to bring back
more, without either of those?
Mr. HAMILTON. `Well, under the voluntary program, on occasion
we brought back the proceeds of long-term borrowings, we brought
back additional amounts in fees, and so on.
Chairman PROXMIRE. This ismy question.
Mr. HAMILTON. There is an alternative.
Chairman PROXMIRE. On the assumption that the voluntary pro-
gram continues?
Mr. HAMIJ1rON. Right.
Chairman PROXMIRE. Now my question is: Will the mandatory
program increase, or rather diminish the outflow by the $1 billion
the President estimates? I am a little confused by the last part of
your answer. You are implying now that you don't need the manda-
tory program, that the voluntary program would work to diminish
the outflow by $1 billion.
Mr. HAMILTON. I think the $1 billion could have been obtained
without a mandatory program; that is correct.
Chairman PR0XMIRE. With the 1965 program.'
Mr. HAMILTON. I think the $1 billion also could be obtained under
the mnandatory program, solely by reducing the outflow side.
Chairman PROXMIIiE. So that what you are saying is that 1968 will
be a better year than 1967, in part because you don't have the peculiar
conditions which you had in 1967-with the British devaluation and
other elements-and that if you continue the voluntary program,
that you could make a billion-dollar-better showing on net capital
outflow, absent having the compulsion; is that correct?
Mr. hAMILTON. `When we talk about reducing the net dollar outflow,
that applies to many companies.
When we apply it to ITT, it is a question of increasing our inflow.
We would be able to do that, and make a positive contribution in 1968
over 1967.
Chairman PROXMIRE. Now, how about travel?
Mr. I-IAMILTON. From my point of view, the only thing I can say
here is-
Chairman PROXMIRE. I am not asking you if it is good or bad. We
have our own impressions of that. Some of us are very critical of it;
but will it work?
Mr. HAMILTON. In the first place, I don't think it will work. Second,
ITT people are, all over the world, n'iaking sure that we generate the
PAGENO="0158"
492
earnings which we are counting on here. I think the people had better
stay abroad and continue their travel.
Chairman PR0XMIRE. You have no particular objections to the Fed-
eral Reserve program, I take it; that is. the restraint on banks and
financial institutions abroad?
Mr. HAMILTON. No, sir; in fact, we have some credit organizations
that are subject to that program.
Chairman PRox~rni~. Very good.
Mr. Norris?
Mr. NoRRIs. Oh, I think that under any mandatory program, you
can do anything you waiit; I mean if you insist that you bring back
a half billion dollars.
Chairman PRox~n1~E. So, you say it will work, but for how long?
Mr. NORRIS. Only because it is mandatory, and I think the actual
results will depend upon the degree of flexibility that is exercised in
the management of the program, and there must be flexibility because
a lot of companies hurt not only short run but they certainly hurt
long run.
Chairman PROXMIRE. You have answered the first part of the ques-
tion that you think you will get the billion dollar saving. But, the next
part of the question is, How long before that will deteriorate?
The burden of the testimony, including Professor Behrman's testi-
mony this morning, was that there is such a quick payback that if you
cut investment abroad by $1 billion, presumably within 21/9 years, you
lose your benefit and you begin to worsen rather than benefit your
balance-of -payments situation.
Mr. Nonms. I agree with what has been said this morning.
Chairman PROx~r~. Would you agree that is right?
Mr. NORRIS. Yes; and I think there are also short-term losses, too.
Chairman PRox~rIitE. How about on repatriation of earnings?
Mr. NORRIS. Here again, I think, if it is mandatory, you can force
anybody to do something under threat of penalty. and imprisonment
aiid fines. But I think the real problem here is whether U.S. industry
isn't going to run into really difficult problems with respect to their
partners abroad, where you have nationals who have majority in-
terests, and where you have laws, as in the case of France, under
which you are actually precluded from doing various things; for ex-
ample, depending upon whether your interest is in a society of limited
responsibility or a sociét~ anonyme.
There are these other restrictions that I have attempted to point
out, such as in Brazil. In many cases you can't do these things by
law. Or you do them against the rights of minority shareholders, and
you can't force your position as a majority holder.
Chairman PROXM~E. You make a very, very strong case. I simply
wanted to get your notion. Now, how about on travel? Will that
work?
Mr. Nomus. The main thrust of our position on travel, Mr. Chair-
man, is that under no circumstances should this program apply to
business, because I think there is an immediate loss and I think that
there is a very long-term penalty that is paid.
Chairman PRox~IIRE. Is there? Secretary Fowler testified that
in his judigment this wouldn't diminish the amount of travel at all-
just the amount spent. He argued that there would be the same num-
PAGENO="0159"
493
ber of students going abroad and teachers going abroad, businessmen
going abroad, but he contended that with a graduated tax and with
a 30-percent tax on everything spent over $15 a day, that. Americans
would be much more careful about where they stay, and how much
they pay. They would be much more careful with what they are
spending. Is there any validity in that to you?
Mr. NORRIS. Of course, if you want to pay the cost of travel, you
can always travel under the proposed program.
Chairman PROXMIRE. Businessmen would certainly tend to travel
in spite of the 30 percent tax. It wouldn't stop them from traveling;
would it?
Mr. NORRIS. But at great penalty and at great cost. They can't
anticipate as an example what their expenditures are going to be,
which you are obliged to do under the explanation of the program that
was put out by the Secretary. That is a very cumbersome proposal.
Chairman PROXMIRE. I think they would be the least likely to cur-
tail their travel, because they are going abroad for a specific busmess
purpose. The cost of that travel as compared-not in all cases, of course,
but as compared to the great majority of the cases with the necessity
for having the businessmen travel_the cost would be relatively
minor.
On the other hand, a tourist, a student, a teacher, because, of course,
they have to pay the whole thing themselves out of their own pockets,
in many cases I think that they would not travel.
Mr. NORRIS. I think the cost to business would be substantial.
Chairman PROXMIRE. It undoubtedly would be substantial. I am
just wondering if it would deter, actually deter, prevent travel.
Mr. NoRRIS. It certainly would not deter necessary travel..
Chairman PROXMIRE. Yes.
Mr. NORRIS. I think, however, that. there may be some curbing of
travel which you would normally take for long-term objectives in the
management of your programs abroad to develop your market posi-
tion, aiid I think this in turn would have an effect upon our inflow,
short term and long range.
Chairman PRox~rniE. Do you want to comment, Mr. Cook? I wish
you would.
Mr. CooK. I would only say this : We have had some experience with
foreign exchange controls, particularly with English sterling. These
regulations we have are called direct investment controls.
By definition of the word "investments" they are actually exchange
controls, I mean that is so if you cut away all of the fat. These are
exchange controls.
I have never had any experience with exchange controls except with
sterling exchange, and the rules applied to nationals of all countries,
whether they were English or Americans. We were doing the switch
business after the wai~ in sterling.
This was fine as long as they didn't catch our money going through
the system. If they did in violation of the regulations, they con-
fiscated it.
Well, I wonder if any exchange controls such as these are having
any real length of life, because I can't imagine a sophisticated investor
in Europe subjecting himself to having his money locked up.
PAGENO="0160"
494
He can make 3 percent a month in Brazil tonight, but if you get it
down there you can't get it out. There are lots of other places to go
with money. So, I am suspicious that these exchange controls will be
self-defeating because of the fear that they create in the minds of
foreigners.
Chairman PR0xMIRE. You think they will be self-defeating and
quite rapidly.
Mr. CooK. In my judgment. like the battlehines during the Civil
~\Tar, the value of the bonds in France went up and clown based on the
value of the collateral in the South.
I think the same is true. As our balance-of-payments deficit or sur-
plus fluctuates, so will the efficacy of the exchange controls, particularly
when we have $30 billion in short-term assets abroad on call.
Chairman PROXMIRE. My time is up.
Senator Percy?
Senator PERCY. I am sorry I was not here for the testimony, but I
read our statements. Mr. Hamilton, I can only say I wholeheartedly
concur with virtually everything you have said. The positions are
sound, and we deeply appreciate your giving us the benefit of these
views.
I would like to ask this. I have read several newspaper articles inch-
cating there was some reluctance on the part of companies to testify,
because of the procedure being used for specific exemptions. There is
a good deal of discretion in the Department of Commerce as to who
gets exempted. The implication in the articles was that if someone
came down and testified, they might not be exempted. Do you think
that this is a. legitimate concern as expressed in this newspaper article?
Mr. HAMILTON. I guess I had better answer that, Senator Percy.
No. Obviously, if we thought this was a problem, that we weren't going
to be treated fairly by the administrators, we would have had to con-
sider-rather, we would probably have been up here earlier, let me put
it that way. No, we fully expect the people in the agencies to render
effective and fair treatment.
As I mentioned. before you came in, I think the problem is that they
have been given both a set of regulations and a target, and they are
very reluctant to ease up in places where it. otherwise obviously makes
sense, because they don't know what the quantitative results will be on
that target.
I said earlier that I am glad I do not have to manifest the wisdom
that they are going to have to have to review, let's say, our whole cor-
porate program as it affects the international flow in 1968, and do it in
such a way that it provides equity among companies, that it. duly rec-
ognizes the rights of shareholders, and that. it takes the proper long-
range view of the U.S. balance-of-payments interest.
It would have been better i.f we could have had a more well-con-
siclerecl and well-thought-out regulation. The regulation frankly was
drafted quite harshly, with the thought that administratively it could
be mache more lenient.. more responsive to need. But. the resulting load
on the people in the Office of Direct Foreign Investment is tremendous
and may prove to be. nearly inmossible.
Senator PERCY. Mr. Norris, I wonder if you could comment on the
small percentage of export business clone by small business in this
country and the vast proportion of it clone by major business.
PAGENO="0161"
495
Now, the point I made with Government witnesses on the travel tax
is that it will not impede the travel of those 3 percent of our companies
in this country who are in the category doing 95 percent of our foreign
trade.
But what we have been trying to do for many years is interest the
rest of American business in business abroad. I don't see how they can
understand how to do business abroad, develop those markets, and
adapt their product for those markets, unless they travel.
It seems to me that the travel tax will impose an undue hardship on
the very small business that we want to encourage to go abroad to
develop these markets that will improve our balance of trade over a
period of time. IVould this concur with your judgment, being in the
practical world of business?
Mr. NORRIS. I thoroughly concur with that viewpoint, and I go
further and say that it will impose a considerable hardship on the
large companies also who are doing a substantial part of the export
business today.
There is not only the matter with respect to the large companies in
developing their export business, but it is the management of their in-
vestment programs which is extremely important also. If one tries to
look at our total position in world trade, I did an exercise on this a few
years ago. I think it must have been 1964 or 1965. If you took the total
trade that was generated by reason of our own exports, and exports
out of affiliates of American companies abroad, I think at that time it
amounted to around $64 billion or $67 billion. This is in my view the
true measure of the. stake of our companies, and of our country's stake
in world trade.
There is a very definite interrelationship between trade and invest-
ment. Each supports the other. Overseas investment generates exports,
so that I don't think you can separate the functions. They are very
definitely dependent one upon tile other.
With respect to the smaller company, that is afraid to get its feet
wet in the export business, this is essentially a matter of orientation.
I think it is an educational process which we must continually go
through. I sit on the executive board of the National Export Expan-
sion Council and much is being done to try to generate this interest
with the small businessman. But I think it needs some help. It needs
some help in the form of some incentives for the smaller company
which has never been in the export business to start, to get its feet wet.
I do feel very strongly that small business would be particularly
harmed by any travel tax program as far as it relates to business.
Senator PERCY. I wonder if the travel proposal is not terribly dis-
criminatory in favor of big companies as against medium-sized com-
panies. My concern is generated by my experience representing a me-
chum-sized company abroad. We would have to send people from this
country to develop sales abroad. But we are competing against, huge
companies that have resident people abroad who don't have to come
back to this country except for infrequent trips. Those fellows don't
have the tax. Those smaller companies and medium-sized companies
that have, to send people back and forth have to pay an unusually dis-
criminatory high costin the form of the travel tax.
Mr. NoRRIs. I think your reasoning follows very clearly.
Senator PERCY. One last question, Mr. Chairman, if I have a minute
left.
90-191--GS-pt. 2-1 1
PAGENO="0162"
496
Mr. Hamilton mentioned a figure of 82½ percent as against the
Commerce Department regulation 65 percent figure. Could you explain
this difference?
Mr. HAMILTON. Well, Senator Percy, 65 percent has been a much
misunderstood figure.
There has been some discussion that American corporations operat-
ing abroad have been paying out approximately 65 percent of their dis-
posable income in the form of dividends, and have been remitting this
back to the United States. When we dug into these figures, we found
some interest payments in the figures and we found some branch profits
which probably reduced the actual payout to around 50 percent
layout.
But, nevertheless, the thought would follow, even if the nuniber
were 65, that since the regulations provide you only have to pay out
as much in1968 as you paid out in the base years 1964, 1965, and 1966,
that you could retain 35 percent.
However, as you will recall, Mr. Chairman, in my testimony I men-
tioned that the regulations limit investment in 1968 to 35 percent of
the direct investment in the base years, and direct investment includes
reinvested earnings, so in effect what can be retained in 1968, under the
more harsh of the two provisions as they affect a company which has
been paying out at a 65-percent rate, is not 35 percent, but, unfor-
tunately, is 35 percent of 35 percent, or 12 percent. I assure you this is
a very little understood situation. In fact, I must admit that there
are many treasurers of large corporations that don't yet understand
that this is what the regulations say.
Senator PERcY. Thank you.
Chairman PRox~Inu~. Have you checked that with the Department
of Commerce? Do they agree that it is 35 percent of 35 percent?
Mr. HAMILTON. Yes, sir; for a company that has been paying out
65 percent.
Chairman PROXMIRE. Ambassador Roth has arrived. I understand
Mr. Widnall has one question and then we will hear from Ambassador
Roth.
Congressman Widnall?
Representative WIDNALL. Thank you, Mr. Chairman.
Mr. Hamilton~ do you believe that the informal ad hoc approach
currently being used by the Department of Commerce is the best pro.
cedure for covering specific exemptions?
Mr. HAMILTON. No, Mr. Widnall. I think it would be much prefer-
able if time could still be given to developing a set of regulations
which, on the one hand, recognized the target of a billion dollar im-
provement in 1968 over 1967 in the priva.te sector, but, on the other
hand, sought improvement in those areas where there would be less
longrun damage or where it would at least be postponed the longest.
My own feeling is that with $3.5 billion flowing out annually, it is
about $3 billion net of what is being borrowed abroad, that there
probably is room in there for reduction of as much as $1 billion in any
1 year, if indeed that is necessary. The corporations, at least, can
control what goes abroad.
They also are, to some extent, free to determine what they borrow
abroad. But, when you dea.l with the income side, the $5 billion worth
of income, this becomes much more difficult for any corporate head-
PAGENO="0163"
497
quarters on this side of the water to control, partly because the income
itself is subject to competitive conditions over which they have no
control, and partly because repatriation at excessive levels is dan-
gerous, for reasons I have mentioned, such as having nationals on the
board, having a rather delicate situation of trying to fit. into the local
national scene as much as possible to further our relationships with
our customers, the governments, and our competitors. Therefore, I
would conclude that we should stay away from the income side, and
from any targets with respect to that area, except for the one requir-
ing the same percentages of payout as in prior years.
I would accept the latter as being perfectly reasonable, and I would
even have gone a little further and said you could have had a modest
increase in that payout rate which might, in our case, mean something
slightly above the present 50 to 55 percent, but not, sir, in the area. of
80, 85, or 90 percent.
Representative `WIDNALL. Do the other witnesses have the same
opinion with respect to that?
Mr. NoRRIs. I think so. Basically; yes, sir.
Representative `WIDNALL. Is that true with you, Mr. `Walker?
Mr. WALKER. Yes.
Representative `WIDNALL. Mr. Cook?
Mr. COOK. I am not suffering from the pangs of maturity that my
friend on the right is, so we have never repatriated any money, so
anything you do to us in my type of business, which is a high borrow-
ing, low equity position in agricultural commodities, quite frankly, I
don't know what it is going to do with our overseas trading. I don't
really think that is an issue right here as far as my balance of pay-
ments. `We have some serious problems, and frankly, we don't know
what we are going to do. In the first place, we can't understand the
regulations.
Chairman PROXMIRE. Thank you very much, gentlemen, for excel-
lent testimony on a very complicated problem. We will now hear from
Ambassador `William M. Roth, the President's Special Administrator
on Trade Negotiations, and if he cares to bring some of the gentlemen
on the staff with him, he may do so.
`We are delighted to have you. `We know of your reputation in this
situation. `We are proud and happy to have you `here. `We have some
serious questions about the trade problems. You have a prepared state-
ment. If you will introduce your colleagues for the record.
STATEMENT OF HON. WILLIAM M. ROTH, PRESIDENT'S SPECIAL
REPRESENTATIVE FOR TRADE NEGOTIATIONS, ACCOMPANIED
BY THEODORE R. GATES, CHIEF ECONOMIST; JOHN REHM,
GENERAL COUNSEL; AND WILLIAM KELLY, COORDINATOR FOR
NEW TRADE POLICY STUDY
Mr. ROTh. This is Mr. Ted Gates, who is our Chief Economist; Mr.
John Rehm, who is our `General Counsel; and Mr. William Kelly, who
is the Coordinator for our New Trade Policy Study. If I could, I
would like to read my statement.
Chairman PR0XMIRE. Very good. You may proceed.
Mr. RoTu~ I have made some changes in it since the one you have
~bef ore you.
PAGENO="0164"
498
First,iet me say that I welcome this opportumty to appear here and
to talk not about the past, but the future, and what we are doing to
prepare ourselves for it.
Last July I appeared before your subcommittee and outlined the
results of the Kennedy Round, which had just been successfully con-
cluded. Today I shall discuss the next step, the future of American
trade policy, which our Office is engaged in studying at the direction
of the President.
I shall begin today, with fundamentals-what our trade policy has
been for these past 34 years, why we have consistently pursued it, and
why we should continue to do so.
Taking into account the hard lessons of experience-the Smoot-
Hawley Tariff Act of 1930 and the downward spiral of world trade
which followed it-the Tjnitecl States embarked in 1934 upon a policy
of trade liberalization and expansion. That policy has gone forward
under administrations of both parties, and has had the support of
congressional majorities of both parties. There has been steady prog-
ress toward the removal of trade barriers over these three decades, cul-
minating in the Kennedy Round last year. World trade during this
period has steadily expanded, and its benefits have been ever more
widely diffused among nations and people.
Why hava we and other nations been steadfast in our trade policies
and goals? Fundamentally, because we have all recognized the great
economic advantages of the division of labor among nations as well as
within nations-with each doing what it does best. Keener competition
is an ever-effective stimulus to efficiency, productivity, and innovation.
All of us benefit, as consumers, from access to a greater rai~ge of variety
and quality in the goods we buy, and their more competitive pricing.
Trade among nations is, after all, only the extension beyond our bor-
ders of the basic elements of the free enterprise system-competition,
specialization, the price mechanism, the free market, freedom of choice,
and mutually advantageous exchange.
The gains, in the real economic worldl, do not come entirely without
some pain. Therefore, we have sought-through an evolving set of
programs a.ndl statutory provisions-to maximize the benefits to the
great majority of our citizens while minimizing injury to the few.
We must be prepared to adjust to changing circumstances-indleed,
our. free enterprise system is in itself a. potent force for change. There-
fore, while steadifast in our goals, we must reexamine from time to
time the means of achieving them. This is the purpose of our studly.
We are beginning with a thorough examination of our competitive
Position in world markets-now and in the future. Much ha.s changedi
since 1962, when we last took stock. The pace of economic development
has greatly accelerated. Industrial technology aimd agricultural pro-
ductivity have grown by leaps and bounds. New industries have sprung
up, both here and abroad. New competitors are appearing in virtually
every market.
Some of the critics of a liberal trade policy see ominous portents
for the future in this rapid pace of recent change. America, they say,
is rapidly losing its competitive edlge. Ignoring our high technology,
~our sophisticatedi management techniques, our advancedi and flexible
capital market, andi other factors relevant to our competitive position,
they predict that lower wages abroad will drive our industries to the
PAGENO="0165"
499
wall. But a sound assessment, we feel, should take into account all
the elements which contribute to success in the world's markets.
There are more positive reasons, too, for a careful look at the nature
of future competition. Sound policies can come only from sound fore-
casts of our needs. lYe need to know what will be the nature, the
terms, and the problems of competition in future world markets-what
difficulties our exporters will face and in what areas the imports of
1970 may cause domestic hardship.
`What will be the implications for our trade of the rapid and con-
tinuing development of regional economic blocs? Or of the continued
evolution of the restrictive agricultural policies adopted in some of
our major export markets? What contributions could expanding East-
West trade make to world prosperity and peace?
What is the interplay between our future trade and our now enor-
mous stakes in oversea direct investment? Each of these involve many
factors which must be carefully sifted out and appraised-in terms
of jobs, productivity, income, growth and, above all, the national
interest.
`We are considering the specifics of trade policy as well-such as the
various ways of conducting trade negotiations, the impact upon trade
of the remaining tariff and nontariff barriers, the trade interests of
the developing countries, the problems of adjustment within our own
economy to foreign competition, and the ways in which trade policy
is formulated and administered, both within our own Government
and in multinational forums.
One of the most important questions with which our study is con-
cerned is that of future negotiating goals and techniques. We are look-
ing at several Possibilities. It has been suggested that the linear ap-
proach of the Kennedy Round, having been successful once, should be
tried again. But for a number of reasons, such as differing tariff levels
among countries, the lmear approach encountered many problems in
the Kennedy Round, which might prove insurmountable in any similar
future negotiation. The item-by-item method followed in previous
negotiations could be again tried-although, of course, it was earlier
experience with the tedious difficulties inherent in the item-by-item
method which led to the adoption of the linear approach.
Eric Wyndham White, the retiring director-general of the GATT,
has proposed that future negotiations be conducted on the basis of
industrial sectors or groups of products and include both tariff and
nontariff barriers. One problem with this approach is trying to find
sectors in which the participants could achieve reciprocity. Logically,
such negotiations might also include such matters as international in-
vestment and research and technology, as well as tariff and nontariff
barriers.
Tariff harmonization has also been suggested and, in fact, was tried
on a limited basis with the steel negotiations in the Kennedy Round.
The advantage attributed to tariff harmonization is that it would put
producers in all countries on a more equal and competitive basis.
Harmonized tariffs, however, may have more the appearance than
the substance of equality, because the same tariff applied in differeiit
countries provides different degrees of protection to the domestic
industries concerned. Furthermore, other factors, such as nontariff
PAGENO="0166"
500
barriers, may play a very important role in determining the actual
level of protection.
During the past few years, as Senator Javits and Congressman
Reuss have brought out, considerable interest has been expressed in
iossible U.S. participation in free-trade areas. Conceptually, these
could cover either all products or particular sectors, such as in the
TJmted States-Canadian automotive agreement. Much attention has
been given to a North Atlantic free trade area-either as an alterna-
tive to United Kingdom entry into the ECC or, possibly, as a first
step tow-ard an enlarged free trade area that would embrace most, if
not all, of the developed countries. WTe are trying to measure the
economic impact of such arrangements, as well as their advantages
and disadvantages to TJ.S. trade.
All proposed methods of negotiation must, of course, take full
account of the fact that nontariff barriers as well as tariffs would have
to be covered.
Prior to the Kennedy Hound, a.nd during it, the United States suc-
cessfully negotiated for the reduction and elimination of nontariff
barriers.
Through the GATT, which the United States took the initiative in
forming, we have succeeded in obtaining the removal of most import
quotas maintained by other industrialized countries. The relatively
few remaining ones are mostly agricultural. We are continuing to press
for liberalization in this fleld, but it is a slow and difficult process, since
all countries resort to some restrictive devices to maintain the income
of their farmers. 1\Te ourselves, as you know, use quotas for this pur-
pose. Under section 2~ of the Agricultural Adjustment Act, we limit
imports of cotton and cotton products, wheat and wheat products, most
dairy products, and peanuts.
We made substantial progress in the Kennedy Hound toward liberal-
izing nontariff barriers. lYe negotiated an antidumping agreement
that should limit the imposition of anticlumping duties to cases of
actual injury, as in our own law, and insure that regular and open ~r~-
cedures are followed to avoid their arbitrary and protectionist apph-
cation. No change in our own statutes will be required.
lYe also negotiated a separate agreement involving a nontariff l)ar-
ncr of our own-the American selling price system of customs valua-
tion. In exchange for its termination, we would, under the terms of this
balanced agreement, receive deep cuts in the chemical tariffs of the
ECC and the U.K. In addition, the ECC countries would eliminate
discriminatory taxes against American-type automobiles, the United
Kingdom would reduce its Commonwealth preference on tobacco, and
Switzerland would eliminate its import limitations on canned fruit
preserved with corn syrup.
This agreement was negotiated on an ad referendum basis for later
submission to Congress, and w-e received some criticism to the effect
that it amounted to an invasion of the prerogatives of the Congress,
although we do not believe this to be true. The agreement, of course,
will not become effective unless and until Congress acts to abolish the
American selling price system. Let me say that this will be a very real
test of our determination to come to grips with nontariff barriers and
w-ill have considerable bearing on the course of our future trade policy
PAGENO="0167"
501
in this area. We welcome the full examination of the agreement by all
Members of this Congress.
Nontariff barriers are the trade negotiation frontier of the future.
We have a long way to go. One reason is that too often in business, in
government, and in legislative bodies, the term "nontariff barrier" is
used without precise definition, facts, or analysis. In preparing for the
Kennedy Round, we often found it impossible to get the close and de-
tailed information we neede~[ to formulate a negotiating position.
Often business had not done its own homework in this area, filled with
analytical traps for the unwary.
For instance, what trade impairment will chemicals X, Y, and Z
suffer in the German market because of an upward shift in their bor-
der taxes last January 1? We do not know, and the chemical industry
does not know. It involves a study of the price consequences of the tax
increase as well as a host of other factors. Oversimplified answers will
not help.
For this reason, my office will hold public hearings shortly to enlist
the advice, information, and expertise of business and agriculture in
nontariff barriers, and in other areas of trade. Shortly thereafter, in
Geneva, all the major trading nations will submit their own analyses of
each other's nontariff barriers. This will lay a foundation for a later
negotiation looking to the dismantling of as many as possible of these
nontariff barriers-the most difficult, most complicated, and most te-
nacious of trade barriers.
However, events in the world are moving with such rapidity that
certain kinds of nontariff barriers cannot await the conclusion of our
trade study. An example of this is one. I just mentioned, the effect of
border tax adjustments on trade, which figured in the President's bal-
ance-of-payment~s message of January 1. We hope and expect to have
this complex and often exaggerated problem examined in the GATT
in the near future.
With respect to the developing countries, I need not tell this com-
mittee that the needs are great and the problems involved in meeting
those needs equally great. There is certainly no easy way of bringing
the economy of a developing country to the point of takeoff. Neverthe-
less, the developed countries must do all in their power through their
own commercial policy to assist these countries.
Last year at Punta del Este, the President declared the willingness
of the United States to explore with other developed countries the
possibility of a joint program to grant generalized tariff preferences
to the developing countries. A number of questions, however, require
careful examination, such as the following:
What kinds of safeguards and what exceptions should be provided
to protect sensitive domestic industries? What countries ought to bene-
fit from these preferences? What kinds of products might be most
appropriate in terms of the export prospects of developing countries?
What should happen to existing preferential arrangements such as the
Commonwealth and ECC preferences? How long a period of prefer-
ence would be desirable? `What margin of preference would be help-
ful, while at the same time not disrupting the U.S. market?
These questions, and others, were debated at a ministerial meeting
of the OECD last November. The United States took the position that
tariff preferences must be generalized and not of benefit only to a par-
PAGENO="0168"
502
ticular region. In addition, it emphasized the reverse preferences, or
giving a developed country a special position in a developing country
market, should be phased out. There was no agreement, certainly, on
all aspects of a developed country preference position. But the desir-
ability of a general preference scheme was sufficiently recognized so
that the developed countries could take a more or less concerted posi-
tion to the TJNCTAD II meeting in New Delhi, which is now in prog-
ress. However, it is still too early, in my judgment, to know whether the
many varied and complex questions which preferei~ees involve can be
answered to our satisfaction and that of the other countries concerned.
Aside from tariffs, the developing countries place considerable em-
phasis on commodity arrangements. Experience has shown that any
consideration of a commodity arrangement raises questions relating
both to the stabilization of primary prothict prices at remui~erative
levels for efficient producers and to the commercial impact of com-
modity arrangements on users of the products covered by such ar-
rangements. More work is required, in my judgment, to determine
the true commercial benefits to be derived from such arrangements.
My office does not have the primary responsibility for the negotia-
tion of commodity agreements on tropical products. Nevertheless, we
have a great and continuing interest in areas of such great significance
to developing country trade. Therefore, our current study will place
emphasis on the long-range implications and the possible benefits
of such arrangements, including their implications for a sound U.S.
commercial policy.
As you know, the United States has support ed the joming together
of developing countrie.s in regional trading arrangements-for ex-
ample, the Latin American Free Trade Association. However, in part,
because we do not have a. large body of experience to guide us. their
impact upon member and nonmember countries needs further examina-
tion. For example, how do these regional trading arrangements affect
I~T.S. export interests? Moreover, it is not clear what. kinds of condi-
tions the United States should seek in relation to the establishment of
such arrangements in order to render them as consistent as possible
with an open international trading system. I think this is a point that
most certainly should be underlined.
Another topic to which we attach great importance is the prob1e~n
of adjustment to import competition.
In 1962, as you will recall, the executive branch proposed, and the
Congress enacted, a program of adjustment assistance to help firms
and workers hurt by increased imports caused by tariff concessions.
Conceptually, this was a. significant forward step in the evolution
of our trade agreements program. It amounted to an ac.imowled~ment
that increased quotas or duties need not necessarily be the most ap-
propriate or effective form of relief for injury due to import compe-
tition. Unfortunately, the program did not, in fact, become operative,
and, therefore, has not yielded us any experience upon which to base
future policy, although we will be proposing liberalized criteria for
adjustment assistance in this field shortly.
But, even without such a body of experience, we must. contInue to
explore alternatives to quotas or higher tariffs. IVe should also ox-
amine other existing programs, such as t.he. manpower training and
PAGENO="0169"
503
development program, and insure that they also make a maximum
contribution to our ability to adjust to import competition.
As you know, there are some who say that there should be an over-
all economic mobility program which is not tied to any specific cause
of economic distress. While this is obviously beyond the bounds of
a study of trade policy, I would personally think it worthy of greater
consideration.
Recently, I have heard it said that the conditions for escape-clause
relief are just as unrealistic as those for adjustment assistance, espe-
cially since they turn on the same causal factors. This conclusion seems
to me premature. I think an examination of the escape-clause petit1onS
made since 1962 would reveal that they involved weak cases in which
the tariff concession was a very old one or in which it was not clear
that there had been an increase in imports. In short, I am not per-
suaded that the criteria for escape-clause relief are unduly rigorous.
However, I do believe that import restrictions should be au available
remedy in certain cases and that we should not reject out of hand any
objective attempt to reevaluate the sufficiency of the conditions for
escape-clause relief.
The final topic of our study concerns the administration of trade
policy. Domestically, this has to do with the organization and adminis-
tration of trade policy within the executive branch and between the
executive branch and the Congress. It was the Congress; of course,
which was, in effect, responsible for the creation, in 1962, of the Office
of the Special Representative for Trade Negotiations. The role of this
Office has been evolving, particularly since the conclusion of the Ken-
nedy Round. Others can best judge how effective our role has been.
At the very least, however, we have raised the issue of how trade policy
could be coordinated within the executive branch-and, hopefully,
even shed some light on it.
I am aware of some feeling that the relationship between the Con-
gress as delegator and the executive branch as delegate is not what
ft should be. It is obvious that there cannot be an effective trade policy
without full congressional participation and, indeed, periodic grants
of authority to the President to work in this field with other countries.
I think that the institution in the Trade Expansion Act of the. con~
gressional delegates proved to be a most effective one. I would certainly
hope that other mechanisms, both formal and informal, could be
established to maintain even greater rapport and understanding be-
tween the two branches.
Likewise, consideration should be given to the continuing develop-
ment of effective forms of cooperation between Government and busi-
ness~ labor, agriculture, and consumer organizations in the formulation
and implementation of our trade policies.
Internationally, it is clear that there is one organization which ]S
first and foremost in all trade matters, although there are others that
play a very important role. For this reason, American support of
the GATT is absolutely vital, since it is the only agreed code-how-
ever imperfect-by which countries trade with each other. For certain
specific issues, the OECD and TJNCTAD have proven effective. Con-
siclerably more attention, however, needs to be given to the orderly
interrelationship of these and other international organizations.
PAGENO="0170"
504
This, then, is a quick survey of the matters we are dealing with in
our trade policy.
I welcome your questions, now and at. any time, and thank you again
for this opportunity.
Chairman PROXMIRE. Thank you, Anthassador Roth, for a very
comprehensive and yet concise statement.
Ambassador Roth, I would like to ask some questions that are not
directly related to trade policy perhaps as much as they are to the
economic impact of t.rade and wha.t we can do about it.
Why, in your view, did our trade balance deteriorate as badly as it
did in the fourth quarter? I noticed that exports declined and imports
increased very rapidly.
Imports increased from a.n annual ra.te in the third quarter of $2G.2
billion to an annua.l rate of $28.4 billion, about a $2 billion increase;
and exports-which have been disappointing all yea.r a.fter the first
quarter, which was a good quarter-remained around $30.7 billion in
the first quarter, $30.8 billion in the second, $30.5 billion in the third,
and clown to $29.9 billion in the fourth.
What is the reason for this deterioration?
Mr. ROTH. I am sure there are a great many. In part. on the export
side., among other things, our agricultural exports declined, partly
clue t.o better crops in Europe..
On the import side, it is difficult at this point to be entirely sure, but
I think, in part, some overheating in the economy, certainly the copper
strike, and the possibility of a. steel strike had something to do with it.
Chairman PRox~rIRE. You see, it seems to me, it is very important
in making economic policy, to try and separate out those temporary
elements. I think you are very wise in gOing into the copper strike and
the steel strike; both of those were significant elements, but obviously
temporary we hope. lYe hope we are not going to have a copper strike
that will go on for years, and we hope that. the steel situation will be
settled one way or the other by July 1.
But, what I am concerned about is whether this could be anything
like a fairly permanent or at least a long-term thing, in which case it
seems to me that our policy action is more urgent than if it is simply
a temporary problem.
Mr. ROTH. I think it is wise to separate them out. One of the tempo-
rary elements in the last quarter was the heavy increase in imports of
whisk. But, in relationship to our trade account as it affects the bal-
ance of payments, the most important thing is that we maintain the
stability of our economy, in terms of prices and costs, and, on the other
hand, that the economies of the surplus countries, the European coun-
t.ries, be expanded by one measure or another.
Chairman PRox~rIRE. One way is to invest more abroad to help them
expand.
Mr. RoTH. Apart from the balance-of-payments implication of the
outflow of direct investment., when you look at the long term this is
certainly an element.
This is why I say that one part of our study will be to analyze, in a
way that hasn't. been clone as thoroughly as we need, the relationship
between direct investment abroad and trade, because there is such a
relationship. .
PAGENO="0171"
505
An American plant abroad tends to buy American components from
here, and the fact that plants go abroad does not necessarily mean a
reduction in profits and employment in this country.
Chairman PnoxMIlm. Is there any kind of a study that you know
anything about-in view of the importance of this, I hope maybe there
is-that would show how significant a difference it would make in both
imports and exports if we have an inflation in the coming year of
3 percent instead of an inflation of 4 percent ?
You see, as I look at the elements involved in our trade-food, auto-
mobiles, and so forth-so many of them are fairly insensitive to a
change in the Consumer Price Index. I am just wondering if that. much
of a difference in inflation, which is all the Council of Economic Ad-
visers claims for a surtax, could make any big difference in our trade
situation?
Mr. R0TI-I. `I know of no detailed studies of this. I think, on the other
hand, it is quite clear that a heavy expansion in our own economy
would certainly, as it did in 1966, draw in a large increase in imports.
This is one of the problems that I don't think is sometimes appreci-
ated. When it is pointed out in a certain industry that there has been
a tremendous increase, in imports, the underlying factor-there are a
number of them, but certainly one basic underlying factor-is always
that there is an inflated economy into which the imports are coming.
Chairman PROXMIRE.. Let me ask `this: You refer to the export re-
bate and import tax, and as I understand it., this is a possibility that
the administration has been considering.
When I was briefed on the balance-of-payments situation by an
administration official 8 weeks ago or so, he mentioned this as a real
possibility and said the President was sending officials around the
world to discuss this possibility with our trading partners.
I am just wondering if we are likely to vitiate any prospect of eiimi~
nating some `restriction we haven't used, but which other countries
have used by this kind of discussion and negotiation now?
If the Congress is already getting in the mood to act in this way, it is
an appealing kind of aëtion for those who have import problems in
their State, and I just wonder if this doesn't seem to be working at
cross purposes with your overall presentation?
Mr. RoTh. This is a very good question, Senator. Actually there are
two possibilities under consideration. One, a modest border tax ad-
justment to offset certain indirect taxes of our own.' Second, a modest
import surcharge because we are in a deficit position.
There are other possibilities, but rather than-and this goes back to
the reasoii for the consultations in Europe and with our other trading
partners-rather than use any restrictive nieasure in the trade area,
the most desirable course would be for our trading partners to take
expansionary measures of their own.
We feel, as I mentioned, that the surplus countries have a responsi-
bility in a grave situation such as we face just as n'iuch as the deficit
countries. This is why it makes no sense at all in adjustment terms for
the Germans to increase their border taxes, even though it is fully justi-
fied in tern-is of the system. For in effect this means a devaluation of
1 to 2 percent when they are in a surplus position. And this is why we
are saying to them now, as our team, under Ambassador Tresize, goes
PAGENO="0172"
506
throughout Europe, that there are many things you can do to quicken
your economy, to untie aid, and the like. If they could take some action,
then it. would be less necessary for us to do so.
If ultimately it is decided by the administration that something must
be done, I think the most important thing is not to do anything that
in any way would undermine the basic trade rules of the trading world,
the rules of GATT. Therefore, consultation and working through
GATT procedures becomes of great importance. As I say, no final de-
cision on this has been made, and consultations in Europe and other
countries are currently being conducted.
Chairman PR0xMIRE. Thank von very much.
Congressman Curtis?
Representative CFRTIs. Thank you, Mr. Chairman.
I am particularly pleased to see Ambassador Roth and his team
here to testify. Along with the. President's Economic Report, lie will
help keep this committee updated on what has transpired in the inter-
national trade area. Certainly the impact of trade today 01i our eco1i-
omy and the problem that we are now experiencing in the international
balance of paymnemits makes it most. timely.
I am pleased to see that our Office is moving forward in this com-
P~e11ensive study. May I ask a little bit about how you are formalizing
these stwlies? Is it correct that these studies are going to be clone in
conjunction with public hearings? -
Mr. Rorn. That is correct, Congressman.
Representative CrumTIS. WTho will be actually conducting the hear-
ings? Will the format be similar to that of the Committee oii Reci-
l)1ocity Information?
Mr. RoTh. Yes. They will be. run very much like we ran the hearings
we held at. the beginning of the Kennedy Round. Our Office chairs
them, but. there w-ill be representatives on the panel from other agencies.
The thing this time t.liat we tried to do last time-~--and we were not
satisfied we were entirely successful-is to encourage iiidustries to
really do their homework, and to come to this not with platitudes, not
with problems of general restrictions abroad, but with very specific
ideas of what those rest.rictions might be.
Iii many cases we found, dlurmg the Ke.mmedy Roimcl, that certain
companies couidln't; give us the detail we needed because the data. was
confidential, such as cost data. So we hope in these cases we could meet
privatei3 with these industries, because this is the kind of guttv ma-
terial we need, in order to put our case together in this complicated
area.
Representative Cui~ris. This, I think, is most essential. I know Mem-
bers of the. Congress and I have received dime complaints from time to
time of alleged unfair trade practices by countries abroad. Yet, fre-
quently we domm't. get the details.
Mr. Ron. Congressman, could I lust interrupt to say that. there are
two parts of the setup of our study which have not been completed?
One is that there will be appointed, as there was for the Kennedy
Round. a blue-ribbomi advisory comnmittee of leaders from industry,
labor, and agriculture.
~\Te aiso need to dlevelop a method of coimgressional participation,
and this mechanism has iiot been developed vet. WTe are even consider-
ing time possibility of putt~ng something to this effect in our proposed
PAGENO="0173"
507
trade bill, but whether it is done formally or informally, this is the
critical ingredient.
Representative CURTIs. Yes. I am most anxious to see the Congress
take an active part. Just how to do it is the question.
Of course, the Joint Economic Committee, to some degree can fol-
low this, and I know it will. Then the legislative comimttees, such as
\~\Tays and Means and Senate Finance, will follow this, also. But this
wouldn't adequately bring about the coordination that I think is nec-
essary in conjunction with these studies.
I guess you will be getting iiito techniques of handling unfair trade
practice and unfair tariff barriers when you find them. Why haven't
we developed and utilized the countervailing duty approach a great
deal more. Will you be getting into that kind of a study?
Mr. R0TI-I. We already are, in several ways. We have asked, during
the ministerial meeting of the GATT last November that a group be
set up specifically to talk about countervailing duties, subsidies, and
related factors. We will be talking about that.
Representative `CURTIs. I have felt that counterveiling duty as a
method. of eliminating the use of an unfair trade practice or a subsidy,
does relate to alleged subsidies. But it seems to me that it would be
possible to have them serve a further purpose and relate to aiiy kind of
au unfair trade practice, just as we did with the international anti-
dumping agreement. It looks to me that maybe we could come up with
an internaitional agreement on counterveiling duties, because everyone
should be concerned about how to handle an unfair trade practice, one
that has been foirnd to exist.
Mr. ROTH. As you know, our countervailing duty law does iiot have
an injury requirement as required under the GATT. However, in talk-
ing about countervailing duity law, we also want to talk about sub-
sidies, bother the overt ones and the hidden ones, if you will, that are
inherent in the common agricultural policy of the EEC.
Representative CURTIS. One other area, the treaties of friendship,
commerce and navigation that we have with many of these countries
seem to have in them the provisions of machinery to do something about
nontariff trade barriers or subsidies or any of these things.
Would this be an area that you would be investigating to find out
what could be done through these treaties that we already have to bring
about a cessation of unfair trade practices, if they are found to exist?
Mr. Ro'ru. This is, certainly, an area we can look at.
Representative CURTIS. And I notice in the steel report this was one
of the things they pointed out; that here was the machinery if it was,
and had not been utilized, at least it was not available to them in a
~ractical way.
Mr. ROTH. May I say, Mr. Congressman, that in our study we are
taking a few industries `and looking at them, as it were, under a
microscope.
Representative CURTIS. You are doing that with steel, aren't you ~
Mr. ROTH. We are doing that `with steel.
Represeiitative CURTIS. I was most pleased with that, because I
thought the Senate Finance Committee did an excellent job. They are
doing some more work on steel whi~h will enable you to use that ~tudy
in carrying it on beyond that.
PAGENO="0174"
508
Mr. ROTH. It is an important sort of prototype industry, and I think
in terms of a review of basic trade policy that a study of this industry
can give us a. great deal of useful material.
Representative CURTIS. One other area.
Senator Proxmire asked whether you would be gettmg into direct
investment and how it relates to trade. I was most pleased to have your
affirmative response. I have been very much concerned.
We have not really related our foreign aid programs-AID, Public
Law 480, or various development, banks, loans, and so forth-to trade.
There is a slogan, "trade not aid," which I happen to agree with. I
think there is a place for aid.
I think it is very important to help get nations on their economic
feet. But I have been fearful that there hasn't been the kind of coordi-
nation between trade and aid.
Would this be an area. that you would be exploring at all?
Mr. ROTH. As of now we had not thought that this would be a part
of the study.
Representative Cuirris. Yes; and yet you have to do it in respect to
t.he agricultural agreements where one of the hopes is that these other
countries will provide more aid.
Mr. ROTh. That is true. We will certainly be dealing with the prob-
lems of developing countries.
Representative Cuims. But it illustrates how closely' these things
are coordinated. I appreciate you have a problem here. You do have
your jurisdiction.
But I am at least in the position where I can make these comments
that somewhere in the administration or in the Congress we have to
brmg together, just a.s you did mention, the commodity agreements
which are not under your jurisdiction. Yet, in so many areas, how can
we readily deal with the problems of trade without having to do those
commodity agreements?
Mr. R0TII. I would like to comment on this problem of the inter~
relationship between the various areas that affect trade. I think, cer-
tainly, one of the things that has become clear to me in the last several
years, and perhaps pai~Licularly in the last 6 months, iS the relationship,
for instance, between trade policy and fiscal and monetary policy. Andl
we do have a: balance-of-payments committee in which all the agencies
concerned are involved, so we are all aware of what is going on.
But, looking to the future, and, certainly, in terms Of a study such as
ours, this is an interrelated world. You cannot separate trade out from
the more general economic and fiscal problems. You just can't.
Representative CuRi~is. I see my time `has expired. Thank you, Mr.
Chairman.
Chairman PR0xMIRE. Senator Miller?
Senator MILLER. Nice to see you again, Mr. Roth.
Mr. ROTH. Thank you, Senator.
Senator MThLER. At the beginning of your speech you referred to t.he
Smoot-Hawley Tariff Act of 1930. I wonder if you could refresh my
memory of that. Was that a. high tariff act?
Mr. ROTH. That is correct.
Senat.or MILLER. It was not a quota act, was it?
Mr. ROTH. No; it was a high tariff act.
PAGENO="0175"
509
Senator MILLER. The reason I asked, I notice that some accounts
in the press and some witnesses have referred to some of these quota
bills that are pending in the Senate Finance Committee as Smoot-
1-lawley Act measures. Since the Smoot-Hawley Act did not have
anything to do with quotas, I just thought perhaps we ought to bring
out that difference.
Mr. ROTH. I think that is a good point. It could be argued that a
tariff at a sufficiently high level in effect has the effect of an absolute
quota.
Senator MILLER. Of an absolute quota.
Mr. ROTH. But you are correct.
Senator MILLER. Which would mean nothing. I assume when you
say absolute quota, you mean that there would be no imports at all
because the tariff would be so high that nobody would be able to buy.
Mr. R0TI-I. I mean a more limited amount.
Senator MILLER. Sir?
Mr. ROTH. A more limited amount of imports. A quota is not an
absolute prohibition.
Senator MILLER. I understand that. A quota is certainly not an ab-
solute prohibition. You might have, for example, a quota on behalf
of our domestic consumption. That would certainly not be an absolute
prohibition, but it would mean that goods would come in at. a low price,
probably, whereas if we had a Smoot-Hawley Act approach it might
put a very, very high import levy on it, and it might narrow the import
quantities clown to 50 percent, but they would be at a very high price;
would they not?
Mr. ROTH. That is right.
Senator MILLER. You referred to the President's balance-of-pay-
ments message of January 1, relating tO border tax adjustments on
trade. Do I understand that there is some intimation that the Con-
gress might be asked to enact some kind of a border tax as sort of a
countervailing offset to border tax arrangements in other countries?
Mr. ROTH. As I mentioned, this is one possibility we have looked
at, but not in retaliation against the border taxes of other countries.
The whole area, as you know, of border taxes is a very complicated one.
It is based on the theory that an indirect tax, like a sales tax, is passed
on into price fully, whereas a direct tax such as we have, the corporate
income tax, is not. Therefore, based on economic theory of 20 years
ago, a border tax for one is legal, and for the other is not under the
GATT. ..
In the last 20 years, economic theory has become more sophisticated.
it is now, I think, clearer that not necessarily all of an indirect tax is
passed on into price and perhaps some part of a direct tax is, depend-
ing upon elasticities. Therefore, we feel that there is a basic inequity
in the G-ATT rules.
On the other hand, because we do not have the analysis we should,
it. is not entirely clear that in the past our trade has been impaired by
the offsetting border tax. But this is one we have to get into in great
depth. . .
Senator MILLER. Do you have any idea how soon we will have hard
statistics that would enable us to make an intelligent decision on this?
Mr. ROTH. There are two problems. One, what we might consider
the basic inequity and the basic difficulty of two systems of taxation
operating together. The other is a more specific and immediate prob-
PAGENO="0176"
510
lem; namely, that Germany, on January 1, moved from the so-called
cascade tax to an added value tax. Accompanying that was an adjust-
inent at the border from undercompensation, because they could not
calculate what the tax was, under the old system, to full compensation,
which meant an increase in tax from 4 to 10 percent.
Before we can know what effect this will have on our export trade,
we will have to know what the price effect in the German economy is.
I think it will be a number of months before we get this in a. definitive
way. Then we have to begin looking at individual American exports
and see whether there has been an effect.
Senator MILLER. Do you think that we are going to have adequate
statistics to enable us to legislate on this at this session of Congress?
Mr. ROTH. No. In terms of the problem of border taxes, as such,
we have asked for negotiations on the GATT rules, but it will be a
long and complex process. Now this problem, the basic problem of
border taxes as such, is perhaps separate from the balance-of-payments
question of whether we should do something moderate and temporary
in the trade sector to help our export position. They are really two
different problems.
Senator MILLER. Well, I can see where they might be two different.
problems, but I can see where they could be related, too.
Mr. ROTH. They are related, also.
Senator MILLER. And, I can see where if we are not careful on the
relationship, we might get ourselves into some problems that we do not
want to get into. That is why I am wondering what we are going to
have by way of hard statistics that will enable us to legislate prudently
on this, if we are asked to legislate on it.. You apparently do not hold
out much hope of having those statistics for quite a long time.
Mr. ROTH. Not on the basic problem of border taxes. This will take
considerably greater analysis both within our own Government and
internationally. If we did come to the Congress with something in the
trade area affecting the balance of payments we would, I hope, have a
supporting case. But, I think the most important thing, as I men-
tioned before, is that should we do anything, we do it within the trad-
ing rules of the world, and that in no sense will we undermine those
rules and set up a spiral of reaction on the part of other countries so
that we net out nothing in terms of our trade balance.
Senator MILLER. You state: "I do believe that import restrictions
should be an available remedy in certain cases."
Does this mean that in certain cases that you believe that import
quotas should be available?
Mr. ROTH. That is right, as they are where the national security is
brought into play pursuant to an OEEC finding, or where it can be.
shown that an entire industry is severely damaged by imports-then
there is the escape clause, and I think that this is an important out that
any economy needs.
What I was trying to say here is that I feel that the present escape
clause is adequate. On the other hand, I do not want this study to be,
in any sense, doctrinaire. There should not be anything we cannot look
at and should not look at in depth.
Senator MILLER. I have just one more question. You are continuing
to operate and do some negotiating in your office; are you not?
PAGENO="0177"
511
Mr. ROTH. Yes, sir. We do not have any authority, but we are con-
tinuing to negotiate.
Senator MILLER. I appreciate that. I understood from Secretary
Freeman when he testified last Wednesday that there were negotiations
being carried on on this particular problem. As I understand it from a
speech by the Foreign Agricultural Service, one of the officials of the
Foreign Agricultural Service, the Common Market has been charging
import duties on our grain shipments to the Common Market, and they
have been taking some of that money to subsidize-to pay a subsidy
for exports of canned ham.
Last fall, 46 of us joined together in a telegram requesting counter-
vailing duties. We have not seen any action on that yet. Secretary
Freeman believed that this was in the process of negotiations. Are you
familiar with this or any member of your staff here?
Mr. R0TII. No; I am very familiar with it.
Senator MILLER. Can you tell us where we are on this'?
Mr. RoTn. Yes. It is still under investigation, but this comes after a
period of very intensive negotiation in which I took part. I went to
Geneva to talk to the Community about it. As a result the Dutch de-
creased the amount of the subsidy; they would say they liaxe, in effect,
eliminated it. It was a very considerable figure. I think it was around
23 percent. The Treasury, along with Agriculture and ourselves, is
looking at the figures to see whether or not we are satisfied. But may I
explore this just a little `bit more with you?
This comes back to the question of countervailing duties.
Chairman PRoxl\HRE. Could I interrupt just for 1 minute?
I, unfortunately, have to leave, Ambassador Roth, and I apologize.
I have asked Congressman Curtis to take over the chair as he will do.
lie is, as you know, the ranking minority member, but I want to thank
~OU for a very, very fine presentation and for your particularly excel-
lent responsiveness to our questions.
Mr. ROTH. Senator, thank you very much. And should the commit-
tee at any point, as our study goes on during the year, think it would
be useful to you-as I think it would `be to us-to have an interim
report and to go into these problems in more detail, we would `be
delighted.
Chairman PROXMIRE. Fine, that is an excellent suggestion. Very
good.
Representative CURTIS (presiding). Proceed.
Mr. Ro~I. Senator, our countervailing duty law does not have an
injury requirement as it is supposed to have under the GATT. There-
fore, any time that a party claims that a subsidy is in existenc&-this
goes to industry as well as to agriculture-the Treasury must make an
investigation.
We try sometimes first to see if the `problem can be worked out,
because it is to the benefit of our domestic economic interest as well as
to international relationships to do away with the subsidy, if at all
possible.
In certain cases countries are not entirely cooperative, and therefore,
there is nothing to do but to begin official investigations. Even when
they are cooperative, it still may be necessary. You may have noticed
just last week in the Federal Register that we are beginning investiga-
tions on tomatoes and tomato paste.
90-101-68-pt. 2-12
PAGENO="0178"
512
Last year we took countervailing duties against Italy in the area of
electrical transmission towers. This is an instrument that is difficult
for us to use in international relations, because it is not entirely con-
sistent with the G-ATT. Nevertheless, we feel it is an important one for
us to use, because in agriculture, in particular, when you look at third
markets, we are disadvantaged by subsidies.
Senator MILLER. May I interrupt you at that point?
L nder tIme G-ATT rules, would that subsidy have been legal, too?
Mr. ROTH. Tinder the GATT rules, and Mr. Rehm, you can correct
me, if it was shown that the subsidy caused injury to a competing in-
dustry, in that case the country would be responsible. If there were no
injury, then it would iiot be illegal.
Senator MILLER. Then here is the problem. What happens during
the period of time that all of this is going on? You see, we received
requests, urgent requests, that countervailing duties be put on immedi-
ately, and then let the investigation proceed, and if it was determined
that there was indeed no harm, then, of course, the countervailing
thities would go off. But, if it was determined that there was indeed
harm, the countervailing duties would stay on, and the idea behind this
request was that we ought to take the protective measures before it was
too late and the damage was done.
Do I understand from what you say that that is impossible?
Mr. ROTH. Tinder the law the investigation must take place first,
because the case must be proven. On the other hand, once you announce
an investigation, often that in itself has an impact. I think this is an
important point you raise. This is the reason why we have requested
in the G-ATT a discussion not only of the countervailing duty laws, but
also of subsidies, because they are closely related.
Basically we would be willing to do away with subsidies, because we
think we are competitive. Poultry is a good example.
Senator MILLER. As I understand it though, the answer to my ques-
tion is that what you have worked out is now being analyzed by your
people-by Agriculture.
Mr. ROTH. Treasury.
Senator MILr~R. And Treasury, to determine whether or not it will
be necessary to have a countervailing duty.
Mr. ROTH. That is correct. Meanwhile, there has been this decrease
of a substantial sort.
Senator MILLER. Thank you, Mr. Roth.
Thank you, Mr. Chairman.
Representative CuRTIs. Senator Percy?
Senator PERCY. Ambassador Roth, Republicans have not only seized
control of this committee this afternoon but by our presence have indi-
cated our deep interest in your work.
Mr. ROTH. Thank you, sir. We have no fear from Republicans.
Senator PERCY. I personally would like to express great admiration
for the work that you have done with the Kemmedy Round. I know
how tough this job has bee~m. but I think the reactiomi of time business
community has been unusually understanding and moderate and ap-
preciative of time tough jobs you have had. I think, also, your educa-
tional efforts to prevent us from going into a disastrous round of
quotas and restrictions that would set back our policy 35 years, has
been very, very good.
PAGENO="0179"
513
Having said that, I wonder if you enthusiastically and whole-
Iiearteclly support the President's travel ban and travel tax which, in
effect., seems to me to be a highly restrictive, protectionist program.
A tax on tourists abroad is the same as a very steep tariff on the im-
port of tourist services. Do you feel that this is a good example to be
set by the world's leading nation in liberalizing trade?
Mr. ROTH. I do not think that I can comment on that problem. I
must say that when Secretary Katzenbach and Deming and I made
this rush trip, on January 1, throughout Europe, to discuss the total
program, I was impressed with the fact that the Europeans recognized
that a very drastic program of this sort was terribly necessary. And I
think I would have to agree that to have a balanced program means
something on the current account as well as the capital account.
I do feel, as I relate all this to problems of trade, that the important
thing is that any program, whether it be on the tourist side or any
other, not bring about retaliation, not bring about any downward
spiral, and in effect not undermine what we have been trying to do.
Senator PERCY. Do you think we can carry this out without
retaliation?
Mr. ROTH. I think we can without severe retaliation, as I think it is
a moderate program. This is one thing that I think is important in
talking about any such measures and any measures that might be pro-
posed in trade areas, if they are. I do not know whether they will be
or not.. The Europeans' deep concern is that they should be temporary.
This is why they are so terribly concerned more than anything else.
Jean Rey, when he was here last week, made very clear their terrible
fear of this type of quota legislation that is now before the Congress,
because this is~
Senator PERCY. What leads you to believe thougli, Ambassador
Roth, that this could be a temporary thing? We have had "temporary"
excise taxes for 23 or 25 years. Once you get adjusted to this, what is
going to cause a rectification? Do we see a substantial reduction in our
oversea expenditures and commitments? Can we perceive in the im-
mediate future a drastic reduction of our expenditures in Vietnam and
foreign aid? Do we see a dramatic reduction in inflation in this coun-
try, to dramatize the ability of our country to increase our exports sub-
stantially, rather than suffer a. decrease because really of a lesser com-
petitive position?
What is going to happen that will make this temporary 2-year
situation?
Mr. ROTH. Let me relate this to the area of trade-rather than
tourism-where I am somewhat more at home. If, for instance, we
decided to ask for ~ small import-export adjustment, as it were, to do
this under the GATT we would need an IMF finding. We would do
it through the GATT and we would be policed by the GATT. I think
this is the important part of going through international channels,
that it would be under review in relationship to the balance of
pa~7me1its.
Now, as to your second problem, which really is how long will the
balance-of-payments problem last, I certainly will not try to forecast
that.. But, certainly, again in Europe, when we talked about the prob-
lems, they were understanding of them, and we talked about some of
the measures that would have to be taken. They said, "The first thing
you have got to take, particularly if you want our cooperation, is the
PAGENO="0180"
514
10-percent surtax." They said, "We, in no sense, want you to deflate
your economy. This would have strong repercussions in Europe. But,
you have got to do something to tighten." I think their feeling is that
if some of them could expand-France has taken some measures al-
ready-this in itself would have an important influence.
Senator PERCY. On the travel tax, I wonder whether or not the ex-
perience of the British, who have tried to restrict and have restricted
the amount that British citizens can spend overseas, would not really
warn us that such curbs are pretty hard to enforce. It causes the best
citizens to find a way to get around it. They get pounds abroad and
have been spending them for years.
Europe is full of Britons, none of whom were permitted by law to
take more than 50 pounds or its equivalent out of the country, all of
whom exceeded that, and yet they are there.
I wonder how many dollars we have lost since the President's an-
nouncement. Is everyone not finding some way to protect themselves,
if they feel this is going to really hurt, in the long run, their goal to do
business abroad, their ability to get an education? Have we not been
trying to regulate and control the farmers' output for 30 years and
have not yet found out how to do that? They always are able to pro-
duce more on less acreage. You cannot find enough regulations to
outwit 200 million people.
I wonder whether we have not already lost far more than we would
gain, just by people taking j~reventive measures to get around an op-
pressive government that tries to strike a blow at a free people. All of
us who have fought to free the movement of goods, it is repugnant to
have us, as the richest nation on earth, to have a restriction on the
movements of people. Imagine making it unpatriotic for a clergyman
to go abroad to Africa or Asia, a student or a teacher or someone to
visit the homeland or the fatherland.
I really feel this has been a disastrous decision by this administra-
tion. It is a terrific blow to our prestige. We have to weigh how much
these things save us, and then how much at the end they really cost us
in lack of confidence in America's ability and in the dollar, I think.
I wonder whether or not you could not be a voice that within the
administration could get them to withdraw what I think is an unpossl-
ble requiry they are making, a mandate that I find the American people
are revolting against, I think the Congress will revolt and it will do us
far more damage than it is ever going to do us good.
Mr. Roni. One part of the President's program in this area, I think,
perhaps should be emphasized, because I think it. has more long-range
implications, and that is the encouragement. of tourists to this country.
Hopefully some of the money that could be collected from, say, the
5-percent tax on international tickets, which, after all, merely equates
the domestic one, could be used for this. Actually, when the Katzen-
bach-Deming party got to Switzerland, the first thing they said was
that we should increase our tourism. Obviously we were not. very good
at this. They were. and they would put together a technical assistance
pro~ra.m for us.
I~tliink this is something we can use, and I think Ambassador
MeKinney's study group is going to come up with some useful answers
in thjs area, in order to brine a lot of Deopie here. who want to come.
Looking ~o the future, because I thinik this goes to the heart of your
question, Americans should travel more and more, after we get over
PAGENO="0181"
515
this immediate problem, but this should be balanced by more and more
other people coming to this country. It is the gap that is the problem,
not the absolute numbers on either side.
So, I think there is a positive element, and I think this is the impor-
tant long-range problem.
Senator PERcY. I certainly concur with you, and I think you know
that a group of us put in a bill to increase substantially the amount
of money we spend to encourage tourism. That is the ositive approach.
That is our way of doing things, to avoid restrictions and fear and
intiniidation and avoid making a person an unpatriotic cit lzeii if he
goes abroad. We must lead with the positive.
That leads me to the second point. I wonder whether you would not
concur that, really, to solve this problem our biggest hope is to expand
the trade surplus that we have-which is declining now-and to see
that we can get this back up to the $7 billion, $8 billion, $10 billion
category, to finance all of our operations overseas, and expand them
rather than finding ways to keep restricting.
To me this means we must encourage more businessmen to go abroad,
to study markets, to look at what we can do to get products over there,
to set up merchandising organizations abroad, and see that the world
market of 3 billion people is a big market for them as against the little
200-million-person market in this country. If my figures are correct,
only 5 percent of our companies do 95 percent of our~ overseas trade.
rfhiis is why I think the travel ban strikes a blow at what we have
been trying to do for years: to opeii up the eyes of American business-
men to the opportunities abroad and encourage them to go abroad.
Mr. ROTH. I certainly feel that the long-range answer is to improve
our trade surplus, and, as you know, there are a number of tools that
the President is asking Congress to bring into play. I think these will
be important. But I certainly agree with you that American industries
have a fat market behind them, have not gone abroad to the extent
that they should or could w-itli profit, and they should be encouraged
to do so.
I was thinking about the remark on the patriotism of people travel-
ing abroad, and I was thinkiiig how difficult it was t:o make wives feel
unpatriotic-at least, some wives.
Seiia.tor PERCY. I would just like to try to modify one aspect of this
in my own personal judgment. You may disagree with me. I do not
think the expansion of trade is too much a long-range program. To me
that is about the quickest thing we could do. The factories are in pro-
duction. Goods and services are available. If we can just find ways to
open up more markets abroad, I think we can rectify this balance more
quickly than any other way. Now, the restrictioiis that we voluntarily
made just a few years ago already are starting to cost us very des~rable
dividend income from abroad. Some of those investments abroad yield
three to four times as much as the investment opportunities we have
in this country.
I am all for trying to get more dilvidlends back into this country, and
doing things to encourage them to come back, such as stamping out
all the tax havens. But, to restrict investment abroad, for a very long
period of time, and keep us out. of markets is a very dangerous thing
over theY long run.
PAGENO="0182"
516
Everything you have done and everything I read in your testimony
is positive, forthright, forward-looking, and yet, these several things
that have been clone vis-a-vis the balance of payments have been com-
pletely contrary to that whole philosophy.
I hope we will put the emphasis on the positive side rather than
restrictive measures which are just contrary to everything~ we believe
in. There is not anyone in this Government smart enough to outwit
the American businessman and the- American public if they do not
believe in what you are trying to do, and they are going to try to get
around your restrictions.
Sorry to have talked so long, but I am deeply concerned about this
situation.
Mr. 1R0TH. Certainly no one, including the administration, would
want to see more than a temporary control of direct investment. It is
interesting, I think, that even before the voluntary program was in
effect, it has encouraged the creation of a Euro-dollar market, a Euro-
peali capital market. I think this has been a. good thing. I think this
should be encouraged.
You know, you hear about the problems of imports in this country,
but when you are in Europe you hear the opposite thing; namely, the
problem of competing with American industry, which has the availa-
bility of capital resources and much better management skills and
higher technology. You see the reverse and that American industry
can compete.
Senator PERCY. That is right.. There is not any question about it.
But the one thing I am really concerned about is how long we can con-
tinue to sustain this tremendous inflationary pressure at home. Effi-
ciency can overcome a. lot.. But whet.her it. can overcome $20 billion
to $30 billion in inflationary cressure, with the kind of deficit the ad-
ministration now proposes and the resultant wage increases that are
going to keep coming well above productivity increases, remains to be
seen. Inflation is already putting pressures on American prices abroad.
I do not know whether American technology can work fast enough
to overcome that.
Mr. ROTH. This is why the Europeans were so concerned about
the tax increase. And, really, this is the basic thing, keeping prices and
costs, as you said, stable here, and then having some expansion in the
surplus countries. This would have a most immediate effect on trade.
I think you are absolutely right.
Senator PERcY. I thank you very much, Mr. Chairman, for your
generous time, and, Ambassador Roth, once again, my great commenda-
tion to you for your great service to this country.
Mr. ROTH. Thank you.
Representative CtR1Is. Thank you, Senator.
I have a couple of questions. In your reference to the Europeans'
concern over our having a tax increase, you mean they are concerned
w-ith the size of the deficit. The Europeans I have talked to are more
concerned about seeing us cut our expenditures. I know it is the proper
thing for an administration official to put the emphasis on the tax
increase, but it is really the deficit that is creating these inflationary
forces.
PAGENO="0183"
517
When Senator Proxmjre asked you about what was the cause of
the cutback of our exports, vis-a-vis the increase in imports, you men-
tioned several things. But you did not mention inflation.
Mr. ROTH. I think I did.
Representative CURTIS. Did you?
Mr. ROTH. Yes.
Representative CURTIS. Then I misunderstood. I think this, of
course, is the basic concern, and it is going to be increasing.
Restricting private investment abroad does get at the very base of
our increased exports. This is another factor which has concerned me
greatly. Another point I wanted to make is the reason why I was not
here this morning for the committee interrogation. I was over in the
Ways and Means Committee, where we were hearing public witnesses
from the private sector on the problem of the proposals of the adminis-
tration on the travel tax. The point that was made and that needs to
be emphasized in respect to encouraging tourists here, is that we are
today the largest host nation-
Mr. ROTH. The largest what?
*Representative CURTIS. We are today the largest host nation. You
might not believe it listening to the kinds of testimony and state-
ments that have been made, but this is true. We produced some data
showing that this has been increasing at a very rapid pace. I think
there are figures there for a period of 6 years.
Mr. ROTH. That is correct; it has been.
Representative CURTIS. Much more than elsewhere. We now have
9 million people coming over, so what we are really talking about is
a rapidly growing economic development; and can we make that
growth faster? But, when you are dealing with growth, you can damage
it. I fear that this administration's package is going to damage what is
already going on. I am sorry Senator Percy left, because his reference
to having Government increase the amount of money that they are
spending to encourage tourism over here leaves me quite cold. That
is what a lot of the witnesses wanted.
I asked these questions: How much private capital is invested abroad
right now, and spent abroad, in promoting tourism into the United
States, and what has been that increase ?-because it has been increased.
I am not so concerned whether the Government spends it. But, I am
concerned by the inconsistency in the administration's position. It
would restrict private investment abroad in this very area of travel,
too, and yet ask for an increase in Government spending abroad to
promote tourism in this country. `Well, it just so happens that Govern-
ment people, dedicated as they are, will not spend the dollar as effec-
tively as the airlines and the travel people and the combines that have
developed in our society with our Hertz organization and our motels
and people that derive money from having people come over here.
They are spending money. But I do not have the data for which I
asked.
`What is this restriction on private investment going to do to their
plans for expanding their efforts to bring tourists to the United States?
Mr. ROTH. Another factor which goes back to something you said
earlier affects tourism just as much as it affects trade; namely, the need
to keep prices and costs stable in this country.
Representative CURTIS. Oh, yes.
PAGENO="0184"
518
Mr. RoTH. Because it is the same thing. The more we can maintain
stability, the more travelers we can get.
Representative CURTIs. This has not been done well. I am being
sarcastic. By having the highest interest rates since the Civil War, we,
at least, have been encouraging investors to come to this country.
Thank you very much, Ambassador Roth.
This adjourns our hearings for today. The conunittee will meet to-
morrow at 10 o'clock in this same room where we will hear the Secre-
tary of Labor, the Honorable Willard Wirtz.
(Whereupon, at 5 :15 o'clock p.m., the committee recessed, to recon-
vene at 10 a.rn., Tuesday, Feb. 20, 1968.)
PAGENO="0185"
THE 1968 ECONOMIC REPORT OF THE PRESIDENT
TUESDAY, FEBRUARY 20, 1968
CONGRESS OF THE UNITED STATES,
JOINT EcONOMIc COMMITTEE,
Washington, D.C.
The committee met at 10 a.m., pursuant to recess, in room S-228,
the Capitol, Hon. William Proxmire (chairman of the joint commit-
tee) presiding.
Present: Senators Proxmire, Javits, and Percy; and Representa-
tives Curtis, Widnall, Reuss, Moorhead, and Rurnsfeld.
Also present: William H. Moore, senior economist.
Chairman PROXMIRE. The Joint Economic Committee will come to
order.
Our witness this morning is the distinguished Secretary of Labor,
the Honorable W. Willard Wirtz. As we all know, Mr. Wirtz is in a
position of great economic importance, as the principal official of our
G-overnn'ient, not only on economic statistics, as we are all aware, but
a'so on manpower policies, on wage-price policies, and on other poli-
cies that deeply concern this committee and the Nation.
Mr. Wirtz, we are delighted to have you. You may proceed with your
statement.
STATEMENT OP HON. W. WILLARD WIRTZ, SECRETARY OP LABOR;
ACCOMPANIED BY ARTHUR ROSS, COMMISSIONER OF THE BU-
REAU OP LABOR STATISTICS
Secretary WIRTZ. Thank you, Mr. Chairman.
First, may I identify-although I am sure it is unnecessary to this
committee-Mr. Arthur Ross, Commissioner of the Bureau of Labor
Statistics, who is here with me this morning. Mr. Ross is also my ad-
viser on economic affairs. When we ~et into the area of economics and
statistics, whatever you may have included in your reference to me
could only apply to him, and not to me.
I have filed with the committee, Mr. Chairman-unfortunately some-
what belatedly-a statement which I think, if it best fits the commit-
tee's convenience, I could summarize fairly quickly, as a basis for
whatever questions you may have. I would be glad to do that, if it
meets your convenience.
Chairman PROXMIRE. Yes. It is an excellent statement.
Secretary WIRTZ. The statement recognizes that there is ample basis
for these hearings and for your questioning, in the Economic Report of
the President and in his message to the Congress on January 23-and
then in the Council of Economic Advisers report. And I hardly need
say I identify myself completely with the matter in those reports, and
(519)
PAGENO="0186"
520
have, in this statement, simply tried to emphasize one. or perhaps two
points which are covered in those. reports. There is nothing here., so
far as I know, inconsistent with them, but this does represent an
emphasis on two points-the first of which is this very stubborn fact
that now, after 7 years of uninterrupted. unprecedented economic ex-
pansion, there is an extraordinary amount of remaining unemploy-
ment, which is hanging on. At this point, almost by definition, that
unemployment is what is left. after we have pressed the economy to
what. most of us consider its maximum effective point, so that it. could
not be pressed further without. danger of what is recognized gen-
erally-although I realize there is disagreement on this-of overheat-
ing. So, what we are talking about here has been called hard-core
unemployment: it. has been called structura.l unemployment more tra -
dit.ionallv. It could also be identified as subemployment, or long-term
unemployment. For purposes, I believe, of the committee's current
analysis, it is that unemployment which remains when the economy
has clone all that it can, and when fisca.l and monetary policy have been
pressed as far as they can be pressed, and what it leaves is a picture
of 3 million unemployed as of a particular time; 10 to 11 million un-
employed at one point or another during the year, with a concentra-
t~on of that. unemployment in particular areas-
Mr. Ross. Ten to eleven million unemployed-
Secretary WIRTZ. At one time or another during the year, and with
a. concentration of that unemployment in particular areas, and among
part ~c.uTar groups, particularly the imnority groups and, in age terms,
the group between 18 and 19. And so, Mr. Chairman, members of the
committee. my statement. is an attempt to focus as sharply as possible
on that particular fact, and on what we are trying to do about it.
I have summarized in the statement the approach that is .beiiig
taken to this problem on two fronts. First, we are increasingly a coun-
try which does whatever we can measure, whether for better or for
worse. And there has been a. little-noticed development, of ver real
significance-I think particularly in the kind of thinking for winch
this committee is responsible-a real development in the last. 12 or 24
months in the identification and measurement of the hard-core kmcl
of unemployment we are talking about, which, from here on, I will
use as a. shorthand phrase, ref erring to that unemployment which fiscal
and monetary policy and the expansion of the economy alone will not
meet.
In this last. 2-year period we have tried, under Mr. Ross' leadlership
in the Bureau of La.bor Statistics, and throughout the Department. to
try to bring our forms of measurement of the problem, of personal
economic disability, into line with the recognition of this hard-core
kind of unemployment. And, in this statement, there is a summary of
what has been done there.
There are really three steps in it. First, we have taken those monthly
reports which t.he c.ountry is familiar with in terms of only a single
percentage-you pick up the pa.per and read that unemployment is
4 percent, or 4.1 percent, or 3.8 percent, and the matter is left in the
headlines there. Very frequently, we have tried to get behind that, and
bring out what has been in those figures but has not `been empha-
sized promptly-the facts of the unemployment rate for minority
groups, the fac.ts of the unemployment rate for women, the facts of
PAGENO="0187"
521
the unemployment rate for youth. And I simply want to point out here
what is old learning to this committee: Whenever we see a monthly re-
1)ort of a 3.5-percent unemployment rate, as we did in January, un-
fortunately it is an average which conceals both the success which we
have reached-a rate for adult males and heads of families, which is
now about 2 percent-and the failure, which is reflected in rates for
minority groups which are twice the majority group rate, and in the
rates for youngsters, which are again about twice whatever they
are for older people.
So, to carry it to the extreme, it is too bad, but true, that when the
country is advised, in the short television program or in the newspaper
headline, that we have a 3.5-percent unemployment rate, it does not
get through that as far as adult males are concerned it is down to 2
percent, which is about as far as it can go, but very probably, although
our sample is quite small, it is also about 30 percent for Negro girls
between the ages of 16 and 19. All of that is lumped together.
Now, the first thing we have done is to try to get behind that, and
I think quite successfully.
The second thing that is being done now, which will represent the
most sophisticated measurement which is going on, is reflected in
the statement and it is in the description of a completely new approach
to, or at least a new emphasis on, these monthly figures. This approach
is going to let us give you, within the year now, a very clear picture, on
the basis of regular monthly checks, of how much of what kind of un-
employment there is where-not only in terms of the demography of
the group, but also in terms of its location physically. And then be-
yond that., we are also moving in this measurement into al area in
which we have so far been able only to guess-namely, the ~ ~iount of
what the public thinks of as unemploym~nt, but what we do not call
unemployment at all, because traditionally when we describe unem-
ployment to the country, we are describing the number of people who
are actively looking for work and unable to find it, and we are not in-
cluding those who are not even looking for work, but who should be.
And, so, I report to you as the second development in this area, that
within the year we will be getting information which breaks clown the
unemployment figure in terms of the type of people who are involved,
the area. in which they are located, and which on the second hand adds
this nonparticipation in the work force.
Now, the third thing which we are doing-and it is to some ex-
tent on an interim basis-is to take the information which we already
have, and to use it as the basis for what are necessarily estimates, but
quite reliable estimates, of the picture in the 20 largest cities. Before,
it has been on a nationwide basis. As of today-and timing it delib-
erately to coincide with this hearing-we are releasing reports now
on the 20 major cities, with a breakdown of unemployment in the
standard metropolitan statistical areas. We are releasing today this
report. which also shows t.he unemployment rate for the center city of
14 of these standard metropolitan statistical areas, rate for the center
city, a~s well as the unemployment rate for the part of the area which
is around the city, a.nd these are broken down also on the basis of race;
broken down also on the basis of sex; broken down also on the basis
of age.
PAGENO="0188"
522
Now, there are copies of that report which will be released later
today. They have been given to you and the committee. And I have
summarized them in my statement.
I think it is a pretty significant advance.
~\Te had 15 of them ready about 6 weeks ago, and did release those.
are now working on the 20, and this is the first release of those.
I have, in my statement, summarized some of the results on a 20-city
basis, but I point out that in doing that we really defeat the pur-
pose of that approach, which is to get away from the averaging of
a lot of matters, and to present the picture which will probably be most
useful locally-to present the picture in terms of the situation in a
particular city.
In my prepared statement, I have suggested some of what we
are ftnding here.
Again, one of the biggest lessons is how much difference there is
in the situation-so that you have unemployment rates today in
Minneapohs-St. Paul of 2.2 percent, 2.3 percent here in Washing-
ton, but 5.6 percent in Los Angeles, and 5.4 percent in San Fran-
cisco and Oakland.
Just to take another illustration, when you get into the Negro
unemployment rates, which we have referred to quite generally in
their relationship to white unemployment rates, you find that Negro
unemployment averages 2.3 times as high as white rate.s, and yet,
here again, there are differences which are perhaps more important
than anything else.
So that here in Washington, the ratio between Negro and white race
is 1.6 percent-1.6 to 1, rather. In New York, it is 1.5 to 1. You turn
to Cleveland, it is 3.1 to 1, which means three times as much. You go
to St.. Louis, and it is 4.2 to 1.
So we have rea.lly totally different situations.
Chairman Pnox~ri~. 4.2 to 1, meaning there are four times as many
Negroes out of work as whites?
Secretary WIRTZ. Taking account of the difference in the size of
the group.
Chairman PR0xIMIRE. Sixty percent more in this city?
Secretary 1\TIRTZ. That is correc.t. Or on a pro ra.ta basis-taking
account of the fact there are fewer Negroes, it is still true.
And then when you turn to the tables, too, you will get what I think
is a very important lesson.
We have sort of escalated our figures about some of these matters
by `talking in percentages. which often seem to imply a good deal more
than the fact.s show. And we forget that although this problem, for
example, of minority group unemployment is exceedingly serious, it
is still well within reach.
So, in my statement, I have suggested a little of that. If 1,-on take
these 20 areas as a. whole, the nonwhite unemployment, in 1967' totaled
269,000. That is in the 20 cities. In these tables, incidentally, we have
taken all 12 months of 1967. averaged those figures together. The 1967
average of those 20 cities' nonwhite unemployment is 269,000. It. is
surely within our reach, if we really go after it.
Incidentally. that is about half of the nonwhite i.memnployment in the
whole country. lYe can scare ourselves sometimes with the percentages,
and the figures, and forget tha.t in a work force of 70 million to 75
PAGENO="0189"
523
million, this is something we ought to be able to get if. we simply get
clown to business on it.
I have used Chicago as a single illustration. There the nonwhite un-
employment includes 9,000 adult men, 11,000 adult women, 16,000
teenagers. A total of 36,000; 33,000 `of them are in the central city,
in Chicago. That should not be `too much of a job for a city that size,
or a country `this size, to get at, if we get down to it.
Now, that is enough perha~s to summarize the changes that we have
taken in the approach `to analyzing this problem. But, I cannot em-
phasize `too much the `significance of our getting the indexes now into
line with `the `social priorities in this country. And, of course, what is
involved is a very basic difference.
\~\T0 have been approaching unemployment, to a very , considerable
extent on the theory `that we have it on a nationwide `basis, involving
aggregate policy. It is very important `these figures do now substan-
tially tell us what it is in terms of the individual `approach to the prob-
1cm that has `t'o be taken.
Mr. Chairman, members of the committee, a good deal of the unem-
ployment that remains is more personal than it is economic, although
no one of the `three terms is very good any more. They all h'ave `old,
blunt, rusty meanings-unemployment, economic, personal. They are
just the best words lying around.
In t.he~ second part of the statement, I have summarized the approach
that is being taken as far as the operating programs are concerned,
but have not gone into i.t in detail here, because I am assuming that it
fall's, if not out side, then `on the edge of the committee's interest. But I
want to just summarize it very quickly.
The emphasis right now on the manpower' program, which is what
I am talking a'bout, are'these:'
First, to concentrate that program where the problem is concen-
trated. And by concentration, I am talking now about specific census
tracts, in specific areas in the city-the concentrated employment pro-
gram is aimed at., or will be in the course of th'is year or next, 146
specific census tract areas, where unemployment still hangs on.
Then in the President's job program, we are looking at the 50 cities;
we are taking the 50 largest cities1 because we know that over half the
remaining unemployment is in those 50 largest cities.
Now, this does, not mean that the `other areas `are being left out.
But, what it comes down to is, we are taking about 25 percent of our
program funds, and aiming those right at the areas in which this
situation exists. ` :
The second major development, as far as this programing is con-
cerned, is that we are relying much more strongly than we were before
on the enlistment of private business in these programs. These pro-
grams represent a sophisticated development of the original on-the-
job training concept. I will be glad to go into further detail about
those programs, but in a very meaningful way we are turning now to
the enlistment of and close cooperation with employers in these pro-
grams. There has been set up a committee, the National Alliance of
Businessmen, headed by Henry Ford, a 65-man committee, around
whose advice and counsel the jobs program will be quite thoroughly
developed. ` `
PAGENO="0190"
524
Along with the model cities program, what you have here is the re-
flection of an aiming of the manpower program, a shooting with a
rifie-or, I would like to think, with even heavier artillery-but not
with a shotgun, as we were before.
There are other parts of those programs I would be delighted to
talk about, but I do not want to intrude my particular interest on those
of the committee.
There has been a good deal of talk, I should say, about the extent
to which there has been a lack of consideration of priorities. I do not
believe that is true as far as this area is concerned. I sense, in my official
capacity-not sense, but know, in my official capacity-a complete ac-
ceptance of the priority of the manpower program. It is reflected in
this fact-but only illustratively of the one fact-that in the budget
which the President has transmitted to the Congress for fiscal year
1969, the total for the manpower programs-and I am taking a. coin-
paratively narrow definition of manpower programs-is to be $2.1
billion. That compares with $1.6 billion in 1968. It is a 20-percent in-
crease. It will mean, in another way of suggesting its magnitude to
you, that in fiscal 1969 there will be, in work and work training pro-
grams in this country, which include both allowances and partial wage
payments to cover the training part-1,300,000 people involved in these
programs, receiving not only training, but allowances or stipends of
one kind or another. It becomes a much more sophisticated form of a
public work and training program than the one most of us grew up
with in the 1930's.
So there is a strong emphasis on it, a strong priority attached to it.
In conclusion, Mr. Chairman and members of the committee, I
have t.ried to suggest this. I think it is terribly important to recog-
nize the unmet part of this problem. It is terribly important, too, to
recognize, because it is so little noticed, it is so much overlooked,
the fact of the gains that are already being made. I know it is not
popular today to suggest the gains that are being made in any particu-
lar area. It is more sophisticated, it is more liberal, it is more news-
worthy to talk about bad news. I do not mean to depart too much from
that. pattern of discussion and publicity. But, I would like to point this
out: I believe it is true that every single group in this country, not
just the country as a whole, but every single group in it, Negroes,
youth, any group, is infinitely better off from the standpoint of em-
ploymeiit opportunity than it was 5 years ago.
Now, you can take the other side of that case, or anyone can
take the other side of the case. And if you do, it is to suggest, in my
judgment, that a selected use of statistics can be used to support almost
any proposition you want to. I hope it is not heresy to suggest that.
today the computers, like the Scripture.s, can be quoted to support
almost. any proposition, if you t.ake something out of context.
I believe the statement remains solid and true-that regardless of
what is left to be done, every single group in the country is today
be.tter off from the standpoint of employment opportunity than it.
was 5 years a.go.
That leads you to another development which I suppose is the most~
important development in the last 5 years.
Five years ago, I believe, we w-ere still accepting in this country
what was virtually a deterministic philosophy, and it was not very
PAGENO="0191"
525
far removed from predestination and foreordination, although we did
not quite realize it in those terms. I think the most important thing
that has happened is today we have rejected any comparison with the
past as being almost irrelevant., almost immaterial, and we have ac-
cepted the proposition that we can do almost anything that we set
out to do-at least as far as this area is concerned.
I think that is the most important change there has been.
Now we meet this situation. Every gain we make today means in-
stead of approaching our goal, we are a little further from it than
we were before, because we are setting a new goal in terms of human
capacity. And this is a very realistic thing. It is as real as the fact
reported in the newspapers last week, that when Detroit recently
opened its employment gates almost without limit of any kind, the
result was to increase unemployment in Detroit, because it brought
more people into the work force, indeed it brought more people into
town.
~\Te face the fact that as we make our programs to meet unemploy-
ment in the slums more effective, unemployment in the slums is like~y
to increase because of the people coming into the city from outside the
city. It is a significant fact that several million p~ople will move from
the countryside to the cities in this decade, a great many of them, the
underprivileged, the disadvanta.ged-'because of the superior oppor-
tunities that they feel are presented in the cities as far as employment
is concerned.
Now, I do not say this in complaint. It is simply a reflection of the
fact that the country now senses that it can meet a much higher stand-
ard than it did before. And it is a grand thing to throw away `the
measures of the past, and to have a new standard set for you every
time you approach the old one. I have suggested here that it does
sometimes, at the end of the: day, make you feel like a greyhound chas-
ing a meghanical rabbit, that you can never catch up with it-and
yet, it permits you, the next morning, to wake up realizing that in a
kind of economic way man has rejected the old idea of determinism,
and has accepted the proposition that we can perfect the human ideal.
That leads me to my final point. It is a point of emphasizing the
unfinished part of this business. There have been three stages in
evolution of the manpower program. They ought to be clearly
marked. The third one we are just moving into, and it is the one I want
to mention here in conclusion.
We started our first official recognition of the unemployment prob-
lem in the middle thirties-we started out by talking about unemploy-
ment insurance, and employment exchanges-the Social Security Act.
of 1935, and the Wagner-Pizer Act of 1933.
The closest we came to a recognition of the individual's significance
in the unemployment situation was to say if you are out'~of a job,
drop `by such and such an address. And furthermore, if you have
worked for ~he system, we will now pay you unemployment insurance
benefits for a while. That is the only road of recognition of the
mdividual there. It was a system-oriented kind of thinking about the
whole `business-the only jobs we were thinking about were those
which the sy~Lem wanted to have filled. And we furthermore thought
about unemployment in this country, until this decade, in terms of
PAGENO="0192"
526
its being simply a. prochict of the equation of fiscal and economic
policy aiid of the expansion of the economy.
~We just assumed there would be. employment or unemployment de-
pending on whether times were good or bad. That was the first stage.
We have been for about 6 or T years now in the second stage, which
represents a very considerable advance. Now, in the manpower pro-
gram we aie recognizing that a lot of people are unemployed even
when there are job possibilities, and we have to develop their capacity
to fill the jobs. as well as develop the job opportim~ties.
That is a very important second step, and one which i do not mean
to minimize in its significance a.t all.
But I think we are well reminded that we are in danger of taking a.
new form of deterministic approach in which we set up the economy as
an end instead of a means, which is all it can be-we set up manpower
programs as rograms. And we a.re leaving out, or not yet paying
enough attention to the fact that in a very real sense, man does not live
just by a job alone-at least in the income sense.
What I am trying to suggest is that I think we are moving now into
a t.hircl stage in which the quality of work is going to receive a. good
deal more attention than it did before-when we talked only about the
quantity.
We are still measurmg unemployment, even in our most advanced
current stages, in terms which mean that if an individual ha.s half of
hiS or her capacities used, he or she is fully employed.
Now, that is an old barnacle definition of employment, which is cast
entirely iii terms~ of what the system wants instead of what the inch-
viclual can do.
Now, this is very relevant all the way up and down the employment
line. But, it comes into its sharpest focus in connection with our ap-
iroach to the problem of the currently disadvantaged workers. And I
am suggesting in this statement, Mr. Chairman and members of the
committee, that we will make a great mistake if we conceive of this civil
rights revolution as being an economic revolution, when in fact it is a
social revolution. It would be entirely possible to offer every Negro in
this country a job as a hired hand, or as a permanent Government em-
ployee, give him a permanent Government shovel, or give him guilt-
edged Government. guarantees-and I spell that g-u-i-1-t. You can give
him all of those things audi not get to the heart of the civil rights revo-
lution-because it is not going to answer the problem that this country
brought. on itself, sjmpiy to offer any kind of,job, on any kind of terms,
to the people that we a.re talking about here. It involves a great deal
more than that. It involves making them full participants in the whole
work relationship. It involves a great dea.l more than just a. paycheck
for whatever job may be involved.
I would be glad to go into this further.
I mvoulcl recognize it has not a great deal of immediate relevance, ex-
cept for this point. We have not got time to make another round of
mistakes as far as the civil rights revoiuti~n is concernedi. Audi to what-
ever extent we approach it at this time on too narrow a basis, we are
going to run out of time. And to whatever extent we feel we can meet
its clemnands today, simply by offering any kmdi of job at any kmdi of
rate under any circumstance to these people, we are going to be wrong.
I want. to make it perfectly clear what I am talking about lies very
PAGENO="0193"
527
close to the area which we have considered, some people have discussed
in terms of the Government's being an employer of last resort, and
others in terms of a guaranteed income. And I do not mean to reject
that kind of thinking. I mean to make it perfectly clear that there is
involved in some of the developments of that kind of thinking a short-
cut across quicksand that still leaves the desirability of looking at
those proposals for the great value which is in them, if we do not make
the mistakes to which I have referred.
I say, Mr. Ohairman, I will be glad to go into this further if there
is interest on the part of the committee.
That concludes my statement, Mr. Chairman.
I know from previous experience you may well want to inquire about
the collective bargaining picture, about the wage developments which
are in prospect, in our recent past, about wage-price policy. I do not,
by omitting them from the statement, mean to minimize their im-
portance. They are very well covered in the various reports.
I will, of course, welcome whatever questions you may have in the
broader area.
(The prepared statement of Secretary Wirtz follows:)
PREPARED STATEMENT OF SECRETARY OF LABOR, W. WILLARD
WIRTZ
This testimony proceeds from the Economic Report of the President, from his
Message of January 23rd to the Congress, and from the Annual Report of the
Council of Economic Advisers; and there is little to add as further basis for the
fuller development the Committee's questions will permit.
My particular interest and responsibility center on one stubborn fact-a stub-
born fact which these Reports have noted: the substantial unemployment which
remains after seven years of unprecedented economic expansion-at such a rate
that 7~/2 million jobs have been added in the past four years.
The President referred to this after no'ting that unemployment in 1967 was at
its lowest level for many years: "Yet there is no room for complacency in these
achievements. The unemployment rate for Negroes, Mexican-Americans and other
minorities remains distressingly high, and far too many of our teenagers look for
work and fail to find it. . . . Increasingly our efforts are concentrated on the
disadvantaged who have been unable to share in our prosperity."
We now know, quite clearly, that whatever is done to strengthen the over-all
economy, consistently with the accepted views about the dangers of "overheating"
it, will leave-unless other and entirely different measures are taken-these con-
sequences:
An average of about 3 million people unemployed as of any one time-resulting
in an unemployment rate (as traditionally defined-meaning those who "are
looking for work and unable to find it") of between 3.5% and 4.0%.
About 10 million people unemployed at one time or another during the year.
A so-far-uncounted number of additional people who ought to be working but
who for one reason or another are not "looking for work" and therefore are not
included in the traditional "unemployment" statistics.
A heavy concentration of the remaining unemployment among particular groups
(especially "minority groups" and youth) and in sharply defined areas (the urban
and rural slums, especially the "ghettos").
I report to the Committee, therefore, on the development of the policy and the
"manpower" programs which are the essential complement of fiscal and mone-
tary policy-for their purpose is to meet the problems of the unemployment (call
it hard-core unemployment, or sub-employment, or structural unemployment)
which expansion and growth of the economy will not meet.
These are essentially problems of "unemployment" which are more "per-
sonal" than "economic"-although each of these terms is less than precise, and
reflects poorly quite a lot of new understanding.
I report significant progress in this area: (a) in the development of new
methods of identifying and measuring this type of "unemployment"; and (b) in
the development of new operating programs to meet it.
90-491 0-68-pt. 2-13
PAGENO="0194"
528
First, about its identification and measurement:
For many years the national unemployment rate was regarded as an adequate
measure of sufficiency or insufficiency of job opportunity. By this measure we
have done very well indeed. The overall rate stood at 6.7 percent in 1901 and was
still at 5.7 percent in 1963. It was down to 4.5 percent by 1965, to 3.8 percent in
1967. For January 1908, the rate was 3.5 percent, lowest since the Korean conflict.
For some time now we have been high lighting in our reports on employment
and unemployment the situation among the groups which have shared least in the
general improvement: Negro and other "minority group" workers, with unem-
ployment still twice as great as white workers; teenagers, with unemployment
averaging 12.9 percent in 1967, not much improved since 1901; nonfarm laborers,
`with an average rate of 7.6 percent in 1967; and so on. Moreover, it has been in-
creasingly emphasized that while almost 3 million persons are unemployed at
any one time, approximately 11 million experience joblessness at some time dur-
ing the year, and that of these over a million are unemployed for a total of at least
half a year.
But we have also come to realize that this traditional concept of unemploy-
mnent-w-hich includes only those who are actively searching for w-orks and re-
ports nothing of the frequent inadequacy of w-hat they find-is misleading as a
measure of hard-core personal economic disability. It takes little or no account of
the fact that hundreds of thousands of men and w-omen are not working because
of remediable physical and emotional handicaps. Others are not looking for work
because they lack the basic minimum of literacy or skill, or have been repeatedly
rebuffed, or cannot find transportation to w-here the jobs are located, or cannot
find child-care facilities. Still others have only part-time w-ork although they
need and are looking for full-time employment. Millions with full-time jobs can-
not earn enough to support their families decently.
In November of 1966, we conducted ~i set of experimental surveys in 15 slum
areas in some of the Nation's largest cities, designed to illustrate these problems
of incapacity, underutilization, nonparticipation and substandard employment
which lies beyond "unemployment' in the traditional sense of the term. In ad-
dition to an average "unemployment" rate of 10 percent, w-e found another 7
percent of involuntary part-time workers; and of those with full-time jobs,
more than one-fifth were earning less than $60 per week. Outside the labor force
w-e found a large number of men so estranged from the world of work, and of
w-omen convinced that they will be barred from w-ork, that they were not even
seeking jobs. At least one out of three residents in these slums was found to have
a serious problem related to employment.
From these pilot surveys the Department has been moving into a regular and
systematic program of information and analysis concerning the economic pa-
thology of the slums. The Bureau of Labor Statistics conducted methodological
work in 1967 in order to tackle special problems of communication. reduce the.
"undercount" of slum residents (especially young Negro males), and achieve a
better understanding of job-seeking methods utilized by casual workers without
good training, experience or connections. We are now- activating the regular sur-
vey program by training interviewers, preparing forms and instructions, selecting
neighborhood samples, and so on. In the course of this year we w-ill be getting
regular and reliable information not only describing and measuring employment
problems (going beyond the traditional concept of "unemployment") in the slums
but also analyzing causes and pointing to the necessary remedies. This informa-
tion will be indispensable in appraising results of efforts such as the Concentrated
Employment Program, the Model Cities Program, and the JOBS program.
In the meantime. we have developed a method for using reliable w-orking esti-
mates of the unemployment situation (largely in terms of the traditional defi-
nition of "unemployment") on a city-by-city basis. This is being done for the 20
largest metropolitan areas. The first complete report on these 20 areas is being
released today. (A preliminary report on 15 of them was released several w-eeks
ago.)
These reports are based on annual averages of 12 monthly surveys during 1967.
They include breakdowns as betw-een the metropolitan area as a w-hole and the
center city (in the case of 14 of the 20 areas) ; on the basis of race (for all 20
areas and cities) : and age and sex (for most of the individual 20 areas and 20
central cities, and for all the cities together and the areas together).
I mention here only a little of what these new compilations show, for their
largest usefulness will be to the citizens and public officials in each of these
areas-who have so long had to work in the dark without reliable, detailed data
about their own particular unemployment situation.
PAGENO="0195"
529
The figures in fact highlight the great weakness in the law of averages-that
it conceals failure with success-for these estimated unemployment rates range
from 2.2 percent in Minneapolis-St. Paul and 2.3 percent in Washington to 5.6
percent in Los Angeles-Long Beach and 5.4 percent in San Francisco-Oakland.
Negro unemployment rates "average" 2.3 times as high as white rates, but
here again there are important differences. The ratio between the Negro and
white rates is 1.5 in New York and 1.6 in Washington, compared with 3.1 in
Cleveland and 4.2 in St. Louis.
For the 20 areas as a whole, unemployment averages 4.7 percent in the central
cities, 3.1 percent in the suburbs. The principal reason is that the majority of
whites live in the suburbs, while over 80 percent of nonwhites are in the central
cities.
These tables also make clearer the actual magnitude of unemployment, as
distinguished from ratios and percentages. For example, nonwhite employment in
the 20 largest areas averaged 269,000 in 1967-divided almost equally among
adult men, adult women and teenagers. (This was 42 percent of total nonwhite
unemployment in the Nation.) Nonwhite unemployment in a single area can be
illustrated by the situation in Chicago: 9,000 adult men, 11,000 adult women and
16,000 teenagers, for a total of 36,000, of whom about 33,000 are in the city of
Chicago itself.
I report, therefore, that we are now well along in a major redesigning of man-
power statistics in the pattern of today's social priorities.
The President describes, in his January 23rd Message, the development and
the new emphases in the operating manpower program. He prescribes there an
intensification of present efforts through: (1) the further concentration of re-
sources and facilities on those particular areas where the needs are greatest;
(2) unified planning and action by the government agencies and private or-
ganizations concerned with manpower; and (3) the greatly increased involve-
ment of private industry in overcoming hard-core disabilities.
I only summarize briefly here the three special program developments which
are designed to implement the President's instruction: the Concentrated Em-
ployment Program, the manpower aspects of the Model Cities Program, and the
JOBS Program presented to Congress in the January 23 Message.
The Concentrated Employment Program responds to the President's direc-
tive in his 1967 State of the Union Message that governmental measures be
redeployed so as to provide concentrated assistance to those with the greatest
need. The guiding principles are (1) to enlist the active cooperation of business,
labor and other community interests; (2) to provide a wide range of counselling,
health, education and training services as needed by the individuals being
served; (3) to provide the follow-up assistance necessary to assure that a job,
once obtained, will not quickly be lost; and (4) to combine in a single project
contract the training and work-training components available under the vari-
ous statutory authorizations and appropriations.
By the end of fiscal 1968 we expect that Concentrated Employment Programs
will have been established in 76 urban slum and rural poverty areas. In 1969,
we plan to have 99 urban and 47 rural areas.
The Model Cities Program, established under the Demonstration Cities and
Metropolitan Development Act of 1966, will mount a compresensive attack on
the social, economic and physical problems of blighted urban areas. The co-
ordination of federal, State and local efforts required by this Act includes the
commitment of the Department of Labor to carry out the manpower aspects
within the framework established by the Department of Housing and Urban
Development.
All of the 65 Model City planning grants approved by the end of 1967 have
included manpower components. Substantial reduction of unemployment and
underemployment through work and training opportunities for neighborhood
residents will be an integral part of every Model Cities plan.
Wherever possible, CEP and Model Cities neighborhoods will be aligned.
The Neighborhood Service Centers will bring together, in one installation, the
services administered by the Department of Housing and Urban Development,
the Department of Labor, the Office of Economic Opportunity and the Depart-
ment of Health, Education, and Welfare.
The JOBS (Job Opportunities in the Business Sector) program for involve-
mont of private industry in training and employing the disadvantaged is a logi-
cal growth of previous undertakings.
PAGENO="0196"
530
Of the 113,000 new OJT trainees enrolled during 1007, about two-thirds were
disadvantaged. This experience taught us that in order to attract hard-core
recruits and move them through training into steady employment, a broader
type of program would be needed. More counselling, health assistance and
other supportive services would be needed; and the additional costs incurred
by employers through loss of productivity, unusual supervision needs and
other extra burdens would have to be taken into account. In 1968, the OJT
program is emphasizing jobs with career potential, and is providing positions
in private industry for many young persons initially enrolled in the Job Corps
and Neighborhood Youth Corps.
Under the JOBS program, the Government will locate and identify the hard-
core unemployed. Cooperating companies will furnish jobs and bear the normal
costs of training, while the Government will underwrite additional costs such as
literary training, transportation, health services and counselling.
The President also announced the establishment of a National Alliance of
Businessmen to help launch the program. Leading business executives are spear-
heading the effort in the 50 largest cities. An expenditure of $106 million from
available manpower funds has been programmed for Fiscal Year 1968, with an
increase to $244 million planned for Fiscal Year 1969.
The OEP and JOBS programs permit combining the resources available to
meet hard-core unemployment under both the Manpower Development and Train-
ing Act and the Economic Opportunity Act-so far as the administration of the
EOA programs has been delegated to the Department of Labor. These include the
New Careers program, the Special Impact program, Operation Mainstream and
the Neighborhood Youth Corps.
These programs funded under the Economic Opportunity Act are budgeted for
$745 million in fiscal 1969. Training programs under the Manpower Training and
Development Act are budgeted for $513,044,000. In addition the Department will
be administering the work incentive program for AFDC recipients, with an ex-
pected enrollment of 110,000 recipients in fiscal 1969.
The grants budget for administration of state employment security agencies
requests $616,573,000 for 1969. I will not take time to tell the whole story of how
the employment services are redirecting their efforts to serve those in greatest
need, but it is an exciting story indeed.
All in all, programs administered by the Department of Labor will provide
1,300,000 training and employment opportunities in 1969.
In summary, regarding this matter of hard-core unemployment, I suggest the
importance of recognizing fully all that remains `to be done-and equally what is
currently being accomplished.
As well as I can advise you, not only the population of the Nation as a whole
but every group within. it has-by any paat measure-made unparalleled gains
during the past five years so far as employment opportunity is concerned. When
particular statistics are picked out to buttress a contrary conclusion, it only con-
firms that computers can now-, like the scriptures, be drawn upon selectively to
support almost any proposition.
One of the significant things that is happening is that each gain which is made
in increasing employment opportunity draws additional people into the work
force. The development of effective training, work-training, and employment op-
portunities for the `hard-core unemployed encourages those who had given up to
try again. There is still only partial realization of the extent to which the in-
tensification of efforts-and the increased effectiveness of the efforts-to meet
the problem of hard-core unemployment in the city slums is draw-ing the nation's
disadvantaged more rapidly into the cities.
This is not remarked in complaint. The most important thing that has happened
in these past five years is probably that we have rejected, as the measure of
our achievement, any standard of previous performance-~substituting instead
the measure of the human potential. What we were able to do before is irrelevant,
any gain by that standard immaterial. If this means feeling at the end of each
day like a greyhoi.md chasing a mechanical rabbit that can never be caught, it
also means sta:rting the next morning with the ennobling realization that man
has finaUy shaken the false ideologies of predestination and determinism and
has accepted responsibility for perfecting the human ideal.
This leads to a final point.
The first stage in the development of a national policy regarding employment
and unemployment accepted the non-use of people-i.e. unemployment-almost
entirely as part of the product of a national economic equation. The purpose was
PAGENO="0197"
531
to increase the number of work opportunities. It was system~centered. The only
measurement was in terms of a totally undifferentiated national average. The
principal feature of that policy, so far as recognition of the individual was
concerned, was paying him insurance benefits for a time when he lost his job-
if he had contributed to the system.
The second stage has been to recognize the necessity to assist the disadvantaged
individual `in qualifying himself for the work opportunities which are available.
This has meant significant advances-reflected in the "manpower" program
which has been described here. The needs of "the system" continue to be
recognized at this stage as dictating what employment `is to be.
The significant character of the `third stage has already emerged. It involves
the quality of "employment," the circumstances of the employment relationship,
the meaning of work to the individual-beyond the fact of its providing a minimal
living wage. This new factor takes a variety of forms, affecting much more
than the employment of the disadvantaged. It is reflected in the fact of current
measurement: that we count a's fully employed a person whose capacities are
only half-used. It is most sharply apparent today in the increasing realization
that equal employment opportunity for the previously and presently disadvan-
taged groups demands a good deal more than providing their members just any
kind of work on any kind of terms. T'he basic human elements in the civil rights
revolution would remain untouched by hollow assurances to Negroes of the
chance to be "hired hands" or life time holders of public works shovels or guilt-
edged Government income guarantees. What is sensible in current proposals for
"last resort employment" and "guaranteed income" plans must be carefully
separated out firom elements which would make these disastrous `short-cuts across
quicksand. This is a social, not an economic, revolution.
The implications of these broader considerations go beyond `the scope of this
hearing. But there is reason to remind that any consideration of "economic
policy" tends to assume that man lives by bread alone, and that any report on
"manpower policy" tends to overlook the implications of the fact ~that even the
phrase itself derives from "horsepower."
I realize that the Committee's inquiry of me will proceed into other entirely
different areas-collective bargaining prospects, wage and price policy, and so
forth. It has seemed advisable to confine this statement to a single area. I shall
of `course welcome your broader questions.
Chairman PRoxMIns. Thank you, Mr. Secretary. I have been lis-
tening to statements before Senate committees now for 10 years. This
is-I think this ranks as one of the most powerful, eloquent~ moving,
and competent statements that I have heard.
Secretary WIRTZ. Thank you.
Chairman PRoxMIiu~. It is most impressive and most encouraging.
I am delighted you put it into a perspective of progress. You are right
that we tend to be pessimistic, and we tend to look at the weak spots,
and overlook the progress. Your statement did a lot to give us the
kind of perspective we need.
Also, it is good to get this instrument of social policy that you are
giving us; the breakdown of unemployment figures by city, and by
the areas surrounding cities.
I want to get to that.
Before I do, however, I would like to ask you for your own justi-
fication of the administration's proposal for a 10 percent surtax which
the Council of Economic Advisers, which I should say the Chairman
of the Council, Chairman Ackley, wrote me would diminish the num-
ber of jobs during this calendar year by 150,000-fiscal year 1969 by
300,000-and would `hit at a time when many economists feel that the
economy is likely to be softer.
Under these circumstances, it seems to me that this very well might
create a situation where it is much harder to get at the hard-core
unemployment-recognizing that excellent as the new programs are,
PAGENO="0198"
532
and improved as they may be, what we need above all, I think, is
an economy which provides a maximum opportunity for those seeking
work to find it in private employment, and good as the Government's
manpower training programs are, far more important, and far more
effective, by and large, are the training programs that take place in
private industry.
Under these circumstances, what is the justification for a surtax
that can very seriously interfere with employment opportunities for
the hard-core unemployed?
Secretary WTn~rz. My response, Mr. Chairman, takes account of
two inhibiting factors. One is that-the statement I am about to make
has been made by so many people under so many different circum-
stances it will be discounted as being only the voice of a parrot.
And second, my response to the question must necessarily be intuitive
to a certain extent, because I recognize the significance of broad prin-
ciples which I only pa.rtially understand. But my answer adds up
to a. complete and unqualified endorsement of the surtax proposal.
I mention it only briefly-because they have no novelty. It is with
a very serious and concerned consideration of the fact to which you
refer. I know that when we talk about the necessity of cooling off
the economy, what that translates into as far as my most immediate
concerns go is the prospect that some fewer people will be working
than were before-unless we do something else about it.
Now, I am not completely clear about t.he additional things that
we can do about it.
We a.re talking about some of them when we raise the training,
the work training program for next year from a million to 1.3 million
people. We have that problem in mind. And then the greatest con-
sideration, Mr. Chairman, and one which I do not profess personal
competence to evaluate, is in terms of the alternatives. If the figures
are correct-a.nd I assume the correctness of the figures which you have
since I have not talked to Mr. Ackley in terms of the specific figure
of 150,000-and if that. is the job price tag of a 10-percent surcharge,
my approach to it would be, first., to try to. compensate for it in other
ways-significantly, in the work a.nd the work train.ing program. And
second, to say that I would not think that a very high price to avoid
the alternatives which could be involved in an inflationary spiral.
And that if that were the price, I would like not to have to look it
in the face, because it. is a tough price. But if we are talking about,
as I am convinced we are, a situation in which we must a.void t.he
dangers of inflation, I think the benefit and advantage to the. working
wage earner of this country-who is by statute my constit.uent-is
very much on that side-just very much.
I said my answer would be intuitive, and it is to this extent. When
I get through all my homework about the surtax, and so forth, and
do not understand all of it. I st.ill come out with a complete convic-
tion that in this stage in t.he development of the prosperity of the
economy we ought to pay our bills. And I know tha.t is a.n oversimpli-
fication. And I know that it is not an absolute that I am talking about.
But, if the prospect. is for a $14, $15, $20 billion deficit, whatever it
may be-when I look at our gross national product-I say it is intui-
tion, I suppose it is upbringing-in fairness to the folks, I do not
think tha.t is total ignorance-my reaction is that we ought to pay.
PAGENO="0199"
533
Chairman PRoxMnu~. Well, you see, the problem that this presents-
in the first place, 300,000 jobs, I think, would be eliminated in fiscal
1969. And 1 think this is a conservative estimate-it could be much
higher than that.
At any rate, these are not the only alternatives. Another alternative
is very possible-I know that you do not approveof this at the present
time, for various reasons, but it would still seem to me it is a perfectly
feasible alternative-to work for a wage-price guideline figure. It is
my understanding that there is a trade-off in the view of many
economists between a low level of unemployment and some degree of
inflation. One way of keeping that level of unemployment as low as
possible, consistent with keeping prices down, is to have a wage-price
guideline that is specific and definitely understood.
This worked, 1 think, extraordinarily well from 1962 to 1965. An
excellent study by John Sheahan who is a distinguished professor at
Williams, and who appeared before this committee a couple of weeks
ago, together with three other top economists in this area, confirmed
that we would do better if we had a precise and definite guideline
figure, which we did not have last year, and we do not have again
this year. It is very hard to get. It is nothing like 3.2 percent-it would
have to be 44/2 percent, 5 percent-but something that would help
to hold down the negotiated wage increases that we are likely to get in
the 6 to 7 and 8 percent range. A guideline figure of 5 percent would
make it possible to keep the cost-push element of inflation under better
control, make it possible, therefore, to stabilize, or come closer to
stabilizing prices, while at the same time providing more jobs.
Secretary WIRTZ. I appreciate that point. I do not have much ob-
servation that is new on it. You are right-within this same forum
a year ago I expressed the view which I very strongly hold, that under
present circumstances the establishment of a specific adjustment point
and guideline would not result in any curtailment of wage or price
increases.
You will note I subscribed completely to two other propositions
which are implicit or on the edges of what you have said. One, atno
point am I going to support stopping inflation by what I can identify
at lease as a deliberate stimulation of unemployment. I know we did
that for a long time. And I am against that-100 percent.
On the affirmative side, at the same time that I say I do not believe
a decimal point figure guideline will help on this whole matter, you
know that I think very strongly that the principle of productivity
is right-not as a matter of morals, but as a matter of everybody's
self-interest. Every time I see a wage increase which is higher than
productivity, and every time I see a price increase which is not justi-
fied by the same principle of productivity, I know that we have lost
ground. The country, as a whole, has lost ground.
Now, the particular people that got it did not. But it is gomg to
be infectious. And I am concerned today in a very real way-we are
at that point where wage increases which are above productivity, and
price increases which are not required, or warranted by productivity,
are having, or will have, an epidemic effect. I am very much concerned.
Chairman Pnoxniin~. Aren't we much more likely to get them ab-
sent some kind of a figure that the Government will announce and
fight for and make clear throughout the country?
PAGENO="0200"
534
Secretary WIRTZ. You put it in the form of a question. I know your
view on it. Mine is to the contrary. 1 think we are not more likely to
get them absent a specific figure. And I think that in a very real way.
Chairman PRox~rn~. What kind of restraint is there on a union not
to try to match the Ford settlement, or not to try to exceed the Ford
settlement? After all, the President says we hope you will restrain
your wage demands. But, unless there is a figure, what does it mean?
Secretary WIRTZ. Well, I do not know, Mr. Chairman, whether we
are talking economics or the language, because my answer would be
when you say what restraint is there-if against our mutual legal
background by restraint we mean something that stops a person, and
says you just cannot do it, it. is against the law-the answer to your
question is "No."
Now, if we go to a broader area of restraint, I do not believe I am
under any illusions about the inclinations of both price setters and
wage setters, or price bargainers in this country, to try to get all that
they can in a particular situation.
I think the answer to whatever extent there is restraint in the
broader sense, as a pragmatic answer, has got to come from the pres-
sures on the other side. In both of those cases, it is the consumers
pushing the pressures on the price side, and it is the employer press-
ing against the wage pressures on the union side. And I believe we
kid ourselves if we think that there is any accepted or recognized
articulated, clearly identified concept of a public interest that any
union or any seller brings to bear when he decides what the wage
demands will be, or how high his prices will be set. I believe it is only
the influences of the marketplace.
Now, I believe that the consumers' pressures on price-against price
increases-are greatly increased by the Government saying, "Now,
look, this thing is in such a situation where right now you better
fight as hard as you can against price increases."
Chairman PR0xMIRE. Wouldn't. you agree there are circumstances
under which wage-price guidelines can be effective; that. they were
effective from 1962 to 1965?
Secretary WIRTZ. I think they were, too, in that period.
Chairman PROXMIRE. What you are arguing for now, Mr. Secretary,
is fiscal restraint and monetary restraint. But you do not provide what
the wage-price guideline experts said-you should also have it if you
have this-which is a restraint in the area. of wage settlements and
price determinations-
Secretary WIRTZ. I have never been very timid about expressing
questions as to whether the experience with the decimal point guide-
lines was in itself much of a restraint.
Of course, the increases hi violation of the productivity principle
were a good deal higher on the price side during that period than they
were on the wage side. The wages stayed roughly in line for the first
3 or 4 years of this decade-S years-they stayed roughly in line with
the productivity principle while prices went higher. But., as far as I
can give you, wha.t is again necessarily a. subjective judgment, I do not
believe t.ha.t except for perhaps the steel case in 1963, 1964, and possibly
the General Electric case the following year, I do not believe t.hat the
fact of the decimal point figure could be translated into the dynamics
of that bargaining as I saw it.
PAGENO="0201"
535
And, so, I do believe that it is the pressure, or the information, the
learning, the education which is given the country as a whole, which
is translated into these forces and which has its effect.
I am very hopeful, of course, that in the working of the Cabinet
Committee, which the President has established, we will find ways,
working together and with representatives of unions and companies,
for implementing this. But, if your next question is how that is going to
be done specifically, I will realize quite quickly, and you will, too, that
I am falling back on an article of faith, that that. good sense can be
sufficiently communicated, that it will do well, and that that good sense
iS not made more effective when it is put into a decimal point.
I realize it is an area of argument and disagreement, and a strongly
held view.
Chairman PROXMIRE. My time is up.
Congressman Curtis?
Representative CURTIS. Thank you, Mr. Chairman.
There are a number of points I would like to develop, but I am not
going to have the time to do it.
Missing from this report, which I think is important, is the impact
of war on unemployment. If we took the same 600,000 boys that are
in uniform now, because of Vietnam, as well as probably a million and
a half in the munitions plants, and added them to the unemployment
rolls, we would have some real problems. And I think we have to think
in those terms.
Also missing from the report is the impact of inflation on unemploy-
ment. Inflation is continuing. It is going to increase imports and bring
about a further decline in exports. This has a serious impact on
unemployment.
The impact of high interest rates on employment was brought to our
attention forcibly in the homebuilding industry.
A fourth area-and there is nothing in the report on this-is the
situation regarding labor-management settlements and strikes. The
chairman has been examining another area which is not mentioned
here-wage-price guidelines, or wages and prices with respect to our
productivity increases.
So, it is very difficult to conduct an examination on a paper that
does not even discuss what I think are the underlying economic condi-
tions that this committee has to grapple with.
Now, let me go to some things that are discussed here-
Secretary WIRTZ. Mr. Chairman-
Representative CURTIS. Sure, you may respond.
Secretary WIRTZ. I have assumed, Mr. Curtis, you are familiar with
the reports, the Economic Report, and with the Council of Economic
Advisers' Report.
Representative CURTIS. Oh, yes.
Secretary WIRTZ. On everything you have mentioned we have tried
to cover in our very detailed report from the Bureau of Labor Statistics
to the Joint Economic Committee last week. And I have assumed thai
there is fa.miliarity with that, and that we would be glad to answer
questions on that.
Representative CURTIS. Well, let me say this:
When you appear, Mr. Secretary, as the Secretary of Labor, I
PAGENO="0202"
536
assume that you are going to stress those things that are the most
significant a.nd important-even though they are in the documents,
and indeed some of this is discussed here-so that we can then direct
our colloquy toward these Important things.
Now, I can prepare a. series of questions, and you can answer. But, I
am familiar with these personal appearances of the administration.
This is the occasion, I think, to point up those things that are the
most significant. I think I can draw the proper conclusion that those
areas, not included in your paper, are those tha.t the administration
feels are not particularly critical.
Secretary WIRTZ. I think that is right. In your terms, Mr. Curtis, my
statement does represent t.hose things which I think are most im-
portant. I am really more interested today, and I think the country
ought to be, in the scenery than in the garbage. I think it is more im-
portant. And that is the reason it is emphasized here.
Representative CtrRTIS. Well, we can take our rhetoric out in another
forum than this. I have listed things that are not garbage by any
means. The impact of the war on the unemployment situation is not
garbage. The impact of inflation on employment as I have described
it, with respect to exports and imports, is hardly garbage. The impact
of high interest rates on unemployment and employment, and cer-
tainly productivity increases, are hardly garbage.
But we will develop our rhetoric in other forums. And believe me,
I shall.
Secretary WIRTZ. I should prefer that.
Representative CURTIS. Now, having said that, I would like to de-
vote a little time to some of the things that are discussed in this report.
Referring to-in your prepared statement-the first stage in devel-
opment of national policy with regard to employment and unem-
ployment-and I am skipping: `~* * * to increase the number of work
opportunities." The second stage, "s' * * to assist the disadvantaged
individual in qualifying himself for the work opportunities which are
available."
What I find missing in here is a discussion of the machinery that-
to identify what work opportunities are available, because without
this kind of material and data, it is very difficult for me to conceive
how any of the training programs that you mentioned in your report
can be fully effective. They can be partially effective.
Two of the tools are, one, updating the Dictionary of Occupational
Titles. The recent updating goes back really to 1965. Where is this
sitting? Is there a new revision that is about to come out?
Secretary WIRTZ. I will check on the specific schedule, and we will
supply it for the record. The answer to your question is that we are
continually working on it. But the answer to your question is also
that that work has been somewhat slowed up. That has a lower priority
now under the economic pressures than it would otherwise have.
(Information below subsequently filed):
The "lower priority rate" is assigned because the current edition of the
Dictionary of Occupational Titles is a comparatively recent (December 1965)
publication. We are planning on a full revision every 4 to 5 years, and are con-
templating the next revision (fourth edition) for 1970.
This is possible through arrangements that are underway to computerize
the revision, maintenance, and printing of the DOT to make the information
PAGENO="0203"
537
more timely, accurate, and varied (depending on the need) in format. We
anticipate being able to use this automated programing technique in fiscal
year 1969 and we will project a new edition of the DOT for the following
fiscal year (1970).
Work is continually being done to keep the information up-to-date. Parenthet-
ically, we have, in the past, prepared and issued "supplements" to earlier edi-
tions, rather than a full revision. However, we found these to be less than satis-
factory to the many users of this document, since each supplement means another
volume to procure, handle and keep track of-and this frequently isn't done.
It may be of interest to note that the current edition of the DOT added some
6,000 occupations to the preceding edition; and that we anticipate adding an
estimated 4,500 occupations new in the economy to the next edition of the dic-
tionary. In addition we intend reflecting the many thousands of changes that
will have taken place in the jobs currently existing in the economy.
Representative CURTIS. How can that have a low priority if the es-
sential features of any job-training program where you are spending
hundreds of millions of dollars depend on identifying the opportu-
nities which are available. And, believe me, the opportunities that are
available require new skills for new jobs which were not even in exist-
ence before.
How, can you elucidate that?
Secretary WLRTZ. I am not clear about the question. Is the ques-
tion whether I think that it is important to try to keep those descrip-
tions up to date?
Representative CURTIS. Yes.
Secretary Wnrrz. I do.
Representative CImTI5. You are saying that because of the economy
pressures, that this has `been slowed down. I am arguing relative prior-
ities, saying it seems quite clear to me this is of the highest priority.
Secretary WIRTZ. Any limiting factor, as far as we are concerned
on that, has come from the attempt to do just every single thing we can
to pull in our belt. When the Congress says cut out 2 percent of your
jobs, and cut off 10 percent of your programs, we have got to do just
exactly that. And I do not object to it. But-
Representative CURTIS. In other words, what you are saying is that
you do not agree that this is the highest priority. If it were the highest
priority, you would not cut it-you would cut things of lower
priority?
Secretary WIRTZ. You are perfectly correct.
Representative CURTIS. Then there is apparently a difference of
opinion. You do not think that continuing to update the Dictionary of
Occupational Titles is of this high priority that I attach to it?
Secretary WIRTZ. I do not think the further expansion of the pro-
gram of keeping up the dictionary is of the priority which you appar-
ently attach to it.
If your suggestion is that the first thing we should do in the De-
partment of Labor is to put more people on the dictionary, we would
have a point of disagreement.
Representative d~JRTIS. I am sure we would because I would say
that it is almost inconceivable to identify the opportunities which are
available if you have not constantly kept up to date the nomenclature
that describes these jobs. How any of these programs can function
without this essential data is incomprehensible.
So, I move to the next tool, the jobs available statistics, which, as I
read the Manpower Development Training Act, was a requirement that
PAGENO="0204"
538
the Department of La.bor developed. Two years ago, this committee
held hearings to be sure that we were not in error about the feasibility
of the jobs available statistics and the necessity of it as far as mak-
ing any manpower training program work.
But, where are we on that?
Secretary WIRTZ. You know our story on that., Mr. Curtis, and how
complete our agreement is on it. And, you know, too, that we have, in
the 5 years that I have been Secretary of Labor, taken each year, to
the Congress of the United States~
Representative CuRTIs. You did not last year, and you have not this
year.
Secretary WIRTZ We have twice-
Representative CURTIS. You have not ever since then.
Secreta.ry WIRTZ. We have twice taken to the Congress of the United
Sta.tes, both the full recommendations of the Secretary of Labor, the
full recommendations of the Bureau of the Budget, and the strong
recommendations of the President., a proposal, a line proposal, for
that study, and the Appropriations Committee, or Congress has de-
cided we should not do it.
Now, I still agree with you in your position. So, we have tried to
meet that problem as much as we can.
Two years ago it seemed to us of critical essentiality that we do
it, because at t.hat. point there were manpower shortages, and we
thought we had to identify those as carefully as possible-not only in
the interests of the individual, but in the interests of the economy. And
so we did-on a draft basis-put together on a bimonthly or quarterly
basis the fullest information we could on that.
We have abandoned that in the last yea.r, because the shortages are
probably not as acute as they were before.
We are also trying, in a variety of manpower development and train-
in programs, to get that information in one form or anot.her. And I
believe we have it substantially. We have given up on the attempt t.o
get from the Congress the approval, t.he special a.uthorization for it.
But we have tried to put it together in our own programs-I agree
with you on this point, and in reality, on a great many more t.han the
previous comments might have suggested.
I would add this:
To the extent. that we can shift. the program to an on-the-job train-
ing basis, as we are doing, that problem is met to a very considerable
extent by seeing to it that. at the training point t:he individuals become
part of the employment relationships in which they will cont.inue
after they have completed training.
Representative CuRTIs. My time is up.
I can only say-and I will come back and discuss it-these efforts
are very, very feeble.
Chairman PROXMIRE. Congressman Reuss?
Representative REuss. Thank you. Mr. Chairma.n.
I want to pursue, Mr. Secretary. the questions that Chairman Prox-
mire was directing at you-in which you have said in effect. when
Chairman Proxmire communicated to you Gardner Ackley's view that
the tax increase will take enough demand out of the economy to make
unemnloyed around 300.000 people who otherwise would be em-
ployed-your answer was that that is a stiff price to pay, but that
PAGENO="0205"
539
you think it has to be met because we, in your phrase, have to pay our
bills.
Secretary WIRTZ. No, Congressman. I think you left out the point
that my response to that would be first to try to find, and I think we
would find, ways of making up that figure. There is a coincidence be-
tween that 300,000 figure, which frankly I have not heard until today,
and the expansion of the work training program, which is also being
expanded this year, 300,000. So my first reaction is not that I just
would pay that price. I would try to meet whatever the effect was first..
Representative REUSS. But if you cannot meet it, because-what
shall it profit a Secretary of Labor to train people for jobs if there are
300,000 fewer jobs than there otherwise would have been? You just
have to keep training them, but they won't get a job, as you think-
passing that point, you then come to the nitty-gritty, which is that
you would be willing to pay that price in order to pay the Govern-
ment's bills.
Secretary WIRTZ. No. If that is a proper paraphrase of what I said,
I should say it again. I am never going to settle to pay a price in un-
employment to prevent overheating in the economy.
I would take into account the importance to the wage earners of this
country of prices not getting way out of line. And I will take into
account the desirability of paying whatever our bills are.
But I cannot support a proposition that you do any of these things
at a recognized price of employing fewer people than there were before.
Therefore, I try to bring these things together by making some provi-
sion-training them for better jobs-which the economy will contiipie
to need.
I try to meet that price by some alternative method.
Representative REriss. I tarry on this point so long because it is
vitally important. And I . am afraid it is one we are going to be con-
fronted with every year for a while, until we solve the secret of the
philosophers.
I am concerned, though, as you are, that here we are, unemployment
still not down to the 3-percent goal which we used, at least, to say should
be our goal, and here we are running a $14- or $16- or $18-billion
deficit. Something is wrong with the scenario, obviously, as I have kept
observing for the last couple of years. What I think is wrong with the
scenario, or in part wrong with it, is that our tax system is so full of
loopholes that it is not grabbing the revenues that it should, and I
ask you-does it really seem like a good idea to retain those loopholes
in the system, to let year after year go by without even asking the Con-
gress to do anything about them, and then take it out on the hide of
the average moderate income taxpayer, and reduce his demand-creating
potential.
Frankly, it does not seem to me a very good way to run the economy.
I wonder how you account for these huge deficits that we are running,
at 3.5 percent unemployment.
Secretary WIRTz. There are several elements in the question, Mr.
Reuss; when we get into the area of tax loopholes, you will realize that
it is an area with respect to which my competence would be purely
personal, and nothing more. But I am against them.
Representative REUSS. I know that. Everybody is, in principle. But
I wonder if it is not a serious matter, that the administration has not
PAGENO="0206"
540
asked the Congress to do anything about them. Because, when you
plug a tax loophole, you probably do not throw a man out of work, as
you do when you grab a similar amount of revenue by an across-the-
board tax increase.
Most of the money that would be brought into the Treasury by
plugging tax loopholes is money that is not spent on consumption,
or isn't spent on real investment in plant or equipment, but instead
bids up the price of commodities, or stamps or jewelry or art works, or
chases around in the stock market, or leaps overseas into foreign
speculation. It does not make jobs.
Therefore, we have something grievously wrong in letting the loop-
holes go unplugged, because we lack the will to do anything about
them-we have to throw men out of work, some 300,000 of them, in
our model here, in order to, in your phrase, pay the bills.
I am for paying the bills, but why not pay the bills by getting
revenues that do not tend to put people out of work?
Secretary WIRTZ. If the question were whether to pay our bills by
closing tax loopholes, or putting 300,000 people out of work, I would
take the closing of the loophole. I believe that is an oversimplification
of it.
Representative REtTSS. A little, but not entirely.
Secretary WIRTZ. It is surely not irrelevant. But I would like to sug-
gest that I think the unemployment rate will not be larger if the surtax
is imposed than if it is not imposed. I want to be very clear about that.
Representative REuSS. You reject Gardner Ackley's 300,000 figure?
Secretary Wiwrz. No. I do not think that is what he says. There are a
lot of other things going on. There is a manpower training program
that is covering 1,300,000 people this year. There are a lot of other
things going on. I repeat., I think that if or when the surtax is im-
posed, the unemployment rate will be lower than it is now, or at least
no higher than it is now.
I think the increase in the number of jobs this year will be as large
as it was last year, or a.proximately that. large. I believe that. is about.
a million six hundred thousand. So that I do not think that the surtax
will reduce that.
Representative R.EtTSS. You will have me voting for the surtax in a
minute here. You really think unemployment will come down?
Secretary WIRTZ. Yes, Mr. Reuss. I think t.he question is whether it
is legitimat.e to look at the surtax alone. In complete candor, perhaps
even letting my guard down, I accept those figures. But I would point
out there are a lot of other things going along with them. And I would
urge considering two parts of the progra.m which the President has
put before the Congress-one, a surtax proposal, which you say the
c~ia~rma.n on the Council of Economic Advisers says could in itself
have an effect on reducing employment, by 300,000, and a second pro-
vision of which is a manpower program expanded by half a billion
dollars which will have the result of putting another 300,000 people
into training.
Representative REUSS. Let me take the second part of that. I will
j'ust expand, and forget about the contracting-what is wrong with
that? And pay the bills by plugging tax loopholes.
Secretary WIRTZ. I beg your pardon?
PAGENO="0207"
541
Representative REUSS. I was buying part of your package. I will
buy the Labor Department part-let us increase those training pro-
grams to 1.3 million, and then let us provide jobs for those who are
getting the training, by forgetting about the surtax, and instead re-
couping the revenues by plugging tax loopholes. Your answer, maybe,
is that we should have done that a year or two ago and we would be all
right. But, would you at least give me that satisfaction?
Secretary WIRTZ. I sure would-on this basis. All my life I have said
in public places and as an indivichial, that I am opposed to a number
of tax loopholes. I have not changed my mind on that. If it is a matter
of expression of administration policy, obviously a statement by the
Secretary of Labor about tax loopholes is not worth the back page of
a paperback book. But in terms of a personal position that I have held
for a lifetime about tax loopholes, I agree completely.
Representative REuss. I was not asking you the question of morals
or equity or fairness. I was asking you the question of whether we do
not have to plug our tax loopholes in this country in order to get the
revenues we need in the Treasury, so that at a time of close to full em-
ployment, we do not keep running disastrously large deficits.
Secretary WIRTZ. It ties the two together again. And I do not rush
from that-the loopholes and t.he effect on employment.
I have not thought it through to an evaluation of whether the closing
of the loopholes to which you are referring would have an effect on
employment. I would like to try to do it.
I think your question is rather about whether the surtax could be
replaced by the closing of the loopholes.
But if the question is-as I gather now it is-if the question is
whether the closing of the loopholes would permit a continuation of
employment at a higher level, I believe I am out of my depth. I do not
believe I could honestly answer the question of the tie-in between the
two.
Representative REuss. It is a question the Secretary of Labor ought
to be concerned with.
Secretary WIRTZ. The question-
* Representative REtJSS. You are not just concerned with struc-
tural-
Secretary WIRTZ. That is right.
Representative REuss (continuing). With structural unemployment.
You are concerned with overall demand unemployment, too.
Secretary WIRTZ. Sure, of course. And if overall demand should go
down, the unemployment rate would go up. And along with every-
thing I have said about the importance of the manpower program, I
recognize that any rocking of the boat-as far as the fiscal, monetary,
general economic situation is concerned-would hurt more than any-
thing that we could possibly make up on a structural basis. I know
that.
Representative REuss. Thank you..
Chairman PROXMIRE. Congressman Widnall?
Representative WIDNALL. Thank you, Mr. Chairman.
Mr. Secretary, we are always very pleased to have you before the
committee. We know you have a great fund of knowledge in connec-
tion with this field.
PAGENO="0208"
542
In your statement, you said:
One of the most significant things that is happening is that each gain which
is made in increasing employment opportunity draws additional people into the
work force.
Now, is it not equally true that as we get inflation, the cost of living
increases, additional people are drawn into the work force because
they cannot meet their bills?
Secretary WIRTZ. I should think it would have some of that influ-
ence. There would be a family which would be pressed tighter by an
increase in the cost of living. And if the husband's income did not go
up as much as the cost of living, then there would be additional pres-
sure for the wife to attempt to work, too. That would be true.
Representative WTIDXALL. It has been my own observation that many
people who thought they had acquired enough for retirement, or who
were forced into compulsory retirement, with an annual income which
seemed to be sufficient at the time, have now found that it is completely
inadequate for their needs, and they have to go back and acquire work
of some kind, somewhere within the labor force. And I think there is
an equal pressure in that direction caused by inflation, and the very
definite change in the cost of living for the average family.
Do you have an inventory of the number of people holding two jobs?
Secretary WIRTZ. We have tried to get-let me answer your second
question first, and then just an observation on the first part.
I will supply the information that we have available on what we
call moonlighting.
Our last survey of persons with two or more jobs was made in May
1966. At that time 3.6 million workers, or just under 5 percent of all
employed persons, held more than one job. This proportion was some-
what lower in 1966 than in 1964 or 1965.
I submit for the record a report on moonlighting which appeared
in the Monthly Labor Review in October 1967, pages 17 to 22.
(The report follows:)
MOONLIGHTING-AN EcoNoMIc PHENOMENON
The Primary Motivation Appears To Be Financial Pressure, Particularly Among
Young Fathers With Low Earnings
(By Harvey R. Hamel*)
Moonlighting habits of the American worker have not increased or even
changed much in recent years. The most recent survey of dual jobholding shows
that 3.6 million workers, just under 5 percent of all employed persons, held two
jobs or more in May 1966. This proportion was somewhat smaller than those
revealed by the 1964 and 1965 surveys.
The typical multiple jobholder is a comparatively young married man with
children who feels a financial squeeze. He has a full-time primary job and
moonlights about 13 hours a week at a different line of work. Teachers, police-
men, firemen, postal workers, and farmers are most likely to moonlight. Many
of them work for themselves on their extra jobs (operating farms or small busi-
nesses) while many others are sales or service workers.
One of the major subjects explored in this article is the relationship between
moonlighting and weekly earnings, data on which is available for the first time.
There is also an analysis of the association between moonlighting and hours of
~Of the Division of Labor Force Studies, Bureau of Labor Statistics.
PAGENO="0209"
543
work, an indication of some of the possible reasons for moonlighting, and a dis-
cussion of the industries and occupations of moonlighters.'
A QUEST FOR HIGHER EARNINGS
Why do over 31/2 million persons hold two jobs or more? The primary reason
seems to be economic. Many moonlighters need, or believe they need, additional
income. For some, a second job is a necessity. A second job enables others to live
at a higher standard.
For still others, a second job may be the means by which they are able to~
maintain a standard of living that would otherwise be lost because of, for ex~
ample, sudden large expenses, loss of wife's income, or a decline in earnings on
the primary job.
Because financial reasons are a prime factor motivating moonlighters, the
Bureau of Labor Statistics collected data on the usual weekly wage and salary
earnings of dual jobholders on their primary job and of single jobholders. These
data show that generally the level of a worker's earnings determines his propen-
sity to moonlight. Multiple jobholding rates for men 25 to 54 years old are highest
at the lowest earnings level-under $60 a week. As the level of earnings rises, the
incidence of dual jobholding declines (see chart 1). The lowest rates were found
among workers with the highest weekly earnings-$200 or more.
The close association between multiple jobholding and earnings is most
evident from the data for married men 25 to 54 years old, the group for whom
family financial responsibilities are usually the greatest. Among these men, the
moonlighting rate for those earning less than $60 a week was 12.5 percent,
more than twice as high as the 5.3 percent for men earning $200 or more a week.
Data available for the first time show that among men who are heads of house-
holds, there is a close relationship between the multiple jobholding rates, the
number of young children, and usual weekly earnings. The moonlighting rate
tends to increase with the number of children under age 18. The rate for men
with at least five children was nearly twice that for men with no young children,
as shown in the following tabulation:
Multiple jobholding rates for men who were heads of households, May 1966-
Uhildren nnder age 18
Total 7.9
None 5.4
1 child 8.3
2 children 9.1
3 or 4 children 9. 8
5 children or more 10.3
Within each of these groupings, multiple jobholding rates tended to decrease
as earnings increased. For example, among men who were household heads with
three or four children, the rate was 16 percent for those who earned under $60
weekly, about double that for those with earnings of $200 or more.
1 Data in the current report are based primarily on information from supplementary
questions to the May 1966 monthly survey of the labor force, conducted for the Bureau of
Labor Statistics by the Bureau of the Census through its Current Population Survey. The
data relate to the week of May 8 through 14.
This is the seventh in a series of reports on this subject. The most recent was published
in the Monthly Labor Review, February 1966, pp. 147-154, and reprinted with additional
tabular data and explanatory notes as Special Labor Force Report No. 63, which also
includes a complete listing of earlier reports and their coverage.
For purposes of this survey, multiple jobholders are defined as those employed persons
who, during the survey, (1) had jobs as wage or salary workers with two employers or
more; (2) were self-employed and also held a wage or salary job; or (3) worked as an
unpaid family worker, but also had a secondary wage or salary job. The primary job is the
one at which the greatest number of hours were worked. Also included as multiple job-
holders are persons who had two jobs during the survey week only because they were
changing from one job to another. This group was measured in the December 1960 survey
and was found to be very small-only 2 percent of all multiple jobholders.
Persons employed only in private households (as a maid, laundress, gardner, babysitter,
etc.) who worked for two employers or more during the survey week were not counted as
multiple jobholders. Workinc for several employers was considered an inherent character-
istic of private household work rather than an indication of multiple jobholding. Also
excluded were self-employed persons with additional farms or business, and persons with
second jobs as unpaid family workers.
90-191 0-68-pt. 2-14
PAGENO="0210"
544
Chart 1. Multiple Jobholding Rates for Men
25 to 54 Years Old. May 1966
ALL MEN
Financial pressure, however, is not the only reason why workers moonlight.
There are several other considerations. Some workers with a regular wage or
salary job want to continue or try their hand at wor]~ng for themselves on a
part-time basis while still maintaining their basic source of income. One-third
of the multiple jobholders are self-employed on their second job. They moon-
light at their own business or devote a few hours to providing some professional
service in their spare time without committing large resources or all their time
to the venture. Moreover, the fact that half of this self-employed group operates
a farm as their second job suggests that some of these dual jobholders have
chosen not to abandon the farm way of life even though economic reasons force
PERCENT
12~'~
10
6-
4~
2-
PERCENT
14
MARRIED MEN
Less $6Oto $100 to $150 to $200 or
than $60 $99 $149 $199 more
Weekly wage and salary earnings
PAGENO="0211"
545
them to work at a full-time wage or salary job. Others may have moved to the
country and taken advantage of the opportunity to do a little farming on the
side.
Some persons moonlight because they are interested in another line of work.
They experiment with a second job, but still maintain their primary job until
they determine whether they like the work on their new job and decide whether
it is feasible to make a change to this new line of work. Still others moonlight
because there is a shortage of their particular skill (for example, teachers and
skilled craftsmen) and they find it very easy to make extra money.
The basic characteristics of moonlighters have remained about the same in
the course of several BLS surveys. The majority are men. Their multiple job-
holding rate is about three times that for women workers. (See table 1.) A
smaller proportion of Negro than white workers were multiple jobholders.°
The incidence of holding two jobs or more was highest among men 25 to 44
years old. This age group accounted for 43 percent of all employed men, but over
half of all men holding more than one job. Moonlighting was least likely among
the very young (14 to 19 years old), most of whom are attending school, and
among workers 65 years old and over. Married men were twice as likely to be
moonlighters as single men.
In sum, the data suggest that the typical moonlighter is a highly motivated
and energetic young married man with a growing family, who works at two
jobs or more primarily to provide additional income for his family but also for a
variety of other reasons; to try his hand at working for himself; to keep busy;
to obtain satisfaction; to experiment with another line of work; or to supply
his skills that are in demand in his community. The moonlighter aspires to a
better living and is willing to work hard to obtain his goal.
WORK-HOURS ON BOTH JOBS
Although the rate of multiple jobholcling has remained substantially the same
in recent years, the question still arises as to whether a shortened workweek
would lead to higher moonlighting rates among workers who are affected by
the cutback in hours. There is no question that when hours are shortened
the opportunity to hold an extra job increase. However, an individual's decision
on how to use his free time-to moonlight or do something else-involves many
factors other than the number of hours worked.
One way of examining the relationship between moonlighting and the length
of the workweek is to compare the dual jobholding rates of men working shorter
hours with those on a longer workweek. The data show that in nonfarm indus-
tries persons who worked 35 to 40 hours on their main job were no more likely
to be multiple jobholders than those who had worked 41 to 48 hours.
TABLE 1.-EMPLOYED PERSONS WITH 2 JOBS OR MORE, BY SEX, 1965-66
Month and year
Persons with two jobs or more
Number
(thousands)
Multiple jobholding rat
e 1
Both sexes Men
Women
May 1966
May 6965
May 1964
May1963
May 1962
December19602
December1959
July 1958
July1957
July1956
3,636
3,756
3. 726
3,921
3,342
3,012
2,966
3, 099
3,570
3,653
4.9 6.4
5.2 6.7
5.2 6. 9
5.7 7.4
4.9 6.4
4.6 5.9
4.5 5.8
4. 8 6. 0
5.3 6.6
5.5 6.9
2.2
2.3
2. 1
2.4
2. 0
2.0
2.0
2. 2
2.5
2.5
1 Multiple jobholders as percent of all employed persons.
2 Data for Alaska and Hawaii included beginning 1960.
2 Data for nonwhites will be reported as data for Negroes, who constitute about 92 percent
of all nonwhites in the United States.
PAGENO="0212"
546
Floursworkedonprimaryjob
Multiple jobho
-
ding rates for m
en, May 1966
-
All industries
Agriculture
Nonfarm
Total
6.5
8.7
6.3
lto2l hours
7.3
9.0
7.0
22 ro 34 hours
10.3
14.1
9.6
35 to 40 hours
6. 8
9.7
6.7
41 to 48 hours
6.7
14. 6
6. 4
49hoursormore
4.5
5.8
4.3
This suggests that reducing the workweek by only a few hours would, not
in and of itself substantially affect the incidence of multiple jobholding provided
there was no cutback in earnings. No significant inverse relationship e~sts
between moonlighting and the length of the workweek. This finding accords
with the conclusions of a recent study of rubber workers in Akron, Ohio.3 It seems
reasonable, therefore, to assume that among full-time workers, factors other
than the length of the workweek determine whether a man looks for a second
job.
Men working part time (22 to 34 hours) were more likely to be moonlighters
than men with a full-time job (but since most men work full time, the majority
of multiple jobholders are full-time workers). The rate was lowest for men
working over 48 hours a week on their main job. Dual jobholding rates for men
who worked less than 22 hours weekly were relatively low, reflecting the fact
that men working so few hours a week are mainly students or older men unlikely
to be interested iii a second job.
Typically, multiple jobholders worked full time on their principal job and
part time on their extra job; about one-fourth worked part time on both jobs;
and 8 percent worked full time on both. On the average, they worked a total of
52 hours, only 13 of which were on their second job. The 39 hours, on the primary
job paralleled the 39 hours `that single jobholders worked on their only job.
Of all multiple jobholders, those who were farmers or factory workers on their
primary jobs worked the longest total workw-eeks----59 and 57 hours, respectively.
Men worked much longer hours than women on their extra jobs, 14 compared
with 9 hours. Men who had additional wage or salary jobs worked longer at
these jobs than those who were self-employed on their extra jobs, 15 hours and
12 hours, respectively.
MOONLIGHT INDUSTRIES
One of the most significant aspects of moonlighting is the high incidence of self-
employment. About 1.5 million or more than 2 out of 5 multiple jobholders
operated their own farms or businesses or were self-employed professionals on
the first or second job (chart 2). About half of them were farmers, typically
holding down a regular blue-collar job and running their farms in their spare
time (table 2). Workers who operated farms as their normal line of work were
nearly twice as likely to have a second job as the average worker. About 25 per-
cent of the 200,000 moonlighting farmers had second jobs as a hired hand on
someone else's farm; 40 percent worked on construction or transportation jobs
or in factories.
On the other hand, the multiple jobholding rate for nonfarm self-employed
workers was low. This reflected both their relatively high earnings and the fact
that businessmen and self-employed pr~essional people often do not have the
time for a second job. The majority of the dual jobholders had `two wage or
salary jobs. Of salaried employees, public administration workers were more
likely to moonllght than workers in any other major nonfarm industry. The dual
jobholding rate is particularly high for postal w-orkers (1 out of 10), a propor-
tion which has remained consistently high over the years (table 3). Other
nonfarm u-age or salary workers with higher than average multiple jobholding
rates included those working in educational services, entertainment and recrea-
tion, transportation, construction and forestry, fisheries, and mining.
John Dieter found no statistically significant difference in multiple jobholding rates for
Akron workers on a 36-hour workweek and those on a 40-hour workweek. He concluded that
the hirh incidence of moonliglating in Akron for many years may reflect an established cus-
tom of these workers, and that other factors (primary job income, number of children in the
family and employment of the spouse) offered better explanations of moonlighting. See
"Moonlighting and the Short Workweek," The Southwestern Social Science Quarterly,
December 1966, pp. 309-315.
PAGENO="0213"
547
Chart 2. Class of Worker oF Primary and Secondary
Jobs for Multiple Jobholders, May 1966
WAGE AND SALARY
ON SECONDARY
JOB1J
I Includes a small proportion of multiple jobholdcrs who were unpaid
family workers on their primary jobs.
One-third of all the secondary jobs were in either farm or nonfarm self-
employment. Another 43 percent of the moonlighters had paid jobs in the trade
or service industries, which can use many part-time workers. Usually, moon-
lighters did not work in the same industry on their second job as they did on
their primary job. Except for service and trade workers, only a small prOpor-
tion had two jobs in the same industry.
There was a sharp difference in the kinds of second jobs held by white and
Negro dual jobholders. About one-third of the white moonlighters were self-
employed on the second job, and one-fourth worked in service industries. Among
Negroes, however, fewer than 20 percent were self-employed and nearly half
worked in service industries.
OCCUPATIONS OF MOONLIGHTERS
Multiple jobholding rates vary with the worker's main occupation. As in prior
surveys, moonlighting rates in May 1966 were highest among men who were
teachers-i out of 5 had a second job (table 4). Some elementary and high
school teachers may moonlight because they have an opportunity to take evening
WAGE AND SALARY ON
PRIMARY JOB,
SELF-EMPLOYED
ON SECONDARY JOB
1/
2 WAGE AND
SALARY JOBS
SELF-EMPLOYED
ON PRIMARY JOB,
PAGENO="0214"
548
TABLE 2.-TYPE OF INDUSTRY AND CLASS OF WORKER OF PRIMARY AND SECONDARY JOBS, FOR PERSONS WITH
2 JOBS OR MORE, MAY 1966
[Numbers in thousandsj
Type of industry and class of worker of secondary job
Persons with 2
Total jobs or more Agriculture Nonagricultural industries
Type of industry and class of em-
worker of primary job ployed Percent Wage Self- Wage Self-
Num- of total Total and em- Total and em-
ber em- salary ployed salary ployed
ployed workers workers workers workers
Total 73,764 3,636 4.9 721 139 582 2,915 2,335 580
Agriculture 4,292 335 7.8 120 83 37 215 212
3
Wage and salary workers 1, 326 88 6. 6 56 19 37 32 29 3
Self-employed workers 2,253 200 8.9 49 49 (1) 151 151 (1)
Unpaid family workers 713 47 6. 6 15 15 (2) 32 32 (2)
Nonagricultural industries 69, 472 3,301 4. 8 601 56 545 2,700 2, 123 577
Wage and salary workers 62, 529 3, 110 5. 0 599 54 545 2, 511 1, 934 577
Self-employed workers 6,371 177 2. 8 2 2 (1) 175 175 (1)
Unpaid family workers 571 14 2. 5 (2) 14 14 (2)
l5elf_employed persons with a secondary business or farm, but no wage or salary job, were not counted as multiple
jobholders.
2 Persons whose primary job was as an unpaid family worker were counted as multiple jobholders only if they also
held a wage or salary job.
Note: Because of rounding, sums of individual items may not equal totals.
TABLE 3.-INDUSTRY GROUP AND CLASS OF WORKER OF PERSONS WITH 1 JOB AND WITH 2 JOBS OR MOR
MAY 1966
Industry group and class of worker
Percent distribution
Multiple
jobholding
rate1
Persons with Persons with 2 jobs or more
1 job
Primaryjob Secondaryjob
All industries
Agriculture
Wage and salary workers
Self-employed workers
Unpaidfamilyworkers
Nonagricultural industries
Wage and salary workers
Forestry, fisheries, and mining
Construction
Manufacturing
Durable goods
Nondurable goods -_
Transportation and public utilities
Wholesale and retailtrade
Wholesale
100. 0
100. 0 100. 0
4. 6
5.6
1. 8
2. 9
.9
94. 4
84. 7
. 8
5.2
27.0
15. 7
11. 3
6. 0
15.5
3. 1
9.2 19.8
2. 4 3. 8
5. 5 16. 0
1.3 (2)
90. 8 80. 2
85. 5 64. 2
1. 0 . 4
6.5 4.2
23.8 6.2
15. 4 3. 0
8. 4 3. 2
7. 3 5. 3
11.9 16.8
2. 8 1. 2
7.8
6. 6
8. 9
6.6
4. 8
5. 0
6. 0
6.1
4.4
4. 9
3.7
5. 9
3.8
4. 5
Retail
Eating and drinking places
Otherretailtrade
Service and finance
Finance, insurance, and real estate
Business and repair services
Private households
Personal services, except private house-
holds
Entertainment and recreation
Educationalservices
Professional services, except education - - -
Publicadministration
Postal services
Other public administration
Self-employed workers
Unpaid family workers
12.4
2.6
9.8
25.3
4. 0
2.1
3. 6
2.2
.9
6.3
6. 1
4.9
. 8
4. 1
8.8
.8
9. 1 15.6
1. 4 3.9
7.7 11.8
25. 4 26. 6
3. 9 4.2
2.4 2.8
. 7 3. 2
1.7 2.2
1.1 3.3
9.6 4.8
5. 9 6. 2
9.5 4.7
1. 7 . 9
7. 9 3. 8
4.9 16.0
.4 (2)
3.7
2. 8
3.9
4.9
4. 8
5.6
1. 0
3.9
6.2
7.3
4. 7
9.2
10. 1
9. 0
2. 8
2.5
1 Persons with 2 jobs or more as percent of all employed persons in industry of primary job.
2 Persons whose only extra job was as an unpaid family worker were not counted as dual jobholders.
PAGENO="0215"
549
jobs at school in some professional activity, but other evidence suggests that
the most likely explanation is their comparatively low earnings of teachers.4
The dual jobholding rate for other male professional and technical workers is
high, but less than half that of teachers.
A very high proportion of men employed in protective services (policemen,
firemen, and guards) had an extra job in May 1966-1 out of every 6. Their
flexible work schedules make moonlighting possible and their relatively low
earnings often make it necessary. Other service workers (including barbers,
cosmetologists, janitors, attendants, and other workers) also had higher than
average moonlighting rates. Men who were managers, officials and proprietors-
an occupation group which typically works long hours and whose earnings are
generally above average-were least likely to be multiple jobholders. Nonfarm
laborers and retail sales workers were also unlikely to be multiple jobholders.
Moonlighting rates were generally higher for white than Negro men, particu-
larly among blue-collar and service workers.
ABLE 4.-OCCUPATIONAL DISTRIBUTION OF PERSONS WITH 2 JOBS OR MORE, AND RATE OF MULTIPLE JOB.
HOLDING, BY OCCUPATION AND SEX, MAY 1966
Occupation group
Persons with 2
jobs or more-
Percent
distribution
Multiple jobho
lding rate I
Primary
job
Secondary
job
Men
Women
All occupations
Professional, technical, and kindred workers
Medical and other health workers
Teachers, except college
Other professional, technical, and kindred workers
Farmers and farm managers
Managers, officials, and proprietors, except farm
Clerical and kindred workers
Salesworkers
Retail trade
Other saleaworkers
Craftsmen, foremen, and kindred workers
Operatives and kindred workers
Private household workers
Service workers, except private household
Protective service workers
Waiters, cooks, and bartenders
Other service workers
Farm laborers and foremen
Laborers, except farm and mine
100. 0
100. 0
6. 4
2.2
17. 8
1. 8
5.2
10. 8
5. 5
7. 8
10. 4
5. 2
2.1
3. 1
15. 8
17. 0
. 7
11. 7
3. 8
2.3
5. 7
3. 2
4. 9
15. 1
1. 6
1. 8
11. 6
16. 1
10.6
7. 4
8. 2
4.9
3. 3
9. 8
11. 4
2. 2
11. 4
1.3
3. 7
6.3
3. 0
4.7
8.9
8. 3
19. 7
7. 4
9. 5
4. 2
6. 5
5. 4
4.4
6. 1
6. 0
6. 0
(2)
9.6
16. 8
6. 4
7. 5
6. 7
4. 8
3. 5
2. 1
3. 8
4. 1
2.2
2. 1
2. 1
1. 7
1.3
3. 8
4.7
.9
1. 1
2. 7
(2)
3.3
2. 4
6. 2
3. 1
1 Persons with 2 jobs or more as percent of all employed persons in occupation of primary job.
2 Percent not shown where base is less than 100,000.
A large proportion of the moonlighters (42 percent) earned their supplementary
income as professional and technical workers or managers, or by operating their
own farm or nonfarm businesses. Much smaller proportions of the moonlighters
were craftsmen or operatives on their second than on their first job. One of the
principal differences in the types of jobs held by white compared with Negro
moonlighters is that a much larger proportion of Negroes work in lower paying
service occupations, including private household service, while a much smaller
proportion of Negro moonlighters hold white-collar jobs on either their main or
their extra jobs.
The majority of second jobs were in occupations different from the moon-
lighter's main line of work, but usually within the same major occupation group
as their first job. Half the professional and technical workers had a second job
in the same occupation group, and half the farm laborers were farm workers on
their second job. About one-third of the clerical and the service workers, and
one-fourth of the managers and the craftsmen, had second jobs in the same broad
occupation groups. On the other hand, the manual skills of farmers and blue-
collar workers made a common moonlighting combination. Half the self-employed
~ Harold W. Guthrie suggests that the teaching profession Is an economically deprived
one and men teachers, particularly those who are married with a nonworking wife, must
moonlight to maintain a standard of living commensurate with their professional status.
See "Who Moonlights and Why ?" Illinois Busine8s Review, March 1965, p. 8.
PAGENO="0216"
550
farmers had a second job in a blue-collar occupation and about one-fourth of
the craftsmen, operatives, and laborers ran their own farm as ~i sideline.
Secretary WIRTZ. I think that the larger factor in older people work-
ing today is the increasing feeling that they want t.o continue in a
meaningful function in life. As far as their ftna.ncia.l positions are
concerned, the increase in the social security benefits and in medicare
a good deal more than makes up for whatever inflation there has been.
Inflation unquestionably hurts the retired person. But, if your ques-
tion is why more people, older people, are trying to work today, we
are proceeding on the assumption which I think is completely sound-
that they want to have a meaning and a function, rather than for eco-
nomic reasons.
Representative IYIDNALL. Compulsory retirement at a certain age
comes as a. real hardship to many people I am sure today. With some,
they have to retire at a very early age.
Now, I have seen so many people just foundering after their com-
pulsory retirement, and then looking around and trying to find some-
thing that their skills and ability would be adequate for, where they
could fill that type of job.
Now, hasn't the number of retired people seeking jobs substantially
increased in the last few years?
Secretary WIRTZ. May I ask Mr. Ross on that. I do not have the
figures immediately available.
Mt Ross. Well, Congressman, just answering rather indirectly,
there are two points. One is t.he number of unemployed persons over
65 is quite low compared to what it was a few yea.rs ago. Secondly,
the percentage of older people in the labor force has been declining
steadily. So that whereas there are certainly a great many people
of the type to whom you refer, the overall statistics indicate tha.t
the trend has been generally downward.
Secretary WIRTZ. I would like to subscribe to the general point,
Mr. Widnall, which your question implies.
There is no qu~tion in my mind but that we, meaning we the
people, we the administration, we t.he economists, have done the poorest
job of providing work and service opportunity for older people, of
any job that we have turned to in this area. Putting it differently,
I count it the least developed area of policy for the country, the
economy and the administration.
Representative WIDNALL. I think it is a pretty sad state of affairs
when people who are physically qualified, mentally qualified, a.re
forced into retirement toda.y as they are in many instances.
Secretary WIRTZ. Mr. Widnall, I suggest-
Representative WIDNALL. Let me speak about one in Government..
There is compulsory retirement of a postmaster at a.ge 70. But if that
postmaster is retired at age 70, a new one can be hired at a.ge 70, who
can continue on for a number of years.
Secretary WIRTZ. I did not know that.
Representative WIDNALL. It is absolutely ridiculous.
And you have the same situation obtaining in many other areas.
I noticed so much that people who are in retirement then go and
get jobs as guards in the bank, guards around factory plants, some-
thing like that. Also many union men who work a short week, 30,
35, 38 hours, to 40 hours, they get a second job. And they will get a
nonunion job for the second job. They want the combination income.
PAGENO="0217"
551
We should have statistics on to what extent this is present today.
Secretary WIRTZ. A shortened workweek does not necessarily lead
to higher moonlighting rates among workers who are affected by the
cutback. When hours of work are shortened a worker may have the
spare time to take a second job, but he has many factors to consider
before he decides to look for a second job.
We have compared the relationship between length of the work-
week and moonlighting by examining dual jobholding rates of men
working long hours with those working short hours. In May 1966
about the same proportion of men working 35 to 40 hours (6.8 percent)
as those working 41 to 48 hours (6.7 percent) were moonlighters.
Representative WIDNALL. I would like to make an observation too,
about the restaurant field, for instance. I notice this in Washington-
where it is quite obv.ious we have a rapidly shifting group of people
acting as waiters in the restaurants, and most all of them have a
foreign background. We are still supposed to have so much unem-
ployment in the city. It would `certainly seem to me many, many
people could be trained in this particular area, to enter the work force
in that area. And I just do not understand how all these people keep
coming in to fill this type of job, constantly shifting-in the major
restaurants here in `the city.
Do you know anything about this?
Secretary WIRTZ. Yes, sir. The principal reason is that `the rates
are so low, that a great many people pass up that kind of work
opportunity.
Representative WIDNALL. I would certainly say as far as a waiter
is concerned, most of them are getting darned good salaries-total
wage.
Secretary WIRTZ. The Wall Street Journal this morning carries
a report that we are running out of waiters with a foreign manner,
which cuts a little across what you are talking about here. But I
think that there is no question about the phenomenon to which you
refer. I think the largest element in it is that a great many of those
jobs are paid at rates which people are passing up, whether rightly
or wrongly.
Representative WIDNALL. May I pinpoint it a little bit more.
At a time when you are concerned with what is going on in the
cities, very deeply involved in that, practically every new waiter I
see is white in the Washington restaurants, and not Negro. Now,
why is that?
Secretary WIRTZ. I do not know. I will try to get some figures on
that. The problem that has concerned me more is if you go into a
particular hotel or particular restaurant, they are almost always all
white or all black. That has bothered me.
But I will try to get some figures, whkth I do not have, on the racial
characteristics of people, waiters in Washington-if `there is `an in-
crease in the number of white waiters, that would surprise me some.
Let me simply find out about it, because I do not know.
Our training programs in the culinary trades in Wa~h.ington are
highly Negro. But I will `try to find out more `aibout that.
Representative WIDNALL. I am not complaining about the service
in these places. What I am trying to understand is why when we have
such an emphasis on Negro unemployment today-there is supposed
PAGENO="0218"
552
to be very much ĥhigher Negro than white unemployment-why does
this situation seem to prevail? I will appreciate any figures you give
us.
Secretary WIRTZ. Very well, sir.
The most recent data available are from the 1960 decennial census.
According to the census, there were 824,000 waiters and waitresses
employed in the United States, of whom 8 percent (66,000) were
Negro. In the District of Columbia in 1960, there~were 7,570 waiters
and waitresses, of whom 59.6 percent (4,510) were nonwhite. There
are no more current or more detailed area data available.
Representative WIDNALL. Thank you.
Chairman PRox~rIiu~. Congressman Moorhead.
Representative MOORHEAD. Thank you, Mr. Chairman.
Mr. Secretary, in your statement you refer to the uncounted number
of additional people who ought to be working but who are not looking
for work.
Granted that you have not counted them, would you be able to esti-
mate the size of that group?
Secretary WIRTZ. It is pretty hard, Mr. Moorhead.
The thing we are talking about is suggest.ed-if you look at table 1
in this information that has come out today-we put in here for the
first time, so far `as I have seen it, the current labor force participation
rate in large metropolitan areas.
The participation rate subtracted from 100 gives the proportion of
the population not in the labor force (that is, neither working nor
seeking work). It is hard to estimate how many of these persons not
in the labor force want to and should be working. I `am going to give
you, though, the rule that I have been working on in my own mind,
and then ask Mr. Ross if he can give us a better one.
I am assuming that there is in the society today a group which ought
to be working and which is not working, which is roughly the same size
as the group that we are talking about as unemployed. So I think there
is about that much additional potential.
Would you like to have Mr. Ross comment?
Representative MOORHEAD. Yes.
Mr. Ross. Well, as the Secretary says, Mr. Moorhead, it is very
difficult to know `how many ought to be working. We know how many
people are not working, we know how many of them say they would
like to work-but who `are not even looking.
A lot of them say they would like to work. "Why are you not looking,
if you want a job?" We do have statistics which `I would like to sup-
ply-I do not have them with me-the number who say they need
some `help with their `health, the number who say they just do not have
the `basic training, the number who say that they have a transportation
problem, they are too far from work, the number who say that they
used to look `but got discouraged and just gave up the search.
In the case of women, a great many say, "Well, I `have young
children, but I would like to work, even so." This is true, I think, of a
great number of women on relief. "I have young children, but I would
need child care, and I would need some training."
Now, the problem is-we know how many people are not working.
To make a judgment how many of them ought to be working is more
PAGENO="0219"
5.53
difficult. As you know, in the case of mothers, you can `argue that either
way.
But we do have a good deal of information. I think it is getting better
all the time. I would like to supply it for the record.
Representative MOORHEAD. Mr. Chairman, I think that would be
very valuable.
Chairman PROXMIRE. Yes, indeed. Without objection, we will re-
ceive that information for the record.
(The information to be furnished for the record follows:)
On the basis of a special survey conducted in September 1966, it was found
that about 10 percent of the persons not in the current labor force-some 5.3
million-wanted a regular job at the time of interview. Of these, however, 22
percent gave only a qualified affirmative answer ("maybe-it depends"), another
24 percent were negative or uncertain about their intentions to look for work in
the next 12 months, and 6 percent did not reply to this question. Thus, about
half of those who said they wanted jobs either qualified their responses or were
indecisive about whether they would look for work in the next year. The reasons
become clear when we examine why they were not looking for work. (See
table 1.)
TABLE 1.-PERSONS NOT IN THE LABOR FORCE WHO WANTED A REGULAR JOB, BY REASON OF NOT
LOOKING FOR WORK, SEPTEMBER 1966
(Numbers in thousands)
Both
sexes
Men
Women
Reason
Number
Percent
distribu-
tion
Number
Percent
distribu-
tion
Number
Percent
distribu-
tion
Total 5,292 100.0 1,641 100.0 3,651 100.0
Ill health, physical disability 1,078 20.4 480 29.3 598 16.4
In school 1,242 23.5 706 43.0 536 14.7
Family responsibilities 1, 080 20. 4 1,080 29.6
Inability to arrange child care 435 8.2 435 11.9
Miscellaneous personal reasons I 434 8. 2 144 8. 8 290 7. 9
Expects to be workin? or seeking work shortly 270 5. 1 44 2. 7 226 6. 2
Believes it would be impossible to find work 2 754 14, 2 266 16. 2 488 13. 4
I Includes old age or retirement, moving, entering or leaving Armed Forces, death in family, planning to go back to
school, no need to work at present time.
2 Includes employers think too old (or too young); couldn't find or did not believe any job (or any suitable job) was
available, lacks skill, experience, education, or training, no transportation, racial discrimination, language difficulties,
pay too low.
The full report on the September 1966 data entitled "Reasons for
Nonparticipation in the Labor Force" is attached. Detailed informa-
tion on persons not in the current labor force will be released regularly
during 1968.
PAGENO="0220"
PAGENO="0221"
A Monthly Labor Review Reprint
From the July 1967 Issue
SPECIAL LABOR FORCE REPORT NO. 86
REASONS FOR NONPARTICIPA11ON
ON THE LABOR FORCE
UNITED STATES DEPARTMENT OF LABOR
BUREAU OF LABOR STATISTICS
(555)
PAGENO="0222"
556 ~
Reasons for Nonparticipation in the Labor Force
ROBERT L. STEIN*
A Special Labor Force
Report on a Test
of Concepts and Methods
N0NPARI'IcIrATIox in the labor force has become a
major concern for manpower research and analy-
sis. Among the important questions that need to be
answered are the size and composition of the labor
reserve-the groups of persons not seeking work
at present, but who do move into and out of t.he
labor force, either in response to seasonal changes
or on a more irregular basis; the dimensions of the
discouragement problem-its causes and the reme-
dial steps that might. help discouraged workers
find their place in the job market; the number and
characteristics of people who need or want work
and would be able to take jobs if something were
done to help them (health programs, child care,
training, etc.). It is also essential to develop a
method for measuring changes in these various
groups over time.
The challenge to the researcher in this area is to
develop objective methods for measuring what are
mainly subjective phenomena. While most of our
labor force concepts are based on objective, overt
actions (e.g., working, having a job, seeking work
in a specific way and within a specified time span)
the data on reasons for nonparticipation are sub-
jective, based on-desire for work, attitudes, per-
ceptions, and opinions. These more elusive data
require careful probing and cross-checking, to ex-
plore the depth of a reported attitude or the reality
of a reported reason.
Research on nonparticipation is moving forward
on several fronts: Analysis of data already col-
lected has been published,1 in February 1967, a
very intensive questionnaire was directed to men
20 to 64 years of age, and a number of method-
ological studies have been designed to improve
measurement techniques. This article summarizes
the results of one particular attempt to measure
t.he reasons for nonparticipation, a test. survey con-
ducted in September 1966 with a representative
nationwide sample of 13,000 households. The re-
cults should be regarded as first approximations
in a continuing program of experimentation and
testing; however, it is believed that the test survey
also provided some important substantive findings.
Approach of the Survey
The specific purpose of the September 1966 test
survey, conducted with 13,000 households in the
Monthly Labor Survey sample, was to try out a
series of relatively simple questions which could
be used on a regular basis in the household survey
to measure some aspects of nonpart.icipation. The
definitions of employed, unemployed, and not in
the labor force were those adopted for official use
in January 1961. The sampling errors were about
twice the magnitude of those for the regular Cur-
rent Population Survey using the 52,~00-house-
hold sample of 1967.° The very small numbers ap
pearing in the tables depict. the results of the Sep-
tember 1966 test survey. Considerably more data
must be compiled to assess the significance and
reliability of these findings.
The first question-"Does . . . want a regular
full-time or part-time job now?"-was designed to
sort out those who had some "propensity" to enter
or reenter the labor force. The question was not
0f the Dtstston of Emptoyment and Unemptoyment Anatyats.
Boreao of Labor Statistics.
° "Adutt Men Not in the Labor Force," Monthty Labor Review,
March 1967, pp. 5-15.
`see the Technicol Note in Emptoyment and Earnings and
Montbty Report on the Labor Force, February 1967, for a dlscns-
stan of the labor force detnttions and the sampttng errora appti-
cabte to the CPS estimates.
UNITED STATES DEPARTMENT OF LABOR
BUREAU OF LABOR STATISTICS
From the Monthly Labor Review, July 1967
Reprint No. 2540
PAGENO="0223"
557
designed to be used alone, since affirmative answers
could not be interpreted without further clarifica-
tion. It was supposed to identify a subgroup of
potential labor force members for further ques-
tioning. Consequently, those who reported wanting
to work (either "yes" or "maybe-it depends")
were asked a second question; "What are the rea-
sons . . . is not looking for work?" A list of rea-
sons was provided on the questionnaire, as follows:
Believes no work available in line of work or area;
Couldn't find any job; Lacks necessary schooling,
training, skills, or experience; Employers think
too young or too old; Other personal handicap in
finding a job; Can't arrange for child care; Family
responsibilities; In school or other training; Ill
health, physical disability; and other.
To avoid leading the respondent, the enumer-
ator was instructed not to read the list, but to mark
each reason mentioned. The question on reasons
was an attempt to determine whether those who
wanted work were also able to work and available
for work. In addition, for about 55 percent of those
who wanted or might want a job, the enumerator
entered the respondent's verbatim comments to
clarify the answers.
It was recognized that this list of possible rea-
sons was ~ot sufficiently detailed to yield informa-
tion useful for program planning, and that some
of the categories were overlapping and not mutu-
ally exclusive. However, the approach did repre-
sent a systematic effort to obtain an objective and
comprehensive measure of unutilized potential
manpower resources, within the limitations of a
brief and highly structured interview situation.
The main reason persons were not seeking work
was determined on the basis of the respondent's
report of the reasons, the person's major activity
during the survey week, and the enumerator's
comments.
A third question was asked of all persons not in
the labor force, to get an additional indication of
their propensity to work or seek work: "Does
intend to look for work of any kind in the next 12
months?"
For about half the sample, persons were report-
ing for themselves; for the other half, the infor-
mation n-as based on the statements of someone
else in a household. In part, therefore, the resulting
statistics reflect another person's perception of the
individual's attitudes toward work and work-
seeking.
Composition of the Voluntary Nonparticipants,
September 1966
Voluntary Nonparticipants
Altogether, 90 percent of those not in the labor
force in September 1966 did not want a regular
full-time or part-time job-47.5 million of the 52.8
million persons 16 years of age and over who were
not employed or seeking work. They could not be
considered as currently available manpower re-
sources, since their nonparticipation was volun-
tary. At that time, at least, they expressed no
desire for regular work. This does not necessarily
mean that they had no financial hardships, or that
they might not benefit from paid employment if it
were made available to them. The term "volun-
tary" in this context simply means that such a
respondent, taking into account his total situa-
tion-health, age, and other responsibilities, could
not say that he wanted a regular job at the time
of the survey. Undoubtedly some of these nonpar-
ticipants would be willing and able to work if
certain circumstances could be changed.
Information was obtained on the age and sex
of the persons who did not want to work, on their
2.6%
AND OVER
TO WORE
- - 69.0%
~NTS 6381000 H050EWIyES 32781,00
PAGENO="0224"
major activity during the survey week, and on
their intentions to look for work of any kind in
the next 12 months. The composition of this group
of 47.5 million voluntary nonparticipants is shown
in the accompanying chart.
Only 2.6 percent were men between the ages of
16 and 64 who were out of school, and presumably
able to work, but who did not want work at the
time of interview. Half t.his group were past. age
55, and thus undoubtedly include a sizable num-
ber of early retirees.
Evidence drawn from the National Health In-
terview Survey suggests that health limitations
may be an important factor among men below age
65 who say they do not want to work and do not
intend to look for work, even though they are not
reported as totally unable to work.' More precise
information on this point will become available
with the results of the special supplementary study
conducted in February 1967 of men 20-64 years of
age not in the labor force. That supplement will
also shed light on the major reasons for non-
participation among other men of working age
who were not in ill health or disabled, but who
nevertheless responded that they currently did not
want to work.
Involuntary Nonparticipants
Ten percent of those not in the current labor
force were reported as wanting a regular full-time
or part-time job at the time of interview. Of this
5.3 million, however, 22 percent gave only a quali-
fled affirmative answer ("maybe-it depends"),
another 24 percent were negative or uncertain
about their intentions to look for work in the next
believe any job (orany suitable job) was available, lacks skill, eoperIeoce,
education, or training, on transportation, racial discrImInation, language
difficulties, pay too low.
12 months, and 6 percent did not reply to this
question. Thus, about half of those who said they
wanted jobs either qualified their responses or were
indecisive about whether they would look for work
in the next year. The reasons become clear when we
examine why they were not looking for work.
(See table 1.)
TABLE 2. PERSONS NOT IN TEE LABOR FORCE WHO
WANTED A REGULAR JoB, BY REASoN FOR NOT LOOKING
FOR WORK, SEPTEMBER 1966-FEBRUARY 1967
[Numbers in thousands]
Resoon
.
Sept.
1966
Nov.
1966
Dec.
1966
Jan.
1967
Feb.
1967
Men, total
t,e41
1,082
1,567
1,460
1,124
Foment o' intat not In labor torte
Reason inr not looking:
Ill heallh or dlsabihly
Going to school
Believes 11 would ho impossible to
find work
All other reasnns
13.1
490
716
260
189
12.1
460
020
274
319
12.0
147
112
361
147
10.7
335
069
208
348
12.1
444
050
109
231
women, total
3,651
4,509
3,771
3,423
3,780
Percestoftotatnotintabnrforco
Reason for not looking:
Ill health or disability
Going to school
Family responsibilities
Inability In arrange child care
Believes It would be tmposolble to
find work
All other reasons
9.0
068
130
1,580
435
489
116
1L3
406
001
1,451
191
606
700
9.4
607
531
1,097
413
142
14)
8.4
505
016
995
414
306
296
9.3
47.8
617
1,090
473
010
132
Data from the household survey samples for
November and December 1966 and January and
February 1967 were developed, using the same gen-
eral methodology and concepts. The figures appear
to be relatively stable (table 2) except for a big
jump in the number of housewives who wanted
work in November-probably temporary jobs for
the Christmas season. There also appeared to be
"Work LimItations and Chrontc Health Problems," Monlhljj
Labor Rerieac, January 1967, p. 41.
558
TABLE 1. PERSONs NOT IN THE LABOR FORCE WHO WANTED A REGULAR Jon, BY REASON FOR NOT LOOKING FOR WORK,
SEPTEMBER 1966
[Numbers In thousands]
Reason
Both sexes
bten
Women
Number
Percent
distribution
Number
Portent
distribution
Number
Peerent
distribution
Total
1,202
100.0
1,841
100.0
3,051
ilLS
Dl health, physical disability
In school
Family reopoosibilhiles
Inability In arrange child cure
btLscollnnrous personni reasons'
Expects lobe working or seeking work shortly
Believrsitwnuldbelmpoulbletoflodwork'
1,078
1,242
1,1180
435
434
270
754
20.4
23.5
21.4
8.2
8.2
5.1
14.2
480
706
144
44
206
29.3
43.0
8.8
2.7
10.2
008
130
1,580
435
290
226
409
16.4
14.7
29.0
11.0
7.9
0.2
13.4
1 Inrludesold agoorretiremest, xnovlog, eoterlogorlesvlngArmed Fortes,
death in family, planning to go buck to school, no need to work at present
`Includes employers think too old (or Ioo young); couldn'l find or did not
PAGENO="0225"
a dip in the number wanting work in ,January,
when nearly all economic activity tends to be at
a seasonal lull. A considerable amount of experi-
ence with these data will have to be accumulated,
however, before definite seasonal or cyclical pat-
terns can be detected.
The number who believed it would be impossible~
to find work ranged between 600,000 and 900,000;
on the average, women accounted for two-thirds
of this group. The number of men in this category
fluctuated between 200,000 and 350,000, with about
half the total between the ages of 20 and 64.
A conceptual problem arises when a person re-
ports more than one reason for not seeking work.
(In September, about 25 percent of those who
wanted work reported more than one reason for
not looking; in subsequent months, this propor-
tion fell to 20 percent.) For example, a person in
school might also report that he was not looking
for work because employers thought he was too
young. A housewife with young children might
also say she doesn't believe there is any work avail-
able that she could do. In the classification system
used in this report, top priority is given to "ill
health or disability," and those not reporting this
reason were assumed to be able to work. Going to
school, family obligations, and personal reasons
follow in that order, under the assumption that
persons who gave these reasons were really not cur-
rently available for work, and that their participa-
tion in programs to help them find work would
be limited.
As table 3 shows, about a third of those report-
ing they believed it would be impossible to find
work were not readily available for work. Of the
1.2 million who believed they would be unsuccess-
ful in the job market, about 450,000 were also either
in ill health (100,000); in school (230,000), or tied
down with family responsibilities (125,000).
Nearly two-thirds were women.
About 450,000 men age 16 and over who were
not in the labor force wanted a job, but were not
looking for work because they believed it would
be impossible to find any. This included 185,000
who were also either in school or in ill health.
About half of the remaining 265,000 reported
that their reason for not looking for work was
that employers thought they were too old.
One-third of these 450,000 men were teenagers
(mainly students), one-third were in the central
age groups (20-64), and one-third were age 65
and over. (See table 4.) Most of the latter said
employers thought they were too old to work.
The reasons for nonparticipation given by per-
sons who said they wanted a job at the time of
the survey in September 1966 are discussed in
more detail below. The qualitative analysis of
reasons is based on verbatim replies recorded by
the enumerators.
Ill Health or Disability
For over a million nonparticipants (500,000
men and 600,000 women), ill health or disability
was given as a reason. For these persons, the de-
sire for work tends to be highly conditional. A
person may want to work, but his doctor will not
permit it, or he may want only very light, seden-
tary work a few hours a day. Many of the responses
indicated that these persons would accept a job
involving a very limited amount of physical ac-
tivity, but w-ere not interested in actively seeking
work. The responses also suggested that `additional
questions would be necessary to distinguish ac-
curately between varying degrees of inability
to work. For some persons, return to the labor
559
TABLE 3. PERsONs NOT IN THE LABOR FORCE WHO WANTED A REGULAR JOB, BUT BELIEVED No WORE WAS AVAIL-
ABLE, BY COMBINATION OF REASONS FOR NOT SEEKING WORK AND DETAILED REASON FOR BELIEVING WORK
NoT AVAILABLE, SEPTEMBER 1966
[Number, in thou,and,[
Reaoon
Tolal
Employer,
think 100
young
Employee,
ihink too
old
Lacks ,kill,
earienee,
educalion
or training
Could not
find, or be-
hove no job
available
No leans-
portalion
Olher
handicap,
or barriers
Toial
Dl healih, di,ahiiiiy
In school
Family responsibiliiies
Inobiliiy io arrange [or child core
No other reason.
1,203
35
217
84
619
147
93
~
74
11
714
39
11
28
220 84
45
167
17
28
. 322
22
34
17
23
51
17
1 Includes racial discriosinailon, looguogo difficuliieo, unsaliofociocy pay scab [or typo of work sought.
57
90-191 0-68--pt. 2-15
PAGENO="0226"
force depended on recovery from accidents or
from operations, on the outcome of scheduled
surgery, on the healing of disfiguring conditions,
or general improvement in health. With more
precise inquiries, it might be possible to identify
those with minor disabilities or illnesses, who
expected to be in the labor force within a month
or two.
About a tenth of this group indicated that they
anticipated that finding work would be impossible,
mainly because of their health and disability
problems.
Persons in School
In one sense, going to school is not a full ex-
planation for not looking for work. Part-time jobs
are available to millions of students who do work
weekends or evenings. The responses indicate that
many students were uncertain about whether
or not they really wanted work. They were avail-
able only for those jobs that would fit in with their
school programs. In September, also, some of them
did not yet have a clear idea whether they could
handle their school work and a regular job. Some
expected to start looking for work in the next week
or two. Replies from about a fifth of the students~
indicated actual or expected difficulties in finding a
job.
Family Responsibilities
Of the persons citing family responsibilities (1.1
million) all were women, and 90 percent were be-
tween the ages of 20 and 54. (See table 5.) The vast
majority were married and had children at home.
The verbatim replies point up the problems
women face in reconciling their desire for work
with their family responsibilities. Some husbands
will not permit. their wives to accept employment.
In other cases, responsibilities to their children
prevent women from working. This may be true
even when the children are grown: Typical exam-
ples are the mother who was too busy getting her
daughter ready to go overseas, the mother who has
a diabetic daughter requiring special care, and the
mother who was waiting until her son returned to
his Armed Forces station.
A closely related group are those women who
specifically mention inability to arrange for child
care as their reason for not seeking work. Presum-
ably this latter group of women would be avail-
able for work if they could solve the specific prob-
lem of finding someone to care for their children
during working hours, whereas those who report
"family responsibilities" are unlikely to enter the
labor force until their children grow older or their
family situation changes so that they have more
freedom. Admittedly the distinct.ion is conjectural.
TABLE 5. PERSONS WANTING WORK Wuo WERE NOT LOOK-
ING FOR WORK BECAuSE OF FAMILY RESPONSmU.ITIES OR
INABILITY TO ARRANGE FOR CHILD CARE, SEPTEMBER 1966
Numbers in thousands)
Age and reason
Family
resnonsi-
bilitlea
InabIlity to
arrange for
child care
TotaL
1,090
433
lOto 19 years
Slto24yearn
Istol4yeass
Ssyearsandev
TotaL
No ether comment
Husband won't permit work
Job, pay, hours, location have to be right
Eapectstobeworklog orseekingworkshortly.
No transportation
Couldn't find or belIeve no job available
All other (moving; going bark to school)
H
ics
554
74
~
740
62
175
17
17
17
11
51
°~
252
6
453
550
17
23
25
17
560
TABLE 4. MEN NOT IN THE LABOR FORCE WHO WANTED A REGGLAR Joo, BY COMBINATION OF REAOONS FOR NOT
LOOKING FOR WORK AND AGE, SEPTEMBER 1966
[Noaasbrro in thousands)
Reason
Age in years
Total, 16
ovr
1(10 19
201064
Total 20 to 24 231034 1510)0 65 to 64
65 and
over
Total
fll health, disability
In school
Sllscellaneoas personal reasons
Expect lobe working or socking work shortly
Beleved It woald be impossible to find work
No other reason
Also In Ill health
ALso gnisg to school
1,341
673
664
122
376
61
105
303
429
573
144
44
430
266
51
133
11
460
22
17
155
22
209
103
77
27
146
123
11
66
20
17
17
1)9
39
33
27
70
61
33 66
11 5
17 34
11 34
6
110
45
150
122
29
133
23
PAGENO="0227"
Miscellaneous Reasons
This relatively small group of about 150,000
men and 300,000 women consisted of women who,
at the time of interview, did not need (or really
did not want) to work; men and women who were
retired or semiretired, but said they might take
some light part-time work if it came their wa.y;
persons who were getting ready to move, were just
getting settled after a move, or were uncertain
when or whether to move; persons who were tak-
ing care of personal business (e.g., after a death
in the family) ; and young persons who were enter-
ing or leaving the Armed Forces or getting ready
to go back te school. By and large, it could be said
of these persons that at the time of the survey in
mid-September 1966 they really did not want to
work, or that their desire for work was relatively
weak.
Expect to Work or Look Soon
Some 270,000 persons expect to be in the labor
force shortly. This group was right on the fringe
of the labor force, but did not meet the strict def-
initions (i.e., working or having a job last week,
seeking work in the last 4 weeks, having definite
instructions to report to a new job in 30 days, or
being on layoff from a job with definite expecta-
tion of being called back). For example, there were
some who had just quit or been discharged from
one job, but had not yet started to look for another.
A sizable number of women were waiting to be
called to a job (and some of them possibly should
have been counted as unemployed), but it was not
clear when they last looked, when they expected
to report, or even if they had definite instructions
to report. Still others said that they planned to
start looking for work soon--this week, next week,
or within a month or two. A small number of per-
sons actually started working at seasonal farm jobs
during the interview week (the week following the
survey week), but had not been seeking work in
the previous 4 weeks and had not known just when
the work would become available.
The Discouraged
An estimated three-fourths of a million per-
sons wanting jobs at the time of the survey, were
willing and able to work, were available for
18 and 18 years
20 tn 64 years
l5toloyears
60 to 64 years
65 years and over
CoLon
Total
Nonwhite
Educational level
Total -
work (in the sense that health, school, or personal
or family obligations did not stand in the way),
but had not looked for work in the past 4 weeks.
The reasons they gave reflected discouragement or
disappointment in the job market, or at least a
negative attitude toward their own job prospects.
(See table 6.) Two-thirds of this group were 20 to
64 years of age-125,000 men and 375,000 women.
For 430,000 of the three-quarters of a million-
110,000 men and 320,000 women-training or
placement assistance appeared to be a possible
help. These individuals reported that they couldn't
find a job or believed jobs weren't available, that
they lacked education or training, or that lan-
guage was a problem.
This group of 750,000 was less educated than
the total not in the labor force (only a third were
high school graduates, compared with about 45
percent of all nonworkers) and also dispropor-
tionately nonwhite (23 percent compared with
only 10 percent of all nonparticipants).
561
TABLE 6. SELECTED CHARACTERISTICS OF PERSONS
WANTING WORK WHO WERE NOT LOOKING FOR WORK
BECAUSE THEY BELIEVED IT IMPOSSIBLE TO FIND, BY
SEX, SEPTEMBER 1966
Numbers In thousands]
characle-Islic
RIA50N
Total Men Worn-
Employers think too yoong
Employers think too old
Locks neceosaryschooling, training, skills, oreoperience
Could aol find or believm ao job (or no soliable iobi
availabi
No iransporiation
Language difficollim -
Pay too low
Other personal handicaps 1
Aol
Total
754
11
229
84
322
51
23
11
23
754
18
28
28
407
34
343
45
74
251
7S4
581
173
754
ill
123
182
168
68
138
22
84
11
268
-22
22
123
17
61
11
34
122
268
211
IS
268
59
Is
39
50
28
488
11
81
62
238
49
17
11
17
480
28
374
17
283
34
40
78
488
370
118
460
88
73
143
130
30
Less than 8 years of schooling
Elementary school graduate
Some high school
High school graduate
Some college -
I Inclodm racial discrimination; eacludeo mental or physical disabilities.
PAGENO="0228"
562
Supplementary Tables
TABLE A. PERSONS wANTING WORK WHo WERE NOT
LOOKING FOR WORK BECAUSE OF ILL HEALTH OR
PHYSICAL OR MENTAL DISABILITIES
[Nombers In thousands]
Age and reason
Total Men Women
1078] 480
80 22 68
328 138 220
173 77 90
101 39 62
lit 66 45
245 139 107
Total
16 to 24 years
2sto44years
45tol4yeaes
Ostollyears
OOto64yeaes
65 years and over.
Total
1,078
033
84
279
75
22
28
45
480
221
60
139
0
11
22
17
158
312
20
141
73
11
6
29
No otber comment
Would take part-lOose or tight work
Will work or seek work sehen health Improves...
Has family responslbliltleu.._ -
No transportatIon -
Em loyees think too old.....
Couldn't Ind or belIeved no job available
TABLE B. PERSONS WANTING WORK WHO WERE NOT
LOOKING FOR WORK BECAUSE THEY WERE IN SCHOOL
[Numbers to thousand
Age sod reason
Total
Men
Women
Total 1,242
16 sod 17 years - 741
18 sod tO years 317
2oto24years 84
25 years and over. 90
Total 1,242
Noolhermmment 633
Job would have loSt In wIth e.ohool program.... 217
No transportation 34
Employers thInk too young 28
Couldn't Snd or believed no job available 107
AH other (family reupooolblUtleo; espect to rule.
Armed Forres) 79
705
396
204
66
39
705
369
110
6
17
110
51
537
345
113
20
It
537
266
107
28
11
07
28
TABLE C. PERSONS WANTING WORK WHO WERE NOT
LOOKING FOR WORK BECAUSE OF MISCELLANEOUS
PERSONAL REASONS
[Numbers In thousands]
Reason
Total
Men
Women
Total .
No strong need to work
434
107
157
17
22
45
39
17
14-4
11
45
0
22
22
11
27
250
90
62
Ii
23
20
30
Old age or retirement .
In process olmovtog
Entertag or leaving Armed Forces..
Death In Isnotly or other ersooat busIness
Planntog to go bark to school
All other
TABLE D. PERSONS WANTING WORK WHO WERE NOT
LOOKING FOR WORK BECAUSE THEY EXPECTED To BE
WORKING OR SEEKING WORK IN THE NEAR FUTURE
[Numbers to thousands]
Reason J
Total
Meo[Wome
1
1 90
7,
22 6
0 45
Total j.~.
Has [oh [tacO up or planning to start business to,
own home 107
Plans to start Iso tog for work shortly j 85
Iota between jobs; haon't started looking br a neos1
ooeyet 28
Walttog to hear the results olappltcatsons or eeaos(
tnatlons It
Includes walttag to eater Job Corps or MDTA.
PAGENO="0229"
563
A source of current labor history
for students of
AMERICAN
LABOR
and SOCIAL
SCIENCE
in
o union
education
o high schools
o colleges
A collection of 33 articles from the MONTHLY LABOR REVIEW which explore
and define labor-management relations, job rights and opportunities, manpower
and employment planning, welfare, and economic and technological problems.
TO: Superintendent of Documents
Washington, D. C. 20402
There is enclosed $ _______ for______ copies of LABOR ISSUES IN THE MID-60'S.
Price, 50 cents. A 25-percent discount is allowed on orders for 100 or more copies.
NAME ___________
STREET ADDRESS
CITY
STATE _zIP ______
PAGENO="0230"
564
Following is a list of reprints of Special Labor Force Reports which have been
published in the Monthly Labor Rev~iew since August 1964. Copies may be obtained while
the supply lasts upon request to the Bureau of Labor Statistics or to any of its regional
offices.
Number
44 Geographic Mobility and Employment Status, March 1962-March 1963
45 Unemployment Among Full-Time and Part-Time Workers
46 Out-of-School Youth, February 1963
47 Out-of-School Youth, February 1963-Part II
48 Work Experience of the Population in 1963
49 Labor Force Projections for 1970-80
50 Marital and Family Characteristics of Workers in March 1964
51 Multiple Jobholders in May 1964
52 Labor Force and Employment in 1964
53 Educational Attainment of Workers, March 1964
54 Employment of High School Graduates and Dropouts in 1964
55 Employment of School Age Yc~uth, October 1964
56 Labor Force Status of Youth, 1964
57 Long Hours and Premium Pay
58 Long-Term Unemployment in the 1960's
59 Why Women Start and Stop Working: A Study in Mobility
60 The Unemployed: Why They Started Looking for Work
61 A Portrait of the Unemployed -
62 Work Experience of the Population in 1964
63 Multiple Jobholders in May 1965
64 Marital and Family Characteristics of Workers in March 1965
65 Educational Attainment of Workers in March 1965
66 Employment of High School Graduates and Dropouts in 1965
67 An Experimental Study of Repeated Unemployment
68 Employment of School Age Youth in October 1965
69 Labor Force and Employment in 1965 (Did not appear in the Review)
70 The Effects of Employment Redistribution on Earnings
71 Out-of-School Youth-2 Years Later
72 Overtime Hours and Premium Pay
73 Labor Force Projections by Color, 1970-80
74 Labor Force Projections by State, 1970 and 1980
75 Poverty Areas of Our Major Cities
76 Work Experience of the Population in 1965
77 Job Tenure of Workers in January 1966
78. Why the Unemployed Looked for Work
79 Adult Men Not in the Labor Force
80 Marital and Family Characteristics of Workers, March 1966
81 Overtime Hours and Premium Pay
82 Low Earners and Their Incomes
83 Educational Attainment of Workers, March 1966
84 Occupational Mobility of Employed Workers
85 Employment of High School Graduates and Dropouts in 1966
PAGENO="0231"
565
Secretary WIRTZ. I think the undercount figure, Mr. Moorhead, in
the 1960 census, which bears on this same problem, was almost six
million. In percentage terms, the undercount was greatest for Negro
males, especially those in the 16-44 age groups.
We will supply those figures specifically. But it is in that range. And
that suggests to you how difficult it is, both for us-it suggests both
how difficult it is to get at this, and that it is probably a figure of sig-
nificant size. Because those people just do not show up in any statis-
tics. I think Mr. Ross feels they show up in some of ours better than
they do in the cenus. But there is a large undercount factor there.
I make two points. First, the undercount is hard to compile spe-
cifically. Second, it is large.
The Census Bureau estimates an undercount in 1960 census of 5.8
million-2.9 percent of the estimated "true" population figure. The
undercount estimate is much larger for the nonwhite population-9.7
percent for males and 7.3 percent for females. The proportion was
highest for nonwhite men aged 25 to 34 (18.9 percent). The percent-
ages undercounted were also high for nonwhite men 16-24 and 35-44
years of age-14.9 percent and 13.6 percent, respectively.
The attached table shows the extent of the population and labor
force undercount in 1966. The above data are only estimates because
it is difficult to get at this problem exactly, but it is clear that the prob-
lem of population undercount is large, especially for Negro men.
PAGENO="0232"
E
U)
U)
cn
a-
U)
0
0
<0
>~
U)~.
-~ .D
Q3U) a)
a)
aw ~