Answer. The following are our comments on the possible reductions discussed in the December JEC staff report. National Defense The Administration supports a reduction in DOD civilian personnel levels by 25,000. This proposal is contained in the 1977 budget and would result in an estimated outlay savings of $100 million in 1977 and $400 million in 1978. The estimated savings from the 40,000 reduction assumed by the JEC staff total $600 million in 1977. It seems unreasonable to expect additional $500 million in savings from an additional 15,000 reduction in civilian personnel levels. As for the rest, the JEC staff report estimates savings based upon a list of reductions it assumes could be made. No rationale for the reductions is provided other than statements to the effect that "there is now considerable evidence that . . ." and exhortations to the effect that savings could result from the "elimination of wasteful practices and activities." If these reductions were desirable, they would have been proposed in 1977. In short, the JEC recommendations offer no evidence to demonstrate that the assumed cuts could be implemented without jeopardizing our security. Regulatory Agencies The Administration has proposed legislation to restructure regulatory functions of the ICC and CAB (and other regulatory agencies as well) to make them more efficient and more responsive to today's needs. The Budget reflects the reforms contained in those legislative proposals, and when enacted, will help reduce inflationary pressures by enhancing the efficiency of our transportation systems. The Administration does not currently propose the phaseout of the Interstate Commerce Commission (ICC) and the Civil Aeronautics Board (CAB). The Budget savings reflected in the Committee print are relatively accurate for the ICC if it were to be phased out. The estimates for the CAB apparently include the elimination of nearly $80 million of subsidy payments to airlines. It is not clear whether the subsidy program should be eliminated with the phasing out of the CAB. Staff costs of the CAB are about $20 million annually, and that amount would be saved if this agency were phased out. The cuts in spending are minor when compared to the economic savings that will be realized upon enactment of the Administration's regulatory reform proposals. Subsidy Payments-Ship Construction and Operation The budget does not propose the elimination of either shipbuilding or ship operating subsidies, nor does the Administration support their elimination. The ship construction program is intended to help improve the international competitive position of the U.S. shipbuilding industry through payment of current differences in price between domestic and foreign construction. The program aids in the maintenance of a strong U.S.-flag fleet for foreign trade by providing support for the replacement of overage U.S.-flag ships engaged in foreign trade, and by requiring U.S. registry of subsidized ships. Ship operating subsidies are paid to offset the higher cost of operating a ship under the U.S. flag rather than under a foreign flag. This helps promote the maintenance of a U.S. merchant marine capable of providing essential ocean shipping services. The estimates for these programs are approximately correct. However, $250 million might be a better figure for 1980 and 1981 for your ship construction proposal. Export-Import Bank Loans The Administration has not proposed and does not support elimination of Eximbank lending. Such lending offsets the lack of commercial credit in critical areas, particularly the longer maturity ranges, and keeps US exporters on a par with foreign competitors who have access to subsidized credits from their own governments. If an international agreement can be reached to eliminate self-defeating subsidized competition among official export credit agencies, Export-Import Bank lending at below-market rates would no longer be necessary. The 5-year estimates of potential savings are somewhat high, especially the 1977 estimate. Our estimate for 1977 would be only a fraction of yours. Impacted Area School Aid The Administration is proposing reform of the Impact Aid program in the FY 1977 Budget. However, the Administration's proposal would go beyond merely limiting savings to the elimination of the "hold-harmless" provisions. The Administration's proposal would limit payments for children whose parents both live and work on Federal property, for certain special provisions and for construction. The cost estimates for the "hold-harmless" provisions are not verifiable by us. Federal Retirement Benefits The Administration agrees that the current overadjustment for cost-of-living increases is inappropriate, and in the Budget recommends the overadjustment be eliminated. Our estimates of the savings to be achieved are slightly lower than yours in 1977, but are lower by a large amount-nearly $2 billion-by 1981. The differences may result from differences in economic assumptions. Social Security The Administration agrees that the unintended double adjustment for inflation is inappropriate, and in the Budget promised to propose legislation to remedy it. The legislation will be submitted by summer. Tax Reform The estimates of receipts for FY 1976 and 1977 in the budget, as well as the 5-year projections contained in Part 3 of the budget, reflect the President's tax proposals. These proposals are explained in some detail in Part 4 of the budget. Special Analysis F-"Tax Expenditures"-contains a section on proposed changes in tax expenditures. With respect to the specific tax features referred to in the JEC staff report: (1) The Administration does not support: (a) Elimination of the Domestic International Sales Corporation (DISC) provisions. (The expected revenue loss from DISC in 1981 is $1.7 billion not $2.0 billion. See the projections of tax expenditures in "Five-Year Budget Projections, Fiscal Years 1977-81," Congressional Budget Office, January 26, 1976.); (b) Abolishing the deferral of income tax on earnings of U.S. corporations generated abroad by foreign subsidiaries. (Note that the Tax Reduction Act of 1975 further limited the deferral provision in the case of subsidiaries in "tax haven" countries.); (c) Elimination of the Asset Depreciation Range system; (d) Reclassifying payments to foreign governments for mineral extraction rights as royalties rather than taxes. (Note that the Tax Reduction Act of 1975 restricted the use of foreign tax credits from foreign oil extraction income. (2) The Administration has proposed making permanent the provision of the Tax Reduction Act of 1975 for a 10% investment tax credit. This proposal is reflected in the Budget estimates. (3) As a part of general tax reform the Administration has supported: (a) A tax on "minimum taxable income" as a substitute for the current minimum tax provisions. (b) The revised capital gains provisions contained in the Ways and Means Committee 1974 bill. The revenue effects of these measures are not reflected in the Budget on the assumption that any legislative package of tax reforms finally enacted would, on net balance, neither gain nor lose substantial amounts of revenue. Representative BROWN of Michigan. Mr. Chairman, before you wind up, when you were here before telling about the tremendous conditions that existed back in World War II, where we had 50 per-cent of the budget and low interest rates and so on, you forgot to mention we had no inflation. Chairman HUMPHREY. Well, we had wage and price controls. Representative BROWN of Michigan. That is true. Chairman HUMPHREY. But, I am simply pointing out that a deficit does not necessarily make high interest rates. Representative BROWN of Michigan. No; but I thought you were suggesting we ought to have a massive defense budget. Chairman HUMPHREY. Oh, no, I am not suggesting that. I just do not buy the thesis, despite my limited economic understanding, that Federal deficits necessarily mean high interest rates. I happen to believe that interest rates are set by banks, just like price-fixing with some relevancy obviously to the market conditions. But I have yet to see the interest rate announced by the Federal Reserve System, which is the public agency, these announcements come from Chase Manhattan Bank or somebody else, and then that is it. I often think that must be looked upon with some interest and concern, because if interest rates have such a tremendous impact on the economy-well, I am going to take this up with Mr. Burns. Mr. LYNN. And Secretary Simon, too? [Whereupon, at 1:10 p.m., the committee recessed, to reconvene at 9:30 a.m., Wednesday, February 4, 1976.] THE 1976 ECONOMIC REPORT OF THE PRESIDENT WEDNESDAY, FEBRUARY 4, 1976 CONGRESS OF THE UNITED States, The committee met, pursuant to notice, at 9:45 a.m., in room 318, Russell Senate Office Building, Hon. Hubert H. Humphrey (chairman of the committee) presiding. Present: Senators Humphrey, Sparkman, Proxmire, Javits, and Taft; and Representatives Reuss, Long, and Heckler. Also present: John R. Stark, executive director; Richard F. Kaufman, general counsel; Loughlin F. McHugh, John R. Karlik, Courtenay M. Slater, William A. Cox, Lucy A. Falcone, and L. Douglas Lee, professional staff members; Michael J. Runde, administrative assistant; George D. Krumbhaar, Jr., minority counsel; and M. Catherine Miller, minority economist. OPENING STATEMENT OF CHAIRMAN HUMPHREY Chairman HUMPHREY. Secretary Simon, you are here in good nature and good humor this morning and it is good to start the morning like this. I hope we can keep it up. I'm afraid that you will see some immigration and outmigration of members today because of many conflicts, but we really appreciate your attendance once again and welcome your presence here. There are a number of questions, of course, that we will want to raise. I want to focus just for a moment in my opening statement on the general question of inflation. In our discussions with Mr. Greenspan and Mr. Lynn last week, a number of the members of this committee, including myself, expressed a strong dissatisfaction with the lack of a Presidential program for bringing unemployment down. I assure you we continue to feel that dissatisfaction. Our feeling is all the stronger because the administration's program, as it appears at least to this member, lacks any anti-inflation policy as well. I think we have to ask the question what are we buying by keeping unemployment high or by permitting it to be so high? By the administration's own estimate it appears that we are buying a continuation of the inflation rate at or near its present level, not only in 1976, but in 1977 as well. We are paying very dearly in human suffering and getting very little or nothing whatsoever in return. I consider that a rather bad bargain. The real tragedy is this: We could have less inflation if we brought unemployment down faster. Productivity gains associated with eco |