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a big part of the recession solved, and you have it in the private

sector.

Secretary SIMON. I would say there are other factors. I agree that a mortgage today at 9 percent is a deterrent to housing. If it was at 5 percent, it would be $100 a month less in payments. But also take a look at what happens as a result of inflation for the past 10 years, really, in the cost of an average house, which is over $40,000 in the United States today. The cost of land has skyrocketed. That is why in attacking inflation

Senator PROXMIRE. Well, there are all kinds of things. What I am saying is here is something we can do something about. We passed legislation in the House and Senate-the President vetoed it. That legislation would have brought the interest rates down.

Now, let me ask you about one other area. I am concerned about your priorities, too. I don't think the budget we are given by the Ford administration is going to put people to work as effectively as another budget might. In the military area, for instance, the papers reported this morning, the New York Times reported there was a memorandum from the Office of Management and Budget that there is a $3 billion of "cut insurance" in the military budget. In other words, $3 billion higher than they felt it really had to be. In addition to that, the President overruled the Office of Budget and Management to the tune of $2.7 billion in restoring funds that the Office of Management and Budget cut. Add those together, and that is almost $6 billion here.

Secretary SIMON. He is the boss.

Senator PROXMIRE. Well, he may be the boss, yes, that is right. But, it suggests that the Office of Management and Budget, which was looking for an efficient way to provide the defense we need, and the "cut insurance" together adds up to a concentration in the military area, which (1) is inflationary because you don't produce the economic goods this way; and (2) is a very expensive way to provide jobs. The average job in the military is about $17,000 for a job, compared to a little more than half that in other areas and far, far less than that in housing.

Secretary SIMON. I don't think there is the water this yearSenator PROXMIRE. This is the first time we had "cut insurance" in writing. In the past, we have speculated on this and it has been denied they had "cut insurance." This time, we have a memorandum in the newspapers.

Secretary SIMON. It is?

Senator PROXMIRE. Sure, the New York Times disclosed it this morning. They tell us there is $3 billion of water in there.

Secretary SIMON. I wasn't aware of that. Of course, I must admit I get a lot of information out of the New York Times and the Wall Street Journal and things like that. As I always said, the ship of state is the only ship that leaks from the top.

Senator PROXMIRE. Well, my time is up. Thank you.

Representative LONG. Senator Taft.

Senator TAFT. Thank you very much, Mr. Chairman.

First, I have an opening statement, which I won't go into, but which I would like to put in the record at this point.

Representative LONG. Without objection, so ordered.

[The opening statement of Senator Taft follows:]

OPENING STATEMENT OF HON. ROBERT Taft, Jr.

One of the major issues to emerge from our hearings on the Economic Report of the President is the controversy over the proper short run economic policy to be followed over the next few months. Do we increase the amount of stimulation to try to drive unemployment down faster, or will this worsen inflation unacceptably and put us back in a boom-or-bust cycle? Can we lower unemployment more swiftly and surely by means of government jobs or through the private sector?

When the Council of Economic Advisors testified here last week, it was their contention that it was at least twice as expensive in terms of tax expenditure to put a person to work with a federal program rather than by lowering taxes enough to stimulate private investment. Furthermore, the Council declared that 80% of the public jobs created by such programs ended up merely replacing one public employee with yet another, for a very small net gain in employment.

This testimony is a serious indictment of the public sector programs we have been funding with billions of dollars. I believe that the Council, or the Treasury, or some other part of the executive branch, owes us a study of these questions that can provide us with hard figures and explanations. Those who favor public jobs are just not going to take the Council's word on the matter. They must have evidence if they are to change their views.

Those of us who favor the private sector also need to see such a study. We need it to prove our case, and I would urge the Secretary of the Treasury to review the testimony of the Council, to discuss this matter with them, and to get such a study under way as soon as possible.

I should like to say a few words about the contention that public jobs can fight inflation by utilizing excess capacity and raising supply. This idea runs counter to the established theory that there is a trade-off in the short run between inflation and unemployment. Unfortunately, there is a grain of truth here that has resulted in a good deal of confusion about this matter.

It is true that an increase in aggregate supply in the economy should tend to lower prices, at least on a oneshot basis. However, we are faced with deficient aggregate demand for the output. We could stimulate demand by cutting taxes or by increasing government spending. The Council prefers the former. The latter has pitfalls.

If the government buys goods and services that the public values and would have freely chosen, then the public experiences an increase in living standards. If the public does not value the added output, then resources have been wasted. What is worse, some people on the Hill are talking as if public jobs could lower the general price level. This is impossible. If we want the price of automobiles to fall, we must do something to increase the efficiency of the industry, so that costs will fall, output and hiring will expand, and the consumer will buy the product at the lower price. This can only be done through investment and the stimulation of production of automobiles. It makes a great deal of difference, from the point of view of increased supply, whether or not it is an increase in the supply of something useful, something the consumer wants, and something the consumer has been reluctant to buy because of the price. It does not fight inflation to hire someone to push paper, or to do something else that does not produce the goods that the consumer wants to buy. The anti-inflation theory only makes sense if people return to work in those private industries which have economies of scale, or if the expansion of private industry occurs because of investment and lower costs of production. These goals can be achieved by tax cuts for business and individuals far faster than through government hiring, which only takes people out of the productive sectors of the economy, and gives us a supply problem for the future.

In short, we can stimulate real output by increasing the rewards for production, encouraging efficiency through investment, and raising consumer demand for the products, all through tax cuts. Or we can put people into jobs the consumer did not create, rather than trying to put them in the productive sector, and, in this roundabout and inefficient way, try to force an increase in demand at two to ten times the tax expenditure of the simple tax cut.

I think that, if we look at this problem from the consumer's and taxpayer's viewpoint, our choice is clear.

Senator TAFT. Mr. Secretary, under the financing plan for the proposed plan for the IMF trust fund, less developed countries will obtain a proportional share of the one-sixth of the IMF gold, which is to be sold to raise money for the trust fund. The developed nations will be the only ones to turn over their gold to accomplish the sale for the trust fund

Secretary SIMON. The who, Senator? I didn't hear that.

Senator TAFT. The developed countries. Are the OPEC countries to be classified as developed or less developed for the purpose of this transaction? The OPEC countries have recently reduced their promised amount of foreign aid to Third World countries. Has the proposed trust fund caused them to shift this burden to the IMF?

Secretary SIMON. I am going to have to check on that question on the countries, and the distribution of gold. But, I would speculate, but only speculate, that the OPEC nations will be treated in the same way as the United States. It is under discussion, I am told. [The following information was subsequently supplied for the record:]

The matter is still under discussion, but the objective is to have OPEC treated as if it is part of the economically developed countries for this particular transaction.

Senator TAFT. Would they sell back to the Fund?

Secretary SIMON. They would do the same thing as the United States would do.

Senator TAFT. In other words, sell back to the Fund?

Secretary SIMON. That is the U.S. position and that you can be sure of.

Senator TAFT. Thank you. How do you answer the argument at the present time in the early stages of an economic recovery, Mr. Secretary, it hardly behooves us to recommend a budget that represents a cutback in real spending?

Secretary SIMON. Well, sometimes we look only at the short run. and not at the long run for the cumulative effect of actions that have been taken in the past. When I look at a budget that was originally going to grow almost 15 percent in 1977 over 1976, without any action towards new programs; when I look at a budget that has grown 40 percent in the last 2 fiscal years; when I look at a monetary policy that has been stimulative and will continue to support an expansion in our economy, I think that a reduction in the growth of spending is indeed called for before we renew the inflationary excesses, Senator Taft.

Senator TAFT. What interest rates levels do you believe are consistent with continued economic recovery, and what interest rates are implied in the budget's provision for Federal deficits?

Secretary SIMON. Well, the average interest rate of the United States Treasury today is 6.55 percent. We never try to guess, if you will, what interest rates will be during the course of the year. So we always set what interest rates actually are in the various sectors of the market today, and then make judgments as to where the various financing is going to tak place in what maturity sectors, and that is how we get our interest rate judgments, and they have been fairly accurate in the past. And of course, the interest rates, as

you know, are a function of the supply and demand for money and most importantly of the level of inflation.

Senator TAFT. Are you saying, then, that you don't expect, the budget doesn't project, any change in average interest rates? Is that it?

Secretary SIMON. Again, we never felt it was our role, in our budget, to give our forecast on what the interest rate might be monthby-month each year, as we are financing our debt.

Senator TAFT. In the preparation of the budget, was any consideration given to having a larger budget than the one that was recommended? Specifically, do you or other officers in the executive branch attempt to predict the consequences of a budget that at least represented no fall off in real spending levels?

Secretary SIMON. Yes, we started that exercise last summer, Senator Taft, in attempting to identify what indeed spending might be and what would be the resulting impact on inflation and the economy with continued spending based on our judgments of GNP and continued economic recovery and the rest. And the decision was arrived at, after much debate, and announced by the President really in October of what we are going to try to do as far as cutting back spending in fiscal 1977 by the $28 billion, in which much of the work had been done-well, most of the work on the economic side, but the specifics all hadn't been designed yet, because all of the agencies were still in the process of doing that.

And it is at that level where, Senator, in our judgment, we believed we could have a sustainable, durable, and lasting recovery. Senator TAFT. Have you, or anybody in the Treasury, anybody in your tax analysis staff, made any comparison or studies showing the net effect of the proposed social security rate and base increases, combined with the proposed tax cuts for lower and midincome families? In other words, will there be a net benefit or a net detriment to these lower-income families?

Secretary SIMON. Well, simply speaking, there would be a net benefit-and that is overall. But we are in the process of doing this now, by income class, which we will supply to this committee just as soon as it is finished.

Senator TAFT. Well, there seems to be some controversy as to the urgency of the crisis in the social security trust fund, which makes the proposed rate increases necessary. The Joint Economic Committee staff estimated that, given the economic assumptions in the budget, the surplus in the trust fund-although declining-is estimated to be $23 billion in 1981 under the current law. Would you explain why you believe this action should be undertaken now? Secretary SIMON. I responded, Senator Taft, before you came in, to Mrs. Heckler. I think Mrs. Heckler asked me that question, and I went into it in some great detail.

Senator TAFT. You don't need to repeat it, then.

Secretary SIMON. I said that $23 billion is only 2 months reserve in 1981, and if we do, indeed, have a recession sometime in the future, that the fund would be very quickly depleted. Nobody disagrees, either you reconomists or ours, that the trust fund is going to run out. Whether it is 1985 or 1987 or 1981 to me is immaterial. We have to get that remedied right now.

Senator TAFT. There have been a number of calls for an increase in public service jobs to help bring the rate of unemployment down quickly. Can you advise what is Okun's Law and what relevance does it have to this situation?

Secretary SIMON. Well, as a rough guide, 3 percent extra growth in real GNP drops the unemployment rate by 1 percent. And of course, stimulation to achieve that, would, in our judgment, be highly inflationary. Our judgment on public service jobs is that they have been not terribly efficient. They have been a good deal more costly than simply providing assistance for the unemployed now. Also, assistance gives people the ability to continue to look for work in the private sector, which today still provides five out of every six jobs in this country. That is the area that must be reinvigorated, with the incentives that I spoke about to Senator Proxmire in our overall economic policies.

Senator TAFT. When the Council of Economic Advisers testified here last week, it was their contention that it was at least twice as expensive in terms of tax expenditures to put a person to work in a Federal program, rather than lowering taxes enough to stimulate private investment. Furthermore, it declared 80 percent of the public jobs created by such a program ended up merely by replacing one public employee for another, with a very small net gain in employment. This would seem to me to be a very serious indictment of public service programs, which have been funded with billions of dollars. Do you think that the Treasury or the Council or some other part of the executive branch should make a study of these questions that can provide us with figures and explanations?

Secretary SIMON. Let us try to do that in a comprehensive way, but understanding at the same time, Senator, that it is very difficult. We have numerous examples in the CETA program and others where we are willing to provide the public service jobs where people get laid off by State and local governments and that there is a replacement there. But, it is very hard to quantify how much, exactly how much that does occur. People are reluctant to talk about it. Therefore, it is difficult to analyze.

Senator TAFT. All I could say about it is, this is going to be an argument in the Congress. And those who favor public jobs aren't going to just take the Council's word, or the Treasury's word on the matter. And I think we need some evidence, and we need a study of some kind put together.

Secretary SIMON. I am told the Labor Department has such a study underway right now. So, we will get a copy of that to you. Senator TAFT. Would that be coordinated with the Treasury? Secretary SIMON. With the Economic Policy Board, it would be,

yes.

Senator TAFT. Thank you very much. I think my time has expired. Chairman HUMPHREY [presiding]. I have a question I would like

to ask.

Mr. Secretary, you talk a great deal in your current statement and also in the past about the dangers of crowding out in the money markets; that is, that large government borrowing demands might take the available credit away from private borrowers, thereby hampering the recovery of the private economy. You have mentioned

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