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and fiscal policies. On August 15, 1971, President Nixon imposed the first comprehensive wage and price controls in the Nation's peacetime history. In one giant step the Nation moved toward a bureaucratically controlled economy. Subsequent ill-conceived policies and an inadequate administration of those policies created massive economic distortions, shortages, excessive deficit spending and credit creation, rampant inflation and the sharpest and deepest recession in 40 years. The anticipated $80 billion Federal deficit for fiscal 1976 exceeds the total of Federal deficits for the entire 20-year period 1948–1968. This I think is very significant in terms of the trends we are seeing today.
A primary reason underlying the accelerating trend toward Government regulation is the enterprise system's failure to cope with reality.
Today's modern, industrialized economy characterized by huge ogilopolistic business organizations side by side with huge labor unions are no longer controlled by impersonal market forces, but to the contrary largely, themselves, control the market. Administered pricing policies of huge corporations and wage determination by huge labor unions and institutionalized forces are largely exogenous to the market's functioning. In turn, these basic forces of inflation are largely noncontrollable by traditional monetary and fiscal policies. We have reached a point where a mixed politically privately directed economy cannot enjoy price stability, full employment and a handsoff policy in the wage-price determination processes. But we must pause here and think. Even though there is an extent to which prices and wages do not respond to market processes, does it necessarily follow that the answer to the problem lies in handing the crucial decisionmaking power to politically oriented men not directly involved in the problems, the planning, the complexities, and the frustrations experienced by business executives directly involved and directly affected by the outcome of the decisions made?
Consumerism with all this word entails in product quality and work safety has, in the seventies, become a matter of considerable concern, indeed, the public interest. In the essence of Keyne's "collective self-interest”, the term "consumerism” denigrates individual judgment, freedom of choice and intelligence, and substitutes in the name of consumerism a protective mesh of regulatory agencies as champions of the individual. From this maze evolves bureaucratic, detailed, procedural regulatory power that is the primary nemesis of businessmen and the prime danger to the enterprise system.
President Ford recently asked the Office of Management and Budget to calculate the total cost of regulation to consumers who pay higher prices and are able to exercise fewer choices because of reguilatorv requirements. OMB estimated an annual cost that "might” be as high as $2.000 per family or a total of $130 billion a year, the same figures Senator Nunn mentioned. This is equal to the total Federal personal income taxes paid which about doubles the governmental burden on the individual who as consumer ultimately pays costs—for consumers as a whole there is no free lunch.
On January 17, 1976 the New York Times reported on a talk given by Richard L. Terrell, vice chairman of General Motors. Mr. Terrell asserted GM would spend more than $1.3 billion this year to comply
with Government regulations "which are often unnecessary or wasteful.” Looking back at 1974, Mr. Terrell pointed out that spending to comply with Government regulations was nearly as much as GM expended on plants and equipment worldwide and about 25 percent more than the costs of special tools. Mr. Terrell said that, before Government regulations are put into effect, their costs should be weighed “to be certain they are indeed necessary for the welfare of the country and its people."
As I perceive Government over-regulation of economic affairs the first bit of reality is to distinguish between symptoms and the disease itself. Symptoms of the enterprise system's ineffectuality are everywhere—in deteriorating, sick, underfinanced cities; in transportation, in energy, in conservation, and use of natural resources, air and water
, pollution, in product and work safety, in capital investment and productivity, in education, in health care, in old-age assistance, in hiring practices, in employment maintenance; in effect, in every nook and corner of our economic environment, Government regulators exercise a heavy hand over decisionmakers.
The disease that underlies the symptoms is the exercise of power over the allocation and use of economic resources and the distribution of income derived from economic endeavor. In this regard the Nation is moving toward a command economy--a condition noncompatible with an enterprise economy.
In developing this brief testimony it was readily apparent that I could make no dent in analyzing the specificity of regulations as applied to specific industries nor as to the economic system impact in their entirety. However, the problem we face is, as cited, how and by whom power will be exercised within a democratic framework? If we are to preserve our democratic freedoms and institutions the only alternative we have is to refurbish and strengthen a dynamic market system that works and works effectively. That is, seat power once again within a viable and functioning marketplace.
I am not suggesting here that all Government regulations of economic affairs can be or should be abolished. We cannot return to the 19th century. We cannot ignore the structural and power relationships of our complex industrialized and urbanized society. While I recognize that compromise is necessitated by considerations of equity, practicality, and inescapable political considerations, we must nonetheless, deal with reality.
Executives I surveyed in preparing this testimony were unanimous in decrying the lack of guiding criteria and the differences in interpretation and enforcement of standards and regulations by individual regulators. That was an across-the-board complaint.
This applies to EPA enforcement of air and water pollution regulations, occupational safety and health standards, enforcement of hiring and discrimination practice standards, et cetera. While this kind of ad hoc bureaucratic regulation of specific situations, specific conditions, and specific instances constitute a costly and continual harrassment of business, the solution is not all that difficult to conceptualize.
First, change the perspective of Government regulation from the specific to the general. Rewrite the “rules of the game” in the sense
of a “rule of law.” Just as we developed management by objective, let's develop Government regulation on the basis of “performance." Establish standards that must be met but do not dictate specific methods that must be used to meet those standards. That is a very crucial point. Industrial polluters would, let's say, pay a fine if their effluents exceed the established standards. Don't insist on specifying the specific methods to be used, but do insist on the standards of performance.
Another illustration relates to construction. Specify performance standards. This can be done for function, for safety, for quantity, and for environmental pollution, but leave the means to meet these standards flexible. Don't freeze requirements into a "specifications cost." Don't perpetuate established methods, materials and design. In summary, don't inhibit or prohibit innovation. Innovation and the “better mousetrap” is what releases human ingenuity and what makes the market place viable, and best for the consuming public.
Such performance standards would seem to apply generally acrossthe-board to product quality and safety, environmental pollution, manufacturing health and safety standards, accounting standards, medical service, legal performances, and the like. That is one-half of the approach, and I say let us establish regulation by rule and not by specific requirement, specific terms or whatever.
The other side of Government regulation and control of the economy relates to the size of Federal expenditures, uncontrollable deficit financing, and incessant efforts to politicize income redistribution patterns.
This facet of Government regulation and control is more difficult to get into perspective. However, some crucial points can be made.
Total Government spending-Federal, State, and local—from calendar year 1950 to 1974 jumped from $61 billion to $505 billion, more than one-third of GNP.
In 1975, the Federal Government spent $299 billion or about 21 percent of GNP. State and local governments spent $206 billion, or about 15 percent of GNP.
In its penchant for redistributing income, more than half, $158 billion, of Federal spending consisted of transfer payments to individuals and grants-in-aid to State and local governments.
Preliminary data for calendar 1975 also indicate a $72 billion deficit which prompts the question "are we engaging in revenue sharing or deficit sharing?"
What is disturbing, in particular, is that in a time of impending capital shortage, the Federal Government absorbed $72 billion of the estimated $88 billion personal savings, or 82 percent through its own fiscal laxity. This contributes to over-extension of bank created credit, inflation, deterioration of the dollar's purchasing power, and an emphasis on consumption at the expense of capital investment.
Government is a user of savings which should be flowing back into our industrial capacity.
As recently as 1955 Federal transfer payments to people amounted to 5.8 percent of earned income. Today such transfer payments are estimated at 22 percent of earned income. The deadening impact such redistribution has on work attitudes and work incentives is clear.
Federal tax policies which allow insufficient depreciation allowances to replace capital equipment and plant at much higher, inflated prices constitute essentially a tax on capital. This is economically devastating to productivity, to real income creation, to the job market, and to our competitiveness in world markets.
In summary: The conclusion is clear that Government is the largest single purchaser of all the odds and ends used in and produced by the economy. Every day as a regulator and as the single largest customer, governments affect the economic lives of 213 million Americans in countless ways that even you and I fail to comprehend even though our professional study is continuous.
While there is too little time to discourse on the basic problem of how to reinstitute a viable and dynamic market economy, the only alternative I subscribe to is that which moves our Nation
away from detailed controls, detailed state planning, and detailed intervention by government in economic production and income distribution patterns.
We can best implement the mandate of the Employment Act of 1946—to promote maximum employment, production, and purchasing power-by adapting to a post-industrial economy through the widespread adoption of employee stock ownership plans.
Through ESOP programing, using market-oriented corporate policies and philosophy of finance, capital ownership can be broadened, income flows argumented and stabilized, productivity improved, capital shortages overcome through equity ownership expension, market forces strengthened and balanced, and inflation minimized. The ESOP paradigm is a contemporary approach to a full employment policy, full production, and maintenance of viable purchasing power without inflation. I urge that ESOP programing be thoroughly studied, appraised, and encouraged by the U.S. Congress.
Senator Nunn. Thank you very much, Professor Green.
On that later point, I recently talked to Senator Long about this particular subject. I read your article about it, and that stimulated my interest.
I think that basically what you are saying is we have to give more people a stake in the free entersprise system that has made the Nation great.
For a long number of years almost everyone in this country had some knowledge of our economy, either they had relatives in a store, or they had a farm themselves, or they knew someone closely associated with small business. Now, well over a half of our people, probably over 60 percent either work for big government, big business, or some other big enterprise that has no direct relationship with the free enterprise system. What you are saying about stock ownership, and the diversifying of ownership is that we basically need to give the average person in this country more of a stake in the economy and more understanding of what makes it tick,
Professor GREEN. That is very important.
We are broadening the ownership base, if we do that no one loses, everyone gains. People would receive income on the basis of the contribution they make, and not due to the political clout they exercise.
This is very important. If we go on down the road using politicized income distribution, we will move into a socialist state.
Senator Nunn. There are people interested in this.
I will be following it with interest, and I have a lot of questions I could ask. This has been an excellent beginning, and I very much appreciate your testimony.
Congressman LEVITAS. Thank you, Senator, Professor Green, your testimony was very provocative.
I might say as far as ESOP is concerned, after listening to Mr. Kelso and Senator Long, I have subscribed to the proposition that this is perhaps the most expeditious capital formation method we can envision in the next few years, and I hope our tax laws will increasingly be revised to encourage ESOP ownership.
I was fascinated by your statement, on the first page of your testimony, in which you linked the need for political freedom and economic freedom, these two go hand in hand, and thev cannot long remain separate, and this is one of the fears that socialism and communism has, the fact that they go hand in hand.
I think it is not coincidental, the Declaration of Independence occurred in the same year that Adam Smith in 1776 wrote his “Wealth of Nations," and I think those two things do go hand in hand.
I have two specific questions. Professor, on page 4 of your testimony, in talking about this $2,000 capital costs, just made by OMB, I have not seen that report yet.
I have seen some summaries of it.
Do you know whether or not this took into account the cost benefits which offset the cost of the regulations, for example, let us take the mandated bumper on automobiles, the impact.
Was any benefit given to the reduction in insurance premiums as a result of that?
Professor GREEN. As I recall the report I saw, no.
It was not included here, and they did not do that at that point. That might temper somewhat
Congressman LEVITAS. For example, some of the environmental regulations, the clear-air requirements which are very costlv for business, I would imagine that someone eventually will classify what is lost through the reduction of the respiratory, although I have a cold today, but there are some cost benefits.
Professor GREEN. I would rather have the standards established, and let the entrepreneur, the firms, the businessman decide how best to meet those standards.
I think it is important to do it that way.
Congressman LEVITAS. The effect of some bureaucrats saying this is the only way you can do it, and there may be many, many ways of accomplishing the result of a much better and least costly, is I think an excellent proposal, and one that I certainly would hope that the regulators will emplement, either voluntarily, or at the urging of the Congress.
Professor GREEN. May I make one statement. We had a hearing last December 12 and 13, before the Joint Economic Committee on the ESOP program. I have a paper in this hearing, and perhaps you would like to read it.