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NOMINATIONS OF WILLIAM E. SIMON AND
DAWI) R. MACI)0NALI)
B 719,124
HEARING
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
NINETY-THIRD CONGRESS
SECOND SESSION
ON
NOMINATIONS OF WILLIAM E. SIMON, OF NEW JERSEY,
TO BE SECRETARY OF THE TREASURY. AND DAVID R.
MACDONALD, OF ILLINOIS, TO BE ASSISTANT SECRETARY
*OF THE TREASURY FOR ENFORCEMENT, TARIFE AND
TRADE AFFAIRS, AND ODERATIONS
APRIL 24, 1974
§
Printed for the use of the Committee on Finance
U.S. GOVERNMENT PRINTING OFFICE
32-39s WASHINGTON : 1974
UNIVERSITY OF MICHICAN LIBRARIES
COMMITTEE ON FINANCE
RUSSELL B. LONG, Louisiana, Chairman
HERMAN E. TALMADGE, Georgia
VANCE HARTKE, Indiana.
J. W. FULBRIGHT, Arkansas
ABRAHAM RIBICOFF, Connecticut
HARRY F. B.Y.R.D, J.R., Virginia
GAYLORD NELSON, Wisconsin
WALTER F. MONDALE, Minnesota
MIKE GRAVEL, Alaska.
LLOYD BENTSEN, Texas
WALLACE F. BENNETT, Utah
CARL T. CURTIS, Nebraska
PAUL J. FANNIN, Arizona -
CLIFFORD P. HANSEN, Wyoming:
ROBERT DOLE, Kansas
BOB PACKWOOD, Oregon
WILLIAM W. ROTH, JR., Delaware.
MICHAEL STERN, Staff Director
(II)
Social Work
K.E.
P-\e
| FG,
1974e
C O N T E N T S .
WITNESSES
Page
Hon. Harrison A. Williams, Jr., a U.S. Senator from the State of New
Jersey sº
Hon. William E. Simon, to be Secretary of the Treasury 2
David R. Macdonald, to be Assistant Secretary of the Treasury for En-
forcement, Tariff and Trade Affairs, and Operations------------------- 36
ADDITIONAL INFORMATION
Communications:
Senator Charles H. Percy, statement 35
David R. Macdonald :
Memorandum to officials of the Department of the Treasury------ 44
Letter to the chairman 45
Hon. William E. Simon, letters to the chairman 45, 53
Senators Gaylord Nelson and Walter F. Mondale, joint letter to the
Chairman tº E. 49
Senator Robert Dole, letter to the chairman --- 52
APPENDIx
Correspondence concerning the enforcement of the countervailing duty
statute against dairy products imported from the Common Market------ -
(III)
suBJECT INDEx
Tight money policy and inflation------------------
Housing problems
Balance of trade------------ tº- =º-
Oil country monetary reserves ---
Tax Cuts
Oil supplies–– * = **
Oil company profits * ~ **
Gas rationing-----------
Oil company antitrust case * = sº
Tax reform mº
Inflation cures—- tºº,
Economic forecasts---------------------------
Proposals to combat inflation
Commissioner Of Internal Revenue * *
Independence of IRS.---
Secretary of the Treasury and energy policy------
Oil production incentives_____ ºs mºs, sºme
Tendency Seen to punish the Oil industry--------
Tax cuts - - - - -
Slowdown in the GNP---------------
Government in the money market-------------------
Deficit spending-------------------------'* =s.
Interest rates * assa asa. ams gº tºms
Government in the money market .
Monetary policy---------- = *-* * *** - * *-* -- - - - - - - - - = ** - - - -- ar. --> -- - - -
Causes of inflation gº sº.
Full employment budget---------------------------
* * * * * * * *
* * * * * * * * * * * * * * * *
|Unemployment - *
Unemployment insurance----------- -
Full employment budget concept
Housing ------------------------------- *
* * * * * * * * * * * sº sº º
Wage controls-- = = * *- = - * *
Spending curbs---------------------- * - am
Inflation curbs----- * = **
Lowering prices
Fiscal discipline Seen needed
Energy Crisis and oil company profits
Reasons for the energy crisis______
Oil and free trade
Oil company profits
Internal Revenue Service
Tax reform
Oil company profits
Interest rateS_____
Tax cuts and a balanced budget
Oil company stock prices
Oil depletion allowance
Petroleum prices º
Rollback of domestic oil prices—
Energy company profits__ ==
Striving for a balanced budget
. (V)
#
3.1
§
é
- --
19

Tax cuts--
Striving for a balanced budget
Con Ed dividend picture
Gas rationing
Con Ed dividend picture
Federal oil and gas corporation
Causes of inflation -
Finding cures for inflation
Plugging tax loopholes
Administration’s economic record
Production incentives
Price rollbacks - --
Interest rates - --
EPage
32
32
33
34
34
36
37
42
42

NOMINATIONS OF WILLIAM E. SIMON AND
DAVID ROBERT MACDONALD
WEDNESDAY, APRIL 24, 1974
U.S. SENATE,
CoMMITTEE on FINANCE,
- Washington, D.C.
The committee met, pursuant to notice, at 9:05 a.m. in room 2221,
Dirksen Senate Office Building, Senator Russell B. Long (chairman)
presiding. - -
Present: Senators Long, Hartke, Ribicoff, Byrd, Jr., of Virginia,
Mondale, Curtis, Fannin, Hansen, Dole, and Packwood.
The CHAIRMAN. In today's hearing, the Committee on Finance will
be considering the nominations of Mr. William E. Simon to be Secre-
tary of the Treasury and Mr. David Macdonald to be Assistant Secre-
tary of the Treasury for Enforcement, Tariff and Trade Affairs, and
Operations.
Mr. Simon is no stranger to this committee. I believe that the Sen-
ator from New Jersey, Mr. Williams, would like to introduce our wit-
ness today. -
STATEMENT OF HON. HARRISON A. WILLIAMS, J.R., A U.S. SENATOR
FROM THE STATE OF NEW JERSEY
Senator WILLIAMs. Thank you very much, Mr. Chairman.
It is a pleasure and an honor to be able to present a fellow New
Jerseyite to the committee as the nominee for this very important post.
While we are all familiar with the contributions Mr. Simon has made,
particularly within the last year to the Nation in the energy crisis, we
in New Jersey know also of his background and his professional life in
the securities industry.
Some might think that this is a bit of a comedown from “czar” to
a Cabinet position, Bill, but I know that everybody, particularly here
in this committee that has first opportunity to consider this nomination,
feel the overriding importance of the Secretary of the Treasury in this
time when there are so many foreboding economic indicators. We in
New Jersey are, of course, proud of this appointment, and we know
that the times will require the best of Mr. Simon. And we know he will
give his best as he has in the 11% years that he has been at the service
of the American people in a high appointive position.
Certainly the energy crisis is not over, and it is not solved. But most
recently, Mr. Simon brought a cool competence to that critical situa-
(1 Y

2
tion, and the same cool competence is needed in this important posi-
tion that you are considering today, Mr. Chairman.
Thank you.
Good luck to you.
Senator FANNIN. Mr. Chairman?
The CHAIRMAN. Senator Fannin? - “,
Senator FANNIN. Mr. Chairman, I would like to have the oppor–
tunity of welcoming Mr. Simon to this committee meeting this morn-
ing. I am very proud that I have had the opportunity to work with
him. And as we all know, after a very brilliant career in private in-
dustry, he came to Government, and his performances have been out-
standing. And he took on a chore that seemed like an almost impossible
task. And although it was a difficult one, he certainly handled it with
great expertise, and we are very proud of his position that he consist-
ently took as to the problem that was involved. He faced up to realities,
and certainly he brought a great sense of responsibility to that posi-
tion. So I think we are very fortunate to have Mr. Simon in Govern-
ment, and I am very pleased, before we proceed with the hearing, to
express my great support of him.
The CHAIRMAN. Do you have a statement that you would like to
make, Mr. Simon? . . -
STATEMENT OF WILLIAM E. SIMON
Mr. SIMON. I have a brief statement, Mr. Chairman; yes, sir.
The CHAIRMAN. Please proceed. . . . -
Mr. SIMON. Mr. Chairman and members of this distinguished com-
mittee, less than 11% years ago, I appeared before you, seeking con-
firmation to high office. This morning, it is my honor and privilege
to come before you again, on this occasion as the President’s nominee
for Secretary of the Treasury. . • .
You have my biography on file. Also, in accordance with your proce-
dures, I have provided the committee with a statement of my financial
assets, which are managed in a blind trust by Morgan Guaranty Trust
Co. of New York. I have also supplied the committee with a letter from
Edward C. Schmults, General Counsel of the Department of the
Treasury, expressing his opinion that my financial arrangements are in
conformity with the conflict-of-interest statutes.
Today, we are faced with a broad range of complex economic and
financial issues. You are familiar with all of them, since they have been
at the forefront of Presidential and congressional attention for some
time. These issues include inflation, renewed economic expansion,
energy, reform of the international monetary system, trade reform, tax
reform, and the restructuring of our financial system. Of all of these
issues, the problem of raising prices has been and will continue to be
our dominant concern. Inflation has been gathering momentum for
almost a decade; it is the most serious and intractable problem faced
by the past two administrations. We must devote our strongest efforts
to help bring it under control. , i.e. -

Over the past year I have testified on innumerable occasions here
5 *
in the Senate and in the House. I assure you that I will continue to be
readily available to work with the Congress on these and other im-
portant issues in the months ahead.
3
Thank you, Mr. Chairman. . . . . . . .
The CHAIRMAN. Mr. Simon, I had prepared a number of questions
that I thought about asking you, but after thinking about it, I have
concluded that it is not quite fair to put a man on the spot when you
think that he is competent for the job, because to do so tends to imply
that if he does not answer the question right, you are going to vote
against his confirmation. So I think I will preface my statement by
simply saying that I am satisfied that you are in all respects qualified
and ought to be confirmed to the job. r
TIGHT MonBY Policy AND INFLATION
Having done so, I would like to ask about the tight money policy
and the inflation problem. Chairman Burns of the Federal Reserve
Board recently stated he believed a tight money policy is necessary to
combat inflation, in spite of the effect of such a policy on housing and
other #itical national priorities. Could you give us your views in that
regard? - - • - .
š. SIMON. Chairman Burns' remarks relative to a continued taut
posture of the monetary aggregates is consistent with the problem
that we have on the inflation front at this point. The chairman is also
dedicated not to have a recurrence of he liquidity Squeeze or the crunch
that we experienced in August of 1966. What we need at this point
more than ever is a proper balance between the fiscal and the monetary
policies, and a return to the fundamentals to get this inflation dragged
back into the cage, Mr. Chairman. . -
PHousING PROBLEMs
And as far as housing is concerned—the second portion of your ques-
tion—there are ways that housing has been helped in the past through
the Federal agencies, through tandem plans, and Ginnie Mae and
Fannie Mae and the auction purchases, and the home loan purchasing;
and we are looking at and studying that right at this minute. .
The CHAIRMAN. One think that gives me cause for concern about our
housing problem is that housing credit necessarily has to be long-term
credit, and when someone signs up for a 30-year mortgage at a time
of very tight money and high interest rates, he spends 30 years carry-
ling the burden of having built a house at a time when the Govern-
ment's fiscal and monetary policies were oriented against an inflation-
ary spiral. I wonder whether we should not be thinking somewhat in
other terms to try to make credit for housing available for people
who want to build it on a basis that would not be so cyclical. That way
there would be a certain amount of credit available every year, and the
interest rates would tend to remain rather level rather than go up and
down from 7 percent to 12, and back on down to 6.
Mr. SIMON. I think probably the most difficult task is to remove hous-
ing from its contracyclical posture as far as the business cycle is con-
cerned. I worked on it at great length as a banker for many of the
housing agencies back in my other world on a variable interest rate

mortgage, and I think that is a very promising alternative at this
point and would answer that question, sir.
The CHAIRMAN. Senator Fannin'? -
32—398—74—2
Senator FANNIN. Well, thank you, Senator. *
As I say I have great confidence in you, and as I stated before, I do.
realize we have some problems that are very serious. And I do not, I
certainly do not know the answers. But, as Chairman Long has ex-
pressed from the standpoint of his being home last week, I could speak
on the same subject because I was contacted by several realtors who
were vitally concerned and were giving me examples. For instance,
they say that with this long-term payment on a home, they buy a water
heater and it lasts for 5 years and they pay for the water heater about
10 times before they get through with the 30-year loan. Do you think
that it is possible to keep our housing program going forward with the
interest rates that we have facing us today? -
Mr. SIMON. Senator §§ interest rates obviously are a de-
terrent to people purchasing homes, and nothing is as great a concern
in our economic discussions at this point. I can say that nothing is of
greater concern to our President right now. The economic team met
yesterday afternon for 21% hours, and housing was the center of the
focus of our discussion. The President has directed us to come up
with remedial suggestions in this area. -
BALANCE OF TRADE
Senator FANNIN. One of the great problems that we have, of course,
today is that in our balance of trade, especially with the petroleum
products being increased in price, do you feel that we can, through our
negotiations in GATT, correct this situation? Here we have the great
imbalance and we have cars coming in this country at a 3 percent tariff,
and we have a problem of getting our cars into other countries for
double that, treble that, and sometimes 10 times that much. The rates
and tariffs have been going up to 50 or 60 percent, and is there any-
thing that the Treasury Department can do in that regard? -
Mr. SIMON. Yes, sir. And there is also a great deal that the Con-
gress and the Senate, in particular, can do about this problem. We
would be extremely optimistic on multilateral trade negotiations, but
we need one thing, first, and that is the successful passage of the trade
bill to give us the tools to negotiate, Senator. -
Senator FANNIN. You feel it is essential, if we are going to have ne-
gotiations in GATT, that the trade bill go through?
Mr. SIMON. I most certainly do, sir, with the highest sense of
urgency. -
OIL CountRY MONETARY RESERVES
Senator FANNIN. Are you alarmed at the tremendous amount of
reserves, monetary reserves, that will be accumulated by countries, like
Saudi Arabia, Iran, and those oil-producing countries?
Mr. SIMON. I think alarm would be a little too strong an adjective.
I believe for the foreseeable future, for the next year, that the invest-
ment mechanism throughout the world, Europe as well as our markets
here, can handle the investment. But, it is going to require other in-
vestment opportunities for these nations, as their reserves, indeed,
surpass their ability to spend them. The committee of twenty is ac-
tively working with the OPEC nations on methods to invest these
reserves in the future, and how these reserves will indeed be handled
in the context of international monetary reform.
5
Senator FANNIN. Do you see OECD as a factor involved in what
we would be able to do in this regard? - - - -
Mr. SIMON. Well, presently, these negotiations are in the Committee
of Twenty that are working on international monetary reform, Sena-
tor. What the ultimate mechanism would be is unclear at this point.
Senator FANNIN. Well, thank you very much. -
Mr. SIMON. Thank you, sir. -
The CHAIRMAN. Senator Hartke?
Senator HARTKE. Good morning, Mr. Simon.
Mr. SIMON. Good morning, sir. -
TAx CUTS
Senator HARTKE. Do you favor a tax cut at this time?
Mr. SIMON. No, sir, I do not, Senator Hartke.
Senator HARTKE. Would the Administration oppose a tax cut?
Mr. SIMON. Yes, sir, the Administration would oppose a tax cut.
Senator HARTKE. Would they veto a tax cut of any kind?
Mr. SIMON. I would not prejudge what the President may or may
not do on a tax cut. That decision has not been made by the President.
Senator HARTKE. If there were a tax cut proposal, would you have
any preference of methods employed? -
Mr. SIMON. We just feel that a tax cut at this point would be
highly inflationary, would stimulate demand that is already excessive.
Our problem today in the economy is one of supply, not of demand.
Senator HARTKE. Do you feel that the present inflationary trend is
a result of a shortage of goods rather than a situation where you
have excessive interest rates and excessive taxation? -
Mr. SIMON. I do. I think the excessive interest rates are a result of
the inflation. Obviously, they have a casual effect if they get this high,
there is no doubt about that. I would say that food and fuel are the
major components of our inflation problem. Certainly there are short-
ages coupled with the high prices that are charged by the OPEC
nations,
OIL SUPPLIES
Senator HARTKE. Is there a shortage of fuel at the present time, to
the extent that the price is increased as a result of the shortage or has
the price increased as a result of the action of the oil companies? . .
r. SIMON. Well, one might say that is one and the same thing,
because these shortages have been created by a group of nations that
own 67 percent of the world’s proven reserves. And for a time they
have the ability to raise the price to these clearly unworkable levels.
OIL CoMPANY PROFITs
Senator HARTKE. In regard to the high oil prices, is it not true that
the profits of the major oil companies have gone up remarkably. Could
we characterize them as excessive? -
Mr. SIMON. They have gone up remarkably and in one instance, I
guess, or in several, perhaps, they could be considered excessive, if
allowed to continue. - . . . . . . .
Senator HARTKE. Do you feel that it is the administration's respon-
sibility to thoroughly investigate why the oil prices have gone up so
6
nigh, in view of the fact that the present shortage has been alleviated
and Saudi Arabia has indicated that they are going to increase their
prºduction. We are not expected to have a shortage for the next 4 or
5 years? - - -
'. SIMON. Two things in that respect: Yes, we are investigating
and searching out the way they made their profits, No. 1. But, No. 2,
the President, in anticipation of these profits, recognizing that they
are profits due to the world price explosion in this commodity, re-
quested a windfall profit tax and submitted that proposal which is
being marked up in the Ways and Means right now. &
Senator HARTKE. Mr. Simon, would that investigation be made
available to this committee? - . . .
Mr. SIMON. Certainly.
Senator HARTKE. And will you do that?
Mr. SIMON. I certainly will, Senator.
TAx CUTS
Senator HARTKE. I disagree with you on the tax cut issue. The fact
is not one of shortage of goods, but an arbitrarily fixed situation on
interest rates and taxes. Most of the individuals, especially lower in-
come groups, are finding it difficult to make ends meet. Would it not
be preferable at this time to institute the recommendations of the
Social Security Advisory Committee and provide for an equalization
of the social security tax by providing that one-third be paid by the
º one-third by the employer and one-third out of the general
fund Ž .
Mr. SIMON. There again that just increases our “Federal economy”
and neglects the inflationary consequences. Our responsibilities to the
future of our country together requires us really not to do that again,
However tempting the immediate political or economic benefits. It may
be good politics temporarily, but it is lousy economics.
Senator HARTKE. It has been bad economics now throughout the past
8 or 10 years. - g
Mr. SIMON. Yes, sir.
Senator HARTKE. We continue to have tight money, severe high
interest rates, high tax policies, and all this has failed to reduce un-
employment or inflation. Why if you have a policy which has failed
for 8 to 10 years do you continue to pursue it?
Mr. SIMON. Well, of course, we are paying the price of our past sins
that probably go back to 1964, with the commencing of “guns and
butter,” and the massive Federal deficits. What I am suggesting is that
we have a new spirit, a new political will, if you will, Senator Hartke,
and have the proper balance of fiscal and monetary policies in this
country that will once and for all cure this problem we have got.
Senator HARTKE. You intend to continue this high interest rate, high
tax, austerity program—dangerously deflationary program 2
Mr. SIMON. That does not imply that. It implies just the opposite,
Senator Hartke, that once that we show a resolve to do something
about inflation, you will see the immediate response in interest rates.
Senator HARTKE. What do you propose to do about inflation then?
Mr. SIMON. Well, I– . . . . .
7
Senator HARTKE. You say it is food and fuel. Food and fuel are not
going to be increased as a result of any policy resolve, they are going
to be increased by production. - -
Mr. SIMON. I think that you have seen that we have been address-
ing the supply problem since 1972. All of the acreage set aside was re-
moved, and agricultural production this year will be at record levels.
And we have seen many key agricultural commodity prices decline
rather dramatically in the last three months. And so this is solving a
problem. It is bringing the problem of supply and demand in balance.
As far as fuel is concerned, that is of a longer term nature because
we cannot grow a barrel of oil as fast as we can a bushel of wheat. It
is going to take 3 to 5 years before we begin to see the product of the
additional oil exploration that is going to be going on in our Outer
Continental Shelf and the secondary and tertiary recovery and all of
the things that you have heard me talk about so much in the last 5
months.
GAs RATIONING
Senator HARTKE. Let me ask you about another subject.
As Administrator of the Federal Eenrgy Office, did you have ration-
ing stamps printed ? . . .
Mr. SIMON. Yes, sir, we did, Senator.
Senator HARTKE. Under what authority?
Mr. SIMON. The authority—and I have testified on this on several oc-
casions with our General Counsel, a very conservative General Coun-
sel, I might add, named William Walker—was in the clear legislative
intent involved in many testimonies that we must be prepared to im-
plement it in the event rationing became necessary. Now, printing of
the stamps takes 30 to 45 days, and we would not have been pre-
pared, obviously, if we did not physically have the stamps ready to
mail out. . . .
Senator HARTKE. Is it not true that there was no authority, that in
fact you exercised only anticipatory authority? -
Mr. SIMON. There was no statutory authority, Senator Hartke. It
was authority that we exercised by the spirit of the law with Congress
and by the mandate that we felt we had received in our testimony, so
º by a letter that we last submitted to Senator Montoya in
e8. I’ll] CºS. -
§ºr HARTKE. What was the cost of the rationing stamps?
Mr. SIMON. $12.7 million. 3. " .
Senator HARTKE. And that expenditure was made without any leg-
islative authority ?
Mr. SIMON. Yes, sir. -
Senator HARTKE. Mr. Simon .
Mr. SIMON. I might say, also, although this is a debatable point, that
is why we requested statutory authority for rationing. Under the De-
fense Production Act of 1950, we have the authority to ration and,
therefore, to go ahead and print the stamps. But, we felt that that was
a moot point, and one for which we should have a statutory base.
OIL CoMPANY ANTITRUST CASE
Senator HARTKE. Mr. Simon, the Washington Post, reported last
year that you directly intervened in an antitrust case in the Federal
8
Trade Commission on behalf of eight major oil companies who were
the object of that case and you were the Deputy Secretary of the
Treasury at the time. What comment do you have on that? . .
Mr. SIMON. I was also at that time, Senator Hartke, Chairman of
the Oil Policy Committee and, as such, I was working on stimulating
refinery construction and expansion in this country, as well as stimu-
lating exploration and production. And when that FTC complaint
was lodged against the oil companies, I wrote the chairman of the FTC
a letter outlining what my energy staff in the Treasury had done rela-
tive to the problems that that created, and we will have an ability to
testify on that. I was not aware at the time that that was a violation,
and it was published in the Federal Register and made public. .
We changed the mandatory oil import quota policy last April, a
year ago, and this was to encourage increased refinery construction in
this country, to give people the stability of supply because you cannot
finance $300 million to $500 million to build a new refinery or expand
an existing one if you do not have a source of feedstock. And the in-
dependents were going out to build refineries, and we had them come
to us and say— -
What are you doing in Government? Here you are telling us to go out and build
regneries, so we go out and we get our financing and we are going down the road
to build or to expand our refineries, and now you tell us that you have to dis-
integrate, and that you are not going to allow it any more. Now, our banker then
º to us and says: How can we lend you the money if the Government is doing
this? .
So, this problem was what we pointed out to the FTC.
I am not saying that they should not be disintegrated. I am just
pointing out that this is a potential danger, and a deterrent for new
refinery construction. 4 - . !.
Senator HARTKE. I will yield. Others have questions.
The CHAIRMAN. I would suggest that each Senator limit himself to
8 minutes during the first round of interrogation. -
Senator Ribicoff?
TAx REFORM
Senator RIBICOFF. Mr. Simon, what are the major areas of the tax
law that you feel should be reformed? -- -
Mr. SIMON. We presented a tax proposal in April of last year,
Senator Ribicoff, that pretty well covered the administration's view-
point on tax reform. - - -
Senator RIBICOFF. Well, would you repeat those for the purpose of
the record now % .
Mr. SIMON. Perhaps I could submit them all for the record, because
I will undoubtedly leave one or two out. -
Senator RIBICOFF: Well, would you mention those that you think are
the most important, then? - - - i
Mr. SIMon. We dealt with runaway plants, and foreign tax incen-
tives for foreign investment. We have proposed the removal of the
foreign depletion. We have proposed a change in the treatment of
foreign taxes and royalties of the oil companies, as far as their treat-
ment as a tax credit. Those are among the most important, as well as
our recent windfall profit tax proposal.
9.
Senator RIBICOFF. What measures do you advocate to bring a halt
to the galloping inflation which is affecting our entire economy? .
INFLATION CURES
Mr. SIMON. Senator Ribicoff, if I thought that I had a magic solu-
tion to cure our inflation problems, that would, indeed, be wonderful.
But, unfortunately, there is no fast or easy solution.
I would go back to what I said before, that we have to get back to
the fundamentals and work together to curb spending and to bring all
rof the excesses under control. And then we will see the reasonable in-
terest rates that Senator Hartke spoke of before and that we all want
So much. - -
Senator RIBICOFF. Do you think it can be solved by just that simple
statement? -- * : . . . . . . .
Mr. SIMON. Well, it is not that simple. It has to address ourselves to
the supply and capacity problems in this country that are creating the
shortages, versus the demand in this country, and we have to be more
aware so that we will have an ability to act, rather than to react, when
we are having these problems. The two recent examples are, of course,
in th; food area last year and fuel this year. And what will it be next
Vē8.I.' . - . . . . . . .
y Well, I hope we have learned our lesson, and that we will put the
proper mechanism into place that will study that as well as provide the
proper economic climate for Savings for the needed investment, for
expansion in all business in this country.
ECONOMIC FoRECASTs
Senator RIBICOFF. You know, I am somewhat puzzled. I have been
sitting on this committee now for 12 years, and during that entire
period I have seen a series of outstanding men, men of integrity, men
of ability, such as yourself who have come before this committee with
their proposals, with their theories, with their objectives and their
recommendations. And as my memory goes back over that 12 years, it
seems that almost all of you have been consistently wrong in your
predictions year after year, Democrats and Republicans alike. And
yet, the executive branch, the Congress, the people, the banking com-
munity, the business community, depend to a great extent upon the
recommendations of the Treasury Department. How can you explain
this consistent error or these consistent wrong predictions from the
Department of the Treasury & . . . . . . . . .
Mr. SIMON. Well, when you say predictions, predictions are made
by many people, primarily the economists, Senator Ribicoff, who are
in charge of forecasts and forecasting is a dangerous profession. I do
not know anybody who is gifted with the ability to see into the future.
It is a natural human propensity to believe that the policies that one
puts in are, indeed, the right policies. And so, therefore, things are
going to get better. I do not have any locked-in rigidity that my poli-
cies, whatever they turn out to be, are going to be at the outset the
right ones. What I am interested in is working cooperatively with the
Congress in addressing some of these, perhaps in a different way.
10
Senator RIBICoEF. Well, is there any place in Government that the
American people can rely upon for predictions and forecasts, as far
as the economy is concerned?
Mr. SIMON. Well, when one talks about predictions and forecasts
and confidence in Government, I think you can say that the overall
profession of forecasting, whether it be in Government or whether it
be in the private sector, errs on many occasions, as all economists erred
last year in the food price explosion and in the inflation rate. I am
afraid that no one foresaw that. So, I believe that our ability on fore-
casting in my recent experience in Government, has been relatively as
good as anyone else's. .
PROPOSALS TO CoMBAT INFLATION
Senator RIBICoEF. Then why could not Senator Kennedy's or
Senator Mondale's proposals for a tax cut be just as good as your pro-
posals? The Nixon Administration proposals have not worked. Why
would your proposals be more sound than the proposals of Senator
Kennedy and Senator Mondale' -
Mr. SIMON. Well, this is a disagreement on the substance of the
issue, Senator Ribicoff. We believe that the fundamentals in our econ-
omy are strong and that the weakness, as shown by the recent nega-
tive real GNP growth figure, is isolated in areas of our economy that
were affected by the energy problems—in the automobive industry
and in housing, due to high interest rates, as well as the energy prob-
lems. And we see that turning around. We see tremendous plant and
equipment spending plans and, if anything, we see them increasing.
So, the fundamentals are there and so why stimulate demand that is
already there, and pay the piper with a higher inflation rate later 2
CoMMISSIONER of INTERNAL REVENUE
Senator RIBICOFF. Mr. Simon, there is one particular man who has
served under you who has been doing an outstanding job. That is the
Commissioner of the Internal Revenue, Mr. Donald Alexander. Now,
I trust that you can assure the committee that you intend to have him
to continue to serve in that capacity. Have you made any commit-
mens to anyone concerning Mr. Alexander's continued service or re-
moval as Commissioner of Internal Revenue ! .
Mr. SIMON. Let me assure you, Senator Ribicoff, in my role as Dep-
uty Secretary of the Treasury actively for almost a year before I
moved to the Federal Energy Office, the Commissioner of Internal
Revenue reports directly to the Deputy Secretary of the Treasury,
and there is no one that I am closer to in the Treasury Department
than Don Alexander. And I cannot say that I can make a commit-
ment from him that he is going to stay but, boy, I certainly want him
and have told him so, and he has assured me that, indeed, he is going
to remain. --
Senator RIBICOFF. But, that is not the question.
Have you made any commitment to anyone that you will remove
Mr. Alexander?
Mr. SIMON. Absolutely not, sir.
11
INDEPENDENCE OF INTERNAL REVENUE SERVICE
Senator RIBICOFF. All right, now. Last year the Joint Committee on
Internal Revenue Taxation requested its staff to review the activities
of the Internal Revenue Service for the purpose of determining
whether any person whose name appeared on the so-called White
House Enemies List, were singled out for specially harsh or punitive
action. This staff study concluded that the Internal Revenue Service
had resisted White House efforts to use them for this partisan purpose,
and with the backing of Secretary Shultz was able to maintain the
independent role intact. I would like you to assure this committee for
the record that you will make every effort to maintain the integrity
and the independence of the Internal Revenue Service administering
the tax laws. - t -
Mr. SIMON. I will guarantee you that I will do that, as I have in
the past in my other role, Senator. -
Senator RIBICOFF. All right. Thank you, Mr. Chairman.
The CHAIRMAN. Senator Byrd?
Senator DOLE. Mr. Chairman, do you rotate on this committee ? -
The CIIAIRMAN. I am just reading down the list, Senator, and I have
Senator Byrd next. If I start from the top he is No. 10, and I have
you as number 11.
Senator DOLE. I do not care, but I have to be at another committee.
SECRETARIES OF THE TREASURY AND ENERGY Policy
Senator ByRD. I will yield to the Senator from Kansas.
The CHAIRMAN. Go ahead.
Senator DoDE. Mr. Simon, do you still have direct control over the
Energy Office? .
Mr. SIMON. No, Senator Dole. I will not have direct control.
Senator DoDE. Do you have any control at all?
Mr. SIMON. Well, control; no. Energy policy, economic policy, that
is a team mechanism. It always has been and always should be, in my
judgment. On a day-to-day basis, I do not believe that any outside
agency should control anybody. -
Senator Dole. That you will have some input? .
Mr. SIMON. Oh, certainly I will have some input in energy policy,
because energy policy and economic policy are inextricably integrated.
The economic policies in the troika will be integrated to implement
Project Independence, and will be involved in the conversations on
what directions we are going to be going, so, yes; I will be directly
and actively involved in energy in that respect, as well as any other
way I can be helpful. •.
John Sawhill was my Deputy, and as you well know, he is a very
competent person and I will help him any and every way I can.
OIL PRODUCTION INCENTIVES
Senator DoDE. Well, I think it is important because I think you have
done a good job in that office, and I think there are still problems
ahead. I would hope that we would not lose the experience that you
32—398—74—3
12
have gained because of a shift in positions. In that same area, we are
looking now at the so-called tax reform on the House side and where
they are planning on raising about $16 billion in revenues, as I under-
stand the package, and about $13 billion of that comes from the
domestic oil industry. -
Now, one of the causes of inflation, as I understand it, are shortages,
and it just seems to me they may, in effect, be driving the independent
oil industry out of business with some of the rather drastic steps taken
by the House Ways and Means Committee.
How are we going to have production in my State of Ransas and
other States of this country, if we take away all of the incentives from
the producer? -
Mr. SIMON. Senator, I agree with that. We cannot. Sometimes there
is a terrible tendency not to understand that the great majority of
those people out there in that oil world are independent, and when
people talk about the oil companies, they think that covers the entire
spectrum of the petroleum industry. They fail to recognize that 75
percent of the new holes that are drilled are those of the independent
producer. So, we have to be very careful about punitive legislation that
will destroy incentives.
TENDENCY SEEN TO PUNISIT THE OIL INDUSTRY
Senator DoDE. I think there is a tendency on the part of some, and
some in the Senate, from non-oil-producing States to punish the oil
industry. I understand that one of the reasons for the housing crunch
is the great increase in the cost of lumber, which is grown in the State
of Washington, and there has been a 71-percent increase in that. Now,
I have not seen many Senators around saying or suggesting that we
rollback the price of lumber. -
When they do not produce oil in their States it is pretty easy to
rollback the price of oil, like me saying, rollback the price of salmon.
We do not have any salmon in Kansas and it is a little distressing to
our industry when 100,000 people are working in that industry in the
State of Kansas, and another 100,000 are royalty owners, to have the
non-oil-producing representatives single out this independent indus-
try. I am not talking about the international oil companies, but about
the independents who have a stake in this country, and who need the
incentive to produce the oil we have said for the past 6 months is so
vitally needed. But there is at stake here, I think, the solution to the
energy problem. We are not going to solve it and become independent
by 1980 or any other year if we destroy the industry in the process.
Mr. SIMON. I agree with that, Senator. w
TAx CUTs
Senator Dole. Now, with reference to tax cuts, and I know it is very
popular, and I am a candidate this year, and no doubt there will be
a tax cut passed by the Senate because we pass everything in the
Senate. What would be the leadtime, if there were a tax cut, how long
would it take to help the economy? - - . .
Mr. SIMON. If our projections are correct, and indeed we believe
that they are, we have already seen the worst of the slowdown due to
13
the energy embargo, et cetera. The second quarter of this year will
show zero or slight growth, and then, in the Second half of this year,
it is going to show increased growth, and the tax cut would come just
at the wrong time. The impact of the tax cut would, at that point,
exacerbate our inflation problems.
Senator DOLE. So, from that standpoint it would not be helpful?
Mr. SIMON. It certainly would not, sir. - .
Senator DoDE. Well, does it really, do you really produce anything
with a tax cut? * , . -
Mr. SIMON. You produce more demand, and, as I said before, we
have sufficient demand right now. It is the supply that is our problem,
the shortages. - - - .
SLowdown IN THE GRoss NATIONAL PRODUCT
Senator Dole. Well, what percentage of the drop of 5.8 percent in
the gross national product has been due to a slowdown in auto Sales?
Mr. SIMON. The entire decline—and this is the difference in this
slowdown—was isolated to the automotive, the housing, and energy-
related activities in our economy. It is not a pervasive slowdown that
goes across the entire spectrum of the economy. It was specialized.
Senator DoDE. So, there are pockets and it is not a broad, nationwide
problem?
Mr. SIMON. No, sir.
Senator DoDE. Well, that is the point that has been made to me a
time or two, and it just seems r
Mr. SIMON Would you not think that the first thing that would
happen when automobiles drop as drastically and as quickly as they
did, that steel production is going to drop 3 But steel production is
going all out at present and capital spending plans are continuing at
record level. We have never seen a pervasive slowdown, or a recession,
or any definition that you wish to give during a period where capital
spending was at these levels. -
Senator DoDE. Is it not true that there is a fairly wide recovery now
in the production of automobiles with the medium size?
Mr. SIMON. Exactly. We believe in the third and fourth quarter,
when they have been able to retool to the extent that they do, with the
demand for smaller automobiles, there will be a significant pickup in
automobile sales. . . -
Senator DoDE. Those are the only questions I have, Mr. Chairman.
But, I would underline that I come from a food producing State.
We believe in the concept you stated earlier, the one way to relieve
this shortage is to provide an incentive. And we will produce the
wheat and the corn and, try to find some oil in our State if they do
not take away their incentive. But, I think there are some in this body
who may want to do that. .
Thank you.
The CHAIRMAN. Senator Byrd’
Senator BYRD. Thank you, Mr. Chairman. .
Mr. Simon, I want to congratulate you on your appointment to a
very important office, and I want to commend the President also for
being able to obtain your services. I think that my colleague from
14 .
New Jersey Senator Williams, summed it up quite well a little while
ago, when he commended the cool competence that you brought to the
position that you have held for the last year or so. .
Gover NMENT IN THE MONEY MARKET
May I ask you this: I know that you do not have the information
with you, but would you have your office—hopefully, reasonably
soon—provide for me information as to the extent to which the Treas-
ury Department or the Government has gone into the money markets
for funds for the 4-month period November 1973 to February 1974?
Mr. SIMON. Would you like that in agencies, federally sponsored
agencies, as well as Government? *
Senator BYRD. Yes. The total Government.
Mr. SIMON. My last memory of it, and I have not looked at these
numbers in about 6 months, Senator, it was close to 62 percent of the
Government's total involvement in the capital markets, which I think
is awful.
Senator ByRD. Thank you.
T)FFICIT SPENDING
Now, there have been several questions in regard to inflation and
how best to get inflation under control. Would you agree that one way
the Government is not likely to bring inflation under control is to
continue this tremendous deficit financing which we have been involved
with for the past 5 or 6 years?
Mr. SIMON. Yes. Almost 10 years. Yes, sir. I definitely agree with
you. . -
Senator ByRd. So, these continued heavy deficits have not solved our
problems at this point; have they? I guess you would agree with that?
Mr. SIMON. Yes, sir. -
Senator BYRD. And if you accelerate or increase these deficits by
reducing revenues, then does it not tend to stimulate inflation rather
, than to curb inflation?
Mr. SIMON. It most certainly does, Senator Byrd.
Senator ByRD. Would you agree that we must bring the deficit spend-
ing under control, and bring about a balance between fiscal and mone-
tary policy, if we are going to accomplish the objective of reducing
inflation? -
Mr. SIMON. Yes, sir. We would have to, as I said, go back to the
fundamentals and stop attacking the results of the problem, Senator.
INTEREST RATES
Senator BYRD. How do you see interest rates going in the next 4 to
6 months? - - -
Mr. SIMON. Forecasts. I am probably not any better at forecasting
than anyone else. But, if indeed we are able to harness the inflation
problem over the next 4 to 6 months, we could see a significant reduc-
tion in interest rates, although it is going to be counterbalanced by
what we believe will be a strong economy in the second half of this
year, with a demand for funds, which is offsetting. So, the long rates
probably would be able to decline, not as much as the short rates.
15
The short rates, obviously, are reestablishment of the yield curve, if
you will, with short rates down quite significantly. - .
GoverNMENT IN THE MONEY MARKET
Senator BYRD. Would it be correct to assume that the more that
the Government itself goes into the money market, the more that tends
to stimulate high interest rates? - - t
Mr. SIMON. Yes, indeed. Excess demand. But, more important than
that, if the number is still approaching that number that I mentioned
a few minutes ago of 62 percent as far as the Federal Government's
total involvement in the capital market, including Treasury bills and
coupon securities as well as federally sponsored agencies, then who
is disadvantaged ? Who becomes the disadvantaged? Is it the Xeroxes
of tomorrow, the State and local government financing? And, obvi-
ously, the pool of savings to supply the money is not infinite, and the
more we take, obviously the higher rate that people must pay at the
bottom end of that ladder. - .
Senator BYRD. So the more that the Government goes into the money
markets, the more money the Government needs, the more money it
must borrow, the more competitive, of course, the money market be-
comes, and the higher the interest rates that everyone, has to pay, in-
cluding the public? - . , ºr
Mr. SIMON. Yes, sir. .
Senator BYRD. And the cost to the Government now, as I recall in
the present budget, and the new budget, which Congress is working
on, is already $29 billion. There are the interest charges that the Amer-
ican Government pays for the money which it borrows from the
public? - - .
Mr. SIMON. That is correct, sir. .
Senator BYRD. That figure is a very substantial proportion of our
entire Federal fund budget, and it goes only for that one purpose—of
paying the interest on this debt. And I assume that you feel that
everyone would be better off, including the average citizen, if those
interest charges, and the costs to the Government of the interest that
it must pay, on the national debt, were not so high? .
Mr. SIMON. Indeed we would, sir.
Senator ByRD. Thank you, Mr. Simon.
Thank you, Mr. Chairman.
The CHAIRMAN. Senator Packwood?
MoMETARY POLICY
Senator PACKwooD. Bill, I share some of Senator Ribicoff's fears. I
have not had his length of experience on this committee and I’ve been
on the Banking Committee for just 5 years. But, for these past 5 years,
I have heard all of the defense and well-intentioned testimony, I think,
from economists of this country, conservative ones and liberal ones,
and I have come to the conclusion that indeed economics is an art; it
is not a science. - - .
Prediction is a hazardous business. You have alluded now to the
proper balance between fiscal and monetary policy. But, for the life of
me, I do not know what that balance is. I am not sure what you mean
16
by that. I know in the first 2 years I was here, in 1969 and 1970, the
Administration talked about high interest rates and, hopefully, an
effort toward balancing the budget, and said it would bring interest
rates down eventually, and would result in price stability. That did not
work, and price instability was not as bad then, but inflation con-
tinued and ran around 5 or 6 percent. What does work? What do you
mean by a proper balance between monetary and fiscal policy &
Mr. SIMON. Where you are not running massive deficits on a con-
tinuing basis, Senator Packwood, and forcing monetary policy to bear
the brunt of economic stabilization all alone. That is what is meant.
CAUSEs of INFLATION
But, also, collaterally I mentioned that one must also take a look at
what causes inflation and what has caused inflation. We have had
shortages in some of our critical commodities—internationally traded
raw materials, the food and fuel problems we know so well—and our
ability to anticipate this problem has not been very good.
Senator PACKwood. But, we did not hit those shortages severely
until the summer of 1973 or a bit earlier.
Mr. SIMON. Basically, it started with food in late 1972. -
Senator PACKwood. Yet, we had a substantial inflation, not 10 per-
cent, but a substantial inflation even before the shortages developed.
Mr. SIMON. This inflation started in the period of the Vietnam
buildup, when we were financing massive deficits, and that was the
start, and we are still paying the penalties for it.
Senator PACKwood. Well, I can hardly defend the Congress’ fiscal
responsibility, but this administration continually sends us a budget
with a $10 billion to $20 billion deficit. That's what they start with,
and then we get ahold of it and make it worse. * .
Mr. SIMON. I would hope that the best first step that we have seen
is the new budget reform, as far as Congress looking at it as a whole,
rather than just on an ad hoc basis, and I think that is a great first
step. . . .
. FULL EMPLOYMENT BUDGET
Senator PACKwood. Do you accept the concept of a full employment
budget as being noninflationary 2 . *.
Mr. SIMON. A full employment budget concept is basically an indi-
cator, and that is what I accept it as. I am not, as you know, Senator
Packwood, an economist, so I do not have the rigidity of concepts, if
indeed—no, I should not say that because that is calling the economists
rigid, and I do not say that. But, I do not have any of these preor-
dained concepts. -
Senator PACKwood. I have no other questions, Mr. Chairman.
The CHAIRMAN. Senator Mondale? .
UNEMPLOYMENT
Senator MondalE. Thank you. Mr. Chairman. - .
This week's Newsweek has quite an article about you. You may have
read it. It makes three or four points about your position in economics.
17
No. 1, it says you would be willing to take the chance that unemploy-
ment will stop at 6 percent, and you might even permit unemployment
to rise to 7 percent, is that correct? . . -
Mr. SIMON. No, sir, it is not.
Senator MoRDALE. What is your position on unemployment?
Mr. SIMON. I am as sensitive to the problem of the unemployed in
this country as any American would be, and I would be in favor of
action to address the problem of unemployment. And there, again,
this was a major topic as far as anticipating what an unemployment
rate might be, as we looked toward the balance this year with the
President yesterday. Senator, I would suggest that I have been ac-
cused of lots of things in magazines and newspapers, and it has been a
favorite sport of lots of people. But, I have made no comments to
newspaper reporters or editorialists or otherwise, on what economic
policies I might embrace, because it would be improper until you,
Senators, confirm me.
Senator Mondale. What do you consider to be an acceptable
unemployment rate?
Mr. SIMON. Our goal should be the full employment goal that we
have embraced which is in the area of 4 percent. We can argue down-
town whether 4 percent is outmoded or not. But, that is strictly the
direction we must work toward. * ,-
Senator MoRDALE. In other words, you consider 6 percent unaccept-
able, and you would move with economic policies to avoid it?
Mr. SIMON.Yes, sir. -
Senator MoRDALE. And what economic policies would you pursue?
Mr. SIMON. We are looking at a number of alternatives, and I would
rather not at this point, Senator Mondale, say that this is the way we
would go, or that way. . - - -
Senator MoRDALE. Well, what are the range of remedies you are
considering then Ž f
Mr. SIMON. Well, one can look at public service employment as,
perhaps, a way to reduce unemployment. - - -
Senator MoRDALE. T)o you think that the present budgetary pro-
posals for public service employment, I think of $350 million, is
adequate? -
§. SIMON. It all depends on what level of unemployment you are
looking at and by how much you are attempting to alleviate unem-
ployment. - -
Senator MoRDALE. I am not trying to debate you. We are looking
at the current economy and we are looking at inflation. We are look-
ing at the current employment rates and we are looking at economic
projections. Do you think in the light of that the current request of
$350 million for public service employment is enough 2 . . . . .
Mr. SIMON. If unemployment is to increase, as we believe it will,
gradually over the near term 6 percent, probably not, Senator
Mondale. - - . . .
Senator MoRDALE. Do you anticipate unemployment around 6
percent? -
Mr. SIMON. I do not expect it to get there, personally, no, Senator.
Senator MoRDALE. The public service jobs remedy would, in effect,
18
try to provide public employment for the unemployed, do you have
any proposals for heading off unemployment in the private sector?
Mr. SIMON. Not at the present, Senator Mondale, no, sir.
Senator MoMDALE. None? -
Mr. SIMON. But we are going to be studying these problems and
they have started these studies already and will be addressing these
in anticipation of something that may indeed not occur.
UNEMPLOYMENT INSURANCE
Senator Mondall. What about unemployment insurance? What
do you think about that? -
Mr. SIMON. The President has recommended increased unemploy-
ment insurance—benefits, I believe the increase is $1.1 billion—recog-
nizing that we needed broader coverage due to the energy problem
and making people come under this act that heretofore did not, and
we would hope that that would receive favorable consideration in
the Congress. - .*
Senator MoMDALE. This Newsweek article goes on to say that the
new Secretary wants to get back to conventional, Republican busi-
nessmen's balanced budget economics. He wants to try and bury the
full employment budget concept. He would like to move toward a
balanced budget. He does not want a housing industry that produces
above 2-million units a year. Would you comment on that ? -
Mr. SIMON. I just do not know where that author got any of those
comments. $,
Senator MoRDALE. You think this is sort of a creative novelist that
wrote this? - -- .
Mr. SIMON. I think that they check around and say, “What does this
fellow believe,” because, obviously, definitively I would not make
Statements. .
FULL EMPLOYMENT BUDGET CONCEPT
Senator Mondalf. This is a good chance for you to tell us what
you believe. Are you against a full employment budget concept?
Mr. SIMON. As I said, I consider the full employment budget con-
cept a good economic indicator basically. I probably could be described
as a financial conservative, so I would lean more toward the balanced
budget concept on an actual basis. There is no doubt about that. But,
I do see the benefit in running deficits during periods of economic
malaises, economic slowdowns, to help get the economy out of its
slump, but not in respect to what has gone on where we have had 14
budget deficits in the last 15 years, some of them quite massive, that
have created this major problem that we have got right now.
Senator Mondar E. I believe a few years ago the President of the
United States in the state of the Union message endorsed the concept
of a full employment budget, and said that that is a good way to guide
the national budget. Do you accept that?
Mr. SIMON. Yes; I do accept that.
. . . } Housing
Senator Mondale. All right, now, what about the statement that you
would oppose housing starts exceeding 2 million per year? -
19.
Mr. SIMON. That is just not correct. Our housing goals have been
stated and that is just an absolute untrue statement. . . .
Senator MoRDALE. How many housing units do you think we should
be producing a year? -
§
Mr. SIMON. I think we can produce in the area, as is the President’s
goal, of 2,600,000 housing units a year. And there again we have pro-
vided many new mechanisms in the last few years that contribute to
this problem that Senator Byrd spoke of in our preemption of the
capital market and the Fanny Mae, and Ginnie Mae, and tandem pro-
grams that assist housing during periods such as this. * .
WAGE ContROLs
Senator MoRDALE. Now, on the wage front, “Simon agreed with
Dunlop that some system of control should continue, even if it is volun-
tary.” Is that accurate? -
Mr. SIMON. I say there what the administration suggested, and that
was the monitoring techniques of the Cost of Living Council to preach
moderation in price and wage increases. I think it is self-defeating to
have explosive wage increases this year.
Senator MoRDALE. Would you have controls on wages?
Mr. SIMON. Outright controls? I do not favor wage and price con-
trols, no, sir. I would propose just what was proposed, and I endorse
that, which is the monitoring system, with the exception, of course,
of health care, which was one exception that the President asked for.
And also the potential of construction as well.
SPENDING CURBs
Senator MoMDALE. All right now. - -
On two or three occasions in your testimony you said we have to curb
spending. By how much and in what sectors?
Mr. SIMON. That is a very difficult question to answer. It is not the
finite thing, as Senator Packwood said. In the science, if you wish to
call it that, of economics, there is no formula that says if we cut by
this much, then we will cut the inflation rate by that much.
Senator MoRDALE. Well, I am using your words. You said we should
curb spending. What do you mean by “curbing spending’”
Mr. SIMON. Yes. We should not continue to have year after year
after year the massive deficits that we have had. And as I said, in
14 of the last 15 years. -
Senator MoRDALE. And would you curb spending this year? Would
you reduce?
Mr. SIMON. At this point in the economy, I think that some stimula-
tion is, indeed, needed, and that our forecasts for fiscal 1974, which
is in the area of a $41% billion deficit, is about on target.
Senator MONDALE. So, when you say curb spending, you are not
referring to this year's budget? - <& . . .
Mr. SIMON. No, sir. . -
: .
- - : . ". . . ;
INFLATION CURBs . . . . .
Senator MoRDALE. What would you do about this excessive infla-
tion ? What are the elements of assigning a plan to restrain inflation
- . . . . . . . . . . . . . . . . . . . . . . . ºf
without unemployment?
32—398–74—4
Mr. SIMON. Here, again, I have no magic solution. -
Senator MoRDALE. Well, I mean, you must have some ideas? This
is the key issue in our country today. - - -
Mr. SIMON. Indeed it is, sir.
Senator MoRDALE. And you are going to be the person in charge of
it. You must be able to tell us something about what you intend to do
to restrain inflation.
Mr. SIMON. There, again, I can go back and stand on my answer
earlier of having the fundamentals in place.
Senator MoRDALE. What do you mean by fundamentals?
Mr. SIMON. It does not mean that monetary policy has to exert the
major portion of the role in our economic stabilization program. We
should address the problems of supply, just as we have addressed them
in agriculture. We can look forward to the fruits of the decision in the
agricultural area, where we are going to produce a record crop this
year, and bring on the additional supplies of petroleum in this coun-
try, the major components there again being petroleum and food which
gave us our problem before.
LowerTNG PRICES
Senator MoxoALE. You said it would be 3 to 5 years to bring on
more petroleum. What would you do to bring down prices now %
Mr. SIMON. Farm prices have already declined. Petroleum will
take a little bit longer, there is no doubt about that.
Senator MoRDALE. If I can just have one more minute. As I under-
stood, you would not reduce spending, you would not permit unem-
ployment to rise. You are against wage and price controls, but you are
going to bring prices down. Now, tell me how are you going to do it?
Mr. SIMON. When you addressed the problem of supply, it is not
done instantly, Senator Mondale. That is the problem economics play
to a much slower drummer, as they say, and it is going to take us some
time to cure these problems. They are not going to be solved this year.
Senator MoMDALE. So your answer to inflation rests solely on the
supply side? -
(* - FISCAL DISCIPLINE SEEN NEEDED
Mr. SIMON. It rests on the supply side and on the fiscal discipline side
as exercised by our Government, which requires a political will and a
cooperation between the Executive and the legislative in paying atten-
tion to the fundamentals. And, as Isaid - -
Senator MoRDALE. When you talk about political will, you are not
asking us to do anything, so what do you need the political will for?
Mr. SIMON. Well, when you say we are not asking you to do any-
thing, we are asking for all of us to get together and stop this continued
increase in spending that we have had for the past 10 years. -
Senator MoRDALE. You just said that you would not change the
budget though. You said the budget is okay. . . .
Mr. SIMON. The budget is okay. The budget is in place for this year,
and also, we are required to put a budget into place a great deal in
advance, Senator Mondale.
The CHAIRMAN. Now, as a matter of procedure, the Democrats on
this committee have something of a problem because the Democratic
21
caucus is meeting at this very moment. I have received a notice urging
that the Democrats attend that caucus. I believe it also well that we on
this committee try to conduct ourselves with a sense of urgency in
getting on with our business. I would suggest that we simply proceed
with this hearing and those who would like to attend the caucus can go
ahead and attend the caucus, while our Republican friends can ask
their questions. • – -
The Staff can inform any Senator whether the question he had in
mind asking the Secretary has already been asked of him, and then
we can proceed on with our business. If those who are here have
finished their questions prior to 11:30, then I would suggest that we
recess until 11:30. Is that all right? -
Senator MoRDALE. If we can get back, I would like to ask some more
questions. Could the nominee return?
The CHAIRMAN. I would suggested that in the event those of us who
remain here have concluded the questions that we want to ask Mr.
Simon, that the committee at that point simply stand in recess until
11:30. I assume that by that time the Democratic caucus will conclude
its business and we can come back. - º
I would suggest that we continue by our 8-minute rule a while longer
because it might help to get on with the business. I would like to ask
one or two things of the Secretary about the energy crisis.
ENERGY CRISIS AND OIL COMPANY PROFITs
Now, Mr. Secretary, are you aware that the general public, rightly
or wrongly, has the impression that the energy crisis was something
that was dreamed up by the oil companies for the purpose of maxi-
mizing their profits?
Mr. SIMON. Unfortunately, Mr. Chairman, I think that is probably
correct. Yes, sir. l
The CHAIRMAN. I come from an oil-producing State, Mr. Secretary,
and I believe that this impression is probabbly the majority view in
Louisiana, where we try to produce more oil for the size of the State
than any State in the Union. In your judgment, is that correct or not?
Mr. SIMON. Yes, sir, that is. And we have all worked terribly hard
to attempt to explain this complicated subject to the American people,
and it just - -
The CHAIRMAN. Well, now, you said that you think it is correct that
people have this impression. But I want to know this: is that impres-
sion that they have correct? - - .
Mr. SIMON. It most certainly is not, sir.
REASONS FOR THE ENERGY CRISIs
The CHAIRMAN. How do you believe that this energy crisis came
about? - . -
Mr. SIMON. Chairman Long, this energy problem has been coming
on this country for a long time. It has been warned about by many
experts long before I came to Washington. One can go back to the
Philips decision in 1954, to the regulation of natural gas at the well-
head and at uneconomic price levels, that was a disincentive to ex-
ploration for natural gas in this country. Production peaked in 1970.
22
Exploration peaked in 1956. All during this period of the past 20
years, the demand has continued to grow between 4 and 5 percent, and
today we are producing 11 million barrels a day in this country, and
we are consuming over 19 million barrels a day. This shows you the
extent of our own imbalance in this country between our supply and
demand, and the result is that we have to rely on foreign nations, some
of them obviously insecure sources for our supply. We have had a cut-
off of this supply four times in the last 25 years. The first three times
it did not make any difference because we were in surplus, and finally
it took the embargo, when we were no longer in surplus, to focus the
attention on this problem here in this country.
The CHAIRMAN. Well, with about half of our energy coming from
natural gas, once we had a situation where the producers were required
to sell that gas for about one-quarter the price that the other fuels were
selling for on a Btu basis. That almost had the effect of dictating that
here was going to be a shortage of gas, did it not? - .
Mr. SIMON. Yes, sir, it most certainly did. It was predicted. We
were warned about it continually, and there have been many attempts
to de-regulate it. We have a bill up here now to de-regulate natural gas,
as you know, Mr. Chairman, that we feel is one of our highest priori-
ties in the energy area. -
The CHAIRMAN. In other words, the effect of that decision meant
that everybody who could get gas was going to want to get it and
change over from oil or coal, while at the same time it reduced the in-
centive of the producer to provide more gas, did it not ?
Mr. SIMON. That is correct, sir. -
The CHAIRMAN. So it was just a matter of time before gas was
going to be in very short supply—not because of the supply going
down, but because of the demand increasing so rapidly?
Mr. SIMON. Yes, sir.
Ori, AND FREE TRADE
The CHAIRMAN. I know that a lot of people think that free trade
would solve all problems, and I can understand how they sometimes
arrive at that conclusion, that there would be Heaven on earth if
you had a complete free trade. But from a complete free trade point
of view, did it not make sense that this Nation should permit the Near
East, where the oil can be produced so much more cheaply, to ship
us a great deal of oil rather than produce it here? I mean, strictly from
a free trade point of view? -
Mr. SIMoS. From a free trade point of view, yes. But, one might
say if we did not have a quota system, it has been argued that there
would be a disincentive for domestic production to go up also, if we
allowed all of that cheap oil to come in, so you can argue both sides.
The CHAIRMAN. Well, I think my first economics professor told me
that in Sophomore economics you are taught to understand how it is
supposed to work, and then you spend the rest of your time studying
why it does not work that way. In the real world it would be desirable
to have less imports, and then have a reliable fuel supply for national
security purposes, if you have to anticipate that those other countries,
not the companies, but the countries, might proceed to get together to
raise the price, and you could be very much disadvantaged. And that
is, in effect, what happened to us when these OPEC countries got to-
23
gether and demanded much higher prices for oil, and also cut off our
supply. tº sº
Mr. SIMON. That is correct, sir.
OIL COMPANY PROFITs
The CHAIRMAN. Now, do you regard the profits that the oil com-
panies have been making this last year as obscene 2 -
Mr. SIMON. I have said that “obscene” was an adjective that I would
not use to describe the profits. We did a study in the Treasury Depart-
ment of the long-term profitability of the petroleum industry from
1958 through September 1973 as related to other manufacturing in-
dustries in this country, and found that they were in the middle range
of profitability. -
One has to look at a longer period of time before people can believe
that, indeed, they are making unreasonably exorbitant or obscene
profits. However, there was one area that we felt, with the arbitrary
increase in the price of crude made by the OPEC nations, who control
67 percent of the world’s reserves, that this represented a per se wind-
fall profit, and that is why we recommended to the Congress a wind-
fall profit proposal directed at crude oil. . -
The CHAIRMAN. What percentage of these increased profits have
been in the international oil area as compared to the domestic area 7
Mr. SIMON. It has been growing each year, and now the major por-
tion of the profitability of the multinational oil corporations are in
their foreign investments. But, it is not only their foreign investments.
Profits have come from their tanker fleets, exchange rate fluctuations
of the dollar last year, and from their refinery and marketing opera-
tions. It is not just from the price of crude oil. -
The CHAIRMAN. The thing that concerns me is that we hear a scream
about the increased profits of the oil companies, and my impression is
that at least 75 percent of those increases is in the foreign area or
international area—yet when we seek to do something about it, the
proposals come through to clobber the domestic producers where less
than 25 percent of those profits are. Now, can you give me some en-
lightenment on that subject?
Mr. SIMON. That is true, Mr. Chairman. I do not know what the
exact percentages are for each company. It yaries company to com-
pany on their international operation and domestic operation. But,
there is a propensity at this point to penalize the entire industry, and
it falls very heavily on a segment of the industry called the Inde-
pendents who provide a great competitive function in this oil industry.
And I would just hope and pray that the infinite wisdom of Con-
gress is going to take hold finally and that we do not do anything puni-
tive to this industry, which would be terribly counter-productive to
our country and our economy. - - -
The CHAIRMAN. Is it true that the only way we are ever going to be
able to say grace over our own destiny in this country, where energy
is concerned, is to develop our own capacity to produce our energy
requirements? It is true that in order to do that you are going to
have to permit the domestic producers to make enough profit and
have enough incentives to expand and produce a great deal more,
unless you want to nationalize the industry and have the Government
do it for them?
24
Mr. SIMON. A reasonable profit, yes, sir. I agree with you.
The CHAIRMAN. Senator Hartke 2
INTERNAL REVENUE SERVICE
Senator HARTKE. Mr. Simon, there has been a report that there is an
intended change in the operation of the Internal Revenue Service in
the offering as to whom the Internal Revenue Director would report
to. Would you have him continue to report to the Deputy Secretary or
the Secretary 3
, Mr. SIMON. Basically, on a day-to-day operational basis concerning
the problems of the Internal Revenue Service, he would contact the
Deputy Secretary, as I say, for the run of the mill things. When there
are particular problems that might involve some sensitivity, I would
always go to the Secretary. In the case of the relationship between
George Shultz and myself, we would go through those problems to-
gether during those visits.
, Senator HARTKE. I am not speaking now of whether or not you con-
tinue the operation with the Secretary or the Deputy Secretary. What
I am asking is whether or not you intend or plan to have the Internal
Revenue Director report to someone of a lesser stature? -
Mr. SIMON. No, sir.
- : TAx REFORM
Senator HARTKE. Do you have any plans for tax reform whatsoever?
Mr. SIMON. Yes. Our proposal would limit artificial accounting
losses which are the basis of tax shelters. It was directed to the petro-
leum industry, for example, and provides that a person could not get
a write-off, a tax accounting write-off, if you will, unless he had in-
come from his investment or it was an actual, not an artificial, loss.
It involved petroleum and real estate, both, and is designed as a limi-
tation of the accounting loss. . - E
Senator HARTKE. This deals with the artificial accounting losses.
Is that what you are talking about? - -
Mr. SIMON. Yes, sir.
Senator HARTKE. What about the minimum tax?
Mr. SIMON. Yes. We have a minimum tax proposal. I have been out
of the Treasury for 5 months now, and the specifics of the minimum
tax proposal, I could supply for the record.
Senator HARTKE. What is your intention in that regard? How much 2
Mr. SIMON. How much? -
Senator HARTKE. Do you know what the percentage is?
Mr. SIMON. I do not have the percentage, Senator Hartke.
[The Department subsequently supplied the following:]
- - [From the Treasury Department's “Proposals for Tax Change,” Apr. 30, 1973]
EXPLANATION-I. MINIMUM TAXABLE INCOME (MTI)
GENERAL EXPLANATION
. . . . . . . . . . . . . . . . . . . 1. SUMMARY OF PROPosAL -
The proposal is designed to assure that every individual will pay a reasonable
amount of federal income tax relative to the size of his income. This will be ac-
complished by requiring that every individual's taxable income, to which the
25
present graduated tax rates are applied, be no less than his “minimum taxable
income,” which is approximately one-half of his adjusted gross income expanded
to include specified tax preferences which represent exclusions from income un-
der present law. - -
The minimum taxable income will be determined as follows: -
(i) By adding to present law adjusted gross income the total of percentage de-
pletion in excess of basis, the excluded one-half of net long-term capital gains,
exempt earned income from foreign sources, and the nontaxable bargain element
in certain stock options to arrive at Expanded Adjusted Gross Income (EAGI);
(ii) By subſtracting from EAGI, the deductions for personal exemptions, a $10,-
000 floor, extraordinary medical expenses, extraordinary casualty losses and
investment interest (and investment expense) to the extent of investment income
to arrive at the MTI Base ; and -
(iii) By dividing the resulting MTI Base by two to arrive at “minimum tax-
able income.” *. , .
Every individual will be required to pay tax on the greater of his minimum
taxable income or his normal taxable income computed in the usual manner.
The specified exclusions * and all itemized deductions will be permitted to op-
erate freely within the area of up to one-half of income, but in all events the
other one-llalf of income will be subject to income tax. Because of the $10,000
floor, the adjustments for extraordinary medical expenses and casualty losses
and other reasons, MTI will have little or no impact on taxpayers in income
brackets below $50,000. -
MTI is not a form of a “minimum tax” like the provision in present law which
imposes a flat 10 percent tax on specified “tax preferences.” Instead, MTI will
be part of the regular income tax structure in which the rates of tax range from
14 to 70 percent. MTI will be a more effective solution, consistent with our gradu-
ated tax rate system, to the problem to which both MTI and the present Minimum
Tax are directed.
The proposed MTI provision, in combination with the proposed Limitation on
Artificial Accounting Losses (LAL), will be substituted for the present Mini-
mum Tax on individuals.” Under these provisions, the contrast to the present
Minimum Tax which treats all tax preferences the Same, different types of pref-
erences will be separated and treated differently. IAL will apply to deferrals of
tax and MTI will generally apply to exclusions from tax.
r * * 2. 1. - iſ: §
Senator HARTKE. May I ask you what is your attitude concerning
the Ways and Means decision to remove the percentage depletion?
Mr. SIMON. We have favored the removal of the foreign depletion
allowance, and we have opposed the removal of the domestic depletion
allowance. We have felt two things about the domestic depletion
allowance. One that it was a useful carrot for the independent pro-
ducer to go out and raise his funds to drill domestically. And, two,
the economists have argued quite compellingly that in former years
the depletion allowance has resulted in a lower price of gasoline and
heating oil to the consumer. -
Senator HARTRE. What about the foreign investment tax credit?
What is your position on that? - .
Mr. SIMON. We recommended that the tilt be changed from the
incentive for foreign drilling to domestic drilling, Senator Hartke.
Senator HARTKE. Would you follow the provisions of the Burke-
Hartke bill, or not? The Burke-Hartke bill, in case you have for-
gotten -
Mr. SIMON. Yes, sir.
1. Other exclusions from income which affect primarily lower and middle income taxpayers
will not be subject to the MTI limitation. These exclusions from income which will not be
affected by MTI include amounts received under health and accident plans, rental value of
parsoniages, scholarship and fellowship grants, etc. - .
* The present Minimum Tax on corporations will be retained. The principal application
of MTI will be to individuals, but it can readily apply to estates and trusts also. .
26
Senator HARTKE. Provides very simply that the foreign tax credit
should be shifted from a credit to a deduction. - *
Mr. SIMON. We just dealt specifically with the oil companies, Sen-
ator Hartke. - -
Senator HARTKE. Do you intend to apply it to just one segment of
industry? -
Mr. SIMON. At this point. -
Senator HARTKE. You do not believe that that is discriminatory !
Mr. SIMON. Well, we believe
Senator HARTKE. That is discrimination. It discriminates against
the oil companies and it is a favor for the other big international
corporations, is it not?
Mr. SIMON. We believe the recent explosion in the tax and royalty
payments could not be literally called a tax credit item, and that should
be changed.
Senator HARTKE. You do not believe it should be applied to the
copper industry, for example, which is in extremely short supply now Ż
Mr. SIMON. We did not address ourelves to that; no, sir.
OIL COMPANY PROFITS
Senator HARTKE. When Senator Long asked you whether or not you
consider the profits of the oil companies obscene, is it not true that
Continental reported more than a 100-percent increase in profits, in
their first quarter and Occidental over 1,000 percent? -
Mr. SIMON. Continental? I do not know whether they did.
Senator HARTRE. And Standard Oil of Indiana a 71-percent
increase? - - -
Mr. SIMON. And Exxon 39 percent.
Senator HARTKE. And Exxon is the lowest, is that right?
Mr. SIMON. It is the lowest I have seen recently. t
Senator HARTKE. Yes. Most of them average around about 70-percent
increase in profits. Do you consider that an unconscionable situation in
view of the fact that most people are facing a difficult time making
ends meet in this inflation ridden society. . . -
Mr. SIMON. If I believed, Senator Hartke, that this was a situation
that was going to continue, yes, I would consider that most exorbitant.
Indeed I would.
Senator HARTKE. And would you propose some type of tax on that?
Mr. SIMON. If indeed that was to continue. I consider this a one-
time event, looking at the prices in the past year. But, when one talks
about, you know, American business, admittedly the oil companies,
who operate multinationally, experienced greater profitability but
1973 was a very, very good year for American business. I think I read
recently that Alcoa, just a couple of days ago, reported a 126 percent
increase in their profits. So, it has been a good year. But there again,
we have to look at the overall 10- or 15-year experience and how it
relates and what is the average growth rate. I think that you will find
that the average annual growth in the petroleum industry has been at
the lower level of profitability, and return on equity has been about,
I think, 10th or 11th out of 30.
- 27
INTEREST RATES
Senator HARTKE. You said you had no idea about how high interest
rates would go. Are we going to have a 12 percent prime? Is that not
the projection? .
Mr. SIMON. I have not seen the forecast of the 12 percent prime, Sen-
ator Hartke, and I am not saying that it is impossible. When I said,
I believe, that I did not know anything about interest rates, I was
questioning my ability or anyone's really to forecast them. .
Senator HARTKE. Even with a 10-percent prime rate, is it not true
that as far as the general business is concerned, and the stock market
specifically, that it increases the price of stocks, and that makes them a
less desirable investment than other types of debt instruments? -
Mr. SIMON. I think one found that looking back at the history of
the 1950's, that a little bit of inflation was considered quite healthy for
stocks and, indeed, it increased the price. But, I think the experience
in the 1960's and indeed, so far into the 1970's shows that inflation is
bearish for stocks, and people are going to commodities. .
Senator HARTKE. And high interest rates makes the debt instrument
more attractive, is that not true? And, therefore, it makes the invest-
ment opportunity less attractive. -
Mr. SIMon. The equity market, yes.
Senator HARTKE. My time seems to be up. .
- II." HANSEN. Please continue as far as I am concerned, Senator
Hartke.
TAx CUTS AND A BALANCED BUDGET
Senator HARTKE. Let me just ask you two more questions quickly.
The only time in the recent history in which you have had a substan-
tial improvement in the debt since 1961 was following the tax reduc-
tion which we accomplished in 1964. That tax reduction amounted to
about $10 billion, which in comparison to the gross national product
was much more than the present $10 billion which present tax cuts
would cost. And the net result of the former tax reductions, Mr. Simon,
was that for the first time we had the sharpest reduction in the increase
in the national debt. And, a nearly balanced debt, even though we re-
duced taxes by $10 billion. . -
Why, with that positive experience with tax cuts, and the negative
experience this country has had with deflationary policies which have
not cut inflation, are you not willing to at least examine the merits of
a general tax reduction at this time. .
Mr. SIMON. Basically, Senator Hartke, it is very attractive to cut
taxes, and it is always much easier to cut taxes than it is to raise taxes.
And we are not recommending that we should have an increase in taxa-
tion in this country. But, looking ahead at the spending needs for this
country, and the uncontrollables in our budget, cutting taxes at this
point would, in our judgment, just add to obviously the deficit and
destroy any ability we had toward moving toward a balanced budget.
Senator HARTKE. I just want to point out for the record that you
have asked for an all-time high in budget expenditures for fiscal 1975
of $304.4 billion. .
28.
The Republicans have not had a chance to question our guest. Sen-
ator Byrd, I am forced to leave. Would you please assume the chair
at this point? . . .
Senator ByRD [now presiding]. Senator Hansen!
OIL CoMPANY STOCR PRICES
Senator HANSEN. Thank you very much, Mr. Chairman.
A sense of fairness tells me to speak out for those of us who have
Presidential aspirations not present this morning, and I want to call
attention to Senator Jackson, because I think he deserves a little action.
I note that the Wall Street Journal says in an editorial: -
Like Justice Stewart, who knows pornography when he sees it, Senator Jackson
knows oil profits are obscene and thus does not have to justify whatever yard-
stick he is using. In our view profits are not obscence so long as they have redeem-
ing social value. -- - -
And I note that the Los Angeles Times for Thursday, April 11, head-
lines in its business and finance section “Uncertainties Hang Over
Industry or Oil Stocks Bob Down Despite Profit Boom.” The article
goes on to point out that stock in Exxon, the world's biggest oil com-
pany, sold for as much as $103.25 a share late last spring. This week
it is selling for $80 on the New York Stock Exchange. Mobil is down to
about $45 share from a 1973 high of $75.50, which represent a 40 per-
cent drop. And Texaco is between $27 and $28, after selling for as much
as $43.12 last year. .
This poses a problem for me to understand when I read about the
obscene oil profits that are being made, and when I contemplate, as all
of us have from time to time, the needs of this industry, which econ-
omists reckon between a low of $800 billion capital required, new capi-
tal if we are to come anywhere near meeting the demands that we will
experience by 1985, to as much as $114, trillion. -
OLL DEPLETION ALLOwANCE
Mr. Secretary, much has been said about the oil depletion allow-
ance. It has been pointed out in this same editorial, to which I re-
ferred in the Wall Street Journal, that they join now with those who
say, “Let us do away with the depletion allowance” for a somewhat
different reason. They say that the depletion allowance tends to sub-
sidize consumption, and with that I agree, because I think that realis-
tically we have to recognize that without the depletion allowance, we
would have had fewer oil and gas supplies. Really what the depletion
allowance has done is to make available more oil and gas at a lower
price than otherwise would have been possible. Do you agree with that?
Mr. SIMON. Yes, sir; I do, Senator. '' .
PETROLEUM PRICES
Senator HANSEN. Do you think that there is some reasonable ra-
tionale for permitting prices to rise to achieve two objectives: First, to
discourage unnecessary consumption on the one hand and, on the
other, to provide the encouragement that the industry will need to
amass the capital necessary to get on with the job of assuring that we
have adequate supplies to meet our eventual requirements by 1985?
29
Mr. SIMON. Senator, it is a conscious policy decision to make sure
we do two things: That energy in our country be brought on line and
at reasonable prices. We are today controlling by law the prices of
petroleum in this country. The present price of crude oil at $5.25, with
added incentives for matched barrels and the stripper, as you know,
is, indeed, necessary to bring on the additional supplies at much more
reasonable levels than we are paying the Arab nations. We can be
self-sufficient in this country at levels much below this, and so we
should strive for that. r:
And I also think of Senator Jim Buckley’s illustration. I never
realized that New York State was a producer State and he talks about
the 5,400 wells in his State that are producing an average of a half a
barrel a day. And, obviously, to produce a well at a half a barrel a day
costs you a lot more money than to produce one that is significantly
greater than that. Well, if they cannot get $9.50 a barrel for their oil,
which they probably are, they would have to close down the well, and
what is the alternative? To pay the money to the Arab nations with
the balance-of-payments consequences and all of the rest of it. Yet, that
is useful, and, yes, we ought to do that.
Ro1.LBACK OF DOMESTIC OIL PRICES
Senator HANSEN. Considering your response to Several questions
asked by Senator Mondale, with the United States admittedly in a
short petroleum supply situation this past year, do you think it makes
sense to roll back the prices of domestic oil? Do you think it makes
sense to impose greater tax burdens on an industry that we have come
to depend so largely on for our very way of life in this country, if
we expect to eliminate inflation over the long haul and everything
else in balance? - -
Mr. SIMON. No, sir. Our position is well-known on that. That is the
only way we will bring on the additional supplies. There again, it
can be done carefully and we believe we are doing it carefully in
exercising responsibly the price controls that we have mandated
by law in the area of petroleum and making sure that we maintain
that fine balance of bringing on the additional supply without having
unreasonable prices. -
Senator HANSEN. We must admit and many may not agree with me,
that the U.S. Congress really has very little to say about the price that
the Arabs and the larger bloc of countries, including the OPEC
nations, charge for oil, but we can do something about the price
domestically, if we choose to continue to dabble or to mess with the
laws of supply and demand, and in an earnest endeavor to make people
live better, decide that it is in the public interest to roll the price of oil
back. Is there anything wrong with the argument that we will leave
the foreign price of oil alone, because we really cannot control that,
but we can do something about the domestic prices so we will cut the
price of that, say, generally in half? Now, that has been proposed,
and is being proposed again. Is that a Sound argument? . . . .
Mr. SIMON. Well, the results of that, Senator Hansen, are predicta-
ble. It would just cease the exploration that we have got going on out
there in this country right now, because people are not going to invest
30
their money in this risky business if there is not a reasonable rate of
return, and, consequently, it would make us more reliant each year,
as our demand grows, on insecure foreign imports at high levels, which
subject us to two things: One, a potential cutoff, and we have had
four of them in the past 25 years; and, two, threat of a price explosion
that can arbitrarily be set by a cartel for a time.
Senator HANSEN. Mr. Chairman, I have used up my time. I have
not exhausted my inquiry, but I yield to you, sir. • .
Senator BYRD. Well, suppose we go to Senator Fannin now and then
we will come back to the Senator from Wyoming in a few minutes.
Senator FANNIN. Thank you, Mr. Chairman.
ENERGY COMPANY PROFITs
Just to follow up on what has been said about profits, and the great
misunderstanding that exists, Mr. Simon, I do have the current issue
of the profit situation from the Chase Manhattan Bank and I feel that
they have done a great service over the years and especially since this
energy crisis has been upon us in properly placing before the Ameri-
can people the true facts as to just what is involved. In other words,
we have much at stake, we have a very dangerous situation.
“The American people are entitled to a much greater insight on the
part of their elective and appointed representatives in the Govern-
ment.” And they state, and I think you will agree, “an urgent need to
publicize the underlying factors responsible for the unusual level of
earnings experienced by the petroleum companies in 1973.” And in
this particular article it brings out that the brief reports appearing in
the business Section of the newspaper attract mainly the attention of
investors and are ignored by most other readers, and that a combina-
tion of abnormal factors in 1973 caused the earnings to be much larger,
and that because of the news media and others, focusing attention on
these high profits, the public awareness is on that particular phase.
Mr. Simon, this could be true of many other industries. Is that not cor-
rect that because of the shortage, earnings have gone up, but it is an
abnormal situation in many instances, and it will correct itself.
Mr. SIMON. There is no doubt about that, Senator Fannin. There was
one other peculiarity that came out in our study running through the
years 1959 to 1973. Comparing 1973 to 1972, 1972 was the worst year
during that 16-year experience. So, you are comparing a high-profit
year caused by a price explosion that came from extraordinary circum-
stances to the poorest year in the 16 years that we studied. So, that is
out of line. Now, this is going to continue because the price explosion
did not come until the last half of 1973, and the oil industry is going
to be what I would say embarrassed by their profitability, probably
through the third quarter of this year, and certainly the second
Quarter. - * - -
d Senator FANNIN. Then in this article it says because of abnormal de-
velopments cited earlier, nearly three-fourths of the increase in the
revenue has occurréd outside of the United States. Now, that is not
the oil companies’ revenues. Now, has that not resulted to a great ex-
tent in other governments of the world or other companies and other
governments of the world, mostly other governments bidding up the
31
price of oil? I can recall when France entered into these negotiations
with the Arab countries, and the OPEC countries that they bid up the
price, for instance, of LNG, and I know Algeria had the same problem.
Is it not true that the other countries of the world have perhaps been
more to blame for this than the United States? " - -
Mr. SIMON. Well, there were cases where the spot auctions after the
embargo was imposed were at what I would call ridiculous levels, that
started at $16 and some odd cents, and went as high, on one or two
occasions, to $25. And I believe that part of our oil industry partici-
pated in some of that, too. But, the profitability of their international
operations did not just come from the barrel of crude oil. It came from
the entire operation of the company. It went through their tanker oper-
ations, the exchange rate profitability, through the strengthening of
the dollar, and the refineries and the marketing. It was not only just a
crude oil price. . .
Senator FANNIN. I think we have had a discussion of the Federal
Power Commission and you have covered it fairly thoroughly many
times, and including today, of the difficulties resulting or accruing
from the 1954 Phillips decision. This has also affected the importation
of liquefied natural gas. I am sure that you are aware of some of the
problems they had with Algeria and the renegotiation, and, also, in
Boston with the attempt to bring LNG in from Algeria. Do you not
think that we could better negotiate and handle these affairs if the
authority could be under the FEO rather than under the Federal
Power Commission ? -
Mr. SIMON. It would greatly facilitate and expedite the negotia-
tions; yes, sir. - . .
Senator FANNIN. I know that referring to a contract effective in my
own State, the El Paso natural gas contract, we were talking to the
officials in Algeria, when they said to us that they would renegotiate
these contracts upward, because the Federal Power Commission had
not acted. They were supposed to have acted in early January, and
we were over there in late January, so they said that the price that
would be negotiated now would be a much higher price. This is, I
think, a very good illustration of the problem that accrues. .
Then getting back to the problem we have with the American pub-
lic and a better understanding, I feel that the American public does
want the free enterprise system to prosper, and they are very anxious
for the individual to have the freedom of opportunity. And when we
are talking about that, the stock of most of the major oil companies,
there are very few companies that are not owned by thousands upon
thousands of stockholders. Is it not true that very few individuals
have any appreciable ownership, of the major oil companies?
Mr. SIMIon. Oh, that is correct, sir. I think you will find that in
every major corporation in America, it would be impossible really for
one individual to have a majority interest. -
$
Senator FANNIN. So, when we are talking a
bout these oil companies,
and major oil companies that get all of the criticism, are we not really
talking about a controllable situation? There are stockholders and they
have a board of directors, and it is all carried on under the laws and
regulations of the United States? And I think the best illustration
of this misconception is the Rockefeller family. I was in Moscow at
32
the same time as David Rockefeller of the Chase Manhattan Bank,
and he was talking to the Russian officials, and they wanted to discuss
the oil situation and petroleum products, they asked David Rocke-
feller if Rockefeller did not own over 50 percent of Exxon, and his
answer was that the Rockefeller family owns less than 1.5 percent
of Exxon. *
So, I feel if the public really had the proper information that there
would be a far different feeling regarding the situation facing this
industry today. Do you feel that way?
Mr. SIMON. Yes, sir. I do, Senator Fannin.
Senator FANNIN. Thank you very much. Thank you, Mr. Chairman.
Senator BYRD. I will take just a couple of minutes and then I will
yield.
Senator HANSEN. Please do.
STRIVING FOR A BALANCED BUDGET
Senator ByRD. Mr. Simon, I do not want to add to the burdens that
you will be carrying as Secretary of the Treasury, but I would hope
that you could take the lead in attempting to get this country back on
some sort of a sound fiscal basis. I think we are on a very unsound
basis. I want to say, frankly, though, that my view is a minority view
in the Congress. I might warn you that the word balanced budget is a
dirty word in the Congress. But, I believe very strongly that we are
not going to get inflation under control until we get these huge Gov-
ernment deficits under control, and it is cause for concern that during
the 6-year period, fiscal 1970 through 1975, that we will have added
to the national debt $133 billion, thus, 25 percent of the national debt
will have been incurred during that short period of time. I realize
that one individual cannot reverse this trend, but I do believe that if
the leadership of the Treasury Department is in that direction, in the
direction of getting us back to a balanced budget, that would be of
tremendous benefit to the Nation. -
I do not want you to say anything today that would complicate
your situation with my colleagues. But, I would hope that you might
be able to work in that direction.
Mr. SIMON. Yes, sir. .
- TAx CUTS
Senator BYRD. I notice that mention was made of a tax cut in 1964,
but no mention was made of a tax cut in December of 1971, when
revenues were reduced by $14 billion at a time when we were running
huge deficits. Undoubtedly, that added to the increased inflationary
pressures, and I just have the feeling that too many persons in both
the administration and the Congress feel that we can get something
for nothing, that we can spend all of the money we want, but nobody
has to pay for it. I think that that is fundamentally wrong. The people
who are being hurt the most by this are those in the lower and the
middle economic brackets, and those on fixed incomes. They are pay-
ing a heavy tax through inflation. Would you agree that inflation is a
hidden tax? - - -
Mr. SIMON. Yes, sir, it is.
33
Senator BYRD. And that it is a cruel tax?
Mr. SIMON. Yes, sir, it is.
Senator ByRD. And that the tax of inflation, as I visualize it, and
I would be glad to get your views, hit hardest those on fixed incomes
and those in the lower economic brackets. - - -
Mr. SIMON. That is correct, sir. - -
Senator BYRD. I doubt that the very wealthy, are hurt much by
inflation. They might even be helped. But, I think the poor guy is
hurt very badly by this inflation that we are experiencing.
Mr. SIMON. I would say the wealthy have a better ability to protect
themselves from it. - - .
Senator ByRD. They have means of protecting themselves.
Mr. SIMON. Yes, sir.
CON ED DIVIDEND PICTURE
Senator ByRD. I noticed in the press this morning that Consolidated
Edison for the first time since 1885 onlitted its dividends for the
quarter. Do you happen to have any comment on that, or any partic-
ular reason why that should be 2 -
Mr. SIMON. I did not see that this morning, Senator Byrd, but I
would believe that would be an outgrowth of the reduction in demand
for electricity this past winter and an inability to get rates raised at
the same time, or in time to compensate for that. That is a judgment.
As I say, I have not read that. -
Senator BYRD. In other words, the public is complying with the
requests of the Government to reduce energy needs •
Mr. SIMON. Yes, sir; that is correct.
Senator BYRD. Which, of course, we needed to do.
Mr. SIMON. Yes, sir. - §
GAS RATIONING
Senator BYRD. I might say that the question of rationing stamps
was brought up this morning and the majority of my colleagues felt
that you should have gone to rationing some months ago and you re-
sisted that. And you have, up to this point, at least, you have certainly
turned out to be right. . .
Mr. SIMON. We just thought it would be absolutely impossible to
administer equitably, given our economy and the way we all live to-
day, versus the last experience in World War II. There are almost five
times as many automobiles on the road today, and massive suburbia,
and no mass transit in areas like Los Angeles and Washington, D.C.,
et cetera, and it would have been just a bureaucracy of 15,000 or 17,000
people and $11% billion of unnecessary expenditure.
Senator Byrd. We have entirely different conditions now than we
had during World War II? - t
Mr. SIMON. Yes, sir. .
Senator BYRD. Thank you, Mr. Simon. -
I yield the remainder of my time, plus his time, to the Senator from
Wyoming. -
Senator HANSEN. The Senator from Virginia is most gracious, as
we all know.
34
CoN ED DIVIDEND PICTURE
Mr. Simon, I do not think I have many more questions to ask you.
Would it not also possibly be a factor in the situation with respect to
Consolidated Edison that fuel prices have increased, and the experi-
ence of complying with ambient air quality demands has been an
added expense? ... •
Mr. SIMON. Yes, sir. Indeed that is a part and parcel, Senator Han-
Sen. Yes, sir.
Senator HANSEN. I have a further question.
FEDERAL OIL AND GAS CORPORATION
It has been proposed by some Members of the Congress that we need
a mechanism whereby we can compare the behavior of the free inter-
prise system in order to know if it is overchanging, if its profits are
obscene and what might be done in the way of remedial legislation.
Pursuant to that idea legislation has been proposed which would cre-
ate a governmental entity to be funded by appropriations, and cloaked
with the authority and responsibility of going into the drilling busi-
ness and into the exploration for oil and gas. Some people would give
it preferential rights with respect to the exporation of petroleum po-
tential on all publicly owned lands. Would you comment on that
proposal :
Mr. SIMON. Well, we have not favored the corporation called FOG.
I think that the fellow who made that name up had a good sense of
humor.
Senator HANSEN. Would you say that again? I do not think every-
body heard you.
Mr. SIMON. FOG, the Federal Oil and Gas Corporation. We just
basically do not believe that the Federal Government in this very
risky industry can do a better job than our free enterprise system. To
give preferential treatment to the Federal Oil and Gas Corporation on
Outer Continental Shelf leasing, which potentially holds the vast ma-
jority of the future reserves for this country, would create the severest
disincentive. The people who would run FOG company could not have
been associated with the petroleum industry, and their pay would be
rather low. I can just see, as I have said in testimony, the poor fellow
going up to the Appropriations Committee asking for a few more
billion dollars after his 31st consecutive dry hole. And I just do not
believe that this is a governmental role. If anything, that would push
us further and further into the arms of other nations as far as our
dependency,
Senator HANSEN. Do you see any reason to believe that there are
other ways of conducting the essential duties and chores that individ-
uals in private corporations do as you look about the world and see
what has been going on in England or in other socialistic countries,
despite criticisms of private enterprise. Do they have a better way?
Mr. SIMON. On the contrary. All experience in nationalized indus-
try shows a stifling, a lack of incentive, and a decrease in the produc-
tive capacity and productive ability of that country. - -
Senator HANSEN. In America, where we placed the customer up on
the pedestal and industry responds to what the customer wants, is it
35
not true that we have a greater choice and a greater variety and, in-
deed, because of those factors a greater freedom than people anywhere
else in the world ! -
Mr. SIMON. We have the greatest standard of living, and the lowest
cost and the highest per capita income, and we are the greatest indus-
trialized nation that the world has ever known. And why in the world
we would want to continue moving more power to the Federal Gov-
ernment, I do not know for the life of me, and I will resist it.
Senator HANSEN. I cannot think of a better place to recess these
hearings than right now. You have brought us out of the fog and into
the clear sunlight. :
• Thank you.
The committee will stand in recess until 11:30 this morning.
| Short recess was taken.] -
Mr. SIMON. Mr. Chairman, do not forget that I have my friend,
Mr. Macdonald, here. Do you not want to ask him some questions, too?
The CHAIRMAN. Senator Percy wanted to be here to introduce Mr.
Macdonald but was unable to make it. We will insert his introductory
statement at this point in the record. -
STATEMENT OF SENATOR CHARLES H. PERCY, A U.S. SENATOR FROM THE STATE of
ILLINOIS
Mr. Chairman and Members of the Committee, I am pleased to support the
nomination of Afr. David R. Macdonald to be Assistant Secretary of the Treasury
for Enforcement, Tariff and Trade Affairs, and Operations. Mr. Macdonald has
had a distinguished career and he currently is a partner in the firm of Baker &
McKenzie in Chicago. - .
Mr. Macdonald combines great knowledge of the law as well as years of busi-
ness experience. I think he is an excellent choice for the post for which he has
been nominated and I hope the Committee will look favorably upon his nomina-
tion. - .
The CHAIRMAN. We will also insert Mr. Macdonald's prepared state-
ment in the record at this point.
[The statement follows:]
PREPARED STATEMENT of DAVID R. MACDoNALD, AssistANT SECRETARY OF THE
TREASURY FOR ENFORCEMENT, TARIFF AND TRADE AFFAIRs, AND OPERATIONS
(DESIGNATE) -
Mr. Chairman and members of this distinguished committee, I am here today
as the President's nominee for the post of Assistant Secretary of the Treasury for
Enforcement, Tariff and Trade Affairs, and Operations. - -
As my biographical sketch shows, I was born in Chicago, Illinois, in 1930 and
raised in Winnetka, a suburb of Chicago, and I still make my home there.
I attended Cornell University in New York, receiving a B.S. degree in 1952, and
in 1955 I received a J.D. from the Michigan Law School in Ann Arbor. After la
school I spent two years in the U.S. Army. g - . . .
Most of my professional career as a lawyer has been with the firm of Baker
and McKenzie, in Chicago, where I specialized mainly in corporate law with
some involvement in international finance. I have also been a director of the
Chicago City Bank and Trust Company, Seaboard Life Insurance Company of -
America, and Scheer Financial Corporation. I have resigned from the director-
ships and my resignation from my law firm will become effective upon con-
firmation. -
fºam a member of the American, Illinois and Chicago Bar Associations, the
Economic and Legal Clubs of Chicago, the Board of Directors of the Chicago
Library of International Relations, and the Committee of Visitors of the Univer- - .
sity of Michigan Law School. -
36
My past experience has not brought me into frequent contact with Congress,
and I am, therefore, looking forward to the privilege of working closely not only
with the members and staff of this committee, but also with the other COmmit-
tees that are interested in Treasury business. *
In accordance with your procedures, I have provided the committee with a
biographical statement, as well as a copy of my financial statement, with assets
in a blind trust managed by the American National Bank of Chicago, and other
information showing what steps I have taken to avoid any possible conflict of
interest questions.
I will be happy to answer any questions you may have.
STATEMENT OF DAVID R. MACDONALD
. The CHAIRMAN. Mr. Macdonald, do you subscribe to the answers
that the Secretary has given to these various issues, or do you find that
there is any area in which you want to challenge his statement?
Mr. MACDONALD. I subscribe to them 100 percent, sir.
Mr. SIMON. Sound thinking. - -
The CHAIRMAN. Well, if Mr. Simon can speak for the two of you,
my guess is that we will expedite these hearings to assume that you
would agree with what the Secretary says or that you do not dispute it.
Mr. MACDONALD. Exactly.
The CHAIRMAN. I do not think that it would be too good an idea for
you at this particular point to be disputing what your potential boss
has said here. -
Senator Mondale has returned from the Democratic Caucus and I
know that he has a number of things he wants to ask about, so I will
call upon him. -
Senator MoRDALE. I am most grateful for your staying around to
permit me to ask some questions about what I think you would agree
to be the central issue, economic issues, facing America; namely, the
distortions that have now developed in the economy as a result of in-
flation and rising unemployment, and shortages and the rest.
CAUSEs of INFLATION
I would like to go back if I might to your analysis of what is caus-
ing the inflation. As I heard your testimony, you are of the solid
opinion, that it is all excess demand, that aggregate demand is causing
a situation in which too many dollars are chasing too few goods. I am
sure you are aware of the fact that Dr. Samuelson from Massachusetts
Institute of Technology, Walter Heller, of the University of Minne-
sota and former Chairman of the CEA, and Arthur Oakum, and
others, disagree. They say we are in a situation which is essentially
cost-pushed where the inflationary factors that are driving up factors
are the result of the commodity price increases that are not going to
be responsive to aggregate demand economics, and that to apply a
remedy designed to restrict excess demand at a time when that is not
the problem can only produce further unemployment, and while at
the same time you have inflation. And it seems to me that is exactly
where we are today. We have a restrictive budget, and we have the
highest interest-rates that I can recall. But, we also have the highest
inflation since World War II, and we see rising unemployment be-
cause, in effect, what we are doing is applying the theory of trying to
treat a surplus demand situation.
37
Now, how do you deal with the argument of Heller and Samuelson
and the others? Surely these are respected economists of high stature.
Mr. SIMON. Yes, sir. Senator Mondale, if one looks back over the
last year's experience of our inflationary problem, over 60 percent of
our inflation problem was due to rising food and fuel prices. And, in-
deed, one might say that that was a shortage situation. It started with
the horrible weather we had here as well as around the world in 1972
and simultaneous boom conditions in all of the countries of the world.
On the petroleum side, the shortage occurred, one might say, ar-
tificially through an embargo that was imposed by nations that con-
trol 67 percent of the world's reserves. The rise in prices of the inter-
nationally traded raw materials came from the boom conditions
around the world, pushing world prices up dramatically, so this has
been the component, and this is what I spoke of before when I said that
we should attempt to anticipate these problems. Indeed, agriculture is
a perfect example where the set-aside was removed and the commodity
markets have responded in the last 3 months. And we have seen
quite a decline in wheat and corn and soybean prices. I believe as the
higher crop production is realized, which it is going to be, that you are
going to see further declines in response to it.
The response to the world price increases of petroleum has been a
significant reduction in demand. I believe this surplusing in the world
production is going to create downward pressure on these prices.
FINDING CURES FOR INFLATION
Senator MoRDALE. Well, I guess I do not quite understand. If you
have your cost-push factors in a limited area, or the limited areas of
food and fuel, however fundamental that is, how does having a slack
economy along with it, a restrictive budget and astonishingly high in-
terest rates and tight credit deal with that problem? -
Mr. SIMON. Well, what was the first part of your statement, Sen-
ator? I am sorry. .
Senator MondalE. Well, I am trying—in other words, these very
respected economists are saying that we are in a recession or heading
into one, we are going to have rising unemployment and inflation at
the same time, because what we are seeing is a period of cost-push
inflation, not excess demand. - -
Mr. SIMON. That is the part I wanted. - .
Senator MONDALE. I heard you this morning repeatedly say that the
problem is excess demand, so how do you .
Mr. SIMON. Well, I have heard these forecasts before and I can go
back and talk about the forecasts that a lot of people made last October
and November about the recession and, indeed, the depression that we
were going to have come February or March of this year due to the
energy problem. Unemployment was going to be at 8, 9, or 10 percent,
and they were suggesting dramatic easing of money and fiscal stimu-
lus. We did not believe this. We believed that we could isolate the eco-
nomic impact of the energy problem, and it has been isolated, so that
is why I do not happen to agree with all of these doomsday forecasts
that we are going to have this bad a time. It has been isolated to the
automotive area and energy-related activities, as well as housing.
Senator Mondal.E. But in any event, your theory is that what we
are dealing with is excess demand and our remedies ought to be aimed
38
at dealing with that and not at stimulating the economy to assure
that people have jobs and so on. Is that correct? r
Mr. SIMON. We see no need at this point, Senator Mondale, to stimu-
late the economy because we believe that the basic demand at this
juncture is strong. .
Senator MoRDALE. All right. Now, you have an inflation rate of
what, 1414 percent, annualized for the next year, the highest inflation
perhaps since the Korean war. And what are your remedies for deal-
ing with that? I am going to write them down. What would you do?
As I understood our discussion earlier, you felt this year's budget had
to stay as is; you thought we should terminate any kind of wage-price
control power as distinct from extension of Cost of Living Council
without any power. What would you do to abate inflation?
Mr. SIMON. There again, going back to the full employment budget
concept, we will run a surplus of approximately $4 billion this year,
and in the proposed fiscal 1975 budget, it will be a $8 billion full em-
ployment surplus. I hasten to add what I said before that this full
employment budget concept is a sound yardstick, and that is what it is,
a yardstick. - º
Now, we have to avoid both runaway stimulus in the economy and
excessive restraint, and we have to walk that fine line. -
The deficit this year, we believe, is modest, between $5 or even $10
billion, as we have projected for next year. What we have to avoid are
the deficits we have seen in the past few years of $20 billion to $25
billion, at a time when the economy is moving and was at that time
moving toward full employment, however one wishes to define what
full employment is. That is the first portion of it, as far as the fiscal
side. And monetary policy at that point will be allowed to exercise
not too severe a restraint and bear, as I said before, the burden alone.
We have to deal, here again, as I said, with the supply and the capacity
problems for our industry.
Senator Mondai E. Well, what you have said is that we have to look
at fiscal monetary policy and we have to look at supply problems. Now,
what would you do in those areas? I did not get your answer. I know
the areas, but what is your policy 3 -
Mr. SIMON. The deficit as stated in the $5 to $10 billion area for
the economy, as we see it for the next 2 years ahead, is modest.
- iºr MoWDALE. Is that, in your opinion, an inflation restraining
policy? - - r - ...?
p º SIMON. We believe that the full employment surplus that that
gives us $4 billion for this year and upwards of $8 billion for next year
is sufficient restraint, yes, sir.
Senator MoRDALE. All right. So, you say one element is a restrictive
budget based on a full employment surplus?
Mr. SIMON. Concept, yes, sir. - - - .
Senator MoRDALE. All right. What is your next strategy for restrict-
ing inflation? . - - :
hº SIMON. Well, as far as the food, I have already commented on
Senator MoRDALE. That is supply that you want to see, the food
supply expanded? - - - -
Mr. SIMON. That is correct.
39
Senator MoRDALE. All right. What alse would you do? .
Mr. SIMON. Well, the manpower programs are something that we
have not been completely satisfied with. They ought to be continued
and improved so that we have a productive labor force in this country.
Beyond that, I have no specific things to mention at this point. -
Senator MondalE. What about monetary restraints? What is your
theory there? -
Mr. SIMON. Well, on monetary policy, Chairman Arthur Burns has
stated that he is going to tighten, if you will, a little further and bring
the growth of the money supply back to a more reasonable level, rather
than the over 7 percent that it has been for, I believe, the past few
months. -
Senator MoWDALE. Do you support that?
Mr. SIMON. Yes, sir, I do. -
Senator MoRDALE. And do you support the maintenance of a prime
rate of what is it now, 10 and something? .
Mr. SIMON. Senator Mondale, I abhor high interest rates, just as
everyone else does, but I do not consider high interest rates a cause
of our problems. I consider them a result of the problems.
Senator Mondal.E. But, in order to restrain inflation would you want
to continue these high interest rates? . . -
Mr. SIMON. There again, this is just about the first time when the
inflation rate has finally caught up with the high interest rates. In the
past 10 years, they have led well ahead because of the inflationary ex-
pectations that we have allowed to become engrained in our economy.
That is what has to be runnnig out. So, it is not a matter of supporting
high interest rates. Nobody supports high interest rates, no. We want
moderate interest rates in this country. And how to we do it? We do
it by attacking the problem, not the result, and the problem is inflation.
Senator Mondai E. Well, I am asking you what your policy is to
restrain inflation, and my question to you is whether you support a
continuation of the present high interest rates and restrictive policies?
I gather that your answer is yes? * . -
Mr. SIMON. It is not a matter of restrictive policies. We do not con-
sider it unduly restrictive. We think that we are walking that line that
avoids runaway stimulus and also avoids excessive restraints. So, we
have a difference of opinion, perhaps, on this, Senator. -
Senator MoRDALE. Well, I just want to know what your policy is.
I am not getting into opinions. Do you support Chairman Burns’
high interest rate policy that he announced the other day? -
Mr. SIMON. Arthur Burns is not supporting high interest rates. He
is doing what he believes as the Chairman of the Federal Reserve is a
responsible action of a central banker in providing his part of the role.
Now, we have to do r -
Senator Mondal.E. And you support that?
Mr. SIMON. Indeed I do, Senator. " .
Senator MondalE. So what are we at, a 10-percent interest rate,
tight ºit Are there any other elements in your anti-inflationary
FOOT3.IOl * , , . . .
p Mr. SIMON. At the outset, Senator Mondale, that would have been
sufficient. There again, this takes more time than I have had to spend
on this, having been otherwise occupied these last few months. . .
40
Senator MoMDALE. All right, now. With these high interest rates and
the tight credit, do you not anticipate a further restriction in the
housing market? - - -
Mr. SIMON. High interest rates, obviously, act as an inhibition to
people buying homes, although there are Government supports as I
said before, including the Ginnie Mae and Fanny Mae, and the home
loan advances, as well as the tandem program that should be studied,
which we are doing right now, to act as a break and, indeed, as a
stimulus for housing.
Senator Mondale. Well, let me see. What is the current housing
construction rate? About 1.46 million, is it not?
Mr. SIMON. That was the last number. That is correct. It averaged
out for the quarter I believe at 1,600,000 plus. -
Senator MoRDALE. Now, interest rates are rising. Do you expect that
housing production rate to drop! - -
Mr. SIMON. I would not expect the housing rate, no, to drop below
1,400,000 level; no, sir. - - .
Senator Mondal.E. Well, what would stop it? - -
Has not the housing market proved to be very sensitive to interest
rates and credit restrictions? - .
Mr. SIMON. It has and it has declined, indicating the sensitivity
over the past few months because of the high interest rates that have
been with us for awhile. We have seen housing come down in the past
year from 2 million starts to 1,400,000 plus right now. So, this reaction
has occurred. But, what you also have to look at is housing permits,
and they remain at a fairly good level. It was over 1,400,000 last month.
So one might say that this reaction has already occurred. .
Senator Mondal.E. Well, I do not quite understand how you are
going to reach your goal of 2,600,000 housing starts when the current
rate is 1.4 million and the interest rates are rising. What is your
strategy? . . . . . .
Mºšºos. Interest rates have risen, Senator Mondale, there is no
doubt about that. . 'i
Senator Mondal.E. Yes, sir. - -
Mr. SIMON. And if they, indeed, stayed at this level, you are correct,
we would not reach the goal of 2,600,000. What we are trying to do is
attack the problem, which will bring the interest rates down when
people are satisfied that they are not going to have the return on their
fixed income investments taken away by inflation. . . . .
Senator MoWDALE. Do you favor the elimination of all wage and
price controls as the Congress currently is prepared to do now? . .
Mr. SIMON. What we have favored, Senator Mondale, was the
continued ability of the Cost-of-Living Council to function as a moni-
toring agency with the ability to control the health sector, as the
President proposed and perhaps even construction.
Senator Mondal.E. But no authority beyond that?
Mr. SIMON. No, sir. ' ' ' - – -- . . - . . .
Senator MoWPALE. You said in your testimony two or three times
that we have to return to fundamentals. What do you mean by that?
Mr. SIMON. Basically, the fundamentals that I spoke of were in
response to your question of what is economic policy here at the office,
to keep away from excessive spending and excessive restraints. -
41
Senator MoRDALE. I guess you had said earlier that you oppose the
tax cut proposal that some of us made to bring Some relief to persons
of average income in this country, and, hopefully, stimulate the econ-
omy on the theory of these economists that we need to provide more
employment. - * -
Mr. SIMON. That is where we have a difference of opinion, Senator,
VeS. - -
- PLUGGING TAx LOOPHOLES
Senator MoRDALE. Now, if we plug some loopholes to make up the
difference, so that the budgetary impact overall remains the same,
would you support that in order to get some relief to these people who
are being tortured by inflation? -
Mr. SIMON. I would have to know what plugging of loopholes we
are talking about. I think Secretary Shultz in his testimony before
this committee some time ago opened his statement by saying that he
favored the tax reduction. Everybody favors the tax reduction burden
placed on the American people, but only if it is accompanied by a cut,
a permanent cut in Federal spending, but that never seems to happen.
Senator Mondal.E. Well, would you—if you and I could agree on
what loopholes should be closed—would you agree at the same time
that the average family is being tortured by inflation?
Mr. SIMON. I think I could agree with that, Senator Mondale.
Senator MoRDALE. It seems to me that as I hear your policy, that
what we have here is a policy of very high interest rates which have
put the clamp on Small business, the average consumer, the housing
industry, and a restrictive budget coupled with high interest rates, so
that we are sure of high unemployment and opposition to any tax
relief for the average American who is being tortured by inflation,
opposition to any rollback in oil prices which might help abate infla-
tion. And I wonder, I just wondered what we have in mind that might
offer some— - - - º
Mr. SIMON. To the contrary, Senator. ''. - . . . . .
Senator MoRDALE [continuing]. Some hope for the average Ameri-
can that his problems are being thought about.
Mr. SIMON. On the contrary, Senator Mondale. I believe sincerely
that I am saying exactly the opposite. The policy, if followed, and the
proper discipline, if followed, will result in lower interest rates and a
real rate of growth and a reduction in the rate of inflation. That in-
deed, if you wanted to have a tax cut now, with what we consider
excessive stimulus and perhaps even an easy monetary policy to pump
the money out temporarily—and we have seen this happen several
times in the last few years, temporarily push short rates down—and
they would not stay down very long because people would know that
that is inflationary and that is where the inflationary expectations be-
come even deeper ingrained. That is what I mean about attacking the
fundamentals and the problem, instead of the results of it. I do not
like the results of the problem any more than you do, or any other
American. No, sir. * : . . . . . . . . . . .
Senator MoRDALE. Well, I believe that is right. But, when we con-
front you with the statement of very responsible economists that we are
heading into higher unemployment and that the economy can well take

42
modest tax reductions to stimulate the economy, and to bring some
relief to these families that are being tortured, and prevent unemploy-
ment, you Say, no.
Mr. SIMON. I could give you many other responsible economists who
would say exactly the opposite, Senator. - *
Senator Mondai E. Yes. But you are kind of like the butcher who
always comes out on his own side, higher interest rates, depression in
the housing market, risking higher unemployment, doing nothing to
try to bring some relief to the average family, and it is a typical old-
fashioned big banker approach to this Nation's economy. And I think
we are going to have Some more inflation.
Mr. SIMON. To the contrary. º
Senator MoRDALE. Please let me finish.
Mr. SIMON. Oh, sure, I am sorry. :
ADMINISTRATION's EconoMIC RECORD
Senator MoRDALE. This administration has been in charge of the
economy for some time. They have been feeding us ambrosia for years.
We have got the highest inflation we have had in 25 years, unemploy-
ment is rising, and the housing market is a disaster. I just saw the other
day that home mortgage foreclosures are rising dramatically, and you
do not have a single policy at this time to bring some relief to the ave-
rage American. And I think that they are beginning to say, well, now,
who is looking out for us. - - * - -
Mr. SIMON. That is where I have a fundamental disagreement, Sen-
ator, but I believe our policies will bring relief to the American people,
because we are not suffering from what you seem to have described as
instant inflation. This has come on long before this administration. It
has been with us for the last 10 years.
Senator Mondal.E. I seem to recall a few years ago we had inflation
down to 4% percent, and employment was rising under phase 2, and
all of that was dumped. And now we are up at 14-percent inflation,
still rising, the interest rates are a big banker's dream, and our at-
tempts to roll back prices modestly meet with vengeful opposition.
Everything we have tried to do to try to lighten this load just a little
bit for the average American has met with powerful opposition from
this administration, and it looks to me like we are going to have a
lot more of it. - - - - " ' -
Mr.SIMON. I do not believe that. I must admit, Senator, we have
a fundamental disagreement. * + -, * .
Senator Mondal.E. Well, I would love to be proved to be wrong.
Mr. SIMON. I hope we can, Senator.
Senator MondalE. Thank you, Mr. Chairman.
The CHAIRMAN. Any further questions, gentlemen?
Senator HANSEN. I would have one, Mr. Chairman.
PRODUCTION INCENTIVEs.
The distinguished Senator from Minnesota was talking about—I
cannot quote him, and you will have to help me, Senator Mondale—
these old-fashioned ideas or the old approach that we have been using.
43
I would ask you, Mr. Simon, if on the basis of the track record of free
enterprise of trying to encourage greater production and greater
availability of supply on the basis of the incentive that the market-
place provides, despite the fact that it is not pretty successful?
Mr. SIMON. It certainly has provided us with the greatest standard
of living of any country in this world. There is no doubt about that.
We have veered away from these fundamentals, and I am just suggest-
ing that it is a good idea now to come back to them. I recognize that
this is not popular in some quarters, nor is it certainly unanimous.
PRICE ROLLBACKs
Senator HANSEN. Well, now, my very good friend from Minnesota,
spoke about a modest attempt to roll prices back. We were in London
just shortly after the first of the year, and although I had not been
there during the war, there were those onboard the plane who likened
the situation that night that we landed there to one reminiscent of
World War II days saying that the city was pretty well darkened
because of an extremely critical coal shortage. They have done these
things that are being suggested now. On the basis of the experience
other countries around the world have had, vis-a-vis our own track
record here, do you have any reason to think that there is a better
way of doing it than the way you are trying to do it?
Mr. SIMON. I certainly do not, Senator.
Senator HANSEN. I have no further questions, Mr. Chairman.
The CHAIRMAN. Senator Fannin? . .
Senator FANNIN. Yes.
INTEREST RATES
Well, Mr. Chairman, I just want to reemphasize and just bring into
proper perspective what the distinguished Senator from Wyoming has
said. And T certainly agree with him. -
But, Mr. Simon, interest rates are a function not only of the Federal
Reserve action but the market force; is that not correct?
Mr. SIMON. That is correct, Senator. . -
Senator FANNIN. And bankers anticipate inflation rate of 10 per-
cent so they charge 12 percent or something like that just to keep the
value of their loans, and it is necessary for them to do that; is that
not correct?
Mr. SIMON. That is correct, sir. - -
Senator FANNIN. And if they were to loan money at 6 percent, when
inflation is 10 percent, the banks are losing money and naturally they
are not in business to lose. If the prime rate or the discount rate
dropped below the market rates, the commercial banks will borrow
heavily from the Fed, discounting commercial papers and so forth and
* their profits, which is just a normal function; is that not
right? . . . . -
Mr. SIMON. I think one will find that the commercial banking system
prospers more with moderate interest rates than they do with high
interest rates. . . . . .

44
Senator FANNIN. So the Federal Reserve discount rate is a conse-
quence of what the commercial rates of interest are, not vice versa?
Mr. SIMON. That is right, Senator.
Senator FANNIN. Now, the key then is, as Senator Hansen stated, to
lower interest rates are a lower actual anticipated rate of inflation?
Mr. SIMON. That is correct, Senator. - - -
Senator FANNIN. And that can be brought about by increased pro-
ductivity, by doing what you are talking about in the training of em-
ployees, the manpower program. I agree that this offers us the same
opportunity that we have had over the years to have this Government
prosper and the people of this Nation prosper. And I think that is a
good goal that you are working toward. . . . .
Mr. SIMON. Thank you, Senator.
The CHAIRMAN. Mr. Secretary, I think the record should show that
Mrs. Carol Simon is here in the room, and I think that she is your
secret weapon, and your best asset, and I congratulate you on your
good judgment of bringing Mrs. Simon with you. --
Mr. SIMON. Thank you, Mr. Chairman. I agree with you.
Senator MoWDALE. On that basis I will vote for you. . .
The CHAIRMAN. I would like to ask Mr. Macdonald one thing:
Are you aware of any conflict of interest that may be involved with
regard to your personal holdings or your financial statement?
Mr. MACDoNALD. I am not, Mr. Chairman, and I have committed
those assets to a blind trust with the American National Bank in Chi-
cago as the trustee. - - - - *
The CHAIRMAN. We will insert in the record at this point a memo-
randum that you have sent to the various officials of the Treasury
disqualifying yourself from taking action in any case involving any
firm with whom you were formerly associated, as well as letters from
both Mr. Macdonald and Mr. Simon stating their willingness to testify
before this or other congressional committees if they are confirmed.
[The documents follow:] - ' - .
OFFICE OF THE SECRETARY OF THE TREASURY,
. Washington, D.C., April 19, 1974.
Memorandum for the : -
Secretary of the Treasury
Deputy Secretary of the Treasury
Under Secretary for Monetary Affairs
|Under Secretary
General Counsel
Deputy Under Secretary
Assistant Secretary for Tax Policy
Assistant Secretary for Administration
Assistant Secretary for International Affairs
Assistant Secretary for Economic Policy
Fiscal Assistant Secretary -
Special Assistant to the Secretary (Public Affairs)
Special Assistant to the Secretary (National Seurity) - - . -
Subject: Disqualification from taking actions affecting certain private
organizations
Subject to my confirmation as Assistant Secretary of the Treasury (Enforce-
ment, Tariff and Trade Affairs, and Operations), I hereby disqualify myself from
any countervailing duty or antidumping matter involving any of the following
45
private organizations. No such matter should be presented to me for decision,
approval or disapproval, recommendation, advice, investigation, or other official
action :-
(a) Baker & McKenzie
(b) Chicago City Bank & Trust Company
(c) Macdonald Engineering Company
(d) Scheer Financial Corp. (and affiliates)
(e) Reed Industries, Inc. (and affiliates)
(f) Seaboard Life Insurance Company of America
In the event that any matter relating to any of the above listed companies
requires attention of the Assistant Secretary of the Treasury (Enforcement,
Tariff and Trade Affairs, and Operations), it should be referred to the Secre-
tary, Deputy Secretary or General Counsel of the Treasury Deaprtment for ac-
tion and should not be brought to my attention.
DAVID R. MACDONALD,
Assistant Secretary-Designate for Enforcement,
- Tariff and Trade Affairs, and Operations.
THE DEPUTY SECRETARY OF THE TREASURY,
Washington, D.C., April 19, 1974.
Hon. RUSSELL B. LoNG,
Chairman, Finance Committee, U.S. Senate,
Washington, D.C.
DEAR MR. CHAIRMAN : This is to assure you that, in the event the Senate of
the United States confirms President Nixon's nomination of me as Secretary
of the Treasury, I will be available and agree to testify before any Committee of
Congress with respect to any matters under my jurisdiction pertinent to my
responsibilities as Secretary of the Treasury. -
Sincerely yours,
WILLIAM E. SIMON.
THE DEPARTMENT OF THE TREASURY,
Washington, D.C., March 27, 1974.
Hon. RUSSELL B. LoNG,
Chairman, Committee on Finance,
U.S. Senate, Washington, D.C.
DEAR MR. CHAIRMAN : This is to confirm that, in the event the Senate of the
United States confirms President Nixon's nomination of me as Assistant Sec-
retary for Enforcement, Tariff and Trade Affairs, and Operations of the Depart-
ment of the Treasury, I agree to testify before any Committee of Congress.
consistent with my duties as such Assistant Secretary of the Treasury.
Very truly yours,
DAVID R. MACDONALD,
Assistant Secretary-Designate for Enforcement,
Tariff and Trade Affairs, and Operations.
The CHAIRMAN. Have you checked with the Treasury’s General
Counsel’s Office to assure that you are in accord with the Conflict of
Interest Statutes?
Mr. MACDoNALD. Yes, sir, I have an opinion from the General Coun-
sel of the Treasury Department to that effect.
The CHAIRMAN. Thank you very much.
Any further questions, gentlemen?
Well, thank you very much.
That concludes this hearing.
[Whereupon, at 11:45 a.m., the hearing was concluded.]

APPENDIX
Correspondence Concerning the Enforcement of the Counter-
vailing Duty Statute Against Dairy Products Imported From
the Common Market

U.S. SENATE, CoMMITTEE on FINANCE,
Washington, D.C., April 26, 1974.
RUSSELL B. LoNG, . - - -
Chairman, Committee on Finance, U.S. Senate, -
Dirksen Senate Office Building, ,” . -
DEAR MR. CHAIRMAN: I respectfully request that this inquiry and
the response to it be made part of the hearing record on the nomina-
tion of the Honorable William Simon to be the Secretary of the Treas-
ury of the United States.
Section 303 of the Tariff Act of 1930 as amended provides: “When-
ever any country, dependency, colony, province, or other political sub-
division of government, person, partnership, association, cartel, or cor-
poration shall pay or bestow, directly or indirectly, any bounty or
grant upon the manufacture or production or export of any article or
merchandise manufactured or produced in such country, dependency,
colony, province, or other political subdivision of government, and
such article or merchandise is dutiable under the provisions of this Act,
then upon the importation of any such article or merchandise into the
United States, whether the same shall be imported directly from the
country of production or otherwise, and whether such article or mer-
chandise is imported in the same condition as when exported from the
country of production or has been changed in condition by remanu-
facture or otherwise, there shall be levied and paid, in all such cases,
in addition to the duties otherwise imposed by this Act, an additional
duty equal to the net amount of such bounty or grant, however the
same be paid or bestowed. A Secretary of the Treasury shall from time
to time ascertain and determine, or estimate, the net amount of each
such bounty or grant, and shall declare the net amount so determined
or estimated. The Secretary of the Treasury shall make all regula-
tions he may deem necessary for the identification of such articles and
merchandise and for the assessment and collection of such additional
duties.” -
The past four years have been marked by increased importation of
dairy products into this country from the European Economic Com-
munity which has openly published a schedule of payments it makes
to its producers for these exports. In 1972 it is estimated that the
European Economic Community paid export subsidies of over $26
million on dry milk, cheese, butter, and butter oil shipped into the
United States. . . .
Despite the clear intention of Section 303 quoted above and despite
the repeated representations of interested American citizens, the Treas-
ury Department has continually refused to discharge its duties under
the law to thoroughly investigate the matter of these payments and
to collect countervailing duties where required. . .
(49)

50
Therefore, I respectfully request of the nominee for Secretary of
the Treasury his response to the following question:
Would Mr. Simon, as Secretary of the Treasury, initiate an investi-
gation into this matter, and if proper, would he oversee the collection
of such countervailing duties as are required on dairy imports as de-
scribed in Section 303? . . . -
The simple intent of this provision of the Tariff Act is to protect
American industry and businesses from unfair competition with the
economic might of foreign governments. I hope that Mr. Simon will
agree that this protection legally is the right of the American dairy
farmer as well. -
Respectfully, . . -
- - GAYLORD NELson
- WALTER F. MoRDALE.
. EXHIBIT A
E.C.: ExPORT subsidies FOR DAIRY PRODUCTs, EFFECTIVE FEB. 15, 1974.
(Cents per poundl
United States E.C.
New Old New” old
subsidy subsidy subsidy" subsidy
Butter with fat content:
62 percent but less than 78 percent------------------------------- 0 (28.95) 41.48 (45.47)
78 percent but less than 80 percent------------------------------- 0 (36.44) 53. 40 (57.24).
80 percent but less than 82 percent------------------------------- 0. (37.37) 53.40 (58.71)
Ot 82 percent but less than 99.5 percent------------------------------ 0 (38.30) 54.72 . (60.19)
er: - -- -
Not exceeding 99.5 percent (butter oil and ghee).----------------------------- 38. 30 54.72 (60.19)
Exceeding 99.5 percent (anhydrous milkfat)---------------------------------- 46.51 72.23 (77.70)
Cheese, Emmenthal and Gruyere: - - -
Zone P---------------------------------------------------------------------------- 7.55 (23.31)
Austria---------------------------------------------------------------------------- 16, 31 (14.66)
Others----------------------------------------------------------------------------- 33, 80 (27.25)
Blue Cheese, except Roquefort--------... = = ~ - - - - - - - - * ~ * ~ * ~ * - - - - - - - - - - - - - - * * * * * * * * = = = ~ * * = = * * = <= 27.62 (22.71)
Processed cheese up to 48 percent fat by weight of dry matter, 33 percent
fat, but less than 38 percent. Others----------------------------------------------------- 12.19 (9,63)
Processed cheese: -
Less than 20 percent fat------------------------------------------------------------- 12.19 (9,63).
More than 20 percent fat------------------------------------------------------------- 17.32 (14. #
40 percent fat or more: - - --
Zone D------------------- - - - - - - - ---------------- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 28.29 (23.91)
!, Others------------------------------------------------------------------- - = * * * * * * * * * * * * * * * * * * m = as m º º
Processed cheese over 48 percent fat with a dry milk content by weight: -
33 percent but less than 38 percent dry matter----------------------------------------- 12.19 (9.63),
38 percent but less than 43 percent dry matter----------------------------------------- 17.32 (14. 23).
43 percent but less than 46 percent dry matter----------------------------------------- 28.29 (23.91)
46 percent but less than 55 percent dry matter:
Zone D------------------------------------------------------------------------ 17.89 (17.89)
9thºrs------------------------------------------------------------------------- 28.29 (23.91).
Switzerland------------------------------------------------------------- - - - - - - - - - - - - - - - - - - - - - - - - - - -
55 percent or more: - • -- . . . .
Zone P-------------------------------------------------------------- -------- -- 20.79 (17.89).
9thºrs------------------------------------------------------------------------- 32.79 (27.91).
. . . Switzørland------------------------------------------------------------------ ----------------------
Grana, Parmigiano, Reggiano------------------------------------------------------------- 37.17 (28.24)
Fiore Sardo, Pecoring------------------- - -,-,- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 45, 38 (36.44).
Cheddar, Chester with a fat content by weight of dry matter of 50 percent
Or more . . " - - . - -
Aged less than 3 mo:
. . Zone P------------------------------------------------------------------------------------ * - - - - -, * *
* - ". . , 9thers----------- - - - - - - - - - - - - - * * * * * * - - - - - - - - - - - * * * * * * * * * * * - - - - - - - - - - - - - - ... - ... -- - - - - - - - - - - - - - - - - - - - - - -
Aged more than 3 mio. -
H.S.S.R. and satellite countries-------------------------------------------- -------- 8.20 (31.78).
. - Others----- * * * * * *----------------------------------- --------------------------- 29.32 31.78).
United States------------------------------------------------------------------- 18.06 (31.78), .
See footnotes at end of table.
51
- EXHIBIT A-Continued
E.C.: EXPORT SUBSIDHES FOR DARY PRODUCTS, EFFECTIVE FEB. 15, 1974 t—Continued ‘.
|Cents per pound| -
United States E.C.
New Qld New” Old 2
subsidy subsidy subsidy” subsidy 2
Tilsit with fat content by weight of dry matter over 39 percent up to 48
t:
Aone P------------------------------------------------------------------------------------------------
Switzerland------------------------------------------------------------------------ 6, 46 (5. 42)
Others----------------------------------------------------------------------------- 29.93 (23.97)
Asiago, CacioCavallo, Provolone and Ragusano: -
- Switzerland------------------------------------------------------------------ * - - - - - 6, 46 (5. 42)
thers----------------------------------------------------------------------------- 29.93 (24.30)
Cantal, Edam, Fontina and Gouda: -
006 D---------------------------------------------------------------------------- 21.72 (20.08)
Zone f----------------- -------------------------------------------------- .46 (5. 42)
§ºland - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -s ºs = * * * * - - - - - - - - - - - - - - * * * - - - - - - - 29.93 (23.97)
BFS-------------------------------------------------------------------------------------------------
But, º Italico, Kerham, Saint Paulin Taleggio, Saint-Nectaire: -
90° 1'------------------------------------------------------------------------------------------------
*one f----------------------------------------------------------------------------- 20.63 (18.99)
Switzerland------------------------------------------------------------------------ 6. 46 (5. §
9thers----------------------------------------------------------------------------- 27.26 (21.89
0; * content 19 percent to 39 percent with a water content up to -
percent:
Switzerland------------------------------------------------------------------------ 6, 46 (5.42)
thers----------------------------------------------------------------------------- 29. 46 (24.30)
Unspecified cheese, grated or powdered, with 85 percent or more dry
matter content by weight, over 20-percent fat content by Weight, under
5-percent lactose content by weight: Others---------------------------------------------- 27.63 (22.16)
Milk and cream, canned in 454 g without sugar: -
Evaporated milk-------------------------------------------------------------------- 4. 46 (2.66)
3-percent up to 7-percent fat---------------------------------------------------- 7.87 § #
§: 7-percent up to 8.9-percent fat-----------------------------------------.* - - - - - 9.04 7, 20
- BFS---------------------------------------------------------------------------------------------
Other canned milk with fat content up to 45 percent in containers up to 2 kg net weight: - –
Qver 3-percent up to 7-percent fat---------------------------------------------------- 4, 46 (2.66)
Over 7-percent up to 8.9-percent fat--------------------------------------------------- 7.87 (6.29)
Over 8.9-percent up to 11-percent fat-------------------------------------------------- 9. 04 (6.20)
Over 21-percent up to 39-percent fat--------------------------------------- ----------- 16.21 (15.98)
Over 45-percent fat------------------------------------------------------------------ 33.87 (33.43)
Wilk and cream, canned in 454 g with sugar (condensed milk): 3 -
Up to 6.9-percent fat---------------------------------------------------------------- 3. 98 (2.19)
Over 6.9-percent up to 9.5-percent fat---------------------------------------- --------- 9.76 (7.93)
Nonfat dry milk up to 1.5-percent fat;4 - s -- - -
Without sugar in packages up to 2.5 kg------------------------------------------------ 5. 47 (8.76)
Without sugar in bulk---------------------------------------------------------------- 4.37 (0.00)
With sugar added in º up to 2.5 kg"-------------------------------------------- 5.47 (8.76)
With sugar added in bulk”. –--------------------------------------------------------- 4.87 (0.00)
To United States (all NFDM)--------------------------------------------------------- 0 (4.37
- - - - - - or 5.47)
Dried milk without sugar (prepared for retail sales): - - -
Over 11-percent to 17-percent fat content---------------------------------------------- 19.45 (14.28)
Over 17-percent to 25-percent fat content---------------------------------------------- 22. 69 (17.31)
Over 25-percent to 27-percent fat content---------------------------------------------- 26.81 §: 34)
Over 27-percent to 29-percent fat content---------------------------------------------- 27.83. 22.35)
Over 29-percent to 41-percent fat content---------------------------------------------- 27.83 (22.35)
Over 41-percent fat content---------------------------------------------------------- 34. 11 (29.41)
Dried milk with sugar added (prepared for retail sales): 5
Over 11-percent to 17-percent fat content---------------------------------------------- 19.45 (14.28)
Over 17-percent to 25-percent fat content---------------------------------------------- 22.69 (17.31)
Over 25-percent to 27-percent fat content---------------------------------------------- 26. 81 (21.34).
Over 27-percent to 41-percent fat content---------------------------------------------- 27.83 (22.35)
Over 41-percent fat content---------------------------------------------------------- 34.11 (29.41)
1 Change of value for units of account U.C. =US$1.2063 plus increases in export subsidies.
2 As of Jan. 15, 1974. -
3 Destined for consumption in this zone,
4 13.13.8/lb on bulk and small package, May 14–July 10, 1973.
*Additional subsidy for sugar to be added. - -
*Countries other than United States, Canada, Mexico, and Puerto Rico.
Source of change: E.C., Brussels 1128, Feb. 21, 1974

52
EC ExPORT SUBSIDY Zones
Zone A Mali
Burundi Mauretania
Cameroon Niger
Congo (Brazzaville) Central African Republic
Congo (Kinshasa) Madagascar
Ivory Coast Ruanda
Dahomey Senegal
Gaboon Tchad
Guines Afara and ISSas
Upper Volta Togo
Zone B
Mexico, States of Central and South America, Islands in the Pacific and At-
lantic between 30 and 120 degrees longitude and 30 degrees latitude as well as
the Islands Fernando-de-Noronha (Cliffs Sao Paulo and Reeas-Atoll), Trinidad,
Martin Vaz and the Southern Sandwich Islands.
201te 0. .
Asian States east of Iran including the Asiatic parts of the USSR and the
Islands of the Indian and Pacific Oceans between 60 degrees and 180 degrees
latitude except Australia, New Zealand and Japan. : • .
200te D
Spanish Territory of Iberian Peninsula and Baleares.
Zone E - . - . . . .
European territory of United Kingdom and Northern Ireland (including the
Isle of Man and Channel Islands) except Gibraltar. - -
20% e F
The territories of the United States situated on the American continent as well
as Hawaii.
- . U.S. SENATE,
- Washington, D.C., April 26, 1974.
Hon. RUSSELL LONG, -
Chairman, Senate Finance Committee,
Washington, D.C. *
DEAR MR. CHAIRMAN: Attached is a letter inquiring about Mr.
Simon's policy regarding countervailing duties on dairy imports. .
It seems most appropriate that the Committee request his appraisal
of the situation due to the problems facing the dairy industry in the
United States today.
Sincerely yours,
. Bob DoIE, U.S. Senator.
. U.S. SENATE,
- - - TWashington, D.C., April 26, 1974.
Hon. WILLIAM E. SIMON, -
Secretary of the Treasury Designate,
Washington, D.C. -
DEAR MR. SIMON: The law calls for the levying of a duty on im-
ports sold in the United States which have received a bounty or grant
from the exporting country.
In the case of dairy products, particularly in the European Com-
munity, the facts in this regard not only seem quite clear but are also
well publicized. The European Community establishes intervention
53
prices on manufactured dairy products, such as butter, cheese and
nonfat dry milk powder. These intervention prices, analogous to our
É. supports, are at least a minimum price for these products in the
uropean Community and generally are the actual prices there. At
the time they are announced such intervention prices are widely
publicized.
Similarly, the European Community announces export subsidies
for these dairy products, which are also widely publicized at the time
they are announced. The Foreign Agriculture Service of the U.S.
Department of Agriculture readily compiles them and makes this
list available on request to interested parties. During 1973, for ex-
ample, the announced export subsidies on nonfat dry milk shipped
by the European Community to the United States were established
at different levels at different times from zero to 13.13 cents per pound.
For butter they were 37.37 cents per pound, for buttteroil 38.3 cents
per pound.
Yet in spite of the availability of this evidence and even in spite of
the recommendations of Secretary of Agriculture Earl Butz that
countervailing duties on these products should be imposed, the De-
partment of the Treasury has taken no action, contending that the
needed data are not available to make their findings.
With this brief background we are asking your views as to what
your policy will be on enforcing the countervailing duty law on dairy
products if you become Secretary of the Treasury.
Sincerely yours,
Bob DoDE, U.S. Senator.
THE SECRETARY OF THE TREASURY,
- - Washington, D.C., April 26, 1974.
Hon. RUSSELL B. LoNg, -
Chairman, Committee on Finance,
U.S. Senate, Washington, D.C.
DEAR MR. CHAIRMAN: This letter is written in response to a letter
from Senators Nelson and Mondale, dated April 26, 1974, addressed
to you, and a letter from Senator Dole, bearing the same date ad-
dressed to me with a copy to you. Both letters concern the enforce-
ment of the countervailing duty statute against dairy products im-
ported from the Common Market.
Matthew J. Marks, Acting Assistant Secretary for Enforcement,
Tariff and Trade Affairs, and Operations, is currently responsible for
this area. David R. Macdonald, Assistant Secretary of the Treasury-
Designate for Enforcement, Tariff and Trade Affairs, and Operations,
will, provided he is confirmed by the Senate, assume this responsi-
bility. Mr. Marks reports that investigation of the countervailing duty
statute as to dairy products is progressing, but has been complicated
by the existence of drawbacks of duties and taxes paid on imports
to the E.E.C. for cattle feed.
The complicated interplay that existing quotas, additional duties
and other trade implements have on our dairy imports, and the pos-
sible repercussions which the application of these measures may have
on other American agricultural interests, highlight the urgency of
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54
immediate enactment of the 1973 Trade Reform Bill. This bill, with
certain revisions which we intend to submit to your Committee, will
provide a framework for a multilateral resolution of this problem over
the long term, and will permit us the best possible posture to enter
negotiations with the Common Market. -
Prior to its enactment, however, I am ordering Mr. Marks and,
provided he is confirmed, Mr. Macdonald, to intensify the investiga-
tion of dairy product exports from the Common Market to the United
States and to report back to me concerning this Department's conclu-
sions as to the applicability of the countervailing duty law with re-
spect to these exports. In the event that the Department concludes as a
result of their report that the countervailing duty law should be ap-
plied, all necessary action will be taken to enforce that law.
Sincerely,
WILLIAM E. SIMoN,
Acting Secretary.
O