ECONOMIC IMPACT OF PRESIDENT FORD'S

ENERGY PROGRAM

WEDNESDAY, FEBRUARY 12, 1975

U.S. SENATE,

COMMITTEE ON INTERIOR AND INSULAR AFFAIRS, Washington, D.C. The committee met at 10 a.m. pursuant to notice, in room 3110, Dirksen Office Building, Hon. Henry M. Jackson, chairman, presiding.

Present: Senators Jackson, Johnston, Haskell, Glenn, Hansen, Bartlett, Randolph, Moss, Stevenson and Hart.

Also present: Grenville Garside, special counsel and staff director; Daniel A. Dreyfus, deputy staff director for legislation; William J. Van Ness, chief counsel; James Barnes, Thomas Platt, Benjamin. Cooper, and Richard Grundy, professional staff members for the majority; Harrison Loesch, minority counsel, W. O. Craft, deputy minority counsel, and David P. Stang, deputy director for the minority.

The CHAIRMAN. The hearing will come to order.

OPENING STATEMENT OF HON. HENRY M. JACKSON, A U.S. SENATOR FROM THE STATE OF WASHINGTON

Today's hearing will place on the record the views of a number of distinguished economists on the economic implications of various energy policy alternatives available to the United States, including the administration's proposal to substantially increase the price of energy through the imposition of tariffs, excise taxes, and the removal of energy price controls.

Estimates of the economic impact of the administration's proposal have arrived at different annual cost figures: $30 billion by Mr. Zarb, $55 billion by Mr. Seidman, $50 billion by the Congressional Research Service and $43 billion by the Interior Committee staff. While it is important to reconcile these disparate estimates, the fundamental fact is not in dispute: The proposal would deliver a shock to the U.S. economy in the form of energy price increases equivalent to those imposed by the OPEC cartel during the Arab embargo.

The administration has posed a stark choice for the American people: Accept this program, with its potential for accelerating inflation and deepening recession, or submit to gasoline rationing at nine gallons per driver per week. This is both a false dichotomy and a misleading formulation of the problem. There is an urgent need to clarify not only the nature of the problems facing this country, but also the realistic options which are available to dealing with them.

Our energy and economic problems have short-term dimensions. which call for particular responses. There are long-term dimensions which may or may not call for different responses. In my opinion, the most important problems we face are those which have severe shortrun impacts. We must turn the domestic economy around. We are in a deepening recession that is indisputably our No. 1 problem. We have an obligation to analyze alternative energy policies in the light of this cruel reality. Scarcely less serious in an inflation which saps the purchasing power of consumers, and dampens business investment for new productive capacity. And we must begin to insulate ourselves and our European allies from the attempts of the Arab nations in OPEC to influence American foreign policy.

The administration claims that its energy program has a neutral impact on the prospects for economic recovery, that its inflationary impact would amount to a one-time 2 percent increase, and that its impact on Arab policies will be significant. I have severe doubts that any of these claims are valid, particularly that any of them are valid over the short run. The hearing today will attempt to clarify these questions.

We have a number of distinguished witnesses that are here and I thought they could present their views, one by one, as a panel, and then we will reserve, if this is agreeable with my colleagues, questioning until they have all spoken.

I want to say we are operating under the Randolph resolution, Senate Resolution 45, and we have herein addition to members of the Interior Committee, Senator Moss, Senator Randolph, and Senator Hart, and we are delighted to welcome them as part of this committee.

We have Dr. John C. Sawhill, former Administrator of the Federal Energy Administration. Dr. William Janeway, vice president, the F. Eberstadt Co. in New York, Dr. Eric B. Herr, economist, Data Resources Inc.. Lexington, Mass., Dr. John A. Lichtblau, executive director, Petroleum Industry Research Foundation, Professor Richard Cooper, Department of Economics, Yale University, New Haven, Conn.

I might say we invited Dr. Seidman to be here in light of his public statements and public utterances regarding the overall total implications of this program and he has indicated to the staff he will rely on executive privilege.

I must say only this, that when assistants to the President meet with the press, occupy the public platform, they ought to be subject to cross-examination by the Congress. There was a period where the assistance to the President were known as the anonymous assistants. I think it is in that category where you can respect executive privilege, but you cannot very well in one breath go out and take a public position and then hide from the opportunity to cross-examine.

There were previous administrations that followed strictly the rule of anonymity, but when you are no longer anonymous and you are out speaking as an advocate, it seems to me there is a responsibility to this branch of Government to be available as to those matters you have spoken out on so they can be subjected to cross-examination to find out wherein the truth lies. There were a number of reporters

It would be interesting to find out where the truth lies on their projections in that regard.

Mr. Greenspan regrets he cannot be here this week but he will be available at a later time and he will testify as chairman of the Council of Economic Advisors.

Now, gentlemen, in which order shall we start? Dr. Sawhill, you are first on the list.

Dr. SAWHILL. Thank you very much, Mr. Chairman.

The CHAIRMAN. First, do any of my colleagues have any comments to make?

Senator Moss. I will reserve them.

The CHAIRMAN. You all agree we will hear from each of them and then we will reserve our questions until all have made their comments. If you have statements, you may place them all in the record and do a summary of them, if you wish.

STATEMENT OF DR. JOHN C. SAWHILL, FORMER ADMINISTRATOR, FEDERAL ENERGY ADMINISTRATION

Dr. SAWHILL. Mr. Chairman, I appreciate this opportunity to appear before you to discuss and evaluate the administration's proposals for dealing with the Nation's energy problems and, specifically, to comment on the proposed tariff on imported crude oil and refined products.

Since energy and the economy are so closely interrelated, I would like to begin by placing the dual problems of economic recession and energy dependence in perspective. There is much talk of the seriousness of our energy problems and the need for prompt action to correct them. As a person who spent some time working in this area, I would be among the last to discount these concerns. But, as an economist, I recognize that other problems have emerged as the most immediate and gravest challenge to the Nation. We must keep our priorities in order.

A year ago, millions of Americans were waiting in line for gasoline; today they are waiting in line for welfare checks. Today, with gasoline in plentiful supply, they cannot afford to buy it. Our energy difficulties have been superseded by our economic dilemma as the Nation's No. 1 problem.

The economy is spiraling downwards into the worst recession since the Great Depression. By the end of this year we will have experienced the first back-to-back decline in real GNP in over 3 decades. Unemployment jumped from 5.5 percent in the third quarter of 1974 to 6.5 percent in the fourth quarter.

It now stands at 8.2 percent and will climb above 8.5 percent and average at least 8 percent this year. Industrial production fell sharply in the last quarter of 1974 and further declines are in prospect. Other economic indicators are equally discouraging, i.e., productivity, housing starts, plant and equipment spending, corporate profits, et cetera. Clearly, this situation is intolerable. The costs in human and social terms of continued unemployment at such levels are profoundly disturbing. Congress must move quickly to reverse these trends. And it must do so not only to salvage our economy here at home but, also,

traditional friends and trading partners overseas-some of whom are experiencing severe financial difficulties.

The most important single thing that we can do to help our trading partners finance their oil deficits-which are far more distruptive than ours is to provide a growing market for their exports, and this growth will not take place until we have turned the American economy around. Thus, both international and domestic considerations demand that revitalization of the economy be our top priority.

Because of the critical condition of the economy, I am convinced that-important as our energy problems are--at this time our economic. difficulties must come first.

A balanced energy budget is an important national goal, but not if it is accompanied by economic dislocations that would largely obliterate its benefits. And this, I fear, might well be the case if the President's energy program were to be implemented exactly as presented.

The impact of the proposed tariffs, excise taxes and price decontrols, as it would be felt in all sectors of our economy, has been estimated at $50 billion, and we simply cannot afford to drain $50 billion of consumer purchasing power out of the economy at a time when we must restore confidence, create more jobs, and get the economy turned around.

Certainly, there is much that is good in the administration's program. The measures designed to increase energy supplies and afford us protection against future emergencies such as opening NPR No. 1 to production, beginning exploration of NPR No. 4, exploring the OCS, creating a strategic reserve, increasing the price of new natural gas at the well head, and creating a strategic reserve, are all important. At the same time, many of the proposed conservation measures such as thermal efficiency standards for new buildings, tax credits for insulation of existing homes, and subsidies to low-income groups to permit them to retrofit their homes with storm windows and doors and utilize additional insulation, are also desirable and should be expanded beyond the administration's proposals. And the expanded funds for energy research and development programs should be provided, although I feel the additional funds proposed for conservation research are insufficient.

But, while I agree that all these things are necessary, I feel that the program, when viewed in its entirety, has major defects.

First-and this returns to my earlier point-it would severely aggravate our economic difficulties, which are already as acute as any we have experienced in decades. The proposed taxes and tariffs on crude oil would raise prices on the entire range of petroleum products, from gasoline to plastics, from home heating oil to synthetic fabrics.

The program would result in higher costs for other fuels as well, such as coal, and it would require an additional tax on natural gas that could, for example, translate into increased fertilizer costs of $4 or more per acre of cultivated land, and ultimately, into further escalation of food prices.

In short, the ripple effects of these proposals would eventually work their way through the entire economy-transportation, industry, agriculture, utilities-they would all be affected. The administration projects an increase in the consumer price index of approximately 2 per