given the scope and magnitude of these ripple effects, that figure remains at best uncertain."

Second, such undiscriminating increases would penalize those people who can least afford them. Poor people and people living on fixed incomes, along with the rest of us, would have to pay those higher prices to heat their homes and feed their families. They would not have the option of closing the cottage in the mountains or postponing the vacation on the West Coast.

Third, people living in certain regions, such as New England and the Upper Midwest, could be forced to carry a disproportionate share of the burden.

And finally, there is no guarantee that the proposals would work: that the Arabs would not simply view this as an invitation to hike their prices again and that a nation faced with increased costs across the board would not simply find itself, a year from now, sending even more dollars to the Middle East. They did not choose to do so at their recent series of meetings, but that is no guarantee that they will not do so at some future time.

Gasoline rationing has been suggested as one alternative to the President's proposals; however, the arguments against rationing are as serious for citizens and the economy as those against the President's program. I am convinced that there is another way to reduce oil imports and curtail consumption at home, and to do so without imposing inequities or adding further disruption to an already shaken economy. The way to achieve this is not to try to meet a conservation goal of 1 million barrels of oil per day by the end of this year, or 2. million barrels a day by the end of 1976. Our economy simply cannot afford it.

We must set some lower target for this year but make sure that we meet that target-and successively higher ones for the next several years. Only in this way, through a more gradual approach, can we hope to return our economy to health as rapidly as is necessary for our own national welfare and that of our allies.

At this point, it might be well to examine more closely why we want to reduce imports. Most experts cite two reasons-first, to reduce the balance-of-payments deficit and, second, to reduce the U.S. dependence on foreign sources of supply and thereby protect our national security and our economy from future embargoes. The real question, then, is whether either of these two objectives require an import reduction goal of 1 million barrels per day in 1975 and the economic dislocation that achieving this goal would entail.

Consider first the balance-of-payments question. If we had a more modest import reduction goal of perhaps 300.000 barrels per day rather than the President's goal, it is clear that our balance-of-payments position would sink $2 billion further into deficit. Since most of our allies will be running much larger oil-induced balance-ofpayments deficits than the United States, this $2 billion would be used by them to help finance their deficits. I would argue, therefore, that, for the sake of international economics stability, it would be appropriate for the United States to run a balance-of-payments deficit in 1975, and certainly from the standpoint of the domestic economy, the $2 billion is a small price to pay for more rapid economic

Second. We must address the economic and national security argument. Here, the question is not whether we reduce our vulnerability to foreign sources-almost everyone would agree that we should do so-but how quickly?

Today, we are importing about 6.5 million barrels of crude oil and petroleum products per day. A 1-million-barrel-per-day reduction would still leave us importing more than 30 percent of our petroleum requirements. Thus, even if we achieve the President's goal, we would remain extremely vulnerable to a cutoff, and the differences between our vulnerability with imports at 5.5 million barrels per day and imports of 6.2 million barrels per day-the result of a more gradual import reduction goal-is marginal.

The fact is that imports in 1975 will be substantially below early expectations even without the proposed program of tariff and price increases to the lower level of economic activity.

Thus, rather than setting an unrealistically large goal and enacting measures which would jeopardize economic recovery, the Congress should legislate a broad program of actions to increase energy supplies-along the lines previously indicated-and gradually reduce demand growth so that, over a period of time, we become less dependent on foreign sources.

In the process, we should not raise all petroleum related prices, for that would do little to reorder personal, industrial, or national spending priorities. Rather, price increases should be confined to those products that we, as a people, can most afford to do without. And the chief among these, of course, is gasoline-which should be the target for higher costs-because it is the petroleum product with which we are the most wasteful.

A moderate but gradually increasing gasoline tax, accompanied by refunds to those who would otherwise suffer undue hardships-that is, those whose livelihoods are dependent upon it-and by investment in mass transit is the best means of achieving the necessary targeted reduction in oil consumption.

It could be set at 5 cents the first year, and increased by perhaps 5-cent increments over the next 4 to 5 years. This would bring about some gasoline savings immediately, but would also signal a future of gradually higher prices. Consumers and auto manufacturers would plan and act accordingly.

The transition to a more efficient auto fleet and better public transportation would be steady and rapid.

This type of energy/tax program is one that the American people can understand and are willing to buy. And, in the long run, with a public increasingly well-educated in energy affairs, it is a far more politically palatable remedy than a program with a "rippled" increase in costs to the consumer that might reach $30 or perhaps exceed $50 billion, according to various estimates.

To reduce the inflow of Arab oil and the outflow of dollars, we could set quotas rather than impose a tariff that, by its very nature, would result in an inflationary price increase. At the same time, we should involve the Government more directly in negotiations with

access to U.S. markets. But, we must first take steps to curb demand before quotas and a bidding scheme can be effective.

In addition, instead of taking a voluntary approach toward development of more energy-efficient automobiles, as the President's program suggests, we should proceed to set mandatory efficiency standards which would require companies to make more efficient cars. After all, automobile manufacturers have, over the years, demonstrated two things: They are resilient in responding to market demand, and they are resistant to accommodation of the public interest— as in decreasing pollution or increasing efficiency of their automobiles-until they feel compelled to be otherwise.

Further, I think the Congress should quickly, and favorably, consider the President's proposals for a mandatory efficiency standard for new buildings, a tax credit to those who retrofit existing buildings with insulation and storm windows and subsidies to low-income families to make their homes more energy efficient.

The change I would suggest in these proposals and it is an important one-would be increase the tax credit from 15 percent to a minimum of 50 percent and increase the subsidy to low-income groups from a one-shot $55 million subsidy to a 5-year, $1 billion program.

Finally, I would suggest that the Congress enact legislation requiring the FEA to develop conservation goals and programs for the largest industrial consumers of energy-that is, steel, aluminum, cement, pulp and paper, petroleum refining, chemicals and food-and report annually on the progress achieved.

With a new, lower set of goals, and a tough, targeted program to bring about the desired results, we will have an energy program that will work to the benefit of our economy at a time when such a benefit is sorely needed.

Conservation is important if we are to achieve self-sufficiency. But we must not sacrifice economic recovery to energy conservation.

In conclusion, then, let me summarize my position. There are some who have argued that we should accept the President's proposals because the Congress has yet to come up with an acceptable alternative. The argument is that, if we fail to do so, Congress will lapse into inaction and the country will remain without a coherent effective national energy policy. I reject this argument. The choice is not between the President's program and no program, but between the President's program and an energy policy more consistent with economic recovery. The President should be commended for presenting a well-integrated program which challenges the Congress to act. And, I would hope that many of the elements of the President's program will be on the agenda for congressional action this year.

But, given the current state of the economy, I believe that the Congress must assess the impact of tariff-induced higher energy prices on the level of economic activity and employment before endorsingthrough inaction-the President's proposals. In unilaterally raising the tariff on crude oil and imported products without congressional concurrence, the President has denied Congress the opportunity to make this assessment. It is now up to the Congress to consider the appropriateness of his action.

My position is clear. I urge the Senate to join with the House in

least until sufficient time has elapsed to assess its economic impact and to consider whether the goal of reducing imports by 1 million barrels per day in 1975 is really in the national interest.

I recognize that this recommendation runs the risk of continued congressional inaction. And, for this reason, I make it reluctantly. However, I have concluded that it would be so damaging to our already weakened economy to increase energy prices across the board that I am prepared to take this risk.

I hope that if the Congress decides to reject the tariff, it will not delay in developing an alternative-perhaps along the lines suggested-which will bring our Nation's energy budget into better balance.

Thank you for the opportunity to present my views. I would be happy to answer your questions.

The CHAIRMAN. Thank you, Dr. Sawhill, for a very fine statement. Our next one is Dr. William Janeway, vice president of Ferdinand Eberstadt and Co. Dr. Janeway, we are delighted to welcome you to the committee.

STATEMENT OF DR. WILLIAM JANEWAY, VICE PRESIDENT, F. EBERSTADT & CO., INC., NEW YORK, N.Y.

Dr. JANEWAY. Thank you, Mr. Chairman. I would like to begin by noting the invitation of the committee to participate in these hearings. The reference to the implications for inflation, unemployment, the domestic economy, world trade, and the stability of the world financial system is broad enough to be realistic.

Specifically, it realistically unites domestic economic issues with international financial issues. It, therefore, invites consideration of the relationship between the exercise of power in world markets and the domestic impact of that power upon American consumers, workers, and investors.

In order to accept this invitation. I will focus on a subject that may at first appear unrelated to the primary points at issue in the debate over energy policy. The subject is the international value of the dollar—and why it matters to Americans concerned about the price and availability of gasoline, fuel oil, and feedstocks. My purpose is to use this question to help place the domestic debate over energy policy in its proper international context.

Why does the international value of the dollar matter at all? The promise of "floating" exchange rates was that it would eliminate the international value of the dollar as a matter of concern for policymakers. The foreign exchange markets could be counted on to set appropriate and equilibrium exchange rates which would reflect the demand and supply of the dollar relative to other currencies. Moreover, the fact that a floating dollar could be expected to decline in value. was an additional positive factor-for, according to the textbooks, depreciation of the dollar would improve the U.S. trade balance as U.S. goods became more competitive with foreign produced goods.

This double analysis, representing the "conventional wisdom" of received economic doctrine, rationalized first the Smithsonian devaluation of the dollar and then the subsequent policy of "benign neglect,"

real world beyond the textbooks, it fails at both levels. First, it assumes that exchange rates are effectively determined by the exchange of goods and services between national currency areas as if there were no such thing as bank accounts.

In fact, in any given day or week or month, it is short-term capital movements which dominate the foreign exchange markets. Bank accounts may be, and have been, shifted from one currency to another for reasons unrelated to the current flow of international trade, such as international interest rate differentials or fear of governmental controls.

In a system of floating exchange rates, such movements become selffulfilling and self-justifying prophecies. When, for example, dollars are sold for D-marks, the dollar declines in value. Then when the dollar declines in value, imports cost more in terms of dollars and exports earn less in terms of foreign currencies. This is the "terms of trade" effect of changes in foreign exchange rates. The initial impact on the trade balance is negative, thus justifying the decline in the dollar's value.

At this point, the supposedly beneficial effects of a depreciating currency are to be called into question. The conventional analysis assumed that the volume of exports will rise and the volume of imports will fall by amounts that more than offset the worsening of the terms of trade. To the extent this occurs, it should be emphasized that a real cost is paid: a larger proportion of U.S. output has to be shipped abroad as exports to pay for the same physical volume of imports.

In fact, in the real world a large proportion of world trade appears to be relatively insensitive to the price shifts generated by exchange rate movements. Much of world trade, after all, is in commodities that are the staples of human and industrial life-and that are traded internationally because there are limited alternative sources of supply. Another large portion takes place between the subsidiaries of multinational corporations. Certainly the dramatic, if temporary, turn around in the U.S. trade balance between 1970 and 1972 offers little evidence to the contrary. The speed and extent of the shift from deficit to surplus can be adequately explained by three "special" factors, without reference to the effective devaluation of the dollar: (1) the deliberate decision by the Japanese Government, in response to the succession of "Nixon shocks," to eliminate Japan's provocatively large bilateral trade surplus with the United States; (2) the explosion in U.S. food and feed prices triggered by the Soviet wheat deal; and (3) the extraordinary incentive to export provided by domestic price controls at a time of world boom which lifted some export prices to levels as much as three times above the domestic ceiling.

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So far, this analysis of the negative impact of the successive decline in the dollar's value has accepted the restricted terms of conventional theory. It is reinforced by three further factors: one, economic; the second financial; and the third political.

The economic factor is one that is well understood everywhere but the United States. A declining currency increases domestic inflation, as import prices rise directly and as the prices of internationally traded goods are marked up toward levels which correspond to the old, higher