I assume that that can be done if the committee members supported it and Congress supported it. And you don't know of any reason why it wouldn't be constitutional and legal, do you, Mr. Roosa ?

Mr. ROOSA. I have to plead that I am not an attorney, as so many members of this committee are, so that I cannot give a competent legal view. But I do believe the Government needs in some way to have the right of protection, whether it is first lien on the assets of a rather crippled railroad company, or whether it is an obligation rendered by the other subsidiaries of the parent company, which includes a great amount of real estate that has supporting value. The CHAIRMAN. Thank you very much, sir.

Now, you may go ahead and present your testimony as you desire.

STATEMENT OF ROBERT V. ROOSA, FORMER UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS; PARTNER, BROWN BROS., HARRIMAN & CO.

Mr. ROOSA. Thank you, Mr. Chairman.

I think the committee has been most constructive in bringing to the fore, in a way that would reflect the active participation of the Congress, this question of imposing some further means of limiting or restraining the price-wage spiral that is still proceeding with such strength.

I think that the effort to limit the inflation by control of the demand side alone, as I said in my prepared statement, has already gone on too long at too high a cost with too little result, and that it should be paralleled by additional means.

I realize that there is a feeling that the guideposts in the past as administered were in time eroded, and there is a reluctance to resort to them again.

There is also a widespread feeling that efforts to introduce an incomes policy of one sort or another in other countries have not been remarkably successful. Yet I am persuaded myself that in an imperfect world we cannot wait for evidence of perfect achievement. If we can find means that can make a significant additional contribution we ought at least to explore them. And in my case I certainly come here to endorse them.

I think that the problem that we face in this country is typical, and will become the classical problem for advanced industrialized countries as they approach full employment at any time over the decades ahead. And certainly this country shouldn't fall back on a skeptical criticism of faltering efforts made in other countries, but instead should try to find the ways in which it can pioneer and demonstrate to other vigorous capitalist economies that there are practicable ways of restraining the kind of speculative and cumulative spiral that we are undergoing now without stifling the creative functioning of the market economy, and without holding the economy well below its physical potential--the problem that I am sure members of this committee have been agonizing over.

All of us are distressed first at the growing appearance of personal unemployment and hardship and beyond that, at the evidence that a vast and impressive, beyond all precedent, industrial machine is being slowly idled at a time when needs on all sides are so great, be

cause we have relied on only one pattern of Government economic policy instead of trying to aline it with others.

As I prepared my own statement I wasn't aware that we would as soon as this be hearing from the President. And I am going to be eagerly hoping to hear at noon today that at least the administration has reached the point of recognizing that there is something to be done on the other side. Whether the proposed course of action will be in any way comparable to what I had thought of suggesting to the committee of course would be another question.

Since things don't get done in this area even with congressional authorization and impetus unless the administration is prepared to take hold and move forward on its own initiative as well, I suppose we are going to be limited for a time to whatever the President may today suggest.

This may perhaps render a little redundant, or at least for the moment is unlikely to make effective, any of the specific suggestions that I am trying to urge that your committee consider. But I would just say in self-defense, and in only vague anticipation of the approach the President may be suggesting, that this is the lasting and overriding economic problem of an advanced economy, and I think there is no reason to feel that because the President takes some kind of action today, full or partial, that the need for sustained congressional searching and probing attention to this issue is in any sense deferred.

My own proposal is for a three-phase approach. And I would suggest that all three proceed simultaneously.

The first is a temporary freeze of prices, wages, rents, and dividends. The second, the initiation of an incomes policy.

And the third, establishment-and this is a newer approach, something I at least haven't suggested earlier-the establishment of what I am calling a 1970 version of the landmark of the late 1930's Temporary National Economic Committee.

Although these three approaches could be started close together, I would view the first phase as applicable at best for only a few months, followed by an incomes policy that may run for 2 or 3 years, in its initial design at least.

By that time I would hope that we could have completed a broad reappraisal of the entire national economic condition, which would be ready by 1972 or 1973, to provide a fuller basis for improving the long run functioning of the economy, and hopefully evolving new objectives and procedures that might be as meaningful for the decades ahead as we have found the Employment Act of 1946 to have been over the last quarter century.

I am not going to try, as you suggested, Mr. Chairman, to spell these three suggestions out in detail. I would like to comment on them very quickly, and then respond to any questions that any members of the committee might have.

The CHAIRMAN. That will be very satisfactory, because I know the members are anxious to interrogate both you and the Governor.

Mr. ROOSA. So far as the freeze is concerned, I have in the past referred to it as a 6-month affair. And I know that Professor Galbraith made the same comment yesterday. And the proposed legislation provides for what would from today be something equivalent to 6 months, with an end date in February 1971.

I am not as rigid about a firm date as I used to be. Instead, what I am suggesting here is that a freeze be imposed which would last until the procedures of an effective incomes policy are in being and in motion, and then the unfreezing occurs as you move into the implementation of an incomes policy itself.

The incomes policy as I see it will, in the way in which it is carried through, only be effective if it results from fairly intensive discussions and negotiation among the groups involved, the spokesmen for the key groups, and with Government officials. And for that reason any blueprint that anyone independently might suggest is only a kind of a sketch. What is most important is that there be something that the principal management and labor groups can themselves agree upon.

And I think if they are agreeing under the pressure of a sustained freeze, which will only be relieved when they have reached an agreement, you have some hope that the negotiation won't go on forever. So when I suggest a design of an approach, all I would like to stress is that I think the emphasis ought to be on finding every possible route toward improving the functioning of a competitive market economy, and not preempting for any outside body the decisionmaking authority on individual prices and wages.

And that leads me to say that I think there does have to be the use of some compulsion, some power of law. But it ought to be used for the purpose of referring individual cases at the option of either party, or of an established review board, referring to the board any such cases for surveillance of the facts, and then an imposed standstill during the period of that review, perhaps for up to 90 days. That can be debated. But the compulsion would be that no action on wages or prices or rents or dividends, whichever was at issue, could occur while the review was underway.

And then once a finding can be made, a finding of fact—and I am not proposing that it necessarily be a recommendation, it could be a finding of alternatives with implications indicated, leaving that to the judgment of a wise board-but as soon as that stage is reached, then the standstill is lifted and the powers of the marketplace are returned, but reinforced by a kind of information available to the whole public, and to the administration, if it is prepared to use the kind of leverage that I think occasionally must be used to overcome the powers of monopoly pressure that otherwise are not resisted in the public interest. Then I think we will have an improved situation without having to resort to the outright determination of prices that Mr. DiSalle knows so much about, and which would be appropriate during a war period, even though in my view you also need public support. Such mandatory controls need public support when you are joined together in a national commitment to a war effort, a commitment which would not characterize today's condition.

Then as to my third suggestion-and I do not make it lightly, Mr. Chairman, although I know everyone is inclined to come along with a proposal for a new study. If I may be unkind, I think the administration has for some months been in danger of relying on the economics of the 1920's, for too long. I think there is also a risk that we might rely on the economics of the 1950's for too long. And it was those economics that characterized more of the period that I was familiar with while

here in Washington. I think we need a shaking up of the whole public policy approach to economic affairs. We need an overall review, of sustained nature, using the power that is only possible when a mixed body with Government authority can pursue the various aspects of such an inquiry at length and commission studies from a number of people, and pursue and analyze them through hearings, and even use the power of subpena in some carefully circumscribed cases. Only in that way, I think, extending over a period of a couple of years, the way the TNEC itself operated, can we make the kind of reexamination I think we need.

We are looking at it piecemeal now. The fact that the President resorts to a series of commissions on special subjects is, I think, itself evidence that he feels this need for a further probing down into the fundamental changes in the structure below. And whatever comes from these various commissions is certainly going to be helpful to the one I am talking about. But the one I am talking about is global. It would try particularly to fold into the economic processes of evaluation and objective determination the force of all we now must take into account in minority group training and advancement, and the transitional costs that are involved there that cannot be met out of the ordinary maximization of profit approach that is characteristic of a functioning free-enterprise economy. In the same way, it would take into account all that must be done, and where Government must play an important role, to equalize the application of standards in the whole field of ecology. It isn't enough to castigate an individual firm for not doing what it should when the cost would be great and the firm would be thrown into serious competitive disadvantage if every other competitor wasn't in some way required to meet comparable standards.

These are things that have to be worked into the cost structure and the proper relation between Government and the firm needs to be thought through in a penetrating way that I do not think we have yet.

And then beyond all of this there is a change in the structure of the economy that we have to think through. For the first time in the last quarter of 1969 we have reached a stage where the largest single component in the gross national product is services, a trend that has now brought us, in the long sweep of history, to the other end of a pattern that began when the rural economy was becoming industrialized, and the mass of the population and the output in the GNP was becoming that of the manufactured product.

Now we have reached the point where we have moved beyond that to the stage where the largest single element in our total gross national product, among the many components, is the services sector where many of the criteria we have used in the past in developing economic policy may no longer be applicable. I think we have got a hard job to do in rethinking. And that is why I am intimidated about suggesting that an income policy of the sort I have outlined or that could be pursued by the kind of board that I have mentioned here would necessarily be valid for more than 2 or 3 years until we have had the more searching reexamination of the structure underneath.

And that is why I feel a little frustrated and a little embarrassed to come without a resounding commitment as to procedures which I think will solve this classic problem of ours for all time.

But I do feel that this is the sort of further inquiry that Congress can initiate and take the leading role in as it did with the Temporary National Economic Committee. And I think the results that have flowed directly and indirectly from those resounding hearings and studies have benefited us all for the subsequent 30 years.

I would think we are ready for another one.

Thank you very much, Mr. Chairman.

(The prepared statement of Mr. Roosa follows:)

PREPARED STATEMENT OF ROBERT V. ROOSA, PARTNER, BROWN BROTHERS,
HARRIMAN AND CO.

Mr. Chairman: The members of this Committee have performed a great service in introducing as Title II of the Defense Production Act the proposed "Economic Stabilization Act of 1970." The powers which this Act would delegate to the President are comprehensive, discretionary and temporary—an approach which to me seems eminently wise. Your action also clearly implies a need for more action of some kind by the President to speed up and strengthen the anti-inflation effort on which the Government has already been engaged too long, at too high cost, with too little result. And I certainly endorse that implication. In the same spirit, the Editors of Fortune wrote in their June issue: "The role of Congress, that instrument of government intended to represent the people in the multiplicity of their political wills, is now more necessary than it ever was." I believe that proposition is as valid for the nation's domestic economic affairs as it is for the foreign commitments and internal social disorder which the Fortune Editors were addressing.

The overriding economic problem of achieving price stabilization at high employment, with which you are concerned, is, of course, common to all advancing countries as they approach full employment. In the case of the United States that problem has been compounded by superimposing upon it the strains of a tragic war, of a long overdue recognition of the rights and needs of minority groups, and now the demands of a growing concern for ecology. This country has tried to contain the inflationary potential that is inherent when the aggregate of all effective demands exceeds the immediate capacity to produce, by using monetary policy and fiscal policy to restrict demand. I do not for a minute question the need for both kinds of action. But the risk-and the world is now seeing its consequences-is that once a "demand pull" inflation gains momentum it • will set off an inner spiral of "cost push." If the necessary weaponry of economic policy is then only to be used on the demand side, total demand has to be pulled down far below the economy's actual potential, with spreading unemployment of people and resources. At a time of unprecedented need for more output, the nation has to settle for less, in the effort to find a new balance from which forward motion can be resumed.

The arresting economic challenge of our times is to find a better way, without swinging to the other extreme alternative-a centralized dictation of prices and wages that would, while nominally stabilizing the symptoms of instability, also stifle the dynamic flexibility and creative genius of a market-guided economy and thereby condemn the economy to a perpetual shortfall below its potential. I imagine everyone in this room will admit that none of us sees, as yet, the answer to that challenge. The Administration has done its best, with conviction, patience, and determination, to avoid any slippage toward this other extreme. But in doing so, it has only succeeded in convincing me, at least, that aggregative demand control cannot be the sole answer when inflationary distortions have already gained momentum. The Government must, I believe, in the overriding public interest, dare to assist the more powerful forces in the marketplace to reach the equilibrium they are now slowly seeking, before the economy suffers costs in unemployment, and impaired initiative and vitality, such as are spreading across the country as the Committee sits here today.

What your Committee has proposed, in these circumstances, is to provide the President with power to improvise means of quickening the lagging adjustment of prices to demand, over a brief period. That may, if the power is used with effectiveness and caution, get the nation through the present conjuncture without imposing any dreaded straightjacket of prolonged controls. But that, I submit, is not enough. It is in times of stress such as these, not during the more