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not in evidence today, and until such a supply is found, the private sector will continue to function in a stagnant and retarded pace with little prospects for real growth and development. Since high levels of productivity and efficiency cannot be accomplished, real unemployment will continue to remain at its present rate and the public works programs will simply gloss the problem over. This does not mean that I favor the abolition of public works employment. Quite the contrary. I merely suggest that continued reliance on such programs should be carefully scrutinized to see if continued funding could not be appropriated to more needed concerns. While public employment does stimulate demand, it does dry up investment capital for the private sector which discourages outlays for expansion and increased employment.

Moreover, it is inflationary, tending to reduce GNP in the long run, and it is easy to visualize the bottleneck to which continued reliance can and does lead.

SUBSIDIZE INDUSTRY

The second essential to improved growth in the private sector is the availability of the money supply for capital investment, or again the subsidy approach to troubled industries. A good example of an industry in dire need of direct subsidization is the steel industry, whose existence is threatened by foreign steel imports and questionable practices by foreign governments. The fact of the matter is that domestic producers cannot produce steel at a cost which is competitive in the marketplace. This industry can be directly subsidized and avert such recurrences in the future. Using the formula allowed for energy subsidization, that is tying the amount provided to gains in productivity and output, the average variable cost of production can be reduced and lower prices achieved due to increased supply.

INDUSTRY ALTERING BALANCE OF LABOR AND CAPITAL

Also, Keynesian economic theory tells us that unemployment and inflation cannot rise simultaneously, and we have all witnessed the contrary. A component part of these issues the ratio of capital expenditures and the labor force to total investment is now showing an unusual shift. Heretofore, investment in plant and equipment assumed the greater percentage of total dollar expenditures, and the general drift now is to employ more workers and spend less on equipment due to increased prices, cost of operation, and cost of repairs. Initially, this means a greater hiring of workers in the service industries, but this gain is offset by the loss of employment in the plants which manufacture equipment. From this fact, one can clearly see that industry is merely altering the balance of labor and capital, neither expanding or investing. Without increased investment, there is no growth in terms of GNP and no decrease in rate of unemployment.

DEFICIT SPENDING INFLATIONARY

Purely on a quantitative basis, the Federal budget appears to be over extended, if not properly utilized. President Carter has promised a balanced budget in the future and I applaud this idea. The

idea of a continuing and growing deficit budget is completely unacceptable and not conducive to economic growth and development. Deficit spending is undeniably inflationary, and continued borrowing by the Government means that there is less money available for business investment. Private sector expansion is limited by the availability of lendable funds in the economy. While a general tax cut may be politically popular, it is only budgetarily sound if matched by an equal decrease in Federal spending. The idea of maintaining a higher budget deficit unadjusted and not tied to the general tax base means that more money must be borrowed to maintain the present level of goods and services.

INTEREST RATE AFFECTED BY DEMAND AND SUPPLY OF MONEY

Moreover, we find that increased Federal spending increases the free-floating rate of interest irrespective of the Federal Reserve Board policies. In terms of the loanable funds theory of interest, the interest rate is directly affected by the demand for and the supply of money. When the tax cut is enacted, less revenue is obtained so more will have to be borrowed. Assuredly, this keeps the interest rate and the demand for funds and such rates hamper or discourage investment in plant and equipment since the marginal efficiency of investment is increased. Accordingly, less expansion occurs, a lower rate of growth of the private sector and a low growth of GNP. Similarly, unemployment remains at about the level. To increase Federal spending or to maintain the same level of spending is not only unproductive but also detrimental to the effects of an increased money supply by the Federal Reserve Board. It is easy to see that as more money is made available by the Fed, the declining revenues necessitate that borrowing be increased, leaving less for the private sector. Moreover, deficit budgeting is the primary cause of inflation, probably the greatest economic concern we face today.

BALANCE-OF-PAYMENTS DEFICIT

Last, the trade deficit or the balance-of-payments deficit requires immediate attention. The last time this country had a budget surplus was in the 1950's; since the oil embargo, we have an unacceptable and still rising balance-of-payments deficit. When this balance becomes too great there is pressure by foreign governments to devaluate the dollar, and this too causes shock in our economic system. Traditional arguments call for tariff and import quotas, and we should look closely at what results tariffs and quotas bring around. In response to anticipated American tariffs on Japanese goods, the Japanese responded by announcing higher tariffs on American imports to that country. Experience has taught us that tariffs and quotas produce retaliatory measures, and it's easy to see to where a tariff war does lead. Inevitably domestically produced American goods will be priced out of international markets and this will result in less demands for our goods and services, increasing unemployment domestically, and slows the growth of our economy. Again, subsidy appears to be the only solution to this dilemma, if applied in the fashion previously discussed. We cannot only

stimulate real economic growth, but also we can reduce the level of unemployment to acceptable levels.

SUBSIDIZATION TO PROVIDE STIMULUS FOR ECONOMY

In summation, it is evident that this country still faces some difficult economic issues and budgetary attention to these matters is clearly needed. Direct industry subsidization, in conjunction with sound monetary and fiscal policy, can provide the stimulus needed for our sluggish economy. We have had experiences with subsidization in the past, some good and some bad; however, the determining factor in effective subsidization is the manner in which it is applied. By directly tying the amounts of subsidy to increase in gains and productivity in an inverse fashion, as in the case of the petroleum industry, we can be assured of some degree of price stability and the incentive to utilize resources efficiently.

Senator SASSER. Thank you very much, Mr. Fishman. And I might say that since you have some references to developing energy programs in your prepared statement, that the administration's fiscal year 1979 budget includes a 19 percent increase for energy programs over the amounts that are currently appropriated for fiscal year 1978. So that is a substantial increase, at least in certain areas of the energy budget.

Thank you very much for appearing.

And if there are no other witnesses, this concludes the hearing, and we thank you for appearing, and especially those of you who testified. And I would like to recognize a distinguished Nashvillian, Representative Harold Love. Representative Love, we are glad to have you here today.

[Thereupon the hearing was adjourned at 1:15 p.m.]

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