Dr. HELLER. Well, the thrust of my testimony is that monetary policy should not be written off as a tool of aggregate demand stimulus. That is, of increasing total demand, strengthening markets, and translating that into more jobs.

Indeed, that ought to be its primary function in an underemployed, slack economy. And that, according to objective observers and a lot of models-economic models, which we should not place 100 percent faith in, but there seems to be a wide range of agreement-that can be done, that kind of stimulus, both Federal Reserve stimulus and fiscal stimulus, can at this stage of the game be given with very little cost, in terms of retarding the reduction of inflation.

And I agree with you wholeheartedly, the 7-percent unemployment rate, or 7.1 percent understates the gravity of the unemployment problem in this country, not only as a human matter, but as a waste of resources. Add to the 7.1 percent, as you say, the discouraged workers, about a million of them, 312 million, or between 3 and 32 million parttime workers who want to work full time, and you come out to something like a more realistic unemployment rate of between 9 and 10 percent of the total potential labor force in this country.

And I think that ought to be constantly borne in mind, that 13percent unemployment of the minority groups, and 40-percent unemployment of black, teenagers, and so forth, in setting monetary policy. Mrs. SPELLMAN. Thank you very much.

The CHAIRMAN. Mr. Leach, I think you have a supplementary question?

Mr. LEACH. I have one quick question, Dr. Heller, and I know you have to go, so a quick answer will suffice. But there is a lot of talk about excess capacity, and you have pointed it out in your statement.

In your judgment, does the increase in oil prices possibly lead to the obsolescence of some of this excess capacity?

Dr. HELLER. Well, when you put the question that way, one has to say "yes, of course." If some productive capacity is built on the assumption of low oil prices, and the oil prices rise, and therefore you get a disjoining in that particular enterprise, and as a result you probably have to shift from oil to coal, or make some adjustment in your structure-in your physical capital structure.

But those who have looked into this, those who have some industry savvy and knowhow, indicate that this is not an overwhelming problem. They disagree sharply with some of the results of the Federal Reserve Bank of St. Louis, economists on this subject, who say our excess capacity is gone because of the energy crisis and the rise in energy prices.

There is some marginal inroad on that capacity. People I respectI haven't done this myself-but people I respect most feel that that is a very small inroad.

Dr. FELLNER. May I say a word to that, briefly?

Mr. LEACH. Please do.

Dr. FELLNER. I think, quite apart from this question of the sectoral factor which exists with regard to the utilization of capacity, I think that the present overall capacity utilization rates are not far from that level at which one would say there is practically full utilization of capacity.

We are not there as yet, but not really very far from that. So I would not make a rapid move, or favor a rapid move toward higher capacity utilization rates. I think this should be gradually approximated. The targets should not be very far from what we now have.

Dr. HELLER. Well, that is a judgment call, in part, but I do reiterate what I said in my testimony: Namely, that in the critical materials industries, we are 10 full points below the capacity peaks reached as the operating peaks reached in 1973. That was 92 percent.

Dr. FELLNER. That was overutilization, however. That was a very tight capacity situation.

Dr. HELLER. Even if you say it was 90 percent, we are still at å substantial number of points away. And I don't think you can assume that capacity is just going to be rigidly maintained at a constant level. It will be expanding, but it is a problem and one we should take account of.

The other thing I think that one should keep constantly in mind, all the time we hear about recovery being at least "normal," or imagine a Wall Street Journal column saying, 10 days ago, that recovery has been extraordinarily vigorous, basing itself on Federal Reserve of St. Louis figures.

First of all, the National Bureau of Economic Research has called it about an "average" recovery. But much more important, when you compare the level of operations today with the prerecession peaks-and I think it is downright un-American to compare ourselves with troughs rather than peaks, GNP is only half as far along today, only up 6 percent since the previous peak. Normally at this stage of the cycle, it is up 12 percent.

When one looks at not just direction and rate of recovery, but the level of operations, I think this tremendously powerful and resilient American economy has a long way to go before we are in an excess demand situation.

You have to remember that I speak as an expansionist, and a great believer in the American economy, and maybe a little bit too optimistic, but I think basically we should not stay the hand of monetary and fiscal policy on grounds that we are just about up against our capacity limits.

Dr. FELLNER. Well, I would say we have some way to go. I would not say we have a tremendous way to go before we get there.

Mr. LEACH. Thank you, Mr. Chairman.

The CHAIRMAN. Well, on that sort of happy note, let us thank both Dr. Fellner and Dr. Heller for an absolutely magnificent contribution to our deliberations. You have educated us enormously, and we are most grateful to you. I am happy that I am able to honor my commitment to you. Thank you both, so much.

Mr. Sindlinger, would you come forward, please.

Our next witness is Albert Sindlinger, chairman of the board of Sindlinger & Co., the publisher of a widely read weekly digest. He has, in recent years, put his mind rather heavily on the question of monetary policy. I am delighted that you are here with us this morning, Mr. Sindlinger.

Under the rule, and without objection, your full statement, together with the supplementary material with which you furnished us, will be

placed in full in the record. And now if you would be good enough to proceed in your own way to summarize your remarks, or in any way you want, and then we will have some questions to ask you.

STATEMENT OF ALBERT E. SINDLINGER, CHAIRMAN OF THE BOARD, SINDLINGER & CO., INC., MEDIA, PA.

Mr. SINDLINGER. Thank you, Mr. Chairman.

The hour is late, and under the conditions, I am going to really go through my testimony fast, and hit some highlights, because I would like to have a little chat with you about a few things when I get through, if we have some time.

In the opening pages of my testimony, I draw some rather disturbing parallels between the current economic conditions which are present in the Nation today and those conditions which led to the depression of the 1930's. And I note that faulty manmade monetary policy triggering the Great Depression, and how these errors touched off the depression's most immediate cause, the loss of confidence in our Government, and the loss of confidence in money.

I am particularly reminded that today we are in July, and it was 50 years ago this month that the actions of the independent Federal Reserve Board were creating the Great Depression.

On page 2, I assert that manmade monetary policy mistakes of 50 years ago were based upon the lack of good information, specifically in the area of jobs and money. And my own company, which for the last two decades has been talking to 1,200 household adults every week throughout the Nation by telephone, is the basis for all of the information that I gather and talk about.

At the bottom of page 2, I note that the Government has also responded by establishing the most comprehensive of data, the greatest data-gathering network in the world.

As I sit back listening to the two good doctors here, I can't help but get the feeling-the frustration-over so many quotes of inflation rates, and so forth, as being "fact," when I am afraid our statisticstheir statistics are very, very bad in many areas. And that is what I want to touch on.

Again, on page 3, I question whether this information hasn't given us acute indigestion. And I'm afraid that some of the information we have now is so bad that we are worse off than we were 50 years ago.

If I put this pencil-and if this were a glass with water in it-and you looked at this glass, that pencil would look crooked. Now that is a mirage. It is an optical illusion which science can explain.

I maintain that we are bringing on a recession right now, through faulty monetary policy. And the reason that I contend this is that the distorted quality of information that we are making decision upon is a statistical mirage which is causing policymakers, specifically at the Fed, to see things that aren't there, as official data.

To document this statement, I have with my testimony included a series of little booklets. One of the booklets is entitled, "The Advantages of Being a Monk." Another booklet is titled "The Monks of the Monetary Monastery." And then I have five booklets under the title of "The Pleasure of Statistical Narcissism," and identify this as a snake.

The first booklet explains why the practices of the seasonal adjustment has become a snake in our economics. The second covers the Fed's M1 for 1973. The next, for 1974. The next, for 1975. And the next book was for 1976, and I have some more books to follow.

[The booklets submitted for the record by Mr. Sindlinger may be found in the appendix.]

The worst example of the error of this mirage from the seasonal adjustment was the Fed's misguided monetary policy decisions of tight money in 1975, 1976, and 1977, which erroneously forced up interest rates to abort our recoveries that were taking place at that time. Three straight back-to-back years of aborting our economy. And I observed that the two gentlemen this morning both alluded to this.

But what they did not explain, which I want to explain now, is why these mistakes were made. And as page 4 shows, these mistakes were made on a mirage, reading things that were not there.

The two most critical areas for economic policy is the seasonal adjustment, and it is putting us in a position as bad as we were 50 years ago, when we knew nothing.

As I explain at the bottom of page 5, the Federal Reserve Open Market Committee, this past May, by tightening money with its seasonally adjusted M, aggregate, showed a 20-percent growth increase from the month of April. This was a complete statistical mirage. As I stated on page 5, I question if we are prepared-especially the Federal Reserve Board and Congress-for the coming consequences of the turns and the twists from inflation to the consequences of deflation. I listened to the two gentlemen before me, assuming that we were going to have continued inflation. If we have some time, I would like to discuss that I am not worried about inflation in the next 30 to 90 weeks. I am worried about how we are going to cope with the recession and the deflation that is coming, mostly created over bad monetary policy.

On page 5, I ask this committee a question: How can Dr. Burns' Federal Reserve Board control the Nation's money supply when the Federal Reserve Board cannot even read their own figures correctly? They act upon statistical mirages to establish monetary policy. On page 6, I show some tables of the real story, the real growth rate of M1, and time is getting short. I would like to have you look at those growth rates, and I would like to remind the committee that the Federal Reserve Board set as its own figure a limit of 10 percent as the maximum growth rate allowed for M1. That interest rate action. should be taken only when above that figure.

If you look at the figures on page 6, at no time in the last almost 6 months has the Federal Reserve Board's M, exceeded 7 percent on a year-to-year basis. If you looked at the raw data, or even if you looked at the seasonally adjusted data, and if you convert the Federal Reserve Board figures to a per-household basis-where the number of households in this country is growing faster than our money-the rate of growth of M, is about 21/2 to 3 percent.

And if we had time today, and if we took the inflation out of M1, M1 is not even growing at all. And yet we abort three recoveries because a statistical quirk makes the Fed read something that is not there.

On page 7, I again refer to the three strikeouts. And I am asking Congress to kill this "seasonal adjustment snake" that is lousing up

all of the Government figures; that is creating problems, where we consistently make monetary policy by seeing something that is not there.

On page 8, I point out how my own forecasts of M1, and all of the monetary figures, were delivered to your chairman, Mr. Reuss, on June 24. And if you check the accuracy of the forecast we made then, the figures have been very accurate. And if you remember, when we met on June 24, I raised the question of the very big rise that the Fed would measure on July 6-another statistical quirk. We don't know what the Federal Reserve Board did last Tuesday when they had their monetary policy conversations. If they acted upon the M1 figures as they should, they are now tightening monetary policy. And as I say in the last paragraph on page 10, these seasonal adjustment figures are also getting into our unemployment data.

I am not going to take any more time. I want to skip here, because time is short. I have a special report that I want to give you, Mr. Chairman, for members of your committee, to show the errors of the unemployment figures in the last 3 or 4 years.

Dr. Burns has often commented that the economy is not working like it used to. But he has failed to answer his own question. For the remainder of page 10, and the first part of page 11, I trace the cycle of a typical cyclical recovery.

Let me quickly go over it. A total cycle starts out with man making a faulty monetary policy decision, to destroy consumer confidence, and the value of money; and then second, a recession starts.

Then, after a while, the recession being under way, consumers begin to regain some consumer confidence. They begin to spend. More confidence induces more spending, and more spending more confidence. And then the next stage comes along where plant and equipment expenditures are necessary to fuel the heated up economy.

We have had questions about plant and equipment expenditures. Dr. Heller is counting on a balanced budget coming from plant and equipment expenditures. I tell you, gentlemen, we are not going to have any plant and equipment expenditures for a long, long time, because our monetary policy decisions kill each recession-or each recovery before that recovery can get underway.

The reason that the economy doesn't work like it used to, as Dr. Burns says, is that the Federal Reserve Board won't let it.

I note at the middle of page 11 that there are two types of inflation, which were also discussed prior to my being here. We have cost-push inflation and demand-pull. This is the very important point that I want to make.

I conclude that rising interest rates are appropriate for any kind of demand-pull inflation. It is the responsibility of the Fed to raise interest rates and tighten up if we are talking about demand-pull inflation.

Now there are two kinds of inflation. There is demand-pull, and there is cost-push. On page 12, I insist that the Fed, for 3 straight years especially in 1977-put gasoline on the fires of inflation because they were fighting demand-pull inflation, when they actually should have been fighting cost-push inflation.