is going to encourage someone to go into business is that he will make a profit. That is what is going to encourage him to go into business. If he goes into business, and if he can get some tax incentives, of course that is going to help. It is going to help to get more venture capital.

Senator BAUCUS. What about any changes in subchapter S definitions, will that help at all?

Mr. ANDERSON. The greatest change they could make in subchapter S is to simplify it. A subschapter S corporation is one of the most complicated areas in the tax law.

Senator BAUCUs. What can be done to simplify it?

Mr. ANDERSON. Most people think that subchapter S corporations are partnerships, and that you can operate a subchapter S corporation just like a partnership, that is not true. Many people get caught in tax traps with a subchapter S corporation because they do not realize that they cannot operate it like a partnership. It's an area of the tax law, in my opinion, that needs to be completely reviewed and greatly simplified. It could be simplified, and it could be made to help the small business person that has one. It is an area that really needs to be worked over.

Senator BAUCUS. Do you have the time to, or will you, George, send me a letter on your suggestions on how to do that?

Mr. ANDERSON. Oddly enough, I rode back on a plane with Bobby Shapiro, who is the chief counsel for the Joint Committee on Taxation, and I got to bend his ear a little about this.

Senator BAUCUs. Did you persuade him?

Mr. ANDERSON. He said that this is an area they have definitely looked at, and that they think really needs some changes in it and that needs to be simplified.

Senator BAUCUS. I'd appreciate your suggestions. If we can convince Bobby Shapiro, then we have gone a long way, I'll tell you.

Mr. ANDERSON. I told him if he would do that, I would loan him my condominium in Big Sky to go skiing.

Senator BAUCUS. Is there a problem with the regulations of the Security Exchange Commission? Is that a big burden?

Mr. ANDERSON. In my opinion, it isn't a big problem in Montana. We practically have no SCC clients.

Senator BAUCUS. How far do we go to cut spending? I was a little curious when you stated that is a main key. I agree that we should cut spending. In fact, the Senate Budget Committee, as you know, has been meeting the last several days and recommended, I think, about $16 billion in spending cuts from the President's budget.

The question really is to what degree; do you balance it about $612 billion, which is roughly the level of spending which both the President and the House and Senate Budget Committees recommended, or do you go even further to cut spending? And, where do you balance the budget? The problems we face obviously are many. Most persons want some increase in defense spending, because of what the Soviet Union has done in Afghanistan and problems around the world.

With inflation rates as high as they have been, lately a lot of transfer payments that are indexed to the Consumer Price Index are going up. Social security, for example, has risen very, very high, and the question is, do we cut social security? Obviously it is not very popular to cut social security, and I don't think social security should be cut.

But, to give one example of the problems we are facing, about a third of all transfer programs are today indexed to the Consumer Price Index. Today a military officer who retires with a military pension of say, roughly $25,000 a year will, if the law is unchanged, for the next 20 years, and will, also if you assume roughly 14 percent of inflation, be receiving an annual military pension of about $370,000. The same kinds of problems occur in other programs that are indexed according to the Consumer Price Index. Obviously some of those programs have to be re-examined, and some are more valid than others.

I couldn't agree more that there are an awful lot of Government programs that should be very drastically cut. I think there are way too many consultant contracts. That burns me, frankly, as much as anything. You turn on the television at night and you see all these advertisements sponsored by Federal agencies promoting these agencies, and what they are doing. I don't know how that affects other people, but frankly I don't like it.

In fact, I have asked the general accounting office to do a study as to how much we are spending on public agencies' advertisements. I don't think that's a good way to spend dollars.

I know that the White House Conference of Small Business recommended cutting back to even as much as 15 percent of gross national product. Right now our rate of spending is something like 21.6 of GNP. And if we were to cut down to 15 percent of GNP, I don't know what that would be, but it would be spending cuts probably $100 billion. That is awfully big, if particularly we are trying to increase defense expenditures these days, and so it is a tough nut to crack.

I agree with you we should cut spending, but you would be amazed the number of people that come into my office daily who want increases. I have pointed out to them: "OK, if we grant you your increase, where are we going to cut?" They don't want to talk about that. That is the last thing in the world they want to talk about. You can't get them to talk about it, and I say, "Look, I am serious," and I am serious. If we are going to increase agriculture, if we are going to increase Brooke-Cranston housing loans and I think we should pass the Brooke-Cranston provision-what are we going to cut? And you just can't get these people to talk about that. That is one of the political problems that we face.

Well, we are going on here. Are there any other points you panelists disagree with or agree with that George and I have brought out?

Mr. LOPACH. Senator, I would just like to say one more word about export expansion. It seems to me that we have gotten ourselves in a position where we are no longer-we no longer have the upper hand in international trade, where our products are not purchased as they used to be and where we are buying much more heavily from abroad.

Is there any thought in Washington that this is a serious matter and that we have, No 1, to stop importing so much; but No. 2, to do something quite serious, immediately, about our export posture?

Senator BAUCUs. Well, we certainly recognize the gravity of this problem. To a large degree, the decline of American exports is the result of our rising energy costs. It is also because, since the Second World War, basic American industry hasn't modernized as quickly as the Japanese and West European basic industry. To a considerable extent, their success has been thanks to the Marshall Plan; thanks to American efforts, charitable, altruistic. Some people think we made

a mistake. But the fact is, we want to be good world citizens, and after the war we did help Japan and we did help Western European countries get back on their feet.

They now have much more efficient modern steel mills than we do, and American business did not keep up.

In addition, most American businesses find themselves in a bit of dilemma. On one hand they don't want government interference. Get Government off our backs, they say: "Don't spend money, get out of our hair, Government." On the other hand, Government has joined hands with other countries' industries. That is, in Germany and Japan the Government helps their basic industries. There's kind of a partnership which occurs, and we in America have got to face that fact.

I think there is much more of a feeling and much more of an inclination in the Congress in Washington, for Government to help promote American exports overseas by bolstering our Embassies overseas. For example, the FAS, the Foreign Agricultural Service, which helps promote American agricultural products. If we can get them working together with the Embassies overseas, and the Taiwan Department of Commerce, for instance, we can be promoting American products overseas in the same way that European countries, with their foreign embassies and consulates are promoting their products.

So, to answer your question, we know it is a real problem. It is one that we fully recognize in Washington, but we are not yet to the point where even big business knows how much it wants for the government to join hands and promote its products; but that is a problem, I agree.

Well, I wish we could spend more time on the points, but we have many more witnesses here today, so I would like to thank you all very much.

We are a little short on time, so we are going to have to move along and set an example for the Government and be very efficient.

The next panel, which is focusing on the effect of inflation on capital formation, is Terry Bass of the Montana Contractors' Association; Bob Oakland, City Motor Co.; C. E. Abramson, realtor in Missoula; and Earl Johnson with the First National Bank in Helena.

You gentlemen come on up here and say what you have to say. After you have all finished your statements, we will take a break, and then get into the questions and discussion immediately after we return from lunch. I encourage you to be brief and to the point, succinct and zing into the heart of the matter and not do like the Government does, waste words and time.

Earl, do you want to begin?

STATEMENT OF EARL JOHNSON, PRESIDENT, FIRST NATIONAL BANK, HELENA, MONT.

Mr. JOHNSON. Fine, thank you.

Good morning, my name is Earl Johnson, and I am president and chief executive officer of First National Bank in Helena, Mont. I would like to talk about today's topic from the subject of not only Montana's interest, but allude to those problems we have nationwide.

I would like to talk about where we are now, and when we read the headlines about the credit squeeze, we are in fact in a form of credit

rationing. Credit rationing involving the consumer, because our accelerated consumer spending is no longer tolerable, apparently, and we are restricting that.

Montana has some problems, because we are suffering disintermediation because of competition from nonfinancial institutions.

The mutuals tell us that the money goes back into the banking system, but I would like to submit that the money goes into the money center banks where then they flow to the higher investments, such as Euro dollar.

I would like to see some way where this disintermediation in Montana banks could be slowed and it probably won't be able to be stopped. One of the problems we have is the lack of the accelerating regulation to banks and its attendant costs. I think banks are terribly overregulated, and I would like to discuss that at length when the opportunity presents itself.

I won't say that the banking industry doesn't have its own faults. Old banking habits die hard, such as Regulation Q, which is recently addressed in the national legislative scene.

We have a problem with lack of incentives to save. We have a buy now syndrome, because it is going to cost more later. Somehow or other we have to dispose of this syndrome and get on a more practical basis.

We have inadequate tax incentives, which was covered a little bit earlier. We have declining productivity, which we read much about, and I think much more in this area has to be explored.

In this part, I would like to say that maybe we are a little bit more like Yogi Berra who said, after the New York Yankees lost the World Series, he replied that, "We made all the wrong mistakes."

Now, where do we go from here, and I would like to say that I am on an optimistic note that we can accomplish what we set out to do. I think Montana bankers can help by providing funds to businesses that foster jobs and to businesses that produce, have better productivity records.

I think that we as bankers can assist governmental bodies in retaining their ability to provide essential services. I think we can encourage Government units to keep their funds in Montana for the use of the financial community in Montana, and I would like to cite a couple of examples I think where it would help.

The State Board of Investments at the present time has a myriad of investments, and as an investment portfolio, I do not find fault with it. However, in the short-term investment pool, $36.5 million were kept in Montana certificates of deposit in various financial institutions. That is 36 percent roughly or $66 million out of $182 million available in that fund.

Teachers' retirement fund, 20 percent of those funds are kept in Montana mortgages out of a total of $172 million in teachers' funds. As I say, perhaps this is a good investment from an investor's standpoint, but I think that these funds used in Montana could produce the jobs and produce the services that we require.

I think that the bankers have to be more innovative in pricing of mortgage money, such things as the variable interest rates, accelerated pavments, where a lesser pavment at the beginning of the mortgage and as the income of the family grows, a larger payment over the term of the mortgage.

I think we need less reliance on Government programs to a certain

extent.

The other night on television they were talking about the bank down in Louisiana who was trying-the banker was trying to help his agricultural community, talking about the overwhelming amount of regulation, Government dependence. I think the bankers could back off of that posture somewhat and still do the job for their communities.

I think that the industry, our industry needs to pay attention to the mobile home industry. The mobile home industry serves as housing for those people who cannot provide and secure financing for a stick built home. I think the financial community can use a multitier interest rate structure to serve agriculture and business and still produce a profit for the bank.

Two-tier is probably not sufficient. Perhaps it should be three-tier or four-tier, depending on the type of industry and its relationship to the community in which the banker is also involved.

I think most of all we in the banking profession need to get more involved in legislative issues ranging from taxation and inflation to the broader social issues. Some of the regulation brought upon the banking industry is because of lack of attention to social issues, and I think we need to be more attendant to that.

That completes my remarks, thank you.
Senator BAUCUS. Thank you very much, Earl.

STATEMENT OF TERRY W. BASS, SECRETARY-MANAGER, MONTANA CONTRACTORS' ASSOCIATION, HELENA, MONT.

Mr. Bass. For the record, my name is Terry Bass. I am the secretarymanager of the Montana Contractors' Asociation, and I reside in Helena, Mont. My association represents large and small contractors, approximately 400 in membership in the State, and nearly 9,500 across the country. I had some testimony that was prepared that was covered quite adequately by George Anderson and others, so I won't belabor the subject, but there is an editorial that appeared in the Nation's Business edition in April 1980 that I think may be a summation of some of those discussions:

In discussing remedies for inflation, America is becoming a nation in which never is heard an encouraging word. It seems hard to find anyone with a credible theory offering more than "blood, sweat, toil, and tears."

There are such people, though. They are called supply-siders. Unfortunately, some of their advice is so pleasing that many people are evidently reluctant to believe it can work. That advice is: Cut taxes.

Who can blame the skeptics? For nearly 50 years, some have kept a majority convinced that the Federal Government could strengthen the economy by spending money it didn't have on social programs that weren't needed.

The country was actually living off its savings and credit during those years. Now both are exhausted, and the current generation faces overdue bills long hidden by budgetary sleight of hand and economic sophistry. People are understandably reluctant to accept good news that sounds suspiciously like the same old snake oil in a new bottle.

The supply-siders, however, have two important advantages over the Keynesians. Supply-side theory is easy to understand, and it is soundly based on the process that created our advanced standard of living.

The cause of inflation, say the supply-siders, is too much money chasing too few goods. That simple diagnosis suggests two likely remedies: Decrease the supply of money or increase the supply of goods and services.