STATEMENT OF FRANK C. CARLUCCI, ASSOCIATE DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET Mr. CARLUCCI. Mr. Chairman and members of the committee, I thank you for this opportunity to propose, on behalf of the administration, certain changes in H.R. 14412, a bill "To establish a Council on International Economic Policy, and for other purposes. Although H.R. 14412 goes somewhat beyond the related joint resolution which Director Shultz submitted to the Congress last July, it, as Secretary Peterson has indicated, is a generally satisfactory legislative vehicle for providing a statutory basis for the Council on International Economic Policy. However, the administration urges that the committee reexamine and modify or omit four provisions. We recommend that section 8 of H.R. 14412, which authorizes appropriations of $1,400,000 for fiscal year 1973, be changed to provide an authorization without limitation as to dollars or time. The preferred approach, which was set forth in the joint resolutions of last year, is to authorize "such sums as may be necessary for the expenses of the Council." That approach is similar to that pertaining to the National Security Council and to the Domestic Council and would be appropriate for the Council on International Economic Policy, whose duties are similar to those of the two other Councils. At a minimum, we believe that the authorization should cover a number of years, such as four. An unlimited or a multiyear authorization of appropriations would not deny the Congress adequate means of oversight of the Councils' operations. For example, the budget of the Council would be reviewed each year by the Congress as it acts on the annual appropriations. In addition, the committees of Congress could be kept informed of Council operations by requesting testimony as needed from appropriate members of the Council. And certainly from time to time the President himself will address or call to the attention of the Congress international economic policy issues. We recommend that the membership of the Council, as set forth in section 4 of the bill, be changed in two respects. First, we do not believe that the Chairman of the Federal Reserve Board should be a statutorily fixed member, and we recommend that that provision be deleted. Because of the unique status of the Federal Reserve Board and its Chairman in relation to the executive branch, we believe inclusion of the Chairman as a member of the Council, by statute, would be inappropriate. This is not intended to suggest that the Board and its Chairman do not have important contributions to make to the economic policies of the Nation. But it does mean that present relationships should be preserved and the membership of the Council, whose duties are to advise the President, be restricted to appropriate high-level executive branch officials. Consultation, as appropriate, with the Chairman of the Federal Reserve Board would, of course, be arranged through other means. Second, we believe that the Secretary of Defense should be made a statutory member of the Council. He serves fully as a member of the Council today. His participation, on a par with the other statutory members, is important because of the significant economic impact of the operations of the Department of Defense both on the U.S. economy and on our economic situation abroad. We recommend that the Executive Director of the Council, provided for in section 7(a) of H.R. 14412. be appointed by the President. without the advice and consent of the Senate. As you know, heretofore the Executive Directors have served in a dual capacity as White House Assistants to the President. That arrangement, which does not involve Senate confirmation, would have been continued by the joint resolutions of last year. It is our view that the appointment of the Executive Director should not be subject to Senate confirmation, since his duties will consist almost solely of managing the affairs of a Cabinet-level advisory group to the President. The usefulness of the Council mechanism to the President could be seriously impaired if it were otherwise. Section 6 of H.R. 14412 would require the President to transmit an annual international economic report to the Congress. It is our view that such a report is not needed, since the international aspects of the U.S. economy are regularly covered in the Economic Report sent to the Congress each year since 1947 under the Employment Act. Typically, there is a chapter of that report devoted to a review of the international economic issues. The present Council on International Economic Policy worked closely with the Council of Economic Advisers in preparing chapter 5-"The United States and the World Economy"-as well as other parts of the annual report of the Council of Economic Advisers transmitted in January of this year. With the changes I have described, the administration believes that H.R. 14412 would provide an appropriate statutory basis for continuation of the Council on International Economic Policy and would welcome its enactment. Thank you, Mr. Chairman. (The letter from the Board of Governors of the Federal Reserve System and the statement of Dr. N. R. Danielian, president of the International Economic Policy Association referred to by Chairman Ashley on page 1, follow:) Hon. THOMAS L. ASHLEY, BOARD OF GOVERNORS, Chairman, Subcommittee on International Trade, Committee on Banking and Currency, House of Representatives, Washington, D.C. DEAR MR. CHAIRMAN: The Board appreciates the opportunity to offer our views on H.R. 14412, a bill to establish on a statutory basis a Council on International Economic Policy. We believe the present Council, which the President established in January 1971, has been performing a useful function. The role of foreign economic policy development and execution will be increasingly important in the period ahead as the United States, in concert with other nations, enters into negotiations on a variety of international economic problems. By establishing the Council on International Economic Policy at this time as a statutory body in the Executive Office of the President, Congress will be giving explicit recognition to the need for effective coordination and involvement at the highest levels of the Government in the formulation and execution of foreign economic policy. We note that Congress, too, will be more closely involved in this process, through the "International Economic Report" which the President will file annually, and by supplementary reports which the President may make. The submission to the Congress of the President's Economic Report and of the Report of the Council of Economic Advisers has proven its value for domestic economic policy over the years, and we believe the "International Economic Report" could serve a comparable purpose. We would call to your attention that the bill does not refer to the present National Advisory Council on International Monetary and Financial Policies, and that the relationship between that Council and the Council proposed in the bill is therefore unclear. We note that one of the members of the proposed Council is the Chairman of the Board of Governors, thus enabling him to make an appropriate contribution to the work of the Council in the light of the information resources, expertise, and responsibilities of the Federal Reserve. Sincerely, J. L. ROBERTSON. STATEMENT OF DR. N. R. DANIELIAN, PRESIDENT, INTERNATIONAL ECONOMIC POLICY ASSOCIATION Mr. Chairman: The International Economic Policy Association is a nonprofit research group focusing its efforts on the public policy issues of U.S. international economic affairs. For many years, we advocated the creation of an agency that would bring together the fragmented responsibilities and negotiations by various branches of the government in the foreign economic field. The President recognized this need when he set up, on January 19, 1971, a Council on International Economic Policy and appointed Mr. Peterson to head it. He also stressed the need for interrelated negotiations on all U.S. foreign economic problems in his August 15, 1971 program. These are useful steps, in our judgment, but the United States still needs a longer term focus and a more permanent statutory basis for structural reform in the foreign economic field. We fully support H.R. 14412 which would provide permanent statutory authorization for the Council on International Economic Policy. I believe, however, this does only part of the job; and I recommend that the bill be expanded so as to create a Foreign Economic Policy Board similar to the Council of Economic Advisers, but with longer tenure, to advise the President on policies, to assess the long-range economic interests of the United States, to prepare annually a foreign exchange (balance of payments) budget for the United States, and to submit a report to the President and the Congress on ways of balancing our international accounts. These steps would help strengthen the policy alternatives and help establish priorities in the expenditures of external resources. They could be exceedingly valuable, not only within the government, as a means of educating the private sector and the public generally about our international economic situation. Senator William Brock, who has continued the interest and work in this area which he started while he was your colleague on this Committee, introduced S. 2394 in the Senate on August 8, 1971. This bill would provide for both a statutory Council, the action or executive arm, and a Foreign Economic Policy Board, an analysis, research, and advisory group. It proposed an annual report and a foreign exchange or balance of payments budget. I seriously recommend that this Subcommittee consider adding to H.R. 14412 these two additional concepts in some form. Foreign economic policy has needed a longterm perspective. We find ourselves in present difficulties because this has been lacking. A look at some of our current economic problems demonstrates the vital importance of a continuing, independent, integrated study. The Department of Commerce announced last week that the U.S. trade deficit for the first four months of 1972 was running at a seasonally adjusted annual rate of $6.6 billion. If this continues, there will be a large 1972 trade deficit-over twice the size, in fact, of 1971's record deficit. The devaluation of the dollar and revaluation of other currencies may have some ameliorating effect as the year progresses, but this Committee hardly needs to be told that our international accounts remain precarious. In 1971, the United States spent nearly $80 billion abroad in imports, travel, investments and government spending, while we earned from all sources little over $70 billion, leaving a basic balance of payments deficit of over $9.3 billion. The U.S. deficit on the liquidity balance was $23 billion, while the official reserve transactions deficit was $30 billion, representing the net addition of liabilities to foreign central banks. Foreigners hold some $65 billion in surplus dollars which represent the accumulation of the last two decades from our balance of payments deficits. The U.S. dollar is no longer fully convertible, but remains the basis of trade and international monetary transactions because there is not, at present, a generally acceptable alternative to the "dollar standard." But some countries, such as France, have imposed a dual system of foreign exchange rates, one for trade and another for capital transactions; others have introduced capital controls, and all desire a return to convertibility in some form because they no longer trust the dollar as a reserve asset. In another area, greater understanding of our long-term interests is necessary. Both here at home and abroad, U.S. foreign direct investments are under attack. There is scant awareness of the vital role U.S. investments play in our national strength. These investments earned over $9 billion in 1971-but not enough to offset losses in trade and tourism and the continued heavy government spending abroad. Direct investment controls abroad hinder the full development of this resource. We need independent judgment as to the proper choices between investments and foreign aid, and between investments and imports for consumption. Add to these our needs for imported raw materials and fuel, claims of less developed countries for foreign aid, the desires of communist countries for credits and technology, and you have a panoply of problems that require deep analysis in a long-term historical context. Solution of these problems and determination of which alternatives will most benefit the world position of the United States in five, ten, fifteen year perspectives are the most serious issues confronting the United States now that military power is being neutralized by technology and international agreements. Too long we have followed "seat-of-the-pants" or "doing-what-comes-naturally" policies, from day to day. The President and the Congress have the opportunity to make a historic contribution to the preservation of American as well as world economic order by creating the machinery for thoughtful analysis and resolution of our longterm interests. Certainly this deserves as much emphasis as military planning, since national security is based not only on technology, but also on economic resources. The actions I am suggesting could help to restore foreign confidence by showing that whoever is or may become President-or Secretary of the Treasury-the American Government is determined to get its international economic house in order. For these reasons, we fully support H.R. 14412 to create the interagency coordinating Council. But we also need a Foreign Economic Policy Board-or at least an independent analytical staff of experts-so as to give the United States a capability for analyzing international economic problems over the long term. The proposed Board should develop recommendations with appropriate guidance from the Congress for bringing programs affecting the U.S. balance of payments into equilibrium and for the financing of any continuing deficit that appears unavoidable. It is worth noting that the present Council of Economic Advisers was established in the Employment Act of 1946 to help implement the national policy of seeking full employment after World War II. The National Security Council was likewise a post-World War II creation, designed to give a national focus to the then fragmented military and foreign policy issues. Yet twenty-five years later, there is no comparable statutory body concerned with the equally strategic international economic issues! The time has come to have a national policy to strengthen the American economic position in the world and to institute the structural reforms needed to achieve it. Objections to this type of proposal might arise on two grounds: (1) that it would limit the President's authority in the foreign affairs field, and (2) that it could lead to an undesirable disclosure of the government's plans in the international economic and monetary fields. On the latter, the disclosure problem should be no worse than presently exists for the State of the Union, economic or foreign policy reports. Regarding the former, I believe that H.R. 14412, amended as suggested, would aid, rather than curb, the President's foreign affairs powers by providing him, through the Council and its staff, with the help of the Policy Board, the indepth, integrated analysis required to determine long-term national interest objectives. Mr. ASHLEY. Mr. Carlucci, working in reverse chronological order, your last point would seem to me to be somewhat contradicted by the informal statements of Secretary Peterson who has certainly made a very, very strong case for not only a partnership between the administration and the Congress with respect to a more enlightened, better coordinated type of foreign policy, but also with respect to the need for focusing on a regular basis on the very specific international 79-748-72 -3 economic policy problems and questions, so that your suggestions that no report is needed on an annual basis to the Congress strikes me as being somewhat contradictory. Is it really enough to rely on the other agencies that Mr. Peterson referred to? Are they the ones that really are the preeminent bodies that the Congress should look to? Mr. CARLUCCI. I think it is important in this connection, Mr. Chairman, to bear in mind that the Council on International Economic Policy is essentially a forum. It is a coordinating mechanism, and it is participating fully in the development of the various reports that I mentioned in my prepared statement that are coming to Congress. Our only desire is not to duplicate work and create additional reports when there are already quite a number of reports coming to the Congress but certainly Mr. ASHLEY. If we are doing this already, if we have all of this information already, then why are we here this morning? Mr. CARLUCCI. The point that we are trying to make is that within the executive branch there needs to be a coordinating mechanism and a forum that the President can use to hear various viewpoints of the members of the Council, the Cabinet departments, relating to international economic policy. Mr. ASHLEY. From the standpoint of the Office of Management and Budget, I think that makes very good sense. From the standpoint of the Congress I do not think it really makes any sense at all, in all truth, because what you seem to be saying is that the kind of material and analysis that were put together as thoughtfully as they were by Mr. Peterson really should be on an ad hoc basis. They should presumably be included in other reports, and not have a life of their own, as it were, and in any event should not be sent directly to the Congress that obviously would be the authorizing body in terms of this council. Mr. CARLUCCI. I think it is important to remember, Mr. Chairman, that the council is essentially an advisory body to the President and that the information the council is developing is being used by the President in making his decisions. Once these decisions are made, of course, then the information that is needed for the Congress is made available in the various reports, the ones that I mentioned. Mr. ASHLEY. I wonder about that because it seems to me there may be times when the report should be prospective in nature rather than reflecting what has already taken place. In other words, suppose that the President wants the Congress to act. Wouldn't it be appropriate for the annual report to include recommendations for congressional action? Mr. CARLUCCI. Well, in most cases where there is a decision that has been made by the President based on information coming through the council, that decision would be implemented by the appropriate agency head or agency heads and they are always available to the Congress to testify and to make recommendations on legislation. What we are really talking about is the information in its raw form as it is correlated and presented to the President so he can make the more fundamental decisions required by the governmental process. Mr. ASHLEY. I can only say, and others may want to be heard on this question, it seems to me this only continues, if not exacerbates, the fragmentation that, again, Mr. Peterson referred to in his state |