RECIPROCAL DEPENDENCE FAVORED

Mr. Leonardi referred to the great difference in the energy policy objectives of the Community countries and the United States. The former were dependent for the foreseeable future on imported petroleum and therefore required absolute security of supplies. This had to be linked to a corresponding dependence on the part of the supplier countries on the consumer countries. The way to achieve this was to strengthen economic cooperation between these countries. Military methods were impracticable and could not be considered.

The U.S. economy, on the other hand, was, in common with the U.S.S.R., almost completely self-sufficient in energy. This meant that the Community states and the United States had different interests. For the former, cooperation was fundamental to their energy supplies, and this naturally demanded sacrifices. Mr. Fraser asked the members of the European Parliament what, in their opinion, should be done to economize on petroleum and petroleum products. Mr. Springorum replied by referring to the program of the Commission of the European Communities for a common energy policy. It had not yet, however, received the complete agreement of the governments of the member states. He then listed several specific points in the program.

Mr. Fraser asked for details of the required economies.

REDUCING DEPENDENCE ON OIL

Mr. Springorum explained certain details, going back to the beginning of the petroleum crisis. Petroleum consumption could not be allowed to rise in absolute terms which meant that it had to fall as a proportion of total energy consumption as energy requirements rose. It was to be hoped that by 1985, when North Sea and perhaps also Mediterranean supplies would be available, the quantities imported would be such that the proceeds would enable supplier countries simply to cover their own import needs. This would put an end to roving petrodollars.

Mr. Fraser asked if energy prices should be increased.

Mr. Kirk referred to the differences in the measures taken by the individual member states to save energy.

WHAT SHOULD FLOOR PRICE BE?

Mr. Springorum noted that Europe and the United States had different views as to the level of the floor price. For the reasons stated, Europe had to protect its own energy production to avoid being put at the mercy of its competitors. The same applied to the protection of investments required to increase energy supplies and prospect for desposits; such investments had to be attractive and profitable if they were to be made at all.

Mr. Lange considered the absence of a common energy policy a severe handicap to achieving the desired objectives. Despite this, the United States and Europe should cooperate very closely in formulating their respective ideas on the matter and continuously exchange views. He was, however, opposed to an energy policy on the lines of the European Community's common agricultural policy. The chairman thanked the speakers and adjourned the sessions at 12:59 p.m.

UNITED STATES-EUROPEAN COMMUNITY ECONOMIC RELATIONS

IN 1975

Paper by Sam Gibbons

"All our countries have to move on three fronts, which are interrelated but which require somewhat contradictory action *** on the energy front, on the recession front, and on the inflation front. And so you have to come up with a kind of policy mix that tries to square the circle or to circle the square."

EC COMMISSION VICE PRESIDENT HENRI SIMONET, Washington, D.C.-January 28, 1975. When we met last, in September, several themes dominated our economic discussions.

We realized that we were living in a world of radically changed economic conditions. We were picking our way over difficult paths in the pursuit of our national economic policies, trying to walk the thin line between dampening inflation and worsening recession. Also, we knew that our actions affected, and were affected by, the actions of other nations, sometimes to a considerable degree. Thus, our efforts to choose appropriate economic policies and time them accurately were made especially complicated.

Moreover, the terrible double-digit inflation we faced was a new kind of worldwide problem with basically international causes. It was rooted in the sudden explosion of world demand resulting from simultaneous national policies of expansion and in the fivefold increase in the price of Persian Gulf oil since the fall of 1973. Our unprecedented economic growth, which had been fueled by rapidly expanding world trade, had turned into a decline in real output.

In these circumstances, we correctly saw our economic futures intertwined, perhaps as never before. We rejected the notion that any of us could really improve our economic prospects or our balance of payments by "beggar thy neighbor" policies, such as import restrictions, directed at our trading partners. We agreed that we had to do a better job of analyzing national and worldwide economic trends, and that we had to continue to consult and cooperate with one another. In particular, we noted the need for development of coordinated energy policies to lessen our dependence on oil from the OPEC cartel, to meet our future energy needs, and to recycle OPEC oil earnings.

Most of the economic issues we discussed in September remain with us today, and just as at our September meeting, we can today find some reasons to be optimistic about our economic situation and some to be pessimistic. Doomsayers continue to claim that our economic difficulties will bring us all to a bad and early end. Nonetheless, I think it can be said that we have made some impressive progress on many of our separate and mutual economic problems. Certainly we have only begun prudent action in many of these areas, and we still face a very challenging economic future. Clearly, our success will depend not only on sustained valiant individual efforts, but also on our cooperative actions, which can be so much greater than the sum of their separate parts.

INFLATION AND RECESSION "STAGFLATION"

To a large extent, recession has replaced inflation as our major economic concern. While we have not forgotten the danger of rekindling inflation, our most immediate concern is getting our countries, and the world economy, out of the worst recession since World War II. Most of us have not yet begun real economic recovery and may not do so until later this year.

We have made real gains in cutting the rate of inflation. Government policies of contraction have had their effect, and sagging national and world demand has brought the prices of many commodities and services down dramatically from their high levels of recent years. In other cases, the rate of price increases has been curbed.

In the case of the United States, predictions are that the increase in consumer prices will be well under last year's level of increase, perhaps only about half as large as that 12-percent increase.

To put it another way, recession has had its good effects in curbing inflation. Unfortunately, the fall in consumer demand has been much greater than Government policymakers had expected. Now we are charged with remedying recession, while still taking care not to resurrect double-digit inflation.

As we formulate our policies in these circumstances, we should certainly do what we can to consolidate the gains we have made during this recession in fighting inflation and in saving energy. These gains can be important to our productivity and to our well-being in the future, as well as to our efforts in the field of energy policy.

For example, the fall in consumer demand for products in the United States has forced many of our companies and industries to streamline their procedures. cut out wasteful or inefficient practices, and in some cases, to lower prices. Some particularly marginal firms have disappeared altogether.

What we look for, of course, is more stable long-term growth without excessive inflation. Our worldwide "boom and bust" experience of the past several years should make us even more determined to perfect our individual and mutual tools for economic policy to achieve this goal. This continues to be an area in need of attention.

The United States is, of course, a major factor in the world economy, although not the giant it once was. Our economic mistakes have serious adverse effects not only on the massive U.S. economy, but also on the economies of other countries-and we do seem to have been making our share of these mistakes in recent years. One which especially haunts us today is the oil import quota program which we maintained for so many years-against some strong objections in the Congress in order to keep out imports of cheap foreign oil and "develop" (or deplete) our own domestic oil reserves.

AVOIDING FUTURE MISTAKES

To try to avoid future serious mistakes in our fiscal and monetary policy, we're currently trying to revamp our procedures for implementing these policies.

As you may know, Dr. Arthur Burns and our Federal Reserve System currently determine our monetary policy independently of Congress and the President. To cite just one instance where this becomes a serious problem, our planned tax reductions, which are designed to stimulate consumer buying and economie recovery, could conceivably be negated completely by a monetary policy which was overconcerned with the problem of rekindling inflation.

How can we make a really prudent judgment about how big a fiscal stimulus the American economy might need at this time when we have no idea what kind of monetary policy will be pursued by the Federal Reserve System over the coming months?

To try to remedy this situation, Congress has passed a directive to the Federal Reserve System to bring about lower interest rates now and to aim for moderate long-term interest rates. We are also considering a requirement that the Federal Reserve System decisions on the money supply be announced publicly immediately after they are made.

Dr. Burns has tried unsuccessfully to dissuade me and others in Congress from this approach. We have been particularly displeased with the wide fluctuations in interest rates which have been an important factor in creating our "boom and bust" situations in the United States in recent years. However, one reason that Dr. Burns has felt such responsibility for fighting inflation through monetary policy is that the administration and Congress had been making no real efforts to fight inflation by controlling the rapid growth of Government spending.

Indeed, by the time President Ford was willing to take strong steps to control inflation through an income tax surcharge and a lean budget-last fall-our best economists were already forecasting recessionary conditions which called for a shift to somewhat more expansionary fiscal policies.

Congress has traditionally been ill-equipped to make really comprehensive evaluations of the effectiveness of the various Government programs and their long-term effects on the economy. We have begun to remedy this situation for the future by instituting a comprehensive budget evaluation and control mechanism in the Congress. I have been elected to the new House Committee on the Budget and am involved in the setting up of this new procedure.

We have high hopes that this procedure will give the Congress the independent means it needs to analyze the various Government programs and their economic effects, set firm spending goals and reorder spending priorities.

The House Committee on the Budget is presently considering $365.2 billion in budget outlays, which would leave us with a $75 billion Federal deficit. This is $23 billion more than was proposed by the President and includes some cuts in defense spending and some increases in spending for domestic programs. It compares with a fiscal 1974 deficit of $3.5 billion and a fiscal 1975 deficit of an estimated $34.7 billion.

FEDERAL DEFICITS

We do not take lightly massive Federal deficits of this size. Indeed, we are shocked by them. Nonetheless, we realize that our deficits at this time may have to be large to provide any stimulus at all to economic recovery.

If the U.S. economy were operating at last year's levels, the budget proposed by President Ford would not be in deficit. However, in an economy the size of ours, a recession with 8.2 percent unemployment cuts mightily into tax revenues and requires massive additional spending for such things as payments to unemployed workers, food stamps, and public assistance payments.

We have little hope of actually balancing our budget again before 1980.

We realize that both U.S. Government and U.S. industry may be borrowing heavily in our capital markets in the near future, although demand for capital is low now along with consumer demand. Thus we will be watching carefully to see to it that U.S. Government borrowing does not become so great in competition with private demand for funds that interest rates are again pushed up to new high rates, refueling inflation and having other adverse economic effects. The House and Senate Committees on the Budget will also be working to insure that congressional additions to the budget do not exceed desirable levels. Notwithstanding our concern about renewed inflation, I would like to emphasize that we are giving priority at the present time to measures designed to promote economic recovery. Hopefully, we've learned something about the need to be more responsive at an earlier time-to economic indicators in our fiscal and monetary policies and to pursue more stable long-term growth objectives. However, the damage has been done for now and we're going to have to undertake some serious steps to promote recovery. The United States is a major element in the world economy and our recovery is also important to recovery in other countries.

HIGH UNEMPLOYMENT

Our unemployment rate has risen to a whopping 8.2 percent of our work force, and we're not sure that this is as high as it will go. This represents about 7,500,000 jobless workers.

Our industrial output declined 2.2 percent last year after an increase of 5.9 percent in 1973. It has dropped by 3 percent or more each month since last December, and we're now operating at about 78 percent of capacity. It is estimated that we will lose something like $200 billion in real output in the U.S. economy this year because of recession. For comparison, that's more than the entire gross national product of Canada. Our auto industry has been particularly hard-hit, as has yours. Our housing starts are at their lowest level since 1946.

Having said all of this, there are some encouraging signs. Business is liquidating its inventories rapidly. The stock market has rallied somewhat. New car sales have not dropped off significantly since the end of Detroit's cash rebate plans, which provided a boost in auto sales.

Consumer confidence remains the key to recovery. Americans are showing somewhat more confidence now that there will be recovery later this year. However, as yet, few have indicated that they are planning major purchases, and this is what is needed to spur recovery. Our retail sales have been holding up pretty well so far. We hope they will continue to do so.

To stimulate recovery, Congress is in the process of approving a substantial tax reduction of $20 to $30 billion. As of this writing, this is not in its final form. However, it will include tax breaks for businesses, cash rebates on 1974 income taxes of something like $100 to $200 per taxpayer, tax reductions for 1975, mostly for low- and middle-income people, and the repeal of certain tax privileges for U.S. oil companies.

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OIL DEPLETION ALLOWANCE

I had a role in adding the repeal of the oil depletion allowance for oil and natural gas production to this tax reduction bill, and I am particularly pleased at the demise of this tax loophole, which costs us $2 to $3 billion each year in lost tax revenues. If this loophole was ever justified, it certainly is not in today's world of high oil prices.

Also likely to become law is $5.9 billion in increased Federal spending for public service jobs and speeded-up public works projects, as well as some additional assistance for people seeking to buy homes.

We are optimistic about recovery later this year. However, we hope to avoid the dangers of another quick fix resulting in rapid recovery, rampant inflation and another boom and bust cycle. Especially in view of the depth and width of this recession, both in the United States and around the world, we know that real recovery will probably not be rapid and will take some time. We are also finally beginning to appreciate the fact that our resources are not unlimited-and that we are going to have to change our life styles in some ways to deal with changed circumstances, including the emergence of the OPEC cartel.

For the longer range, there are several steps being considered which could have a healthful effect on the U.S. economy. To mention just a few-increased action to break up economic concentration and promote competition, the reevaluation and possible elimination of many of the tax preferences and direct Government subsidies which favor some sectors of our economy over others and cost us $95 billion or more a year, and the elimination of those Government regulations which have been ineffective in promoting goals for which they were designed and have created further inefficiencies in our economy.

U.S. ENERGY POLICIES

At this point, it is somewhat unclear exactly what U.S. energy policies will be. The main disagreements among us center on whether increased prices for petroleum and other energy products should be relied upon completely, and immediately, to induce the conservation measures we need to lessen our dependence on high-priced OPEC oil-or whether a Government mechanism should be established to keep energy prices relatively low and allocate any shortages. Whatever the final decision, I do believe that we will see substantial energy savings by the United States, the consumer of one-third of the world's energy supplies. The price increases which have already occurred are changing life styles and transportation habits and there will certainly be more of this.

Additional mandatory measures are definitely needed to keep the pressure on Americans, however. Like Europeans, they tend to backslide in their driving and other habits when there is no crisis atmosphere or long waiting lines at the gasoline pumps.

Even today, Americans see the major oil companies pushing gasoline sales with longer sales hours and giveaways of water glasses, et cetera. This, even though they have been told that our domestic oil reserves are being depleted rapidly and we're having to pay billions of dollars in extra costs for imported oil. Understandably, they wonder where the truth lies when they see gasoline sales being promoted at the same time the Congress is considering an additional tax on gasoline to discourage consumption.

We're going to have to eliminate contradictions such as these and keep reminding Americans of the real cost to us of OPEC oil imports. For instance, we calculate that oil imports are now costing us about as much as the Vietnam war did at its peak-and all of this in foreign exchange.

Our balance of trade last year was $6.35 billion worse than for the previous year, entirely because of the higher prices we had to pay for imported oil. Our oil deficit last year was $25.1 billion, $17.6 billion worse than for the previous year. This was a big factor in our near-record balance of payments deficit of $10.58 billion.

Such costs are a tremendous burden to all oil-importing countries, no matter how successful we may be in recycling petrodollars and encouraging OPEC investments in our countries.

You are perhaps familiar with President Ford's proposed energy program. Basically, I agree with him that we must rely on the price system over the long run to induce energy savings. At least some of my colleagues in the Congress do not seem to feel the same way-or perhaps they feel under public pressure to try to somehow avoid high prices for energy, including higher gasoline prices.