ENERGY ANTIMONOPOLY ACT OF 1979, S. 1246 THURSDAY, OCTOBER 4, 1979 U.S. SENATE, COMMITTEE ON THE JUDICIARY, Washington, D.C. The subcommittee met, pursuant to notice, at 9 a.m., in room 2228, Dirksen Senate Office Building, Senator Max Baucus (acting chairman) presiding. Present: Senators Metzenbaum, Baucus, Mathias, and Thurmond. Senator BAUCUS. The hearing will come to order. OPENING STATEMENT OF SENATOR BAUCUS The Senate Judiciary Committee resumes hearings today on S. 1246, a bill to limit large-scale acquisitions by the major oil companies. Thus far the committee and the Antitrust Subcommittee have held 8 days of hearings on the bill. During the last set of hearings, the Assistant Attorney General, John Shenefield, testified on behalf of the administration and indicated support for this legislation, should it be amended in two important respects. The first of these proposals concerns the extent to which the bill ought to exempt from coverage those mergers which demonstrably enhance competition in the industries which are affected. Such an exemption could encompass those mergers which promote competition and thus productivity in the energy industries. The propriety of such an amendment and especially its administrability are issues about which I have several concerns, and I understand that such questions will be addressed at a subsequent hearing later this month. Today we consider the second of Mr. Shenefield's proposals, that the bill be modified to account for significant international implications. If the bill were limited solely to domestic oil companies, it might create an incentive for American companies to focus their attention on available acquisitions outside the United States. On the other hand, an indiscriminate, international reach might both needlessly infringe upon the domestic policies of foreign nations and implicate larger foreign policy concerns. In the past 2 weeks, the State Department and the Department of Justice has jointly offered new language which seeks to address both concerns. The State Department's Deputy Legal Adviser James Atwood is here today to explain the scope and rationale of such language. Before he testifies, we are pleased to welcome former Assistant Secretary of State George W. Ball, now chairman of the board of Lehman Brothers, Kuhn, Loeb, to discuss the broad international implications of this legislation. Before proceeding with the witnesses, a statement by Senator Thurmond will be inserted in the record at this point. OPENING STATEMENT OF SENATOR THURMOND Mr. Chairman, as we continue our hearings and discussions of S. 1246, our primary considerations, of course, are for the antitrust, monopoly and business rights aspects of this bill, that is, its anticipated impact on the national economy, on the overall public interest, and on individual American consumers. This proposed legislation relates principally to our Nation's economic policy-a national policy which, until recent months, was heavily focused on the demand side, rather than on the supply side, of the economy. In the last year, however, we have seen increasingly more attention directed to the supply side. This is entirely appropriate and, in my opinion, long overdue. We must give more consideration to the longrange supply side factors, such as investment, innovation, and risk taking. Only then will we be able to make the much needed improvements in productivity and effectively battle inflation. Antitrust concerns are inextricably involved in these type economic and industrial policies. With these concerns in mind, Mr. Chairman, I would like to call the attention of this committee to a speech delivered recently by Mr. Jerry J. Jasinowski, Assistant Secretary of Commerce for Policy, at the annual meeting of the National Association of Manufacturers in Houston, Tex. Mr. Jasinowski's speech was directed largely toward discussing the need for "supply side" industrial policies. He pointed out that "the source of our problems lies not in the Nation's ability to consume, but with our capacity to produce." He referred to the emerging additional emphasis on several factors, including supply constraints, capital formation, international trade competition, international interdependence, regulations, and the unrealistic demands of various government policies on our Nation's businesses. Mr. Jasinowski, in discussing policy directions for the 1980's, emphasized the need for a supply side-industrial policy which would require major changes in the attitudes and activities of both the public and private sectors. He noted that we must concentrate on the longrange economic fundamentals in order to rebuild the American economy for the future. I think it is important for us here today to give serious consideration to his comment that Our antitrust policies have been the keystone of the Government's long-term approach to industry. The new realities of the 1980's compel a reexamination of the Government's posture toward market structure, to encourage the industrial cooperation needed to compete in high-technology, high-growth world markets, and to promote the growth of small and medium business firms. Continuing with one other comment from Mr. Jasinowski's speech, he stated that * All too often we wait until an industry runs into trouble, and then seek to solve its immediate problems without analyzing the long-term consequences of public actions, or adequately considering the repercussions of these actions on other sectors of the economy. To be blunt, we muddle through in a disorganized and sometimes contradictory manner. Mr. Chairman, the speech by Mr. Jasinowski reflects, in my opinion, the growing consensus in this country that we must give more attention to the long-neglected supply side of our economy. Hopefully, the hearings today and our subsequent discussions will provide all of us with the clear perspective that we need as we consider this proposed legislation. Mr. Chairman, I ask unanimous consent that Mr. Jasinowski's entire statement be made a part of the record of these hearings. [The prepared statement of Mr. Jasinowski follows:] PREPARED STATEMENT OF JERRY J. JASINOWSKI CASE FOR AN INDUSTRIAL POLICY We are at a turning point in the conduct of economic affairs in this country. In the sixties and early seventies, we were all Keynesians. There was a consensus that the Government's prime economic responsibility was to control the level of total spending, or aggregate demand, in the economy. By manipulating government expenditures, taxes, and the size of the deficit, or by altering credit through the Federal Reserve, the level of total demand driving the business cycle was to be managed so that steady growth and high employment could be achieved. But energy and other supply shortages, decreased productivity, substantial market rigidities, and over-regulation have blunted the effectiveness of Keynesian economic tools. Keynesian attempts to manage the economy by manipulating aggregate demand have failed to achieve healthy economic growth and stable prices. Now we must admit openly that conscious management of demand via public expenditures, taxes, and control over credit is a necessary, but not sufficient activity in addressing the problems of the 1970's and 1980's. Increasingly, those problems revolve around our ability to efficiently supply the goods and services necessary to satisfy overall demand at stable prices. The source of our problems lies not in the nation's ability to consume, but with our capacity to produce. The challenge of the 1980's, in order to address the deficiencies of economic policy and to cope with the paramount problem of inflation, is to focus on the supply side of the economy. Attention to the supply side, I would argue, means shifting from a preoccupation with the ebb and flow of the business cycle, to a searching analysis of the effect of economic policies on the longterm structure, performance, and growth of sectors and industries. In that sense, I believe supply side policies are essentially economic growth and industrial policies. Supply side policies are preeminently industrial policies because such a large proportion of the goods and services produced by the economy come from our industrial sectors. Although I recognize that the dividing line between industrial and general business is blurred, I am referring here to manufacturing, construction, mining, utilities, transportation, and communications. Taken together, these sectors produce almost half of our private sector GNP and represent the heart of our economy with respect to economic growth, productivity, jobs, and trade. Within these six sectors, we are talking about roughly 200 relatively distinct industries. The case for supply side policies My case for a new "supply side" industrial policy is based upon the emergence of several factors, which limit the effectiveness of Keynesian demand management. 1. Supply constraints.-We must begin to recognize the real limitations imposed by finite natural resources, adjusting policy to ensure both increased availability of supply and greater conservation. · Supply shortages, most notably energy, already constrain growth, add to inflation, and reduce the margin of freedom for government and private enterprise actions. As we move into an era of increased scarcity, we can expect additional shortages in water, arable land, lumber, and basic metals. 2. Capital formation.-We must reverse what appears to be a chronic decline in capital investment. Productivity growth rates are down in the United States, from approximately 3 percent between 1948 and 1973 to under 11⁄2 percent for the past 5 years. But productivity declines are a symptom of more fundamental trends: (a) There is a weakening of growth in manufacturing industry capacity: 1968 to 1973. 1973 to 1977__ Percent 4 2.9 (b) The labor force is growing more rapidly than our stock of fixed capital. (c) Investment as a proportion of U.S. domestic product is lower than any of our major trading partners. The rates for 1966-1976: 3. International trade competition.-The decline of the dollar is one tangible expression of the erosion of American leadership in international trade. Our massive trade deficits, though owing partly to OPEC, are also the result of the growing economic strength of our trading partners. We face aggressive export competition from trading partners who have not hesitated to intervene in their economies through industrial policies designed to improve their trade balance. 4. International interdependence.-My emphasis upon foreign trade also reflects a new and inescapable interdependence in the world economy. United States economic policies can, in short, no longer stop at the border. Japanese growth rates effect our domestic employment. Domestic credit management must reflect international monetary considerations. A harvest failure in the Soviet Union has repercussions for a Nebraska farmer. In short, unprecedented international interdependence requires increased attention both to the availability of domestic supplies and to the viability of key export and import-impacted industries. 5. Regulations.-We must begin to regard regulatory goals as no more sacred than industrial growth and development goals. Government regulations have an enormous impact on the structure and performance of American industry because they divert private capital from productive uses. But they will not disappear. On the contrary, they must be regarded as important statements of public concern for health, safety, and environmental quality. But regulations are also haphazard in their cumulative effect on the industrial structure and productivity. The uncoordinated, bourgeoning growth of regulations in the late sixties and early seventies requires a harder examination. 6. Unrealistic demands.-Finally, the demands of various government policies have reached the point where they place too great an economic burden on the economy. The Nation's real economic growth has declined from an annual rate of 4 percent in the 1980's to roughly 3 percent in the 1970's. Given the size of our economic pie, our efforts to achieve quality of life improvements, higher living standards, higher defense spending, and other social and economic objectives exceed what our industrial machine can provide, without using up our capital stock. We must choose among our national priorities. What does the supply side mean? Given the domestic and international realities we face, and the limitations of past economic policies, I believe the case is made for shifting our attention to a supply side industrial policy. The issue then becomes: What does focussing on the supply side mean? Focusing on the supply side implies a major change in the emphasis of economic policy. It denotes a shift from a preoccupation with macroeconomics to the microeconomic dynamics of market and business development. At its best, it is an affirmative statement that we are turning our attention to the fundamentals of national economic well-being: a healthy, competitive, and productive industrial structure. It is conscious recognition of the fact that a primary responsibility of government in the 1980's should be to enhance, not inhibit business development. But on the other side of the ledger we face substantial challenges in shifting our focus to the supply side. In the simplest sense focussing on the supply side means increasing our national productivity. But behind productivity, given the way we measure it, is a collage of important and challenging dynamics. Looking behind the curtain of productivity, focusing on the supply side means: (a) Increasing the efficiency with which we use our available labor, capital and other resources in the production process, within individual firms, in industries, and among industries. Focussing on the supply side means working harder in the sense of shifting resources from areas of low productivity to areas with higher payoff. (b) Increasing the quality and availability of labor, capital, and other resources in the production process. (e) Providing more or better resources to production and less to consumption. (d) Combining the resources that go into production more ingeniously so that we increase output for any given combination of inputs. Focussing on the supply side means working smarter, not just harder. (e) Improving our capacity to produce by creating a stable environment that encourages long-term economic growth. Focussing on the supply side means pursuing an investment-oriented growth path. (f) Taking a longer view, both in the public and private sectors. Ezra Vogel, in his very interesting book, "Japan as Number One," has noted the strong Japanese attention to long-term market development and capital investment. Certainly, that attention is facilitated by the credit financing route Japanese companies take in supporting their capital requirements, but the long-term focus is yet noteworthy, Government policies must encourage a longer corporate vision, primarily through an enhancement of the long-term predictability of government policy. (g) Finally, focussing on the supply side involves two quite different levels of policy. At one level, it will mean examining how Federal policies influence industrial development across industries. At another level, it will mean examining how the package of Federal policies impact a particular industry. Both the substance and the politics of policy will be quite different from these two perspectives. Certainly, in proposing so broad a policy perspective to our national economic challenges, there is at least some burden upon me to suggest specific policy directions. As a beginning, let me suggest the following: Policy directions for the 1980's A supply side-industrial policy will require major changes in the attitudes and activities of both the public and private sectors. We cannot continue to operate our economy in the eighties as we have in the 1970's. We must concentrate on the economic fundamentals in order to rebuild the American economy for the future. As Lincoln told his countrymen during another difficult time, "We must think anew and act anew." 1. Controlling government expenditures.-We must maintain stringent controls on Federal spending in order to provide the resources for future economic growth. The share of Federal spending in GNP should be reduced to 21 percent by fiscal year 1982 with further reductions sought thereafter. We must shift from government expenditures to private investment. 2. Reducing specific government burdens.-We must also reduce the specific legislative, regulatory, and administrative actions that directly increase costs and prices, without providing commensurate benefits. Attention in this area requires controlling Federal regulations, working toward the long-term objective of establishing a regulatory budget. Beyond that, I believe we ought to establish a report card that grades government actions in terms of their impact on inflation. 3. Tar policy.-We must use tax policy that encourages long-term growth, rebuilds our industrial structure, and increases productivity. As budget resources |