National security

Mr. OBERSTAR [presiding]. Thank you very much, Mr. Wall. It is a very fine, comprehensive statement.

We will also include in the record the statement of Earl Clark, codirector of your committee, so that that, too, can be made a part of the official record.

[The statement of Earl Clark, above referred to, follows:]

STATEMENT OF THE LABOR-MANAGEMENT MARITIME COMMITTEE

ECONOMIC CONTRIBUTIONS OF THE SUBSIDY PROGRAM

Mr. Chairman and Members of the Committee:

We appreciate the opportunity of appearing before the committee on that very important subject, "The Economic Benefits which result from the Maritime Subsidy Program." Since the announced subject matter of this hearing encompasses both shipbuilding and ship operations, we shall address them in that order.

Shipbuilding

As of March 1, 1975, U.S. shipyards had 91 large merchant ships under construction or on order for a combined total of 8.8 million deadweight tons for the foreign trade valued at $4.5 billion. This was an overall peacetime record.1 Assistant Secretary Robert Blackwell recently stated that once American shipyards complete orders for these 91 merchant ships they will more than double the carrying capacity of today's active fleet. This massive ship construction program was engendered in substantial measure by the Merchant Marine Act of 1970 and provides strong economic support for the economy of the United States. However, since one of the stated interests of the committee hearing today relates to economic benefits derived from subsidy expenditures, we shall direct our attention chiefly to that phase. For this purpose we have appended Table No. 1 which covers fiscal year 1975 through February 1, 1975 (the latest available figures) and is confined to yards capable of building ships of 475 by 68 feet dimensions. Statistics reveal that for such period there was an average of 11,330 production workers on ship construction supported by construction subsidy (Col. 5, Table 1). The figure is an actual daily average and does not include employees absent due to strikes, temporary layoffs, illness, etc. Actually, there were some 13,330 shipyard workers on the rolls. (If we add the administrative, engineering and the white-collar group, the figure jumps to some 16,000).*

1. Wages. Average hourly earnings of shipyard construction workers, as of November, 1974, was $5.40 per hour or $203.04 per week." Thus, such workers

1 Marad Release. Apr. 30, 1975.

3 Congressional Information Bureau, June 6, 1975, p. 14.

See Table 1 attached. Marad Statistics. July 1974 to February 1975.

4 Shipbuilders Council of America, March 1974.

Bhipbuilders Council of America, March 1974.

would earn in one year an average of some $10,558.08. The 11,330 average monthly number of shipyard workers on subsidized ship construction would, at this rate, have earned $119,622,140 per year, exclusive of fringe benefits of about 25 percent. Were these ships not built in America and assuming all were built foreign, this amount would be lost to the American economy.

2. Tax-loss-corporate.-Tax-wise, the United States would ultimately be deprived of an appreciable amount of corporate taxes. Taking the calendar year 1974 just ended and utilizing estimated costs for subsidized ships under construction, it is possible under the assumptions set forth to make a very rough calculated estimate of the corporate tax loss were the ships built foreign. It must be only a rough estimate since total construction costs of subsidized ship construction were not obtainable for that particular year.

A great number of our shipbuilding companies are owned by conglomerates which do not publish detailed statistics covering shipbuilding. Profits are inordinately low since we are in the very heart of an inflationary period.

The Office of the Assistant Secretary of Defense (Comptroller) has indicated the following percentages for the years 1969 through 1973 for a limited sampling : Percent of profit on sales before taxes1

1 Shipbuilders Council of America, "Shipyard Weekly", May 1, 1975.

Percent

3.4

2.3

1.2

0.8

1.9

This is extremely conservative when applying it to the entire industry. Utilizing this inordinately low profit projection on an unweighted basis and applying it against an estimated overall shipbuilding payout of $568,301,291,7 gives a figure of $11,366,025 in profits for 1974 which, at a 48% corporate tax rate, would engender some $5,445,692 in taxes.

If we take total costs of all ships under construction in 1974 regardless of the year of contract award, profits would amount to an estimated $56,381,388 on the above basis with Federal taxes of over $27,000,000 based on the above tax rate. We want to make it clear that we not profess that this figure possesses an exact degree of accuracy, nor can it without access to highly developed and detailed records of each participating shipbuilding company. This was neither available nor computed out as of this writing. The figure is, at best, an estimate founded upon incomplete base. Suffice it to say, it is a conservative indication of the loss of tax dollars, if ships, now being built with construction subsidy, were built foreign and thus lost to American yards.10 In normal or non-inflationary years, that tax loss would multiply.

3. Tar loss from workers.-There is no exact way to evaluate the loss in individual taxes of those employed in the subsidized ship construction program. Each individual family has its own exemption and deduction and net taxable income base. At an average income of $10,588" (not counting any other wage and family income), the taxes have been estimated as follows A family average placed at four, with earnings at some $10,500 per year with standard deductions of $1,575 and exemptions of $3,000, would, upon filing a joint return, pay in Federal taxes alone on the remaining $5,925 some $260 on the first $4,000 and 19 percent on the excess, for a total of $986. Such an amount is obviously low since State and local taxes are excluded. However, the total annual taxes (Federal) estimated for 11,330 workers, at this rate, would amount to some $11,171,380 in taxes.

By such types of estimates where all specifics are not available, we can at least get a feel of the great income producing potential to the U.S. economy from our ship construction subsidy program. It sets up a chain reaction in our society like every other dollar spent that reverbates through many channels of our economy.

• Does not include ship repair.

7 $369.395.839 estimated direct cost to shipbuilder plus $198,905,452 paid out subsidy. Marad Annual Report 1974, Appendix 6. p. 68.

8 Marad 1974 Annual Report, p. 61. col. 3, computed at 2 percent profit.

* Spread over the years of production.

16 Does not cover subsidized repairs.

11 Computed from Marad source data, June 1975.

4. Overall loss to the economy.-In order to evaluate the total loss to the United States economy, including wages, materials, supplies and components, let us take the Maritime Administration's figures for June 30, 1974.12 The total subsidy paid out during 1974 for the 52 subsidized ships under construction was $198,905,452.

Assuming an average of 35 percent subsidy for ships under construction in 1974 and assuming a 65 percent expenditure from private funds, industry would have expended $369,395,839.

This amount of $369,395,839 would represent the projected foreign cost and thus, the corresponding loss to the Ameican economy from purely private sources were the ships built foreign, as, in all likelihood, they would be, were it not for the construction subsidy program of the 1936 Merchant Marine Act. This amount would not only be lost to the U.S. economy but our international balance of payments would be adversely affected by an equivalent $369,395,839.

The economic chain reaction of our shipbuilding enterprise affects the economy of many states of the union as it contributes its materials, supplies, labor and components generally to ship construction. Thus, not only the general economy is enhanced but also the results of the total enterprise affects many segments of the economy and varied sections of the nation. Were this program of shipbuilding transferred foreign, the United States economy would have been deprived of a sizable income producing segment of industrial production with all such benefits redounding to competing maritime nations.

5. General benefits.-Based on the premise of reasonable accuracy with respect to the $986 (supra, p. 5) estimated Federal tax for each shipyard worker's family, and considering certain of the other major benefit factors, let us look at these estimates for the year 1974.

Total shipbuilders payout_-.

Number of shipyard workers_.

Wages for the economy-

Projected workers' Federal taxes_

Projected industry profits___

Projected corporate taxes--

Favorable international balance of payments___

$369, 395, 839 11.330

$119, 623, 046 $11, 171, 380 $11, 366, 025 $5,455, 692 $369, 395, 839

1 Exclusive of subsidy. Subsidy payout for same year: $198,905,402-Marad 1974 Annual Report, Appendix I, p. 68, Maritime Administration.

Some of the items not covered above include taxes paid to State and local authorities by both corporations and individual and industry outlays for shipyard capital assets. Certain of the above items cover allied industry suppliers, etc.

There is a usage of the "magic of multiplication" which, taken abstractly, tends to exemplify stupendous results. Mr. Gerald R. Jantscher appears to use it widely in his book, "Bread Upon the Waters," and in his magazine publications. For example, I quote: "Between 1936 and fiscal 1973, construction subsidy payments totaled more than $1.8 billion." Now when we take your rent or home mortgage, your electric bill, your heating bill or your doctor bill and multiply them by 30 or 40 years, the magnification has striking results.

Since Mr. Jantscher has employed this method, let's try it on economic benefits in subsidized ship construction. If we take the next 20 years based on 1974 figures alone, shipyard workers would earn $3,588,664,200 and pay taxes amounting to an estimated $335,141,000." Shipyards, at current depressed profits rates, would earn $341,980,750 in profits 15 and pay $163,670,760 16 in taxes. Our international balance of payments, by not building an equal number of ships foreign each year, would benefit by $11,081,875,170.1

Now what we are trying to say is that we would hope that the opponents of specific government programs, such as maritime support, would avoid trying to discredit reputable endeavors by the "magic of multiplication". This can aso be turned around sometimes with strikingly favorable results as we believe the above figures tend to demonstrate. So much for shipbuilding. Let us turn now to a review of the benefits in the area of ship operations.

12 Marad, June 1974 Annual Report, Appendix 1, p. 68.

13 Ibid. p. 61. Actually 34.5 percent for all ships under construction in 1974 for all contract years.

14 $119.622.140 yearly earnings multiplied by 30 yrs.

15 $11.366.025 currently depressed profits multiplied by 30 yrs.

18 $5.455.692 low yearly tax estimate in a depressed market multiplied by 30 yrs.

17 $369,395,839 foreign cost equivalent for 1974 multiplied by 30 yrs.

Ship operations

"The 1936 Act originated with a lively concern that the American shipper not be left to the mercy of foreign shipping which might unfairly discriminate against American trade and which might again, as it has done at the outset of the two World Wars, desert the American trades. That protective purpose has been served by the American Merchant Marine." 18 This conclusion has been reiterated by Maritime Administrators from Kennedy on down through the years. It has been the frequent and unwavering judgment of this committee and the Executive Committees established to study the U.S. Merchant Marine. In keeping with this sustained policy, our purpose here today is to evaluate the economic benefits of the subsidized service.'

A. EXTENT OF WORKERS' INCOME

1. Licensed officers.-In 1974 there was an average of 2,303 licenses jobs or billets on subsidized vessels. The average daily take-home pay (before taxes) in base wages, overtime and vacation pay was approximately $100. Base wages, overtime and vacation pay for all such licensed billets amounted to a total daily cost of $230,300 or $82,908,000 yearly.

2. Unlicensed seamen.-In the unlicensed category, daily take-home pay (before taxes) for base wages, overtime and vacation pay amounted to approximately $50 for 5,937 jobs or billets. The average daily cost on this basis for such unlicensed billets was $296,850 or $106,866,000 for a yearly total.

Were it not for the operating subsidy program, these jobs and the commensurate amount of income, in all probability, would have been lost to the American economy for the year 1974. (This assumes all transferred foreign).

B. TAXES DERIVED FROM WORKERS' INCOME

This brings us to an estimate of the effect of employment on workers' taxable income. The following figures from Marad shed real light on this subject. Wage data is based on 1974/75 statistics. Work experience is taken from the year 1972.0

1. Licensed officers.-Licensed officers worked an average of 143 days and earned an average yearly income of $14,300 including base wages, overtime and vacation pay. This figure is for a non-automated ship and, therefore, does not include the 10% premium pay. The above is an across-the-board average and includes occasional and short-term employment as well.

2. Unlicensed workers.-Unlicensed seamen worked an average of 133.2 days in 1972. A 1974/75 wage application arrives at a yearly income of $6,660 including the same items as for the licensed. This is an across-the-board average and includes occasional and short-term, as well as regular, employment. The more regularly employed unlicensed seamen earn considerably in excess of this statistical average.

Using an average of four in the family, the normal Federal taxes in 1974 on an average licensed officer's income would approximate $1,544 while that of an unlicensed seamen would be $355. The tax results would, therefore, be as follows:

18 ODS White Paper, Gardner and Sciar. Nov. 21, 1974. Reference: Study No. 1.

19 In treating of the benefits from operating subsidy we do not assess those stemming from the Russian grain program or the bulk trade facets.

Source: Marad, June 1975. (Latest work experience available).

62-989-76—20

Again, these Federal taxes (and unestimated State and local taxes) would have been lost to government had the ships been transferred and operated foreign. This analysis underestimates the actual recoupment by using average figures and must, therefore, be considered minimum. Full-time seamen will work between 210 and 270 days per year and those just entering the industry or without seniority of dispatch for employment would work between 90 and 120 days per year, or less, which would explain the low average of $6,660 per year. Obviously, the tax would be greatly magnified for those of higher earnings, especially those with incomes between $25,000 to $50,000 per year in the licensed category. The Master on a new, automated vessel will work about seven months per year and earn about $40,000 to $45,000 per year. His taxes will aggregate about $10,000 per year.

C. CORPORATE TAXES

Had the subsidy been discontinued and the ships transferred foreign, there would obviously have been little or no loss in corporate taxes in 1973, (the last reported year in the 1974 Annual Report of the Maritime Administration). The combined subsidized and unsubsidized balance sheets as of December 31 of that year show a net loss after subsidy of $9,729,000." The subsidized liner group loss for that year was even greater. This does not represent a normal year due in great measure to inflationary costs, i.e., for the combined subsidized liner group, the years 1963 through 1969 show appreciable net profit after taxes ranging from $71 million in 1966 to $30 million in 1969. However, yearly taxes ran an average of $13 million for the more normal years, 1963 through 1969. For the 11 year period, 1963 through 1973, the yearly average for the combined subsidized liners lowered to $8.3 million due to heavy losses in 1970, 71 and 1973.

Computed over any extended period, the corporate taxes engendered by U.S. flag operation made possible by the subsidy program is rather substantial. Therefore, since 1973 would be a most unrepresentative year, covering as it does the greatest loss period in over a decade, we utilize the average yearly tax amounts for the 11 year period 1963 through 1973, or $8.3 million. In passing it is interesting to note that the first six months of 1974 showed appreciable profits after taxes for nine selected subsidized liner companies; $26 million after an estimated $8 million in taxes.

D. TOTAL VESSEL EXPENSE

Let us compare costs in terms of total vessel expense. In a representative year wages approximate some 32 percent of total vessel operating expense, maintenance and repairs 5 percent and insurance some 6 percent. The latest figures available, however, are for the year 1973. Ten of the 11 subsidized lines constitute this sampling."

Total vessel operating or voyage expense-$778,331,610. Subsidizable items:

Wages

Maintenance and repair.

Insurance

Total

Actual

$245, 229, 472

37, 958, 841

45, 294, 235

328, 482, 548

Of these subsidizable items, wages were subsidized to the extent of $171,660,630 or approximately 69 percent; maintenance and repair $11,767,240 or approximately 31 percent and insurance an estimated $22,400,000 or approximately 49 percent in 1973 fiscal year.

This totals to an estimated $205.8 million. It constitutes the operating subsidy amounts paid out of a total expenditure of $778.3 million. This would leave a total of some $572.5 million expended in total vessel operating expense from private capital.

Of the total $778,331,610, which includes all voyage expenses, $453,090,561 * is direct vessel expense, most all of which flows into the economy of the United States. Direct vessel expense includes wages, subsistance, fuel, store, supplies and equipment, maintenance and repair, insurance and other minor items. Total voyage expense, on the other hand, includes, in addition, such other items as

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