that means we are going to have to leave when the bells ring. If possible, we will come back.

As you probably are aware, we are working on an extremely important bill on energy, so if you can shorten or summarize your testimony here, the entire testimony will appear in the record, and we would like to question you before we go to the next witness.

You may proceed.

STATEMENT OF GERALD R. JANTSCHER, RESEARCH ASSOCIATE IN THE ECONOMIC STUDIES PROGRAM, BROOKINGS INSTITUTION, WASHINGTON, D.C.

Mr. JANTSCHER. Madam Chairman, the written statement that I have submitted is rather long, so with your permission I propose to read a somewhat abbreviated version of it here. I request, however, that my full statement be made a part of the record of this hearing. Before proceeding I am obiiged to say that the opinions I express here this morning are my own, and are not necessarily shared by the officers, directors, or other staff members of the Brookings Institution.

Madam Chairman and members of the subcommittee, it is a priv ilege for me to appear here today to share with you some of my thoughts about the current U.S. maritime program.

I believe the subcommittee is performing a signal public service by conducting these oversight hearings and inviting persons of all shades of opinion to express their ideas on this important subject.

The subject of today's hearing is the economic and national security benefits that are presumed to flow from the current promotional program. I propose to discuss these benefits, explain why I believe that the program's contribution to national security furnishes the only au thentic justification for maintaining it, and recommend ways in which the program might be changed in order to add to its value.

The maritime program is a very costly one. In my recent book I estimated that since the Second World War promotional aids to the U.S. shipbuilding and ship operating industries have cost the Nation more than $10 billion.

Even if we restrict our attention to the direct aids that the subcommittee is examining in these hearings-the operating and construction subsidies and the tax aids to the industries and ignore such indirect aids as cargo preference and the cabotage laws, the cost has been nearly $6 billion.

The amendments to the program that were made by the Merchant Marine Act of 1970 insure that the anual costs of these aids will continue to be sizable for some years to come. Just recently your parent committee recommended that over $550 million should be authorized for construction and operating subsidies in fiscal year 1976.

If we add to this sum reasonable estimates of the cost of the direct aids, we must conclude that the costs of the total program cannot be far short-if short at all-of $1 billion a year.

Four rationales have commonly been offered in support of Government aids to the shipbuilding and ship operating industries. The first maintains that a U.S.-flag merchant marine is necessary even in peacetime to serve the needs of U.S. shippers.

The second cites the favorable employment and output effects of these

aids. The third rationale emphasizes the contribution that these industries make to a more favorable U.S. balance of payments. The fourth says that the Nation's security depends in part on a strong shipbuilding industry and sizable merchant marine.

In order to save the subcommittee's time I shall omit the discussion that appears in my written statement of the first of these rationales, the argument that even in peacetime U.S. commerce is better served by U.S.-flag vessels than by foreign-flag ships. The argument is not heard as much these days as it used to be, so I would prefer to proceed to more popular arguments based on the employment and output effects of the maritime program and its impact on the balance of payments.

If members of the subcommittee have questions later about this first rationale, I shall be glad to try to answer them.

Advocates of a sizable U.S. maritime program often allege that such a program has beneficial employment and output effects, not only in the shipbuilding and ship operating industries, but also throughout the economy. The argument is not wholly without merit, particularly at a time like the present when so many resources have been idled by the recession; but in my opinion, and for the reasons to follow, it provides an inadequate justification for the current maritime program.

As commonly stated by those who believe in it, the employment argument is not very credible. Proponents tell us that the shipbuilding and ship operating programs will generate so-and-so many new jobs throughout the economy, and will add greatly to public revenues through increased tax collections.

The Commission on American Shipbuilding spoke of an annual addition of $2.8 billion to the U.S. gross national product and of $570 million to U.S. tax revenues if the Nation persisted in the current maritime program.

It appears that these figures are calculated on the assumption that in the absence of the program the resources it employs would lie idle. If the more realistic assumption is made that at least some-and perhaps most of these resources could find employment elsewhere, the net effect of the program is smaller.

To put it another way, to calculate the net effect of the program on U.S. employment and output one must debit against the gross employment and output figures for the program the alternative employment and output of the resources it employs.

I wish that I could offer the subcommittee improved estimates of the net effect of the maritime program on employment and output; but the task is too large for me alone. It is disappointing that the Commission on American Shipbuilding, which had the opportunity and the resources to investigate this highly important question, made no effort to measure the impact of the shipbuilding program on the U.S. economy. All it provided were the unsophisticated figures quoted above.

A close reading of the Commission's report suggests that many of the skilled workers employed in U.S. shipyards have ample opportunities for employment elsewhere.

A recent report to the Congress by the Comptroller General made much the same point.

If so, it implies that the net effect of the program on employment. and output may be much smaller than its gross effect.

If this subcommittee is sincerely interested in determining what

the employment and output effects are of the shipbuilding and ship operating programs, I believe it ought to insist that instead of putting forth erroneous and misleading estimates based on unrealistic assumptions the Maritime Administration should undertake to estimate the effects properly. It is not an easy job and no decisive answer will ever be possible; but much light could be shed on the subject if the job were done right. The Maritime Administration certainly has the capability of doing so.

The current recession affects the argument only slightly. Unquestionably the program's net effect on employment and output is much greater today, when the national unemployment rate exceeds 9 percent, than it was 1 or 2 years ago. It would be perfectly right for this committee to be cautious about making drastic cuts in the program in current economic circumstances.

Nevertheless, I do not believe that one can justify a multibillion dollar program extending over many years on the basis of its shortrun effects on employment and output. The maritime program is especially unsuitable as a tool of fiscal policy.

Typically months are required between the time when the decision is made to build more ships and the time when the first expenditures for the ships are made. Construction takes place over many more months by which time the economy may have moved from underutilization of capacity to overutilization. And the ships that are built will be with us for years afterward, requiring a continuing input of labor resources at a time when labor may be in short supply.

There is another point to make here. The construction and operating subsidies support a remarkably small number of jobs in the shipbuilding and ship operating industries-important of course to those who fill them, but expensive to support. Consider the operating subsidy program. There are currently fewer than 9,000 shipboard jobs in the subsidized merchant fleet. These provide steady employment for perhaps 18.000 workers.

Annual expenditures for operating subsidies total, say. $250 million. Accordingly, the subsidy cost per shipboard worker is approximately $14.000 a year-an astonishingly high figure. To be sure, this figure takes no account of the shoreside jobs that are supported, directly or indirectly, by the operating subsidy program.

On the other hand, it bears repeating that many of these jobs must be filled by persons who could otherwise find work elsewhere. If the principal purpose of the program is to protect workers from unemployment, the Federal Government would save a great deal of money by terminating the program and giving workers who lose their jobs $5.000 a year for the duration of their unemployment.

I wish to emphasize that I am not using these figures to advocate ending the operating subsidy program. There may be sound reasons for continuing it, despite its high cost. But I submit that the employment effects of the program are not one of them.

Nor do I want to leave the impression that the jobs supported by direct operating subsidies are more costly to the Nation than other jobs that are supported by such indirect forms of subsidy as cabotage or cargo preference. It is merely easier to measure the public costs of operating subsidies a virtue of the program, it might be added.

It is more difficult to calculate construction subsidy costs per worker in the shipbuilding industry on the basis of publicly available figures. The number of production workers in U.S. shipyards who are engaged in work on Maritime Administration projects is relatively small-no more perhaps than 12,000 persons. If the annual cost in construction subsidies of the work they are doing is much in excess of $100 million," as it probably is, the annual cost per shipyard production worker must approach or exceed $10,000.

Another advantage that proponents often claim for the maritime program is that it contributes importantly to a favorable U.S. balance of payments.

Whenever a shipper chooses a U.S.-flag vessel instead of a foreign vessel to move his goods, the nation either earns foreign exchange, if the shipper is a foreigner, or saves the foreign exchange that the shipper would otherwise spend, if he is American.

In either case, so the argument goes, the nation benefits. Similarly, purchases of vessels from U.S. shipyards either earn or conserve foreign exchange. To the extent that these earnings or savings would be smaller in the absence of the maritime program-because the American industries would be forced to contract-they are to be counted among the program's benefits.

I should like to pause here to consider what manner of benefits these are that the nation receives. When exchange rates are allowed to float freely in response to supply and demand, an expansion in exports or reduction in imports tends to raise the value of the dollar in terms of foreign currencies. More foreigners want dollars, fewer Americans want foreign currency.

Americans benefit by holding dollars that are now worth more than they used to be. That is, every dollar now commands a slightly larger quantity of imports. Accordingly, the nation benefits to the extent of a modest decline in the price of imports.

The U.S. shipbuilding and ship operating industries undoubtedly do confer a benefit upon the Nation by causing the value of the dollar to be elevated slightly. The question that Congress should consider is whether the benefit is worth the cost. It is an extraordinarily difficult question to answer inasmuch as no value can be assigned to the benefit-not because it is valueless but because it is unmeasurable. Nevertheless a few observations can be offered.

First, the value of this benefit is apt to be small if there is no pressing need for lower import prices. Of course, lower prices are always welcome, but the situation in the United States is undoubtedly different from that in some foreign countries that desperately need-or believe they desperately need-imported goods, perhaps in order to meet development plans.

Understandably they may place a high priority on activities that lower the cost of such goods. In the case of the United States, it is difficult to imagine what arguments to offer in favor of a deliberate policy to lower the prices of imported goods. There must be few such goods that we currently cannot buy because their price is too high. In that case surely there is a strong presumption that no import expanding policies are called for.

Second, if we do decide to seek a more valuable dollar by subsidizing either exports (to the extent that the GATT rules permit us

to) or domestically produced goods that might substitute for imports, commonsense tells us to design the subsidy as efficiently as possible. Efficiency here means that the subsidy should be so directed that a small amount of it yields a large return.

That is, we should subsidize goods such that a small reduction in their price leads to a large increase in demand. Often these will be goods in which foreign producers enjoy only a small cost advantage over U.S. producers. If this small cost advantage can be eliminated by means of a small subsidy to U.S. producers, U.S. exports may greatly expand or U.S. imports greatly fall.

The principal objection to subsidizing the U.S. shipbuilding and ship operating industries on balance of payments grounds is that the amounts of subsidy required to so large relative to the U.S. costs of producing ships and shipping services. Foreign shipyards and ship operators enjoy a sizable cost advantage over their U.S. counterparts. Accordingly the size of the U.S. subsidy must also be large to offset this advantage over one-third of the cost in the case of most new U.S.built ships, and between 40 and 50 percent of vessel costs in the case of U.S. shipping services.

It is difficult to think of less suitable activities for us to subsidize. On the contrary, economic reasoning tells us that of all the goods and services that we ought to buy from foreigners instead of produce ourselves, ships and shipping services must stand high on the list.

After all, if the purpose of a policy is to make imports cheaper, there is a presumption behind that policy that imports are desirable. But which imports are most desirable? The answer is: Imports of goods that we do not have or that it would cost us too much to produce ourselves.

I suggest, therefore, that balance-of-payments effects provide scant justification for the current maritime program. If Congress thinks that it is desirable to promote exports or restrain imports, there must be many other goods whose production it would be preferable to subsidize than the construction of new merchant ships or provision of shipping services.

Would it not be more plausible, for example, to subsidize 10 percent of the cost of small American automobiles in an effort to win back a part of the domestic market from imported makes? Such a subsidy might not only stimulate domestic sales at the cost of imports but promote exports of U.S. cars as well-all at a small real cost in relation to the value of the product.

I come now to the only justification for a Federal maritime program that I believe stands scrutiny on the facts available. The shipbuilding and ship operating industries undoubtedly add to U.S. security by standing ready to serve the Nation's needs in time of war or other emergency. Unless we are prepared to depend totally on foreign shipyards and foreign carriers, we must be prepared to aid the domestic industries if in the absence of such aid those industries would disappear. I shall say little here concerning the addition to the Nation's security that would follow from an expansion in domestic shipbuilding capacity. All that needs to be said now was said 14 years ago in a report to the Maritime Administration:

The fundamental problem of the construction subsidy program is the absence of specific defense objectives for the subsidized shipbuilding industry. It is