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there is no professional independent economist on the list of witnesses in support of the SST.
UNANIMITY OF OPINION BY ECONOMIC PROFESSION
Senator PROXMIRE. Is it your understanding, on the basis of a very broad acquaintance in the economic profession, that most economists oppose the supersonic transport?
Mr. Okun. I know of no dissenter within the economic profession. Senator Proxmire, and I am speaking about a lot of people whom I know, whom I disagree with on almost everything else, but Professor Samuelson, Dr. Heller, Dr. Friedman, the leading people in this profession all have precisely the same views on this one matter. I suspect that they would take those views for many of the same reasons that I have expressed today; that they do not see the job benefits; that they do not agree with the balance-of-payments argument; and that they do feel that this is a unique incursion over a normal desirable boundary line of Federal versus private responsibility.
SST PRODUCTION FINANCING: AIRLINES AND MANUFACTURERS AND
POSSIBLE ANTITRUST LEGISLATIVE RELIEF
Senator PROXMIRE. One of the points made by Mr. Halaby in his very eloquent and able testimony this morning, as I understood him, and perhaps I misunderstood him—was that, if the airlines are going to get financing for the production phase of the SST, the airlines and the manufacturers both will have to help finance it, and it will be necessary to get some relief from our antitrust laws. Do
you think this can be justified? What would be the implications, the economic implications, of such action by the Congress or by the Federal Government?
Mr. OKUN. I would not be in a position, obviously, to make the judg. ments that some legislative relief was necessary. There have been areas where I have seen questions come up involving partnerships among business firms which require clarification by the Justice Department. In most of the instances they were usually able to set up such safeguards as to convince the Justice Department that this could be done within the framework of existing legislation.
Again, maybe that can be done, but if you have a cooperative venture among business firms and they agree to limit the cooperation to a particular venture firm, it is often possible to establish the safeguards within the framework of existing law.
I have already said too much not being in any sense a lawyer.
ANOMALY OF PRIVATE SECTOR PROVIDING FUNDS FOR PRODUCTION AND
UNWILLING TO PROVIDE THEM FOR DEVELOPMENT
Senator PROXMIRE. You indicated, Dr. Okun, that you felt that, if the private sector could finance the production phase, why don't they finance the research and development and prototype phase.
Mr. Okun. It is a good question.
Senator PROXMIRE. I would like to put it in reverse. If funds are needed, and they appear to be all the testimony from the administra
tion has indicated that they are needed if they are going to get research and development, prototype development—if they are needed for that
, what likelihood is there that the private sector can some up with what I calculate to be about $25 billion for the production phase ?
Mr. Okun. This is the paradox that keeps striking me. If they will do the big part that is the production phase, why can't it be done for the development or prototype phase? If it can't be done for the prototype phase, how can anyone have confidence that the developments of these prototypes will actually lead to production based on private funds rather than to another request for public support? I just don't understand the picture that is being drawn that the private markets are good enough, big enough, ample enough to provide the funds for this larger part of it but not for this little extra piece.
Senator PROXMIRE. I thought you developed very well the argu. ment that our capital markets do the job. You gave us the artithmetic
. You pointed out the amount of financing they do every year. They are the biggest capital markets, I presume, in the world, and on the basis of available funds they can do it. But the risk factor seems too great. Once again, I ask: if the risk factor is too great in research and development, isn't it likely under all circumstances and in view of the technological questions, the environmental questions, that the risk factor is likely to be too great for the private sector to finance the production part of it, which amount is much greater!
Mr. OKUN. One speaks of the risk factor being too great. I wonder what that means. I have seen natural gas exploration projects which had been honestly described to me by their proponents as crapshooting, as being just terribly risky, as being based on the flimsiest kinds of geological evidence. They go to the capital markets and get funds. The capital market is based on taking risks. That is what the name of the game is. That is what the whole function is, to appraise reward on one hand with risk on the other.
ROYALTY AGREEMENT WITH FEDERAL GOVERNMENT
Senator PROXMIRE. Let me tell you what I am talking about in terms of risk. The risk that the Federal Government is taking that it will get its money back on the royalty agreement which has been made to which Senators have referred to. In the event that only 100 or 150 of these planes are produced the Federal Government would get only a small portion of its money back. It would lose perhaps all of it
. It would certainly lose a great deal. This would be a risk that investors would be reluctant to take if there was a likelihood that they would only produce 100 or 150 or 175 of these planes.
Some reputable economists and others estimate that that is the probability. That is the risk factor that makes it hard for the private market to put up the money.
Mr. OKUN. It is a risk factor which makes this a poor investment and if it is a poor investment of private funds it is an equally poor investment of public funds, it seems to me. Basically, there is a difference between risk in the sense that you can never be certain of what
you are going to get out of a project, and risk in the sense that there is a very great likelihood that the project will be unsuccessful. If we are talking about the latter kind of risk that is as much a factor in the prospect and justification for Federal funds as it is for private funds. So if it is too risky for private funds, I suspect it is too risky for public funds.
INTERNATIONAL COMPETITION: PRESTIGE AND BALANCE OF PAYMENTS
Senator PROXMIRE. I have one final question. The testimony this morning brought out very well the problem that confronts the President and the administration in trying to meet international competition. The Soviet Union has a plane that is flying. The British-French have a plane that is flying. The feeling is that if we don't proceed with the several hundred million dollars remaining, with the prototypes, we have given up, we have lost this race. This is important from the standpoint of international prestige as well as the balance of payments. What can you contribute to this very strong argument; and, frankly, I think the strongest argument we have had today.
Mr. Okun. I suspect that is really a very important factor motivating proponents. They are saying even if this is a poor investment, even if it loses money, it is very important to be there first, important for national prestige, and important apart from economics.
This is outside my field. I place great weight on American prestige outside the area of dollars and cents, however. I just wonder whether we are making the right choices on what we want to be first on, on where we place the emphasis on international prestige. I would like to place our international prestige on lowering our infant mortality rate below that of any other country in the world; I would like to base our international prestige on our ability to have the cleanest cities in the world; I would like to base our international prestige on our ability to live together in a multiracial nation.'
I think there are a lot of places where we are demonstrably first, and technology is one of them.
The view of the rest of the world of the United States is one of our enormous technological capability. They think of us as just so vastly superior to them in every other way, except in human value. We proved our technology. I think it is time to prove our humanity.
Senator PROXMIRE. Thank you.
QUALITY OF TESTIMONY OF WITNESS
Senator PERCY. I would like to say, Dr. Okun, that I view your testimony as evidence that you have greater faith in the private enterprise than most businessmen I know. I think you would get a high ẢCA rating. I think you are perhaps even more conservative than most of the public officials who classify themselves as conservatives. I mean
that in the very best sense of the term. I think you have cut through all the arguments. And it will be very hard for anyone to answer the arguments you have presented.
A comment was made on the merchant marine. I would like to mention that I concur with your feelings on this. We had a wonderful example just recently concerning an effort to open up the Great Lakes to year-round shipping. This would increase the number of ships coming in by 3,000 to 5,000. But the law is such that we can't buy icebreakers from Finland, who happens to know how to make them and make them well. If we were to become licensed by them, the cost would increase from $7.5 million to $15 million, which might make the whole project less economical. We are bound in by our own legislation preventing us from doing something which is economically sound to do, and would certainly use far more ships. Commerce would be created and so forth.
Is is simply because we are trying to protect, with these laws, a merchant marine.
Senator MAGNUSON. We make icebreakers in the United States.
Senator Percy. Well, we do, but the cost is a great deal higher and they are not as good, apparently, as the Finnish icebreakers. I saw the Finnish icebreakers in Finland last November. It is a miracle, what it will accomplish. We need them to open up oil from Alaska and we need them to open up the Great Lakes to commerce. Yet our laws prohibit us from buying something that will be a stimulant to our economy.
MANUFACTURER EFFORTS TO OBTAIN PRIVATE FINANCING FOR AIRCRAFT
You have raised a question at the bottom of page 2, where you state:
: By standards of the private financial markets, the SST is a big project but not an indigestible one. I frankly do not know whether the companies involved in the SST developments have made a serious effort to obtain private financing.
On December 2, I gave a speech on the floor of the Senate and indicated for the record the fact that I had asked Mr. Magruder if he would be at all interested in seeing me sponsor legislation, making it unnecessary for the airlines and aircraft manufacturers to pay back the $1 billion they might owe us if we build this fleet, so he could go to the banks to see if they would finance the project if we gave them the $700 million, the $100 million in cancellation costs and threw in $300 million to sweeten it more. I asked if he could get the remainder under such an arrangement, and he came back and said "No."
I think that answers your question. They have tried and they have not been able to get anything from the private investment field, even though you have given figures on how very large the investment is.
Mr. ÖKUN. I am not sure, Senator Percy, that I take that as decisive evidence that a major effort was really made within the New York financial community. I tried this out casually on people and asked whether they could'imagine private enterprise doing it. Their
answer was “You sure can get an investment banker to listen to anything that big and listen to the case." If they won't do it, I suspect they are not convinced of the case in terms of the commercial advantage, environmental safety, and public practice.
ABILITY OF GOVERNMENT TO DISENGAGE ITSELF FROM PROJECT
Senator PERCY. You raise the question on the last page: The question now is as to whether the Government can disengage itself as rapidly and as efficiently as possible from this project.
As an economist, would you tell us what you think would have happened if the Ford Motor Co. had continued to persist in producing the Edsel, if there just didn't seem to be the viable market for it, but because of prestige and pride, which have been factors in connection with the SST? What if they had just pressed forward as hard as they could to keep making Edsels? What would be the outcome?
Mr. Okun. We would be talking about the big two in the automobile industry.
RUSSIAN ANNOUNCEMENT OF INTENT TO OPEN MOSCOW-(ALCUTTA
COMMERCIAL ROUTE WITH SST
Senator PERCY, Are you familiar with the fact that just yesterday the Soviet Union announced they intend to open a commercial route between Moscow and Calcutta with the SST!
Mr. OKUN. I did hear reference to that, yes.
Senator PERCY. I wonder if you would care to comment on your judgment as an economist? What do you think of the soundness of the investment of a country such as the Soviet Union, where they don't have enough automobiles and where a private citizen, even if he could afford it, would have to wait 5 to 10 years to get an automobile, flying to a country where the average income is $100 or less, and the mode of transportation most in common use, as I saw in my 11 visits there, is oxcart? What economic sense does this make? If it is as nutty for them to do that as I think it is, is that any reason why we should say we had better do it, too?
U.S. SYNDROME Mr. Okun. I think you are pointing to a curious syndrome we have as a nation when we see the way the Russians allocate their resources, the way they deprive the consumer sector, the way they push things into heavy industry and defense activity, we find this most unattractive, we can't understand why they want to divide their gross national product in that curious way, so inconsistent with our taste. And yet whenever they are doing something we are not doing, somehow we feel à pressure to emulate that. I think we can afford not to emulate them in a great many ways, ranging from scarcities of consumer goods to the converse emphasis on certain types of love for technology for its own sake.
COST OF OPERATING SST AT SUBSONIC SPEED Senator Percy. DOT claims that the SST is designed so that it won't consume any more fuel at subsonic speed than it will at supersonic speed. As an economist, I wonder if you could give us your judgment