Mr. MATSUI. I think, though, that we created more inefficiency in terms of investment with this new system or do you think the old system had more inefficiencies?

Mr. FELDSTEIN. The old system had many more problems and was a very strong disincentive to investment in plant and equipment.

Mr. MATSUI. Because of disparity or because the rates were higher?

Mr. FELDMAN. The total effective tax rates were very high, and you could have brought the rates down to current average level in ways that in principle provide a greater equality of rates but you have to, I think that the calculation is often presented to show that, ignores the fact that the relative use of debt in different kinds of investment situations, for different kinds of assets in different industries differs a lot, and therefore, the usual calculations of disparties are misleading.

You can't, without tying the investment rules to the debt financing mix, which I don't think you are about to do, achieve the kind of neutrality that academics talk about when they come before you. Mr. PECHMAN. I disagree with Dr. Feldstein. I don't think the present system is a good one.

I think that you would achieve a much greater degree of neutrality if you went to expensing. As I indicated earlier, I also think you ought to substitute some degree of fundability for leasing which would improve the neutrality of the system.

If Dr. Feldstein is worried about the remaining nonneutrality after you have expensing, I will join him in eliminating the deduction for interest which is the proper way to eliminate the nonneutrality that he talked about.

Mr. SAMUELSON. I don't have an interesting opinion on this.
Mr. MATSUI. Thank you.

Mr. CONABLE. That was a remarkable statement. I congratulate you on it, and I also doubt it.

Mr. Chairman, I would like to ask a question for the record, since it does not have a great deal to do with the subject at hand, however, it does with the work of this committee, and I refer to a comment by Dr. Feldstein in this morning's Wall Street Journal article in which he advocated the elimination of the interest deduction for consumer interest, among other things.

That seems like a rather interesting proposal, because I am sure it would be, I mean, the suspicion one has, it would be rather difficult for the auto industry and it would be somewhat regressive in its nature, although I acknowledge that three out of four taxpayers are on a standard deduction but I wonder if you have any figures on that that you would put in the record that would instruct this committee on the effect of the elimination of the consumer interest deduction in terms of its impact.

It is a proposal which has been considered vaguely, and only briefly from time to time by this committee, and if you have some studies on that, their inclusion in the record would be of interest. I don't insist on an answer now.

Mr. FELDSTEIN. I will be happy to send some numbers along. It would not be regressive for the reason that you mentioned, that

most lower income taxpayers don't itemize at all and wouldn't be affected by it.

Mr. CONABLE. Obviously, well-to-do people don't buy cars on credit, either.

Mr. FELDSTEIN. It depends on how narrowly you construe con

sumer

Mr. SAMUELSON. Householders, mortgage interest?

Mr. CONABLE. I am talking about consumer credit itself. That, of course, has been one of the burgeoning areas of debt, and has been considered as something desirable in terms of getting down inflation, I mean the deduction has been considered here but not seriously considered and I wonder if there is a study available that would be of interest to the committee on that.

Mr. FELDSTEIN. I will try to send you some numbers.

Mr. CONABLE. Thank you very much.

Mr. PICKLE. Mr. Chairman, early this year or last year, the administration said that the recession ought to bottom out by the early part of this year and level off in early spring and by the end of the year we would have a real vigorous economy, and then we would end up at the end of the year with a plus 0.2 real growth in GNP, and that it would go from that point to a plus 5.2 in 1983. Mr. Samuelson, a while ago you said that you didn't think we were going to have a recession, things would get a little better, and we go into a depression.

Do any of you feel that we are on schedule now, will we have a 0.2 real growth in GNP by the end of this year, and can we have a 5.2 plus growth in 1983?

Mr. PECHMAN. I can only refer to some calculations that my colleague, George Perry has made. The assumption of the 0.2 for the year implied that the rate of decline of GNP in the first quarter would be something like 1 or 2 percentage points; it would bottom out in the second quarter, and then go up sharply at the rate of 5 or 6 percent.

As a result of the 3 percent decline in industrial production in January and the reduction in housing starts and retail sales, many forecasters are raising the drop in the first quarter GNP to something like the kind of drop we had in the last quarter of 1981. If we have a five point drop in GNP-

Mr. PICKLE. A minus figure?

Mr. PECHMAN. Yes, and it might be minus 2 percent for the entire year. The assumed rate of growth of about 5 percent in 1983 is also very optimistic in light of the problems we indicated earlier with a tight money policy and a loose fiscal policy, and high interest rates.

Mr. PICKLE. No question about it being optimistic.

Is it within the realm of reality?

Mr. CONABLE. It also now is a little stale.

Mr. SAMUELSON. Mr. Pickle, it is definitely an achievable number in terms of all of the business cycle experiences of the possible World War II period, to say nothing for the last 130 years.

It would not even be an immodestly high figure in terms of my experience, but given the fact that we have a constant concern not to have inflation break out again, that we have not yet exorcised that from the system, and that that is built into every policy

maker, both at the Federal Reserve level and in the Congress, weighing all the evidence, including the more recent evidence that Dr. Pechman has referred to, one has to regard those numbers, January numbers, quite stale by now perhaps, as not numbers to bet on for a prudent person.

Mr. FELDSTEIN. I think that is correct. The administration's forecasts have generally been in line with what the business forecasters have been saying to their bosses and clients about the economy, and that they have been much too optimistic for the last year, and that this year is likely to turn out to be a very flat period.

Chairman ROSTENKOWSKI. If there are no further questions, I want to thank you gentlemen for joining us.

Thank you very much. You have been very helpful.

The committee stands adjourned until 9 o'clock tomorrow morning.

[Whereupon, at 4:45 p.m., the committee adjourned, to reconvene at 9 a.m., Friday, February 19, 1982.]

ADMINISTRATION'S FISCAL YEAR 1983

ECONOMIC PROGRAM

FRIDAY, FEBRUARY 19, 1982

HOUSE OF REPRESENTATIVES,
COMMITTEE ON WAYS AND MEANS,

Washington, D.C.

The committee met, at 9:05 a.m., pursuant to notice, in room 1100, Longworth House Office Building, Hon. Dan Rostenkowski (chairman of the committee) presiding.

Chairman ROSTENKOWSKI. The committee will come to order.

It is certainly a pleasure to have back at the witness table one of the more outstanding members of President Carter's Cabinet, Mike Blumenthal.

Mike, I remember some very interesting discussions that we had, and certainly some of the great decisions that you made with respect to the Nation's economic policy. On a personal basis as well as on a public basis, I want you to know that it is wonderful to have you back with our committee.

I am sure that the committee is looking forward to receiving your testimony and will be guided by the advice that you present. STATEMENT OF W. MICHAEL BLUMENTHAL, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER, BURROUGHS CORP., AND FORMER SECRETARY OF THE TREASURY

Mr. BLUMENTHAL. Thank you very much, Mr. Chairman, Mr. Pickle.

It is my pleasure to respond to your invitation to come back here before this distinguished committee. It does seem a bit like old times, although I feel a lot more relaxed somehow than I did in times past. I had ample opportunity to appear before you during the 21⁄2 years I served as Secretary of the Treasury, and I have stayed away since from any testimony before the Congress.

So, coming back here today in my first return engagement, brings back some fond memories, others not so fond. But, I do wish, in a way, that my return engagement since leaving Washington might have occurred under less somber circumstances than it is. And that is, Mr. Chairman, because the President's budget for fiscal year 1983 and his economic game plan through fiscal year 1985 are, in my view, worrisome and unrealistic. They lack credibility and defy basic economic commonsense. They are also patently unfair and lack fundamental equality of sacrifice for the various segments of our society which is so essential if any program is to

be viable and enjoy the necessary broad based support among the American people.

Unless substantially modified, hopefully through a comprehensive bipartisan effort of the Congress and the administration, the President's program is likely to prolong and deepen the current serious recession and to cause severe hardship for millions of Americans in many parts of the country. It is therefore urgent that this committee, and the Congress as a whole, enact an economic program more likely to restore sustainable economic growth without renewed inflation and without imposing undue and uneven hardship on any one segment of the population or region of the country. I appear before you today, Mr. Chairman, speaking only for myself as a private citizen and as a businessman-albeit one with extended experience in the public sector as well. Since leaving Washington, I have returned to private industry and am currently chairman and chief executive officer of the Burroughs Corp., the second largest information systems and computer company in the world.

I also serve as director of one of our country's largest commercial banks and of the Nation's third largest insurance company. I am also a board member of a major Midwestern food company headquartered in Minneapolis, Minn.

Moreover, since leaving Washington, I have resumed my interest in higher education as a trustee of Princeton University and have worked closely with Gov. Bill Milliken in my home State of Michigan, to advise him on how best to cope with the tremendous economic difficulties we face in what is lamentably now one of the highest unemployment areas in the country.

Mr. Chairman, the budget proposals before you represent a program which is unbelievable, unworkable, and unjust. I must tell you in all frankness, and I have given this a great deal of thought, that if I had been asked as Secretary of the Treasury to support and defend such a program, I would surely have seen no choice but to tender my resignation forthwith.

This is a strong statement, Mr. Chairman, and I do not make it lightly. Allow me, therefore, to explain briefly why I have come to this conclusion.

First, as to the budget deficits. Taking the budget proposals at face value and without, for the moment, questioning the underlying assumptions, it is being suggested that we add to our national debt of $1 trillion with planned deficits in fiscal year 1982 through fiscal year 1985 totaling $345 billion more. In other words, it is being recommended that we increase our total national debt accumulated over the past 200 years by as much as one-third or more in the span of just 4 short years.

Mr. Chairman, annual deficits of such a magnitude are most unwise. They are bound to be inflationary and would condemn us to a continuation of the current monetary policy whose hallmark is interest rates at unacceptably high levels.

Double digit interest rates and, in particular, high long-term rates effectively kill off any hope for the kind of increased business investment envisioned by the Tax Act of 1981. And without more investment, there will be no sustained economic recovery, no im