Chairman GIBBONS. Thank you. Mr. Lippke. BY STATEMENT OF BRUCE R. LIPPKE, PRESIDENT, WHARTON ECONOMETRIC FORECASTING ASSOCIATES, ACCOMPANIED GEORGE SCHINK, VICE PRESIDENT OF RESEARCH Mr. LIPPKE. Thank you, Mr. Chairman. I am Bruce R. Lippke of Wharton Econometric Forecasting Associates. We are located in the Science Center in Philadelphia. I am pleased to submit a written statement which describes our estimate of the macroeconomic effects which would result from implementating natural resource subsidy legislation. The principal business of our organization is economic consulting to business and government clients. Most of our work is based upon our economic models which have evolved over all the years from the original research done by Professor Klein, Nobel Prize winner for his efforts, the founder of our firm, and still our approval board chairman. The work that we have done in this particular study is based upon our work in long-term inner-industry model and the agricultural model. George Schink, our vice president of research is with me today. He has done work with these models for over 10 years. He has refined them many times over the years, and he can give you any of the technical details that you might ask about. The results of our analyses are extremely disturbing because the jobs which would be saved in the domestic ammonia, petrochemical, carbon black, and soft lumber industries, which we looked at most thoroughly by implementing this kind of legislation, are more than offset by job losses in other industries. The bottom line of this analysis is that there would be a net job loss of as much as 275,000 jobs while the protected industries would gain only about 9,000 jobs. We have examined the effect of the natural resource subsidy legislation under two kinds of scenarios. The first is with no retaliation by the affected foreign countries, and the second including retaliation. In our view, the likelihood of retaliation is very high, but the exact form of that retaliation is certainly less well known. Hence, we have described these as separate cases. With the assumptions that the foreign countries which would be hurt by the natural resource legislation would not retaliate, the key impacts on the economy of implementing the legislation-and we assume it to be effective January 1, 1986, in this analysis-are estimated. The U.S. output or GNP for all sectors would be reduced by $80 billion, measured in 1985 dollars over the 1986 to 1994 period. Economywide, the job losses would reach 275,000 while the net job gains in the protected sectors would be 9,000. Due primarily to those higher fertilizer prices that you heard a bit about earlier, net U.S. farm income would be reduced, on average, by some $890 million per year over that same period for a total loss of $8 billion. The reductions in farm income and output due to those higher fertilizer prices would reduce the number working on farms by as much as 40,000. Real personal disposal income would be lower over that same period by some $40 billion. Unemployment roles would be expanded by as much as 266,000 during that period. And, of course, consumer prices would be higher as a consequence of the duties levied to protect sectors, on average, by 0.5 percent during the time period. Higher unemployment and lower personal income would cause Federal outlays for transfers, such as unemployment compensation, to increase by $16 billion over the same period. The Federal debt would be raised by about $10 billion due to the reduced receipts from other taxes and higher outlays. The results obtained assuming no retaliation show that implementing natural resources subsidy legislation would have a very high economic cost overall. Let me add that these results would almost certainly have been worse if we allowed the initial countervailing duty to rise as the U.S. purchases of U.S. stumpage drive up the price of U.S. stumpage. But this in turn would drive up the duty, as I understand the formulas, creating a spiral both in prices and the duty. I believe the bill has very unstable economic implications with very inflationary tendencies. We believe that the cost would be even higher of course, because the countries which lost U.S. sales as a result of the subsidy legislation would be inclined to retaliate. Canada, Mexico, the Soviet Union, and Saudi Arabia are the most likely group to retaliate. I described our efforts under this kind of retaliation assumption. Let me explain why this legislation which tries to protect some distressed sectors is so counterproductive to the Nation as a whole. It is important to see why duties related to natural resources impacts are particularly ineffective as protectionist legislation. During much of our Nation's history, we have been resource rich, and over these years we have developed facilities to convert the abundant resources into products using less and less labor with more and more capital in the primary processing conversion industries. In the same time period, more labor was devoted to the finished product and service sectors. Now, since the subsidy legislation protects our capital-intensive industries, the number of jobs that would be added in response to increased prices and output would be quite low. These gains are small when compared to the jobs that would be lost by the more labor-intensive sectors that have to purchase these products in the production of their finished products. We typically would, in this kind of analysis, run several alternatives to test the range of key assumptions. We would change some of the price assumptions and some of the supply responses. But in this particular situation, varying those assumptions will only change somewhat the ratio of the jobs lost to the jobs gained. The dominant result would still be that far more jobs would be lost resulting from the higher prices than jobs gained by the protected sectors. I hope that makes it somewhat clearer why this particular legislation does not have a positive jobs impact. Now, I would like to describe the more probable situation of foreign retaliation. As I said, we believe that to be the likely case for many of the these countries directly affected. If retaliation were to occur, the negative impacts on selected indicators would be from 20 to 30 percent worse than for our no retaliation case for most sectors, ranging to a full doubling of the loss in income in the farm sector, which we believe to be the most vunerable sector. By our estimates, real GNP would be cut by $114 billion over the time period that we talked about before. Net economy-wide employment losses would be as great as 385,000 while the gains to the protected sectors would actually decline. Job losses in agriculture would be as much as 52,000. Net farm income would be reduced by something like $2.6 billion per year on the average for a cumulative impact over the time period from 1986 to 1994 of $24 billion. Real disposable income would be reduced by some $89 billion. So the number of unemployed would climb to 369,000 and 16,000 would leave the labor force without being able to find a job. Federal unemployment compensation and other transfer costs would rise by almost $20 billion over this same time period, and the Federal debt would rise by $33 billion by 1994. By 1994, the cumulative U.S. merchandise trade balance would deteriorate under retaliation by $13 billion, whereas in the first case, without retaliation, it was positive by $10 billion. The ultimate costs of implementing natural resource subsidy legislation could be, of course, much greater than I have described because I have not considered any retaliation of a comparable sort on the part of the European countries or any trade war that cascaded with one country rebounding, doing something, and another country having to do the same thing, and it spreading from one country to another. If that were the case, of course, you would basically unravel a considerable part of the world's growth over the past 10 to 20 years that has been derived from each country sharing their comparative advantages with other countries. Now, while we do not believe that the natural resource subsidy legislation is the solution, we do recognize that the United States is currently at a serious disadvantage in the international marketplace, due primarily to the high value of the dollar. Legislative action aimed at reducing the Federal deficit would contribute significantly to reducing the value of the dollar. Basically a lower deficit would ease pressures on the credit markets, and lead to decline in real interest rates. This would be a very good omen for the capital intensive sectors. As interest rates decline, the value of the dollar would decline, and this result would then make all of U.S. industries more competitive in the international arena. As a result, our exports would be increased instead of becoming the target of increased protectionism. WHARTON ECONOMETRIC FORECASTING ASSOCIATES, Hon. SAM GIBBONS, DEAR CONGRESsman Gibbons: Wharton is pleased to submit the attached written statement which describes our estimate of the macroeconomic effects which would result from implementing natural resource subsidy legislation. Our analysis was performed using wharton's Long-Term Model of the U.S. economy and our Agriculture Market Models. The results of our analysis are extremely disturbing because the jobs which would be saved in the domestic ammonia, petrochemical, carbon black, and softwood lumber industries by implementing natural resource subsidy legislation would be more than offset by job losses in other industries. Net job losses would be as much as 275,000 while the protected industries would gain at most 9,000 jobs. Wharton has examined the effect of natural resource subsidy legislation under two scenarios: (1) no retaliation by the affected foreign countries; and (2) retaliation. Our results are as follows: NO RETALIATION SCENARIO Assuming that the foreign countries which would be hurt by the natural resource legislation would not retaliate, the key impacts on the U.S. economy of implementing the legislation to be effective January 1, 1986 are that: Total real U.S. output (GNP) would be reduced by $79.7 billion (1985 dollars) over the 1986-94 period. Economy-wide job losses would reach 275,000 while net job gains in the protected domestic industries would be at most 9,000. Due primarily to higher fertilizer prices, net U.S. farm income would be reduced on average by $889 million per year over the 1986-94 period for a total loss of $8.0 billion. The reductions in farm income and output would reduce the number working on farms by as much as 41,000. Real personal disposable income would be lower over the 1986-94 period by $39.9 billion (1985 dollars). Unemployment rolls would expand by as much as 266,000 during the 1986-94 period. Consumer prices would be higher on average by 0.5 percent during the 1986–94 period. Higher unemployment and lower personal income would cause federal outlays for transfers (e.g., unemployment compensation) to increase by $16.0 billion over the 1986-94 period. The federal debt would be raised by $10.5 billion by 1994 due to reduced receipts from other taxes and higher outlays (largely transfers). RETALIATION SCENARIO The results obtained assuming no retaliation show that implementing natural resource subsidy legislation would have a high economic cost. We believe, however, that the costs would be even higher because the countries which lost U.S. sales as a result of the subsidy legislation (Canada, Mexico, the Soviet Union, and Saudi Arabia) would retaliate. In retaliating, these countries would attempt to cause the greatest economic and political demage in the U.S. while minimizing the costs to themselves, thereby making U.S. agricultural exports an obvious target. If retaliation were to occur, the negative impacts on selected economic indicators would be that: Real U.S. output (GNP) would be cut by $113.9 billion (1985 dollars) over the 1986-94 period. Net economy-wide employment losses would be as great as 385,000 while gains in the protected industries would be only 8,000. Net farm income would be reduced on average by $2.6 billion per year for a cumulative loss over the 1986-94 period of $23.8 billion. Job losses in agriculture would be as much as 52,000. Real personal disposable income over the 1986-94 period could be cut by $58.8 billion (1985 dollars). The number unemployed would climb to 369,000 while 16,000 would leave the labor force. Federal unemployment compensation and other transfer costs would rise by $19.3 billion over the 1986-94 period. The federal debt would rise by $33.3 billion by 1994. By 1994, the cumulative U.S. merchandise trade balance would deteriorate by $13.0 billion. The ultimate costs of implementing natural resource subsidy legislation could be much greater than estimated here if European countries implement legislation to protect their industries. While we don't believe that natural resource subsidy legislation is the solution, we recognize that the U.S. is currently at a serious disadvantage in the international marketplace due primarily to the high value of the dollar. Legislative action aimed at reducing the federal deficit would contribute significantly to reducing the value of the U.S. dollar. A lower federal deficit would ease pressures on credit markets and lead to a decline in real interest rates. As interest rates declined, the value of the U.S. dollar should decline. This result would help make all U.S. industries more competitive in the international arena. Sincerely yours, STATEMENT OF BRUCE R. LIPPKE, PRESIDENT, AND GEORGE R. SCHINK, VICE PRESIDENT, RESEARCH and DeveloPMENT, WHARTON ECONOMETRIC FORECASTING Associ ATES OVERVIEW Mr. Chairman, I am pleased to appear before this subcommittee to discuss the views of Wharton Econometrics regarding the macroeconomic impact of implementing natural resource subsidy legislation. Wharton's Long-Term Model of the U.S. economy was used to estimate over the 1986-94 period the direction and size of changes in output, employment, income, and prices which would result following the passage of natural resource subsidy legislation to be effective January 1, 1986. The results of our analysis are extremely disturbing because the jobs which would be saved in the ammonia, petrochemical, carbon black, and softwood lumber industries would be more than offset by job losses in other industries. Net job gains in the protected industries would be at most 9,000, but net economy-wide job losses would reach 275,000. This result occurs under the assumption that the foreign countries directly impacted by natural resource legislation would not retaliate; retaliation would make the net job losses even larger. Our analysis examined the effects that natural resource subsidy legislation would have on the markets for ammonia, petrochemicals, carbon black and softwood lumber. Time and resource constraints precluded extending our analysis to include cement. The natural resource input pricing policies for natural gas, carbon black feed stocks, and softwood stumpage were examined for Canada, Mexico, the Soviet Union, Saudi Arabia plus other Middle Eastern countries, and Trinidad-Tobago. The natural resource input prices in these countries were compared with the "fair market value” prices for these inputs as required by the proposed legislation. The latter prices were defined as the export value in the exporting country, or, if the input product was not exported, an estimate of the export value based on the price of the product in a likely export market less transportation costs, existing duties, and processing costs including liquefaction costs for natural gas. The difference between these two prices was translated into a percentage duty on imports of ammonia, pertrochemicals plus carbon black, and softwood lumber. Given that U.S. producers are seeking relief from foreign competition, we assumed that these duties would be reflected in higher product prices for both imported and domestically produced goods. The percentage price increases by product would be 27.1 percent for ammonia (nitrogenous fertilizer), 14.5 percent, on average, for petrochemicals and carbon black, and 14.4 percent, on average, for softwood lumber. ECONOMIC IMPACTS ASSUMING NO RETALIATION The U.S. farm sector would be hurt as a consequence of implementing natural resource subsidy legislation. Higher nitrogenous fertilizer costs would lead to a cutback in fertilizer application and a reduction in grain yields, particularly for corn. |