Of course after seeing the way the Government programs have been operated in many instances, a lot of people now seem to agree that the less government the better. But when we depend on the free market to regulate prices of essential raw materials, we are asking for exactly the kind of roller coaster that we have been on each time there is a dislocation in world supply. And we know that these prices are not set by the free play of the market in a great many cases. They are set by governments imposing export taxes or minimum export prices or entering into cartel agreements, and the consuming countries pay the price in inflation.

Our government has been willing on numerous occasions to subsidize industry, no matter how many billions might be involved, but it always invokes free enterprise arguments in opposition to investing public funds in projects which will pay back their cost to the Treasury. It seems to me that if we invested in essential raw materials when prices are low, and sold them when the prices are high, this could be a useful employment of Federal funds in combating inflation. We have been doing that for 30 years while pretending not to be doing it. Isn't it time to look at this thing with open eyes? That is my question to you.

Mr. PARSKY. Well, I would agree we should be looking at it with open eyes, and I think if you could assure me that we would buy when it was low and sell when it was high, and that we had the wisdom and the capacity to function that way, then I would be in a position to support the establishment of such a policy.

We haven't in our administration advocated the elimination of government or have not felt that the Government has no role. We have just felt that the balance has been tipped too much in the direction of more government than is called for. And that in this particular subject, which I think is a very important subject, that we have to be careful, that we should be cautious before we inject the Government more deeply into the marketplace than it already is.

Our government should play an active and forceful role in trying to eliminate barriers to the free flow of market forces, and to the free movement of goods and investment throughout the world. That role can be played vis-a-vis other governments, but because other governments interfere with the market, I don't think the proper reaction is for our government to in fact invoke the same interference.

Chairman SULLIVAN. I agree with the idea that there can be too much government supervision and that a lot of it is not being properly done, because over my period of government service, which is nearly 24 years, I have seen bureaucracies grow and grow. Regardless of whether they are needed or not, they are still there.

Mr. PARSKY. I agree.

Chairman SULLIVAN. Part of it is our fault in the Congress, because we do not always go back to see how the programs that we legislated into being are actually being operated. We need further study on that, but because there are just so many hours in the day-and anyone who works around us knows how most of us spend those hours-we often just don't get to it.

Bureaucracies are hard to break up and they are hard to control. At times the programs that are put into operation under statutes that

we put on the books are not recognizable once they come back to us. Our intent when the law was passed is changed in the program's operation.

I want to say, Mr. Parsky, I am sorry we had to pursue you to another committee and press you to appear but I am glad you were able to testify in person instead of just putting your statement in the record. You are a very articulate and effective witness, and it has been a pleasure to have you here. In fact, when you walked up to me, I thought you were an aide and somebody else was the Assistant Secretary, because I hadn't met you. We don't have many government officials as young as you are coming up here to testify with the knowledge that you have demonstrated.

I would like to close this hearing with a short statement.

I want to thank you, all of you gentlemen, for your testimony. It has helped to establish a useful record on the subject of economic stockpiles and it will be of considerable benefit to Congress in addressing the economic stockpile legislation that has been proposed. It will also assist the Congress in dealing more generally with the recommendations of the National Commission on Supplies and Shortages which are expected later this year. I believe it would be premature to express any decision now about the advisability of having economic stockpiles to protect the Nation's economic stability.

We have heard strong cases propounded for and against such measures, and we have heard of alternative strategies for coping with supply shortages, and of the associated economic and diplomatic problems such stockpiles might cause. The current situation in the materials market and on the international front do not make it clear which course the country should take.

The record made here in the last 2 days, however, amply demonstrates that an ultimate decision to go forward with economic stockpiling must be based on a clear and common understanding of the purposes of such a program.

If the country embarks on this course without a coherent and agreed-upon set of goals, the likely results will be disappointed expectations in many quarters and perhaps no real amelioration of materials-related problems such as extreme price fluctuations, economic disruptions, and international conflict.

The record also demonstrates that our experience with stockpiles and with commodity policy generally is not such as to give us very much confidence that these tools will always be used in a manner most advantageous to the economy and to the consumer. To be successful in promoting the economic security of the American people, any stockpile will have to be credible to the public and to be credible, it will have to have safeguards to prevent manipulation, and uses for other than its intended purposes.

I thank you all for coming and for the witnesses' answers to our questions. If we have further questions, I hope you can get the answers back to us quickly.

Thank you all for coming. The subcommittee hearing stands adjourned.

[Thereupon at 1:10 p.m. the hearings were concluded.]

APPENDIX I

MR. BERGSTEN'S RESPONSES TO ADDITIONAL QUESTIONS FOR

THE RECORD

Question 1. Do you have any recommendations as to how the Board of your proposed stockpile corporation would be constituted? Who belongs on it? What authority would it have? How could it maximize both independence from pressures and responsiveness to public needs?

Answer. Reasonable proposals on all of these administrative details are incorporated in H.R. 9597, the Rees bill.

Question 2. Would you expand on your contention that the shift from buyers' to sellers' markets has produced contrived shortages. Perhaps you can provide a concrete example of this?

Answer. The case is outlined in several of my articles, notably "The New Era in World Commodity Markets" and "A Second OPEC in Bauxite," Challenge, July-August 1976. Oil is the obvious case to date, with bauxite the most likely

successor.

Question 3. How do you account for the condition you describe in your testimony of rising commodity prices in the face of large commodity inventories and large amounts of unused industrial capacity? Is this a result of contrivance or market manipulation?

Answer. Neither. As indicated in my statement, it derives from upward shifts in both the demand and supply curves for many commodities. The current condition, like the earlier situations described in my statement, is clear evidence of fundamental change in those markets.

Question 4. You mention that France is starting a stockpile for $23 million and Japan for $100 million. Do you have any estimates for the initial capitalization of an economic stockpile such as you describe for the United States? Please supply a range of figures.

Answer. I have no range at present. The methodology for constructing them is cited in my statement, and reference is made to the calculations by the Department of the Interior for "optimum stockpiles" in several products.

Question 5. Your recommendations for the financing of the stockpile corporation appear rather optimistic. Just in the last few years, the revolving fund set up under the Defense Production Act to stimulate materials production went broke because sales of purchased materials provided revenues inadequate to cover interest and other costs. Isn't there thus a danger that the stockpile authority would become like the Postal Service or Amtrack, nominally selfsustaining but requiring ever larger congressional handouts while postponing the date of self-sufficiency?

Answer. There is always a risk that mismanagement or undue political influence will abort sensible public policies. But the U.S. strategic stockpile and Treasury gold stock have always made money, though they were not set up to do so. The revolving fund is not analogous, because it sought to stimulate new mines which, by definition, are almost always more costly-rather than buying cheap from existing capacity and selling dear later. In a sense, it is an alternative--not necessarily a complement-to an economic stockpile.

Question 6. You give two major selection criteria of materials for stockpiling: (1) importance of the commodity to the domestic economy, and (2) degree of import dependence. You then give iron ore as an example meeting these criteria. Is not the 29 percent import figure for iron ore more a result of price and convenience of supplies to steelmakers than of actual domestic shortages of iron ore? Would not an increase in price make domestic ores more attractive to the domestic steel industry? What role does the integrated structure of the steel industry play in this import dependency?

How would you apply these criteria to bauxite? Would not increases in cost of imported bauxite induce companies to develop non-bauxite aluminum sources in the United States?

How does manganese fit your criteria? Nearly all is imported, there are no significant U.S. sources, and it is essential to steelmaking.

Answer. (1) Obviously, increased iron ore prices would lead to increased domestic output. An economic stockpile would inter alia seek to preserve the present price and convenience advantages of imported ore, which are national as well as corporate advantages. The steel industry is integrated with respect to both domestic and imported iron ore.

(2) As analyzed in detail in my "A Second OPEC in Bauxite," there is absolutely no tendency toward the development of non-bauxite aluminum sources in the United States over two years after the seven-fold increase in the price of bauxite. Indeed, this case well illustrates my general theme about imperfections in the commodity "markets."

(3) Manganese is certainly a strong candidate for the economic stockpile. Question 7. You advocate the sale of domestically produced materials at a high enough price to permit adequate profits and to promote net domestic material sources. Between 1951 and 1962, a "domestic purchase program" was established for tungsten and other metals under the Defense Production Act. At the height of the tungsten buying program, 715 tungsten mines were operating, but when it closed-after high-cost producers had taken full advantage of the government's generosity-only 3 mines were open.

Would your plan mean a continuing subsidy for mining firms with subeconomic holdings? How could the experience referred to be avoided again? Answer. I do not envisage direct government purchases from new mines, nor necessarily any rash of new mining ventures. The objective is to maintain adequate levels of output from existing facilities, and sufficiently strong markets that new production will come on stream as needed. It is obviously difficult to set (and subsequently maintain) a price range which achieves these goals without supporting uneconomic output, so the stockpile management would have to re-assess its programs continually and be prepared to admit mistakes quickly. Question 8. A well-run NRSI would earn operating profits, according to you. Is not a profit-making function inconsistent with the NRSI's major function, to damp prices? Please explain more fully how these two functions are compatible.

Answer. Price stabiliation is the objective and profits only a side effect, but the two are fully compatible. The NRSI would stabilize prices by buying when prices were low and selling when prices were high, thus automatically generating profits. (I would leave a wide enough range within which market forces would operate that these profits would almost certainly be large enough to cover interest, storage and administrative costs.) But the goal of the stockpile management should not be to maximize profits, or else it might wait too long to both buy and sell.

Question 9. What would be the effect on private inventories of an NRSI? Will not government holdings displace private holdings? Would not this change to government stockpiling shift the cost of stockpiling from consumers of products manufactured by specific industries, to the general tax-paying population? How can this shift be justified?

Answer. Government stockpiles might replace private inventories to some extent. They would not do so wholly, because firms have their unique corporate needs and they would not know when the NRSI would sell. The shift, to the extent it occurred, would be desirable because it would increase the likelihood that stocks would (a) be held in adequate amounts and (b) managed to promote public (e.g., anti-inflationary) purposes rather than private (e.g., oligopoly position) purposes. Since the objective of the exercise is to increase the national economic security of the United States, it is entirely appropriate to finance the program from general tax revenues.

Question 10. You indicate that there has been a real shift in the supply funetion. Do you mean that there has been a real increase in the cost of producing these materials, e.g., that two units of labor are now needed where one formerly sufficed? Or is the cause mostly inflationary?

You also mention increased capital costs for new production. Is this phenomenon caused by a shortage in the money supply, lack of sufficient savings, or what? Answer. The shift in the supply function derives from increases in the costs of producing raw materials relative to the production costs for other outputs.