PAGENO="0001" ~c~i rob ECONOMIC EFFECT OF VIETNAM SPENDING HEARINGS BEFORE THE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES NINETIETH CONGRESS FIRST SESSION Volume II The Military Impact on the American Economy: Now and After Vietnam A Compendium of Statements, Articles, and Papers Compiled as Background Material Printed for the use of the Joint Economic Committee U.S. GOVERNMENT PRINTING OFFICE 78-M6 WASHINGTON: 1967 For sale by the Superintendent of Documents, U.S. Government Printing Office Washington, D.C. 20402 - Price $2.00 PAGENO="0002" SENATE JOHN SPARKMAN, Alabama J. W. FULB RIGHT, Arkansas HERMAN E. TALMADGE, Georgia STUART SYMINGTON, Missouri ABRAHAM RIBICOFF, Connecticut JACOB K. JAVITS, New York JACK MILLER, Iowa LEN B. IORDAN, Idaho CHARLES IL PERCY, Illinois WILLMM H. MOORE Jonx B. HENDERSON HOUSE OF REPRESENTATIVES RICHARD BOLLING, Missouri HALE BOGGS, Louisiana HENRY S. REUSS, Wisconsin MARTHA W. GRIFFITHS, Michigan WILLIAM S. MOO RHEAD, Pennsylvania THOMAS B. CURTIS, Missouri WILLIAM B. WIDNALL, New Jersey DONALD RUMSFELD, illinois B'. E. BROCK 3D, Tennessee ECONOMISTS GEORGE R. IDEN DANIEL I. EDWARDS II DONALD A. WEBSTER (Minority) JOINT ECONOMIC COMMITTEE [Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.1 WILLIAM PROXMIRE, Wisconsin, Ghairmasc WRIGHT PATMAN, Texas, Vice Chairman JOHN II. STARK, Executive Director JAMES W. KNOWLES, Director of Research PAGENO="0003" ECONOMIC EFFECT OF VIETNAM SPENDING THE MILITARY IMPACT ON THE AMERICAN ECONOMY: NOW AND AFTER VIETNAM A COMPENDIUM OP STATEMENTS, ARTICLES, AND PAPERS CONTENTS Part I. THE MILITARY PROGRAM OF THE UNITED STATES Statement of Secretary of Defense Robert S. McNamara before the Subcommittee on Department of Defense Appropriations of the Senate Committee on Appropria- tions (amendment to the fiscal year 1966 defense Page budget), August 4, 1965 367 Statement of Secretary of Defense Robert S. McNamara before a joint session of the Senate Armed Services Committee and the Senate Subcommittee' on Depart- ment of Defense Appropriations, fiscal year 1966 sup- plemental for southeast Asia, January 20, 1966 379 "Defense Budget Highlights, Approach to the fiscal year 1968-72 Program and the fiscal year 1967-68 Budgets," Defense Industry Bulletin, February 1967 Part II ECONOMIC ANALYSIS OF IMPACT OF VIETNAM EXPENDITURES Gilbert Burck, "The Guns, `Butter, and Then Some Economy," Fortune, October 1965 489 Murray L. Weidenbaum, The Inflationary Impact of the Federal Budget, Washington University Department of Economics, Working Paper 6529, February 10, 1966_~ 498 William Bowen, "The Vietnam WTar: A Cost Accounting," Fortune, April 1966 502 Keith M. Carison, "Budget Policy in a High-Employment Economy," Federal Reserve Bank of St. Louis Review, April 1966 518 William H. Chartener, `The Outlook for Defense Spending- How Great An' Uncertainty? a paper presented before the annual meeting of the American Statistical Associa- tion, Los Angeles, August 18, 1966 531 Arthur M. Okun, National Defense and Prosperity, re- marks before the American Ordnance Association, Washington, D.C., October 12, 1966 538 :iii PAGENO="0004" IV CONTENTS Murray L. Weidenbaum, The Federal Budget and the Out- look for Defense Spending, a paper presented before the 14th Annual Conference on the Economic Outlook, Page University of Michigan, November 18, 1966 546 "1966-Year of Excessive Demands and Their Control," Federal Reserve Bank of St. Louis Review, December 1966 556 Annual Report of the Conacil of Economic Advisers, January 1967 (excerpts) 580 Keith M. CarlsOn, "The Federal Budget and EconOmic Stabilization," Federal-Reserve -Ban/c of St. Louis Review, February 1967 587 Part III. MILITARY IMPACT ON THE GENERAL ECONOMY Murray L. Weidenbaum, "The Economic Impact of the Government Spending Process," University of Houston Business Review, Spring 1961 603 Edward Greenberg, Employment Impacts of Defense Ex- penditures and Obligations, Review of Economics and Statistics (preprint) 662 Maw bin Lee, The Relationship of New Orders to Ship- ments of Defense Products, Department of Economics, Pennsylvania State University (paper issued on Septem- ber 15, 1965) 678 Part IV. REGIONAL AND INDUSTRIAL IMPACTS Wassily Leontief et al., "The Economic Impact-Indus- trial and Regional-of an Arms Cut," Review of Econom- ics and Statistics, August 1965 687 "Economic Impact of a Military Base," New England Business Review, October 1965 725 R. A. McAuliffe, The Salina Story, Office of the Secretary of Defense, August 1966 732 Selections from C-E-I-R, Inc., Economic Impact Analysis of Subcontracting Procurement Pattern-s of Major Defense Contractors, preliminary report submitted to Office of the Secretary of Defense, September 1966 790 "New England's Defense Closings," New England Business Review, October 1966 792 Robert Kokat, "Some Implications of the Economic Im- pact of Disarmament on the Structure of American Industry," Ky/cbs, volume XIX, 1966 805 Research Analysis Corporation, Economic Impact Analysis: A Military Procurement Final-Demand Victor, Volume I, Results and Methodology, March 1967 820 Vernon M. Buehler, Economic Impact of Defense Programs, Office of the Secretary of Defense, March 1967 870 Department of Defense, Military Prime Contract Awards by Region and State, fiscal years 1962-66 889 PAGENO="0005" CONTENTS V Part V. POST-VIETNAM PLANNING Economic Report of the President, transmitted to the Con- Page gress January 1967 (excerpts) 1021 "Initial Conclusions on Government Policies," Report of the Committee on the Economic Impact of Defense and Disarmament, July 1965 1022 PAGENO="0006" PAGENO="0007" Part I THE MILITARY PROGRAM OF THE UNITED STATES This section consists of official statements of Secretary of Defense Robert S. McNamara on defense programs and budgets. 365 PAGENO="0008" PAGENO="0009" STATEMENT OF SECRETARY OF DEFENSE ROBERT S. McNAMARA (Before the Subcommittee on Department of Defense Appropriations of the Senate Committee on Appropriations (amendment to the fiscal year 1966 defense budget), August 4, 1965) Mr. Chairman, members of the committee, last Wednesday President Johnson informed the Nation of the mounting Communist aggression in South Vietnam and the additional measures which we plan to take to assist the people of that country in defending their freedom and independence. We are here today to report on that situation, to review with you the additional military actions involved, and to request the funds required to finance these actions pending the sub- mission of a detailed fiscal year 1966 supplemental request to the Congress when it convenes in January. Although Vietnam is now the focus of attention, we are not over- looking the possibility that trouble may arise in other areas of the world, perhaps as a reaction to our increased effort in that country or for other reasons. Accordingly, in planning for the increased deployment of U.S. forces to southeast Asia, we have also taken into account the forces which may be needed to meet contingencies else- where. Although we have no basis to assume at this time that the Soviet Union or Communist China would deliberately provoke new crises in other areas, prudence dictates that we be prepared for such emergencies. The issue in Vietnam is essentially the same as it was in 1954 when President Eisenhower said: I think it is no longer necessary to enter into a long argument or exposition to show the importance to the United States of Indochina and of the struggle going on there. No matter how the struggle may have started, it has long since become one of the testing places between a free form of government and dictatorship. Its outcome is going to have the greatest significance for us, and possibly for a long time into the future. We have here a sort of cork in the bottle, the bottle being the great area that includes Indonesia, Burma, Thailand, all of the surrounding areas of Asia with its hundreds of millions of people * * * What is at stake there is the ability of the free world to block Com- munist armed aggression and prevent the loss of all of southeast Asia, a. loss which in its ultimate consequences could drastically alter the strategic situation in Asia and the Pacific to the grave detriment of our own security and that of our Allies. While 15 years ago, in Korea, Communist aggression took the form of an overt armed attack, today in South Vietnam it has taken the form of a large scale intensive guerrilla operation. The covert nature of this aggression, which characterized the earlier years of the struggle in South Vietnam, has now all but been stripped away. The control of the Vietcong effort by the regime in Hanoi, supported and incited by Communist China, has become increasingly apparent. 367 PAGENO="0010" 368 ECONOMIC EFFECT OF VIETNAM SPENDING The struggle there has enormous implications for the security of the United States and the free world, and for that matter, the Soviet Union as well. The North Vietnamese and the Chinese Communists have chosen to make South Vietnam the test case for their particular version of the so-called wars of national liberation. The extent to which violence should be used in overthrowing non-Communist gov- ernments has been one of the most bitterly contested issues between the Chinese and the Soviet Communists. Although the former Chairman, Mr. Khrushchev, fully endorsed wars of national liberation as the preferred means of extending the sway of communism, he cau- tioned that "this does not necessarily mean that the transition to socialism will everywhere and in all cases be linked with armed up- rising and civil war. * * * Revolution by peaceful means accords with the interests of the working class and the masses." The Chinese Communists, however, insist that: Peaceful coexistence cannot replace the revolutionary struggles of the people. The transition from capitalism to socialism in any country can only be brought about through proletarian revolution and the dictatorship of the proletariat in that country. * * * The vanguard of the proletariat will remain unconquerable in all circumstances only if it masters all forms of struggle-peaceful and armed, open and secret, legal and ifiegal, parliamentary struggle and mass struggle, and so forth. (Letter to the Central Committee of the Communist Party of the Soviet Union, June 14, 1963.) Their preference for violence was even more emphatically expressed in an article in The Peking Peoples Daily of March 31, 1964: It is advantageous from the point of view of tactics to refer to the desire for peaceful transition, but it would be inappropriate to emphasize the possibility of peaceful transition. * * * the proletarian party must never substitute parlia- mentary struggle for proletarian revolution or entertain the illusion that the transition to socialism can be achieved through the parliamentary road. Violeot revolution is a universal law of proletarian revolution. To realize the transition to socialism, the proletariat must wage armed struggle, smash the old state ma- chine and establish the dictatorship of the proletariat * * "Political power," the article quotes Mao Tse-tung as saying, "grows out of the barrel of a gun." Throughout the world we see the fruits of these policies and in Vietnam, particularly, we see the effects of the Chinese Communists' more militant stance and their hatred of the free world. They make no secret of the fact that Vietnam is the test case, and neither does the regime in Hanoi. General Giap, head of the North Vietnamese Army, recently said that "South Vietnam is the model of the national liberation movement of our time. * * * If the special warfare that the U.S. imperialists are testing in South Vietnam is overcome, then it can be defeated everywhere in the world." And, Pham Van Doug, Premier of North Vietnam, pointed out that "the experience of our compatriots in South Vietnam attracts the attention of the world, especially the peoples of South America." It is clear, therefore, that a Communist success in South Vietnam would be taken as positive proof that the Chinese Communists' posi- tion is correct and they will have made a giant step forward in their efforts to seize control of the world Communist movement. Further- more, such a success would greatly increase the prestige of Communist China among the nonalined nations and strengthen the position of their followers everywhere. In that event we would then have to be prepared to cope with the same kind of aggression in other parts of PAGENO="0011" ECONOMIC EFFECT OF VIETNAM SPENDING 369 the world wherever the existing governments are weak and the social structures fragmented. If Communist armed agression is not stopped in Vietnam, as it was in Korea, the confidence of small nations in America's pledge of support will be weakened and many of them, in widely separated areas of the world, will feel unsafe. Thus, the stakes in South Vietnam are far greater than the loss of one small country to communism. Its loss would be a most serious setback to the cause of freedom and would greatly complicate the task of preventing the further spread of militant Asian communism. And, if that spread is not halted, our strategic position in the world will be weakened and our national security directly endangered. It was in recognition of this fundamental issue that the United States, under three Presidents, firmly committed itself to help the people of South Vietnam defend their freedom. That is why Presi- dent Eisenhower warned at the time of the Geneva Conference in July 1954 that "~` * * any renewal of Communist aggression would be viewed by us as a matter of grave concern." That is why Presi- dent Johnson in his statement last Wednesday made it clear to all the world that we are determined to stand by our commitment and provide whatever help is required to fulfill it. CONDITIONS LEADING TO THE PRESENT SITUATION IN SOUTH VIETNAM Essential to a proper understanding of the present situation in South Vietnam is a recognition of the fact that the so-called insurgency there is planned, directed, controlled, and supported from Hanoi. True, there is a small dissident minority in South Vietnam, but the Government could cope with it ii it were not directed and supplied from the outside. As early as 1960, at the Third Congress of the North Vietnamese Communist Party, both Ho Chi Minh and \T0 Nguyen Giap, the commander in chief of the North Vietnamese armed forces, spoke of the need to "step up" the "revolution in the South." In March 1963 the party organ Hoc Tap stated that the authorities in South Vietnam "are well aware that North Vietnam is the firm base for the southern revolution and the point on which it leans, and that our party is the steady and experienced vanguard unit of the working class and people and is the brain and factor that decides all victories of the revolution." Yet through most of these years the North Vietnamese Government denied and went to great efforts to conceal the scale of its personnel and materiel support, in addition to direction and encouragement, to the Vietcong. It had strong reasons to do so. First of all, in 1954 the authorities in Hanoi had pledged to "respect the territory under the military control of the other party"-South Vietnam-"and engage in no hostile act against the other party." In 1962 those same authorities pledged that they would "not use the territory of the Kingdom of Laos for interference in the internal affairs of other countries." The North Vietn amese regime had no wish to force upon the atten- tion of the world its massive and persistent violations of those pledges.. Nor was it anxious for its own citizens to dwell upon the ultimate risks of committing, unequivocally, aggression across international PAGENO="0012" 370 ECONOMIC EFFF~CT OF VIETNAM SPENDING boundaries. Nor could the Vietcong cause be anything but harmed if it were to be recognized openly in the South as an instrument of the North Vietnamese regime. However, in building up the Vietcong forces for a decisive challenge, the authorities in North Vietnam have increasingly dropped the dis- guises that gave their earlier support a clandestine character. Through 1963, the bulk of the arms infiltrated from the North were old French and American models acquired prior to 1954 in Indochina and Korea. Now, the flow of weapons from North Vietnam consists almost entirely of the latest arms acquired from Communist China; and the flow is large enough to have entirely re-equipped the main force units, despite the capture this year by government forces of thousands of these weapons and millions of rounds of the new ammu- nition. Likewise, through 1963, nearly all the personnel infiltrating through Laos, trained and equipped in the North and ordered South, were former Southerners. But in the last 18 months, the great majority of the infiltrators-more than 10,000 of them-have been ethnic Northerners, mostly draftees ordered into the People's Army of Vietnam for duty in the South. And it now appears that, starting their journey through Laos last December, from one to three regi- ments of a North Vietnamese regular division, the 325th Division of the North Vietnamese Army, have deployed into the Central High- lands of South Vietnam for combat alongside the Vietcong. Thus, despite all its reasons for secrecy, Hanoi's desire for decisive results this summer has forced it to reveal its hand even more openly. The United States during the last 4 years has steadily increased its help to the people of South Vietnam in an effort to counter this ever- increasing scale of Communist aggression. These efforts achieved some measure of success during 1962. The South Vietnamese forces in that year made good progress in suppressing the Vietcong insur- rection. Although combat deaths suffered by these forces in 1962 rose by 11 percent over the 1961 level (from about 4,000 to 4,450), Vietcong combat deaths increased by 72 percent (from about 12,000 to 21,000). Weapons lost by the South Vietnamese fell from 5,900 in 1961 to 5,200 in 1962, while the number lost by the Vietcong rose from 2,750 to 4,050. The Government's new Strategic Hamlet pro- gram was just getting underway and was showing promise. The economy was growing and the Government seemed firmly in control. Therefore, when I appeared before this committee in early 1963, I was able to say: * * * victory over the Vietcong will most likely take many years. But now, as a result of the operations of the last year, there is a new feeling of confidence, not oniy on the part of the Government of South Vietnam but also among the populace, that victory is possible. But at the same time I also cautioned: We are not unmindful of the fact that the pressures on South Vietnam may well continue through infiltration via the Laos corridor. Nor are we unmindful of the possibility that the Communists, sensing defeat in their covert efforts, might resort to overt aggression from North Vietnam. Obviously, this latter contingency could require a greater direct participation by the United States. The survival of an independent government in South Vietnam is so important to the security of all of southeast Asia and to the free world that we must be prepared to take all necessary measures within our capability to prevent a Communist victory. PAGENO="0013" ECONOMIC EFFECT OF VIETNAM SPENDING 371 Unfortunately, the caution voiced in early 1963 proved to be well founded. Late in 1963, the Communists stepped up their efforts and the military situation began to deteriorate. The Diem govern- ment came under increasing internal pressure and in November it was overthrown. A year ago last February, I had to tell this com- mittee that: The Vietcong was quick to take advantage of the growing opposition to the Diem government and the period of uncertainty following its overthrow. Vietcong activities were already increasing in September and continued to increase at an accelerated rate in October and November particularly in the Delta area. And I must report that they have made considerable progress since the coup. Following the coup, the lack of stability in the central government and the rapid turnover of key personnel, particularly senior military commanders, began to be reflected in combat operations and through- out the entire fabric of the political and economic structure. And, in 1964 the Communists greatly increased the scope and tempo of their subversive efforts. Larger scale attacks became more frequent and the flow of men and supplies from the North expanded. The inci- dence of terrorism and sabotage rose rapidly and the pressure on the civilian population was intensified. The deteriorating military situa- tion was clearly reflected in the statistics. South Vietnamese combat deaths rose from 5,650 in 1963 to 7,450 in 1964 and the number of weapons lost from 8,250 to 14,100. In contrast, Vietcong combat deaths dropped from 20,600 to 16,800 and, considering the stepped-up tempo of activity, they experienced only a very modest rise in the rate of weapons lost (from 5,400 to 5,900). At various times in recent months, I have called attention to the continued buildup of Communist forces in South Vietnam.. I pointed out that although these forces had not been committed to combat in any significant degree, they probably would be after the start of the monsoon season. It is now clear that these forces are being committed in increasing numbers and that the Communists have decided to make an all-out attempt to bring down the Government of South Vietnam. The entire economic and social structure is under attack. Bridges, railroads, and highways are being destroyed and interdicted. Agri- cultural products are being barred from the cities. Electric power- plants and communication lines are being sabotaged. Whole villages are being burned and their population driven away, increasing the refugee burden on the South Vietnamese Government. As I mentioned, in addition to the continued infiltration of increas- ing numbers of individuals and the acceleration of the flow of modern equipment and supplies, organized units of the North Vietnamese army have been identified in South Vietnam. We now estimate the hard-core Vietcong strength at some 70,000 men, including a recently reported increase in the number of combat battalions. In addition, they have some 90,000 to 100,000 irregulars and some 30,000 in their political cadres, i.e., tax collectors, propagandists, etc. We have also identified at least three battalions of the regular North Vietnamese Army, and there are probably considerably more. At the same time the Government of South Vietnam has found it increasingly difficult to make a commensurate increase in the size of its own forces, which now stand at about 545,000 men, including the regional and local defense foroes but excluding the national police. Combat deaths on both sides have been mounting-for the South Vietnamese from an average of 143 men a week in 1964 to about 270 PAGENO="0014" 372 ECONOMIC EFFECT OF VIETNAM SPENDING a week for the 4-week period ending July 24 this year. Vietcong losses have gone from 322 a week last year to about 680 a week for the 4-week period ending July 24. Most important, the ratio of South Vietnamese to Vietcong strength has seriously declined in the last 6 or 7 months from about 5 to 1 to about 3 or 3~ to 1; the ratio of combat battalions is substantially less. This is far too low a ratio for a guerrilla war even though the greater mobility and firepower provided to the South Vietnamese forces by the United States help to offset that disadvantage. The South Vietnamese forces have to defend hundreds of cities, towns, and hamlets while the Vietcong are free to choose the time and place of their attack. As a result, the South Vietnamese forces are stretched thin in defensive positions, leaving only a small central reserve for offensive action against the Vietcong, while the latter are left free to concentrate their forces and throw them against selected targets. It is not surprising, therefore, that the Vietcong retains most of the initiative. Even so, we may not as yet have seen the full weight of the Com- munist attack. Presently, the situation is particularly acute in the northern part of the country where the Communists have mobilized large military forces which pose a threat to the entire region and its major cities and towns. Our air attacks may have helped to keep these forces off balance but the threat remains and it is very real. Clearly, the time has come when the people of South Vietnam need more help from us and other nations if they are to retain their freedom and independence. We have already responded to that need with some 75,000 U.S. military personnel, including some combat units. This number will be raised to 125,000 almost immediately with the deployment of the Air Mobile Division and certain other forces. But, more help will be needed in the months ahead and additional U.S. combat forces wifi be required to back up the hard pressed Army of South Vietnam. Two other nations have provided combat forces- Australia and New Zealand. We hope that by the end of this year others wiii join them. ROLE OF LT~S. Co~IBAT FORCES IN SOUTH VIETNAM As i noted earlier, the central reserve of the South Vietnamese Army has been seriously depleted in recent months. The principal role of U.S. ground combat forces will be to supplement this reserve in support of time front line forces of the South Vietnamese Army. The indigenous paramilitary forces will deal with the pacification of areas cleared of organized Vietcong and North Vietnamese units, a role more appropriated for them than for our forces. The Government of South Vietnam's strategy, with which we concur is to achieve the initiative, to expand gradually its area of control by breaking up major concentrations of enem forces, using to the maximum our preponderance of air power, both land and sea based. The number of "fixed-wing" attack sorties by U.S. aircraft in South Vietnam will increase ma.nyf old by the end of the year. Armed helicopter sorties will CiSO mucrease dramnatically over the same period, and extensive use will he made of heavy artillery, both land based and sea based. At the same time our air and naval foices i ill contid ie t~ intel ict e ~ Ltcong sappil 1 es 110 n Yo~b Vietnam, both land and sea. PAGENO="0015" ECONOMIC EFFECT OF VIETNAM SPENDING 373 Although our. tactics have changed, our objective remains the same. We have no desire to widen the war. We have no desire to overthrow the North Vietnamese regime, seize its territory, or achieve the uni- fication of North and South Vietnam by force of arms. We have no need for permanent military bases in South Vietnam or for special privileges of any kind. What we are seeking through the planned military buildup is to block the Vietcong offensive, to give the people of South Vietnam and their armed forces some relief from the unre- lenting Communist pressures-to give them time to strengthen their government, to reestablish law and order, and to revive their economic life which has been seriously disrupted by Vietcong harassment and attack in recent months. We have no illusions that success will be achieved quickly, but we are confident that it will be achieved much more surely by the plan I have outlined. INCREASES IN U.S. MILITARY FORCES SINCE 1961 Fortunately, we have greatly increased the strength and readiness of our Military Establishment since 1961, particularly in the kinds of forces which we now require in southeast Asia. The Active Army has been expanded from 11 to 16 combat-ready divisions; 20,000 men have beeii added to the Marine Corps to allow them to fill out their combat structure and at the same time facilitate the mobilization of the Marine Corps Reserve. The tactical fighter squadrons of the Air Force have been increased by 51 percent. Our airlift capability has more than doubled. Special Forces trained to deal with insurgency threats have been multiplied elevenfoid. General ship construction and conversion has been doubled. During this same period, procurement for the expanded force has been increased greatly: Air Force Tactical aircraft from $360 million in 1961 to about $1.1 billion in the original fiscal year 1966 budget; Navy aircraft-from $1.8 billion to $2.2 billion; Army helicopters- from 286 aircraft to over 1,000. Procurement of ordnance, vehicles and related equipment was increased about 150 percent in the fiscal year 1962-64 period, compared with the preceding 3 years. The tonnage of modern nonnuclear air-to-ground ordnance in stock tripled between fiscal year 1961 and fiscal year 1965. In brief, the Military Establishment of the United States, today, is in `far better shape than it ever has been in peacetime to face whatever tasks may lie ahead. Nevertheless, some further increases in forces, military personnel, production and construction will be required if we are to deploy additional forces to southeast Asia and provide for combat consump- tion while at the same time maintaining our capabilities to deal with crises elsewhere in the world. FURTHER INCREASES IN THE FoRcE STRUCTURE AND MILITARY PERSONNEL To offset the deployments now planned to southeast Asia, and pro- vide some additional forces for possible new deployments, we propose to increase the presently authorized force levels. These increases will be of three t'~pes: (1) additional units for the Active Forces, over and above those reflected in the January budget; (2) military personnel' PAGENO="0016" 374 ECONOMIC EFFECT OF VIETNAM SPENDING augmentatioris for presently authorized units in the Active Forces to man new bases, to handle the larger logistics workload, etc.; and (3) additional personnel and extra training for selected Reserve component units to increase their readiness for quick deployment. We believe we can achieve this buildup without calling up the Re- serves or ordering the involuntary extension of tours, except as already authorized by law for the Department of the Navy. Even here the extension of officer tours will be on a selective basis and extensions for enlisted men will be limited, in general, to not more than 4 months. Our present estimate of the numbers of military personnel involved are shown on the table following this statement. 1. INCREASE IN ARMY FORCES For the Army, we plan to activate one division force, three brigade forces, a large number of helicopter companies, and their combat service support units. In addition, we plan to replace the military personnel drawn from the Strategic Army Forces to provide logistic support in Vietnam. The buildup of these forces will require a sub- stantial expansion of the Army training establishment. The larger deployments to South Vietnam and the increase in Army mffitary personnel generally will result in a higher number of men in transit and other support activities. A military personnel strength increase in the Army of 235,000 is provided for these purposes. 2. AUGMENTATION OF THE THREE MARINE CORPS DIVISION/AIRCRAFT WINGS Some 30,000 additional military personnel have been provided for the Marine Corps to augment existing units and to activate certain new units, such as helicopter squadrons, and communication, engineer, and military police battalions, and to provide for the increased training and manpower pipeline requirements. 3. STRENGTHENING THE NAVAL FORCES The increased tempo of attack carrier operations and the intensified coastal patrol off Vietnam will require a small increas in the number of active ships in the Navy as well as an increase in the manning of the ships deployed to that area. These ships are required to operate at close to wartime tempos and therefore require higher manning levels than normally provided other fleet units. Furthermore, additional Navy personn3l are needed to operate the new ports now being built in South Vietnam and to support the heavier logistics load at other bases. Other support activities, including pipeline, account for the balance of 35,000 additional personnel provided for the Navy. 4. AUGMENTATION OF THE AIR FORCE STRIKE AND AIRLIFT CAPABILITIES In addition to the increased number of tactical attack sorties, we are also planning more B-52 sorties from Guam. To support the B-52 aircraft to be utilized for this mission, additional personnel wifi be needed at Guam, to handle ammunition, increased maintenance, and so forth. Support of the additional tactical fighter and troop carrier squadrons deployed to southeast Asia will require more men. PAGENO="0017" ECONOMIC EFFECT OF VIETNAM SPENDING 375 With the greatly increased flow of traffic to South Vietnam, a further early increase in our airlift capability is indicated. We plan to approximately double our existing capability for sustained operations through higher rates of utilization of present airlift aircraft. The more modern MATS aircraft, which now have a planned utilization rate of 5 hours per day, will be raised and held at 8 hours per day. The C-130E troop carrier aircraft in Tactical Air Command and in the Pacific, which now have a planned operating rate of l~ hours per day, will be raised and held at 5 hours per day. More personnel will be needed. The increase in the number of Air Force military personnel will require an expansion of the training establishment, which together with other support activities, principally the logistics base, will require a total increase in the Air Force end fiscal year 1966 military personnel strength of 40,000. In total, 340,000 military personnel will be added to the active forces. To provide this additional strength, the current draft call rate of about 17,000 per month will be approximately doubled. 5. INCREASED READINESS FOR THE RESERVE COMPONENTS As I noted earlier, we must be prepared to deploy additional forces to southeast Asia over and above those now planned. Furthermore, we must also be prepared to deal with crises elsewhere in the world. Accordingly, steps should be taken now to raise still further the readi- ness of selected Reserve component forces so that they could be quickly deployed if the need should arise. There are a number of steps which could be taken towards this end. The units Could be manned at full strength, the number and duration of the paid drills could be increased, additional tours of active duty for training could be provided, the equipment required for movement could be identified and earmarked, etc. Shown on the table are the selected Reserve component forces whose readiness we believe should be raised over the next few months. The Army forces (three divisions and six brigades) will require additional personnel to raise their manning to the desired levels. These personnel can be obtained by enlisting additional men from. civilian life or by reassigning men from Reserve units for which there is no military requirement. The required increase in Reserve Force readiness could be greatly facilitated by the realinement of Reserve Forces which we proposed in the fiscal year 1966 budget. The realinement would permit us to. concentrate men, equipment, and civilian technicians in the units we need for our contingency plans, instead of spreading them over a large number of units for which there is no military requirement. This was the primary objective of our realinement proposal and the events of the last few months have demonstrated the soundness of that objective. In my judgment, the realinement should go forward. without further delay. For the Marine Corps Reserve, we propose to add 2,500 paid drill training spaces to raise the manning of the 4th Division/Aircraft. Wing (nine battalions and nine attack/fighter squadrons). About 4,000 additional paid drill spaces will be provided to the Air Force Reserve components to raise the manning of nine fighter 78-516--67-vol. 2-2 PAGENO="0018" 376 ECONOMIC: EFFECT OF~ VIETNAM SPENDING squadrons, four tactical reconnaissance squadrons and ii airlift squadrons to full authorized strength. We expect that all of these units will be ready to deploy on 24-hour notice by the end of this calendar year. 6. OTHER MILITARY PERSONNEL AND OPERATION AND MAINTENANCE COSTS Over and above the costs of the additional military personnel, there will also be increased costs for the operation of installations and facilities in southeast Asia; the increases in flying and steaming hours; the consumption of spares and repair parts; and the trans- portation of supplies and equipment to southeast Asia. An increase of almost 36,000 "direct hire" civilian employees, raising the total at end fiscal year 1966 to just short of 1 million, will also be required. None of these personnel and operation and maintenance costs can be estimated with any degree of precision at the present time. We have yet to work out detailed personnel plans and to calculate, on a phased basis, the increases in activity rates, movements of troops and materiel and other operation and maintenance costs associated with the buildup in southeast. Asia. However, by the time we appear here next January with the fiscal year 1967 budget estimates, we will have completed this work and we will have a much more precise estimate of all of these additional costs and our financial reqnir~rnents for the balance of fiscal year 1966. Accordingly, we propose that these additional military lersonnel and operation and maintenance costs be financed during the interim under section 512 of the fiscal year 1966 Defense app%priations bill, as approved by the House (FLR. 92.21). Subsection 512(a) of the Bill provides that: During the current fiscal year, the President may exempt appropriations, funds, and contract authorizations, available for military functions under the Department of Defense, from the provisions of subsection (c) of section 3679 of the Revised Statutes, as amended, whenever he deems such action to be necessary in the interests of national defense. Subsection 512(c) provides that: [Jpon determination by the President that it is necessary to increase the number of military personnel on active duty beyond the number for which funds are rovicled in this Act, the Secretary of Defense is authorized to urovide for the cost of such increased military personnel, as an excepted expense in accordance with theprovisions of Revised Statutes 3732 (41 U.S.C. 11). PROCvREMENT AND CONSTRTrCTION As in the case of personnel and operation and maintenance costs, we have not as yet had sufficient time to develop detailed require- ments and prodttctioi~ and construction p1a~ts for the additional PAGENO="0019" ECONOMIC EFFECT OF VIETNAM SPENDING 377 materiel and facilities needed for the support of the expanding oper- ations in southeast Asia. And again, we will be in a much better position next January to provide these details and to state our addi- tional requirements for the balance of fiscal year 1966. The $1.7 billion amendment to the bill now before the committee which we are proposing at this time will provide the additional financing needed through January to gear up the production machine-to accelerate the delivery of essential items already in production and to initiate the production of new items required for the support of our forces in southeast Asia, as well as the construction of the most urgently needed facilities. We suggest that this amendment take the form of a new appropriation account-' `Emergency fund, southeast Asia"-and that the language be similar,. except for the amount, to the $700 million fiscal year 1965 supplemental for southeast Asia. As you know, we have planned in our fiscal year 1966 and prior year budgets a substantial buildup of war consumable stocks, partic- ularly modern ordnance and ammunition. If we are to fulfill these plans, we must replace what we are drawing from these stocks for consumption in southeast Asia. Furthermore we must provide replacements for the aircraft being lost there in combat. And finally, we must buy some additional helicopters for the new Army and Marine Corps aviation units which we now plan to activate. The higher activity rates planned for our forces in southeast Asia will increase considerably the consumption of spares and repair parts for many types of equipment. Stocks of these items must be restored through increased production. We will also need to replace in our inventories the additional quantities of equipment for the new bases being established or expanded in southeast Asia. Funds for these purposes are included in the $1.7 billion supplemental. Finally, the increased deployments of U.S. forces to southeast Asia will require an extensive program of construction in South Vietnam and along the lines of communication back to the United States. Included in this program are airfields, ports and troop sup- port and logistics facilities. SUMMARY Last `Wednesday in his statement on Vietnam, President Johnson said: "I have asked the Commanding General, General Westmoreland, what he needs to meet this mounting aggression. He has told me. `We will meet his needs." The program I have outlined here today and the $1.7 billion amend- ment to the fiscal year 1966 Defense appropriation bill now before the committee will, in the collective judgment of my principal military and civilian advisers and myself provide the men, materiel, and facilities required to fulfill this pledge, while at the same time main- taming the forces required to meet commitments elsewhere in the world. I earnestly solicit the full support of this committee and the Congress for this program and budget request. PAGENO="0020" 378 ECONOMIC EFFECT OF VIE~AM SPENDING Summary by program of proposed personnel increases 1. Increase in Army forces: (a) 1 division force (b) 3 brigade forces (c) Aviation companies (d) Combat service support (e) STRAF support forces (J) Expand training (g). Transients and other support Total, Army 235, 000 2. Augmentation of the three Marine Corps division/aircraft wings: (a) Bring units to be deployed in Vietnam up to full strength (b) Activate new units to augment the forces to be deployed (c) Expand training (d) Provide increased pipeline Total, Marine Corps 30, 000 3. Strengthening the naval forces: (a) Retain ships (b) Activate ships (c) Increase manning for deployed ships and bases in southeast Asia (d) Other support (pipeline, Marine Corps, etc.) Total, Navy 35, 000 4. Augmentation of the Air Force strike and airlift capabilities: (a) B-52 aircraft deployed to Guam (b) Tactical fighter and troop carrier squadrons deployed to southeast Asia (c) Retain 1 reconnaissance squadron scheduled to be phased out in fiscal year 1966 (d) Raise airlift aircraft utilization rates: MATS PAC-TAC (e) Expand training (f) Other support (logistical base) Total, Air Force 40, 000 5. Increased readiness for the Reserve components: Army: (a) 3 division forces (1) (b) 6 brigade forces (I) Marine Corps: (c) 4th Division/aircraft wing 2, 500 Air Force: (d) 9F-100 squadrons 1,667 (e) 4 RF-84 squadrons 697 (f) 11 ~J-124 squadrons 2, 205 Total, Air Force 4, 569 6. Recapitulation of personnel increases: (a) Active duty military personnel: Army 235, 000 Navy 35,000 Marine Corps 30, 000 Air Force 40, 000 Total 340, 000 (b) Reserve component paid drill spaces: Army (1) Marine Corps 2, 500 Air Force ~, 569 Total (1) (c) Direct hire civilian personnel, total 35, 762 1 Army numbers still to be determined. PAGENO="0021" STATEMENT OF SECRETARY OF DEFENSE ROBERT S. McNAMARA (Before a joint session of the Senate Armed Services Committee and the Senate Subcommittee on Department of Defense Appropriations, fiscal year 1966 supplemental for southeast Asia, January 20, 1966) Mr. Chairman and members of the committee, when I appeared before this committee last August with the amendment to the fiscal year 1966 Defense budget, 1 described to you the actions we were taking to carry out the President's decision to deploy a force of 125,000 U.S. military personnel to South Vietnam and to be prepared to deploy still more forces if that should become necessary. I noted at the time that if we were to maintain our capabilities to deal with crises elsewhere in the world, these deployments would require some increases in forces, personnel, operating rates, production rates, and construction of facilities above the levels provided in our original fiscal year 1966 budget. Because we had not had time to work out detailed personnel plans ~nd to calculate on a phased basis the increases in activity rates, the movements of troops and materiel, and the other operation and maintenance costs associated with the buildup in southeast Asia, we proposed to finance the additional military personnel and 0. & MI. costs under section 612 of the fiscal year 1966 Defense Appropriation Act. Similarly, because we had not had time to develop detailed estimates of production and construction plans for the additional materiel and facilities required, we proposed, and the Congress appropriated, an additional $1.7 billion in a separate account, "Emer- * gency fund, southeast Asia". This appropriation was intended to provide for the additional financing needed through early 1966 to gear up the production machine, accelerate the delivery of essential items already in production, initiate production of new items required for the support of our forces in southeast Asia, and construct the most urgently needed facilities. I said at the time that when we appeared here this January we would have a much more precise estimate of the additional require- ments and our financial needs for the balance of ficsal year 1966. These estimates are now available, and total $12,345,719,000 in new obligational authority. INCLUSION OF CERTAIN MILITARY ASSISTANCE SUPPORT IN THE DEFENSE BUDGET Included in our supplemental request for fiscal year 1966 is about $200 million for the support of South Vietnam's Armed Forces and other free world military assistance forces engaged in that country. These requirements have heretofore been financed in the military assistance progTam. However, now that large U.S~ and other free world military assistance forces (e.g., Korean) have joined in the 379 PAGENO="0022" 380 ECONOMIC EFFECT OF VIETNAM SPENDING defense of South Vietnam, the maintenance of separate financial and logistic systems for U.S. and military assistance forces is proving to be entirely too cumbersome, time-consuming, and inefficient. The same problem was encountered at the outset of the Korean war. It was solved, then, by programing, budgeting, and funding for all requirements under the "military functions" appropriations and providing a consolidated financial and suppiy system for the support of United States, Korean, and other friendly forces engaged in that effort. This arrangement gave the field commanders maximum flexibility in the allocation of available resources and improved the support of the forces employed. We are proposing essentially the same solution for the problems now being encountered in South Vietnam. Under the proposed arrangement, all unexpended balances of fiscal year 1966 and prior year military assistance funds for South Vietnam would be transferred to and merged with the accounts of the military departments; and all additional funds required for the support of the forces of South Vietnam and other free world military assistance forces in that country would be authorized for and appropriated to the accounts of the military departments. The remainder of the military assistance program would be legislated separately. IMPLEMENTATION OF THE AuGUST 1965 FORCE AUGMENTATIONS Since my appearance here last August, our requirements in support of the military effort in Vietnam have continued to grow. We have already deployed a total of about 190,000 U.S. military personnel to South Vietnam, excluding the elements of the 7th Fleet now operating off the coast of Vietnam. And we must be prepared to deploy eveii more forces if the Communists choose to expand their operations in South Vietnam The force augmentations approved in August included: For the Army: An increase of one division force, three brigade forces, and a large number of aviation companies. For the Marine Corps: An increase of two helicopter training squadrons, and additional communications, engineer, and military police battalions. For the Navy: An increase of 25 active ships in the fleet plus four for MSTS, for a total of 29. For the Air Force: An increase in airlift aircraft utilization rates, from 5 to 8 hours per day for Military Airlift Command (formerly MATS) aircraft, and from 1.5 to 5 hours per day for C-130E's in other commands. For all the Active Forces: Additional personnel to round out the manning of units to be deployed in Vietnam and for increased training and logistic support. For the Reserve components: Additional drill pay spaces to raise the manning and readiness levels of three divisions and six brigades and. necessary supporting forces in the Army Reserve components, 24 squadronsin the Air Force Reserve components, and the Marine Corps Reserve division/aircraft wing. An additional 340,000 military and 36,000 direct hire civilian per- sonnel were approved to support these force increases. PAGENO="0023" ECONOMIC EFFECT OF VIETNAM SPENDING 381 FURTHER FORCE AtIGMENTATIONS AND RELATED PERSONNEL INCREASES If we are to be prepared to deploy additional forces to southeast Asia, some further augmentations of our forces and personnel strengths are required. The increases in forces and personnel now proposed are summarized in table 1. The first column shows the personnel increases approved in August 1965 and the second column the increases as revised in January 1966. A number of these changes require some explanation. In the Army, the major change since last August is in the number of additional military personnel required for the support forces. Inas- much as it appears desirable to be in position to deploy additional forces without calling up Reserves, these support units must be pro- vided in the Active Force structure. In addition to that change, we have also added another large increment of Army aviation cbmpanies to the number approved in August. The major increase in the Marine Corps over last August is an additional division force, together with a number of tactical helicopter squadrons, observation squadrons and an air support control unit. In the Navy, we have added to the forces approved in August: 11 LST's and one refrigerator stores ship for logistic support, more SWIFT boats and a mother ship to augment our coastal patrol activities, a number of river control boats and yard craft, and one destroyer. We have also augmented the Navy construction battalions in the Pacific area and are adding four new construction battalions to the Navy structure. The increases in the Air Force are related to the retention of B-57 and F-102 aircraft previously scheduled to be phased out, a major expansion in the rotation and training base and the logistic support required for the forces in Vietnam. As shown on the bottom of table 1, a total of about 510,000 military personnel will be required to man the additional forces and support the increased training, rotation, and logistic base. Other adjustments in forces and activities will add another 17,000, but our decision to substitute some 58,000 civilian for 74,000 military personnel spaces will reduce the net increase over the original end fiscal year 1966 military personnel strength to about 453,000, some 113,000 more than the increase approved last August. When I appeared before this committee last August, we had not as yet determined the number of additional drill pay spaces needed in the Army Reserve components to raise the manning of three division and six brigade forces to 100 percent, or how these spaces should be made available. The number of additional spaces required for this purpose is now estimated at 30,000-18,500 in the Army National Guard and 11,500 in the Army Reserve. The additional spaces needed in the Army Reserve have been provided by a redistribution from units for which there is no requirement in our plans. The 18,500 spaces needed for that purpose in the Army National Guard, plus 20,000 spaces needed to man other Guard units at their authorized strengths, have been added to the 380,000 spaces provided for in the fiscal year 1966 Defense Appropriation Act. PAGENO="0024" 382 ECONOMIC EFFECT OF VIETNAM SPENDING With regard to civilian personnel, the major part of the increase over the number approved last August is related to the substitution of civffian for military personnel, as shown in table 1. Table 2 provides a recapitulation of the proposed personnel in- creases, including those related to southeast Asia. The second column shows the additional personnel required for the support of the south- east Asia effort over and above the numbers provided in the original fiscal year 1966 budget as shown in column 1. The third column shows the adjustments resulting from the substitution of civilians for military personnel. The fourth column shows other adjustments (pluses and minuses) related to productivity savings, nonsoutheast Asia related force changes, etc. The fifth column shows the net additions to the original end fiscal year 1966 strengths. The next column shows the number scheduled to be on hand at end fiscal year 1966 and the last column the balance to be added thereafter. ADDITIONAL FISCAL YEAR 1966 REQUIREMENTS FOR PROCUREMENT, R.D.T. & E. AND CONSTRUCTION Table 3 shows the additional funds required for the balance of the current fiscal year for procurement, for research, development, test, and evaluation, and for military construction in support of our combat operations in southeast Asia. Of the $1.7 billion added to the fiscal year 1966 budget last August, about $1,534 million was applied to procurement, particularly for long leadtime components, new pro- duction equipment, tooling, and all the actions necessary to accelerate production rates-but not actually to finance these higher production rates beyond about February 1966. That is the purpose of the additional $7 bfflion which we are now requesting for procurement in this fiscal year 1966 supplemental for southeast Asia. The balance of the $1.7 billion added to the fiscal year 1966 Defense budget last August, about $166 million, was used to finance (through February 1966) the most urgent construction projects needed for the support of our military operations in southeast Asia. The additional $1,238 million included in the supplemental will complete the financing of the fiscal year 1966 increment of that construction program. In preparing the estimates of our financial requirements for the balance of fiscal year 1966, we have assumed, for budgeting purposes, that combat operations will continue through the end of June 1967; thus the entire requirement for the longer leadtime items through that date is included in this supplemental. AMMUNITION As shown on table 3, about $2.1 billion is included in the fiscal year 1966 supplemental for ammunition which, together with the approx- imately $1.1 billion included in the original fiscal year 1966 budget and $800 million from the August amendment, gives us a total of about $4.1 billion for fiscal year 1966. This is, admittedly, a very high figure; but our operational plans call for a massive application of firepower to enhance the effectiveness of our forces and reduce cas- ualties. We estimate that our ground forces (including associated helicopter units) are now consuming ammunition at the rate of about $100 PAGENO="0025" ECONOMIC EFFECT OF VIETNAM SPENDING 383 million per month, and we are budgeting for a consumption rate con- siderably higher. It is important to note that whereas in 1964 we had no artillery in Vietnam, we now have a substantial number of artillery battalions there. In 1964, the U.S. Army and Marine Corps flew an average of 19,000 helicopter sorties per month; by the middle of last year they were flying about 60,000 sorties per month and at the end of the year, about 125,000. This intensive use of helicopters greatly increases our mobility, making it possible to operate with a much smaller central reserve and to conduct offensive operations without prolonged depletion of our forces in areas already under our control. Many of these helicopters are armed and provide a highly mobile source of firepower. With regard to air munitions, we are now consuming at a rate of about $110 million per month; and we are preparing to support a much higher rate. For example, in March 1965 we flew 800 attack (ord- nance consuming) sorties in order to stem the flow of war materiel and personnel into South Vietnam. By June of last year, the number of these sorties had increased to 2,800 and by December to over 5,000 The number of attack sorties flown by fixed-wing tactical aircraft against targets in South Vietnam has increased from a monthly average of 1,200 in 1964 to 7,200 in June 1965 and almost 13,000 in December 1965. In addition, we have been flying approximately 300 B-52 sorties, consuming about 6,000 tons of bombs per month since July 1965. Overall, we consumed about 25,000 tons of aircraft-delivered munitions in July 1965 and more than 40,000 tons in December of that year, or at an annual rate of 480,000 tons, and this supplemental will support a considerably higher rate AIRCRAFT Although the aircraft loss rate continues low, the rapidly increasing number of sOrties is resulting `in larger total losses. In 1964, we lost 38 fixed-wing aircraft and 24 helicopters to hostile action. In 1965, with both the very large increase in activity and the attacks against Noi th Vietnam, we lost 275 fixed-~ mg aircraft and 76 helicopters We anticipate that 1966 losses will be somewhat higher. A total of about 81 8 billion for the replacement of `urcr'%ft losses is included in the fiscal year 1966 supplemental Anothei $168 million is included for `the Army to equip new aviation units. `The considerably higher rates of utilization of many types of air-' craft in all the services will also incre'ise the consumption of spaies For example, Air Force tactical aircraft in Vietnam' are now flying 60 percent more hours `per month than they normally do in peacetime. And you may recall' that I mentioned last August, we were increasing the utilization rate of Military Airlift Command aircraft also by about 60 percent. Accordingly, we have included in the fiscal year 1966 supplemental about $1.2 billion for aircraft spares and other aircraft equipment for all the services OTHER MATERIEL The additional funds requested for vehicles, electronics, and com- munications, and other procurements are mostly to equip new units, notably the additional Army and Marine Corps divisions, and for PAGENO="0026" 384 ECONOMIC EFFECT OF VIETNAM SPENDING logistic and training support as well as to equip the new facilities being built in sontheast Asia. INCREASES ix PRoDUcTIoN RATES To support these higher rates of consumption and combat attrition, rebuild inventories and provide for the additional forces, we have greatly increased production rates and started new production lines. Planned production rates of the principal types of helicopters used in Vietnam have been just about tripled and certain fixed-wing types just about doubled. Production rates of the principal munition items have been increased many fold and major increases have been made in the production of tropical uniforms and jungle. boots. RESEARCH, DEVELOPMENT, TEST, AND EVALUATION The $152 million included in the fiscal year 1966 supplemental for R.D.T. & E. is to accelerate certain development projects of particular interest to our operations. in southeast Asia. You may recall that one of the items included in our first set of amendments to the fiscal year 1962 budget was the sum of $122 million for research and de- velopment of nonnuclear weapons a.nd equipment specifically designed for limited wars and counterinsurgency operations. Since that time, we have vigorously pursued Our efforts in that area and many of the new weapons, equipment and techniques now being employed in Viet- nam came out of this work, e.g., the armed helicopter, jungle communi- cations equipment, battlefield radars, defoliation agents, emergency airfield equipment,. lightweight body armor, minigun armed aircraft, ammunition for M-79 grenade launchers, jungle boots, etc. Many other items of this type are now well along in development. In order to make. them available for use in Vietnam at the earliest possible time, we ha.ve undertaken a new effort called Project Provost (priority research and development objectives for Vietnam operations support), designed to identify those current R. & D. projects which could make a significant contribution to our military operations in Vietnam, and which, with additional funds, could be brought t.o frui- tion relatively quickly. So far the military departments have identi- fled over 150 items of this type, and we have already utilized about $58 mfflion from the fiscal year 1966 R. & D. emergency fund for their support. We are now requesting an additional $152 million for fiscal year 1966 to continue and expand this effort and to meet other urgent requirements. Among the items to be supported with these additional funds are the development of a therapeutic drug for fulciparum malaria and a wide yariety of surveillance devices, weapons, munitions, and personal equipment. MILITARY CONSTRUCTION As shown on table 3, the bulk of the $1.2 bifiion requested for mili- tary construction is for facilities in southeast Asia. The balance is for a variety of supporting facilities along the lines of communication back to the United States, and, to a small extent, for trainin .~ and troop facilities within the Uinted States. . The $1,238 mifiion requested in this supplemental, together with the $166 million provided by the PAGENO="0027" ECONOMIC EFFECT OF VIETNAM SPENDING 385 August amendment, will make a total of $1,404 million available for construction in support of southeast Asia in fiscal year 1966, $355 million more than the entire appropriation for military construction in fiscal year 1965. The explanation for this large request lies in the nature of the mili- tary operation we have undertaken in southeast Asia. South Viet- nam itself is primarily an agricultural country; the only major port is Saigon. The deployment of large U.S. military forces, and other friendly forces such as the Korean division, in a country of this sort requires the construction of new ports, warehouse facilities, access roads, improvements to highways leading to the interior of the country and along the coasts, troop facilities, hospitals, completely new air- fields and major improvements to existing airfields, communications facilities, etc. We will be prepared to house and support additional units if their deployment should be required in the future. Since construction is a long leadtime activity, the great bulk of this require- inent has to be financed in the fiscal year 1966 supplemental. In order to provide some flexibility in the utilization of these funds, we are requesting that $200 million of the $1,238 million total program be appropriated to "Military construction, Defense agencies," for later transfer to the military departments as required. Although I cannot assure you that the funds requested in this supplemental will complete our construction program in southeast Asia, since we do not know how the conflict there may evolve, I can tell you that the amount included in the fiscal year 1967 budget for military construction is very much smaller. FINA~N CIAL REQUIRE\IENTS Table 4 summarizes our financial requirements for the current fiscal year. The first column shows the amounts thus far enacted, less the $1.7 billion amendment which is shown in the second column. The third column shows the net additional amounts required in fiscal year 1966 to defray the costs of the pay raises enacted last year. The fourth column is the supplemental for southeast Asia which I have discussed, and the fifth column shows the total, $63,308,175,000 in new obligational authority, which would be available for the current fiscal year if the military and civilian pay supplemental and the southeast Asia supplemental are enacted as requested. 1 should point out that we have included in the southeast Asia supplemental for the military personnel accounts of the Active Forces a total of $440 million which, last January, we had planned on obtain- ing by transfer from the working capital funds of the Department of Defense in lieu of new appropriations. You may recall that the total amount planned for transfer last January was $470 million-$30 million from the cash balances of the Army Industrial Fund and $440 million from the cash balances of the Army, Navy, Marine Corps, Air Force, and Defense Stock Funds. Because of the expansion of the forces and the higher rates of activity, the stock funds have had to increase their inventory levels, thus decreasing their balances to a pOint where no excess cash is available for transfer to the military personnel accounts. Indeed, we are proposing a new general pro- vision which would relieve the stock funds of the present requirement that their cash balances must he at least equal to the amount of PAGENO="0028" 386 ECONOMIC EFFECT OF VIETNAM SPEND~G accounts payable at all times. They would, of course, continue to retain sufficient cash to meet their day to day disbursement needs. In addition, this general provision would also permit transfer between such funds in such amounts as may be determined by the Secretary of Defense with the approval of the Bureau of the Budget. The $30 million from the Army Industrial Fund is still available and will be transferred, as planned, to the "Military personnel, Army," account in fiscal year 1966. Accordingly, we are requesting the appropriation of only $440 rnfflion to replace the balances which were to have been transferred from the stock fund. As shown on table 4, $1,620 million has been included in this supple- mental for military personnel, of which $64 million is for the Reserve components to raise the manning of the selected forces. About $2,316 million will be required for operations and maintenance, including the additional funds needed by the Reserve components for the support of the additional personnel and the higher readiness levels. I have already discussed the amounts required for procurement, R.D.T. & E., and military construction. ADDITIONAL AUTHoRIzATIoNs The additional amounts requested to be authorized for aircraft, missiles, naval vessels and tracked combat vehicles, and R.D.T. & E., are shown in tables 5 through 7. The additional military construction authorizations are identical to the amounts requested for appropria- tion, as shown on table 3. * * * The President, in his state of the Union address to the Congress on January 13, discussed the reasons for our greater military involve- ment in southeast Asia and the resulting increases in Defense expendi- tures. I have attempted in this statement to outline the purposes for which the additional funds requested in this supplemental are required. I can assure you that my associates in the Defense Depart- ment and I have reviewed this supplemental with great care, and we now stand ready to help you in every way we can to facilitate the passage of the necessary legislation. PAGENO="0029" Approved Revised August January 1965 1966 Increase in Army Forces: (a) Division and initial support forces (b) 3 brigades and initial support forces (c) Aviation companies (d) Sustaining support for 1 division, 3 brigades, and other forces (e) STRAF support forces (1) Expand training base and pipeline Total, Army 235,000 306,657 2. Increase in Marine Forces: (a) 1 division (b) Activate forces to be deployed to Vietnam (c) Bring units to be deployed to full strength (d) Expand training and support base (e)°~'~'~-~'- jflpeuut~ Total, Marine Corps 30,000 85,169 3. Increase in Naval Forces: (a) Retain ~hina (b) Activate or procure ships (c) Increase manning for deployed ships and bases in southeast Asia~~ (d) Augment coastal and river patrol (e) A,~ ~ (1) Support of Marine forces (g) Flight ~amm5.. Total, Navy 35, 000 55,450 4. Increase in Air Forces: (a) B-52 aircraft deployed to Guam (b) Tactical fighter and troop carrier squadrons deployed to SEA and their flfl1~TTT0 ~ 1-~-~,- (c) ~ ~fr1ift ~..n- (d) Expand training (e) Other support (including logistical base) Total, Air Force Total Active Force, military - Adjustment for substitution of civilians Other adjustments 5. Increased readiness for Reserve components: Army: (a) To raise 3 division and 6 brigade forces to 100 percent manning~ (b) To man other ANG units at their authorized strengths Marine Corps: (c) Reserve division/wing team Air Force: (d) 9 F-100 squadrons (e) 4 RF-84 squadrons (f) 1 Tactical control group (g) 11 0-124 squadrons Total, Air Force 6. Increase in direct hire civilian personnel: (a) Army (b) Navy (including Marine Corps). (c) Air Force (d) Defense agencies Total personnel 35,762 Adjustment for substitution of civifians Other adjustments Net Increase ECONOMIC EFFECT OF VIETNAM SPENDING 387 TABLE l.-Summary of force and personnel increases related to southeast Asia 40,000 340,000 66,245 PM-~1 A~.,,, 340,000 510,521 -74,300 +16, 622 452,843 (1) 218,500 20,000 ~38, 500 2,500 2,500 1,667 697 1,667 697 436 2,205 2,205 4,569 5,005 11,600 15,500 7,300 1,362 31,133 21,400 18,355 4,893 75,781 +58,000 -4,554 1 Was to be determined. 2 The remaining 11,500 personnel required to raise the manning of the selected Reserve Force to 100 pe*cent is being provided by redistribution from units for which there is no requirement in the contingency plans. 3 Represents increase over the end fiscal year 1966 Army National Guard drill pay strength of 380,000 provided for in the fiscal year 1966 Appropriation Act. 35, 762 129:227 PAGENO="0030" 388 ECONOMIC EFFECT OF VIETNAM SPENDING TABLE 2.-Recapitulation of military and civilian personnel authorizations Budveted strength as of June 30. 1966 per original budget (1) Increases proposed as of Aueust 1965 and January 1966 (2) Adjust- ment for Other suhstitu- adjust- tion of ments civilians (3) (4) Net increase proposed (5) Strength increase to be realized By June After 30, 1966 June 30, 1966 (6) (7) Active duty military personnel: Army 953,094 Navy 684,848 Marine Corps 193,190 Air Force 809,134 Total_ - - 2, 640,266 Direct hire civilian personnel: Army 317,152 Navy (including USMC) 320,125 Air Force 286,099 Defense agencies 40,778 Total 064,154 306,657 55,450 85,169 63,245 -36,500 -15,000 -2,800 -20,000 +10, 432 ±2,575 ±2, 625 ±980 280, 599 43,025 84,994 44,225 205,949 38,875 56,880 45,364 74,650 4,150 28,105 1-1,139 510, 521 -74.300 ±16,622 452, 843 347,077 105, 766 31,133 21,400 18,355 4,893 ±26,585 +14. 415 +17.000 -16,947 ±6.953 -12,737 ±18, 177 40,771 42.768 22,618 23,070 42,480 1-5,700 37,476 5.292 15,279 7.139 27,727 1 -4,657 122,962 6,265 75.781 2±58,090 -4,554 529,227 Army ~ Navy Marine Corps Air Force Defense agencies Total Procurement: Ammunition consumption Aircraft: Attrition Equipment of new units Spares Other aircraft equipment Total aircraft Vehicles Electronics and communications Other Total procurement R.D.T. & E Military construction: South Vietnam Other locations Planning 671 366 338 758 2,133 400 168 562 149 (1) (`) (~) 837 555 1, 799 168 925 221 27 (1) 194 258 37 738 (1) ~586 3.159 329 241 398 39 45 14 71 42 66 66 505 76 404 179 827 2,465 1,372 517 2,665 7.019 28 53 (1) 71 152 408 172 39 207 83 15 (1) (1) C) 110 725 198 453 16 61 Total program 610 305 (1) 324 1,238 To be appropriated to military de- partment 510 255 (I) 274 1,038 Tobe appropriated to defense agencies 200 203 Totalappropriation 510 255 (1) j 274 203 1, 238 I Denotes a smell decrease in strength after end of fiscal year 1960. 2 Excludes 2,509 additional indirect hire civilians, bringing the total to 60,500. TABLE 3.-Fiscal year 1966 supplemental for procurement, R.D.T. & E. and military construction related to southeast Asia (new obligational authority) [In millions of dollarsl * 1 Included in the Navy. Nora.-Detail may not add to totals due to rounding. PAGENO="0031" k C)~C) C) C) C) C) ~II~ C C C~) H C H -~1o"~ C) C) C) ~- C) C) C) C) C)C)C)~C)! t'~ C) C) C) C) o~ ::~~!~ :~ :~ C) C) C) ~ C) C)C) C) - C) ~ C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) C) PAGENO="0032" 390 ECONOMIC EFFECT OF VIETNAM SPENDING TABLE 4.-Financial summary of fiscal year 1966 budget including the proposed supplemental for southeast Asia-Continued [In thousands of dollars) NOA enacted excluding amendment $1, 700 million amend- ment Military and civilian pay sup- plemental SEA supple- mental Total NOA Military assistance: Executive Total, Department of Defense Recapitulation: Army Navy Air Force Defense agencies Civil defense Miitaryassistance Total 1,470,000 1,470,000 48,398,935 1,700,000 863,521 12,345,719 63,308,175 11,241,644 14,268,960 17,842,766 3,468,799 106,766 1,470,000 569,100 549,600 581,300 262,000 255,254 260,900 985,367 5,002,595 3,309,670 3,791,685 241,769 17,075,339 18,383,484 22,476,651 3,795,935 106,766 1,470,000 48,398,935 1,700,000 863,521~ 12,345,719 63,308,175 TABLE 5.-Amounts requested for aircraft, missiles, ships, and tracked combat vehicle procurement authorization in fiscal year 1966 supplemental request [In thousands) Authorized 1 fiscal year 1966 Appropriated1 fiscal year 1966 Supplemental (NOA) fiscal year 1966 Aircraft: Army Navy and Marine Corps Air Force Missiles: Army Navy Marine Corps Air Force Naval vessels: Navy Tracked combat vehicles: Army Marine Corps Total $485, 400 2,100,400 3,709,000 2S3, 700 369,600 15,200 800,100 1,721, 000 $485, 400 2,104,500 3,675,800 277,000 358,200 15,200 800,100 1,590,500 $82~5, 600 738,300 1, 85, 700 64,000 26,200 27,500 63,700 75,800 10, 3,417,700 9, 454,400 9,306,700 `Included amounts totaling $496,100,030 provided through emergency fund for southeast Asia, Public Law 89-213. PAGENO="0033" ECONOMIC EFFECT OF VIETNAM SPENDING 391 TABLE 6.-Source of funds for aircraft, missiles, ships, and tracked combat vehicles, fiscal year 1966 supplemental procurement program [In thousands] Total fiscal year 1906 program Funding available I for financing program in part NOA requested for authorization Aircraft: Procurement of equipment and missiles, Army Procurement of aircraft and missiles, Navy (and Marine Corps) Aircraft procurement, Air Force Subtotal, aircraft Missiles: Procurement of equipment and missiles, Army Procurement of aircraft and missiles, Navy Procurement, Marine Corps Missile procurement, Air Force Subtotal, missiles Naval vessels: Shipbuilding and conversion, Navy Track combat vehicles: Procurement of equipment and missiles, Army Procurement, Marine Corps Subtotal, tracked combat vehicles Grand total $1,333,200 3,224, 000 5, 596,200 $507, 600 2,485, 700 4,010, 500 $825, 600 738,300 1, 585, 700 10, 153, 400 7,003, 800 3, 149, 600 358, 600 381, 600 42, 700 1, 242, 800 304, 600 355,400 15,200 1, 179, 100 64,000 26,200 27, 500 63, 700 2,035, 700 1, 854,300 181,400 1,930,500 1,930, 500 - 375, 700 13, 400 299,900 2, 500 75, 800 10, 900 - 389, 100 302, 400 86, 700 14,108,700 11,091,000 3,417,700 I Includes total amount of $496,100,000 provided through emergency fund for southeast Asia, Public Law 89-213. TABLE 7.-Amounts requested for R.D. T. & E. authorization in fiscal year 1966 supplemental request [In thousands] Authorized, fiscal year 1966 Appro. priated, fiscal year 1966 Supple- mental (NOA), fiscal year 1966 Research, development, test, and evaluation: Army Navy (including the Marine Corps) Air Force $1,406, 400 1, 439, 200 3, 103, 900 495, 000 - (1) $1, 406, 400 1,439, 200 3, 103, 900 495, 000 125, 000 $27, 995 52, 570 71, 085 0 0 151,650 Defense agencies Emergency fund Total 6, 444, 500 6, 569, 500 1 Not available. 78-516-67-vol. 2-3 PAGENO="0034" DEFENSE BUDGET HIGHLIGHTS* APPROACH TO THE FISCAL YEARS 1968-72 PROGRAM AND THE FISCAL ~EAR 1967-68 BuDGETS (Editor's Note: This issue of the Defense Industry Bulle- tin is devoted almost entirely to Secretary of Defense Robert S. McNamara's statement on January 23, 1967, before a joint session of the Senate Armed Seri'ices Committee and the Senate Svbcommittee on Depart in en t of Defense Appro- priations on the fiscal years 1968-72 Defense program and the 1968 Defense budget. While space limitations permit only am abbreviated treat- ment of the statement, am attempt has been made to excerpt those portions which are of special interest to Defense ind'us- try. Using the method established in previons years, para- graph markings have been deleted from the original text for the sake of clarity. The statement of the Secretary of Defense on the fiscal year 1967 supplemental for southeast Asia will be carried in next month's issue of the Bulletin.) Last year when I appeared before this committee in support of the fiscal years 1967-71 program and the fiscal year 1967 budget I said: With regard to the preparation of the fiscal years 1967-71 program and the fiscal year 1966 supplemental and the fiscal year 1967 budget, we ha.ve had to make a somewhat arbitrary assumption regarding the duration of the conflict in southeast Asia. Since we have no way of knowing how long it will actually last or how it will evolve, we have budgeted for combat operations through the end of June 1967. This means that if it later appears that the conflict will continue beyond that date, or if it should expand beyond the level assumed in our present plans, we will come hack to the Congress with an additional fiscal year 1967 request. Throughout the spring and summer of last year in my appearances before various congressional committees, I reiterated the fact that the fiscal year 1967 budget was based on the arbitrary assumption that the conflict would end by June 1967, and that additional funds would be required if the conflict continued. What we were trying to do was to avoid the overfunding which occurred during the Korean war when the Defense Department re- quested far more funds than were actually needed. For example. the Defense Department requested a total of about $164 billion for the 3 fiscal years 1951-53; the Congress appropriated a total of $156 billion; the amount actually expended was $102 billion; and the un- expended balances rose from $10.7 billion at the end of fiscal year 1950 to $62 bfflion by the end of fiscal year 1953. It took about 5 years to work the unexpended balance down to about $32 billion; and we were able to support a Defense program of about $50 bfflion *Reprinted from Defense Industry Bulletin. February 1e67. 392 PAGENO="0035" ECONOMIC EFFECT OF VIETNAM SPENDING 393 a year during fiscal years 1962-64 with about $30 billion of unexpended balances. Although we still have no way of knowing when the conflict will end, it is perfectly clear that we must take whatever measures are neces- sary to ensure our ability to support our forces in the event the conflict does continue beyond June 30, 1967. Indeed, when it became ap- parent last summer that this was likely to be the case, we continued the buildup of our military personnel strength beyond the level anticipated in the fiscal year 1967 budget and took action to ensure that deliveries of long lead time items would continue beyond June 30, 1967, without interruption. The Congress was informed of these actions through the reprograming process and related hearings. But, while it was clear even last summer that additional funds would be required for fiscal year 1967 if the conflict in southeast Asia were to continue, the timing and the amount of the additional request posed a problem. With regard to timing, we had essentially two alternatives: request an amendment to the fiscal year 1967 budget in the summer of 1966, while it was still before the Congress; or wait until early the following year and request a supplemental appropria- tion. Each of these alternatives had certain advantages and dis- advantages. The major disadvantage of waiting for a supplemental has been the need to reprogram, on a rather large scale, available fiscal year 1967 funds to meet our most urgent longer lead time procurement requirements, pending the availability of the additional funds. We recognize that this extensive reprogramming has placed an extra burden not only on the Defense Department but on the Armed Services Committees and the Defense Appropriations Subcommittees as well. Some of these reprogramming actions required the prior approval of this and other interested committees; all of them have been reported to the committees concerned. However, in order to facilitate your consideration of the fiscal year 1967 supplemental re- quest we have prepared a recapitulation of all of the major procure- ment program adjustments affecting that fiscal year, which will be furnished separately. Now, with a year and a half of combat experience in southeast Asia behind us, I believe that we have a much better understanding of our future requirements. In October 1965, when the fiscal year 1967 budget was being developed, we were in the midst of an explosive buildup in South Vietnam; it was then that we moved over 100,000 men 10,000 miles in less than 120 days. The future was impossible to predict with accuracy. In contrast, in October 1966, at the time of the preparation of the fiscal year 1968 program, we could look ahead to the time when our forces in southeast Asia could be expected to level off. Since we can now project our requirements for the conflict in south- east Asia with far greater confidence than last year, we have changed our basic approach in preparing the fiscal year 1967 supplemental as well as the fiscal year 1968 budget. Sufficient funds are being re- quested in both the fiscal year 1967 supplemental and the fiscal year 1968 budget to protect the production lead time on all combat essential items until fiscal year 1969 funds would become available. Thus, if it later appears that the conflict will continue beyond June 30, 1968, we would be able to use fiscal year 1969 funds to order additional PAGENO="0036" 394 ECONOMIC EFFECT OF VIETNAM SPENDING ammunition for delivery after December 1968 and keep the production lines going without interruption. In the case of tactical aircraft, which have a production lead time on the average of about 18 months, we have included sufficient funds in the fiscal year 1967 supplemental and the regular fiscal year 1968 budget to cover deliveries at rates sufficient to offset combat attrition in southeast Asia to January 1, 1970. If it later appears that all of such aircraft will not be required to replace combat attrition, the pro- duction of some might be cancelled and some used to modernize the forces at a faster Eate than presently planned. Similar provisions have been made in the fiscal year 1967 supple- mental and the fiscal year 1968 budget for other categories of material which would be affected by the continuation of combat operations in southeast Asia beyond June 1968. Accordingly, barring a signifi- cant change in the character or scope of the southeast Asia conflict, or unforeseen emergencies elsewhere in the world, the fiscal year 1967 supplemental and fiscal year 1968 budget should be sufficient to cover our requirements until fiscal year 1969 funds become available, even if the conflict continues beyond June 30, 1968. Because of the large demands of the southeast Asia conffict, I have deleted from both the fiscal year 1967 supplemental and the fiscal year 1968 budget, procurement funds which are required simply for the replacement of items already in the inventory with later models, except for tactical aircraft and helicopters and where the newer item is being procured to replace consumption. This type of marginal modernization can be safely deferred to a later time. With regard to military construction, we have included funds in the fisèal year 1968 budget for military family housing and other cate- gories of "noncombat" facilities, e.g., replacement of old barracks, BOQ's, maintenance shops, administration and school buildings, etc. We deferred these types of construction programs in fiscal year 1966 and 1967 in order to reduce our demand on an economy already labor- ing under inflationary pressures. Now that these pressures appear to be subsiding, we should be prepared to assume the orderly moderniza- tion and expansion of our physical plant, which represents an invest- ment, in terms of acquisition cost, of well over $35 billion. The rate at which we do so wiJi depend upon economic developments during the next 12 to 18 months. In any event, we would first release the balance of the fiscal year 1966 military construction program (about $565 mil- lion), and then move forward with the fiscal year 1968 program, for which a total of $2,123 million has been included for military construc- tion and $267 mfflion for the construction of military family housing. Needless to say, we are continuing our cost reduction efforts with undiminished vigor. And, as you know, we have developed another list of base closings and consolidations, none of which will in any way affect our combat capabilities in southeast Asia or elsewhere. By eliminating unneeded and marginal activities and deferring whatever can be safely deferred, I have been able to reduce the fiscal year 1967 supplemental and the fiscal year 1968 budget requests of the services and Defense agencies by about $23.3 billion, while at the same time providing for all essential military requirements. We are requesting for fiscal year 1967 a total of $72~8 billion in new obliga- tional authority, of which $12.3 billion is in the special supplemental PAGENO="0037" ECONOMIC EFFECT OF VIETNAM SPENDING 395 for southeast Asia. For fiscal year 1968 we are requesting a total of $75.3 billion in new obligational authority. Expenditures are now estimated at $67.95 billion for fiscal year 1967 ($9.65 billion above the original budget estimate) and $73.1 billion for fiscal year 1968. IMPACT OF THE DEFENSE PROGRAM ON THE BALANCE OF PAYMENTS During the past year the progress that the LTnited States has been making in its efforts to eliminate the troublesome deficit in its inter- national balances of payments was arrested. By 1965, the overall "liquidity" deficit was slightly over $1.3 billion, down substantially from the $2.8 billion level of the previous year, and we were hoping for a further improvement in 1966. However, we now expect that when final data are available for that year, they will show that on a liquidity basis the deficit was roughly the same as the year before. The chief factors in this development were some deterioration on the trade accounts stemming from the rapid domestic economic expansion during the period and higher Defense expenditures abroad. As you know, for many years the Department of Defense has been making a vigorous effort to reduce the net impact of its program on the U.S. balance of payments while still maintaining all necessary combat capabilities and avoiding undue hardships for the individual service- man or his dependents. Figure 1 summarizes the results of this effort over the fiscal year 1961-66 period. FIGURE 1 [In billions] Fiscal year- 1961 1962 1963 1964. 1965 1966 Expenditures: U.S. forces and their support (excluding increase in SEA expenditures over fiscal year 1961) Military assistance Other(AEC,etc.) Total Receipts Net adverse balance (excluding increase in SEA expenditures over fiscal year 1961) Increase in SEA expenditures overfiscal year 1961 Net adverse balance $2. 5 .3 .3 $2.4 .2 .3 $2.4 .3 .3 $2. 5 .2 .1 $2.3 .2 .1 $2.4 .2 .1 3.1 -.3 3.0 -.9 3.0 -1.4 2.8 -1.2 2.6 -1.3 2.6 -1.2 2.8 2. 1 1. 6 .1 1. 6 .1 1. 2 .2 1.4 .7 2.8 2. 1 1. 7 1. 7 1.4 2. 1 As you can see, between fiscal year 1961 and fiscal year 1965 we succeeded in reducing the net adverse balance on the "Defense" account by half, from $2.8 billion to $1.4 billion~ This reduction was achieved through a dramatic rise in receipts from sales Of U.S. military goods and services to foreign countries, coupled with a successful effort to hold down overseas expenditures in face of substantial in- creases in foreign prices and wages and in the pay of U.S. Defense Department personnel. For example, in Europe the cost of living went up about 16 percent and wage rates rose more than 30 percent. However, during fiscal year 1966 the requirements of the southeast Asia conflict, together with a modest though, hopefully, temporary decline in military sales receipts, combined to raise the net adverse balance to $2.1 billion. PAGENO="0038" 396 ECONOMIC EFFECT OF VIETNA~I SPENDING The major factor underl~ng this rise, of course, has been the war in Vietnam. Military expenditures abroad are closely related to the size of our deployments overseas. Between June 1965 and June 1966, the total number of U.S. military personnel in south Vietnam rose from 59,900 to 267,500, an increase of 207,600. In addition, it was neces- sary to undertake very large construction and logistics efforts in support of operations in southeast Asia, both of which added to the payments deficit. These additional foreign exchange costs were not unexpected (once the dimensions of our commitment there became apparent), and I reported to you a year ago that the conflict might raise such costs several hundred million dollars above prebuildup levels; indeed, we now estimate that there were approximately $500 million of such additional expenditures in fiscal year 1966. We recognized this threat to our balance of payments from the beginning and we have taken extraordinary measures to minimize its impact. Nevertheless, we must expect that the higher southeast Asia deployments planned over the next year and a half will inevitably cause our overseas spending to rise still higher in the months ahead. Indeed, it now appears that Vietnam-related foreign exchange costs in fiscal year 1967 will nm over $1 billion higher than the prebuildup year of fiscal year 1965. In previous years I have described in some detail the Defense Department's actions to limit the balance of payments effects of our overseas programs, including: The prompt withdrawal of U.S. forces from overseas areas whenever changes in circumstances, our own capabilities, or those of our allies permit such action. A continuing review of the requirement for and the efficient utilization of overseas installations with a view to eliminating or consolidating these facilities in order to reduce their costs to a minimum. Acceptance of up to 50 percent cost penalties (in some cases more) in order to favor procurement of U.S.-produced goods and services over those of foreign countries. Through fiscal year 1966, nearly S300 million of such procurement was diverted to U.S. sources. The virtual cessation of new offshore procurement for the military Assistance Program. In fiscal year 1966, expenditures for such procurement were less than a third the fiscal year 1963 level. Efforts to encourage Defense Department personnel to reduce their overseas spending and, conversely, to increase their personal savings. Sharp curbs on the size of U.S. headquarters staffs abroad and on the number of foreign national employees. \~\Tith the escalation of the conflict in southeast Asia, a number of special measures have been added. For example, in the area of per- sonal spending, disbursement procedures were modified to make it easier for a serviceman to leave his pay "on the books" or increase the size of the allotment sent home. A most promising step was the enactment by the Congress last August of the uniform service savings deposit program which authorizes interest rates of up to 10 percent to encourage savings by servicemen overseas. We have initiated a vigorous educational program to complement this new savings oppor- PAGENO="0039" ECONOMIC EFFECT OF VIETNAM SPENDING 397 tunity and the results to date have been most encouraging. Total deposits under this legislation in the first 3 months (September- November 1966) totaled $23.4 million. In the construction area, special procedures have been put into effect to minimize the balance of payments costs of our large building program in southeast Asia, again with gratifying results to date. For example, during fiscal year 1966, only about one-fifth of the $372 million paid our principal contractor in Vietnam entered the balance of payments. The rest in effect was "returned" to the United States to buy American goods and services, including transportation on U.S.- flag vessels. Most important, this was accomplished without imped- ing in any way the progress of the construction work itself. With respect to military receipts, the decrease in fiscal year 1966 can be traced almost entirely to the phasing of actual receipts from the Federal Republic of Germany, with whom we have had an agreement to offset U.S. military expenditures in that country. The basic agreement called for the Germans to make payments in fiscal year 1966-67 of $1,350 million for purchases of U.S. military goods and services required to meet their defense needs. With regard to our military sales program, I have the impression that our policies and objectives in this area are not very well under- stood, either at home or overseas. For example, allegations have been made: That we are forcing unwanted arms on countries. That we are selling arms to countries which have no legitimate use for them and which could better use their scarce resources to improve the lot of their people. That by indiscriminately selling arms, we are promoting the arms race and undermining the peace. That in some cases our military sales efforts are thwarting the objectives of our own economic aid programs. That our military sales efforts are motivated primarily by balance of payments considerations, abetted by the desire for profits on the part of U.S. manufacturers. All of these allegations are false and are based on a misunderstanding or lack of knowledge of the facts involved. I believe it would be useful, therefore, to review briefly the background and origin of the present foreign military sales program. It has been widely recognized in our country, at least since the Korean war, that the collective defense of the free world required armed allies, and somewhat more belatedly, that the internal security of most countries requires some armed forces. Circumstances of history, in particular the greatly weakened economic condition of most countries following World War II, forced on the United States the role of major armament supplier to the free world. Accordingly, during the decade of the 1950's, the United States had to meet the legitimate armament needs of its friends primarily through a large grant aid program. Indeed, of the $22 billion of U.S. military exports during the 1950's, $17 billion were financed by Congressional apPropriations. By the latter part of the decade, however, many of these countries had become prosperous again, enabling them to produce more of their own arms or buy them abroad. At the same time, this rising affluence e.Howed several of these countries to rebuild their monetary reserves. PAGENO="0040" 398 ECONOMIC EFFECT OF VIETNAM SPENDING Also, between fiscal year 1957 and the end of fiscal year 1961, the United States lost about $5 billion of its gold holdings while its liquid liabilities to foreigners (which represent potential claims on our gold) had risen from about $15 billion to about $22 billion. The increasing prosperity of many of our allies was reflected in our military assistance policies. Grant aid by fiscal year 1961 had already declined from an average annual level of $2 billion plus during the 1950's to about $1.5 billion. Since fiscal year 1961, this downward trend has continued with grant aid declining both absolutely and relatively. Whereas in fiscal year 1961, there were two dollars of grant aid for every dollar of military sales to foreign recipients, by fiscal year 1966 the ratio had been reversed. Moreover, I think it is important to note that, in terms of total value, U.S. military exports in the 10-year period, fiscal year 1962-71, are not expected to be measurably higher than in the decade, fiscal year 1952-61; the big change will be in the shift in the way these exports are financed- from grant aid in the 1950's to military sales in the 1960's. With this shift in emphasis from grant aid to sales, it was decided to organize the latter on a more formal basis within the Department of Defense, indeed, to make it a separate program. The principal objective of this foreign military sales program is, however, basically the same as that of the grant aid program, i.e., to promote the de- fensive strength of our allies in a way consistent with our overall foreign policy objectives. Encompassed within this objective are several specific goals: To further the practice of cooperative logistics and standard- ization with our affies by integrating our supply systems to the ma~mum extent feasible and by helping to limit proliferation of different types of equipment. To reduce the costs, to both our allies and ourselves, of equip- ping our collective forces, by avoiding unnecessary and costly duplicative development programs and by realizing the economies possible from larger production runs. To offset, at least partially, the unfavorable payments impact of our deployments abroad in the interest of collective defense. Three basic standards were established to govern the conduct of our foreign military sales program: \~re will noi~ sell equipment to a foreign country which we believe it cannot afford or should not have. We will never ask a potenti al foreign customer to buy any- thing not truly needed by its own forces. We will not ask any foreign country to purch ase anything from the United States, which it can buy cheaper or better elsewhere. V These standards are fully consistent with the spirit of the provision added to the Foreign Assistance Act last year, which calls for the sales program to be administered in such a way as to encourage reciprocal arms control and disarmament agreements and discourage arms races. Over the next 5 years, we estimate that the countries of the non- Communist world will have legitimate requirements for substantial amounts of new military equipment. Based on past experience, we believe that many of these requirements can be most effectively met by purchases from us. However, our ability to realize this potential will depend on one major condition: we must convince our allies that PAGENO="0041" ECONOMIC EFFECT OF VIETNAM SPENDING 399 the U.S. military sales program is not a threat to their long-range national interests. And, as I mentioned previously, we must be willing, as a nation, to make military trade a "two way" street. For our part, the Defense Department will continue to take every oppor- t~mity to promote cooperative logistics arrangements-including co- operative research and development efforts-and to emphasize the important contribution which the sales program can make in furthering the objectives of collective defense. Turning again to our international payments position, for the near term future, the prospects for any reduction in the net adverse balance on the "military" accoirnt must rest on an increase in sales receipts, and there are both practical and desirable limits as to how much relief we can or should expect from this source. In Europe, we should be able to make a net reduction in the size of our logistics support establishment in the process of relocating from France, although there will be some initial offsetting costs for the relocation itself. In the Far East, we will face continuing high foreign exchange costs as long as our Vietnam deployments remain large. Let me assure the committee, however, that despite our preoccupa- tion with the important national security objective we are charged with accomplishing, we remain keenly aware of the burden that our overseas programs place on the Nation's international balance of payments. In this regard, we have no intention of relaxing our efforts to make that burden as light as possible. STRATEGIC FORCES In this section of my statement 1 will discuss the three major pro- grams which, together, constitute the foundation Of our general nuclear forces; and civil defense. Because of their close interrela- tionship and, indeed, their interaction, it is essential that all three of these programs be considered within a single analytical framework. THE GENERAL NUCLEAR ~S AR PROBLEM During the past several years, in my annual appearances before this committee, I have attempted to explore with you some of the more fundamental characteristics of the general nuclear war problem and the kinds of strategic forces which it involves. I noted that our general nuclear war forces should have two basic capabifities: To deter deliberate nuclear attack upon the United States and its allies by maintaining, continuously, a highly reliable ability to inflict an unacceptable degree of damage upon any single aggressor, or combination of aggTessors, at any time during the course of a strategic nuclear exchange, even after absorbing~a surprise first strike. In the event such a war nevertheless occurred, to limit damage to our population and industrial capacity. The first capability we call "assured destruction" and the second "damage limitation." The strategic offensive forces-the ICBM's, the submarine-launched ballistic missiles (SLBM's), and the manned bombers-which we usually associate with the first capability, can also contribute to the second. They can do so by attacking enemy delivery vehicles on their bases or launch sites, provided they can PAGENO="0042" 400 ECONOMIC EFFECT OF VIETNAM SPENDING reach those vehicles before they are launched at our cities. Con- versely, the strategic defensive forces-manned interceptors, anti- bomber surface-to-air missiles; antiballistic missile (ABM)-which we usually associate with the second capability can also contribute to the first. They can do so by successfully intercepting and destroy- ing the enemy's offensive weapons before they reach our strategic offensive forces on their bases and launch sites. As long as deterrence of a deliberate Soviet (or Red Chinese) nuclear attack upon the United States or its allies is the overriding objective of our strategic forces, the capability for assured destruction must receive the first call on all of our resources and must be provided regardless of the costs and the difficulties involved. Damage liniitin~ programs, no matter how much we spend on them, can never~substitute for an assured destruction capability in the deterrent role. it is our ability to destroy an attacker as a viable 20th century nation that provides the deterrent, not our ability to partially limit damage to ourselves. What kind and amount of destruction we would have to be able to inflict on an attacker to provide this deterrent cannot be answered precisely. However, it seems reasonable to assume that in the case of the Soviet Union, the destruction of, say, one-fifth to one-fourth of its population and one-half to two-thirds of its industrial capacity would mean its elimination as a major power for many years. Such a level of destruction would certainly represent intolerable punishment to any industrialized nation and, thus, should serve as an effective deterrent to the deliberate initiation of a nuclear attack on the United States or its allies. Assured destruction with regard to Red China presents a somewhat different problem. China is far from being an industrialized nation. However, what industry it has is heavily concentrated in a compara- tively few cities. We estimate, for example, that a relatively small number of warheads detonated over 50 Chinese urban centers would destroy half of the urban population (more than 50 mfflion people) and more than one-half of the industrial capacity. Moreover, such an attack would also destroy most of the key governmental, technical and managerial personnel and a large proportion of the skilled workers. Since Red China's capacity to attack the United States with nuclear weapons will be very limited, even during the 1970's, the ability of even a very small portion of our strategic offensive forces to inflict such heavy damage upon them should serve as an effective deterrent to the deliberate initiation of such an attack on their part. Once sufficient forces have been procured to give us high confidence of achieving our assured destruction objective, we can then consider the kinds and amounts of forces which might be added to reduce damage to our population and industry in the event deterrence fails. But here we must note another important point, namely, the possible interaction of our strategic forces programs with those of the Soviet Union. if the general nuclear war policy of the Soviet Union also has as its objective the deterrence of a U.S. first strike (which I believe to be the case), then we must; assume that any attempt on our part to reduce damage to ourselves (to what they would estimate we might consider an "acceptable level") would put pressure on them to strive for an offsetting improvement in their deterrent forces. Conversely, an increase in their damage limiting capability would PAGENO="0043" ECONOMIC EFFECT OF VIETNAM SPENDING 401 require us to make greater investments in assured destruction, which, as I will describe later, is precisely what we now propose to do. It is this interaction between our strategic forces programs and those of the Soviet Union which leads us to believe that there is a mutuality of interest~ in limiting the deployment of antiballistic missile defense systems. If our asumption that the Soviets are also striving to achieve an assured destruction capability is correct, and I am convinced that it is, then in all probability all we would accom- plish by deploying ABM systems against one another would be to in- crease greatly our respective defense expenditures, without any gain in real security for either side. It was for this reason that President Johnson decided to initiate negotiatioiis with the Soviet Union, designed, through formal or informal agreement, to limit the deploy- ment of ABM systems, while including at the same time about $375 million in his fiscal year 1968 budget to provide for such actions-e.g., protection of our offensive weapon systems-as may be required if these discussions prove unsuccessful. In this connection, it might be useful to reiterate another~funda- mental point, namely, that the concept of assured destruction implies a "second strike" capability, i.e., a strategic force of such size and sufficient strength to destroy the attacker. Thus if assured destruc- tion is also a Soviet objective, they must always view our strategic offensive forces in their planning as a potential first strike threat (just as we view their forces) and provide for a second strike capability. THE SIZE AND CHARACTER OF THE THREAT In order to assess the capabilities of our general nuclear war forces over the next several years, we must take into account the size and character of the strategic forces which the Soviet Union and Red China are likely to have during the same period. Again, let me caution that, while we have reasonable high confidence in our estimates for the close-in period, our estimates for the early part of the next decade are subject to much uncertainty. As I pointed out in past appear- ances before this committee, such longer range projections are, at best, only informed estimates particularly since they deal in many cases with a period beyond the production and deployment leadtimes of the weapon systems involved. ? he Soviet strategic offensive-defensive forces rf~ro significant changes have occurred during the last year in our projections of Soviet strategic forces. The first is a faster than ex- pected rate of construction of hard ICBM silos; the second is more positive evidence of a deployment of an antiballistic missile defense system around Moscow. (Both of these developments fall consider- ably short of what we assumed in the "higher than expected" threat, against which we have been hedging for several years.) Our current estimates for other elements of the Soviet strategic forces are generally in line with those I discussed here last year. Summarized in the following table are the Soviet's strategic offen- sive forces estimated for October 1, 1966. Shown for comparison are the U.S. forces. PAGENO="0044" 402 J~cdxoMtc EFFECT OF VIETNAM SPENDING United States versus Soviet intercontinental strategic nuclear forces `Oct. 1, 1966 U.S.1 U.S.S.R. ICBM's2 SLBM's CUE launchers; Total intercontinental ballistic missiles Intercontinental bombers 934 512 340 130 1,446 680 470 155 1 These are mid-1966 figures. 2E~cludes test range launchers and Soviet MR1IRBM's capable of striking Eurasian targets. 3 In addition to the SLBM's, the Soviets possess submarine-launched cruise missiles whose primary tar- gets are naval and merchant vessels. 4 In 1965, intelligence reports estimated Soviet intercontinental missiles as of mid-1966 to number between 430 and 500. `In addition to the intercontinental bombers shown in the table, the Soviets possess medium bombers capable of striking Eurasian targets. Intercontinental ballistic missiles. As of now, we have more than three times the number of intercontinental baffistic missiles (i.e., ICBM's, and SLBM's) the Soviets have. Even by the early 1970's, we stifi expect to have a significant lead over the Soviet Union in terms of numbers and a very substantial superiority in terms of overall combat effectiveness. In this connection, we should bear in mind that it is not the number of missiles which is important, but rather the character of the payloads they carry; the missile is simply the delivery vehicle. Our superiority in intercontinental bombers, both in numbers and combat effectiveness, `is even greater and is expected to remain so for as far ahead as we can see. There is still no evidence that the SOviets intend to deploy a new heavy bomber in `the late 1960's. Antiballistic missile defense. We have been aware fot many years' that the Soviets have been working on an; antibaffistic `missile defense system, just as we have been. After a series of `abortive starts, it now appears that the Soviets are deploying such a system (using the "GALOSH" missile, `publicly displayed in 1964) around Moscow. They are also deploying another type of "defensive system elsewhere in the Soviet Union, but the weight of the evidence at this time suggests that this system is not intended primarily f'or antibaffistic missile defense. However, knowing what we do about past Soviet predilections for defense systems, 1 we must for the time being, plan our forces on the assumption that they will have deployed some sort of an ABM system around their major cities by the early 1970's. Whether made up of GALOSH only, or a combination of GALOSH' and other types of missiles, a full scale deployment would cost the Soviet Union at least $20 to $25 billion. The Red Chinese n'uciear threat There has been no basic change' in our estimates fo `the Red Chinese nuclear threat. Their firing of a nuclear armed missile over a distance of a few hundred miles last October falls within the limits of that estimate. 1 The Soviets for more than a decade have spent substantially more on air defense against strategic bombers than has the United States. But if our Strategic Air Command is correct in its judgment that a very high proportion of the U.S. incoming bombers could penetrate the Soviet, defenses and reach their targets, and I have no reason to dispute it, then we must conclude that the bulk of these Soviet eapenditures has been wasted. PAGENO="0045" ECONOMIC EFFECT OF VIETNAM SPENDING 403 With regard to an ICBM, we believe that the Red Chinese nuclear weapons and ballistic missile development programs are being pursued with high priority. On the basis of recent evidence, it appears pos- sible that they may conduct either a space or a long-range ballistic missile launching before the end of 1967. However, it appears un- likely that the Chinese could deploy a significant number of opera- tional ICBM's before the mid-1970's, or that those IOBM's would have great reliability, speed of response, or substantial protection against attack. Red China also has some bombers which could carry nuclear weapons, but most of then have an operational radius of only a few hundred miles. It is highly unlikely, on the basis of cost alone, that they would undertake the development, production, and deployment of a new, long-range bomber force. If they chose. to do so, it would take them a decade or more before they could deploy it. Accord- ingly, we have no reason on this account to change our estimate that a significant Red Chinese nuclear . threat to the continental United States will not develop before the mid-1970's. CAPABILITIES OF THE PROPOSED FORCES FOR ASSURED DESTRUCTION The most demanding test of our assured destruction capability is the ability of our strategic offensive forces to survive a well coordinated surprise Soviet first strike directed against them. Because no one can know how a general nuclear war between the United States and the Societ Union might occur, prudence dictates that we design our own strategic forces on the basis of a greater threat than we actually expect. Capability against the expected threat E.ven if the Soviets in the 1972 period were to assign their entire available missile force to attacks on our strategic forces (reserving only retire missile and bomber-delivered weapons for urban targets), more than one-half of the total forces programed last year for 1972 would still survive and remain effective. Considering the overall size and character of that force, it is clear that our strategic missiles alone could destroy the Soviet Union as a viable 20th century society, even after absorbing a well coordinated, surprise first attack. Indeed, the detonation of even one-fifth of the total surviving weapons over Soviet cities would kill about 30 percent of the total population (73 million people) and destroy about one-half of the industrial capacity. By doubling the number of warheads delivered, Soviet fatalities and industrial capacity destroyed would be increased by considerably less than one-third. Beyond this point further increments of warheads delivered would not appreciably change the result, because we would have to bring smaller and smaller cities under attack, each requiring one delivered warhead. Although it is not at all certain that they will do so, we must, as I noted earlier, base our force planning on the assumption that the Soviets will deploy a reasonably effective ABM defense around their principal cities; and we must be prepared to overwhelm it. We have been hedging against this possibility for some time, and last year we took a number of actions of which the following are the most important: PAGENO="0046" 404 E~CONOMIC EFFECT OF VIETNAM SPENDING Accelerated development of the Poseidon missile. Approved production and deployment of Minuteman III. Developed penetration aids for Minuteman. Now in the fiscal year 1968 program we propose to take a number of additional actions to enhance the future capabilities of our assured destruction forces, of which the following are the more important: Produce and deploy the Poseidon missile. Produce and deploy improved missile penetration aids. Increase the proportion of Minuteman III in the planned force and provide it with an improved third stage. Initiate the development of new reentry vehicles, specifically designed for use against targets heavily defended with ABM's. I will discuss each of these actions in greater detail later in con- nection with our other proposals for the strategic forces. But for now, let me point out that the net effect of these actions would be to increase greatly the overall effectiveness of our assured destruction force against the Soviet Union by mid-1972. Even if the Moscow-type ABM defense were deployed at other cities as well, the proposed U.S. missile force alone could inflict about 35 percent (86 million) fatalities on the Soviet Union in 1972-after absorbing a surprise attack. As I noted earlier, a relatively small number of warheads detonated over 50 cities would destroy half of Red China's urban population and more than one-half of her industry. Thus the strategic missile forces proposed for the fiscal year 1968-72 period would, by themselves, give us an assured destruction capability against both the Soviet Union and Red China, simultaneously. Capability against "higher than expected threats" As I indicated last year, our assured destruction capability is of such crucial importance to our security that we must be prepared to cope with Soviet strategic threats which are greater than those projected in the latest intelligence estimates. The most severe threat we must consider in planning our assured destruction forces is an extensive, effective Soviet ABM deployment combined with a deployment of a substantial ICBM force with a hard-target kill capability. Such a Soviet offensive force might pose a threat to our Minuteman missiles. An extensive, effective Soviet ABM system might then be able to intercept and destroy a significant portion of our residual missile warheads, including those carried by submarine-launched missiles. (The Soviet offensive and defensive threats assumed here are both substantially higher than expected.) To hedge against the possibility of such a threat to our land-based missile forces, we have authorized the development and production of the Poseidon. Should still additional offensive power be required, and such a requirement is not now clear, we are considering the development and deployment of a new Advanced ICBM, designed to reduce vulnerability to such a Soviet threat. The deployment of the Nike-X as a defense for our Minuteman force would offer a partial substitute for the possible further expansion of our offensive forces. But again I want to emphasize that we don't know whether the Soviet Union will develop and deploy the kind of forces assumed PAGENO="0047" ECONOMIC EFFECT OF VIETNAM SPENDING 405 heie E~ en `tgainst this highei than expected threat, and e~ en without a Nike-X defense of Minuteman, our proposed strategic missile and bomber forces could still inflict 40 percent or more fatali- ties on the Soviet population throughout the time period involved. More extreme threats ai~e highly unlikely. In any event, the changes we are now proposing in OUr strategic offensive forces would make it dangerous and expensive for the Soviet Union to move in the direction of mome extreme thieats to our assured destruction capability Jr we assume, as I behe~ve we should, that the Soviets would want to reduce the vulnerability of their own offensive forces against the possibility of a first strike by our very accurate forces in the fiscal year 1972-73 period, they must further disperse and harden their strategic missiles, which is exactly what they appear to be doing now. To do so is expensive and for the same budget outlay results in reduced missile payloads. Not to do so would leave the Soviet force highly vulnerable. Thus we can, in planning our forces, foreclose any seemingly "easy" and "cheap" paths to their achieve- ment of a satisfactory assured destruction capability and a satis~ factory damage limiting capability at the same time. We of course, cannot preclude the possiblity that the Soviet Union may increase its strategic forces budget at some time in the future. That is why we are now undertaking a very comprehensive study of a new strategic missile system. And that is why we are not precluding the possible future construction of new Poseidon submarines or the defense of our presently deployed Minuteman silos with Nike-X. While I believe we should place ourselves in a position to move f or- ward promptly on all of these options if later that should become necessary, we need not commit ourselves to them now. CAPABILITIES OF THE PROPOSED FORCES FOR DAMAGE LIMITATION The principal issue in this area of the strategic forces program con- cerns the deployment of an ABM defense system, i.e., Nike-X. There are three somewhat overlapping but distinct major purposes for which we might want to deploy such a system at this time: To protect our cities (and their population and industry) against a Soviet missile attack. To protect our cities against a Red Chinese missile attack in the mid-1970's. 0 help protect our land-based strategic offensive forces (i.e., Minuteman) against a Soviet missile attack. After studying the subject exhaustively, and after hearing the views of our principal military and civilian advisors, we concluded that we should not initiate an ABM deployment at this time for any of these purposes. We believe that: The Soviet Union would be forced to react to a U.S. ABM de- ployment by increasing its offensive nuclear force still further with the result that the risk of a Soviet nuclear attack on the United States would not be further decreased; and the damage to the United States from a Soviet nuclear attack in the event deter- rence failed, would not be reduced in any meaningful sense. As I noted earlier, the foundation of our security is the deterrence of a Soviet nuclear attack. We believe such an attack can be prevented if it is understood by the Soviets that we possess strategic nuclear PAGENO="0048" 406 ECONOMIC EFFECT OF VIETNAM SPENDING forces so powerful as to be capable of absorbing a Soviet first strike and surviving with sufficient strength to impose unacceptable damage on them. We have such power today. We must maintain it in the future, adjusting our forces to offset actual or potential changes in theirs. There is nothing we have seen in either our own or the Soviet Union's technology which would lead us to believe we cannot do this. From the beginning of the Nike-Zeus project in 1955 through the end of this current fiscal year, we wifi have invested a total of about $4 billion on ballistic missile defense research-including Nike-Zeus, Nike-X and Project Defender. And, during the last 5 or 6 years, we have spent about $1.2 billion on the development of penetration aids to help en- sure that our missiles could penetrate the enemy's defenses. As a result of these efforts, we have the technology already in hand to counter any offensive or defensive force changes the Soviet LTnion might undertake in the forseeable future. We believe the Soviet Union has essentially the same requirement for a deterrent or assurred destruction force as the United States. There- fore, deployment by the United States of an ABM defense which would degrade the destruction capability of the Soviet's offensive force to an unacceptable level would lead to expansion of that force. This would leave us no better off than we were before. With respect to protection of the United States against a possible Red Chinese nuclear attack, the lead time required for China to develop a significant ICBM force is greater than that required for deployment of our defense-therefore the Chinese threat in itself would not dictate the production of an ABN'I system at this time. Similarly, although the protection of our land-based strategic offensive forces against the kind of heavy, sophisticated missile attack the Soviets may be able to mount in the mid- or late 1970's might later prove to be worth while, it is not yet necessary to produce and deploy the Nike-X for that purpose. I have already discussed, in connection with my review of the capa- bilities of our strategic forces for assured destruction, the third major purpose for which we may want to deploy an ABM defense (i.e., the protection of Minuteman). Now I would like to discuss the other two purposes. Deployment of Nike-Xfor defense of our cities against a Soviet attack What is involved here is an analysis of the contribution the Nike-X system might make to the defense of our cities under two assumptions: That the Soviets do not react to such a deployment. That the Soviets do react in an attempt to preserve their "assured destruction" capability. As you know, the major elements of the Nike-X system are being developed in such a way as to permit a variety of deployments; two have been selected for the purposes of this analysis. The first, which I will call "posture A," represents a light U.S. defense against a. Soviet missile attack on our cities. It consists of an area defense of the entire continental United States, providing redundant (overlapping) coverage of key target areas; and, in addition, a relatively low-density Sprint defense of a number of the largest cities to provide some pro- tection against those warheads which get through the area defense. PAGENO="0049" ECONOMIC EFFECT OF VIETNAM SPENDING 407 The second deployment, which I call "posture B," is a heavier defense against a Soviet attack. With the same area coverage, it provides a higher-density Sprint defense for twice the number of cities. Shown on the figure 2 are the components and the costs (which, if past experience is any guide, may be understated by 50 to 100 per- centfor the systems as a whole) 2 of posture A and posture B. FIGURE 2 Investment cost [In billions) Posture A Posture B Radacs: MAR TACMAR PAR MSR Investment cost $6. I $12. 6 Missiles: Spartan Sprint Investment cost - DOD investment cost 2. 4 4.8 17. 4 AEC investment cost Total investment cost (excluding R. & D.) Annual operating cost Number of cities with terminal deficiencies 1. 0 2.0 9.9 .38 X 19.4 . 72 2X The multifunction array radar (MAR) is a very powerful phased- array radar which can perform all the defense functions involved in engaging a large, sophisticated attack: central control and battle management, long-range search, acquisition of the target, discrim- ination of warheads from decoys or "spoofing" devices, precision tracking of the target, and control of the defense interceptor missiles. The TACMAR radar is a scaled down, slightly less complex and less powerful version of the MAR, which can perform all the basic defense functions in a smaller, less sophisticated attack. The perimeter acquisition radar (PAR) is a phased-array radar required for the very long-range search and acquisition functions involved in area defense. To achieve the full potential of the extended range Spartan, the target must be picked up at much greater distances in order to compute its trajectory before the Spartan is fired. The missile site radar (MSR) is a much smaller, phased-array radar needed to control the Sprint and Spartan interceptor missiles during an engagement.. It can also perform the functions of the TACMAIR but on a considerably reduced scale. Actually, a number of different sizes are being studied. This "modular" approach will permit us to tailor the capacity of the radar to the particular needs of each de- fended area. The Spartan is a three-stage missile with a nuclear warhead capable of intercepting incoming objects at relatively long range above the atmosphere. Even before the systems became operational, pressures would mount for their expansion at a cost of still additionalbillions. The unprotected, or relatively unprotected, areas of the United States would claim that their tax dollars were being diverted to protect New York and Washington while they were left naked. And critics would point out that our strategic offensive force is premised on a much larger Soviet threat (the "possible," not the "probable" threat); they would conclude that the same principles should be applied to our strategic defensive forces. For these and other reasons, I believe that, once started, an AIIM system deployed with the objective of protecting the United States against the Soviet Union would require an expenditure on the order of $40 billion over a 10-year period. 78-516-67-vol. 2-4 PAGENO="0050" 408 ECONOMIC EFFECT OF VIETNAM SPENDING The Sprint is a shorter range, high-acceleration interceptor missile designed to make intercepts at lower altitudes. The technical principles involved in the radars are now fairly well established. One research and development MAR-type has been constructed at the White Sands Missile Ra.nge. A contract has been let for the power plant of a second MAR-type radar, which is to be constructed on Kwajalein Atoll. The missile site radar is well along in development and the construction of one of these radars on Kwaja- lein Atoll has also hegtm. Testing of the Sprint missile was started at White Sands in Novem- ber 1965 and the tempo of testing will steadily increase during the current year. The Spartan is still on the drawing boards. It rep- resents a very substantial redesign of the original Zeus and we will not know until it is flight tested how well it will perform. Facilities for testing both the Sprint and the Spartan will be con- structed on Kwajalein Atoll. These, together with the TACMAR and MSR and the programs for the computers, will give us all of the major elements of the NIke-X system which are essential to test its overall performance against reentry vehicles fired from Vandenberg AFB, Calif. (We feel we know enough about the PAR technology to be able to use the mechanically steered radars already on Kwajaleiii as simulators.) The system will be tested in stages, starting with the MSR. and Sprint, then the Spartan misbile and the TAC~1AR radar. A large number of test shots will be launched from the west coast of the United States to Kwajalein to test the system thoroughly as a whole. The most intportant objective of this effort is to deter- mine proper system integration and computer programing, since the individual components of the system will have already been tested. But even after this elaborate test program is completed, some technical uncertainties will still remain unresolved; this is to be expected in a system designed for such a highly complex mission. Moreover, we have learned from bitter experience that even when the developntent problems have been solved, a system can run into trouble in production or when it is put into operation. All too often the development prototype cannot be produced in quantity without exten- sive reengineeriug. Production delays are encountered and costs begin to spiral. Sometimes these problems are not discovered until the new system actually enters the inventory and has to function in an operational environment. In this connection, it is worth noting that had we produced and deployed the Nike-Zeus system proposed by the Army in 1959 at an estimated cost of $13 to $14 billion, most of it would have had to be torn out and replaced, almost before it became operational, by the new missiles and radars of the Nike-X system. By the same token, other technological developments in offensive forces over the next 7 years may make obsolete or drastically degrade the Nike-X system as presently envisioned. We can predict with certainty that there will be substantial additional costs for updating any system we might consider installing at this time against the Soviet missile threat. The deployment of a Nike-X system would also require some un- provement in our defense aaainst manned bomber attack in order to preclude the Soviets from undercutting the Nike-X defense; and we would want to expand and accelerate the fallout shelter program. The investment cost (including research and development) of the former is PAGENO="0051" E~CONOMIC EFFECT OF VIETNAM SPENDING 409 estimated at about $1.5 to .$2.4 billion and would provide for a small force of F-Ill or F-i 2 type interceptors and airborne warning and control aircraft (AWACS). The expanded fallout shelter program would cost about $800 million more than the one we are now producing. We would also need some of our antisubmarine warfare (ASW) forces for. use against Soviet missile submarines, but we are not yet clear whether these ASW forces would actually have to be increased over the currently planned levels. In any event, the "current" estimates of the investment cost of the total damage limiting package would amount to at least $12.2 billion for posture A and at least $21.7 billion for posture B. rio test the contribution that each of these Nike-X deployments might make to our damage limiting objectives, we have projected both the United States and Soviet strategic nuclear forces (assuming no reaction by the Soviets to the U.S. ABM deployment) to the time when posture B, the heavier defense, could be fully in place. The fatalities which these Soviet forces could inflict upon the United States (with and without a U.S. ABM defense) and the fatalities which the U.S. forces could inflict on the Soviet Union (with a Soviet ABM defense) are shown in the figure 3. FIGURE 3 Number of fatalities in an all-out strategic exchange (assumes no Soviet reaction to U.S. ARM deployment) [In millionsl 2 Soviets strike first, United States retaliates United States strikes first, Soviets retaliate U.S. fatalities Soviet fatalities U.S. fatalities Soviet fatalities U.S. programs: Approved Posture A Posture B 120 40 30 120± 100 120± 30 120+ 20 70 70 70 I Fatality figures shownabove represent deaths from blast and fallout; they do not include deaths result- ing from fire, storms, disease, and general disruption of everyday life. 2 The data in this table are highly sensitive to small changes in the pattern of attack and small changes in force levels. Assumes United States minimizes U.S. fatalities by maximizing effectiveness of strike on Soviet offensive systems. The first case, "Soviets Strike First, United States Retaliates," is tile threat against which our strategic forces must be designed. The second case, "United States Strikes First, Soviets Retaliate," is tile case that would determine the size and character of the Soviet reac- tion to changes in our strategic forces, if they wish, as they clearly do, to maintain an assured destruction capability against us. These calculations indicate that without Nike-X and the other damage limiting programs discussed earlier, U.S. fatalities from a Soviet first strike could total about 120 million; even after absorbing that attack, we could inflict on the Soviet Union more than 120 million fatalities. Assuming the Soviets do not react to our deployment of an ABM defense against them, which is a most unrealistic assumnption, posture A might reduce our fatalities to 40 million and posture B to about 30 million. PAGENO="0052" 410 ECONO~UC EFFECT OF VIETNAM SPENDING Although the fatality estimates shown for both the Soviet Union and the United States reflect some variations in the performance of their respective ABM systems, they are still based on the assumption that these systems will work at relatively high levels of effectiveness. If these ABM systems do not perform as well as our technical people postulate, fatalities on both sides could be considerably higher than shown in figure 3, or the costs would be considerably higher if major improvements or additions had to be made in the systems to bring them up to the postulated level of performance. If the Soviets are determined to maintain an assured destruction capability against us and they believe that our deployment of an ABM defense would reduce our fatalities in the "United States Strikes First, Soviets Retaliate" case to the levels shown in figure 3, they would have no alternative but to increase the second strike damage potential of their offensive forces. They could do so in several different ways. Shown in the table below are the relative costs to the Soviet Union of responding to a U.S. ABM deployment in one of these possible ways: Level of U.S. fatalities which Soviets believe will provide deterrence' Fatalities (millions): Cost to the Soviets of offsetting U.S. cost to deploj,t an ABM 40 $1 Soviet cost to $4 U.S. cost. 60 $1 Soviet cost to $2 U.S. cost. 90 $1 Soviet cost to $1 U.S. cost. 1 U.S. fatalities if United States strikes first and Soviets retaliate. If the Soviets chose to respond in that way to our ABM deployment the results would be as shown in figure 4. In short, the Soviets have it within their technical and economic capacities to offset any further damage limiting measures we might undertake provided they are determined to maintain their deterrent against us. It is the virtual certainty that the Soviets wifi act to maintain their deterrent which casts such grave doubts on the advisa- bility of our deploying the Nike-X system for the protection of our cities against the kind of heavy, sophisticated missile attack they could launch in the 1970's. In all probability, all we would accomplish would be to increase greatly both their defense expenditures and ours without any gain in real security to either side. Defense against the Red Chinese nuclear threat With regard to the Red Chinese nuclear threat, an austere ABM defense might offer a high degree of protection to the nation against a missile attack, at least through the 1970's. The total investment cost of such a program might amount to $3.5 biffion, including the cost of the nuclear warheads. PAGENO="0053" ECONOMIC EFFECT OF VIETNAM SPENDING 411 FIGuRE 4 Number of fatalities in an all-out strategic-exchange (assumes Soviet reaction to U.S. ABM deployment) [In millions] . . Soviets strike first, United States retaliates United States strikes first, Soviets retaliate U.S. fatalities Soviet fatalities U.S. fatalities Soviet fatalities U.S. programs: Approved (no response) I'osture A Posture B 120 120 120 : 120± 120+ 120+ 100 90 90 70 70 70 The effectiveness of this deployment in reducing U.S. fatalities from a Red Chinese attack in the 1970's is shown in the table below: Chinese strike first (Operational inventory) X missiles OX missiles U.S. fatalities (in millions): Without ABM 0+ 1 With ABM This austere defense c.ould probably preclude damage in the 1970's almost entirely. As the chinese force grows to the level it might achieve by 1980-85, additions and improvements might be required, but relatively modest additional* outlays could probably limit the Chinese damage potential to low levels well beyond 1985. It is not clear that we need an ABM defense against China In any event2 the lead tune for deployment of a significant Chinese offensive force is longer than that required fOr U.S. ABM deployment; therefore, the decision for the latter need not be made now In the light of the foregoing analysis, we propose: To pursue with undiminished vigor the development, test and evaluation of the Nike-X system (for which purpose a total of about $440 million has been included in the fiscal year 1968 budget), but to take no action now to deploy the system. To initiate negotiations with the Soviet Union designed, through formal or informal agreement, to limit the deployment of ABM systems. To reconsider the deployment decision in the event these dis- cussions prove unsuccessful; approximately $375 million has been included in the fiscal year 1968 budget to provide for such actions as may be required at that time, e.g., the production of Nike-X for the defense of our offensive weapon systems. I would now like to turn to our specific proposals for the strategic forces in the fiscal year 1968-72 period. STRATEGIC OFFENSIVE FORCES The force structure proposed for the fiscal year 1968-72 period is shown in the classified table furnished to the committee. PAGENO="0054" 412 ECONOMIC EFFECT OF VIETNAM SPENDING Missile forces Last year I told this committee that: The U.S. response to a Soviet deployment of an ABM defense would be the in- corporation of appropriate penetration aids in our strategic missiles. Against area defense interceptors, penetration aids can be provided for U.S. missiles (so that an assured destruction capability is maintained) at a cost to us of less than 10 percent of the cost of an ABM defense to the Soviets. The leadtime for the Soviets to mount an ABM defense is greater than the time for us to produce and deploy penetration aids, provided we take timely action to develop them and can move forward promptly to produce them, and this we are doing. The decision actually to deploy new penetration aids can be made later this year. If the Soviets did attempt a large ABM defense we would still be able to produce and install the necessary penetration aids before the Soviets could achieve an extensive deployment. * * * against a combined Soviet expanded strategic rnissile/ABM threat, the most efficient alternative available to us would be to develop Poseidon (with the new penetration aids) and retrofit it into Polaris boats. To hedge against the possibility of such a threat, we now propose to accelerate the development of the Poseidon missile (which was initiated last year). The timing of a decision to pro- duce and deploy the missile would depend upon how this threat actually evolved. This is essentially the program we now propose to pursue. Minuteman. Last year we had planned a Minuteman force which would ultimately have consisted of a mix of 1,000 Minuteman iT's and Minuteman ill's with all the Minuteman l's phased out. Now, in order to increase the capability of this force against a possible strong Soviet ABM defense, we propose to increase the proportion of Minute- man Ill's in the force and equip them with a new improved third stage which will increase the payload of each missile. This increased pay- load will enable the Minuteman III to carry more penetration aids to counter an ABM defense. The total cost of this program is estimated at $400 mfflion, but it wifi cost the Soviet Union many times more in ABM defenses if they try to offset it. We also propose to step up the schedule for reequipping the Minute- man Ii's with an improved reentry vehicle and to procure penetration aid packages for all Minuteman II and III missiles. Engineering development was started on these penetration aid packages last year. The total cost of this program is estimated at $315 million, of which $100 mfflion was provided through fiscal year 1967, $125 million is required in fiscal year 1968, and another $90 million in subsequent years. Eventually, it will probably become necessary to replace the earliest Minuteman TI missiles because of their age. At that time we could add more Minuteman III's if that should appear desirable. Mean- while, I believe we should initiate the development of a new improved reentry vehicle for the Minuteman 111, and funds for this purpose have been included in the budget request. Polaris-Poseidon. By the end of the current fiscal year, 39 of the planned 41-ship Polaris force will have become operational. The last two Polaris submarines will he deployed by September 1967. I also believe it would be prudent at this time to commit the Poseidon missile to production and deployment. In order to hold to a minimum the number of submarines which would have to he withdrawn from the operational fleet, we propose to spread the Poseidon retrofit program over a period of years on a schedule tied to the regular overhaul cycle. PAGENO="0055" ECONOMIC EFFECT OF VIETNAM SPENDING 413 The total incremental cost of developing Poseidon, and producing and deploying the prol)osed force is estimated at $3.3 billion. A total of about $900 million is included in the fiscal year 1968 budget for Poseidon. (The decision to deploy Poseidon will produce an off- setting saving of about $200 million in the Polaris program.) Funds have also been included in the budget for the development of certain desired improvements for the Polaris missile. Titan II. rflh~ Titan II force, consisting of 54 missiles deployed in hard silos, presently makes a unique contribution to our strategic offensive capabilities. However, with the deployment of Minuteman III and, later, of the Poseidon, this capability of the Titan 11 will no longer be unique. The Minuteman III from the continental United States and the Poseidon from forward undersea locations will be able to reach all the important targets in the Soviet Union. Accordingly, we now propose to end procurement of new Titan boosters for testing and operational reliability demonstration with the fiscal year 1966 buy, and, instead, use boosters already in the inventory for these purposes in the future. With about six follow-on tests per year, the force of 54 Titan missiles on launchers can be main- tained for a number of years. New strategic missile systems. Although we believe the strategic missile programs now proposed will be adequate to meet the threat, even if the Soviet Union were to carry out a full scale deployment of an ABM system and develop more effective ICBM's, we are making a very comprehensive study of a new long-range missile system. To shorten the lead time on any option selected as a result of this study, we have included funds in the FY 1968Budget for contract definition should such a decision become warranted. Strategic bomber forces The manned bomber forces we propose to maintain through fiscal year 1972 are the same as those I presented here last year for the fiscal year 1967-71 period. The B-52C-F's and B-58's will be phased out as planned, leaving a force of 255 B-520-H's and 210 FB-l 1 lA's. Since the new FB-1 il's with the SHAM air-to-surface missile will be entering the bomber force during fiscal year 1969-71 and the B-52G/}I's can be maintained in a suitable operational condition well into the 1970's, there is no pressing need to decide on the produc- tion and deployment of a new bomber in the fiscal year 1968 budget. Clearly, the first order of business in the strategic offensive forces program at this time is the provision of penetration aids and other Improvements for our presently planned strategic missile force, and the production and deployment of the new Poseidon. Nevertheless, we plan to continue work on the engine, avionics, and the related airframe studies, for which a total of $26 million is programmed for fiscal year 1968. Air launched missiles Last year I said that we planned to keep the Hound Dog missiles in the operational inventory through fiscal year 1970, phasing their number down in step with the phase out of the B-52C-F's. We now propose to phase out the older Hound Dog "A" by end of fiscal year 1968, retaining only the "B" models. PAGENO="0056" 414 ECONOMIC EFFECT OF VIETNAM SPENDING The SHAM program is unchanged from that which I presented last year. While we still do not plan to deploy SRAM on the B-52G/H's, we are continuing the development of the necessary avionics to per- mit such a deployment if it should become desirable. Strategic reconnaissance The strategic reconnaissance force is the same as that presented a year ago. STRATEGIC DEFENSIVE FORCES The strategic defensive forces proposed for the fiscal years 1968-72 period are shown on the classified table provided to the committee. The civil defense program for fiscal year 1968 is shown separately. Surveillcnce, warning, and control The programs shown under this heading are, with two exceptions, the same as those I presented last year. Activation of BUIC III control centers will slip somewhat from the schedule shown last year due to delays in firming up the technical details of the program. The delay will be made up by the temporary retention of two of the BUIC II control centers and 12 of the manual backup centers through fiscal year 1968. By end of fiscal year 1969 all 19 BUIC III's should be operational and the remaining BUIC II and manual control centers will be phased out. The second change pertains to the search radars. Last year we had planned to reduce the number of these radars to 151 by end fiscal year 1967. As you may recall, this reduction was predicated on the internetting of our radar system with that of the Federal Aviation Agency (FAA). However, in order to make the inputs from the FAA radars compatible with the SAGE-BUIC III system, they must first be converted into appropriate computer language by a special piece of equipment called a "digitizer." Because of a slippage in the production of this digitizer, five more Defense Department radars will have to be operated until fiscal year 1969, when we expect to be able to reduce the number to 149. Manned interceptors The manned interceptor forces are generally the same as those presented last year. As you know, we have been studying during the past several years various ways of modernizing our air defense forces. Interceptor versions of both the SR-71 (F-12) and the F-ill have been considered for this role. Either one, equipped with the improved ASG-18/AIM 47 fire control and missile system and used with an effective airborne warning and control system (AWACS), would be better than the present interceptors in operating from degraded bases and inde- pendently of the vulnerable fixed ground environment, and in counter- ing concentrated bomber attacks, including air-to-surface missiles. In fact, a small force of such aircraft operating with AWACS would have a combat capability superior to the programmed force of several hundred Century series fighters and the hundreds of ground radar and control sites. The feasibility of this plan, however, depends upon the successful development of the AWACS. We now have a test program under way to examine three proposed solutions to the problem of developing an PAGENO="0057" ECONOMIC EFFE~CT OF VIETNAM SPENDING 415 overland airborne radar which could provide effective coverage at all altitudes. Design efforts are also being pursued on the airframe and avionics. We hope that by the end of this year sufficient data will be available to demonstrate the feasibility of the AWACS. Only then will we be in a position to make a decision on the interceptor force. Accordingly, we propose to continue development work on both the F-12 and the F-i ii types of interceptors and on the fire control and missile systems, and $20 million is included in the fiscal year i968 budget for this purpose. Although no additional funds are requested for work on the AWACS airframe, another $10 million is included in the fiscal year 1968 budget to continue work on overland radar technology. Surface-to-air missiles The Nike Hercules and Hawk missile forces are the same as planned a year ago except that we now intend to replace eventually some of the present Hawk missiles with the new Improved Hawk which is now in development. In addition to the improved Hawk, which is designed primarily for the field forces, we also have in advanced development a new surface- to-air missile called the SAM-P. While this system is also primarily oriented toward air defense of the field forces, it also has. a potential application for continental air defense. This effort, thus far, has been directed mainly to development of the required components or "build- ing blocks" and a deployment decision at this time would be pre- mature. Additional funds have been included in the fiscal year 1968 budget to continue development. Ballistic missile warning The numbers of ballistic missile early warning systems (BMEWS) and over-the-horizon (0TH) radar sites are the same as shown last year. We are also continuing work on "back scatter" over-the-horizon radars. An interim capability to detect sea launched ballistic missiles (SLBM's) is being phased in during fiscal year 1968. The SLBM detection system will include modified SAGE and SPACE-TRACK radars. Antisatellite defense As described in previous years, we have a capability to intercept and destroy hostile satellites within certain ranges. This capability will be maintained through fiscal year 1968. CIVIL DEFENSE The civil defense program proposed for fiscal year 1968 is essentially the same in content and objectives as that approved for the current year. The funds requested would carry forward the civil defense program at about the same level as the current fiscal year. A finan- cial summary of the program, estimated to cost $111 million in fiscal year 1968, appears in figure 5. PAGENO="0058" 416 ECONOMIC EFFECT OF VIETNAM SPENDING FIGURE 5 Financfai s~rnmary of civil defense [TOX dollars in millions] Fiscal year- 1152 1963 1964 1963 1966 1967 196S St:eitersurvey 58.4 Shelter imorovement Shelter development .3 Marking and stocking 90.3 Shelter Warning 6.8 Command, control, asal communications 4 22.9 Emergency operations support 16.6 Financial assistance 18.9 information activities 3.9 Management 12.4 Research and development 19.0 Training and education 2.6 Total3 252.3 Shelter spaces (millions, cumulative): Identifled Marked Stocken 9.3 1.4 32.7 4.1 3. 1 10. 1 27.5 3.4 13.6 11.0 9.2 7.1 1.7 24. 2 1.8 6.5 6.7 23.7 2.0 13.9 10.0 12.9 10.6 1.4 3.6 2.3 4.5 2.7 8.4 6.0 25.6 1.4 14.3 10.0 10.7 17.7 ~.5 5.1 1. 1 2.7 .6 11.6 6.6 23.9 1.7 12.0 10.0 11.6 18.4 5.0 1. 5 2.3 .8 3.9 6. 5 27.0 2.3 12.6 10.0 11.7 18.0 337 4.8 3. S .9 2.8 9. 7 30.0 2.5 13.2 10.0 11.6 125.4 110.5 101.5 105.1 102.1 111.0 103.7 42.8 9.7 121.4 63.8 23.8 135.6 75.9 33.8 152.1 85.3 41.3 162.0 97.0 49.0 170.0 112.0 56.0 `Total obligational authority. 2 Includes packaged ventilation kits. Includes architect and engineer advisory services on design techniques. Includes S2,300,000 carryover from 00DM for construction of a regional center; $13,400,030 returned to Treasury-not used by GSA in Federal building construction. `Totals may not add due to rounding. Shelter spaces resulting from the currently approved program: fiscal years 1963 to 1966 are actual, fiscal years 1067 and 1068 are estimated. Only public shelters having 50 or more spaces are eligible for marking and stocking. FINANCIAL SUMMARY The strategic forces programs I have outlined will require total obligational authority of 88.1 billion in fiscal year 1968. A comparison with prior years is shown below: 1952 1963 1964 1965 1966 1967 : 1968 actual actual . actual actual actual estimate proposed Strategic forces 11.2 10.5 9.3 7.1 6.8 7.1 8.1 GENERAL PURPOSE FORCES The General Purpose Forces include most of the Army's combat and combat support units, virtually all Navy units (except for the Polaris forces), all Marine Corps units, and the tactical units of the ~jy Force. These are the forces upon which we rely for all military actions short of general nuclear war, i.e., limited war and counter- insurgency operations. REQUIREMENTS FOR GENERAL PURPOSE FORCES Over the last few years I have presented to the committee in con- siderable detail or analysis of the limited war problem and our require- ments for General Purpose Forces. I have pointed out that our stra- tegic nuclear capability is designed to deter attack at but one end PAGENO="0059" ECONOMIC EFFECT OF VIETNAM SPENDING 417 of the spectrum of aggression and that we must, therefore, have other forms of military power, both to deter lesser aggressions and to defeat them if deterrence fails. We need these other forms of military power, not so much for the defense of our own territory as for the support of our commitments to other nations under the various collective defense arrangements we have entered into since the end of World War II. These include the Rio Pact in the Western Hemisphere, NATO in Europe, SEATO and ANZUS in the Far East, and the bilateral mutual defense agreements with Korea, Japan, the Republic of China, and the Philippines. All of these mutual defense treaty commitments, involving a total of some 40-odd sovereign nations, stem from the great policy deci- sion, made at the end of the Second World War, to base our security on the collective defense of the free world. In fact even without these treaty obligations, I suspect that our country's action would not have differed significantly in the more than two decades which have elapsed since the end of World War II. We must remember that we twice came to the assistance of our friends in Western Europe without any prior treaty commitments; we did so because we deemed it vital to our own security. We came to the assistance of South Korea-and we are now assisting South Vietnam- for the same reason. So it is not the treaties themselves that cause our greater involvement in the affairs of the rest of the world, but rather what we deem to be our own vital national security interests over the longer run. While the distinction between General Nuclear War Forces and Limited War Forces is somewhat arbitrary in that all of our forces would be employed in a general war, and certain elements of our strategic forces in a limited war (e.g., the B-52's against the Vietcong forces in Vietnam), it is primarily the limited war mission which shapes the size and character of the General Purpose Forces. Because we cannot predict in detail the actual contingencies we may have to face, we must build into our forces a capability to deal with a very wide range of situations. This accounts for the great diversification in the kinds of units, capabilities, weapons, equipment, supplies, and training which must be provided and seriously complicates the task of determining specific requirements. Nevertheless, our continuing study of these requirements has re- affirmed my conclusion that the General Purpose Forces which I pre- sented here a year ago are about the right order of magnitude. This conclusion takes into account the contributions to collective defense which our allies can he expected to make, as well as our own going capability to concentrate our military power rapidly in a distant threatened area. Although our General Purpose Forces are primarily designed for nonnuclear warfare, we do not preclude the use of nuclear weapons even in limited wars. However, as I have pointed out in previous years, the employment of such weapons in a limited war would not necessarily be to our advantage in every case, and it would present some extrem~iy difficult and complex problems. A careful review of our General Purpose Force requirements, includ- ing the temporary augmentations for southeast Asia, indicates a need in fiscal year 1968 for a total land force of about 3i~ division force equivelents. By "division force" I mean the division itself, plus all PAGENO="0060" 418 ECONOMIC EFFECT OF VIETNAM SPENDING of its support forces. The Army will have active division equivalents; and Marine Corps, four. With regard to tactical air power we now have a total of about 4- fighter, attack, and reconnaissance aircraft which constitute the equipment of the combat squadrons of both the Active and Reserve Forces of the Air Force, Navy, and Marine Corps. The nonaviation naval forces are more difficult to summarize in this manner and I will discuss them in detail later in the context with - Navy General Purpose Forces. As I have pointed out on numerous occasions in the past, it is not enough that our forces be of the right and composition; they must also be provided with the weapons, equipment, ammunition, and supplies needed to sustain them in combat. And, since most combat operations wifi usually involve all the services the logistics obj ectives which inscribe in broad terms the equipping and stockage standards to be followed, must he as uniform as possible throughout the Department. The objectives, together with the force to be supported and our contingency deployment plans, determine the content (and costs) of the annual procurement programs. Of course, the specific procurement programs to achieve these logistic objectives must realistically take account of the state of the production base, especially for ammunition. The purpose of our war reserve inventories is to provide our forces with sufficient supplies to conduct sustained combat until production can he raised sufficiently to offset combat consumption. In peacetime, therefore, when pro- duction rates are tailored to low levels of consumption and attrition, it is important to have large stocks on hand, equal or nearly equal to the calculated war reserve objectives. However, once our forces have been committed to combat and production has been built up to offset current consumption, as is now the case in the current conflict, it is not necessary (indeed, it would be imprudent) to rebuild those stocks to their precombat inventory level before the conflict ends. It is not necessary because our present expanded production base will be able to provide for all expected southeast Asia consumption as well as any other contingency or contingencies which might arise. It would be imprudent because we know from experience that when the conflict ends, we either would have to shut down the lines abruptly, with all of the resultant adverse consequences for our economy, or we would have to acquire unwanted surpluses. Accordingly, we have planned our fiscal year 1967-68 procurement program in such a way that if the war should end suddenly, we can taper off production gradually, using the excess production capacity to rebuild our inventories to the desired procombat levels. At the present production rates this could be achieved very quickly. For items which are not currently in expanded production for southeast Asian operations, or for new items just entering the inventory, we will, of course, continue to procure toward our logistics objectives with the goal of achieving them, wherever feasbile and desirable, with the fiscal year 1968 buy. CAPABILITIES OF THE PROGRAMED FORCES As I noted earlier, our General Purpose Forces requirements are derived from analyses of contingencies, including the support of our allies around the world. Accordingly, our General Purpose Forces PAGENO="0061" ECONOMIC EFFECT OF VIETNAM SPENDING 419 capabilities must be assessed in conjunction with the capabilities of these allied forces. Although we have considerable knowledge of the force plans of our allies, we cannot be sure how they will change with the passage of time. This creates some uncertainty about the specific requirements for U.S. forces in the more distant years of the 5-year programing period, for which we must make allowances in our force planning. ARMY GENERAL PURPOSE FORCES The Department of Defense for many years, and under several administrations, has been striving to make the "One Army" concept a reality as well as a slogan. You may recall that when I appeared before the congressional committee in May 1961 in support of Presi- dent Kennedy's recommendations on the realignment of the Army Reserve components, I noted that "they must be so organized, trained, and equipped as to permit their rapid integration into the Active Army." Since that time we have not only been working on the question of how the Reserve components should be organized but also on how the Reserve and Active Army structures could best be meshed together. This latter question requires not oñiy a com- prehensive analysis of the total Army force requirement but also a very careful and detailed analysis of which elements of the total structure should be provided in the Active Forces and which in the Reserve Forces. Fundamental to this type of analysis is the concept of a "division force." Although the combat division has long been the most widely used standard for measuring the strength of the land forces, it accounts for only about one-third of the combat and support units required to sustain the division in combat over an extended period of time. A "ready" division without "ready" support elements would be incapable of combat. The division force concept ensures that our planning explicitly recognizes this relationship (indeed, interdependence) between the division and its major support ele- ments, since it requires us to identify these elements in detail. As a first approach to the problem, we have grouped all of the organized (T.O. & E.) units of the division force into three categories: The division itself. The initial support increment (151), i.e., the nondivisional combat and combat support units which are required to support the division in the initial combat phase. The sustaining support increment (SSI), i.e., the additional nondivisional units including the combat, combat support, and service support needed by the division for sustained combat operations beyond the initial phase. By structuring the division force in this way, we can see more clearly the relationship of the divisions themselves to the other Army units shown on the classified table provided to the committee. In addition, the division force concept helps us to: Relate standards of unit readiness, manning levels, etc., directly to the time phased unit deployment schedules, which underlie our contingency planning. Determine more precisely which units must be provided in the actual forces and which could be provided in the Reserve com- ponents. PAGENO="0062" 420 ECONOMIC EFFECT OF VIETNAM SPENDING Tailor forces for particular missions, operational environments, and tempos of activity. Understand better the relationship between support functions (supply, maintenance, transportation, etc.) and combat func- tions (maneuver and firepower), thereby enabling us to achieve a better allocation of resources among them. Calculate more precisely the personnel and materiel require- nients of each unit. While the concept still needs considerable development before all of the foregoing advantages can be fully realized, it has already proved of significant value in our force planning. Army force structure The integrated Active-Reserve Army force structure proposed for the fiscal year 1968-72 period is grouped under three main headings- division and brigade forces, major supporting forces, and combat and support battalions. Division and brigade forces. Because of the temporary Vietnam augmentations to the Active Army, the force structure we are pro- posing at the end of fiscal pear 1968 is the equivalent of 27~ division forces in the active and Reserve structure combined (183'~ Active and nine Reserve components). You may recall that funds were included in the fiscal year 1967 budget to initiate procurement of long leadtime items for the con- version of a second division to the airmobile configuration, if experi- ence proved this desirable. The existing airmobile division, the 1st Cavalry, proved its worth in Vietnam and I have, therefore, tentatively approved the conversion of an airborne division to an airmobile con- figuration. The actual timing of this action is subject to the prepara- tion of a detailed conversion plan by the Army and the JCS, but for planning purposes we have scheduled it for early fiscal year 1969. Major supporting forces. This grouping covers the maj or support- ing forces, most of which represent the initial or sustaining support for the division and brigade forces. In fiscal year 1969 (when an airborne division is converted to airmobile), the Army wifi keep a portion of the airborne assets to form a new permanent airborne brigade, thereby establishing the brigade total at seven. Combat and snpport battalions. We now propose to make a small increase in the number of maneuver battalions. With respect to artillery battalions, the demands of the conflict in southeast Asia together with our continuing study of the peacetime force requirements have caused us to make a number of changes in the structure. First, we now plan to increase the number of artillery battalions in the active forces. Second, our experience in Vietnam has shown that the mix of separate artillery battalions could contain more heavy 8-inch howitzers and 175-mm. gun battalions. Ac- cordingly, a significant portion of the increase in artillery battalions will be of these types. The number of engineer combat battalions in the active forces has been temporasily increased in order to meet southeast Asia needs. The buildup of aviation units in the Army will continue through fiscal year 1968. We now plan to initiate in fiscal year 1968 a new development program designed to ensure that the Nike-Rercules can continue to PAGENO="0063" ECONOMIC EFFECT OF VIETNAM SPENDING 421 operate effectively in the 1970's. This new program together with the Hawk improvement program will provide a hedge against possible slippage in the development of the SAM-D which is tentatively planned as a replacement for both Hercules and Hawk. Last year we had tentatively planned to start procurement of the Improved Hawk in fiscal year 1968. However, the project has en- countered some development problems and the program has slipped. Meanwhile we will go ahead with production preparations using the funds provided in fiscal year 1967 and those requested in fiscal year 1968 for production engineering and production prototype missiles. Three types of operational gun/Chaparral battalions are being formed: a fully self-propelled battalion for the armored and mecha- nized divisions; a modified self-propelled version (including one towed gun battery which can be airlifted) for the infantry division; and an all-towed version for the airmobile and airborne division. Army procurement The revised fiscal year 1967 Army procurement program now totals $5,863 million, of which $2,130 million is included in the supple- mental. The 1968 program totals $5,881 million. The fiscal year 1967 program now totals $1,202 miffion for 2,697 aircraft, of which $533 million is included in the supplemental request. The fiscal year 1968 program includes $769 million for 1,479 air- craft. The aircraft to be procured include the UH-1B/D (Iroquois) tactical utility transport helicopter, the AH-1 G (Cobra) armed heli- copter, the CH-47 (Chinook) transport helicopter, the OH-6A obser- vation helicopter, the CH-54A heavy lift helicopter, the TJ-21A administrative support aircraft, the OV-iC (Mohawk) fixed-wing observation aircraft, as well as a large number of training helicopters. Funds are also requested for tire procurinent of long leadtime components for the AH-56A advanced aerial fire support system (AAFSS) to permit early initiation of production, when development warrants such a decision. Army missile procurement (including spares) will total $561 million in fiscal year 1967 and $769 million in fiscal year 1968. The fiscal year 1968 program provides for ground support equipment for the Quick Reaction Alert Pershing battalions deployed in Europe; Lance missiles and related ground support equipment; initial procurement of the TOW missile system; a large quantity of Shillelagh missiles; Redeye and Chaparral air defense missiles; and ground support and training equipment for the Hawk missile system. The revised fiscal year 1967 program for weapons and combat vehicles totals $589 million ($83. million in the supplemental request), and $554 million is included in the fiscal year 1968 budget request. These funds will provide for completion of the planned procurement of the M-139 (IIS-820) 20 mm. gun; substantial quantities of the 20 mm. Vulcan air defense gun and the 5.56 mm. rifle; and additional 81 mm. mortars and self-propelled 155 mm. howitzers. The funds requested will also provide for procurement of the M-578 light recovery vehicle, the General Sheridan armored reconnaissance and airborne assault vehicle, the MI-i 13 armed personnel carrier, the 81 mm. and 107 mm. self-propelled mortars, the M-577 command post carrier and the M-54 cargo carrier. We have also included funds for M-60's with the 105 mm. gun, M-60's with the Shillelagh 152 mm. PAGENO="0064" 422 ECONOMIC EFFECT OF VIETNAM SPENDING gun, the armored vehicle bridge, and the combat engine vehicle, all of which use the M-54 chassis. In fiscal year 1968, advance production engineering for the main battle tank will require $11 miffion. Additional funds will be required for the U.S. share of the development costs. The revised fiscal year 1967 program for trucks and other non- combat vehicles total $653 million ($154 in the supplemental request). For fiscal year 1968 $483 million is requested for a variety of these vehicles. Included in the fiscal year 1968 program are h-ton, l3fton (M715), 23~-ton and 5-ton trucks of all types. For communications and electronic procurement, the revised fiscal year 1967 program provides $617 million ($30 miffion in the supple- mental request and the fiscal year 1968 request totals $55 million. For ammunition the Army's revised fiscal year 1967 program in- cludes $1,36* million ($584 million in the supplemental request). For fiscal year 1968, $2,2** mfflion is requested. Ammunition pro- curement will continue to increase in fiscal year 1968 in order to meet the projected needs of southeast Asia. Among the major items are: small arms ammunition (5.56 mm., 7.62 mm., and 30 caliber); 40 mm. ammunition; 81 mm., 105 mm., 106 mm., 152 mm., 155 mm., and 4.2-inch cartridges; and 2.75-inch rockets. The revised fiscal year 1967 program for other support equipment (road graders, tractors, etc.) totals $608 million ($247 million in the supplemental request) and $437 million is requested for fiscal year 1968. The revised fiscal year 1967 program for production base support totals $272 million, ($220 million in the supplemental request and $95 million is requested for fiscal year 1968. NAvY GENERAL PURPOSE FORCES The Navy General Purpose Forces proposed for the fiscal year 1968- 72 period are shown on the classified table provided to the committee. Except for the Vietnamese-related forces, the major changes from the program planned last year concern the antisubmarine warfare forces, the guided missile ships, the amphibious ships and the minesweepers. There is, however, one general problem in this area which deserves special mention, and that is the dolorous state of the American ship- building industry. It has become increasingly apparent in recent years that our ship- building industry, both public and private, has fallen far behind its competitors in other countries. Not only does it cost twice as much to build a ship in this country, it also takes twice as long. This is a startling development in view of the fact that the United States is the most highly industrialized nation in the world. It is even more startling when we realize that the modernization of the European and Japanese yards has been achieved by applying, on a massive scale, U.S. automobile and aircraft manufacturing technology to shipbuilding. Unfortunately, public discussion of the shipbuilding problem in this country has been focused on what is actually the minor part-its relationship to the Merchant Marine problem. I can well understand why the American flag line operators should wish to sever the present interlocking relationship between the Merchant Marine and the PAGENO="0065" ECONOMIC EFFECT OF VIETNAM SPENDING 42~ shipbuilding industry; they could buy ships abroad at half the price send get delivery in about half the time. But while this divorce might solve the problem of the Merchant Marine, it would not solve the problem of the Defense Department. The U.S. Merchant Marine provides only a few hundred mifiion dollars of work per year to the shipbuilding, industry; Navy work amounts to between $2 and $2.5 bifiion a year. Thus the Defense Department, and the taxpayer, has a stake in the American shipbuilding industry which goes far beyond the immediate problems concerning the Merchant Marine. Obviously; the more fundamental solution is to revitalize the American shipbuilding industry. Although we may never be able to overcome completely the wage rate differential, there is no reason why the American shipbuilding industry should not be, in a tech- nological sense, as good as the best any other country has to offer. We have the technology and the manufacturing "know-how;" what we need to do is to find some way in which they can be applied to the American shipbuilding industry and some way to finance the relatively large investments that would be required. With regard to Navy work, the Defense Department has already embarked on such a program. Wherever feasible, we are grouping our annual shipbuilding program into multiyear procurement. Of perhaps .greater significance over the longer run is the new procurement package approach, of which the fast deployment logistics (FDL) ship is an outstanding example. Under this approach, the shipbuilder is asked to bid on the entire package-design, develop- ment, and construction-of a relatively large number of ships to be delivered over a period of years, much like the package approach to aircraft procurement. Several new programs of this type are con- thrnplated, and I will discuss these in context with our proposals for the Navy General Purpose Forces in the fiscal year 1968-72 period. Attack carrier forces Last year, I described to the committee a new plan under which we would maintain an active fleet of 15 attack carriers and 12 air wmg equivalents', instead of the 13 carriers and 13 air wings wewere plan- ning on before. We made this change because of new force structure promises to provide significantly more usable combat power than the one previously planned-and at no increase in cost. However, a force of 15. carriers and 12 air wing equivalents would require some change in the present mode of operation. Carriers would normally deploy in peacetime with less than the maximum complement of air- craft. and additional aircraft would be flown to the carriers when and as needed. In effect, we would be treating the attack carrier as a forward floating .airbase, deploying the aircraft as the situation re- quires, much as we do in the present carrier operations off Vietnam. It is this kind of operational flexibility that enables the attack carriers to make a unique contribution to our overall tactical air capabilities. Although the adjustment of the air wings to the new force structure is scheduled to begin in fiscal year 1968 and be completed by fiscal year .1971,~ the total number of combat aircraft assigned to the attack carrier force will remain.. virtually unchanged. You may recall that 2 years ago; in a decision unrelated to the number. of carrier wings, we decided to increase the number of light attack aircraft per squadron, and the number of light attack squadrons per Forrestal-class carrier. 78-516-67-vol. 2-5 PAGENO="0066" 424 ECONOMIC EFFECT OF VIETNAM SPENDING In terms of aircraft assigned, these increases, together with the re- placement of Essex-class carriers with the much larger Forrsestal's and Enterprise's will just about offset the reduction to 12 equivalent air wings. In other words, each equivalent air wing will have about 25 percent more aircraft than the present average air wing~ Ships. The attack carrier force at the end of the current fiscal year will consist of one nuclear-powered carrier, the Enterprise, and seven Forrestal, two Midway, and five Essex class. In fiscal year 1969, the last of the conventionally powered attack carriers now under construc- tion, the John F. Kennedy, will join the fleet, followed in fiscal year 1972 by the second of the nuclear-powered carriers. As I stated last year, if we are to retain a force of 15 carriers, two more will have to be provided. One is scheduled for fiscal year 1969 and one in a later year; both will be nuclear powered. Fifty mfflion dollars is included in the fiscal year 1968 budget for long leadtime components for the fiscal year 1969 carrier. When these ships are delivered to the fleet the remaining Essex-class carriers wifi be retired from the OVA force, which would then consist of four nuclear powered, eight Forrestal- and three Midway-class carriers, for a total of 15. Carrier aircraft. No major change is contemplated in the compo- sition of the aircraft complement of the attack carrier forces from that projected a year ago. The decline in the number of fighter air- craft after fiscal year 1967 reflects two factors-the previously men- tioned reduction from 15 to 12 air wing equivalents beginning in fiscal year 1968 and the substitution of the more capable F-iiiB for other fighter aircraft on a less than one for one basis. In contract to the fighters the number of attack aircraft will have increased substantially by the time the transition to the 12 equivalent air wings is complete. At that point, the attack aircraft. force will consist of A-6's and the new A-7's. Inasmuch as the A-3 heavy aircraft are no longer required for the strategic mission, they are now being used as tankers to extend the range of "shorter~ legged" Navy aircraft. No significant changes have been made in the combat readiness training aircraft forces ASW and destroyer forces Three years ago in recognition of the unsatisfactOry stiite of our knowledge in antisubmarine warfare I requested the Navy to under- take systematic long-term studies of all of the related aspects of the problem~ From these studies has come a much better understanding of both the character and extent of the threat and the capabilities of the forces required to cope with it. As a result it now appears that some additional changes should be made in our ASW program. These involve the size of our ASW carrier forOes and the substitution of land-based patrol aircraft for the seaplanes. ASW carriers. We now have eight Essex-class ASW carriers, one of which, the Intrepid, is temporarily operating as an attack carrier in support of southeast Asia operations. Our studies show that com- pared with other ASW forces, the OVS ASW Group is a high-cost system in relation to its effectiveness; the annual operation cost of a OVS is about $32 million, including about $17.5. million for the aircraft complement PAGENO="0067" ECONOMIC EFFECT OF VIETNAM SPENDING 4~5' As the newer ASW systems-the SSN's, the DE's, the P-3 patrol air.. craft, etc.-~join the fleet in increasing numbers, the relative value of the ASW carriers wifi continue to decline. Accordingly, we now pro- pose to reduce the force somewhat when the conflict in Vietnam ends. The older SH-34 helicopters or CVS's have already been replaced by the new SH-3, and the CVA's are now also being provided some of these helicopters. The older S-2's will have been completely replaced by the newer S-2E's by the the end of fiscal year 1967. While full scale development and procurement of a replacement aircraft should not be undertaken until the role of the CVS in the overall ASW effort of the 1970's has been clarified and until the need for a more sophisticated capability has been clearly demonstrated, we have included funds for contract definition of a new aircraft (VSX) should further study warrant our going ahead with this program. In addition to its ASW aircraft each CVS is authorized a few A-4- in order to provide a limited intercept and air defense capability. Finally we wifi continue to maintain eight squadrons of carrier-based ASW search aircraft and four squadrons of ASW helicopters in the Naval Reserve Forces for the four CVS's we plan to retain in the Reserve fleet. Attack submarine forces. By the end of the current fiscal year the submarine force, excluding Polaris will number 105 submarines, 32 of which will be nuclear powered. We have continued to encounter diffi- culty in getting the SSN program on schedule; ~principally'because of: the submarine safety program and a shortage of skilled workers As a result we will have a few less SSN's in the force at end fiscal year 1967 than planned last year but we hope to make up most of this shortage next year. In the meantime, we propose to offset this slippage by delaying the phaseout of an equivalent number of conventionally powered submarines. As I pointed out last year, a force of about 64 "first class" SSN `s would be needed. Five SSN's were provided by the Congress in fiscal year 1967, leaving a total of six SSN's stifi to be funded. We now propose to start three more SSN's in fiscal year 1968 and three in fiscal year 1969. This program will give us a total of 64 first class SSN's, plus four other SSN's which could be used together with the conventionally powered submarmes for other ASW missions If our contmuing study of the ASW problem should mdicate that additional SSN's are required, ~ e can add to this program next year Originally, we had intended to modernize' 12 conventionally powered submarines (Korean war vintage of later); including pro- vision of improved sonar. Last year, when it became apparent that these sonars were not going to be available in time, we decided to go ahead with the modernization of the first five submarines without the. sonar improvements. It now' appears that the new sonar components will still not be available for installation in the remaining seven submarines in fiscal year 1968. Moreover, other modernization costs' have risen to the point where we now believe that it is no longer practical to proceed with the program Accordingly, the plan tQ modernize these seven submarines in fiscal year 1968 has been dropped In the submarine direct* support categOry;'~we' propose a phased replacement program for our present `submarine rescue ships `(ASR's). PAGENO="0068" 426 EcowoM~c EFFECT OF VIETNAM SPENDING Therefore we tentatively propose to construct five new ASR's over the. next few years.. These new ASH's will have catamaran (i.e., twin) hulls and provide much greater deck space, including a heli- copter platform,. and better sea-keeping qualities than the present ships. They will be capable of operating two rescue submersibles and supporting. divers at greater depths for prolonge4 periods. We are requesting $17.7 million for the ASH in fiscal year 1968. In addition to the 10 ASH's, which we plan to maintain throughout the period, the submarine direct support force includes six submarine tenders (AS) and .nine auxiliary submarines (AGSS). Two new submarine tenders are tentatively scheduled to be constructed in future years. ASW escorts. The requirement for ASW escorts can be met by several different types of ships most of which are also capable of per- forming other missions such as patrol, fire support and antiair warfare. In planning for our future ASW escort forces, all ships with an ASW capability are taken into account. However, only the destroyer types without a SAM capability are included under the ASW category; the SAM ships will be discussed later. Two years ago we proposed a phased replacement program for the destroyer escort force. In accord with that plan, $298 million has been included in the fiscal year 1968 request for 10 more of these ships. With respect to the years beyond fiscal year 1968, it now appears that substantial construction and operating economies could be achieved with a newly designed ship (tentatively designated the DX) employing the "total package" procurement concept and a large i~aultiyear buy. It may also be possible to use the same approach and the same or a similar design for a new class of guided missile ships (tentatively designated the DXG.). Accordingly, we propose to initiate a new program which would provide for: Standardized design and serial production of a sizable quantity of identical ships in order to minimize total procurement cost. Incentive to .the contractor .to design a highly automated, ship requiring minimum maiming in order to reduce operating costs. Standardization in.. order to. reduce logistic support costs. Possible standardization/integration of . the DX. and DXG in order to maximize further advantages of standardization and serial construction (e.g., both ships might have the same hull and . differ only in their weapon systems, or perhaps their hulls could have common bow and stern sections with separate mid- sections for each type). Possible use of modular design concepts so that major com- ponents (e.g., specific weapon systems) could be installed and removed em bloc, facilitating both repair and future modernization. We. have included $30 million in the fiscal year. 1968 budget to initiate concept iormulation and contract defimtion of the DX/DXG t the conclusion of the~contraçt definition phase the entire program will be reevaluated in. the light of the detailed, designs and cost esti- mates which result; . ,f ., .:`~. . ,` We are also continuing to improve the SQS-23 so~iars on most . of the earlier. DE's and~ on a `large number of ..DP's, guided. missile destroyers (DDG's), and cruisers: (OG/OGN's).. .~ About $18 million was programed for. this purpose. in fiscal year.~l.966,. about $1 1 million PAGENO="0069" ECONOMIC EFFECT OF VIETNA SPENDING 427 in fiscal'year 1967, and we are requesting another $24 million in fiscal year 1968. As I described a year ago, we are taking steps to improve the ASW capabilities of 13 remaining D-931 Class destroyers, all of which are less than 12 years old. We are providing them with ASROC, im-. proved communications, a new variable depth sonar (YDS), improved EOM capabilities, the improvement to the SQS-23 sonar, a modern ASW combat information center, etc.-at a cost of about $14 mfflion each. Since the YDS equipment will not be available this year, the ships are being rewired now to accept it later when it does become available. With these improvements, the 13 remaining `DD's should offer comparable, and in some ways even better, ASW performance than the new DE's we are building, Originally, having funded one in fiscal year 1964, we planned on five of these DD-931 conversions in fiscal year 1966 and five this year, with the last three scheduled for fiscal year 1968. However, because of equipment procurement problems, we have rescheduled the pro.. gram. We have one in conversion now and plan to start three con- versions this year, seven more in fiscal year 1968, and the last three in fiscal year 1969. Patrol aircraft. While we still plan to maintain, a total of 30 squadrons of ASW patrol aircraft, we now propose to phase out the three remaining squadrons of seaplanes (SP-5) and retain, instead, three squadrons of SP-2 land-based patrol aircraft. One squadron will be converted this year and the other two in fiscal year 1968. This change will permit us to decommission the three remammg seaplane support ships (AV's) and thereby save $17 mfflion per year in operating and indirect costs, with no reduction in our, overall ASW or survefflance capability. Except for these three squadrons, all the SP-2's will be phased out of the active ASW patrol forces over the next few years and replaced with 27 squadrons of the new P-3's. (Ten squadrons of SF-2's will be retained in the Navy Reserve.) Beginning in fiscal year 1968, all new P-3's will be procured with the A-NEW avionics system and when the force buildup is completed we will have nine squadrons so equipped. Multipurpose SA1k( ships. The multipurpose surface-to-air missile (SAM) ships provide an important part of the fleet's antiair warfare (AAW) capability. As I described last year, our current program ob- jective for the SAM force is 79 ships. By the end of fiscal year 1967 the SAM ship force will consist of 70 ships, three of them nuclear powered. Last year Congress added funds to our original budget request for construction of a nuclear-powered frigate. As you know, we did not recommend the inclusion of such a ship in our fiscal year 1967 program. However, we have decided to proceed with construction this year. I am also again recommending the construction of two guided- missile destroyers (DDG's). . , , The new DDG's and DLGN would have significantly improved AAW and ASW capabilities compared with present SAM ships, particularly in a hostile EOM environment. They will employ the new Standard missile and be equipped with the latest ASW equipment, the Navy tactical data system, and the improved.: SQS-26 sonar. Provisions would, of course, be made to incorporate new systems and PAGENO="0070" 428 ECONOMIC EFFECT. OF VIETNAM SPENDING technologies as they become available, and space will be provided for this. Some $167 million is requested for the two DDG's in fiscalyear 1968. In addition, we are continuing the SAM improvement program, under which the Standard missile is now being procured to replace both Tartar and Terrier. Last year I mentioned that we were studying the feasibility of pro- viding a "close-in" or "point" air defense capability for other types of combat ships. We now propose to procure and install a basic point defense surface missile system (PDSMS) on ships which are not likely to encounter the more sophisticated forms of air attack and which do not generally operate in the company of regular SAM ships-e.g., amphibious assault ships and destroyer types operating independently near hostile land areas. This system makes use of existing hardware (e.g., Sparrow III missiles) and can be installed on existing gun mount foundations. About $14 million has been included in fiscal year 1968 budget for the, first procurement. Other combatant ships At end fiscal year. 1967, there will be 23 ships in the small patrol category. These ships are used for coastal surveifiance and patrol boats (PTF's) costing. $17 mifiion have been added to the fiscal year 1967 program. The primary mission of fire support ships, also included in this cate- gory, is to provide a heavy concentration of ship-to-shore fire during amphibious assaults. `The Navy is presently studying the feasibility of a new type of landing force support ship' which would combine the fire support capabthties of the cruiser's heavy guns and the rocket ship's saturation fire Amphibious assault ships Last' year I. informed the committee that while our objectives of ~chieving a modernized (20-knot). amphibious lift for one and a half Marine ~xpeditionary Forces (MEF, of division/wing teams). .and sufficient older ships to provide a slower lift for another half of a MEF remained the samO, further study of the competition of the' fo~ce had convinced us that some modification of the future construction pro- gram was desirable. I also noted that the Navy, was investigating the possibility of designing a multipurpose ship `~~hic.h.could combine the `features of several `different types of `amphibious ~hips and that one of the reasons we had rescheduled the program was to provide time to develop a'design for thisnew ship. Unfortunately, experience has shown: that our current LPD's are too small to be.truly' effective as' a multipurpose amphibious ship in the assault role and' they cannot by themselves serve as a replacement for a variety of specialized ships. For `this purpose we need a bigger assault ship capable of landing,, either by air or by, sea, a much larger and more balancOd land force than is now possible with any existmg amphibious vessel, `and this was the type of `ship I mentioned last `year. ` Our'further study of this problem indicates that the development of such `a ship is not only feasible `but highly desirable., On the basis of the Navy's preliminary design `work, this amphibious assault ship, PAGENO="0071" ECONOMIC EFFEICT OF VIETNAM SPENDING 429 now designated the LHA, would be quite large (about 40,000 tons, compared with less than 18,000 tons for the LPD) and would have both a boat well and a helicopter deck. In view of these advantages, we now propose to substitute LilA's for a variety of specialized amphibious ships which we had previously programed. The first of these LilA's has been included in the fiscal year 1967 program. As in the case of the 0-5- and the fast deploy- ment logistic ships, we plan to use the two-step contract definition, total package procurement technique for the LilA's and $18 mfflion is included in the fiscal year 1968 budget. for contract definition in addition to funds for the construction of the first ship. One of the goals we hope to achieve in this program is a considerable reduction in operating costs. To this end the competing contractors will be encouraged to design this ship so that it can be operated by significantly fewer personnel than previOus ships of this size. Mine countermeasure force At the end of this fiscal year we will have a mine countermeasure force of 88 ships, composed of 64 ocean mmesweepers (MSO's), 18 coastal mmesweepers (MSC's), three mine countermeasures support ships (MCS's), and three other support ships In order to modernize this force and improve its mine countermeas- ure capabilities, we propose to undertake a major rehabilitation program for all the existing MSO's We propose to start the reha- bilitation of nine MSO's in fiscal year 1968, for which we are requesting $33 million Two years ago, we started a construction program for new MSO's. Four MSO's were funded in fiscal year 1966, five more in fiscal year 1967, and we are requesting $61 million infiscal year 1968 for the last seven. Last year we initiated a program to provide some of the Marine Corps assault helicopters (011-53's) with a secondary mine-sweeping capability. Modification of some of these helicopters to accept the sweep equipment was begun last year, and we plan to start more m fiscal year 1968. This program will give our assault forces a signifi- cantly augmented minesweeping capability against less. sophisticated mines at a total cost of only about $12 million; Lo9istical, operational support, and direct support ships In order to take advantage of modern resupply methods and to complement the higher speeds of our latest ships, we have planned a long range construction program to rebuild the underway replenish- ment fleet The fiscal year 1968 program includes two AE's (am- munition ships) and one AOE (fast combat support ship) at an esti- mated cost of $137 mfflion. Marine Corps forces The major Marine Corps ground and air units shown on the classified table provided to the committee are essentially the same as those we projected last year. The temporary units added to support the southeast Asia deployments include a fourth active division with its associated nine infantry, one tank, one amphibian tractor, and the equivalent of five artillery battalions, four Hawk air defense batteries, and twO light observation. and two medium transport helicopter PAGENO="0072" 430 ECONOMIC EFFECT OF VIETNAM SPENDING squadrons. The permanent force remains at four divisions/aircraft wings (three active and one reserve). The Marine Corps fighter forces will be maintained at about the current level. The tactical air control (TAO) force, which is used to locate enemy targets and then direct the attack aircraft to them, is programed to remain at the present level. In the transport helicopter category, we now plan to maintain the currently: augmented active force level through fiscal year~ 1969, while simultaneously building our Reserve structure. When the Vietnam conflict ends the Marine Corps transport helicopter force will return to the planned permanent level. In the light helicopter and observation category the total number of aircraft will be increased significantly in fiscal year 1968 through the temporary retention of :O_1~s and TJII-l's previously scheduled to phase out after the new OV-10's are delivered. Last year we undertook a major program to increase the fixed- wing combat readmess training capabilities of the Marine Corps This program will be continued. We also undertook at that time, on a temporary basis, a program of combat readiness training for Marine Corps helicopter pilots. We nOw plan to make the combat crew readiness training program permanent and to expand the force level Later, as the OV-10 enters the operatmg force, we plan to add some of these aircraft to the combat readiuess~ training force. The numbers of tanker/transport aircraft and of support aircraft are essentially unchanged from those presented last year. Navy and Marine Corps Reserve forces The Navy will contiiiuito maintain a total of about 50 ships in the Naval Reserve. As more modern ships become available from the active forces, older ships will be phased out. The Navy also maintains a large number of ships in the Reserve (or "mothball") Fleet, in either category B (Bravo) or category C (Charlie) according to their physical condition and readiness status. As I noted last year, because of their relatively poor physical condi- tion many of the Charlie ships would be usable only after extensive overhaul and modernization. Accordingly the Navy is continuously surveying these ships in order to identify those which have no further value. These ships are then scrapped or otherwise disposed of. As a result, the size of the Reserve Fleet has been progressively reduce± The Naval and Marine Corps Reserve air units are programed for about 740 aircraft at the end of this fiscal year, and this number will be increased over the next few years. Navy-Marine Corps aircraft procurement The Navy and Marine Corps aircraft procurement program is shown on the classified table provided to the committee. In order to meet the requirements of the southeast Asia conffict and continue the planned modernization of the force, we propose to increase the fiscal year 1967 program from the original 620 aircraft to 1,047, and to buy another 680 aircraftin fiscal year 1968 instead of the 604 planned a year ago. With regard to the modernization of the attack carrier fighter forces, we stifi plan to initiate F-11IB procurement in fiscal year 1968. To provide for combat attrition beyond fiscal year 1967 and com- PAGENO="0073" ECONOMIC EFFECT OF VIETNAM SPENDING 431 plete the equipping of the Marine Corps fighter squadrons, we have increased the fiscal year 1967-68 F-4 procurement programs sub-. stantially over the number previously planned. This will permit the replacement of the last Marine Corps F-8 squadron in fiscal year 1968. Since we plan to retain a number of F-8 aircraft in both the Active Fleet (for the Essex-class OVA's) and the Reserve Forces for some time beyond fiscal year 1968, we have decided to rework a substantial number of the latest models, providing them with new wings and other life-extension modifications. The program was initiated last spring, using about $17 million of fiscal year 1966 funds; $70 million is included in the revised fiscal year 1967 budget; another $70 mfflion is requested for fiscal year 1968. In the attack category we now plan to increase substantially the fiscal year 1967-68 procurement program envisioned a year ago. We have added A-4F's and A-6A's to the fiscal year 1967 program, and A-6A's to the fiscal year 1968 program. The A-7 program for fiscal year 1967-68 is about the same as presented a year ago. Last year we had planned on buying the first 100 OV-10 aircraft for the Marine Corps in fiecal year 1967. However, the need for certain design changes has delayed the award of the contract and has caused us to reduce the fiscal year 1967 quantity. Additional OV-10's will be procured in fiscal year 1968. For the ASW mission, another increment of the P-3's with A-NEW will be procured in fiscal year 1968. To provide for the higher tempo of operations and future combat attrition in Vietnam, we are increasing our procurement of helicopters in fiscal year 1967, and buying more in fiscal year 1968. In the fleet tactical and mission support category, we have added some 0-130 radio relay aircraft to the fiscal year 1967 program and canceled the previously planned C-2A procurement. The increase in planned pilot production from 2,200 to 2,525 per year will require the procurement of additional training aircraft. Accordingly, we have canceled the previously planned procurement of 72 T-28C's in fiscal year 1966 and 58' in fiscal year 1967, and instead we now propose to procure 36 T-2B's and 94 TA-4's in fiscal year 1967, and 90 T-37B's in fiscal year 1968. We have also included in the fiscal year 1967 program 9 TC-4C's (a version of the Grumman Gulfstream) for navigator bombardier training. This wifi reduce the requirement for A-6A's now being used for this purpose. For helicopter training we will be able to utilize Ull-1E's as they are released by new OV-10's phasing into the force, thus permitting the cancellation of the 20 TH-iE planned for procurement in fiscal year 1967. In addition, we plan to buy 40 new instrumented light turbine helicopters (LTH's) in fiscal year 1968 to provide the increased training capacity mentioned earlier. Other Navy procv~rement. In order to build toward our logistics objectives and to provide for projected combat consumption in southeast Asia, we are requesting $1,389 mfflion in fiscal year 1967 (of which $164 mfflion is included in the supplemental request) for Navy missiles, ordnance, and am- munition; and $1,723 million more is requested in the fiscal year 1968 budget for this purpose. PAGENO="0074" 432. ECoNOMIC EFFECT OF VIETNAM SPENDING Large quantities of alr-tO-gTound munitions will continue to be needed in. fiscal year 1967-68. The largest single item in this cate- gory is the MK-82 500-pound bomb. Other important items in the fiscal year 1968 program are the 2.75-inch rockets, the 5-inch Zuni rockets, the 250-pound bomb, Walleye TV-guided glide bombs, and air-to-surface antiradiation missiles. For the, surface-to-air missile . ships~ which provide the fleet's air defense, the Navywifi procure only the new Standard missile beginning in fiscal year 1968, although deliveries of Terrier and Tartar missiles will continue for some time. We are requesting $5 million in fiscal year 1968 for both the medium range and the extended-range Standard missiles. Funds for the procurement of the final quantity of Tabs missiles are included in the fiscal year 1968 budget. With respect to air-to-air missiles we are buying both' the Sidewinder and the Sparrow iii in fiscal year 1968. We also propose to initiate pilot line' production of the Phoenix missile in fiscal year 1968. In the ASW category, we plan ~to continue the procurement of Asroc and Subroc in fiscal year 1968. Last year I informed the committee that the DASH ASW drone helicopter was encountering higher than expected peacetime attrition at lower than expected performance, and that we would review the entire program. As a result of this review,~ we have now decided to reduce the planned deployment of this system to about one-third. This reduction in deployment will permit cancellation of the previously planned fiscal year 1967 procurement. Improved ASW torpedoes continue to be a major prerequisite to a more effective. `ASW force, and this category of weapons has con- tinued to receive our close attention. In an attempt to expand the production base for the MK-46 and obt'ain the cost benefits of com-, petitive procurement, we have opened a second production source. Although we have achieved the cost benefits (the torpedoes bought in fiscal year 1966, for example, cost $124.3 million compared with the budget estimate of $179 million), it now seems clear that we will not achieve the production levels in fiscal year 1967 originally ex- pected; Accordingly, the fiscal year 1968 procurement is adjusted to take this slippage into account. Funds `are also included in the fiscal year 1968 `budget' for the AN/SSQ-41' `(Julie, Jezebel), an improved sonobuoy capable of em- ployment in either an active (Julie) or passive (Jezebel) mode. `.Finally,' a total of about $125 million is included in the fiscal year 1968 Budget for 8-inch, 6-inch, and 5-inch naval gun. ammunition to meet the consumption. requirements of southeast Asia . and. continue the buildup of our stocks Marine Corps procurement The fiscal year 1967 Marine Corps procurement now totals $541 million, of which $253 million is included in': the fiscal . year 1967 supplemental. For fiscal year' 1968, a total of `$7.15 million is requested.' ` Included in the fiscal year `1967 total. is:$231 million for munitions., and ordnance ($114 million in the supplemental); $463 million'is includded for this purpose in fiscal year 1968. .`The fiscal yCar .1967 `supplemental provides about $70 million for: the procurement of support vehicles such as 3d-, ~-, 2~-, and 5-ton PAGENO="0075" ECONOMIC EFFECT OF VIETNAM SPENDING 433, trucks, and $39 million more is included for support vehicles in fisc~iI year 1968. For tracked vehicles, $4 mfflion is included in the fiscal year 1967 supplemental and $5 million in the fiscal year 1968 budget.. In the communications and electronics category, which includes~ such major items as radars and the Marine Corps tactical data systeni (MTDS), we have increased our fiscal year 1967 procurement to $107 million, $29 million of which is included in the supplemental request. Another $145 million is included for communications and electronic equipment in fiscal year 1968. AIR FORCE GENERAL PURPOSE FORCES The Air Force General Purpose Forces shown on the classified table provided to the committee are essentially the same as those presented a year ago, with the exception of certain changes related to our operation in Vietnam. F'tghlei and attacL Our long-range force objective in this category is the same as last year, namely, 24 wings of F-4's, F-i ii's, and A-7's. In the near term, however, we now propose to make several changes in the force structure and procurement programs. For the most part, these adjustments are related to operations in southeast Asia, in particular, the changes in our budget planning assumptions and the variations from the projected combat attrition rates reflected in our force plan.. fling last year. And, in a few cases, the proposed changes are the result of adjustments ~ production schedules. rrhe B-57's that we are using in South Vietnam will decline in number through fiscal year i968, after which they .are scheduled to: phase out of active service completely. With respect to the F-iOO's, we had originally planned to phase down the.active force to fewer aircraft by end fiscal year i967. How- ever, attrition has been lower than forecast and we will have more squadrons in the force at end fiscal year 1967 than we had previously planned. Last year we had planned to hold a large number of F-i02's in the force through fiscal year 1967 and then phase down considerably in. fiscal year 1968. However, in order to free F-4's for deployment to. Vietnam, F-i02's scheduled to phase out of the continental air defense forces were transferred to the tactical forces in fiscal year i966. Last year we had planned to retain the two F-i04 squadrons. through fiscal year i967. However, we ~ plan to have only, one squadron at end of fiscal year 1967 and phase this squadron out by the end of fiscal year i968. . . .` The number of F-i05's in .the active forèe is projected to decline, and ultimately these a.ir~raft will be phased intO the Air National Guard'. . . . . .. . , . .. ..;` The F-4's are experiencing sornewhat.lower: attrition than forecast last January and this will help the fOrce to build up faster than planned. The F-ui activation schedule"i~ the same as planned last year,' except, for a small slippage in a few of the later squadrons. Last year, in order to help diversify the Air Force tactical fighter force, we proposed the procurement of the A-7, a relatively inexpen- sive subsonic aircraft. with' good range, large ordnance-carrying capa- PAGENO="0076" 434 ECONOMIC EFFECT OF VIETNAM SPENDING bility, long loiter time, and good close ground support features. Our original deployment schedule called for activation of the first squadron in fiscal year 1968 with more to be introduced later. However, this schedule was predicated on an early decision to proceed with the deployment of an afterburner for the Air Force A-7. Two considerations caused us first to delay and then change this decision. First, it appeared desirable, if possible, to find a new engine production source rather than add to the a]ready crowded schedule of one of our principal engine manufacturers. Second, if a different, more powerful engine could be used, the load-carrying capacity of the A-7 would not have to be penalized by several hundred pounds of dead weight which the afterburner would involve. Such a engine, the Rolls Royce's "Spey," proved to be obtainable from Allison, who will produce it in the United States under license from the British firm. The net result of this decision will be a more capable aircraft but a delayed delivery schedule for the first aircraft. However, a new, faster production schedule will stifi permit the achievement of the projected force by the originally planned date. Tactical reconnaissance The present long-range objective for the tactical reconnaissance force remains the same as a year ago. Because of anticipated southeast Asia attrition and higher training requirements, the RF-iO1 force had been expected to decline by the end of the current year and then level off. In order to maintain that level, we will have to modify additional F-1O1's to the RF-iOi configuration. With respect to the RF-4's, the force will be built up to its full planned strength, although projected attrition in southeast Asia will cause a slight delay in the scheduled buildup. Ultimately, we will probably want to introduce a more advanced capability into the tactical reconnaissance force. To this end we initiated in fiscal year 1966 a development project which would provide a reconnaissance version of the F-i ii. This development provides for the necessary equipment to be installed in the attack version of the F-ill with minimum modification to the aircraft. Through fiscal year 1967, $25 million has been devoted to this effort and $2 million more is included in the fiscal year 1968 requested. An addi- tional substantial sum is included in our request for the initial procure- ment. Tactical electronic `warfare st~pport With the increasing importance of electronic warfare, underscored by our experience in southeast Asia, we have decided to establish a separate tactical electronic warfare support (TEWS) force in the Air Force General Purpose Forces. This force will be composed of EB-66's converted from the RB/EB-66 aircraft previously shown in the reconnaissance category, and EO-47's (formerly RC-47's). In order to provide sufficient aircraft for training, mamtenance and advanced attrition, we plan to convert the RB-66's now in the force and WB-66's now in storage to the EB-66 configuration; this will involve some modification of the engines and provision of new EOM gear. A substantial sum is requested in the fiscal year 1967 supple- mental for these modifications. Later, as advanced electronic equip- PAGENO="0077" ECONOMIC EFFECT OF VIETNAM SPENDING 435 ment becomes available (e.g., from the Navy EA-6B program), it may be retrofitted into these aircraft. Special air warfare forces Since its creation in 1962, the Special Air Warfare (SAW) Forces have grown both in size and in the range of missions performed. In order to meet the requirement of the Vietnam conflict, we have increased the size of the SAW Force. This increase includes additional 0-2's, AC-47's, 0-123's, 0-47's, and A-37's, partially Offset by the reduction of A-i's. Other aircraft The tactical air control system (TAOS) provides the command and control capability for the tactical air commander in field operations. Currently, the Air Force is using modified 0-1 aircraft transferred from the Army for the airborne forward air controller (AFAC) mission in southeast Asia. Last year, we had planned to convert this force completely to OV-10's by the end of fiscal year 1968. However, during the past year the requirement for AFAC aircraft has virtually doubled and, as a result, the authorized TAOS force has been increased. In addition, the OV-l0 program has slipped and we do not now expect deliveries of that aircraft to the Air Force to be made as fast as originally planned. In order to build up the force as soon as possible, we have already taken action to procure an off-the-shelf Cessna aircraft designated the 0-2. With respect to the longer term, it is too early to make a final determination of the size and composition of the TACS force, a matter we now have under study. Combat readiness training As described a year ago, we want to increase the size of the advanced flying training base very significantly over what it has been in recent years. Predicated on the assumption that the southeast Asia conflict would end by June 30, 1967, this expansion was to have been sub- stantially achieved by the end of fiscal year 1968. Now, however, under our revised budget planning assumption, completion of the buildup of the training base in terms of aircraft would be delayed until the following year. Tactical missiles As I indicated last year, the remaining Mace B missiles (one squad- ron) deployed in Germany will be phased out as Pershing takes over the quick reaction alert (QRA) - ~-. The remaining Mace B's deployed in Okinawa, however, are tentatively scheduled to remain in the active force through the program period. Air National Guard A number of changes have been made in the planned equipage of Air National Guard squadrons, most of them related to changes in the active structure. The Guard will retain more F-84's and F-86's longer in order to offset delays in the transfer of F-i 00's and F-i 05's from the Active Forces. The Guard will have 547 tactical fighters at the end of fiscal year 1967 and this number is scheduled to increase modestly in future years. Aircraft procurement The Air Force wifi procure a total of 732 tactical, air control, and reconnaissance aircraft for the General Purpose Forces in fiscal year PAGENO="0078" 436 ECONOMIC EFFECT OF VIETNAM SPENDING 1967, at a total cost of $1,847 mfflion.' (Of the total, 102 aircraft costing $457 mfflion are in the fiscal year 1967 supplemental request.) For fiscal year 1968, 874 aircraft costing $2,076 million are requested for these forces. Both the fiscal year 1967 and fiscal year 1968 pro- grams provide for combat attrition through the normal production lead time. Accordingly, if the Vietnam conffict should end before that~ date, both the active and reserve Air Force structures would be modernized faster than now projected. Last year, we had scheduled procurement of a sizable number of F-4 aircraft for fiscal year 1967 and a final procurement in fiscal year 1968. We now propose to increase the fiscal year 1967 program and buy an even larger quantity in fiscal year 1968. With respect to the F-il 1A, we now plan to buy somewhat fewer aircraft in fiscal year 1968 than we planned last year so as to be able to include certain improvements, which are now being made, in more oi the aircraft. The aircraft deleted from the fiscal year 1968 program will be added to the end of the line. The Air Force's A-7 program has, as I indicated earlier, slipped substantially from that projected a year ago. The fiscal year 1966 buy has been deleted and the fiscal year 1967 buy reduced. For fiscal year 1968 we plan to buy a large number of A-7's, and additional offsetting upward adjustments in procurement in subsequent years should permit us to, achieve the planned force level by the originally scheduled date. Last year we had tentatively scheduled procurement of 157 OV-iO's for the TACS force. However, the TACS requirement has grown sharply during the past year, leading to the decision to buy the 0-2 and this, coupled with a delay in projected OV-i0 deliveries and an in- crease in the cost of that aircraft, has caused us to revise our planned procurement program. Although we still plan to purchase 157 OV-iO's for the TAOS mission, the fiscal year 1967 buy has been reduced and the difference added to the fiscal year 1968 program. Further procurement of the OV-iO for the Air Force will depend upon a future decision to use it to help modernize the Special Air Warfare Forces. As previously mentioned, action has already been initiated to pro- cure 176 0-2A aircraft in fiscal year 1967 for the TAOS force and SAW Force's program to provide for combat attrition replacement. More A-37 aircraft have been added to the fiscal year 1967 program and still more will be procured in fiscal year 1968. We also plan to buy more F-5's, principally to help modernize the Vietnamese Air Force. Finally, to offset projected attrition of reconnaissance aircraft in southeast Asia, the fiscal year 1968 quantity of RF-4 aircraft has been increased `and more will be procured later for advance peacetime attrition. And, as~ previously mentioned, to maintain the desired level of RF-ioi squadrons,' we will convert a number of F-101's to the reconnaissance configuration in fiscal year 1968. ` Other Air Force procurement The Air Force's aircraft nonnuclear ordnance program for fiscal year 1967 totals $1,739 million, of which $438 million is included in the supplemental request. The proposed fiscal year 1968 program totals $1,629 million. : ` PAGENO="0079" ECONOMIC EFFECT OF 7VIEPNAM ~PENDING 437 "Iron bombs," which are being cOnsumed at high rates in southeast Asia, will continue to dominate the fiscal year 1967-68 procurement programs For these 2 years, $1,400 million will be spent on these bombs, including 250-pound, 500-pound, 750-pound, and 2,000-pound bombs, $31 million is for napalm bombs and $463 million is for 2 75-. inch rockets and 20 mm ammunition For certam special purpose ordnance, $888 million is requested Also included in the Air Force's fiscal year 1967-68 program is $241 million for TV-guided Walleye's, antiradiation missiles, and Sparrow air-to-air missiles Theater a'trbase vulnerability The theater airbase vulnerability progfam is designed to minimize the damage an enemy could do~ to our overseas airfields, and the aircraft on them, in a nonnuclear attack. This year's request for $26 million will provide various vulnerabil- ity reductions measures (shelters, paving for dispersal sites, POL facil- ity hardening, etc.) at a number of European. and Pacific bases. The total program presently envisioned would ultimately provide shelter for a significant number of aircraft and other high-value aviation equipment, together with the full range of other vulnerability meas- ures-at a total cost of about $178 million. I urge the Congress to provide the $26 million included in our fiscal year 1968. request so that we may get started promptly on this critical program. TACTICAL EXERCISES Under normal peacetime conditions, large scale strategic mobility and tactical exercises contribute to the maintenance of high combat readiness, provide highly visible demonstrations of our capabilities, help test new operational concepts and weapon systems, and permit TJ.S. and allied forces to perfect coordination procedures which they would have to use in wartime. However, with the expansion of com- bat operations in southeast Asia during the past 18 months, the impor- tance of simulating such operations has dropped sharply and in fiscal year 1966, only about $9 million was used for the larger exercises "directed" or "coordinated" by the Joint Chiefs of Staff. Therefore, on the assumption that the Vietnam conflict will continue through fiscal year 1968, we have budgeted only $27 million for this purpose, far below the $100,million plus level of pre-Vietnam years.. FINANCIAL SUMMARY . The General Purpose Forces program outlined abo v C will `~equire total obligational . authority of $35.4 billion in fiscal year 1968. A comparison with prior years is shown below: . H [In billions of dollarsj 1968 propcsed 344 1962 actual Total obh~ational authority Fiscal year- 18.0 PAGENO="0080" 438 ECONOMIC EFFE~YP OF VIETNAM SPENDIN(~ AIRLn~T AND SEALIFT FORCES Included in this program are the Military Airlift Command trans- ports,. the Air Force's troop carrier aircraft assigned to the Tactical Air Command and the unified commands, the transport and troop carrier aircraft in the Air Force's reserve components, and the troop ships, cargo ships, tankers and "forward mobile depot" ships operated by the Military Sea: Transportation Service. Although not specifically included in the airlift/sealift program, those elements of other major programs whose missions and capabilities are closely related to the general requirement for lift have also been considered in determining what forces should be provided here. : These other elements include such specialized transportation forces as the carrier-on-board delivery aircraft of the Navy and the cargo aircraft of the Marine Corps. Within the context of this specific program, the lift mission consists of two main tasks: the strategió requirement for transport support of military operations in overseas areas and the tactical requirement for intratheater and assault airlift. The strategic task can be further divided into the requirement for the initial rapid military response to distant crises and the longer term requirement for continuing support and resupply of overseas military operations. This distinction is very important because it helps determine what kind of equipment is needed, when it must be available, how it should be organized and deployed, and who should control it. As you know, during the past several years, our principal concern in the airlift/sealift area has been to build up a quick-reaction capability adequate to meet our global security commitments. More recently, our experience in supporting a major military deployment in southeast Asia has focused our atten- tion on the problems of providing lift support over the longer term, and especially under conditions when it is not feasible to requisition commercial shipping. STRATEGIC MOVEMENT All of our studies show that the length and cost of a war, as well as the size of the force ultimately required to terminate it favorably, are importantly influenced by how fast we can bring the full weight of our military power to bear on the situation. In previous posture statements I have discussed at some length the range of strategies available to us for meeting the requirement for such prompt and effective response to distant military contingencies. Basically, these choices range from reliance on large ready forces de- ployed overseas in advance of need, to reliance on a central reserve of men and equipment in the United States to be deployed by airlift and sealift as required. A strategy which combines features of both these extremes might provide for prepositionin~ equipment and sup- plies overseas, either on land or aboard ship, with the men to be air- lifted in as needed. Although each of these approaches has its owr~ advantages and disadvantages with respect to operational flexibility, foreign exchange costs, total manpower and equipment requirements, etc., the strategy of a mobile central reserve supported by an ade- quate lift capability and balanced prepositioning has long been accepted as the preferred alternative for meeting the rapid response objective. PAGENO="0081" ECONOMIC EFFECT OF VIETNAM SPENDING 439 During the past several years, the Defense Department has been embarked on a major effort to achieve the rapid deployment capa-. bility needed to support such a strategy. Now, we are buying a new transport, the C-5A, which will enable us to make another major improvement, both qualitative and quantitative, in our strategic air- lift capacity. Thus, when our presently planned six squadrons of C-5A's are all in the force in fiscal year 1972, our airlift capacity will be more than 10 times what it was in fiscal year 1961. Over the years, forward prepositioning of military materiel, espe- cially heavy and bulky equipment, has grown in importance, partly because of the great increase in our ability to airlift forces and partly because of the emergency of new prepositioning concepts and equip- ment. The most important of these concepts has been the "forward floating depot" (FFD), in which balanced stocks of equipment and supplies are maintained on ships stationed overseas within a few days steaming distance of potential trouble spots, and thus very quickly available to "marry up" with airlifted forces from the central reserve. As a first generation "floating depot" system we planned to use old Victory-class ships, specially modified for this purpose. Three of these ships were actually deployed in fiscal year 1963 and we had planned to add more this year. However, the requirements of the conflict in southeast Asia have now caused us to defer this deploy- ment for the time being. Our future plans call for this first generation system to be replaced by a new class of ships, the FDL's, which are being specifically de- signed to support a rapid deployment strategy. Unlike the relatively slow (16 knots) and small payload (2,265 short tons) Victory ships, the FDL's will be fast, large payload (8-10,000 short tons) ships capable of rapidly delivering cargo either over the beach, using embarked lighters and helicopters, or at established ports. Because of these improvements, the FDL's will provide a wider range of operational flexibility than the Victory's. While we would probably always want to have some of them fully loaded and deployed forward, some of them could also be held partially loaded with ammunition and supplies but in a ready status in either U.S. or overseas ports where vehicles, helicopters, etc., tailored to the mission, could be placed on board quickly as the situation requires. This mode of operation which is feasible only because of the speed and efficiency of the FDL's would allow us to meet the desired rapid deployment schedules without immobilizing indefinitely large amounts of high cost equipment some of which also requires substantial continuing maintenance. In either mode of operation, however, the FDL's would have to be committed to the rapid deployment mission at all times and would not be avail- able for regular point-to-point service. Thus while they will make an enormous contribution to our rapid deployment capability and will also be highly efficient carriers for resupply after the initial deploy- ment phase, these FDL's in themselves do not provide the answer to the overall sealift problem. Indeed, all of our study and experience shows that the require.. ment for sealift continues to grow after the initial buildup phase, as more forces are deployed and stocks of consumables have to be re- placed. To meet this larger and longer term need, we must rely in large part on merchant shipping. Based on the transportation re- 78-516-----67-vol. 2-6 PAGENO="0082" 440 ECONOMIC EFFECT OF VIETNAM SPENDING quirements implicit in our contingency planning for a number of the most likely limited war situations, it appears that the equivalent of up to 460 general cargo ships (averaging 15,000 MT capacity, 15.. knot speed) might be needed in a future emergency, over and above those available in our own Airlift/Sealift Forces. Simply in terms of size, the U.S. Flag Merchant Fleet (Active and Reserve) is adequate for such contingencies now, and should continue to be so in the future. The real problem, underscored by our recent experience in supporting our southeast Asia deployments, concerns the availability of these U.S. flag merchant ships to the Defense Department on a timely basis. For the past year and a half, we have been engaged in a massive sealift of men and supplies to Vietnam. In the first quarter of fiscal year 1967, the Military Sea Transportation Service (MSTS) exceeded its fiscal year 1965 average quarterly shipping rate by 165 percent. However, only about a third of the increase was obtained from the U.S. liner fleet (both subsidized and unsubsidized). These, of course, were the ship operators who had been given preference in carrying peacetime Defense cargoes, who up until recently (when MSTS introduced competitive bidding) had collectively negotiated freight rates with MSTS, and on whom Defense had traditionally counted for the "hard core" of its sealift augmentation in wartime. But, when the heavy demands for sealift to southeast Asia began to develop, most of the liner operators chose to continue to ply their normal commercial trade routes, and in the July-September 1966 period only 8 percent of the subsidized fleet and something less than 10 percent of the non- subsidized liner fleet were under charter to MSTS. This choice was understandable under the circumstances. In a total war, neither the Government nor the shipline operators would have any choice, the ships would be requisitioned, But in a limited war, such as Vietnam, the issue is not as clear; the shipline operators, understandably, don't want to lose their place on the world trade routes and the Government doesn't want to be forced to requisition the ships it needs. Fortunately, in the present situation, we have been able tO obtain the needed sealift without recourse to requisitioning, principally through the use of the unsubsidized tramp fleet and through reactiva- tions from the Reserve Fleet (NDRF). Almost two-thirds of the increase in* Defense sealift capacity achieved since the start of the Vietnam buildup has come from these sources. While these resources have successfully met the needs of the present emergency, they many not all be available in another emergency a decade hence. By 1975, most of the ships in the NDRF will be 30 to 35 years old and will require larger expenditures for conversion to assure satisfactory reliability. Moreover, the unsubsidized tramp/ irregular fleet will probably have disappeared because its aging World War II vessels cannot be replaced at an economical price. As a result, the Defense Department may in another emergency be far more dependent on the subsidized berth line operators than it is today. The greater requirement for berth line ships is disturbing not only because of the problem of responsiveness but also because of the cost implications involved. We know from past experience (and we `caflnot realistically expect it to be otherwise) that, unless the operators are assured a good profit (at prices established in a tight market~ , their ships will not be forthcoming voluntarily in an emer- PAGENO="0083" EICONOMIC EFFECT OF. VIETNAM SPENDING 441 gency. This makes the subsidized liner fleet a very costly form of sealift for the Defense Department to hire, just when it needs it most. Furthermore, U.S. flag ships are twice as expensive to operate, even in normal times, as most foreign flag ships. And, as I mentioned earlier, ship construction in U.S. yards costs about twice as much as that abroad. To offset these cost differentials, the U.S. Merchant Marine is subsidized by the taxpayer, directly and indirectly, to the tune of nearly three quarters of a billion dollars a year-on the premise that this shipping is required for potential national security needs. Yet, despite this large annual subsidy, virtually all our sealift needs since World War II have been met* without requisi- tioning merchant ships. Moreov~r, it seems clear that the most likely requirements for sealift augmentation in the future will be associated with limited war situations like Vietnam, in which re- course to requisitioning will be as undesirable as it seems today. In summary, from the viewpoint of the Defense Department, there is a firm requirement for reliaole, responsive sealift augmentation for a wide range of limited war situations, a requirement which the present subsidized U.S. liner fleet, for various reasons, has not met. Various solutions have been suggested, ranging from a major increase in the subsidized U.S. flag merchant fleet to a full scale program of reserve fleet modernization. I do not propose to offer a solution at this time; other agencies of the Government are also involved. I believe a way can be found to revitalize both the Ameri- can shipbuilding industry and the U.S. Merchant Marine and make them. both more truly competitive in the world markets-and I believe that these objectives, along with our military requirements, can be met at costs lower than those our nation is incurring today. AIRLIFT The airlift forces currently planned through fiscal year 1972 are shown on the classified table provided to the committee. In the active forces, the C-5A deployment schedule is the same as that en- visioned a year ago with the first two squadrons scheduled to become operational in fiscal year 1970. The first operational aircraft were included in the current year's procurement program and $423 million is included in the fiscal year 1968 request for the next increment. The total C-5A program cost (including research and development and facilities construction) is estimated at $3.4 billion. Last year we had tentatively scheduled the phaseout of. the C-133 fleet from the active forces in fiscal year 1971. However, in order to maintain the squadron integrity of the Military Airlift Command's force structure, we now plan to phase out the last two squadrons of 0-133's as the last two C-5A squadrons become operational. We also. plan to retain one additional 0-424 squadron (16 *UE aircraft), previously scheduled to be phased out this year, through. fiscal year 1968. . . . ~ : .~ The 0-141 force will reach its planned .strength. of 14 squadrons in fiscal year 1968 and is scheduled to hold at that level throughout the program period. . . .. . . ... . Before the end of fiscal year 1967, we plan to reorganize the existing 0-130 fleet within a force .structure of 28 squadrons rather than. the 31 previously planned. . . . . PAGENO="0084" 442 ECONOMIC E~FE:CT OF VIETNAM SPENDING As a result of an Army-Air Force agreement in April 1966, which redelmeated certain air support mission responsibilities within the~ combat theater, the Army's OV-2 Caribou transports (redesignated the 0-7A) have now been transferred to Air Force operation and are- therefore, accounted for in this program for the first time. No major changes are contemplated in the airlift force structure of the Reserve components from that proposed a year ago. In fiscal year 1968, we proposed to continue one 0-121 squadron and one more 0-97 squadron than planned last year. Eventually, the Reserve airlift force wifi consist entirely of 0-130's. During fiscal year 1968, we propose to continue the 100 percent manning for the 11 Air Forcer Reserve 0-124 squadrons, which was inaugurated as a readiness measure in the summer of 1965. SEALIFT As discussed earlier in this section, we propose to build a fleet of fast deployment logistic (FDL) ships. The Congress approved funds. ($67.6 million) for two of these ships in fiscal year 1966, including $10 mfflion in the fiscal year 1966 supplemental for the initiation of contract definition. As I explained a year ago, actual contracts for these first two ships are being deferred in order to permit their inclusion in the "total package" contract. We now plan to award the multiyear- contract late this fiscal year. Funds for five FDL's are included in the fiscal year 1968 request. The FDL's we now propose will be considerably larger, faster, and. more efficient ships than those we originally envisioned. Two years. ago, the preliminary FDL concept called for a vessel capable of carry- ing about 5,600 tons of division equipment and supplies; the ships we are now considering will be able to carry perhaps twice that tonnage and at an estimated increase in the cost per ship of less than 10 percent. As I noted earlier in the discussion of the shipbuilding problem, the FDL program represents the first application of the concept formula- tion and contract definition process and the "total package" approach to ship procurement. The first phase of this approach, "concept formulation," was completed in July 1966 when three contractors were awarded definition contracts. During the first phase of contract definition, the competing contractors prepared their initial proposals around Army and Navy performance requirements and standards instead of detailed ship specifications. Thus, for the first time, the talents of private industry are being brought to bear on the initial design of the ship. During the second phase of the definition process, which has just been completed, the three competing contractors prepared detailed proposals for their design and a comprehensive program plan for their production. As part of these detailed pro- posals, each of the contractors has developed plans for a new shipyard or modernization of an existing one. Any one of these, in terms of efficiency, would be far superior to the existing U.S. yards and in terms of design and layout would be equal to the best of the foreign yards. We are now in the last stage of the definition process, i.e., bid evalu- ation and source selection. The three Victory-class cargo ships which had been used as forward mobile depots since fiscal year 1963 have been temporarily converted PAGENO="0085" ECONOMIC EFFE~CT OF. VIETNAM SPENDING 443. to point-to-point service in support of our current effort in southeast Asia. Our plans now cal) for retaining these ships in this role through the end of fiscal year 1968. Subsequently, with the end of the Viet- nam conflict, we would expect to . return them to their forward mobile depot role and add more ships for this mission. The Victory ship fleet would be retained until a sufficient number of .the more efficient FDL's became available in fiscal year 1970. During fiscal year 1966, MSTS operated in the nucleus fleet an additional general purpose cargo ship to help meet the increased re- quirements of our southeast Asia operation. Tentatively, we now plan on retaining this ship through fiscal year 1968, after which the active general purpose cargo fleet is scheduled to decline. Another' minor change in last year's planned deployments resulted from the fact that one roll-on/roll-off ship which had been expected to enter service in May or June 1966 has been delayed. With respect to special. purpose cargo ships, the temporary Vietnam nugmentations which I described a year ago have now been extended through fiscal year 1968. In addition,. MSTS will operate 13 more LST's in fiscal year 1967 than envisioned last year and 1 more through fiscal year 1968. After fiscal year 1968, the special purpose cargo fleet is tentatively scheduled to return to the pre-Vietnam level. FINANCIAL SUMMARY The airlift and sealift forces outlined will require total obligational authority of $1.6 biffion in fiscal year 1968. A comparison with prior years is shown below: [In billions of dollars) Fiscal years- 1962 1963 1964 1901 1966 1967 1968 actual actual actual actual actual esti- pro- mated posed `Total obligational authority 1. 1 1. 1 1.2 1. 4 1. 7 1. 5 1. 6 RESEARCH AND DEVELOPMENT Included in this maj or progi am are all the research and develop- ment efforts not directly identified with weapons or weapon systems approved for deployment. We have made a special effort again this year not only to cull out marginal projects in the research and de- velopment programs, but also to defer to future years all projects whose postponement would not have a serious adverse effect on our future military capabilities. But even while we have eliminated, reduced and deferred projects in some areas of this program, we have had to add, increase and accelerate projects in other areas, to meet new needs growing out of the conflict in southeast Asia and the military situation generally. Last year I described Project Provost (priority research and de- velopment objectives for Vietnam operations support) which we had established to ensure that the research an.d development program related, to limited war situations, which had been accelerated in prior years, would be wholly responsive to the more specific requirements PAGENO="0086" 444 ECONOMIC EFFECT or VIETNAM SPENDING of our forces in southeast Asia. As a result of Provost, projects totaling about $370 million were identified as having significant potential for Vietnam operations and were singled out for priority funding in fiscal year 1966. During the past year, the test of combat in Vietnam has revealed a number of areas where still more effort appears warranted. These newly identified requirements have been an important influence in the formulation of our fiscal year 1968 request. However, most of this work should be started promptly, and thus also concerns the current year's research and development program. While a portion of it has been financed by reprogra.ming or use of emergency funds, we have had to request an additional $135 million for research, development, test, and evaluation (R.D.T. and E.) in the fiscal year 1967 supplemental. Broadly speaking, the projects funded in the supplemental can be grouped into three main categories. The first is concerned with improving the ability of our forces to fight at night. The second is concerned with reducing our aircraft losses. The third is concerned with the development of improved counterinifitration systems. As described later, the proposed fiscal year 1968 program provides for additional effort in all of these areas. Before I turn to the specifics of the fiscal year 1968 research and development program, there are two general areas which might. usefully be discussed as entities rather than in terms of the separate projects which they comprise. These are nuclear testing and test detection, and space development projects. NUCLEAR TESTING AND TEST DETECTION As you know,. the Defense Department, in cooperation with the Atomic Energy Commission (AEC), is maintaining four specific safe- guards . with relation to the Test Ban Treaty. For the Defense Department's portion of this program, we have budgeted a total of $255 miffion for fiscal year 1968, compared with $224 million in fiscal year 1967 and about $238 million in fiscal year 1966, as shown on the classified table provided to the committee. In support of the first safeguard-the underground test program- we have included $49 million in the fiscal year 1968 budget, comparec[ with the $33 million provided in the fiscal year 1967 program. In support of the second safeguard-maintenance of modern nuclear laboratory facilities and programs in. theoretical and exploratory nuclear technology-our fiscal year 1968 budget includes $63 million as compared with the $53 inifiion in fiscal year 1967. The fiscal year 1968 budget includes about $27 million in support of the third safeguard-the maintenance of a standby atmospherh~ test capability-about the same as fiscal year 1967. In support of the fourth safeguard-the monitoring of Sino-Soviet. nuclear activities-we have included a total of $116 million in the fiscal year 1968 budget, compared with $111 million in fiscal year 1967. We conduct two principal programs to support this safeguard-the Advanced Research Project Agency's Vela program and the Atomic energy detection system (AEDS). The fiscal year 1968 budget includes $50 million for Vela activities. The present atomic energy detection system (AEDS), designed to~ detect and identify nuclear detonations, now represents a facilities- investment of about $85 million. PAGENO="0087" ECONOMIC EFFECT OF VIETNAM SPENDING 445 About $58 million was provided in the fiscal year 1964-67 budgets for this effort and $16 mfflion is included in the fiscal year 1968 request. An additional $46 million will be needed in fiscal year 1968 for the R.D.T. & E. and operating costs of the system. SPACE DEVELOPMENT PROJECTS While the various elements of the Defense Department's space effort are spread, on a functional basis, throughout the program and budget structures, I believe this effort can be more meaningfully discussed as a separate entity. The Defense Department's program is, of course, wholly integrated into the larger national space program, expenditures for which now total over $7 billion a year. The Defense portion is designed to maximize the utilization of space technologies and environments for defense purposes, e.g., to apply space technologies and capabilities to our strategic and tactical weapon systems to increase their effective- ness, to exploit the new potentials in information systems made possible by satellite-based communications and sensors, and to explore the usefulness of manned space systems for defense purposes. In total, about $1,998 mfflion of our fiscal year 1968 budget request is for the space program, $328 mfflion more than in fiscal year 1967. Spacecraft mission projects By far the largest project in this category is the Manned Orbiting Laboratory (MOb), for which we are requesting $431 mfflion in fiscal year 1968. A total of $83 million is requested in fiscal year 1968 to continue work on Defense satellite communications programs and to procure, operate and maintain satellite communications equipment. Of the $83 miffion requested for satellite communications programs in fiscal year 1968, about $17 million is for the development, procure- ment and operation of Army ground terminals; $13 miffion is for Navy shipboard terimnals, and $49 million is for Air Force space subsystems, airborne terminals, launch vehicles, and the costs of procurmg and launchmg new satellites In addition, $3 million is for the Defense Communications Agency for overall systems engineer- mg and management direction I have already discussed the next item, "Nuclear test detection (Vela)," m connection with the Test Ban Treaty safeguards The fiscal year 1968 budget mcludes about $8 million for this program We are requesting $18 million for the Navy's satellite navigational system Reseaich and development funding for the antisatellite system p1 ogi am has been completed The funds requested for fiscal year 1968 will provide for the normal operating costs of the system. The funds requested for space "Geodesy" will support programs by each of the services as well as the Department of Defense's partici- pation in the national geodetic sateffite program. * * * Vehicle, engine and component developments The Titan III family of space boosters has begun to enter the op- erational mventory The first Titan IIIB (Agena configuration) was launched last July and production is now proceedmg The Titan 1110 has been in the flight test phase since June 1965 and is PAGENO="0088" 446 ECONOMIC EFFECT `OF VIETNAM SPENDING being used to launch the initial defense communications sateffite, Vela, tactical communications sateffite, and multiple engineering payloads. The funds requested for "Agena D" will continue work being initiated this year to increase the capability of the standard Agena D for the heavier sateffite payloads now projected. The funds requested for "Spacecraft technology and advanced reentry tests (START)" will complete the present phase of this program. The funds requested for "Advanced space guidance" will support an ongoing program of studies, experiments and equipment development in such areas as long-term accuracy and reliability of inertial guidance components, horizon sensors and star and landmark trackers, and on- board determination of astronomical data for autonomous navigation. The fiscal year 1968 program includes procurement of an inertial reference unit (which will serve as an instrumentation standard for the sensors) and other navigation components, which wifi then be ffight tested. The "large solid propellant motor" project was undertaken to create the technology base required for the development of missile or launch vehicle engines up to 156 inches in diameter. Funds already provided will be sufficient to complete the remaining tasks, i.e., demonstrations of a low cost nozzle, an advanced thrust vector control system, and a self-eject launch concept. The next item, "Advanced liquid rocket technology" comprises three projects: advanced storable liquid rocket technology; high performance, cryogenic liquid rocket technology; and maneuverable space rocket technology. Other Defense activities supporting the space program The ground support category shown on the classified table supplied the committee is that portion of the costs of the missile range, test instrumentation, and sateffite detection and tracking systems which is charged to space activities. The largest item in this category is the $132 million for the Eastern Test Range. The fiscal year 1968 request includes $34 million for support of Spacetrack and $5 million more for SPASTJR, for a total of $39 million. The $57 million requested for the "sateffite control facility" is for operation, maintenance, and modification of the military space vehicle support network which provides sateffite tracking, command and data handling, as required by the major Defense space programs. The last two cstegories on the table, "Supporting research and development" and "General support," constitute the overhead of the military space program and consist of prorated portions of the costs of a wide range of space-related activities. RESEARCH Last year I discussed in considerable detail the problems involved in organizing and managing a research program consisting of literally thousands of individual tasks and projects, most of which require relatively small amounts of money for their support. I pointed out that because of the large number and relatively small dollar value of these projects, we had to manage the program from my office on a PAGENO="0089" ECONOMIC EFFECT OF VIETNAM SPENDING 447 "level of effort" basis, with the objective of advancing our knowledge in a balanced manner across the entire spectrum of science and tech- nology pertinent to the Defense effort. To facilitate the manage- ment of the program and to insure that it is always responsive to changes in our fields of interest, I noted that we had organized the overall effort primarily in terms of disciplines, i.e., materials, genera]. physics, chemistry, oceanography, etc., and that the effort in each discipline was allocated among the components of the Department on- the basis -of their primary fields of interest and competency. Show on figure 6 is the research program proposed for fiscal year 1968, compared with prior years. You will notice that there is a sharp reduction in the amount of funds allocated to materials research. and to a lesser extent for in-house laboratory independent research~ In both cases, the amounts of unobligated and unexpended funds. exceeded the levels dictated by prudent management. Accordingly, the amount of new funds requested for fiscal year 1968 has been reduced below the actual program levels which will be about the same as in fiscal year 1967; FIGURE 6 Summary of the research program [TOA, in millions of dollars] * . . . Fiscal year- 1962 1963 1964 1965 1966 1967 1968 Engineering sciences: Electronics Materials Mechanics Energy conversion 26 34 25 12 27 44 26 14 28 45 29 14 28 ~7 29 15 27 ~ 28 14 . . .. .~ Subtotal . . 97 111 116 119 102 Physical sciences: General physics Nuclear physics Chemistry * Mathematical sciences Subtotal Environmental sciences: Terrestrial Atmospheric Astronomy-astrophysics Oceanography Subtotal .------ .~ 28 15 10 33 30 17 11 35 33 15 11 37 30 16 11 38 . 3(} 13 11 37 86 93 96 95 91 .~ 6 19 8 18 6 20 9 19 7 19 10 19 6 21 . 10 20 8 . 22 9 22 .~ .------ 51 34 9 36 35 54 33 10 38 39 55 33 12 39 35 57 34 13 41 36 18 7 59 32 12 43 34 27 8 Biological and medical sciences Behavioral and social sciences .~ ~ Nuclear weapons effects research In-House independent laboratory research University program (THEMIS) Other support ** . .~ - . 8 7 Total research 339 351 346 383 391 415 409 1 Amounts will not necessarily add to totals due to rounding. Included in the fiscal year 1968 request for research is $27 million f or the Defense Department's share of the national program for de- veloping new, centers of excellence in science and technology. This program,~previous1y referred to as the "university program" and now called THEMIS, is in addition to our regular contract/grant arrange- ments with institutions of higher learning and is not a substitute for PAGENO="0090" 448 ECONOMIC EFFECT OF VIETNAM SPENDING them. Rather, the new program is designed to create, eventually, about 100 new departmental centers of superior scientific and engi- neering competence at universities which are, at present, poorly sup- ported. Patterned after the joint services electronics program, from which significant technical advances like the laser evolved, this new effort holds great promise of yielding a similar "payoff" in the future. We have initiated Project THEMIS this year at a level of $18 mfflion, and have supplied interested colleges and universities with detailed information on our requirements. Additional centers will be started in fiscal year 1968. EXPLORATORY DEVELOPMENT Exploratory development is directed toward the expansion of tech- nological knowledge and its exploitation in the form of materials, components, and devices which it is hoped wifi have some useful application to new military weapons and equipment. Here the em- phasis is on invention and on exploring the feasibility of various ap- proaches to the solution of specific problems, up to the point of demon- strating feasibility with a "bread board" device and even, in some cases, prototype components and subsystems. Along with research, exploratory development forms the technological pooi from which future equipment `will be designed. The more than 800 individual exploratory development projects represent about 15 percent of the cost of the entire R.D.T. & E. program, with the average project requiring about $1.3 million annually. About 40 percent of exploratory development work in conducted by our in-house laboratories, 50 percent is contracted to industry, and the remaining 10 percent is performed by educational and nonprofit institutions. A. recent study of the origin of weapon system performance improvements has shown that almost all have resulted from Defense supported technological advances and very little from other sources. As shown on the classified table provided to the committee, we are requesting a total of $988 million for exploratorydevelopment in fiscal year 1968, $65 mfflion less than the revised estimate for fiscal year 1967. Army For the Army's exploratory development program, $21.6 million is requested for fiscal year 1968, somewhat less than the level planned for fiscal year 1967. In the areas of electronics and commtinications, the development effort mcludes small rugged field operated digital data processmg equipment; communications equipment having increased traffic han- :dling and improved antijaniming capabilities; devices for rapid, posi- tive, and automatic recognition and identification among friendly surface units and between them and their supporting air units; new sensors for airborne and ground surveillance and target acquisition of enemy units on the battlefield; communication sets and variable time fuzes; night vision devices; improved solid state, thermionic, and frequency control components common to a variety of equipments; etc. Efforts in the ordnance category include work on weapon sys- tems for Army helicopters, the improvement of missile components, PAGENO="0091" ECONOMIC EFFECT OF VIETNAM SPENDING 449 and development of conventional ammunition, weapons, and explo- sives. In the materials category, the Army is concerned with the develop- ment of new metals, ceramics, plastics, and composite materials which can improve' its firepower, mobility, armor, and communications, with particular emphasis on high strength, lightweight materials for use in the field. Navy The Navy's exploratory development effort in fiscal year 1968 will require $272 miffion, compared with $283 million now estimated for fiscal year 1967. Approximately one-third of. the Navy's program is devoted to improving the design of ships, aircraft and other "sea- based" warfare systems, including higher performance, lower cost nucleai propulsion systems for surface ships and submarines sea-. based countermeasures to help protect ships against mines, torpedoes, air-to-surface missiles, and nuclear attack; and better shipboard radar and sonar equipment to improve target acquisition, surveillance, and navigation. A large number of projects are directed toward develop- ing new. or improved materials,, equipment, and designs for. ships; in the past, these efforts have produced the "captured air bubble" craft, hydrofoil craft, and ship hulls for penetrating heavy ice formations. Another large share of the Navy's program is `concerned with elec- tronics and' communications, in~ particular with improving the per- formance and reliability of complex sea-based electronic systems which ~tre subject to extreme variations in temperature, humidity and'shock. New surveillance, navigation, and communications equipment for Navy aircraft is also of maj or interest. A third major area, "Ordnance," comprises a large number of proj~. ects in such areas as antisubmarine warfare, mine warfare, `air- and shipboard-launched ordnance as well as component work in propulsion, fuzes, explosives, pyrotechnics, ballistics, and infrared and laser de- vices. . ` ` ` ` ` ` Air Force Previously the Air Force had budgeted separately for the support- mg laboratory expenses associated with the exploratory development program As part of an overall restructuring of its exploratory de- velopment program, these expenses have been prorated tO the over 200 individual projects which the laboratories support. The other serv- ices have been prorating their laboratory costs for a number of years. A portion of the Air Force's exploratory development program, for ivhich.$285 million is requested in fiscal year 1968, will again .be de- voted to space investigations and space-related projects. Each of the categories, except for ordnance, includes some space-related projects. For example, a large share of the funds for "Chemical technology" will be devoted . to the development of propellants and propulsion systems for missiles and rockets, and.hence for space, boosters.. "Aero- nautics" includes projects which cover the entire speed/altitude regime from V/STOL flight to space and reentry technology. These projects nre directed toward developing the technology and `understanding for extending Air Force operations into new operational environments such as hypersonic flight, for improving the capabilities of present aircraft, and for reducing the cost of future aircraft developments PAGENO="0092" 450 ECONOMIC EFFECT OP VIETNAM `S~PENDING * As `a~part of the reorganization of the Air Force's exploratory devel- opment program a "Bioastronautics" category was created embrac- ing `the Air Force's effort in the life sciences, aviation medicine, and machine-environmental systems support for aircraft and space* ac- tivities. The funds requested for this category will support the ac- tivities of the seven Aerospace Medical Division laboratories as well as development of the life-support systems for the Manned Orbiting Laboratory. The closely related areas of communications, electronics and avionics account for about one-third of the Air Force's program, while only a relatively small effort is conducted in `the area of conventional ordnance.' With respect to "materials," the Air Force'is exploring new composites having enhanced radiation and blast, and X-ray resistance, metals with improved strength and stiffness; and sealant `and elastic materials formed from the new polymers. Advanced Research Projects Agency (ARPA) AItPA' operates as a small research and development management team, supervising its service-conducted programs by overall financial control and technical direction. A total of $215 million is included in the fiscal year 1968 budget for~ ARPA's projects in' exploratory de- velôpment, compared with $231 million in fiscal year 1967 and $225 million in fiscal year 1966. ` *: `ProjectDefertder. The Defender progr~'is the principal explora- tory' development effort designed `specifically to provide the missile and ~reentry technology associated with strategic defensive and offensive systems, and to' develop concepts for' advanced defensive systems against ballistic missile attacks. In fiscal year 1968, a sub- stantial portion of the $118 million requested for this project will be devoted to missile reentry and midcourse `phenomenology. Project Vela. Project Vela has already been discussed in connection with the test ban safeguards program. For ` fiscal year 1968, $50 million is requested, slightly more than in the current fiscal year. Project Agile. For fiscal year 1968, $27 million is requested for Project Agile, about the same as fiscal year 1967. This is our basic `research and development effort oriented to the special problems of remote area conffict with particular reference to the requirements of insurgency warfare. ADVANCED DEVELOPMENT This category includes projects which have advanced to a point where the development of experimental hardware for technical or * operational demonstration is required prior to the determination of whether the item should be designed or engineered for eventual service use. In contrast to engineering `development where design specifications are employed, advanced development permits the use of `perf Ormance specifications which allow the engineer greater latitude in meeting operational needs, thereby encouraging innovation. A total of $1,250 million is requested for advanced development in fiscal year 1968 compared with $922 miffion in fiscal year 1967 and $807 million in fiscal year 1966. The sharp increase in fiscal year 1968 re~1ects the growth of a few major projects, most notably MOL V/STOL developments The first two items under Army "Advanced development" are related to the Defense Department's total V/STOL effort in which all PAGENO="0093" ECONOMIC EFFECT OF VIETNAM SPENDING 4M- three military departments are participants. For a number of years, the Department has been developing a variety of vertical and short takeoff and landing (V7STOL) aircraft. This program has focused on the construction of prototype aircraft suitable for operational testing by all three services. The present status of this program is recapitulated below: The XC-142A, a tilt-wing turboprop transport with a cruise speed of 250 knots, a combat radius of 200 nautical miles, and a 4-ton payload, has been undergoing technical and operational evaluation by a triservice test group with some participation by * NASA and the FAA. The $3 million requested for "Triservice V/STOL" in fiscal year 1968 (under Air Force advanced develop- ments) should complete funding of the test program. These aircraft are approaching their maximum safe life of 300 flight hours and costly life extensiOn modifications would not be warranted. The X-22, a Navy monitored triservice V/STOL research and development project, is a twin tandem, tilting-duct, fan-powered flight vehicle, which closely simulates the characteristics of * conventional aircraft and was designed to provide technical data = on stabffity and control criteria for V/STOL, aircraft generally. The $2 million in the fiscal year 1967 budget will be sufficient to * complete the presently scheduled DOD test program for the X-22. The remaining aircraft may then be turned over to NASA for further testing. The XV-6A (P-I 127) is a British designed, lightweight V/ STOL strike-reconnaissance aircraft, first flown in October 1960 A total of nine test aircraft were constructed under a joint program with the United Kingdom and Germany. The tri- partite evaluation of the aircraft was terminated in 1965, although the United States continued to conduct operational tests of its six airci aft until July 1966 Two of these aircraft have been turned over to NASA while the other four will be held by the Air Force pending evaluation of further testing proposals Two XV-4A's, an augmented jet lift aircraft, were tested by the Army until May 1965 One aircraft was lost during the testing period and the other, which was turned over to the Air Force, will be modified with direct lift and diverted thrust engines and designated the XV-4B It is to be utilized in the Air Force's VTOL integrated flight control program The second of two XV-5A's, an experimental fan-m-wmg aircraft, crashed last September while being operationally eval- uated as a rescue aircraft (The first crashed in April 1965) All of the remammg assets associated with the program have now been transferred to NASA Another V/STOL effort just gettmg underway is the joint development of a strike fighter aircraft with the Federal Republic of Germany The $3 million provided in fiscal year 1967 should complete the financing of the configuration (i e, contract) defini- tion phase At present, this effort is directed to V/STOL technology rather than full scale engineermg development Each nation will make its own decision concermng production Since a decision on prototype development cannot be made until we have thoroughly reviewed the configuration d~finitibn results PAGENO="0094" 452 ECONOMIC EFFECT OF VIETNAM SPENDING (now scheduled for completion in October 1967), no additional funds have been requested for fiscal year 1968, although they would be needed if the program were continued. The Army's "new surveillance aircraft" project is now a con- tinuing long-range study effort concerned with the determination of desirable characteristics of a reconnaissance and survefflance aircraft for the mid-1970's. In summary, we are now coming to the close of the current phase of our V/STOL development effort. For this reason, our overall effort on V/STOL development will decline in fiscal year 1968, although the services will continue to reexamine the results of these programs and how these may be applied to future aircraft needs. In any event, it appears that a great deal of research and experimental work, particu- larly on propulsion systems, remains to be done before we will be ready to undertake full scale engineering development of a V/STOL aircraft. NASA, of course, wifi continue its research and develop- ment effort in the V/STOL area. Army I have already discussed the first two items on the Army's list of advanced developments, ("operational evaluation V/STOL" and "new survefflance aircraft"). No additional funding is needed for the third item, "heavy lift helicopter." This is the CI-I--54 "flying crane" which is now in operational use in Vietnam. Funds are requested for the "research helicopter" in fiscal year.1968. The fiscal year 1~9~68 funds will be used to build wind tunnels and dynamic scale models of the stowed- and tilt-rotor versions. The program is oriented primarily to the development of technology which will yield an efficient aircraft that will both hover and have a ffight speed of about 400 knots. The funds requested for "Aircraft suppressive fire systems" is for work on improved helicopter-borne weapons for our forces in Vietnam, including evaluation of various fire control systems, guns, missiles and rockets. About half the funds will be used for feasibility demonstra- tions of presently available missiles and rockets, and most of the balance on advanced fire control systems and optical sighting devices. The nextitem,. "Automatic data system/Army in the field," covers the development of electromc data processing (EDP) equipment needed to help maintam and analyze data for the field commander regarding the current tactical status of his own and enemy umts and of his various tactical plans and alternatives. Contracts for initial equipment have been awarded and the Army plans to begin field experiments with the 7th Army in Europe. The SAM-D, for which funds are requested in fiscal year 1968, is an advanced surface-to-air missile system previously mentioned in connec- nection with both. the Strategic and General Purpose Forces. SAM-D is now in contract definition phase which willbe completed this spring. We will then have to decide whether to proceed directly with develop- ment of an integrated system suitable for direct operational depoly- ruent, to limit development to a pi ototype s~ stem for feasibthtv demonstration, or to return to concept formulation The second option would provide additional time to incorpoi ate still more ad- vanced technol6gy and lead to demonstratiOn tests. The first option would lead to full service tests. The funds requested will support any PAGENO="0095" ECONOMIC EFFECT OF VIETNAM SPENDING 453 option. The major remaining task is to integrate into a working model a number of components, the feasibility of which has already been verified~ on an individual basis. The SAM-D program is closely related to the Navy's advanced surface-to-air missile system program and the development of the respective subsystems and components is being fully coordinated by the two Services. The $6 million of "DOD satellite communication, ground" covers the Army's portion of the Defense satellite communications programs, which were discussed earlier. The $20 million requested for "Nike-X advanced developments" will finance development of those advanced components whose lead times would not permit their incorporation in an early deployment of the system. This work fills the gap between the engineering develop- ment effort and the development of completely new hardware for possible use later. The $5 mfflion requested for "antitank weapons" will provide for the evaluation of new antitank missile concepts. Present efforts are directed toward identifying those system characteristics which together seem to offer the best chance of achieving an effective low cost anti- tank weapon. The funds requested for the "lightweight howitzei" will support the development of a 155 mm. self-propelled weapon. Development of the system is being coordinated within NATO, with the United States, France, Germany, and Canada all participating in designing the ammunition. The "Limited War Laboratory," for which $7 mfflion is requested in fiscal year 1968, is the Army's quick reaction research and develop- ment facility for counterinsurgency operations. The "therapeutic developments" program was initiated in calendar year 1965 in response to the drug-resistant falciparum malaria which was causing such a serious problem for our forces in southeast Asia. The $11 million requested will continue the development and testing of new anti-malarial drugs. The next item, $12 million for "Power system converters," consists of four major categories of projects directed toward the development of engines, transmissions, final drives, and related components for combat and tactical vehicles. These categories are: power conversion for track and wheel vehicles, multifuel, variable compression engmes, spark ignition engines; and rotary combined' cycle po~ver systems. The fundmg requested for "Night vision" reflects the mcreasmg importance of night operations in modern warfare. Among the many types of equipment now under development are starlight scopes, small portable radars and special goggles. The last item on the Army's list, "Airborne surveillance and target acquisition," is also in large part concerned with the problems of night operations. One of the major efforts in this `program is aimed at providmg a better night reconnaissance capability Navy The first item on the Navy's list, "V/STOL development,'.' repre- sents the Navy's currentparticipation in the triservice V/STOL pro- gram previously described The next item, "Airborne `electronic warfare equipment," for which funds are requested, is a multiproject effort aimed at developmg PAGENO="0096" 454 IICONOMIC EFFEQT OF VIETNAM SPENDING active (jamming) and passive (signal interception) electronic warfare equipment required by the Navy. The "advanced surface-to-air missile system (ASMS)" is the new automated integrated air defense system being developed as a pos- sible replacement for the Terrior-Tartar-Talos (3-T) systems. As mentioned previously, we are seeking in this development to maximize ~the use of the technology, components, and subsystems, developed br the Army's SAM-D system. As a result, the ASMS program must lag behind the SAM-D development by about 1 year. With the completion of SAM-D contract definition in this fiscal year, we will be able to decide which elements should be used on both systems. `This will allow us to initiate ASMS contract definitions by late fiscal year 1968. * The funds requested for the advanced point defense surface missile system (advanced PDSMS) program will support the development ~of a replacement for the basic point defense system (modified Sparrow III) now being deployed. This development is being closely co- ordinated with the Army's advanced forward area air defense system (AFAADS) program to maximize the common use of technology and components. The funds requested will support contract defi- nition of the advanced PDSMS in fiscal year 1968. The funds requested for "advanced ARM technology" wifi support rpreliminary development work on advanced antiradiation missiles. The funds requested for the "Landing force support weapon (LFSW)" wifi complete feasibility testing of the Army Lance missile adapted to `a sea-borne role for support of amphibious assault oper- ~ations. , ` The "augmented thrust propulsion" program, for which funds are requested in fiscal `year 1968, seeks to advance propulsion technologies for both strategic and tactical missiles in ~order to increase payload :and/or'range. Grouped under "Astronautics" are several Navy programs, which I ~described earlier, relating to satellite communications and the potential us~ of navigation sateffites by the tactical forces. We are requesting ~a total of $6 million for these programs in fiscal year 1968. The next group of items under Navy advanced developments are ~concerned with antisubmarine warfare (ASW) and the deep sub- mergence program. The fiscal year 1968 budget includes a total of ~$356 million for ASW R.D.T. &.E., $126 mifiion in advanced de- ~velopments. The first item, "Advanced undersea survefflance", includes three .ASW surveifiance projects. The next two items involve the development of new sonars. The ~first, the "Advanced submarine sonar" program, consists of three efforts a new submarine sonar, investigations in submarine acoustic ~communieations, and the testing of a sonar for deep-diving auxiliary submarines. The advanced surface sonar program provides, for the ~development of a passive/active sonar to detect, localize, classify, :and traek submarines (PAD LOC). `The next item, $42 million, for the "Deep submergence program", is `one of the more important~ efforts in `terms of its potential impact eon, future Navy programs. This program consists of three separate but closeiy interrelated projects the deep submergence system PAGENO="0097" ECONOMIC EFFECT OF VIETNAM SPENDING 455 project (DSSP), deep research vehicles (DRV), and deep ocean technology (DOT). No further funding is requested for the "combined gas turbine propulsion" program, pending further study of the results achieved to date. The "active PLANAR array sonar" is concerned with the develop- ment of an experimental integrated ship sonar system. The "ASW/ship integrated combat system" consists of two efforts: ASW command and control, and ASW integrated combat system (ICS). The next item, $13 million for "Reactor propulsion plants," wifi consist of three concurrent efforts in fiscal year 1968: the develop- ment of a "natural circulation" powerplant, a small combatant ship reactor, and a more powerful reactor for use in aircraft carriers. The "advanced surface craft" consists of advanced development projects for three different types of surface ships, for which a total of $10 million is requested in fiscal year 1968. The first effort, "surface effect craft" (e.g., air cushion vehicles and captured air bubble ships), is to acquire the technology and design capability needed to build large high-speed "surface effects" ships. In the second effort, "hydrofoil craft", we have built a 110-ton, 45-knot patrol craft (POll) and have a 300-ton, 50-knot hydrofoil auxiliary ship (AGEH) over 90 percent complete. The third effort, "landing craft", is con- cerned with the development and test of high speed amphibious and assault landing craft concepts. Air Force The first five items on the Air Force list of advanced developments are all part of the V/STOL technology program which was discussed earlier. Last year, we programed $3 million for fiscal year 1967 to support preliminary work on a new "V/STOL assault transport." We have reconsidered the requirement for this type of aircraft and decided that it is premature to settle now on a specific design. Therefore, the project has been renamed "Light Intertheater Transport" and will be concerned with the development of a new aircraft to replace eventually the CV-2 (Caribou) and similar small transports. The $2 million requested in fiscal year 1968 will be used for preliminary study of possible desio'ns including V/STOL aircraft. The fiscal year 1967 funds for "V/STOL aircraft technology" will, as previously described, support contract definition of a new V/STOL fighter aircraft, a project jointly financed with the Federal Republic of Germany. No further funding is required for the next item, "Lightweight turbojet," which was principally concerned with demonstrating light turbine engines for V/STOL aircraft. The $3 million requested for "Tn-service V/STOL" development will continue operational testing of the XO-142A aircraft, as I noted earlier. The next item, $20 million for "V/STOL engine development," will provide for the continued work on two engines, a direct-lift engine and a lift/cruise engine or for forward propulsion. . . The next two items, "Overland radar" and "AWACS," were men- tioned previously in connection with their potential application to 78-516-67-vol. 2-7 PAGENO="0098" 456 ECONOMIC EFFECT OF VIETNA~*i SPENDING future continental defense against bomber attack. The funds re- quested for the "Overland radar" program in fiscal year 1968 will support continued flight testing of radar techniques for detecting and tracking airborne targets over land in the presence of severe ground clutter and provide for development of components for still more ad- vanced radars for future generation air early warning systems. No additional funding is requested for AWACS in fiscal year 1968 inas- much as the radar evaluation is not yet far enough along to warrant going forward with contract definition during fiscal year 1968. How- ever, funds will be available to support continued concept formulation of the "AWACS" system and contract definition if progress on the program indicates this as the logical next step. The next item, "Advanced avionics," is concerned with improving the night and bad weather attack capabilities of tactical aircraft. Work will be conducted on visual sensors, weapons delivery sub- systems, navigation equipment (doppler, inertial, loran), and an integrated radome-radar for reconnaissance fighters. The funds requested for "Penetration aids for tactical fighters" will support continued work on devices and techniques for existing tactical aircraft to enable them to operate successfully in hostile radar-con- trolled gun and surface-to-air missile environments. The funds requested for "Tactical air-to-ground missile (Mav- erick)" would support contract definition and initiation of engineering development in fiscal year 1968 of a new TV-guided air-to-surface missile. For "Conventional weapons" development, $5 million is requested in fiscal year 1968. These funds will finance a number of projeèts designed to demonstrate the technical feasibility of advanced con- ventional munitions and air delivery systems, various carriage and release mechanisms, fuzing technology, etc. The $8 miffion requested for "Flight vehicle subsystems" in fiscal year 1968 wifi support adva~nced development effort in two areas vital to future aircraft design. The first proj ect consists of collecting and analyzing air turbulence data with the objective of improving the design of aircraft structures and control equipment. The second project is concerned with demonstrating the ability of current flight control technology to reduce the effects of wind gusts, aircraft maneu- vers, etc., particularly in low-level flight, in order to increase structural life and crew efficiency. The $8 mfflion for "Advanced ASM technology" wifi support a program designed to provide a technical foundation for new and im- proved tactical air-to-surface missile guidance systems. The largest single proj ect involves a new approach to the all-weather guidance problem. The $3 million requested for the "X-15 research aircraft" program will complete in fiscal year 1968 all of the Defense Department sponsored experiments now planned. Subsequently, NASA wifi as- sume full responsibility for funding the X-l5 test program. The next item, "AMSA" will require $26 miffion in fiscal year 1968. (The $11.8 million added by the Congress for fiscal year 1967 will be applied to the fiscal year 1968 program). In fiscal year 1968, we plan to carry on development of an engine that could be used in this and other advanced aircraft. Additional funds will be required for PAGENO="0099" ECONOMIC EFFEtCT OF VIETNAM SPENDING system integration of the avionics and to allow the airframe contractors to accommodate their designs to the engine d eveiopments. The $8 million requested for "Advanced filaments and composites'~ will support further work in developing, new high strength, lightweight materials for use in aerospace structural and propulsion systems. The next item, "Advanced ICBM technology," has now been reoriented from a "general" technology effort to the specific support of projects most likely to aid in the selection of subsystems for the possible new ICBM discussed earlier. No additional funding in fiscal year 1968 is requested for the next item, "Stellar inertial guidance." The Pace II, a highly precise inertial navigator developed with prior year funds, is now in its evaluation phase which is expected to extend into fiscal year 1968. After review of these test results, future followup efforts will he determined. A number of the other Air Force advanced development items are. space proj ects which I discussed earlier. ENGINEERiNG DEVELOPMENT This category includes those projects being engineeied for service use, but which have not yet been approved for production and deployment. Army A total of $422 million has been included in the fiscal year 1968 budget to continue development of the Nike-X on a high priorit~r basis, as discussed in Strategic Forces section of this statement. One of the Army's major research and development progratn Ob- jectives is to have, a number of ground force ` weapon systems in various stages of development at all times. The next item, "Firë~ power other than missiles," for which $49 million is requested, con'- stitutes the bulk of the Army's effort in this area and is divided into three main categories: "Individual and supporting weapons"; "field artillery weapons, munitions and equipment"; and "nuclear muni- tions." The largest project in the first category is the medium antitaii.k weapon (MAAW), a shoulder-fired 14.5-pound `missile (28 pound~ including launcher) with a shaped charge warhead. Other projects in the individual and supporting weapons category include a series of new ordnance signaling devices which are being engineered in response to southeast Asia requirements and a new vehicle rapid flr~ weapon system, to replace the cal. 50 machine gun and the interIm HS-820 20 mm. cannon. The "Field artillery weapons, munitions, and equipment" category encompasses the development of sophisticated conventional munitions and the resolution of ammunition problems associated with southeast Asia. The "Nuclear munitions" category covers the development of Army supplied components for nuclear projectiles and atomic demolition munitions. Present efforts are being directed toward an advanced firing device for demolition munitions, and fuzes and cases for an improved 155 mm. artillery round. PAGENO="0100" 458 ECONOMIC EFFECT OF VIETNAM SPENDING The "Aircraft suppressive fire support system" project, for which $14 million is requested in fiscal year 1968 is concerned with the development and adaptation of weapon subsystem for Army aircraft. "Other airmobiity projects," for which $6 million is requested, includes work on aircraft engines, lightweight aircraft armor, and aerial delivery equipment. The next item, $9 million for "Surface mobility," comprises three efforts: "wheeled vehicles," "tracked special vehicles," and "marine craft." The major project in the first category will be the initiation of engineering development for the new 13~-ton XM-705 truck as an ultimate replacement for the current M-37 truck in rear areas. The major project in the second category will be a new armored recon- naissance vehicle capable of operations in adverse terrain and the "mechanized infantry combat vehicle-70," a replacement for the cur- rent personnel carrier. The third category includes work on shallow draft boats, a beach discharge lighter, etc. The $14 miffion for "Combat surveillance and target acquisition" provides for a number of projects. The largest is the TACFIRE system in which automatic data processing and display techniques will be used to improve the accuracy, response time and overall effectiveness of field artillery firepower. Contract definition will begin this year, with initiation of engineering development scheduled to take place next fall. Other projects include: improved sensors for the detection and location of enemy personnel, vehicles and weapons on the battlefield; airborne sensors for visual target location; a forward- looking infrared set for helicopters; image interpretation and photo processing equipment, etc. The $21 million for "Communications and electronics" provides for a broad based program to improve the Army's communication, avionics and electronic warfare equipment. Nary The first item on the Navy's list of engineering developments is the "Medium range air-to-surface missile (Condor)". The fimds requested for the "Advanced Sparrow" will substantially complete this development. The next item, ~`Three-T systems improvements," consists of the engineering work necessary to support the updating of the three-T missiles (Tartar, Terrier, Tabs) through the development of replace- ment components designed to increase the performance of these systems. The $7 million requested for fiscal year 1968 will support development of improved components for the Tabs system's radar. The $8 miffion requested for "Unguided/conventional air launched weapons" will support engineering development of a number of muni- tions projects: Snakeye Ii, a second generation retarded bomb; Fireye, an improved fire bomb using new napalm mixes and improved igniters; a hypervelocity tactical aerial rocket; an improved 20 mm. general purpose projectile, etc. The next item for which we are requesting funds in fiscal year 1968, "Muitimission tactical fighter ~VFAX)," is for concept formula- tion of an advanced fighter aircraft. Since both the Navy and the Air Force may require such a fighter, we are examining the feasibility of a joint development program. Both services would use a power plant employing the lift/cruise engine technology. PAGENO="0101" ECONOMIC EFFECT OF VIETNAM SPENDING 459 The next five items on the list are all related to undersea warfare (USW), and total $76 million for fiscal year 1968. The largest single dollar item in fiscal year 1968 will be the "ASW aircraft development (VSX)". The funding level proposed will support continued concept formulation and development of long leadtime components of this system in fiscal year 1968. The next item, the "MK-48 Torpedo," is designed for use by both submarines and surface ships. The MK-48 is already under contract. The funds requested for the "Directional Jezebel" will complete the development funding of a sonobuoy capable of providing the bearing of a target directly to ASW aircraft. The "Other undersea warfare projects" for which $19 million is requested, include, for example, a shipboard periscope detection radar, the development of antenna systems integrated into the sub- marine's superstructure, etc. The "Carrier based airborne tactical control system (CBATCS)" is designed to provide a major performance improvement over the present system now carried by the E-2A. The $14 mfflion requested for "Marine Corps developments", will support a number of projects on electronic systems, weapons and vehicles for the Marine Corps. Included in this program are the Marine Corps' portion of joint-service research projects such as the medium and heavy assault antitank weapons (MAAW and TOW), which were mentioned earlier in connection with the Army's research and development program. Another project is the development of a new landing force assault amphibian vehicle, with equally good heavy surf capabilities but better land performance than present vehicles. In the area of electronics, the overall objective is more reliable and lighter-weight equipment, e.g., a new lightweight battlefield mortar locator being developed jointly with the Army. Other projects in- clude an automated system for integrating air support activities into the Marine Corps tactical data system; improved nuclear, biological and chemical hazard detection equipment; and a semiautomatic electronic switching facility for use by tactical units in southeast Asia-type environments-all of which are being developed jointly with one or more other services. Air Force Many of the Air Force's engineering developments have already been discussed in connection with other programs. The XB-70 test program has been continued following the accident last June, using the one remaining aircraft. We believe that all of the truly important obj ectives of this test program can be accomplished with presently available funds and no further financing is requested for fiscal year 1968. Development funding for the next item, the "J-58 engine," was com- pleted in the fiscal year 1967 budget. The $20 million shown for the next item, "Interceptor/fire control system/missile," will support redesign and engineering work on the AWG-9 fire control system and the AIM-47 folding fin missile, pro- vide funds for the reconfiguration of the YF-12 test aircraft for use as a test bed for these systems, and continue studies on the possible use of the F-ill or F-12 airframes as a basis for the next generation of inter- PAGENO="0102" 460 ECONOMIC EFFECT OF VIETNAM SPENDING ceptor aircraft. (The fire control system and missile system work would be applicable to either.) The next item,. "F-4 improvements," reflects the cost of developing the internal 20-mm. nose gun for the F-4E. This gun is currently undergoing testing and no additional funds are requested for fiscal year 1968. The $33 million requested for "Mark II avionics" will substantially complete the funding of this follow-on to the F-il lA's current avionics suit. A modified version of the Mark II will be incorporated in the FB-1l1. The funds requested for the "Advanced tactical fighter (FX)," will support continued concept formulation studies on a new air superiority aircraft for possible introduction into the force in the mid- 1970's. We are requesting funds for "Advanced ballistic missile reentry systems," which comprises a wide variety of efforts to provide new reentry vehicle technology for our stategic missiles and to improve our defense penetration techniques. The $8 million requested for "Nike targets" will provide launch site support at Vandenberg AFB for ABM targets launched into the Kwa- ~alein area, and for certain Air Force modification development work on the target vehicles. The funds requested for the next item, "Advanced ICBM," would, as mentioned in the discussion of our Strategic Forces, permit initia- tion of contract definition for a new strategic missile system in fiscal year 1968, if that proves to be desirable. The funds requested for the "Adverse weather aerial delivery system" will further develop components designed to give airlift aircraft the capability to navigate to, and air drop personnel and materiel at, specific locations in bad weather or at night without ex- ternal ground based assistance. The remaining engineering development items on the Air Force list have all been discussed in connection with the Department's space- related projects. MANAGEMENT AND SUPPORT Army The fiscal year 1968 budget includes $90 million for the support of the White Sands Missile Range. Test programs are conducted at this range for all the services and NASA. Among the specific projects are the Air Force's advanced ballistic reentry system (ABRES), the Navy's new antiradiation missile (based on the standard SAM missile), the Army's Lance, as well as NASA's Aerobee project. A major effort at this facility is the range instrumentation program, now in its third year, which will refine the data collected on the range, improve the data reduction capability, and augment the range com- munication system. We are also requesting $44 mfflion for the Kwajalein Test Site, operated by the Army. The $229 million requested for general support covers the costs of all Army research and development installations and activities other than White Sands and Kwajalein. PAGENO="0103" ECONOMIC EFFECT OF VIETNAM SPENDING 461 I~Tavy The Pacific Missile Range, for which $68 million is requested in fiscal year 1968, is responsible for range scheduling, communications, weather and meteorological services, and data reduction in support of assigned missile and space launch operations in the Pacific. The Atlantic Undersea Test Evaluation Center (AUTEC), lo- cated in a deep-sea canyon off the Bahamas, wifi consist of three separate test ranges for weapons, sonars and acoustic systems. The weapons range became operational October 1966; the acoustic and sonar ranges are scheduled for completion during fiscal year 1967 and fiscal year 1970, respectively. For AUTEC, $18 million is requested in fiscal year 1968. General support for other Navy research and development labora- tories and test facilities not chargeable to specific programs will require $310 million in fiscal year 1968. Air Force For the Eastern Test Range, $219 million is requested in fiscal year 1968, approximately $13 million less than for the current fiscal year. Future test activities will mvolve greater accuracies, larger payloads, and more complex reentry vehicles as well as mOre sophisticated missions. To meet these more demanding requirements, the funds included in the fiscal year 1968 request will provide a capability for collecting improved trajectory evaluation data on new frequencies. The program will also provide *for the operation of eight specially instrumented C-i 35 aircraft to support the activities associated with the Apollo programs. About $89 million is requested for fiscal year 1968 to support the Air Force Western Test Range which consists of a complex of range- instrumentation networks supporting Air Force, Navy, and NASA launches from Vandenberg AFB, Point Arguello, and Point Mugu. The program also provides for the operation of five Apollo support ships. General support, including "Development support," will require $65 million in fiscal year 1968. This item carries the major support of the Air Force Systems Command and its nationwide complex of research, development, and test installations, the construction of additional research and development facilities, and other support programs. It includes about $85 million for the cost of services provided under contract by organizations such as Rand Aerospace Corp., and the Lincoln Laboratory. EMERGENCY FUND For the Department of Defense emergency fund, we are requesting the appropriation of $125 million and transfer authority of $150 million, the same as the amounts provided for fiscal year 1967. FINANCIAL SUMMARY The research and development program, including the development of systems approved for deployment will require about $8 billion in PAGENO="0104" 462 ECONOMIC EFFECT OF VIETNAM SPENDING new obligational authority for fiscal year 1968. A comparison with prior years is shown below: [Billions of dollars) 1962 actual 1963 actual 1964 actual 1965 actual 1966 actual 1967 esti- mated 1968 pro- posed R. & D.-except systems approved for de- ployment 4.4 R. & D.--systems approved for deployment.... 2. 5 TotalR.&D 6.9 Less support from other appropriations -.6 Total R.D.T. & E. (TOA) 6.3 Less financing adjustment -.9 Total R.D.T. & E. (NOA) 5.4 5.2 2.5 5.4 2.3 5.1 1.9 5.3 2.2 5.4 2.3 .5.8 2. 4 7.7 -.6 7.7 -.6 7.0 -.5 7.5 -.6 7.7 -.5 8.2 -.7 7.1 -.1 7.1 -.1 6.5 6.9 -.2 7.2 7.5 -.2 7.0 7.0 6.5 6.7 7.2 7.3 OTHER MAJOR PROGRAMS In last year's reorganization of the 5-year defense program struc- ture, we established four new major programs which, for purposes of this presentation, have been grouped together in this section. SPECIALIZED ACTIVITIES Specialized activities comprise those elements of the Defense pro- gram which are directly related to the missions of the combat forces in the Strategic, General Purpose, and Airlift/Sealift Forces programs, but which for purposes of management are more logically handled within the context of homogeneous functional groupings of similar or complementary activities. National military command system The National Military Command System (NMCS) is the primary subsystem of the Worldwide Military Command and Control System. The NMCS comproses the National Military Command Center (NMCC) at the Pentagon, the Alternate National Military Command Center (ANMCC), the National Emergency Command Post Afloat (NECPA), the National Emergency Airborne Command Post (NEACP), and the various communications networks linking these command facilities, the unified and specified commands and service headquarters. As part of our continuing effort to improve the NMCS, we have ex- panded the automatic data processing capability at the NMCC to handle the increased workload related to southeast Asia operations and to provide support for the newly created strategic mobility staff in the Office of the Joint Chiefs of Staff. The fiscal year 1968 budget. request provides funds for the further improvement of the data processing system, the information displays, and the related facilities and equipment. Gommunications The communications category includes both the Defense Com- munications System (DCS) and certain non-DOS communications operated by the military departments. PAGENO="0105" ECONOMIC EFFECT OF VIETNAM SPENDING 463 Other specialized activities The specialized activities program also includes the overseas ad- ministration and grant aid portions of the military assistance program, and such other mission-related activities as weather service, oceanogra- phy, aerospace rescue and recovery, etc. Because the military assistance program is not included in the legislation being considered at this time, only the last category of activities will be discussed here. Weather Service. The Air Force and Naval Weather Services collect, analyze, predict, and disseminate, globally, meteorological and geo- physical information for the support of military operations, NASA's space program (including manned space vehicle reentries and recov- eries), research and development missile test firings, and they conduct hurricane and typhoon tracking and forecasting, and collect nuclear debris air samples for the AEC in connection with the test ban treaty safeguards. Oceanography. This category comprises the activities of the Navy's Oceanographic Office, Defense support of the National Oceanographic Data Center and their related research aircraft and survey ships. During the coming fiscal year, the Navy will significantly expand its oceanographic effort. For example, in the "broad ocean survey" program the range of data collected will be greatly increased. At the end of fiscal year 1966, nine oceanographic research and survey ships (three manned by Navy crews and six operated by MSTS) and two environmental production research aircraft were employed in the program. Seven of these are converted World War II ships but the other two are new oceanographic survey ships (AGS's) which entered the force during fiscal year 1966. In fiscal year 1967 two more new ships-oceanographic research vessels (AGOR's)-will be commissioned, increasing the force to 11 ships and making possible an expansion of the program. The AGS funded in fiscal year 1967 should enter service in fiscal year 1969. No new ships are being requested in fiscal year 1968 for this "operational" program, although two oceanographic research ships are included in the budget for the research and development program with which this survey effort is closely integrated. Air rescue and recovery. The air rescue and recovery program com- prises the Air Force Aerospace Rescue and Recovery Service (ARRS), certain specialized forces of the Navy, and certain assigned forces of the Army and Marine Corps. To provide increased aircrew recovery capability in southeast Asia, additional ARRS helicopters will be procured in fiscal year 1967 and fiscal year 1968. Traffic control, approach, and landing system. The Traffic control approach and landing system (TRACALS) element encompasses those "common system" air traffic control facilities not provided by the Federal Aviation Agency. There are two prominent current programs. The first, the AIMS program, is concerned with the addition of the air traffic control radar beacon system., which provides positive identification and loca- tion of aircraft to all air traffic control radar facilities. The second is concerned with the replacement of current VHF and UHF air- ground-air communications systems in order to meet the more stringent requirement of 50 kilocycle spacing between channels in PAGENO="0106" 464 ECONOMIC EFFECT OF VIETNAM SPENDING accordance with our agreements with other members of the Interna- tional Civil Aviation Organization. Nuclear weapons operations. This element covers the activities of the Defense Atomic Support Agency (DASA) which provides special- ized staff assistance to the Secretary of Defense and the Joint Chiefs of Staff; operational, logistical and training support for the military services; liaison with the Atomic Energy Commission on weapons development and the planning and conduct of weapons effects tests; and management for the national atomic weapons stockpile. The nuclear weapons effects tests, themselves, as well as nuclear weapons research, are included in the research and development program and were discussed earlier. DASA's construction program for fiscal year 1968 includes further shoreline protection work at Johnston Island. LOGISTIC SUPPORT Logistic support comprises a wide variety of activities which can- not be readily allocated to other major programs or program elements. Included under this heading are the costs of moving passengers and carriers, the Military Sea Transportation Service, the Military Airlift Command and contract airlift; purchasing, storing, and inspecting materiel; those parts of the industrial preparedness program (e.g., the provision of new industrial facilities and the maintenance of reserve facilities and equipment) not identified with elements of other major programs; and the major overhaul and rebuild activities for items which are returned to a common stock and cannot, therefore, be related directly to specific military forces of weapon systems. PERSONNEL SUPPORT The personnel support program comprises the training, medical and other activities associated with personnel, except for those portions of such activities which are integral elements of another program. Training The Defense Department's training establishment constitutes a vast and varied system, including at least 83 major military instal- lations, designed to meet not only peacetime needs for militarily trained manpower, but also to provide the potential for rapidly ex- panding this force in periods of mobilization. Our total capital in- vestment in these facilities exceeds $4.8 billion and annual operating costs run over $1.5 bfflion. On the average, nearly one-fifth of the active force is assigned to these centers at all times, either as part of the permanent training staff or as trainees. The rising cost of train- ing in the fiscal years 1966-68 period directly reflects the rapid buildup in the size of the military establishment. Recruit training. Recruit training (i.e., "basic" or "boot camp" training) is given every new enJisted serviceman to facilitate the transition from civilian life, to inculcate necessary standards of con- duct and discipline, to provide initial weapons training, to ensure adequate physical conditioning and to foster motivation and service esprit. In total, recruit training loads are expected to decline slightly in fiscal year 1968, following the rapid rise in fiscal years 1966-67. We now estimate that about 920,000 men will enter basic training PAGENO="0107" ECONOMIC EFFECT OF VIETNAM SPENDING 465 next year compared to about 995,000 now estimated for fiscal year 1967. The fiscal year 1968 request includes funds for two major expansions of basic training facilities. The Air Force plans to add 5,400 addi- tional barracks spaces at its Lackland Military Training center in Texas and about $17 mifiion will be needed for this purpose in fiscal year 1968. Construction of a third Navy Recruit Training Center on the site of the former Orlando AFB in Florida (which was previ- ously transferred to the Navy for use as a training devices center :~fl 1964) was initially funded in the fiscal year 1967 budget ançl $21 million more is requested in fiscal year 1968. Technical training. The military services train enlisted personnel for about 1,500 separately identifiable occupational specialties. Professional training. Professional training encompasses primarily postgraduate level education in military and civilian schools, including medical training. Among the military schools are the several service command and staff colleges, the service war colleges and the joint service colleges. Each year, over 4,000 students, including foreign military officers and U.S. Government civilians, are educated at these institutions. Flight training. Flight training is the most expensive type of instruction given by the Defense Department, in large part because of the very heavy investments required in trainer aircraft and facilities. Three factors have now combined to compound our flight training problem: the large numbers of World War II trained pilots who are now coming to the close of their flying careers; the rotation require- ments of the Vietnam conflict; and the rapidly increasing size of the Army's aviation program. To meet these increased pilot require- ments, the fiscal year 1968 budget includes funds to increase the number of pilots being trained by the services to an annual rate of approximately 13,500. Actual pilot production will not reach the higher authorized levels in fiscal year 1968, however, since it takes up to 18 months to train a pilot. In the Air Force, the planned annual output of pilots has been increased to 3,492 compared with 2,956 in fiscal year 1967 (including jet pilots trained for the military assistance program). To help handle this increased training load, a ninth undergraduate pilot training operation will be opened at Randolph AFB. The new planned Navy annual pilot production rate is about 2,525 pilots (including 100 for the military assistance program and U.S. Coast Guard), compared with about 2,200 previously in fiscal year 1967. Of the 2,425 earmarked for the Navy and Marine Corps, about 945 will be trained for jet aircraft, 830 for propeller aircraft and 650 for helicopters. The Army's planned pilot production has been increased to 7,500 pilots per year (including 180 for the military assistance program), compared with about 3,700 in the original fiscal year 1967 budget. About 90 percent of the new Army pilots will be trained for helicopters, up from about 50 percent in fiscal year 1966. The Army will commis- sion about 75 percent of its new pilots as warrant officers since their positions do not involve command responsibilities. To help handle the larger training loads in fiscal year 1968, Hunter AFB in Georgia (which was scheduled to close in July 1967) has been assigned to the PAGENO="0108" 466 ECONOMIC EFFECT OF VIETNAM SPENDING Army and the present flidit training program at Fort Wolters will be expanded. To support the larger flight training programs, the revised fiscal year 1967 budget and fiscal year 1968 budget requests provide 582 trainer aircraft for the Army, 269 for the Navy, and 458 for the Air Force. Service Academies. As you know, we have been increasing the level of enrollment at the Military Academy over the past few years toward an ultimate goal of over 4,000. In fiscal year 1968, enrollment will average about 3,300 cadets. To help accommodate the larger student body, the fiscal year 1968 budget includes funds for a new 66-classroom academic building at West Point and for personnel facilities and utili- ties. Enrollment at the Naval Academy (currently the largest of the three service Academies) in fiscal year 1968 wifi remain constant at about 4,100. Construction funds, totaling $3 mfflion, are requested for the modernization of an academic building at Annapolis, and for additional personnel facilities. The Air Force Academy, which has also been gradually building up the size of its student body to an ultimate level of 4,000, will reach a total of 3,100 cadets in fiscal year 1968. In addition, a cadet pilot indoctrination program, designed to encourage all physically qualified cadets to consider flight training upon graduation, will be instituted. About $5 million is included in the fiscal year 1968 budget for construc- tion of medical, training, and other facilities at the Air Force Academy in fiscal year 1968. Medical services Medical services include those costs for medical and dental services not directly associated with military units in our other major pro- grams, the costs of medical care for military dependents at non- military facilities, the costs of providing veterinary services, and the cost of operating various health service activities such as the Armed Forces Institute of Pathology. The fiscal year 1968 construction program for medical facilities totals $161 million-the largest ever. It includes 27 new hospitals or additions to existing hospitals, together with a large number of other medical facilities. PAGENO="0109" ECONOMIC EFFEIGT OF VIETNAM SPENDING 467 TABLE 1.-Department of Defense: Budget summary [In millions of dollars] Fiscal year Fiscal year 1967 Fiscal year 1966 Basic Supple- mentals Total 1068 Total obligation authority: Military personnel 17, 047 18, 731 1, 704 20,435 22, 025 Operation and maintenance 15,378 15, 712 3, 562 19, 274 19, 154 operating 32,426 34,443 5, 266 39, 709 41, 179 Procurement 22,595 18,080 6,306 24,386 24, 013 Research, development, test and evaluation 6,946 7,042 135 7, 177 7,523 Military construction 2,545 533 624 1, 158 2, 144 Family housing 682 519 11 530 823 Civil defense 105 102 102 Ill Special foreign currency program 7 7 16 Total, military functions 65,299 60, 727 12,342 73, 069 75,808 Military assistance 1, 163 888 888 621 Total, TOA 66,462 61, 614 12,342 73,956 76,429 Less financing adjustments -2,929 -1,676 -1, 676 -1,400 Plus NOA for revolving funds 535 535 241 New obligation authority 63, 533 59, 939 12,877 72,816 75,270 Expenditures 55, 377 58, 300 9, 650 67, 950 73, 100 TABLE 2.-Department of Defense: Summary of the fiscal year 1967 sup plernentals [In millions of dollars] SOUTHEAST ASIA Military personnel 1,364 Operations and maintenance 3, 311 Subtotal, operating 4, 675 Procurement: Ammunition 677 Aircraft: Combat attrition 1, 525 Training and other 439 Spares 996 Other aircraft equipment 775 Total aircraft 3, 715 Vehicles 506 Electronics and communications 581 All other procurement 840 Total change in procurement program 6, 317 Financing adjustments -11 NOA for procurement 6, 306 Research and development for limited war 135 Construction for southeast Asia 624 Increase in stock funds 535 Subtotal, SEA 12, 276 OTHER Pay increase already voted: Military 340 Civilian 179 Medicare and homeowners assistance, already voted 82 Subtotal, amounts already voted 601 Total new obligational authority requested 12, 877 PAGENO="0110" 468 ECONOMIC EFFECT OF VIETNAM SPENDING -~ c~ ~ Cl *~ Cl ~ ~ `~ - Cl ~ C- C- CC .~ ~4. CC CC _____ CC C1CC ~CCC- CC~ ~ClCCCCCCCC g~c~ ci~ C- C- - ~ CC ~ - CC CC ~ -~ Cl ~ ~ CC CC C~ *C~* 0 CC `~ ~cC CC 0~ ~ 0 0 ~ 0 El PAGENO="0111" Memo: Increase in p~y included above: Military .1 1.1 1.6 2.4 3.4 3.4 3.9 Civilian - .2 .3 .6 .7 1.0 - 1.0 1.1 Increased payments to retired personnel .1 .2 .4 .6 .8 1.0 1.0 1.2 Total .1 .5 1.8 2.8 4.0 5.4 5.4 5.9 Memo: Unfunded military retirement past service liability~ $45.1 $47.3 47.3 48.0 56.1 59.5 66.6 71.4 71.4 74. 1 1 Included is supplemental appropriation request for military and civilian pay increases 2 In 1961 and 1962, funds forthis activity were appropriated to the military departments. authorized by Public Law 89-501 and Public Law 89-504; medicare authorized by Public Excludes cost of nuclear warheads. Law 89-614; and Homeowners Assistance program authorized by Public Law 89-754. 0 C 0 0 0 LTj PAGENO="0112" TABLE 4.-Department of Defense: Direct budget plan (TOil), new ob1igat~onal authority, and expenditures, fiscal years 1966-68 [In millions of dollars] Direct budget plan (TOA) New obligational authority Expenditures Fiscal year 1966 FIscal year 1967 Fiscal year 1968 Fiscal year 1966 Fiscal year 1967 Fiscal year 1968 FIscal year 1966 Fiscal year 1967 FUNCTIONAL CLASSIFICATION Military personnel: Active Forces Reserve Forces Retired pay Total Operation and maintenance Subtotal, operating Procurement Research, development, test, and evaluation - Military construction Family housing Civil defense Special foreign currency program Revolving and management funds Total, military functions Military assistance - Total, military functions and military assistance 14, 652 17, 636 `19, 055 14, (155 17, 636 803 9(15 950 818 985 1,592 1,814 2,021) 1,600 1,814 1 1'J, 1)55 950 2, 020 17, 047 15, 378 20, 435 19, 274 1 22, 025 1 19, 154 17, 073 15, 339 20, 435 19, 274 1 22, 025 119, 154 16, 753 14, 710 20, 200 18, 600 0 CD ttl ~rj C) H Fiscal year 1968 0 I 18,01)3 2,011) `21,823 119,017 ~ 40,840 21,632 ~ 7, 200 ~-4 1,600 ~ 5(12 0 100 337 14,4(17 17, 465 755 935 1,591 1,800 32,426 22, 595 6, 946 2, 545 682 105 39,709 24, 386 7, 177 1, 158 530 102 7 41,179 24, 0)3 7, 523 2, 144 823 111 16 32,412 20, 013 6, 746 2, 3)36 (35(1 107 39,709 22,8811 7, 181 1, 097 518 101 7 535 41,179 22, 917 7, 273 2, 123 814 lii 10 241 31,463 14,339 6, 259 1,334 647 86 281 38,800 18, 465 6, 700 1, 600 57(1 97 2 716 65, 299 1,163 73, (309 888 75, 808 621 62, 510 1,023 72, 034 782 74, 674 596 54, 409 968 66, 950 1,000 72, 300 800 66, 462 73, 956 76, 42)) 63, 533 72,816 1 75, 270 55, 377 67, 95(1 73, 10)) PAGENO="0113" 65,299 1, 163 73, 069 888 175, 808 621 DEPARTMENT OR AGENCY Department of the Army 18, 548 22, 920 23, 918 17, 492 22, 089 23, 629 14, 832 21, 108 23, 372 Department of the Navy 19, 462 21, 365 21, 690 18, 486 20, 709 29, 134 16, 026 18, 978 20, 429 ~ Department of the Air Force 23, 593 24, 803 25, 281 22, 655 24, 263 24, 891 20, 131 22, 594 24, 077 Defense Agencies/OSD 3, 590 3,879 4, 767 3, 770 3, 972 4,867 3,335 4, 174 4, 282 Civil Defense - 105 102 lii 107 101 111 86 97 100 Total, military functions 1 72, 300 ~ Military assistance 800 -I ____ ___ ___ Total, military functions and military assistance - 66, 462 73, 956 76, 429 63, 533 72, 816 75, 270 55, 377 67, 950 73, 100 0 1 Fiscal year 1968 includes amounts proposed for separate transmittal under proposed NoTE-Fiscal year 1967 NOA includes amounts proposed for separate transmittal: ~ legislation not distributed by military department, as follows: $12,275,870,000 for southeast Asia support: $340,130,000 for military pay increase; $179,- ~ 000,000 for civilian pay increase; $71,000,000 for medicare benefits; and $11,000,000 for home- [Millions of dollarsj owners assistance. 62, 510 1,023 72, 034 782 1 74,674 596 54,409 968 66, 950 1,000 TOA NOA Expendi- tures Military personnel Operation and maintenance Total 24 18 24 18 23 17 42 42 40 t:rJ a 0 ti PAGENO="0114" CC C.) CC) CC CC C.) CC CCCCO C) ~ CCC 11 C ii! if = 472 ECONOMIC EFFECT OF VIETNAM SPENDING - C)!J CCC CC CC CC CC CC CC C') CC CCC CC C--CC )/) )CC z C) CC H ~, C)_ CC) CC'.-~ CCC C)CC CC CC 5 ~-iCCCCCC CC CC C CCCCC- C-- CC C') CC ~)CCCCCCC .CCCCC'- C- CC CC CC C') C')-C'CC CCCC't'- CC CCC) CCC) CC CC C'- CCC) ~) .~ ~ C) ~ ~ ~ ~i ~ C) C) CC CCC ~3_~ C'- 5,~_ CCC-- CC C') CC ~ ~ 5~5CC ~ CC CC C--C--~ C) CC ~ r~ C) )CC. ~ ~ S ~-C- ~2 `~ ::: ::: ~` CC C C) ~ cC) CCC) CC S t~ ~ ~ ~ S C'tC'~ CC c'~ ~ ~ 5S5~')S~ CCCCCC CCC') S C-C C) C)C")CC CCCCCC C) CC S CC CC) CC CC CC -C CC) CC C') CCC) ~ S C-~CC C'. C ~ , ~ C) C) CC ~ ))~ CC CC `CC C') ~- CC CC CCC C") CC - CCCC~ CCC) CCC-- CCC) CC CC CC CC'CC CC CC CC C C) CC CC C CC C)) CC `-i CC CC C CC C C C C CC CC ©C)- C),-~-~ C C) C) C) C) C C PAGENO="0115" Military construction: Active Forces- Reserve Forces Total Family housing Civil defense Special foreign currency program Total, military functions Military assistance Total, TOA Less financing adjustments Plus NOA for revolving funds New obligational authority Expenditures 592 610 140 279 611 17 10 5 5 21 690 t~,j C) 21, 690 ~ -559 4 0 21, 134 ~ 20, 429 C) (-3 2,519 624 1,131 2,107 1,066 288 20 26 37 430 2, 545 682 105 624 11 1, 158 530 102 7 2, 144 823 111 16 1, 066 288 438 609 659 140 285 656 65, 299 1,163 12,342 73, 069 888 75, 808 621 18, 548 5, 293 22, 920 23, 918 ---- 19, 462 3, 645 .21,365 66,462 -2,929 12, 342 535 73, 956 -1,676 535 76, 429 -1,400 241 18, 548 -1,056 5,293 351 22, 920 -282 351 23, 918 -349 60 19, 462 -976 - 3, 645 - 77 21, 365 -733 77 63, 533 55, 377 12, 877 72, 816 75, 270 17, 492 5, 644 22, 989 23, 629 18, 486 3, 722 20, 709 9, 650 67, 950 73, 100 14, 832 4, 589 21, 108 23, 372 16, 026 1, 923 18, 973 0 PAGENO="0116" TOTAL OBLIGATIONAL AUThORiTY (TOA) Military Personnel: Active Forces Reserve Forces Retired pay Total Operation and Maintenance Subtotal, operating Procurement: Aircraft Missiles Ships Tracked combat vehicles Ordnance, vehicles, and replacement equipment Electronics and communications Other procurement Total Research, development, test and evaluation: Military sciences Aircraft Missiles Astronautics Ships Ordnance, vehicles, and relate(l equipment Other equipment Programwide management and support Emergency fund Total Miiitsry construction: Active Forces Reserve Forces 4, 399 5l() 5, 526 5, 61)4 137 3 155 153 0 -4 H 48 UI 101 `d 10 t~1 118 ~ 3 t:i z 234 ~1 12 125 TABLE 5.-Department of i)efeusc-Direct budget plan (TOA), new obligational authority, and expenditures, fiscal year 1966-68 by functional title and se'rviee-Contiiiued [In millions of dollars] Functional classification Department of the Air Force Defense ageneles/OSI-Civil Defense Fiscal year 1966 Fiscal year 1967 supple- mental Fiscal year 1967 total Fiscal year 1968 Fiscal year 1966 Fiscal year 1967 supple- mental Fiscal year 1967 total Fiscal year 1968 1,592 154 1,814 2,020 0 0 t~i 2, 020 ~ 1012 ~x1 3, 032 b H 5,075 5, 259 413 905 5,681 5, 790 5,847 5, 670 1,592 753 34 115 1,814 965 10, 334 1, 109 11, 471 11, 526 2, 345 140 1, 779 5, 518 1,248 1,426 487 446 1, 303 45 460 44 33 5, 685 1,284 1,863 361 545 -- 5, 782 1,368 1,728 323 511 1 6 30 1 5 39 1 11 37 9, 125 1, 884 9, 738 0, 712 37 45 157 845 759 1, (125 314 241 10 23 160 157 103 107 711 740 17 12 862 890 123 114 918 1,089 4 4 31)8 307 343 22 243 208., 228 4 11 18 796 I 426 3,339 33 3, 168 3, 410 501 22 508 602 779 l7.__ 196 413 13 618 15 24 0 246 240 Total. 633 24 I) PAGENO="0117" Total, TOA Less financing adjustments Plus NOA for revolving funds New obligational authority Expenditures 23, 593 -939 *---- 3222 24, 803 -540 25, 281 -434 44 3, 695 182 182 107 3,981 -15 107 4,878 -32 133 22, 655 20, 131 3, 222 2, 785 24, 263 22, 594 24, 891 24, 077 3, 877 3, 421 289 503 4, 073 4, 271 00 4978 Q 4,382 0 I Fiscal year 1968 TOA includes amounts proposed for separate transmittal under pro- NoTE--Fiscal year 1967 TOA includes amounts proposed for separate transmittal: ~ posed legislation not distributed by military department, as follows: $11,740,870,000 for southeast Asia support; $340,130,000 for military pay increase; $179,000,- ~ iclilitary personnel $24, 000, 000 030 for civilian pay increase; $71,000,000 for medicare benefits; and $11,000,000 for hoineown- Operation and maintenance 18, 000, 000 era assistance. 00 C) 0 00 00 z 0 Family housing Civil defense Special foreign currency program Total Military functions 23 593 3 222 24 803 258~1 682 11 105 3, 695 530 102 182 823 111 16 3,981 4,878 PAGENO="0118" 476 ECONOMIC EFFECT OF VIETNAM SPENDING TABLE 6.-Department of Defense: Estimated obligations and amounts available for obligation, general fund appropriations, fiscal year 1966-68 [In millions of dollars] New obli- Item gational authority Reim- burse- ment Total available for obli- gation Oblige- tions Un- obligated balance carried forward Un- obligated balance as percent of available 17,492 18,486 22,655 3,770 107 3,211 1,750 1,520 67 23,174 25,381 27,432 4,114 130 21,000 18,714 23, 009 3,513 90 2,156 6,666 4,421 573 39 9.3 26.2 16.1 13.9 30.0 10 1,023 6,548 6 80,230 906 FISCAL YEAR 1966-ACTUAL Department of the Army Department of the Navy Department of the Air Force Defense agencies, OSD Civil defense Total, military functions ~1it~,-~ assistance - Total, military functions and mili- tary assistance FISCAL YEAR 1967-ESTIMATED Department of the Army Department of the Navy Department of the Air Force Defense agencies, OSD Civil defense Total, military functions Military assistance Total, military functions and mili- tary assistance FISCAL YEAR 1968-ESTIMATED 66,325 895 13,854 11 17.2 1.2 63,533 6, 555 81,136 67,220 13,865 17.0 22,638 20,632 24.263 3, 865 101 3,339 1, 534 1,527 77 28,240 28,903 30,282 4,315 142 25,901 23,615 25,788 3,994 130 2,319 5,286 4,494 320 12 8.2 18.2 14.8 7.4 8.4 71,499 728 6,527 10 91,861 743 79,427 733 12, 454 10 13.5 1.3 72,227 6,537 92,624 80,160 12,464 13.4 DepartmentoftheArmy 23,569 Department of the Navy 21,130 Department of the Air Force 24,847 Defense agencies, OSD 4, 734 Civil defense ill Proposed legislation 42 Total, military functions 74,433 Military assistance 516 Total, military functions and mill- I tary assistance 74, 969 3,246 1, 576 1, 000 77 29,154 27,995 30,341 5,132 123 42 26,944 22,516 26, 080 4,561 118 42 2,210 5,479 4,262 571 5 7.5 19. 5 14. 0 11.1 4.0 5 900 92, 787 80,261 12, 526 10 556 546 10 5, 910 93,343 80,807 13.4 1.7 12,536 NOTES (1) The total available for obligation is the sum of (a) unobligated balances from the prior year (I) new obligational authority, (c) reimbursements. and Id) transfers between appropriations. (2) In addition to obligations, the unobligated balance carried forward was reduced by $51 million of expired obligating authority withdrawn. 13.4 PAGENO="0119" ECONOMIC EFFECT OF VIETNAM SPENDING 477 TABLE 7.-Department of Defense: Estimated expenditures and amounts available for expenditures, fiscal years 1966-68 [Dollar amounts in millions] Item New obliga- tional authority Total available for expendi- ture Expend- itures Unex- pended balance carried forward $17, 492 18,486 22, 655 3, 770 107 $23, 781 34,128 32,419 5, 134 211 Unex- pended balance as percent of available 37. 5 52. 9 37.9 34.2 56. 3 $14, 832 16,026 20,131 3,335 86 $8, 941 18,074 12,316 1, 760 119 62,510 95,673 54,409 41,210 1, 023 2,799 968 1,831 63, 533 98, 472 55, 377 43. 0 65.4 43.7 FISCAL YEAR 1966-ACTUAL Department of the Army Department of the Navy.. Deoartment of the Air Force Defense agencies/OSD Civil defense Total, military functions Military assistance Total, military functions and military as- sistance FICAL YEAR 1967-ESTIMATED Department of the Army Department of the Navy Department of the Air Force Defense agencies OSD Civil Defense Total, military functions Military assistance Total, military functions and military as- sistance FISCAL YEAR 1968-ESTIMATED Department of the Army Department of the Navy_ -- Department of the Air Force Defense agencies OSD Civil defense Proposed legislation Total, military functions Military assistance - Total, military functions and military as- sistance 43,041 22,989 20,709 24,263 3,972 101 32,037 38,884 36, 571 5, 532 220 21,108 18,978 22, 594 4,174 97 10,930 19,907 13,977 1, 358 123 34. 1 51. 1 38.2 24. 5 55.9 72, 034 782 113,244 2,613 66,950 1,000 46,294 1,613 40.8 61. 7 72,816 115,856 67,950 47,906 41.3 23, 629 21,134 24,891 4,867 111 42 34, 558 41,047 38,862 6,225 234 42 23,372 20,429 24,077 4,282 100 40 11,186 20,618 14, 785 1,943 134 2 74, 674 596 32. 3 50.2 38. 0 31.2 57. 2 4.7 120,968 2, 209 75,270 72,300 48,668 800 1,409 123,176 40. 2 63.7 73,100 Norns.-(1) The total available for expenditure is the sum of (a) unexpended balances from the prior year, (5) new obligational authority and (c) transfers between appropriations. Transfers, which total $173,000,000 in fiscal year 1966; $200,000,000 in fiscal year 1967: and $6,000,000 in fiscal year 1968 are not shown in detail. (2) In addition to expenditures, the unexpended balance carried forward was reduced in fiscal year 1966 by $54,000,000 of balances withdrawn. 50,076 40. 6 PAGENO="0120" 478 ECONOMIC EFFECT OF VIETNAM SPENDING -~ .~ 0 -4 0 = 0 be ~ 0 0~ ~e 0 -4 -4- 4-4 -4 -4 :~ ~ -4 -4 ~ ~ c~5 E~ ~ ~ 4.4.40)0) C)~ C) 0)0)0) 0),-) C) C) -4.40) - ~- C) oo_-4~ `a'- C) k,,- .4-) C) .4-4 t- - `-4 ~: ~` C) 0)0) C) ~-s C- C) - b-~) - `~` -~` 0) 0) C) - C) C) C) ~)~-) 0) C) C) C) 0) C) N- ~4 C) C) C'- 0) C- C) C- C) C'- `~4C) o ~ ~9 o C) c'~ ~`-4~2 -.4' 0)0)0) ~ C) C) C) C)~- ~N--)C) ~99~ 9 DC- C) 0) `~` C) 94CC) 9~ C) 0) g~C) C) ~ C -~ 0) 3~2~ 0)0) ~9 C) C') ~0.41 -.- ~) C) C') ~ ~`-~`~ C) 0)0) -4 C) C'- C') ~ ~`-I C') 0) ~ ~N C') ~ ~`- ~.4 C') ~) *0 )~`C),-) I -`ii ~iii `00) I ~,-, -i 0 C') C) ~ C) C) ~j 10 C) C) C) C) C) C) :`-~~ C-C') ~ C) ;~~- C) ` C) C) ~ C) ~ ) ~ C) ~`) 9 ~ `00) ;~ t- C) C) C- 0)0) 4'- ~ C) C))') I ~ t- ~ ~ ~ ~- C) ~ C') ; ~1 s ~j ~ i~'~-~ ~`-~i L ~ i-'- )~ 9'- ~~b9 ;~)~ 9~ 9 ~` -~ ~2 C) C'- .4- ~` C)'-.4 C') 4-b C) C') 0)0)0) -4~'-, C') ~0'0 9'~C)'- C) C-C) ~`-I C- C) g- C- ~`- ~4--~'- ;0)C) ~4C) 1'- ~ C)C')4'-b )40) ~EI~'0 C)'0 C)0) `C'- `.4'C) 0)" N-~ C)C) 1'- C') H~)E~ C) ~I ~-J~ b C)'-~C) ~2~-' eC~C)C) C) C) C) ~ ~ .40 ~ -4) 0) C'- C- C) ~ ~ C)be -4) `~-~° b-C) C) C- ~ N- C) - "~T ~ 4") C) ~` ~ ~ 4-'b ~ C) C) N- Cl C) `0-41 C) C) 0) -,~ - C) 0) C) 4-') C) C) C) C-~C) C') CO *0 C) `0')'0 C) C) 0) 9-4.4 C) C) -`) C) ~ C) C) -b' ~C) C') C- ~ C 4.4 `.4 -`~ z C z 414 C -4-44.4' `-4 -4 S PAGENO="0121" ECONOMIC EFFECT OF VIETNAM SPENDING ~4e~ ~ 479 t- C'1 C~ ~ ~ ~rg~ C~- ~ c~ ~ g~ t~- ~ ~ C ~ c~ ~O ~ C~-~ ~ C~ ~o u~ ~ - ~ ~C c~ ~ c~ Cl C C~ Cl C l,-4~C~~-4 CCCCl ~~Cl C ~-C c~-~ `~ C `-I - C Cl~C~ t-~ C CCCC C~C C~ZC CC CIGO C~- C C - ~ c~N c~cXt~-Cl cc~~ ~2 CC ;i~ C ~ ~-~z ~- ~Ct-~- CC~C~C t~.C ~ CC c Ct~-CD ~-ClCC t-CCI I~ t-Cl C~ C CC ~-4 g~ *~;C; ,C o ~,o C)C~.0 ,~ 0 C) ~o.EZ ~ ~ C CC ~ E CCC C) C? `~CC:~ ~ E ~ ~O CCCC~CC I.~ C~CC) o CC o C~CC CC C C C II C CCC -~ c~i~ ~ CCC Co bi~ C CC E CC C C ~ .~ CE .~Z-~CC ~: p~ CE ~ -~C)C) O~C ~ PAGENO="0122" CC C) C) C) 0 ~0 C-) C) 04 0 C) 0 C) 480 ECONOMIC EFFECT OF VIETNAM SPENDING C) 00 C) ~C) C- ;Pi~ ~! !- `~ ~ ~ C- oo ~ 00 CC ~ CCC) C) C) ~- CC CC ~ ~ C) C)~C C-CC -4 ~ C) ?C ~ C- CC ~- `C CCC-CC ~C)~O~Ci C')©C-COCCCC CCC~ CC ~ `~~~-C C) Co ~ CC CCC) -40 ~-4 0CC 0 ~`CC C) C- C)~- CC 00CC ~44 CCC-4 1 -~ ~ C C) ,-~ ~. ~ ~-) CC CCC) 0CC CC CC. CC CC CC ~` ~) 04CC) -4-4 0CC ~-~` C) -~ ~ C) C- ~) c2 C) ~ CC~~ )CCC~)~4 ~) `~4-4 C) C~ `C~C~ 00 C- ~- 0- CC 00 ~t-CC ~ 00 CC~0 CCC- ~- ~~-r-' ,-~ 0 0;-) ~ CC ~ C)~ C) CC~~-~ C- o ~ -~j~ ~ ~`- L ~ ~ ~- ~-~` ~`~`:~ `~h~ ~ C~ CCC)~~' C~ C ~-) ~ ~ C) C- ~ CC C- CCC) `C C' 4'- ~ ~ ~-~-` CC 00 -4 CC ~ I ~ 4 I CCC) ~ CC ~2 ~ 0 C)C)C~H I~c~ C-~ ~ CC ~-`C) ~z; CC ~ ~ C' C' C' ~ CC CC ~-4CC 00 ~ - ~I ~CC~;~I - CC ~ CC)) CC &~ C~ 0 c~ ~`o - -C--C' CC 0CC `CC II CC CC C C E C 0 PAGENO="0123" ECONOMIC EFFECT OF VIETNAM SPENDING 481 ~C)i'~C ~S ~C),-4 p_ g~j~oo ~C)r~~)C)~ ~zg~ ~- ~r~- ~ CC~ ©C)C))C)~ ~ ~_C) C)lt- ~ ~ CC CC ~ CC CC CC `-~ ~_C)~ CC ~CQ ~ ~C) C'~ ~ ~C C~')C~C) ~ CC_~,-) t-CC~ -CCC)C)~ ~ *C)C~ C~C) ~,-4 C~CC C~CC) ~ `~ ~ ~ ~ ~C) ~ CCCC~ CC~1 `-~ gj~ ? ~CCCC ~ ~-# C1,-~ ~C) ~ C~ ~ ~ ~C')C))~ ~ ~CC~C) ~-4C'~ C~CC ~Ci H H C C) CC C) S ~ .5 .~ .5 ..~ ~ ~ h ~: ~ ÷))~C)C) ~2 ~ flui ~ C) C) C) C) C)) CC C) C) C) CC C) ~ C) C) C)~ C) C) S C) .sg *~ U ~ ~ 5.515 S `C) C) C) C) S C) CC C) ~C) oo~ wS ~C) `-"C) CCC) ~ ~ - CC C)] C)] C)] PAGENO="0124" 482 ECONOMIC EFFECT OF VIETNAM SPENDING TABLE 10.-Department of Defense-Financial summary of fiscal year 1967 budget, appropriations enacted and supplementals proposed Military personnel: Military personnel, Army Military personnel, Navy Military personnel, Marine Corps Military personnel, Air Force Reserve personnel, Army Reserve personnel, Navy Reserve personnel, Marine Corps Reserve personnel, Air Force National Guard personnel, Army National Guard personnel, Air Force Retired pay, Defense Total, military personnel Operation and maintenance: Operation and maintenance, Army.... Operation and maintenance, Navy.~ Operation and maintenance, Marine Corps - Operation and maintenance, Air Force Operation and maintenance, Defense agencies Operation and maintenance, Army National Guard Operation and maintenance, Air Na- tional Guard National Board for Promotion of Rifle Practice, Army Claims Defense - Contingencies, Defense Court of Military Appeals, Defense... - Total, operation and maintenance - Procurement: Procurement of equipment and mis- siles, Army Procurement of aircraft and missiles, Navy Shipbuilding and conversion, Navy~. Other procurement, Navy Procurement, Marine Corps Aircraft procurement, Air Force Missile procurement, Air Force Other procurement, Air Force Procurement, Defense agencies Total, procurement [In thousands of dollars] 494 25,000 15,000! 600~ 40,000 40,000 33, 000 22, 000 "Medi- Appro- priations enacted Trans- fers and adjust- ments Military and civil- ian pay supple- mental care" and "Home- ownersas- sistance" supple- mental SEA supple- mental Total 6,164,400 3,652,100 1,183,200 .5,015,800 288,211 112,500 36,500 69,700 346,533 82,000 1,780,000 4,164 -4,164 78, 500 77, 700 24,300 106,300 6,200 800 800 1,100 8,520 1,910 34,000 650 500 220,800 58,400 403,700 14,900 15,280 290 6,897,564 3,946,436 1,265,900 5 525 800 309,311 113,400 37,300 70,8055 370,333 84,200 1,814,000 18,731,04L 340,130 1,353,870 20,435,044 5,122,427 3,980,300 325,600 4,943,100 806,500 231,000 33,001 -24,800 -45 -1,823 2,515 64,000 42,000 2,300 49,000 20,300 29,000 25, 005 17,005 1,968,000 624,000 96,700 528,000 85,800 253,300 7,216,432 4,646,494 424,552 5,535,277 915,117 231,000 254, 700 494 34,000 15,000 600 1,400 9,006 15,703,321! 8,844 179,000 71,000 3,311,500 19,273,665 3, 483, 300! 1, 789,950 -58, 000 1,756,700! 1, 968, 300! 262,910 4,017,350 -4, 000 1, 189, 500 2, 122, 6001 51,300! 2, 130, 000 1, 752, 000 287, 000 253,000 1, 303,000 45,000 536, 000 5, 613, 100 3,483, 900 1,756,700 2, 255, 300 515,900 5, 316, 300 1, 234, 500 2,658, 600 51,300 16,641,800~ -62,000 6,306,000~2,885,800 Research, development, test, and evalua- tion: E.D.T. & F., Army 1,528, 700~ 27, 998 R.D.T.&E.,Navy 1.758,60th 115,436 R.D.T. & E., Air Force 3, 112, 600 23, 151 R.D.T. & F., Defense agencies 459, 059 1, 781 Emergency fund, Defense 125,000: -106,805 Total, R.D.T. & F 6983,959! 61, 561 1, 596, 698 1,914, 036 3, 168, 751 482, 840 18,195 135,000 7,180,520 Military construction: Military construction, Army 114, 0l4~ Military construction, Navy I 126.918! Military construction, Air Force~ 205,411: Military construction. Defense agen- cies 7,547: 440! Military construction. Army Reserve. Military construction, Naval Reserve 5,400. Military construction, Air Force Re- serve 3.600, Military construction, Army Na- tional Guard I 288, 500 402, 514 140,000 266,918 190000 401,495 7,950 .~ 5,400 PAGENO="0125" Military construction-Continued Military construction, Air National Guard Loran stations, Defense Total, military construction - Family housing: Family housing, Defense Homeowners assistance, Defense Civil defense: 0. & M., civil defense Research, shelter survey and marking, civil defense Construction of facilities, civil de- fense Total, civil defense Special foreign currency program Revolving funds: Army stock fund Navy stock fund - Defense stock fund - Total, revolving funds Military functions, totals: Department of the Army Department of the Navy Department of the Air Force Defense agencies, OSD Civil defense Total, military functions Military assistance - Total, new obligational authority, DOD TABLE 11.-Department of Defense: Net additions to the fiscal year 1967 procurement program for southeast Asia [Millions of dollars] Army Navy and Marine Corps Air Force Total Ammunition Aircraft: Combat attrition Training and other Spares Other aircraft equipment Total aircraft Vehicles Electronics and communications Other Total changes in program (TOA) Financing adjustments 309 14 258 149 169 89 1,073 135 314 329 279 438 46 533 257 677 1,525 439 996 755 590 288 338 607 1, 851 167 102 131 1, 274 51 141 110 3,715 506 581 `840 2, 130 2,340 -48 1, 855 +29 1,884 1 6,317 1 Fiscal year 1967 supplemental (NOA) - .~__ 2, 130 2, 292 6,306 ECONOMIC EFFECT OF VIETNAM SPENDING 483 TABLE 10.-Department of Defense-Financial summary of fiscal year 1967 budget, appropriations enacted and sup plementals proposed-Continued [In thousands of dollars] "Mcdi- Trans- Military care" and Appro- priations fers and adjust- and civil- "Home- SEA ian pay owners as- supple- Total enacted ments supple- mental sistance" supple- mental mental 9,400 - 9,400 472.374 440 624, 500 1,097,314 507, 196 11,000 .507, 196 11,000 66, 100 35,000 -1 66, 099 35, 000 101,100 7,348 -l 101,099 7,348 351,000 351, 000 77,000 77,000 107,000 107,000 17,279,079 16,959,018 21, 024,395 3,784,550 101,100 65, 167 28,418 17,328 -102,069 -1 157, 220 147,900 159, 710 54,300 - 29,000 25,000 17,000 11,000 535,000 5,458, 180 3,548,900 3,044,990 223,800 535,000 22,988,646 20, 709,236 24,263,423 3,971, 581 101, 099 59, 148, 142 792,000 8,842 519, 130 82,000 12,275,870 -10,425 72, 033,988 781,575 59,940,142 -1, 583 519, 130 82,000 12,275,870 72,815, 559 Total expenditures, DOD 58,300,000 505, 000 61,006 9,084,000 67,950,000 1 Reflects $8,000,000 reduction in procurement, defense agencies program. PAGENO="0126" 484 ECONOMIC EFFECT OF VIETNAM SPENDING TABLE 12.-Department of Defense: Major procurement item quantities, fiscal yea~ 1967 and 1968 programs [Millions of dollars] Fiscal year 1967 program Fiscal year 1968 program Enacted funds Supple- mental Total Aircraft: Army $1, 807 Navy and Marine Corps 560 Air Force 821 Total, aU services 3. 188 Helicopters 1,903 Other aircraft 1, 285 Total, all services 3, 188 Missiles: Army 34,715 Navy and Marine Corps 6, 172 Air Force 4,777 Total, missiles 45, 664 Ships, Navy: New construction 57 Conversions 8 Total, ships 65 Tracked combat vehicles: Army 4,437 Marine Corps 144 Total, tracked combat vehicles 4, 5Sl $890 487 207 $2, 697 1,047 1,028 $1,479 680 1,2,50 1, 584 4, 772 3,409 863 721 2,766 2,006 1,588 1,821 1,584 4,772 3,409 1,992 34,715 8,164 4,777 26,237 12,815 5,273 1.992 47, 656 44,325 57 8 34 21 65 M 1,392 7 5, 829 151 4, 797 1, 399 5,980 4,797 PAGENO="0127" ECONOMIC EFFECT OF VIETNAM SPENDING 485 TABLE 13.-Departrnent of Defense: Military and civilian personnel, ycarend number * Fiscal year 1965 actual ~ Fiscal year 1966 actual Fiscal year 1967 estimate Fiscal year 1968 estimate Military personnel: Army: Officers Enlisted Military Academy cadets Total, Army Navy: Officers_~ Enlisted Naval Academy midshipmen Aviation cadets Total, Navy Marine Corps: Officers Enlisted Aviation cadets Total, Marine Corps Air Force: Officers Enlisted Air Force Academy cadets Total, Air Force Department of Defense, total: Officers Enlisted Academy cadets and midshipmen Aviation cadets Total, Defense Civilian personnel: Army Navy Air Force Defense agencies, OSD 111,541 854,755 2,017 117,205 1,079,525 2,316 142,837 1,308,453 2,910 154,900 1,362,004 3,096 968,313 1,199,046 1,454,200 1,520,000 77,720 588,353 4, 179 757 79,457 660,130 4,331 551 83,773 665,298 4,243 80 85,014 673,031 4,243 671,009 744,469 753,394 762,288 17,234 172,638 315 20,485 240,909 293 24,193 255,831 600 25,211 269,316 387 190,187 261,687 280,624 294,914 131,141 689,585 2,907 130,285 752,913 3, 152 135,986 759,250 3,364 137,828 745,697 3,575 823,633 886,310 898,600 887,100 337, 636 2,305,331 9,103 1,072 347,432 2,733, 477 9,799 844 386, 789 2,988,812 10,517 680 402,953 3,050,048 10,914 387 2,653, 142 3,091,552 3,386,818 3,464,302 332,875 333,271 291,496 42,278 371,121 356,744 306,911 68,923 426,164 398,608 319,462 72,361 431,474 410,787 325,796 72,057 Total, Defense 999,920 1,103,699 CONTRACT FUNDS STAT~JS REPORT APPROVED BY THE BUREAU OF THE BUDGET 1, 216, 595 1,240,314 During December 1966 the Bui~eau of the Budget (BOB) approved the quarterly contractor reporting requirements described by DOD Instruction 7800.7, "Contract Funds Status Report" (CFSR). BOB's approval followed extensive coordination between industry representatives and Defense officials. DOD and industry have a mutual interest in information about funding. The DOD manager must assure the adequacy of the funds for varied Defense programs, and at the same time exercise adminis- trative fund controls on appropriations required by public law. Industry, on the other hand, is vitally concerned about receiving timely payments in appropriate amounts. Funds reporting has evolved from the need to satisfy both needs. The first effort for uniform application throughout DOD in this area occurred in 1959 with the development of the financial manage- ment report, DD 1097. This report was designed to be used essen- tially to assess potential expenditure levels. As expenditure restraints eased, it was adapted to answer funding status questions. This PAGENO="0128" 486 ECONOMIC EFFECT OF VIETNAM SPENDING report proved to be inadequate from both industry and DOD points of view. To overcome its deficiencies, individual report versions were designed by the military departments to provide their repre- sentatives with better information. These reports were limited to a small number of contractors, and thus, did not require BOB approval. To curb the tendency toward proliferation of data gathering efforts on this subject, DOD in 1964 undertook to install a single uniform approach for DOD-wide use. The resulting contract funds status report was developed through continuous consultation with industry. These consultations started in 1964 as a part of the cost and economic information system (CEIS). During March 1966, industry, through the Council of Defense Space and Industry Associations (CODSIA), was provided a draft version of the CFSR reporting instruction. CODSIA comments and recommendations were received in May 1966, and a series of joint DOD-industry meetings was held in late summer to discuss the CODSIA recommendations. Many changes were made to the original proposal as a result of industry comments. CFSR has benefited from this exposure. It can become a useful, workable document that will serve the needs of both DOD and in- dustry. In gaining BOB approval, the CFSR joins the cost information re- ports (CIR) and the economic information system (EIS) as visible parts of the selected acquisitions information and management systems (SAIMS) - The CFSIR is designed to supply the funding data that, with other performance measurement inputs, will provide information about Defense contracts to DOD managers for: Updating and forecasting contract fund requirements. Planning and decision making on funding changes in contracts. Developing fund requirements and budget estimates in support of approved programs. The contractor compares current funding with estimated fund requirements and describes the relative firmness of requirements on which estimates are based. Reasons for changes in quantitative fund requirements are also to be submitted. In view of the lead time required to adjust approved levels of funding when changes in estimated fund requirements are involved, reporting accurate information as early as possible is a matter of pronounced importance to the contracting parties (DOD and in- dustry) who must use the information. The CFSR will he implemented on all new contracts, which require funds status reporting, to replace reports such as the DD 1097, DD 1097 Addendum NAVWEPS 7810/4, and the contractor fi- nancial requirements estimate (CFRE) - If suitable arrangements to incorporate this reporting requirement can be made, the current use of the aforementioned reports wifi be discontinued in existing contracts. The instructions (DOD Instru~tion 7800.7) include descriptions of data items which are the contractor's required input to the CFSR. Questions concerning the implementation of CFSR should be referred to the Directorate for Assets Management Systems, Office of the Assistant Secretary of Defense (Comptroller), room 3B857, the Pentagon, Washington, D.C., 20301, telephone (202) OXford 7-7565. PAGENO="0129" Part!! ECONOMIC ANALYSIS OF IMPACT OF VIETNAM EXPENDITURES This section consists of various papers, statements, and articles on aspects of the impact of Vietnam expenditures on the American economy. They are arranged in chronological order. Several of the papers have been published subsequent to their original issue. The paper, "The Inflationary Impact of the Federal Budget," appears in the July-August 1966 issue of The Financial Analysts Journal. The paper, "The Outlook for Defense Spending- How Great an Uncertainty?," appears in the 1966 Proceedings of the Business and Economic Statistics Section, American Statistical Association. 487 78-51G--67-vol. 2- 9 PAGENO="0130" PAGENO="0131" THE GUNS, BUTTER, AND THEN-SOME ECONOMY * BY GILBERT BURCK The United States could fight several Korean wars with just its annual increase in output; the Vietnam buildup, at its present pace, probably will not push the economy to capacity. But enlarged global responsibilities may raise future military spending. Like the first surge of a rapidly rising river, the flow of U.S. materiel into South Vietnam has told the world that America is determined to lay out what it takes to hold the line in southeast Asia. Men and supplies, guns and ammunition, bulldozers and helicopters, and all the other military machinery provided by modern logistics have begun to inundate the little country as the United States consolidates its position in the grim business of war. Yet this war, like all wars, is more than a war. In the gigantic U.S. economy, upon which so much of the world depends, war is a powerful economic force. And it is not only a powerful force, but one that can be enlarged tremendously in a very short time. The war is also a force that is uncommonly volatile and unpredictable. Because of Vietnam, the Nation is confronted with a wide variety of economic possibilities, diffused, overlapping and penetrable only by informed and careful speculation. The hope of many economists that military spending will rise just enough-but no more than enough-to take up the slack in the economy is a fragile one, already nearly squeezed to death by other more portentous possibilities. First and most immediate of them, so strong that it stifi amounts to a probability, is that despite the war the growth of U.S. output will slow dowii some- what during the next 6 months. In that event, the United States could be in the odd position of fighting a difficult war while enjoying a sufficient surplus of resources to present it with something of a "peacetime" problem. But other and opposite possibilities, though not imminent, are growing more minatory. Military men and their backers in Congress may wangle a big increase in military spending to compensate for what they regard as the penny pinching of Secretary MoNamara's economy program; the cost of the Vietnam war may rise to much higher levels; general restlessness in Asia suggests that other Vietnams may break out without much warning; and the United States may soon embark on production of a whole new strategic weapon system, the Nike-X antimissile missile, which would soon begin to cost billions per year. And beyond that the United States may yet fall heir to most of the British cOmmitment in the Far East. All these possibilities suggest that defense spending could later rise considerably higher than has been commonly expected. A combination of such possibilities, depending on when and how they arise, could conceivably *Reprinted from Fortune, October 1965. 489 PAGENO="0132" 490 1~C0NOMIC EFFECT OF VIETNAM SPEN1)I~ elevate military spending to the point where the Nation's resources would be hard pressed, where many Great Society programs would have to be shelved, where taxes would have to be raised, and even where wage and price controls would have to be invoked. One great circumstance, however, should give U.S. citizens a large need of security. Barring Armageddon itself, the U.S. economy has grown so large that it can take on its world responsibilities with an astonishingly small percentage of its total effort. Just since the Korean war, the United States has added to its gross national product the equivalent of more than two-thirds of the total national produc- tion of the Soviet Union. The Nation's annual growth is now several times the annual military cost of fighting the Korean war, and its :jmmense and growing armed power actually takes much less of its total output than it did a decade ago, The Russians are said to regard the invasion of Korea as the biggest postwar mistake of international communism because it touched off a major U.S. military buildup; for the same reason the Chinese Communists may some day regard Vietnam as a great error. Plaimly the United States can maintain its might at a level sufficient for its aims and maintain it without straining its productiveness at all. The U.S. economy should have enough excess capacity to accom- modate next year's defense spending easily enough. Before the Vietnam buildup, many businessmen and a few economists believed that the great 56-month expansion would continue practically unabated through 1966. But many others, including Fortune'.s Business Roundup, argued that a slowdown of the growth rate was in the cards for next year, and believe a small one still is. This case rests on the argument that three sectors of the economy have expanded at a rate they cannot maintain: (1) consumer spending on goods has expanded a little too fast, partly because installment an.d mortgage credit have increased at a rate that cannot keep up; (2) inventory accumulation, owing mainly to hedging against a steel strike, has been excessive, and wifi probably be reduced severely; and (3) capital~ spending by manufacturers has been and still is rising so fast that it is bound to generate excess capacity. As all three slow down, they would tend to decelerate (not stop) the growth of the economy as a whole. HOW MANY DEFENSE BILLIONS IN 1966? At all events, the big question is how much and when military spending will boost business. The answer seems to be that although the plans for the buildup may give the economy a psychological lift, nothing that Vietnam will do to military spending over the next 6 months is likely to keep it growing at its recent rate of more than 4.5 percent a year. The Armed Forces, during the next 10 months or so, will be increased by some 376,000-340,000 mffitary and 36,000 ~`direct hire" civilian personnel. President Johnson talked of sending only 125,000 men in all to South Vietnam, but extra Marines have already gone there, and the best unofficial estimates in Washington say that some 250,000 men will be landed before the end of fiscal 1966 (June 30). Although Johnson decided not to call up reserves, the Defense Department is taking appropriate steps to "maximize" their ireadiness. Even before the manpower increases were announced last July, Defense Department spending had begun to turn up sharply from its PAGENO="0133" ECONOMIC EFFECT OF VIETNAM SPENDING 491 rather depressed level of early 1965. Although the Pentagon origi- nally expected to spend $51.2 bfflion in fiscal 1965, delays and econo- mies in procurement resulting from Secretary McNainara's cost-cutting program kept actual outlays down to only $47.4 billion, or $1.6 billion less than the estimate for fiscal 1966. But last spring the Defense Department increased its spending steeply toward the budgeted level for 1966; and then, as the Vietnam "situation" worsened, it revised its goals sharply upward. Not only is Defense spending the $49 billion it planned to spend last January, it has twice asked Congress for more. In May it got authority to spend an extra $700 million, and in August it got its second "supplemental" of $1.7 billion. It is also taking advantage of Section 512c of the appropriations act, which allows it to commit itself to outlays for operation, maintenance, and personnel- e.g., outfitting and training draftees-without prior appropriation by Congress. Next January, Defense will again petition Congress for a large spending permit, partly to cover outlays made and planned under section 512c. This request will be for at least $4 biffion, possibly more than $6 billion. Whatever its psychological impact, however, it will not result in $5 biffion or $6 billion additional spending m the fiscal year ending June 30, 1966; contracts are still to be made, and the bills for many will not come due until fiscal 1967 or 1968. The Pentagon's actual increased spending in fiscal 1966 will include $800 million to take care of the $1 biffion pay rise granted last August, about $1 biffion for added military personnel, and perhaps $1.7 billion of the $2.4 billion in "supplementals" it got last spring and summer. Thus outlays will probably total about $3.5 billion above last winter's estimate, or $52.5 bfflion in all. By late spring or early summer, of course, Defense will be spending at a higher leve~-say at an annuaJ. rate of about $55 billion. What the $3.5 biffion "extra" to be disbursed in fiscal 1966 does for the economy will depend on what it goes for. About half will be used for manpower increases-pay, uniforms, food, housing, etc. Sinc& the Pentagon will add men to the forces at the rate of only 35,000 a month, the annual rate of outlays for them will not be attained at least until next summer. Thus the total cost for new military per- sonnel, mcludmg the cost of clothing, housing, shipping, and paying combat rates to the men shipped to Vietnam, will probably come to no more than $1 biffion by July, 1966. The cost of ocean transporta- tion is hard to estimate. No stepup for capital outlays is yet called for; Defense has chartered some 55 modern vessels, has taken over a score or so from the Maritime Administration's large reserve, and can get more where those came from. The United States needed 600 to 800 ships in the Korean fracas, but these figures provide little edi- fication. A lot of men are now being flown to the Far East, and in any event the buildup is slow enough so that the present inventory of ships, including Navy-operated vessels, may be adequate. To the extent that some men will eat better in the services than they did at home, food buying will be stimulated. If an employed youth is drafted and his job goes to an unemployed man, the economy is stimulated. But the difference between an unemployed man's income and a soldier's pay and upkeep may not be very great. There will be less Government spending on unemployment benefits and other Federal programs than there might have been. Other factors, includ- PAGENO="0134" 492 ECOXOM1C EFFECT OF VIETXAM SPEXPING ing psychological ones, may irihibih popular spending. Employed young men about to be draf~.ed and older men awaiting a call from the reservns may no~ be inclined to go into debt to buy durables. The other half of the increase in the Defense Department's present suen ~ g ~ q c~p e ~ hi n c e i `~ u~e ~lcct on ~ ~s tess fo it will go mainly for eonstruct~on, ammunition, ordnance, and air- ~vait ~t leist ~150 i LO ~ ~gi ui'~u f~ cons±~ tCttGli n South ~ie~nar moc~ of it to e U ~i~J 3'u into a grea± j~ good deal of this money Wi~i be. spent in Sou~ie Vietnam, whence part oi (tiono ~ th som~ ~roo1 ~\) v0 find its t~ a~ to r nce ~ one of South Vietnam's big suppliers, and may there ironically add to the U.S. balance-of-nayments problem. But outlays at home for ammunition and ordnance (not counting missiles), which exceeded $1 billion in fiscal 1965, may more than double in fiscal 1963. During the past few years Defense has been laying out between $6 billion and $7 billion annually on planes, and the caption on page 121, which describes some of the craft being bought or considered for Vietnam, suggests the figure. will rise considerably. Except for helicouters, however, most planes on order or on. the list will have a long lead time. Defense, for example, is expected to order some 60 of the new CS-A giant transport planes, and spend about $2.2 biffion on them. Deliveries will be spread over 5 or 6 years. For all its impact, spending on ammunition, ordnance, and aircraft does not stimulate the economy as much as, say, a tax cut of com- parable dimensions. When consumers are handed buying power in the form of a tax cut, their suppliers build up inventories to accom- modate the new level of demand; the economy thus gets a double direct boost. It also gets an indirect boost when private capital is spent to expand factories and stores to take care of the new demand. But the Defense Department may supply a. military contractor with machine tools from its stockpile, in which case the economy gets no stimulus, direct or indirect. Or Defense may advance hint dollars in the form of progress payments to take care of working capital and equipment needs. In that event, the economy may get only a one- shot boost, for the contractors' suppliers are not likely to build up their stocks perntanently until more orders come in. All in all, to repeat, military spending as now scheduled may be insufficient, if a slowdown is in the cards, to keep the U.S. economy growing at its recent rate of about 4.5 percent a year (in constant dollars). Appropriately enough, the President's fiscal advisers, in- cluding the Council of Economic Advisers, are seriously discussing future tax cuts. "Indeed, we are still worried about slack in the economy," says one of the CEA staff members. THE "SECRET" REPORT The slack may be a short-lived worry. Next January the Defense Department will ask CongTess for more supplemental appropriations and wifi make public its preliminary estimates of needs for fiscal 1967. Suppose it requests not $5 billion or $6 billion but $10 billion or so more in suppiernentals, to be spent over a few years; and suppose it follows this with an estimate of more than $55 billion for 1967. Such figures would almost surely portend average annual military outlays of around $60 billion, or $10 billion above the current level, perhaps PAGENO="0135" ECONOMIC EFFECT OF VIETNAM SPENDING 493 beginning in fiscal 1967. The prospect of $60 billion a year, almost everybody agrees, would keep the economy at capacity and perhaps threaten to overheat it, especially since the Armed Forces would then be using up scarce manpower. Merely in anticipation of this level of spending, business would be less inclined to reduce excessive inven- tories, and more inclined to keep its capital spending high. Tax cuts would go out the window. There would be talk of inflation, of cuts in nondefense Government spending, of voluntary wage and price restraints, perhaps of controls. One influence that may help convert such a possibility into actuality is a remarkable 100-page "secret" report put together under the aus- pices of the Preparedness Subcommittee of the highly regarded Senate Armed Services Committee. The report argues that even before the Vietnam buildup Defense should have been spending billions more a year for Army procurement. It points to shortages and obsolescence in radio, spotting, and warning equipment, and guidance and control systems; in trucks, troop carriers, and helicopters; in machinegun, antitank-gun, and rifle ammunition. The report also urges an im- mediate funding for new procurement, and estimates that the Army alone needs between $12 billion and $18 billion worth of additional equipment during the next 5 years. On the assumption that the other services have suffered similar underprocurement, many have estimated the total "shortfall" in terms of $5 billion a year or so. Senator John Stennis, of Mississippi, chairman of the subcommittee, admits there is no evidence of shortages in Vietnam; the so-called short- ages one reads about there are generally a simple problem of trans- porting equipment to where it is needed. But Stennis argues that to keep forces in Vietnam well supplied the Army has had to strip assets and resources of the Reserves and active forces elsewhere. Hanson Baldwin, the well-informed military correspondent of the New York Times, has long criticized McNamara's lean budgets and recently let it be know that one of the reasons President Johnson did not call up the Reserves for Vietnam last July was that they lacked training and equipment. If true, this alone could presage a large increase in pro- curement. McNam ara naturally disagrees with the charges-stubbornly, sharply, and explicitly. He and his staff point out that the Armed Forces are in a much higher state of readiness than they were 5 years ago, "particularly in the kinds of forces we now require in southeast Asia," and they argue that the shortcomings cited in the report make little real sense. No army is ever completely modern, they say, nor does it want to be if production lines are to he kept open, and if large blocks of equipment are not to be out of date at once. Furthermore, they say, standards of logistic readiness cannot be used to measure combat readiness. STEP-UP IN VIETNAM But even by their own definition the time may be at hand to start producing for war. Georgia's Senator Richard Russell, chairman of the Armed Services Committee, is one important figure who seems to think so. He defines need as "everything on earth the American soldier can possibly need to fight a battle," and insists that Defense will have to spend much more. He has denounced a "casual attitude toward a situation that holds greater dangers than those inherent in PAGENO="0136" 494 DCONOMIC EFFECT OF VIETNAM SPENDING the Korean conifict," and forecasts that the war will have a big effect on the economy. For he sees as many as 300,000 topflight U.S. soldiers in South Vietnam, and is sure that Congress will vote the money even if the conflict costs upwards of $10 bfflion a year more than it is expected to cost. Whether and how much the action in Vietnam will be accelerated is a question that makes anything properly describable as calculation next to impossible. Some believe the conflict can be kept within limits. The failure of the Vietcong to take advantage of their big chance in the last monsoon season suggests that the United States can secure its bases and help enlarge the South Vietnamese area of control without enlarging its effort beyond present plans. But the war, as everyone is well aware, `is being stepped up; and there are strong reasons for thinking the U.S. commitment will have to be increased further. If only as a matter of military economics, many argue, a combatant with the potential of the United States is bound to throw more and more power into the conflict, hoping to achieve its ends less expensively by achieving them sooner rather than later. What is more to the point, both the strength and the resolution of the enemy are formidable. Some 250,000 Americans, as already noted, may well be sent to South Vietnam. But this may not be enough. Now the old notion that it takes 10 men to counteract one guerrilla, based on past wars including that of the British in Malaya, is no longer taken very seriously in an army whose firepower can be substituted for manpower. As McNamara himself has said again and again, a ratio of 3 to I may be too low, but a ratio of 10 to 1 is excessive. How do the figures stand? It appears that the Vietcong number at least 65,000 hard-core guerrillas and anywhere from 85,000 to 135,000 part-timers, plus two regular North Vietnamese divisions: total 170,000 to 220,000. The South Vietnamese forces, everybody hopes, come to 600,000; add 250,000 Americans, and you have 850,000. This might amount to a ratio of 4 or 5 to 1 This is only part of the story. The North Vietnamese "people's army" consists of 200,000 regulars and more than 250,000 semiregulars, reinforced by large reserves, a well-armed border police force, and hundreds of thousands of volunteers "ready to go." Bernard B. Fall, professor of international relations at Howard University and an old Vietnam hand from the days of the French defeat, holds that this force is one of the toughest, largest, most courageous, politically educated, and fanatically devoted armies in the world. He suggests it may move south to support the Vietcong, and also suggests that it might be supported, as it was against the French, by Chinese "volun.. teers" or Russian "technicians." A mass movement of North Viet- namese troops, of course, would make this a new war, and one made to order for U.S. airpower. Still, it would surely take more manpower. The possibility that another 250,000 U.S. troops may yet be moved to \Tietnam, at a cost of $5 billion or more a year, is manifestly not sheer speculative fantasy. "If we stay in, we must stay in with a hell of a lot of power," says Robert Lovett, Truman's Secretary of Defense. "You cannot skimp on power, and you cannot half fight a war. And no quartermaster was ever hanged for ordering too much of what's needed." PAGENO="0137" ECONOMIC EFFECr OF VIETNAM SPENDING 495 BILLIONS MORE TO GO Other magnitudes of possible military spending, though not so immediate as Vietnam, are not so very distant either. This fall or winter, for example, the decision will be made on whether to produce the Nike-X, the great antiballistic-missile system. An article in Fortune next month will explore the uses of the Nike-X; suffice it to say here that, depending on what strategy is adopted, this weapon system can cost anywhere from $8 billion to $40 billion, starting with only $250 million the first year but building up steeply over 7 or 8 years. As the insane conflict between Pakistan and India illustrates so vividly, war and revolution are endemic in the Asian subcontinent, and nothing gratifies the Chinese Communists more than to see them flourishing. If Thailand is relatively secure, not so much perhaps can be said for its' neighbors Laos and Cambodia. And over the longer run it looks as if the United States' would wind up as the only Western Power with large international commitments-and additional bfflions in military and other spending. Britain, the only other Western Power extensively involved overseas, is increasingly restive under its load. The British defense budget is about $6 billion, or 6.6 percent of GNP, almost as large a percentage as that of the United States. Worse, the country's still farfiung military organization is responsible for about $850 million or 77 percent of the U.K.'s $1.1 billion (esti- mated) balance-of-payments deficit, the most important problem facing a nation that is living beyond its means in the sense that it cannot export enough to pay for its imports. Defense Minister Denis Healey accordingly has announced an interim program for cutting the British defense budget by $600 million or 10 percent, and warns that more reductions will be in order unless the country's balance of payments takes a quick and satis- factory turn for the better. The interim cost-reduction program is supposed to be achieved mainly by drastic economies that will not alter existing commitments. Up until recently British military accounting was practically nonexistent, but with the help of the Pentagon, the British military establishment is being McNamara- ized. The United States wants dearly to keep the British in the game, and not only because it doesn't want to be the only Western country policing the world. The British can play the game more cheaply than the United States; a good part of the British forces in Malaysia, for example, consist of low-paid Ghurka troops. And the continuing presence of the British is a stabilizing influence in countries where the sudden withdrawal of colonial rule has left people dis- oriented. "WHAT ARE WE DOING THERE?" Whether McNamara-izing the British military establishment will suffice to keep it in the game is another matter. Britain has already proposed reducing its military outlays in Germany. Now the ques- tion of whether its strongholds east of Suez are worth hanging on to is being debated. The British are spending about 20 percent of their defense budget east of Suez, and committing a third of their purely military strength to Malaysia and Singapore. The 50,000-man British force in Malaysia, relatively cheap as it is, costs around $300 PAGENO="0138" 496 ECONOMIC EFFECT. OF VIETNAM SPENDING million a year, or six times the profit sent home from British invest- ments there; such is latter day "imperialism." In 1963, Britain signed a treaty binding itself to defend the Malay- sian Federation, and it has honored that pledge. But the whole sub- ject was blasted open in August when Singapore suddenly withdrew from the federation. In an editorial entitled "What Are We Doing There?" the Economist asked a few questions of the kind bothering many Britons: "Just how necessary is it that Britain should be in a position to restrain Dr. Sukarno or his-quite possibly Communist- successor? What part ought Britain to play in containing China?" If the British decide to phase out of Singapore or to reduce their commitment in the rest of Malaysia, Malaysia might become another Vietnam. It might anyway. The United States, in any event, may find itself obliged to take up the slack there, as it may in many another place east of Suez. The British, for example, want to get out of Aden, on the southwest corner of the Arabian Peninsula, even though some Britons regard it as vital to the country's Persian Gulf oil interests. An important question is whether even existing British bases in the East are now enough-i.e., whether they are located in the most advantageous positions to box in southeast Asia and Africa. The United Statesmaywant to, indeed mayhave to, move in to back up and enlarge the West's outposts by establishing communication centers, supply bases, ports, and airports on a number of well-placed British islands in the Indian Ocean and off the coast of Africa. Meantime U.S. obligations in Europe, which are great, cannot easily be reduced. Some 250,000 of our best-trained men are stationed in Germany. Just as the Chinese and other Asiatics would misread a withdrawal of troops from Korea, so the Russians might be em- boldened by a sizable reduc.tion of forces in Germany, or more precisely by a U.S. commitment to Asia on a scale that would deplete Euro- pean reserves. Some U.S. specialists have already been shipped to Asia, and the West Germans get alarmed every time a group leaves. Any speculation on future increases in military spending must weigh the possibility that France might pull out of NATO, and that our pipelines, bases, hospitals, etc., will have to be moved outside France. This restructuring of European military deployment will be expensive, even though the United States is developing a kind of long-range logistics system to offset it. The Pentagon finds, for instance, that it can often fly spare parts right from the United States more cheaply and expeditiously than it can maintain many depots abroad; everything needed~ for B-52 bombers is now stored in Texas, and for the F-100's in Utah. INFINITE COMBINATIONS The precise effect of any of these various defense spending possibili- ties on the country depends of course on if and when each becomes an actuality; the balance of an economy can change very fast when it is growing at around $30 bfflion a year. The range of possibilities is almost infinite. If the Vietnam conflict subsides, annual military spending may not rise above the $55 billion now in prospect; but a stepup to a rate of $60 billion or more by next summer would surely PAGENO="0139" ECONOMIC EFFECT OF VIETNAM SPENDING 497 keep business humming. Depending on the strength and weaknesses in the rest of the economy, so might the same rate a full year later. And if by some outside chance Vietnam and other commitments were to accelerate steeply and simultaneously, and annual military spend- were to hit a rate of $65 billion by late 1967, the Nation still might not have to resort to direct controls as it did during the Korean war. For a $65 bfflion level would still represent a stepup of $15 billion in 2 years. Given such a stimulus, the economy would be sure to grow, in the same period, by some $60 billion, or four times the increase in defense spending. In other words, the productive power of this guns, butter, and "then-some" economy is so immense that it can take almost any foreseeable defense increase in stride. WINGS OVER VIETNAM Dirty little ground wars like Vietnam were low in the Pentagon's calculations when the U.S. jet-age air force was planned. Consequently the war in Vietnam has opened up new areas of plane and helicopter procurement. Among the favorites and the candidates: 1. Hughes's OH-GA light helicopter, designed for observation; 714 are on order for the Army, and as many as 4,000 eventually may be ordered. The war looks like one in which helicopters will take the place of tanks and tracks; the Army has increased its helicopter companies to perhaps 50 each with 30 machines. 2. Boeing's CH-47A (Chinook) medium transport chopper, good at moving cargo and combat troops. The Army will spend at least $125 million on them. 3. Bell's Till-I (Iroquois or Huey) helicopter, also for cargo and troop trans- port. The Defense Department has ordered at least 1,500 at roughly $140,000 each. 4. Northrop's $700,000 F-5 twin-jet tactical fighter, which can carry a heavy bomb load and yet fly (after dumping its load) at 1,000 miles per hour. None has yet been ordered, but the F-5 may be one successor to the 18-year-old Douglas A-i Skyraider, a piston-engine fighter whose ability to carry more than its weight in bombs proved invaluable not only in Korea but in Vietnam. 5. Ling-Temco-Vought's A-7A, a light attack bomber that can carry twice as much as any other plane in its class and carry it farther. It is also a candidate to succeed the A-i. 6. Lockheed's ~J-i41 is doing most of the air-ferrying of men and material to Vietnam. It will be succeeded, in 2 or 3 years, by the giant C5-A, which will carry as many as 700 men or as much as 110 tons. 7. For counterinsurgency (COIN) jobs the Pentagon is considering a number of light armed reconnaissance planes. One of the candidates of North American Aviation was the YAT 28. 8. Hoping for orders, General Dynamics has gone ahead and built prototypes of its own counterinsurgency plane, the Convair Charger. 9. Even civilian planes, such as the new Piper Cherokee 6, are being con- sidered for counterinsurgency work. Piper is just working up to production of three a day for the civilian market. PAGENO="0140" THE INFLATIONARY IMPACT OF THE FEDERAL BUDGET* By MuBRA~s L. WEIDENBAUM, associate professor of economics at Washington University An article in a recent issue of the Journal of Finance states, "If fiscal policy is to be developed into a more precise art, if not a science, then it is crucial to be able to pinpoint more accurately the timing and the extent of impact of fiscal measures."' The purpose of this article is to point out than the present time provides an important example of ~heneed~ to understand the timing of the economic impact of fis- cal measures. Moreover, an improved understanding may, it will be argued, lead to the conclusion that the inflationary impact of the January 1966 Budget sub- mission has been underestimated and that fiscal policy measures may need to be modified substantially. It has been pointed out in the literature on public finance that the impact on employment, production, and income of a military buildup may occur primarily at the point in time that budget recommenda- tions are made, increased appropriations are enacted, and orders placed with military contractors. Although this may appear quite obvious to those acquainted with defense industries, the standard measures of Federal fiscal performance-such as the statement of Federal receipts and expenditures on national income account or the computation of the "high" employment budget surplus-confine the measurement to the actual delivery of completed weapons and other military "hard goods". Immodestly, I cite the results of a detailed study of mine which examined the economic impact of each step in the long process be-. tween budget recommendations for military procurement and deliv- ery of the completed items to the government and payment therefore. The primary effect on productive activity, to the extent there is any, occurs in advance of the actual government expenditures. Under most circumstances, the placing of orders induces production on gov- ernment accounts and such production remains in the private sector and does not show up as government expenditures until it is com- pleted and the goods involved delivered to the public sector.2 This point was elaborated in testimony before the Joint Economic Committee in 1962 where it was shown that, conceptually, production on government order is not reflected in Government purchases of goods and services at the time the work is performed, This activity, as measured by the cost incurred, is currently included in the gross national product, in the change in business inventories. When the *Bep~ted from Financia' Anal yst~o Journal, July-August 1966. I Joseph Scherer, "On Measuring Fiscal Policy," Journal of Finance, December 1965, p. 653. ~M. L. Weidenbaum, "The Timing of the Economic Impact of Government Spending," Naflenal Tax Journal, March 1959, p. 85. 498 PAGENO="0141" ECONOMIC `E'FFE~'I' OF VIETNAM SPENDING 499 Government contractor delivers the finished items, the transaction shows up in the national income accounts as a decline in business inventories. It also is then recorded as a Government purchase of goods and services. These two entries tend to cancel each other out, with no net effect on GNP. At the time it is recordedin the national income accounts, the Government purchase does not represent payments to the factors of production; it is more in the nature of an intersectoral transfer-a reimbursement to the ` Government contractor for his outlays during earlier periods. It is at the order stage that the government action normally will have its initial and often major impact on the markets for labor, raw materials, and financial resources. The contribution to economic activity is made during the production period prior to the actual government "purchase." Indeed, the recording of the governmentS purchase may coincide in time with a reduction in governmental. impact on total demand,3 HISTORICAL EXPEIUENCE If we reflect upon a previous military buidlup effort of the United States-the Korean mobilization-we can see that the proper under- standing of the timing of the economic impact of such government activity can have important consequences for `Federal fiscal policy. The $3.5 billion budget surplus during the first year of that defense expansion-fiscal year 1951-was hardly adequate in a period of rapid military buildup, as indicated by the aócompanying inflationary pres- sures of substantial proportions. Using conventional measures, Federal expenditures remained fairly stable during 1951. In contrast, the amount of appropriations and other "new obligational authority" granted by the Congress for the year was 68 percent above the 1950 total. The aggregate amount of contracts let and other obligations entered into by the Federal agencies almost doubled in the first year of the Korean mobilization program. The interplay during that crucial period of the opposing tendencies of the opposite ends of the Federal spending process was clearly brought out in the following comment on this period by the Joint Committee on the Economic Report: The ineffectiveness of the governmental cash surplus, normally a deflationary force, was, in large part, attributable to anticipatory forces on the inflationary side arising from the current or expected placement of orders for future deliveries.4 The following year, fiscal 1952, was the period of' the' actual major increase in Federal defense expenditures; it was one of ~`comparative stability in the American economy. Several interesting ~points emerge from an examination of the Korean mobilization program: 1. The major expansion in economic activity occurred at approxi- mately the same time as the~announcement and authorization of the program, and while many of the defense orders were being. placed. 3 "Statement of Murray L. Weidenbaum" in U.S. Congress Joint Economic Conmiittee~ liwentori., Fluctuations and Economic S'aiflizat ion, 1062, pp. 170-179. See also Edward Greenberg, Emplojnnen.t Im- pacts of Defense Erpenditures and Obligations, Washington University, Department of Economics, Working Paper 6505, April 29, 1065; Michael Spiro, Impact of Government Procurements on Emplo~ment in the Aero- space Industry, Massachusetts Institute of Technology, Alfred P. Sloan School of Management, Working Paper 134-65, November 1965.2 4 U.S. Congress, Joint Committee on the Economic Report, Notional Defense and the Ecoveanvic Ontlook for the Fiscal Year 1958, 1952, p. 49. PAGENO="0142" 500 ECONOMIC EFFECT OF VIETNAM SPENDING 2. The expansion in economic activity slowed down at about the ~same time that the rise in new obligational authority slowed down. 3. The major rise in economic activity occurred prior to the major rise in government expenditures.5 Because the early stages of the government spending process often show up in the private sector rather than in the public sector- particularly private production on government account-it is a temp- tation, during periods characterized by sharp increases in government purchasing, to conclude that private rather than government demand is contributing the inflationary pressures. The following is an example of this shortcoming which often mars otherwise cogent analyses. The author is discussing the first year of the Korean mobilization program: This great increase in private demand took place at a time when the federal budget was running at a surplus, and when the direct increase in expenditure for security programs was quite small. Thus most of the inflation in the year after Korea can be said to have been caused by the large volume of private spending. The important point is that Federal fiscal policy cannot be held directly responsible for the inflation.6 Maintaining that Federal fiscal policy was not inflationary during a period when the rate of military orders was doubling and constituted the major expansionary force in the economy may, in retrospect, appear to be a somewhat odd interpretation. However, the purpose here is not to dwell about ancient error, but to examine the possibility of its being repeated at the present time. THE JANUARY 1966 PRESIDENTIAL MESSAGES The budget message of the President issued in January 1966 states: This budget presents a responsible fiscal program. It accommodates our foreign and domestic responsibilities in an environment of strong but noninflationary economic growth.7 The January 1966 Annual Report of the Council of Economic Advisers estimates that both the actual and high employment (née "full" employment) budgets on the national income accounts basis are expected to be approximately in balance in fiscal 1967.8 The text of the report does not cover 1966. However, the statistical appendix provides some extremely useful information. It shows that the Federal Government is anticipated to move from a point of some restraint in fiscal 1965-a surplus of $1.2 billion on the national income account basis-to a deficit of $2.2 billion in 1966. No estimate is presented for 1966 on a "high employment" budget basis. The body of the Economic Report does not explain why fiscal policy will shift from, mild restraint in 1965 to a somewhat expan- sionary condition in 1966. However, this point becomes more acute when attention is drawn to the measures of the early stages of the government procurement and expenditure process. Appropriations and other new obligational authority is estimated to rise (on an administrative budg3t basis) from $106.6 biffion in fiscal `M. L. Weidenbaum, "The Econcrnic.Impact of the Government Spending Process," Business Review, University of Houston, Spring, 1961, pp. 39-40. 6 W. Glen Campbell and others, Economics of Mobilization and War, Homewood, ]]L, Richard D. Irwin, 1952. p. 75. 7 The Budget of the United Stales Government for the Fiscal Year Ending June 30, 1967, 1966, p. 9. 8 Economic Report of the President, 1966, p. 54. PAGENO="0143" ECONOMIC EFFECT OF VIE:TNAM SPENDING 501 1965 to $126 billion in 1966, an 18 percent growth. Compared to this $19.4 billion rise, budget receipts are projected to go from $93.1 billion to $100 billion during this same period-an increase of only $6.9 biffion. As shown in table 1, the bigger increase in revenues will occur in fiscal 1967, when the expansion in new funding will have dampened down. TABLE 1.-Selected measures of Federal finance [in billionsi - Fiscal years- 1965 1966 1967 New obligational authority Budget receipts $106. 6 $126. 6 $121.9 93. 1 100.0 111. 0 Source: 1967 Budget, pp. 11, 16. TABLE 2.-Selected measures of military finance [In billions] . Fiscal years- 1965 1966 1967 New obligational authority Obligations incurred Expenditures $50 5 $63 3 $59 9 50.2 63.7 62.8 47.4 54.2 58.3 Source: U.S. Department of Defense, FAD-554, Jan. 24, 1966. An examination of the available measures of the military budget is quite revealing. As shown in table 2, the entire current expansion in new obligational authority and obligations to be incurred for the Department of Defense is scheduled for fiscal 1966; in fact, declines are projected for 1967. In contrast, the expenditure rise is slower in 1966 and continues to 1967. It would appear, on the basis of the published materials, that the major expansion in Federal programs will occur during the present year and that fiscal restraint will not take hold until next year. SUMMARY Given the nature of the military and political assumptions under- lying the 1967 budget, an evaluation of its economic impact is hazardous. Nevertheless, it would appear, on the basis of the justifications and explanations accompanying the document, that the current, immediate inflationary potential-during the fiscal year 1966-has been virtually ignored. The fiscal policy sketched out for 1967 may be adequate, assuming no Vietnam supplemental in the 1968 budget, but this writer has the uneasy feeling that the inflationary experience that accompanied the first year of the Korean expansion may be repeated at the present time, although on a reduced scale. Hence, once again, failure to focus on the full range Of. méas- urements available of the economic imnact of the government spending process may result in inappropriate fiscal policies being adopted. PAGENO="0144" THE VIETNAM WAR: A COST ACCOUNTING * Br WILLIAM BOWEN The Vietnam war is peculiarly expensive, far more so than is generally thought. Costs are running above $13 billion a year, and are headed up. Fortune's figures suggest that we're in for bigger defense budgets-and new economic strains. What happens in the U.S. economy over the next year or two, what happens to demand and production and prices and taxes, will to a large extent depend upon the cost of the Vietnam war. If anyone inside the Pentagon knows the current cost, he is not telling, nor, of course, is anyone there telling about costs associated with future operations. Accordingly, Fortune has undertaken on its own to figure out the cost-present and prospective-of the Vietnam war. it is already costing a lot more than almost anybody outside the Pentagon imagines. At present, with about 235,000 U.S. servicemen in South Vietnam, the U.S. costs are running at a yearly rate of more than $13 bfflion. Costs, it should be observed at once, cannot be translated mechanically into expenditures; a drawdown on inventories involves a cost, but may not involve an expenditure for quite some time. Stifi, if the war continues at only the present rate through fiscal 1967 (the year beginning next July 1), the resulting Defense Department expendi- tures will probably exceed the $10 billion or so that the hefty 1967 defense budget officially allows for the Vietnam war. But the war, it appears, will get bigger. U.S. Senators who know what Defense Department witnesses say in closed congressional hear- ings have predicted a U.S. buildup to 400,000 men, or more. Gen. William C~ Westmorëland, the U.S. commander in Vietnam, has reportedly requested a buildup to 400,000 by the end of December. With that many U.S. servicemen in South Vietnam, the cost of the war would run to $21 bfflion a year-even more if bombing and tactical air support increased in proportion to the buildup on the ground. At any such level the Vietnam war would bring on economic strains beyond what most economists appear to foresee, and beyond what makers of public policy appear to be anticipating. The strains would surely add to the pressure for higher taxes. In its Vietnam cost accounting, Fortune had considerable help from outside economists, but no access to classified data. The basic sources were public documents-Federal budgets, Defense Depart- ment publications, transcripts of congressional hearings. Defense Department officials interviewed were persistently wary of discussing the costs of the war, although the department proved willing to pro- ~Reprinted from Fortune, April 1966. The cost analysis for this article was carried out by a team consisting of, in addition to Mr. Bowen: Alan Greenspan, president of Townsend-Greenspan & Co., consultants; P. Bernard Nortman, independent economic consultant; Sanford S. Parker, chief of Fortune's economic staff; and research associate Karin Cocuzal. 502 PAGENO="0145" ECONOMIC EFFECT!' OF VIETNAM SPENDING 503 vide some missing bits of factual information that would otherwise have been unobtainable. It turned out that some costs-of ammuni- tion, for example-could be easily calculated from published Defense Department figures. But getting at some other costs required elabo- rate calculations, and stifi others could only be estimated. Estimates and assumptions were in all cases conservative. The results, set forth by category below, represent what is probably the first serious effort outside the Defense Department to analyze the costs of the war. The purpose of the undertaking was not to make a case against (or for) the fiscal 1967 defense budget, but to provide a basis for looking beyond the budget and assessing the potential economic effects of the war. In wartime no defense budget can sensibly be viewed as a hard forecast of defense spending. Actual expenditures during the fiscal year will be determined by unfolding events that no budgeter can foresee months in advance. So far as the economy is concerned, then, what counts is not budget projections but Defense Department orders and expenditures. The costs and expenditures resulting from a war do not match up in the short run. They rise and decline in different trajectories. In the early phases of any war, the Defense Department can hold down expenditures by drawing upon existing forces and supplies, just as a business firm can temporarily reduce cash outlays by letting inven- tories dwindle, or a family can cut next month's grocery bill by eating up the contents of the pantry. Later on in the war, expenditures catch up with costs. It must be kept in mind that "expenditures," as used here, means incremental expenditures-those that would not be required if it were not for the war. An idea of the movements of costs and expenditures and defense orders, and their changing economic effects, can be gathered from the following budgetary-economic scenario of a medium-sized war- i.e., a war not very different from the one in Vietnam. A WAR IN FIVE ACTS Act I. It looks like a small war, and it requires only smallish incremental expenditures. The forces sent overseas are members of the existing Defense Establishment, and the Defense Department would have had to pay, feed, and otherwise provide for them if they were doing peacetime duties in Georgia instead of fighting guerrifias in a tropical republic. The weapons, ammunition, and equipment come from existing stocks. The extra expenses (hostile-fire pay, I transportation) can be temporarily absorbed in the immensity of the defense budget, and the administration does not have to ask Congress for supplemental appropriations to finance the war. It is being financed, in effect, through "reduced readiness"-that is, the United States has fewer trained men and smaller stocks of war materiel to deploy or use in any other contingencies. Act II. The struggle has expanded, and the Armed Forces need extra inflows of men and materiel to compensate for the unexpectedly large outflows to the war zone. The Pentagon places contracts for additional arms, ammunition, equipment; it expands draft calls and recruitment efforts. The administration asks Congress for supple- mental appropriations. War expenditures are still only moderate, but with defense orders increasing and inflationary expectations 78-516-67-vol. 2-1O PAGENO="0146" 504 ECONOMIC EFFECT OF VIETNAM SPENDING beginning to stir, the war is already having noticeable effects upon the economy. Act III. The U.S. buildup in the war zone has continued. The administration has asked Congress for large supplemental appro- priations. Spending still lags behind costs, but it is rising fast- the recruits in training have to be paid, and so do the additional civilians hired. The war's economic effects, moreover, are expan- sionary out of all proportion to the actual increases in defense spend- ing: the surge in defense orders has increased demand for skified workers, materials, components, and credit in advance of deliveries and payments. To some extent, the Defense Department's materiel buildup is being temporarily financed by the funds that contractors and subcontractors borrow from banks against future payments from the U.S. Treasury. Act IV. The U.S. military buildup in the war zone tops out. Defense production continues to rise, but the rate of rise is much less rapid than in Act III, and the expansionary economic force exerted by the war begins to wane. Deliveries of arms, ammunition, and equipment rolling into military depots more than match the chewup of materiel in the war, and so some replenishment of inventories takes place.. Me n are moving out of training and into operating units faster than forces are being sent overseas, and so there is a net buildup of trained, deployable military forces in the United States. Expenditures catch up with costs. Act V. The war ends. The dropoff in contract awards and the collapse of inflationary expectations reverberate throughout the econ- omy. Far from faffing steeply, expenditures continue to rise a bit before entering into a gradual decline: the incoming deliveries must be paid for, and the men brought into the Armed Forces must be provided for until they are mustered out. With deliveries no longer partly offset by wartime chewup, inventories fill rapidly, and begin to overflow. During the period of readjustment, military manpower and military inventories exceed normal peacetime requirements. Ex- penditures for this excess readiness largely make up for the expendi- tures deferred through reduced readiness in the early phases of the war. In January, 1965, the Vietnam war was still iii act~ I, and to all appearances nobody in the administration expected an act II. The President's budget message declared that, with the "gains already sheduled," U.S. military forces would "be adequate to their tasks for years to come." The new budget projected a decrease in defense spending in fiscal 1966, and a decline in total uniformed personnel. Maj. Gen. D. L. Crow, then Controller of the Air Force, subsequently testified at a congressional hearing that "the guidelines for the prepara- tion of the budget as they pertain to Vietnam were actually a carry- forward of the guidelines that were used in the preparation of the 1965 budget, and they did nOt anticipate increased activity, per se, in Vietnam." IT'S NOW ACT III Not until last May was it entirely evident that act II had begun, but there were intimations earlier. In January 1965, after declining for four consecutive quarters, the Federal Reserve Board index of "defense equipment" production turned upward, beginning the pre- cipitous climb depicted at the bottom. of the . page opposit.e. In February the United States began bombing targets in North Vietnam. PAGENO="0147" ECONOMIC EFFECT OF VIETNAM SPENDING 505 In March the decline in Army uniformed personnel came to a halt, though the downtrend continued for a while in the other services. In April the U.S. buildup in Vietnam accelerated. In May the administration asked for, and Congress quickly voted, a supplemental fiscal 1965 appropriation of $700 million. In June the decline in total uniformed military personnel turned into a steep rise. The Vietnam war is now well along in act III of the budgetary- economic scenario. Since that $700 million request in May 1965, the administration has asked for $14 billion in supplemental war appropria- tions. Soaring orders for ammunition and uniforms have contributed to shortages .of copper and textiles for civilian use. So far, however, the costs of the war have been largely channeled into reduced readiness. The war reserve of "combat consumables" has been drawn down. New equipment and spare parts that otherwise would have gone to units elsewhere have been diverted to Vietnam-Iroquois helicopters, for example, that would have gone to the 7th Army in Germany. Fixed-wing aircraft to replace losses in Vietnam have been ordered, but not yet fully delivered and paid for. The war has required only moderate incremental expenditures (that must be understood, how- ever, to mean "moderate" as war expenditures go-a few billion dol- lars). But as deliveries roll in and the Armed Forces expand, expendi- tures will begin to catch up with the war's far from moderate costs. In numbers of U.S. servicemen deployed, the Vietnam war is not as big as the Korean war at its peak. But costs per man run much higher than they did in the Korean war. The pay that servicemen get has gone up more than 40 percent since then. Some materiel costs have risen very steeply since Korea. The F-86D fighters in Korea cost about $340,000 each; the F-4C's in South Vietnam cost nearly six times as much. Ammunftion use per combat soldier is very much higher than in the Korean war. The M-14 rifle fires up to 150 rounds per minute, and 10 rounds per minute at a sustained rate. The M-16, carried by some Special Forces troops, can use up ammunition at a full- automatic rate of 750 rounds per minute. The M-79 grenade launcher fires grenades as if they were bullets. The nature of the war contributes to making it peculiarly expensive for its size. Technologically sophisticated military forces, magnifi- cently equipped to kill and destroy, are inefficiently employed against~ meager or elusive targets. In Korea, there were visible masses of enemy forces to shoot at, and the U.S. superiority in weapons could be exerted efficiently; in Vietnam the enemy hits and runs, moves under cover of darkness or foliage. With their abundant firepower, the su- perb U.S. fighting men jn South Vietnam clobber the Vietcong in shooting encounters, but the U.S. forces run up huge costs-in troop supplies, fuel, helicopter maintenance-just trying to find some guerrillas that they can shoot at. PAGENO="0148" 3.1 2.9 2.8 2.7 - . 4 , .4 , Total U.S. military personnel -300 -~ 200 . U.S. forces in Vietnam .-~~-- - 1.00 Vietnam Requirements Are Pushing U.S. Armed Forces over the Three-Million Level... In keeping with Secretary McNamara's long-range plans, the total number of U.S. military personnel shrank in the latter half of calendar 1964, and the shrinkage con- tinued until May, 1965, even after the buildup of U.S. forces in South Vietnam had begun. But after May the military-personnel curve rose steeply. By the end of June, 1967, according to plans already announced, the armed forces will have 452,000 more men than they had at the May low. As the chart shows, far more men have been added to the armed forces since May, 1965, than actually have been sent to Vietnam since then. A main reason for the disparity is' that it takes a serviceman outside the theatre of war to support one in Vietnam. C) 0 0 C) Llj 0 ~rJ ttj 1:~1 C) 1963 . 1964 1965 IIIHIO ~ 1966 1967 PAGENO="0149" 507 EtCON0M~ EFFEC'r OF VI~T~ SFEND~0 PAGENO="0150" Both lines o this chart show quarterly changes, season- ally adjusted. Arms production as measured by the Fed- eral Reserve Board "defense equipment" index (main components: military aircraft, ordnance, Navy ships) rose (luring 1961, the first year of McNamara's steward- ship, remained on a bumpy plateau in 1962 and 1963, de- clined in 1964, then moved into a spectacular upswing beginning in the first quarter' of 1965. By January, 1966, the index had reached 126 percent of the 1957-59 average, indicating that the Vietnam war has already had a sub- stantial impact on the economy. Contracts normally pre- cede production, and so the commitment line normally moves up (or down) months ahead of the production line, but in 1965 there was an extraordinary switch in this relationship. The reason is that arms production was pushed upward by a surge in precontract "letter con- tracts" from the Defense Department-a sign of urgency. While Defense Production Soars 0 0 a 0 ~rJ 3 ~ 1960 196~ 1962 1963 1964 1965 PAGENO="0151" ~CONOMIC EFFECT OF VIETNAM SPENDING 509 FIRING INTO A CONTINENT There is an almost profligate disparity between the hugh quantities of U.S. bullets and bombs poured from the air upon targets in Vietnam and the military and economic damage the bullets and bombs do, in the aggregate. In North Vietnam the United States has debarred itself from attacking economically valuable targets such as port facilities and manufacturing plants. From bases in Thailand, F-105's fly over North Vietnam and drop their mighty payloads on or near roads, rail lines, ferry facilities, bridges. The costs to the enemy of repairing the damage are picayune compared to the costs to the United States of doing the damage. In South Vietnam the guerrillas seldom present concentrated targets. Machineguns mounted on heli- copters and on A-47's (elderly C-47's, modified and fitted with three guns) fire streams of bullets into expanses of jungle and brush that are believed to conceal Vietcong guerrillas. The thought of an A-47 firing up to 18,000 rounds per minute into treetops brings to mind that bizarre image in Joseph Conrad's Heart of Darkness, of the French warship off the African coast: "There wasn't even a shed there, and she was shelling the bush * * * firing into a continent." B-52's. operating at a cost of more than $1,300 per hour per plane, fly a 10-hour round trip from Guam to South Vietnam to strike at an enemy that has no large installations or encampments visible from the air. The B-52's have been fitted with extra racks that increase their payloads to more than sixty 750-pound bombs, about $30,000 worth of bombs per plane. "The bomb tonnage that is resulting is literally unbelievable," said Secretary McNamara at a Senate hearing last January. Several weeks later, at a press con- ference, he said: "Our consumption in February * * * of air-de- livered munitions alone in South Vietnam was two and a half times the average monthly rate in the 3 years of the Korean war." But much of that "literally unbelievable" bomb tonnage merely smashes trees and blasts craters in the earth. Only a rich nation can afford to wage war at ratios so very adverse. But the United States is a rich nation. If there is a great disparity between the bomb power dropped and the economic value of the targets, there is also a great disparity between the wealth and power of the United States and of the enemy. The cost of the bombs is small in relation to the GNP of the United States, and the damage they do is sometimes substantial in relation to the GNP of North Vietnam, or to the resources available to the Vietcong. But the costs of winning are going to be unpleasantly large. The official position of the Defense Department is that it does not know what the costs of the war are, and that it does not even try to compute them. As a Pentagon official put it: "We have no intention of cost-accounting the war in Vietnam. Our business is to support the conffict there. Our business is not cost accounting. We have no estimates of costs. It's not practical to say the war has cost x dollars to date." The Defense Department argues that the war costs are commingled with those of a military establishment that existed before the U.S. troop buildup in South Vietnam began. And that, of course, is true. Still, a meaningful total can be arrived at by analyzing and adding up the various war costs, regardless of whether they translate PAGENO="0152" 510 ECONOMIC EFFECI' OF VIETNAM SPENDING immediately into added expenditures. One way or another, we may assume, all costs will result in either added expenditures or reduced readiness, and in the reckoning of the costs it does not matter which, or when, or how. Fortune's first objective was to arrive at an approximation of annual costs at the early-1966 level of 200 000 U.S. servicemen in South Vietnam. The results of that analysis can serve, in turn, as a basis for calculating costs at higher levels of buildup. In what follows, costs are divided into standard categories-military personnel, operation and maintenance, and procurement-that the Defense Department uses in its budgeting. To outsiders, the department's assignment of expenses to these categories sometimes seems a bit arbitrary. Some clothing is funded under personnel and some under operation and maintenance; ordinary repair parts are funded under 0. & M., aircraft "spares" under procurement. INSIDE AND OUTSIDE THE THEATER Military personnel. As noted, the fiscal 1066 defense budget, submitted in January 1965, projected a moderate decline in total uniformed military personnel ("Active es, from about 2,663,000 at that time to 2,640,000 as of June 30, 1966. Actually, the decline proceeded so briskly that the total got down to 2,641,000 in May 1965. Since then the Defense Department has announced plans to increase military personnel to 2,987,000 by next June 30, and to add on another 106,000 by June 30, 1967; by the latter date, the total would be 452,000 above the May 1965 low point. In addition the Department is expanding the civilian payroll by about 100,000 during fiscal 1966, and many of these civilians will take over work previously done by service-. men, freeing them for other duties. It might appear that these figures could serve as a basis for calcu- .lating the personnel costs attributable to the Vietnam war. But it is impossible, without knowing the Defense Department's classified plans and assumptions, to relate the announced personnel increases to any particular force level in South Vietnam. And to have any meaning, statements about the cost of the Vietnam war must be related to specified force levels. Here we are trying to get the cost of the war at a particular level-200,000 U.S. servicemen in South Viet- nam. For this reckoning, the war personnel costs may be taken as the combined personnel costs of (1) the 200,000 men in Vietnam, (2) the peripheral supporting forces in southeast Asia, and (3) the required backup forces. The Defense Department defines personnel costs as pay and allowances, subsistence (chow), personal clothing (the "clothing bag" issued to each recruit), plus certain other expenses. Average personnel costs in the armed forces run to $5,100 per man per year, but the men in South Vietnam get "hostile-fire pay" of $65 a month, and other war costs boost the average to about $6,200. So, 200,000 men at $6,200, or $1,240,000,000. The peripheral supporting forces-mainly aboard 7th Fleet ships and at bases in Thailand-numbered at least 50,000 last winter, when the U.S. force level in South Vietnam reached 200,000. That's 50,000 men at $6,200 a year, or $310 million. Each thousand U.S. servicemen stationed overseas under nonwar conditions have on the average about 600 other servicemen backing PAGENO="0153" E'CONOMIC EFFECT OF VIETNAM SPENDING 511 them up: trainees, transients, men serving in supply units or per- forming various auxiliary functions. But it takes far more than 600 men to back up a thousand men deployed in South Vietnam. Addi- tional supply men are required to keep the huge quantities of arms, ammunition, equipment, and supplies moving into the theater of war. The men serving there are rotated home after a 1-year tour (a 3-year tour is normal for U.S. forces in Western Europe), and additional trainees are needed to support the rotation. Extra backup men are needed, also, to make up for the erosion resulting from deaths,. severe injuries, and tropical ailments. In the course of a month, large numbers of men spend some days or weeks in transit to or from South Vietnam. And additional men in training require additional men to train them. With all the additions, it works out that there is a ratio of one to one, or 1,000 to 1,000, between servicemen in the theater of war and servicemen outside the theater but assignable to the war as elements of cost. For the 250,000 men in Vietnam and vicinity, then, there will be 250,000 others elsewhere. Since some of these are new recruits, the' average personnel cost is taken to be only $4,700. That makes another $1,175,000,000, bringing total personnel costs to $2,725,000,000. KEEPING THEM FLYING Operation and maintenance. This category is even more capacious. than its name suggests. It includes everything that does not fall. into other categories-recruitment, training, medical care, repairs, operation of supply depots, transport of goods, and, in the official. expression, "care of the dead". A great many of those additional civilians hired by the Defense Department in the last several months. are working in 0. & M. In fiscal 1965, 0. & M. for the entire Armed Forces averaged out. to $4,630 per man. For 500,000 men that would come to $2,315,000,- 000. But the Vietnam war entails extraordinary 0. & M. expenses. Planes there fly a lot more hours per month than they normally do, and the extra 0. & M. involved in keeping them flying runs at a rate of more than $200 mfflion a year. Extra repair and maintenance are required to keep vehicles moving and equipment working. An enormous logistic flow must be coped with-more than 700,000 tons. a month. The shipping costs to Vietnam amount to $225 million at. a yearly rate. Combat clothing gets ripped up in the bush, de-. teriorates rapidly in the moist tropical heat. And, of course, extra medical care per man is needed in a tropical war. When all the extra 0. & M. costs involved are added together, the total, by a con- servative reckoning, comes to $1 bfflion. That brings the over-all 0. & M. costs to $3,315,000,000. Procurement, i.e., materiel costs. As reckoned here, these are taken to be the chewup in the war zone rather than the additional procure- ment resulting from the war. Ammunition and aircraft losses together account for more than 75 percent of materiel costs, and for both. categories the costs can be calculated with some statistical precision. McNamara reported last January that U.S. ground forces in South Vietnam, including Army and Marine helicopter units, were "con- suming ammunition at the rate of about $100 mfflion per month," and that U.S. air forces were using up "air munitions" (mostly PAGENO="0154" 512 ECONOMIC EFFECT OF VIETNAM SPENDING bombs) at a c~hze; of about. SilO million per month. That works out to co ~I~i~te u~ 82 5 ~non c" A~ di t e tnere w etc q00~ J,O ( ]O h~ S s~j~ i~er~en ii South ~ ~etn~n , ~o u the ca'~ul tion of costs at the 200,000-man level, the figure has to 1~e adjusted upward a. hit, to $2,650,000,030. in testriymg at congressional hearings, Mc.Namara and other Dc- fenbe DC) idn)cnt ~ it-esse~ Illid Si 3~ in met ous u.~ s of ii form'' `)n ibout if S ~i' "~~TL opa atioi s m tlie ~ha4 mm w `ir, mclii Ii e losses in 1965 and numbers of sorties over various periods (one flight by one plane counts as one sortie). Sorties per month increased dramatically during 1965, and despite low less rates per 1,000 sorties, losses added up to large numbers over the course of the year: 275 fixed-wing ~i~ia~ o~t i tes ut ot "o~t~ie action" ~ e a~ 1~7 eIicopt~s lust, 70 a~ `t ~c ul o~ "tiost 1~ `c ion," 101 ii `~c i e ~ c ashes `i~d other mishaps. Assuming continuation of 1965 ratios between sorties and losses, estimated annual attrition at a 200,000-man force level works out, in rounded figures, like this: 475 fixed-wing tactical planes, at $1,800,000 8855, 000, 000 165 other fixed-wing planes (transport, observation), at $200,000_ 33, 000, 000 320 helicopters, at $250,000 80, 000. 000 Total 968, 000. 000 A figure for aircraft spares was arrived at by first calculating total flying costs of the aircraft operations (information on average flying costs per hour for various types of military aircraft is available). That came to $800 million a year. Spares represent, on average, 20 percent of flying costs, which comes to $160 million. With the addition of a minimal $25 million to allow for spares required to repair planes hit by enemy fire, the total for aircraft spares comes to $185 million. Little information is available about materiel chewup, apart from ammunition and aircraft. iii the absence of direct evidence, however, Defense Department procurement orders provide a basis for rough estimates. It is assumed-and this is a bit of a leap-that the annual attrition of weapons, vehicles, and equipment is equivalent to one-third of the increase in procurement orders in those categories (as measured by the increase in prime contract awards from the second half of 1964 to the second half of 1965). From that procedure emerges a round figure of $600 miffion for attrition of hard goods other than aircraft, ammunition, and ships (in effect, ship losses are assumed to be zero). That brings total procurement to $4.4 billion. The three categories together-military personnel, 0. & M., procurement-add up to $10,440,000,000. That is the appro~mate annual cost of' the U.S. operations in the Vietnam war at the 200,000- man level reached early this year. To that figure must be added support for South Vietnamese military forces. (For fiscal 1967, military assistance to South Vietnam will be included in the defense budget.) Counting supplemental requests, total military aid to South Vietnam comes to more than $1 billion in the current fiscal year. in the early 1960's, military aid to South Vietnam ran to something like $100 million a year; the $900 million difference can be considered a Vietnam war cost. in addition, the United States pays $50 million to help support South Korean forces in South `~ietnam. PAGENO="0155" E!CONOMIC EFFECT OF VIETNAM SPENDING 513 Much of the $1.4 billion that Congress has appropriated in fiscal 1966 for military construction in southeast Asia has to be counted as part of the Vietnam war cost. According to Secretary McNamara's testimony at a Senate hearing, all of the contemplated construction "is associated with the operations in South Vietnam." Some of the facilities may have military value to the United States after the war is over, but it seems reasonable to suppose that at least $1. billion of the planned construction would not have been undertaken had it not been for the war. If that is spread over 2 years, construction adds $500 million a year to the cost of the war. That brings the grand total to $11.9 billion a year. This figure does not allow for an important deferred cost, depreciation of equip- ment. Since the Defense Department does not pay taxes or operate in terms of profit and loss, the business-accounting concept of depre- ciation is hard to apply, but the wearing out of equipment is a reality whether it is cost-accounted or not. This wearout is a separate cost from the additional maintenance and repair required to keep planes and ground equipment operating in the Vietnam war. Tactical planes and Military Airlift Command planes involved in the war are flying 60 percent more hours per month than they normally do in peacetime, and even with extra maintenance their useful lives are being shortened. The consequences will show up in future defense budgets. In addition, the war imposes substantial nonmilitary costs that are not included in the $11.9 billion (or in the other war-cost figures that follow). U.S. economic aid to South Vietnam, for example, leaped from $269 million in fiscal 1965 to $621 million in the current year. MORE MEN FOR PATROL, SEARCH, PURSUIT, ATTACK The $11.9 billion may be taken a.s the annual military cost of sus- taining the war with 200,000 U.S. servicemen in South Vietnam-the level reached around February 1. Given that yardstick, it is a relatively simple matter to cost out the present level (about 235,000 in South Vietnam). It can be assumed that costs have increased since February in direct proportion to the buildup, except that con- struction costs and military aid to South Vietnam remain unchanged. So calculated, the current cost works out, at an annual rate, to $13.7 billion-the "more than $13 billion" mentioned at the beginning of this article. Efforts to project costs at very much higher levels of buildup run into some uncertainties. Costs at the 400,000-man level-the level General Westmoreland is reportedly aiming for by the end of this year-would not be double those at 200,000. For one thing, the expansion of U.S. forces will itself tend to alter the character of the war. Indeed, it has already. The widening U.S. superiority in firepower forced the enemy to cut down on direct assaults by battalions and regiments and revert pretty much to guerrilla warfare. As the number of GI's in South Vietnam increases, the forces needed to guard the coastal enclaves will not have to increase proportionately, so a larger percentage of the total combat-battalion strength will be available for patrol, search, pursuit, and attack operations. Some costs, as a result, will increase faster than the number of U.S. service- PAGENO="0156" 514 ECONOMIC EFFECT OF VIETNAM SPENDING men in South Vietnam-e.g., Fortune has assumed a 5-percent increase in the rates of ground and helicopter ammunition use per 100,000 men.. But in some respects costs would not nearly double as we built up to 400,000. The existmg construction plans, for example, provide for port facilities, roads, and installations beyond current require- ments. Costs of supporting South Vietnamese forces would not. double either-South Vietnam's military and paramilitary forces already number about 600,000 men, and an increase of even 50 pre- cent could not be squeezed out of a total population of 16 million.. (An increase to 670,000 has been announced, however, and some upgrading of the military equipment and supplies furnished by the U.S. wiJI undoubtedly occur.) Bombing and tactical air support. operations would probably not double either: lack of runways would~ prevent that large an expansion. In Fortune's calculation it was assumed that the 100 percent in- crease in U.S. servicemen in South Vietnam, from 200,000 to 400,000,. would be accompanied by these less than proportionate increases: 50 percent in bombing and tactical air-support operations; 10 percent a year m construction costs; 15 percent m mihtary aid to South Vietnam,. On these exceedingly conservative assumptions, the costs at 400,000' come to the resounding total of $21 billion a year. To calculate Vietnam war costs during fiscal 1967 it is necessary to make some assumptions about the pace of the buildup. Fortune assumed that U.S. forces in South Vietnam would increase to 250,000 men by this June 30, expand steadily to reach 400,000 as of December 31, and then remain at that level. On this basis the prospective Vietnam war costs during fiscal 1967 work out to $19.3 biffion. USED-UP OPTIONS The $58.3 billion defense budget for fiscal 1967 includes, by official reckoning, $10.3 billion in expenditures resulting from the Vietnam war. With a buildup to 400,000 in fiscal 1967, war expenditures during the year would greatly exceed this figure, but would not necessarily boost total defense spending as much as $9 billion. For one thing, Secretary McNamara can cut somewhat further than he already has into programs not directly connected with the war. But not very far; McNamara's options for deferring expenditures in fiscal 1967 have been pretty well used up. The 1967 defense budget shows a total of $1.5 bfflion in cutbacks in military construc- tion, strategic-missile procurement, and other non-Vietnam programs. In view of McNamara's economizing in recent years, there cannot be- much leeway left for deferrals. The Secretary himself said not long ago that in shaping the 1967 budget he had deferred "whatever cam be safely deferred," which suggests that there is no leeway any more. He has also largely used up the options for restraining expenditures by drawing down inventories and reducing trained forces outside the war theatre. McNamara has vigorously insisted that "we have a great reservoir of resources," and he is undoubtedly right about that, especially if "a great reservoir" is interpreted to include the potential capacity of the U.S. economy to produce military goods. But he has overstated his case by arguing, in effect, that the Vietnam war has not reduced readiness at all (CC* * * far from overextending ourselves, PAGENO="0157" EtCONOMIC EFFECT OF VIETNAM SPENDING 515 `we have actually strengthened our military position"). Counting peripheral supporting forces, the United States now has about 300,000 men deployed in the Vietnam war theater, and (in keeping with that 1-to-i ratio) another 300,000 men are committed to backing them up. That makes 600,000 men unavailable for other contingencies. Since the low point in May 1965, U.S. military manpower has in- creased by approximately 400,000 (this figure allows for substitution of civilians for uniformed personnel), and a lot of those 400,000 are men stifi in training. It would be remarkable indeed if all this had somehow "strengthened our military position." Nor is there much left to draw down in military inventories. As shown in the middle row of charts on pp. 506-8, Defense Department expenditures for procurement declined sharply in fiscal 1965-by $3.5 bfflion, in fact. This decline in procurement apparently contributed `to the Army shortages (of repair parts, communication equipment, helicopters, and trucks, among other things) discovered early last year by investigators of the U.S. Senate's Preparedness Investigating Subcommittee, headed by Mississippi's Senator John Stennis. Pen- tagon witnesses tried to explain that the "shortages" were mere routine gaps between reality and ideal tables of equipment. But at one point South Carolina's Senator Strom Thurmond pinned down two Pentagon generals in this exchange: Senator THtTRMOND. You have not denied those shortages, have you, General Abrams? General ABRAMS. No. Senator THURMOND. And you have not, General? General CHEsArn~x. No. Senator THURMOND. You do admit the shortages? General CHESARIIK. Yes, sir. The combination of rising Vietnam requirements and thin, declining inventories led last year to surges in military production and orders far beyond what can be inferred from the official estimates of expenditures attributable to the Vietnam war. In the second half of calendar 1965, Defense Department prime contract awards ran $3.3 billion ahead of the corresponding period of 1964-$6.6 billion at an annual rate. In contrast, the Defense Department estimates fiscal 1966 expenditures for the Vietnam war at only $4.6 billion. Anyone trying to catch an intimation of things to come might do well to keep an eye on orders, rather than expenditure estimates. Orders' are for real: if you want the stuff delivered in time, you've got to order it in time. But ex~- penditure estimates are not binding upon anybody. TRYING TO AVOID THE PILE-UP AT THE END Since they are not for real, budgetary expenditure estimates are an exceedingly unreliable guide to the future. A better guide can be found in requests for appropriations. For the fiscal years 1966 and 1967 combined, the Defense Department has estimated Vietnam war expenditures at $15 billion, but for the same 2 fiscal years the depart- ment has already requested approximately $23 biffion in Vietnam war appropriations. Big as they look, however, these requests for war appropriations will almost certainly be added to long before the end of fiscal 1967. That probability can be inferred from on-the-record statements by Secretary McNamara and other Defense Department witnesses at congression al hearings. PAGENO="0158" 516 ECONOMIC EFFECT OF VIETNAM SPENDING The Defense Department has based its requests for war appropri- ations not upon a forecast of what will actually happen in the Vietnam war, but upon what a Pentagon official calls "calculated requirements." In calculating the "requirement" for any procurement item,. the department considered the lead tirne-how far ahead you have to order the item to have it when you need it. For complex or precisely tooled military hardware, lead times may nm to a year or more, and for such items-particularly aircraft and aircraft spares-the depart- ment allowed fully for expected losses and use-up to the end of fiscal 1967. But for items with shorter lead times, requirements were calculated tightly, on the assumption that later on they could be revised and McNamara could ask for supplemental appropriations. Supplemental appropriations have come to be viewed as natural in wartime. And McNamara's policy of asldng for funds "at the last possible moment," as he puts it, has its merits. By following that policy he hopes to avoid "overbuying" and any pileup of surplus materiel at the end of the war. (When the Korean ~var ended, the Military Establishment had billions of dollars worth of excess goods in stock or on order.) But the policy implies that the Defense Department will have to ask for more funds before the end of fiscal 1967 unless there is some unexpected abatement in the war. Of necessity, the 1967 defense budget was constructed upon work- ing assumptions about how big the war will get and how long it will last, and given all the uncertainties, these cannot be expected to coincide with the realities. In estimating expenditures and appropri- ations for fiscal 1967, the Defense Department assumed that U.S. "combat operations" in Vietnam will not continue beyond June 30, 1967. In keeping with that assumption, the 1967 budget does not provide funds for orders of aircraft or other military goods to replace combat losses after that date. Here again the assumption implies that the Defense Department wifi need supplemental appropriations in fiscal 1967 if the war continues at even the present rate. McNamara has not said in public what U.S. force level in South Vietnam is allowed for in the 1967 budget, and the explanations he has offered at congressional hearings have been deleted by Pentagon censors. But at a Senate hearing in January, Gen. John P. McCon- nell, the Air Force Chief of Staff, indicated that, for the Air Force at least, the appropriations requested so far allow for little or no expan- sion of the war beyond the 200,000-man level. Said McConnell in reply to a question concerning the adequacy of the funds requested: "We don't have any problem if the war continues at about the same rate as now, Mr. Chairman." These budgeting assumptions expressed and implied by McNamara and other Pentagon witnesses lead to a strong inference: by next January, if the war continues unabated until then at even the pres- ent rate, the Defense Department will have to ask for supplemental appropriations for long-lead-time items required in fiscal 1968 and shorter leadtime items required in the last months of fiscal 1967. Some months before next January, indeed, perhaps this summer, the department will have to begin ordering very long leadtime items in anticipation of fiscal 1968 combat losses. PAGENO="0159" ECONOMIC EFFECT OF VIETNAM SPENDING 517 MOUNTING ASTONISHMENT AT THE BAD NEWS It follows that if the U.S. buildup in South Vietnam proceeds to a much higher level, the supplemental requests will run into many bil- lions before the end of fiscal 1967. And since the Military Establish- ment will have to procure a lot of additional equipment and supplies and bring in a lot of additional men, defense expenditures will rise bfflions of dollars above the estimate submitted last January. So the 1967 budget barely begins to suggest the level of Vietnam war spending that probably lies ahead. The budget is not misleading once its rather sophisticated underlying assumptions are understood; but the assumptions are not widely understood, and the administration has not made much of an effort to see that they are. There is likely to be mounting astonishment this year and next as the bad news about the war's costs and the implied message about taxes and inflation sink it. It's a good bet that Americans will still consider the war worth winning. There is no reason for them not to know its cost. PAGENO="0160" BUDGET POLICY IN A HIGH-EMPLOYMENT ECONOMY The Federal budget for fiscal 1967,1 presented to Congress on January 24, provided for substantial increases in both expenditures ~nd revenues during the remainder of fiscal 1966 and for further increases in fiscal 1967. According to the administration's budget plan, the excess of expenditures over revenues (i.e., the deficit) is expected to increase from fiscal 1965 to 1966 and then to decline in fiscal 1967. This article focuses on the implications of the Federal budget for economic stability in calendar 1966. To assist in the analysis, several niternative measures of budget policy are examined, and some eco- nomic principles are reviewed. Prospects for Federal taxes and ex- penditures may be substantially different now from what they were when the budget was prepared. Nevertheless, it is believed that this ~article, based on the January budget report, will promote understand- ing of the budget plan in light of the current economic environment. MEASURES OF BUDGET POLICY The fiscal activities of the Federal Government can be summarized in several ways. Some alternative budget concepts and the relation- ships between them are discussed in the following sections.2 Table I provides a reconciliation of these budget concepts, with data for fiscal 1965-67 used for ifiustration. `The Federal Government's fiscal year runs from Fuly 1 to Fune 30 and is designated by the calendar year in which it ends. 2The term "budget" is used loosely here. There is in fact only one Federal "budget" in the sense of a financial plan, and that is the administrative budget. All other "budgets" discussed here are summary statements of receipts and expenditures classified in various ways for purposes other than administrative planning. 518 PAGENO="0161" ECONOMIC EFFECT OF VIETNAM SPENDING 519 TABLE 1.-Reconciliation of various measures of Federal receipts and expenditures [In billions of dollars] Fiscal year- 1965 1966 1967 actual estimate estimate RECEIPTS Administrative budget receipts. 93.1 100. 0 111. 0 Plus: Trust fund receipts 31. 0 33. 5 41.6 Less: Intragovernmental transactions 4.3 4. 5 5. 5 Receipts from exercise of monetary authority . 1 9 1. 6 Equals: Federal receipts from the public 119.7 128.2 145.5 Less: Cash transaetionsexcluded from Federalreceipts ac- count (Districtof Columbia, financial transactions, etc.) 1.0 .6 .7 Plus: Items added to Federal sector account but not in cash receipts (netting differences, timing differences, etc.) .9 1.2 -2.6 Equals: Federal receipts, national income accounts 119. 6 128. 8 142. 2 Plus: Adjustment for tax receipts because of deviation of economyfromhighemployment 5.9 2.0 .5 Equals: High.employment receipts 125.5 130.8 142.7 EXPENDITURES Newobligatiortalauthority 106.6 126.0 121.9 Plus: Authorizations enacted in prior year but spent in currentyear 30.7 Less: Expenditures to be made in future years 39.8 Equals: Administrative budget expenditures 96. 5 106.4 112.8 Plus: Trust fund expenditures 29. 6 33.8 37. 9 Less: Intragovernmentaltransactions 4.3 4.5 5.5 Debt issuance in lieu of checks and other adjustment& -. 6 . 7 .2 Equals: Federal payments to the public 122.4 135. 0 145. 0 Less: Cash trafisactions excluded from Federal expendi- tures account (District of Columbia, financial transac- tions, etc.) 5.8 4.0. 1.6 Plus: Items added to Federal sector account but not in cash payments (netting differences, timing differences, etc.) 1.7 Equals: Federal expenditures, national income accounts 118.3 131. 0 142. 7 Plus: Adjustment for expenditures because of deviation of economy from high employment -.2 -.2 .2 Equals: High-employment expenditures 118.1 130.8 142. 9 SURPLUS OR DEFICIT Administrative budget -3.4 -6.4 -1.8 Cash budget -2.7 -6.9 ±5 National income accounts budget +1.2 -2.2 -.5 High-employment budget +7.4 0 -.2 Sources: The Budget of the United States Government for the Fiscal Year Ending June 30, 1967, pp. 47, 377, and Federal Reserve Bank of St. Louis. ADMINISTRATIVE BUDGET The administrative budget is the basic planning document of the Federal Government, covering receipts and expenditures of funds that it owns. Its main purpose is to serve as a guide to executive and legislative program planning, review, and enactment. Those agencies for which Congress makes regular appropriations are included in the administrative budget; activities of trust funds (social insur- ance, highway, etc.), quasi-public agencies (e.g., Federal home loan banks), and self-financing agencies are excluded. Expenditures and receipts are generally recorded on a cash basis, i.e., on the date of actual receipt or payment. Interest expense is on an accrual basis. 78-516-67-vol. 2-11 PAGENO="0162" 520 ECONOMIC EFFECT OF V~TNAM SPENDING CASH BUDGET The consolidated cash budget is a summary statement of cash flow between the Federal Government and other sectors of the econ- omy. Included are activities of the regular Government agencies found in the administrative budget plus the activities of trust funds and Government-sponsored agencies. Because activities of some agencies (e.g., the post office) are recorded on a net basis, the full magnitude of cash flows between the Federal Government and other sectors of the economy is not measured by the cash budget. The cash surplus or deficit serves as a measure of the direct impact of Federal Government spending and taxation on the financial assets of the private sector of the economy (including State and local gov- ernments). Surpluses or deficits in this budget indicate changes in the public debt and/or changes in the Treasury's cash balance. NATIONAL INCOME ACCOUNTS BUDGET Federal Government activities in the national income accounts are restricted to receipts and expenditures which reflect the direct impact of Federal spending and tax programs on the flow of current income and output. This measure is obtained by making two major adjust- ments in the cash budget. First, capital transactions adjustments exclude expenditures on existing assets and loans (or loan repayments). Second, timing adjustments are made. Expenditures are recorded when delivery is made to the Government (whereas the cash budget records spending at the time of payment). Tax receipts are recorded when the tax liability is incurred (whereas the cash budget records them when collected). HIGH-EMPLOYMENT BUDGET The high-employment budget is an estimate of expenditures and revenues in the Federal sector of the national income accounts for a level of high employment.3 it is an attempt to correct the distortion introduced by the impact of the economy itself (through the effect of changing levels of economic activity on Government expenditures and tax receipts) on the realized surplus or deficit. The smaller the surplus or greater the deficit in this budget, the more stimulative is the impact of Federal fiscal activities and the less is the dependence on private demand to maintain high employment. NEW OBLIGATIONAL AUTHORITY In evaluating the impact of the Federal Government on the econ- omy, another measure of particular importance is "new obligational authority." This is legislation by Congress permitting a Government agency or department to commit or obligate the Government to certain expenditures. Congress does not vote on expenditures; it determines new obligational authority. Before funds can be spent, an agency must submit and have approved by the Bureau of the 3 The President's Council of Economic Advisers defines a high-employment level of economic activity as that level associated with a 4 per cent unemployment rate. The high-employment budget could be computed for other budget concepts, hut, for an analysis of the economic impact of the budget, the national income accounts basis seems most appropriate. For a description of techniques and procedures for calculat- ing high-employment budget estimates, see Nancy H. Teeters, "Estimates of the Full-Employment Sur- plus, 1955-1964," The Review of Economics and Statistics, XLVII (August 1965), 309-321. PAGENO="0163" ECONOMIC EFFECT OF VIETNAM SPENDING 521 Budget an apportionment request. This determines the rate at which obligational authority can be used. An agency usually incurs obliga- tions, i.e., commits itself to pay out money, after apportionment by the Bureau of the Budget. Incurring obligations does not necessarily mean immediate cash expenditures. When the GOvernment buys goods and services produced by the private sector, the lag of expenditures behind obliga- tions may be substantial. In the case of items not usually kept in inventory, like military hardware, it usually takes time for private producers to draw plans, negotiate subcontracts, produce and deliver the product. BUDGET POLICY IN FISCAL 1966-67: FACTS AND FIGURES Budget plans for future months indicate marked increases in both expenditures and receipts. This obtains for any one of the four major budget measures discussed above. Generally, according to the budget plan, deficits will become larger in fiscal 1966 compared with fiscal 1965, then turn toward surplus in fiscal 1967 (table I). OBLIGATIONAL AUTHORITY New obligational authority (table II) jumps to an estimated $126 billion in fiscal 1966 from $106.6 billion in fiscal 1965. Included in this $19.4 billion increase is $11.4 billion for defense, international, and space and $4.6 billion for health, education, welfare, and relat~d programs. U.S. Government Fiscal Operations (+)Surplus; (-)Deficit of Dollars Billions of Dollars 20 1959 1960 1961 1962 1963 1964 1965 1966 Sources: U.S. Treasury Department, Council of Economic Advisers, Board of Governors of the Federal Reserve System, and Department of Commerce Latest data plotted: 4th quarter 1965 preliminary 1st and 2nd half 1966 estimated by Federal Reserve Bank of St. Louis PAGENO="0164" 522 ECONOMIC EFFECT OF VIETNAM SPENDING TABLE IL-Changes in Federal spending and obligational authority [In billions of dollars] Fiscal 1965 to fiscal 1966 Fiscal 1966 to fiscal 1967 Cash payments to the public: Defense, international, and space . Domestic ±6.6 +6.0 +4.0 +6.0 Health, education, welfare, and community development Interest on public debt Other - +7.7 ±. 7 -2.4 +4.9 ±. +.2 Total -4-12.6 +10.0 -4.1 ±1.0 +. 8 -1.8 -4.1 New obligational authority: Defense, international, and space Domestic +11.4 ~- +4.6 +. 7 +2.7 +19.4 Health, education, welfare, and community development Interest on public debt Other . Total..~ Source: The Budget of the United States Government for the Fiscal Year Ending June 30, 1967, pp. 41, 439. Proj ections for fiscal 1967 are for a decrease in obligational authority to $121.9 bfflion, reflecting a decline of $4.1 billion for defense, inter- national, and space.4 Obligational authority for all domestic civilian programs is expected to be unchanged from fiscal 1966 to 1967. EXPENDITURES The pattern of Federal cash payments in fiscal 1966 and 1967 is quite different from that of obligational authority. Payments are estimated at $135 bfflion in fiscal 1966. and $145 bfflion in fiscal 1967 compared with $122.4 billion in fiscal 1965.. Expenditures are projected to increase in fiscal 1967 but by a smaller amount than in fiscal 1966. Defense, international, and space spend- ing is expected to increase $4 billion, while domestic civilian spending is scheduled to rise by $6 billion. Reflected in the expenditure totals for fiscal 1966 and 1967 is a proposed substitution of private for public credit. The proposal involves asset sales of $3.3 billion in fiscal 1966 and $4.7 billion in fiscal 1967 compared with $1.6 billion in fiscal 1965.~ These asset sales are to include mainly pooled loans of several Federal agencies (Export- Import Bank, Federal National Mortgage Association, and the Vet- erans' Administration). Because such sales are netted against ex- penditures in the Government's accounting system, actual outlays stated in the budget are understated by the amount of asset sales. The discrepancy between changes in new obligational authority and cash payments to the public from fiscal 1966 to fiscal 1967 implies that the pool of authorized but unspent funds will be built up in fiscal 1966, then drawn down in fiscal 1967. This conclusion rests on the assumption that there will be no supplemental appropriations required for Vietnam. Note that there is a decline because obligational authority is extraordinarily high in fiscal 1966, reflecting large supplemental appropriations for financing the war in Vietnam. `There is some indication that asset sales will fall short of budgeted totals in fiscal 1966. A sale of Export- Import Bank participation certificates in February totaled $360 million out of $700 million offered. PAGENO="0165" ECONOMIC EFFECT OF VIETNAM SPENDING 523 RECEIPTS Federal cash receipts are estimated to rise sharply, especially from fiscal 1966 to 1967. Increases in receipts for fiscal 1966 reflect mainly growth in the economy, while collections in fiscal 1967 are expected to reflect changes in tax laws as well as growth. Cash receipts in fiscal 1966 are expected to be $128.2 biffion, up $8.5 billion from fiscal 1965. This increase (table III) reflects the excise tax cut in the summer of calendar 1965, restoration of excise taxes on automobiles and telephone service in the first half of calendar 1966, speedup of corporate and individual income taxes early in calendar 1966 and the social security tax increase that went into effect on January 1, 1966. The net effect of these and other minor tax changes is expected to be an increase of $.9 biffion in receipts. The bulk of the remaining $7.6 biffion increase in receipts can be explained by growth in the economy. TABLE 111.-Changes in Federal receipts [In billions of dollarsi * Fiscal 1965 to fiscal 1966 Fiscal 1966 to fiscal 1967 Changes due to changes in tax law: Excise tax reduction~__ -1. 8 +. 1 +. 1 +1.0 +1. 6 ±. 1 -.2 -1. 2 +1. 2 +4 +3.2 +5. 2 +. 1 Reimposed excise taxes Individual income tax speedup Corporate income tax speedup Social security tax increase Social security tax speedup (sell-employed) Other tax changes Total Changes due to growth in economy and other factors 1 Total change in receipts +. 9 +7.6 +8.9 +8.4 +8. 5 +17.3 Includes receipts from estate and gift taxes, customs, other miscellaneous sources (e.g., sales of Gov~ ernment property), trust fund receipts from sources other than social security and excise taxes, and adjustments for lntragovernmental transactions. Source: Estimated by Federal Reserve Bank of St. Louis from the Budget of the United States Government for the Fiscal Year ending June 30, 1967. The tax program designed for fiscal 1967 is somewhat different from that for fiscal 1966. Receipts are expected to rise by $17.3 bfflion. Changes in tax legislation, primarily a speed-up of corporate tax collections and an increase in social security tax rates scheduled for January 1, 1967, are expected to provide over half of the increase. The restoration of auto and telephone excise taxes has the effect of offsetting the decline in collections that would have been experienced in the absence of legislation. Continued gTowth in the economy is expected to provide the bulk of the remaining $8.4 bfflion increase. SUMMARY Federal budget expenditures and receipts are both estimated to rise sharply in the 18-month period ending June 30, 1967. The cash budget deficit is expected to increase in fiscal 1966 but turn toward surplus in fiscal 1967. The basis for such a. projection lies in an estimate of expected increases in~ receipts, mainly from increased socml security tax collections and growth in the economy In addi- tion, certain "one-shot" proposals-tax speedup and sales of financial PAGENO="0166" 524 ECONOMIC EFFECT OF VIETNAM SPENDING assets-will have the effect of reducing the deficit, especially in fiscal 1967. BUDGET POLICY IN CALENDAR 1966: EcoNo~1rc EFFECTS The above facts and figures on the Federal budget have important implications for economic stability in coming months. To assist in the understanding of these implications, some basic principles of economic analysis are reviewed. This framework is then used to analyze the administration's fiscal plans within the economic setting expected in calendar 1966. The following section presents a theoretical framework for analyzing the effects of the Federal budget on the level of economic activity. Also, the terminology used in later sections of this article is introduced here. The reader who is not interested in the analytical framework may proceed directly to the next section, "Economic Setting." ANALYTICAL FR A ME WORK6 The level of economic activity is determined by the saving and spending propensities of households, businesses, governments, and foreigners.7 The most comprehensive measure of economic activity is gross national product (GNP)-the total value of final goods and services produced in a given time period. GNP can be measured by summing all expenditures or by summing all incomes. All production can be thought of as being bought; thus, the total l)roduct can be measured by gross national expenditure (GNE) on this product. Simi- larly, all production has income charges against it equal in value to what is produced; thus, the total product can he measured by gross national income (GNY). This definitional relationship between total product, total expenditure, and total income can be expressed as fol- lows (where triple bar, ~, means "identically equals"): (1) G~VP~ G~E~ GNY Gross national expenditure (GNE) can be divided into its major cornpouents-consurnption (C), investment (I), and government pur- chases (G). Gross national income (GI\TY) must be allocated to con- sumption (C), savings (8), and taxes (T). Equation (1) can be re- written, expressing GNE and GNY as the sum of their components: (2) C-f-I±G~C-f-S+T where: C= personal consumption expenditures; I=gross private investment; G=government purchases of goods and services; 8= gross private saving; T=net government receipts. Both GNE and GNY contain consumption (C). As a part of G1\K, consumption is spending on consumer goods and services. As an allocation of GNY, consumption is that portion of income spent on 6 This section draws heavily from Robert Solomon, "A. Note on the Full Employment Budget Surplus." The Review of Economics and Stattsfics, XLVI (February 1961). 105-lOS. `All terms are defined so as to be consistent with the national income accounts framework. Investment Is defined to include gross private domestic investment and net foreign investment; private saving includes both personal and business saving; government purchases are for Federal, State, and local governments and net government receipts are essentially taxes net of transfer payments. PAGENO="0167" E~CONOMIC EFFECT OF VIETNAM SPENDING 525 consumer goods and services. Both statements refer to the same magnitude. For convenience, consumption (C) can be ignored, and attention focused on the remainder of GNE(I+ G) and the remainder of GNY (S+ T). Dropping consumption (C) from both sides of equation (2) leaves: (3) I+G~S+T. Government expenditures (G) can be netted against receipts (T), yielding government saving (T- G). The resulting expression shows that investment (I) is identically equal to total savings {S+ (T- G)]: (4) I~S+(T-G~. In an accounting sense, saving and investment are always equal, regardless of the level of GNP. However, accounting definitions of saving and investment do not themselves provide an explanation of the dynamic forces that cause GNP to be what it is. Nevertheless, the concepts are useful in developing a framework for understanding what determines GNP. Although measured saving and investment are always equal, planned saving and investment are not. Saving and investment are performed largely by different groups; each group is motivated by its own set of considerations. An attempt by businesses to invest more than is willingly saved by households, businesses, and governments sets in motion forces causing GNP to increase. Under such circumstances injections of investment expenditures into the income-expenditure stream exceed the leakages of private and government saving from it. An excess of injections over leakages leads to an increase in GNP. The rise in GNP continues to a level where planned saving and invest- ment are brought into balance. Whether an economy achieves high employment with stable prices (i.e., an optimal GNP) 8 depends on the relation between planned saving and investment at that specified level of economic activity. If investment falls short of planned saving at high employment, GNP will fall short of its optimal level and unemployment will result. Qn the other hand, if planned investment exceeds planned saving at high employment, GNP will exceed its optimal level and prices will rise. In terms of equation (4) these conclusions may be summarized as follows (where the subscript H denotes "high-employment value"): Relation between planned saving and investment at high employment Result I~ less than SM-F (Tif- GH) GNP falls short of its optimal level `H equals S~+ (TH- Gq) GNP achieves its optimal level `H greater than SH+ (TM- GH) GNP exceeds its optimal level Understanding why GNP exceeds or falls short of its optimal level is crucial to the policy formulation process. Within the analytical framework discussed above, the problem reduces to an analysis of the discrepancy between high-employment values of saving and invest- ment. If a discrepancy exists, policy measures can be instituted which will restore GNP to its optimal level. This discussion ignores possible inconsistencies between high employment and stable prices. Choice of an optimal GNP probably involves a "tradeoff" between an increase in employment and a rise in the general level of prices. PAGENO="0168" 526 ECONOMIC EFFECT OF VIETNAM SPENDING To make the saving-investment framework operationally useful for policy formulation purposes, it is helpful to make certain assumptions. Private saving (3) and net Government receipts (T) are quire predict- ably related to GNP, and their values can be estimated for an optimal level of GNP, Investment (I) and government spending (U) are not so predictably related. Investment is subject to numerous in- fluences in addition to the level of GNP, an important one being monetary actions. Government spending is largely determined by noneconomic elements, especially of a political character. Thus, we may assume that planned high-employment levels of investment and Government spending are approximated by their observed values. In terms of the algebra, the H subscript is dropped from I and U. With these assumptions, we may (1) state the appropriate magni- tude of government saving (TH- U) needed to achieve optional GNP, given the relation between actual investment and planned high- employment private saving (I-SH), or (2) state the amount of in-. vestment needed to close the high-employment savings-investment gap (I-SH), given the magnitude of government saving (TH- U). The first interpretation indicates the fiscal actions required to achieve optimal GNP, given monetary actions; the latter specifies the required monetary actions as they influence investment, given fiscal actions. By regrouping equation (4) and denoting high-employment values, these interpretations of the saving-investment framework can be summarized as follows: (5) I-Sff=Tff-G. The left-hand side of equation (5) indicates the private sector of the economy, the right-hand side, the Government sector. The larger is high-employment Government saving (Tif- U), the more investment (I) must exceed saving (SH) if high-employment with stable prices is to be achieved. Alternatively, the more investment (I) exceeds saving (SH), the larger must be high-employment Government saving (Tif- U) if optimal GNP is to be achieved. ECONOMIC SETTING Economic activity advanced strongly in calendar 1965, continuing the expansion which began in early 1961. GNP rose 5.5 percent in real terms and unemployment approached 4 percent of the labor force late in the year. Fiscal and monetary actions provided a strong stimulus to the economy during calendar 1965. Recent economic experience in a saving-investment framework. With reference to the framework outlined above, actual investment ap- proached planned high-employment saving during calendar 1965, re- sulting in high employment and production. This was the first time since late in 1956 that actual investment and planned high-employ- ment saving were so nearly in balance. PAGENO="0169" ECONOMIC EFFECT OF VIETNAM SPENDING 527 From calendar 1957 to mid-1965, high-employment saving exceeded actual investment. The source of discrepancy can be attributed to two primary factors-the amount of investment spending and the level of high-employment government (Federal, State, and local) savings. The historical record indicates the importance of monetary and fiscal actions in influencing economic activity. Federal fiscal actions are reflected directly in high-employment saving and in investment. In addition, saving and investment, particularly the latter, are re- sponsive to monetary actions via interest rates. The period since 1961 has been marked by very stimulative monetary actions, while fiscal actions have been stimulative at some intervals during the period. Stimulative fiscal actions during the 1961-65 period included a rising trend of Federal expenditures during the period, revised depreciation guidelines and an investment tax credit in calendar 1962, reduced income tax rates for individuals and corporations in calendar 1964 and 1965, and reduced excise tax rates in mid-1965. These actions were offset in part by an increase in social security tax rates in calendar 1963 and the normal growth of revenues associated with the upward trend in income and employment. Prospects for economic activity in calendar 1966. The Council of Economic Advisers (CEA) has forecast GNP and its components for calendar 1966 (without, however, providing a distribution between halves). This forecast takes into consideration fiscal plans and, sup- posedly, an implicit assumption about monetary policy. The forecast Investment and High-Employment Saving (Calendar Year) Ratio Billions of 1956 1958 1960 1962 1964 1966 Sources: Department of Commerce, Council of Economic Advisers, and Federal Reserve Bank at St. Louis Latest Data Plotted: 1st and 2nd half 1966 estimated by Federal Reserve Bank at St. Lauis tram 1966 Annual Report of Council ofEcanomic Advisers PAGENO="0170" 528 ECONOMIC E~TEC'I' OF VIETNAM SPENDING f or GNIP is $722 biffion for the calendar year 1966 as a whole.9 This suggests that GNP will be about $711 biffion in the first half and $733 bfflion in the second. The composition of the forecast increase in GNP in calendar 1966 does not differ markedly from previous years. Federal purchases of goods and services are scheduled to rise more rapidly, while consumer spending, plant and equipment expenditures, and state and local government outlays are expected to continue their steady advance. Actual gross investment and high-employment saving are expected to be in approximate balance. It is this relation that underlies the CEA's belief that high employment can be maintained without ex- cessive price inflation. Any tendency for investment to outrun high- employment saving would indicate excessive total demand and be reflected in increased prices. BUDGET POLICY IN ITS ECONOMIC SETTING Budget policy is outlined in the budget document on a fiscal year basis; the annual report of the Council of Economic Advisers provides additional insight into the implications of the budget for calendar 1966. The last section of this article attempts to analyze planned budg.et policy for calendar 1966. High-employment budget. The high-employment budget is ex- pected to move from a small surplus (Federal Government saving in terms of our analytical framework) in the second half of calendar 1965 to a slight deficit in the first half of calendar 1966. This fiscal stimulus arises from an increase of expenditures in excess of the re- strictive measures on the receipts side-viz, rescinding of excise tax High-Employment Budget B;liions of Dollars (Calendar Year) BilUons of Dollars I 50'- Seasonally Adjusted An nuol Rates 30 14C ./` ::"~~~`i nc - ~ - - - 1 OC - !ceJ!J7~.i7~/ 1! II L..L..L !!1r!LfI,nh1_l~___ l_.1...l_ 140 : 110 Since the publication of the CEA report the GNP estimate for the fourth quarter of 1965 has been revised upward by $2.6 billion. This statistical revision implies an increase in the CEA forecast from $722 billion to nearly $725 billion. Furthermore, data for the first 3 months of 1966 indicate that economic activity may be advancing even more rapidly than the CEA expected. 9C 7c Os-, 2C 11' 7 i-"r'r~ Sur~Ius (deficit) -~1~# Ext endit res ~~`~Tk 90 80 70 60 20 10 _____________________ 0 _________________ -10 1956 1958 1960 1962 1964 1966 Sources; Council of Economic Advisers, Board cI C-overr.ors of the Federal Reserve System, and Federal Reserve Bank of St. Louis Latest data plotted; 1st and 2nd half 1966 estimated by Federal Reserve Bark af St. Lauis PAGENO="0171" ECONOMIC EFFECT OF VIETNAM SPENDING 529 cuts on automobiles and telephone service, increased social security tax collections, speedup of individual and corporate tax collections, and normal growth in revenues as the economy expands. rphe second half of calendar 1966 also is expected to show a net fiscal stimulus; the high-employment budget is expected to move toward a larger deficit of about $1 billion. Planned increases in expenditures are expected to be larger than the growth in receipts. increases in receipts will have to flow almost entirely from rising incomes, because no tax increases are scheduled in the budget plan for the second half of calendar 1966. Graduated witholding of personal income taxes may dampen purchasing power somewhat, but the impact is not expected to be large. The speedup in corporate tax collections is not designed to change payment schedules in the second half of calendar 1966. in the first half of calendar 1967 the high-employment budget is expected to show a surplus as the rate of increase of expenditures ta- pers off and receipts continue to climb because of rising incomes. Esti- mates so far in the future are not reliable, however, because of many contingencies and uncertainties, particularly regarding the war in Vietnam. Fiscal plans and economic setting-An evaluation. Budget policy in calendar 1966 as presented in the CEA report is predicated on the belief that actual gross investment will be approximately equal to planned high-employment private saving. High-employment gov- ernment saving is expected to be slightly more than $2 billion, con- sisting of a State and local government surplus partly offset by a slight deficit in the high-employment Federal budget. Of critical importance in judging the economic impact of the Federal budget is whether a dollar of receipts restrains private demand by a like amount. An implication of the high-employment budget as a measure of fiscal impact is that a dollar of increased expenditure has the same economic effect as a dollar decline in ta~~ receipts. The va- lidity of this assumption is especially important when lt is noted that the budget program for calendar 1966 plans a near balance in the high- employment budget but includes marked increases in both expendi- tures and receipts. If a dollar increase in tax receipts does not re- strain private spending by the same amount, the high-employment budget understates its fiscal impact. As noted above, the national income accounts measure Govern- ment purchases at the time of delivery. Thus, the high-employment budget may not be entirely accurate as a measure of fiscal impact for this reason. If the flow of Government orders is relatively smooth, the Government expenditure series may accurately measure the impact of the budget on the economy over time. However, at times of sharp chaiiges in Government orders, the economic effects of the change are no~ recorded in the budget accounts until the goods have been delivered.'0 Such a factor may be particularly relevant early in calendar 1966. Increases in Government spending are projected over the current fiscal year (fiscal 1966) and the next, but new obligational authority 10 For a discussion of this view of the Government spending process and its relevance for the 1967 Federal budget, see Murray L. Weidenbaum, "The Inflationary Impact of the Federal Budget," Washington Uni- versity Working Paper 6529 (Feb. 10, 1966). PAGENO="0172" 530 ECONOMIC EFFECT OF VIETNAM SPENDING is soaring this fiscal year and is scheduled to taper off in fiscal 1967. If it is the order stage of the Government spending process rather than the delivery stage which is relevant for measuring fiscal impact, the effect of projected increases in Government expenditures may be having its major impact currently (in the first half of calendar 1966). Another implication following from this thesis is that the economic stimulus of the current defense buildup may evaporate late in calendar 1966 or early in calendar 1967 if the scheduled changes in obligational authority are realized. The Council's economic plans appeared to be internally consistent at the time of publication of their report in late January. These plans, however, left little margin for error, even within their analytical frame- work. Any unexpected increase in expenditures would require offsetting fiscal or monetary actions. Granting their assumptions about expenditures, receipts, and the level of GNIP, there is some question whether budget policy was designed to restrain total demand sufficiently to avoid price inflation, given the shortcomings of the high employment budget as a measure of fiscal impact." Since late January maj or measures of economic activity have indicated that total demand is rising more rapidly than the Council anticipated in their report. Within the saving-investment framework, it appears that planned investment is in excess of planned high- employment private saving. Such a situation would be appropriate if offset by high-employment government saving. This does not appear to be the case; it seems ]ikely that the Federal Government is experiencing a high-employment deficit which is not being offset by a state and local government surplus. Given this fiscal stance, investment and high-employment total saving (private and government) can be brought into equality by policy action designed to (1) discourage investment and/or (2) encour- age private saving.'2 A failure to do one or both will result in price increases. Unless fiscal plans are changed, the aim of monetary policy should be to dampen investment plans and to encourage private saving via higher interest rates, thereby reducing inflationary pressures. Higher interest rates would also be beneficial to the balance of payments by keeping U.S. prices competitive with the rest of the world and by reducing capital outflows. While such higher interest rates may have some social disadvantages, they may be more than offset by the benefits of stable prices and an improved balance of payments. KEITH M. CAItLSON. 11 This is not to imply that the Council is not aware of these shortcomings. Sec the testimony of Gardner Ackley, Chairman of the Council of Economic Advisers, before the Subcommittee on Fiscal Policy of the Joint Economic Committee, July 20, 1965. ~ statements in recent weeks have indicated a possible move in the direction of fiscal restraint if price pressures continue in evidence. An increase in individual and corporate tax rates would Increase Government saving and tend to discourage Investment. PAGENO="0173" THE OUTLOOK FOR DEFENSE SPENDING-HOW GREAT AN UNCERTAINTY?* B~ WILLIAM H. CHARTENER, Economist, Goldman, Sachs & Co. During the current business forecasting season a hedge that is fast overtaking the privet and the boxwood in popularity is the uncer.. tainty occasioned by the war in Vietnam. This, we are told, makes the economic outlook for 1967 unusually hazardous to forecast. In some of the more tremulous analyses, the forecaster confesses disarm- ingly that he really has no idea what will happen-but if it does, all bets are off, In the popular sense of the word "uncertain," this approach has some validity. Conceivable developments in Vietnam range all the way from an abrupt withdrawal of U.S. forces t~o a thermonuclear war with Communist China and the Soviet Union. Defense spending might, ~onceivably, drop $10 billion (annual rate) by the end of 1967, or increase $50 billion-with a comparably wide range of implications for the economy. In a statistical sense, however, the "uncertainty" attached to the outlook for the ~var and for defense spending is subject to more precise and more useful definition. A forecast of defense spending through the end of 1967 made nOw does involve somewhab more uncertainty than a forecast of corporate depreciation, consumer expenditures for services, electric power generation, the tides, or California weather in August. But it involves less uncertainty-in the sense of probable relative error-than a* forecast of auto sales, housing starts, inventory accumulation, the balance of payments, the stock market, or California weather in December. Specifically, I shall put my view of the outlook for defense spending in these terms: Defense spending on the Commerce or gross national product basis appears likely to continue, increasing at an annual rate of about $1 billion a quarter through next spring, then $1 billion a* quarter to the end of 1967. This would mean total defense purchases of goods and services of $65 billion in the calendar year 1967, up from about $58 billion in 1966 and $50 billion in 1965. On the administrative budget basis, L expect defense spending (including atomic energy) to total $66 billion in the 196? fiscal year, as compared with the $5?.? billion now officially estimated for fiscal 1966 and $60.5 billion estimated for 1967 in last January's budget. To attach numerical though highly subjective value to the "uncer- tainty" surrounding these figures, my current impression is that there is a 70-percent probability-or about a one sigma range-that defense spending in 1967 will fall within $2 billion plus or minus of the esti- mates on the two bases. Outside this central range, the distribution becomes quite skewed: 1 would assign only a 5-percent probability to defense expenditures being lower than these estimates by more than $2 billion and the remaining 25 percent to the wide open upper range. * Paper presented before the Annual Meeting of the American Statistical Association, Los Angeles, Aug. 18, 1966. 531 PAGENO="0174" 532 ECONOMIC EFFECT OF VIETNAM SPENDING In quoting odds on the outlook for defense spending, I do not mean in any way to minimize the gravity of the war in Vietnam or the seriousness of its implications for the U.S. economy. My purposes are two: (1) To observe that the business forecaster does not discharge his obligation when he characterizes an important se~ of determi- nants of his forecast as "uncertain" without providing some guide to the probable configuration; and (2) To emphasize that, in being bemused by the less likely extreme courses the war in Vietnam and defense spending can take, one may lose the practical economic advantages and the pyschological security that are apt to flow from confident action premised on the more probable central range. From this point our analysis will concentrate on what seems to me to be a narrowing degree of uncertainty regarding the dimensions of the war in Vietnam and total defense spending in 1967. THE PATTERN OF ESCALATION Special costs of the war in Vietnam accounted for only 10 percent, or $5.8 billion, of total budget expenditures for defense in fiscal 1966. But most of the increase in defense spending occurring in 1966 and anticipated for 1967 results from Vietnam. Both in dollar amount and in percentage of total defense spending, Vietnam outlays will probably be at least twice as great in fiscal 1967 as in 1966 Escalation of the U.S. military effort in Vietnam has been gradual, over a period of a dozen years and three presidential administrations, beginning with the assignment of military advisers and now including intensive bombing of military targets in North Vietnam and the demilitarized neutral zone. Escalation on the part of the Vietcong and North Vietnam, both on their own initiative and in response to U.S. efforts, likewise has been gradual. Despite the gradual nature of this progression, two points in time can be identified as involving major shifts in the scale of the U.S. effort in Vietnam and major changes in the prospective magnitude and pattern of defense spending. The first shift came in the summer of 1965, when U.S. forces as- sumed direct and open responsibility for combat operations in Viet- nam. The President then requested a supplemental defense appro- priation of 81.7 billion and promised to return for more in January 1966. (Vietnam, incidentally, had come in for scarcely any mention at all in the January 1965 budget.) At the time of this change in scale of effort, the outlook for defense spending changed from essentially fiat to a rise of at least a billion dollars a quarter. The second important shift came last winter when the President and the Defense Department gained a fuller appreciation of the costs of achieving their objectives in Vietnam. The President then re- quested a $12.8 biffion supplemental appropriation for Vietnam and budgeted a large increase in defense outlays. On the basis of the January 1966 budget and other official statements last winter, the outlook for defense spending changed again, implying a rise at a rate of about $2 biffion a quarter for several quarters. It was then that the figure of 400,000 began to be mentioned as the target for deploy- ment of U.S. military personnel in Vietnam by the end of 1966. PAGENO="0175" ECONOMIC EFFECT OF VIETNAM SPENDING 533 There appears to have been no further basic change in the scale of effort planned by the U.S. in Vietnam since last winter. If there has been, it is not evident in official statements nor in data on expendi- tures. Nor, so far as I have been able to ascertain, has information indicating any basic change in plan been communicated by the President and the Defense Department to the other vitally interested Government agencies. I emphasize plans and outlook in discussing the Vietnam war and defense spending because these are our principal interest and bllcause it is easy to lose perspective when actual day-to-day events change rapidly and dramatically. Each new troop buildup receives a head- line; and each time an unidentifiable Pentagon employee speaks of an increase in U.S. troops in Vietnam to 400,000 by the end of the year, this also is considered news that's fit to print on the front page. Thus the January 1966 budget-with some modifications and statistical license I shall describe presently-along with official statements issued in support of that budget remains the best source of detailed information on defense spending prospects for the period to mid-1967. And this is likely to remain the case until the fiscal 1968 budget is announced next winter. ADJUSTING THE BUDGET To this point most of our discussion of defense spending has been in terms of the national income and product accounts, as this is the basis on which defense spending figures enter the typical general economic forecast. The budget figures are of the same general magnitude and show the same general trend-as can be seen in the charts-but there are differences, particularly in timing Defense expenditures on the administrative budget basis were estimated as follows in the January budget. Preliminary actual figures for the completed 1966 fiscal year also are given. (In millions of dollars] 1965 actual 1966 1967 estimate Estimate Actual Department of Defense, military functions Military assistance - Atomic energy - Total' 46, 173 1, 229 2, 625 52,925 54,363 1, 275 945 2, 390 2, 404 56,560 57,700 57, 150 1, 150 2,300 60,541 50,163 `Total includes defense-related activities, which are negative in 1966 and 1967. Considering the rapidity of the buildup in Vietnam in recent months, actual expenditures in fiscal 1966 came reasonably close to the January budget estimat3. Examination of the monthly status of funds reports of the Defense Department for details on spending by broad category through the month of May bear out this observation. Much of the biffion-dollar "error" can ba ascribed to the expansion of number of men in uniform ahead of schedule. Military personnel had been expected to total 2,987,000 on June 30, 1966, and 3,093,000 on June 30, 1967. Actually, the June 1967 target has already been attained, and presumably some further expansion will occur. PAGENO="0176" 534 ECONOMIC EFFECT OF VIETNAM SPENDING In a harmless display of budgetary plastic surgery, the administra- tion made the total defense spending figure for fiscal 1966 appear smaller than was indicated in the January budget-by removing the $2.4 billion for atomic energy from the broad defense category where it had been lodged previously. The figures used in this paper include atomic energy, to preserve historical continuity of the data. I indicated earlier that defense spending on the budget basis seems headed toward a total of about $66 biffion in fiscal 1967. You may sense some inconsistency between this figure and the official budget estimate of only $60.5 billion, especially in view of the contention that there has been no significant change in basic plan since last winter. Much of the discrepancy can be explained by a special feature of this year's budget. Secretary McNamara described it in these words in his statement before the House Armed Services Committee on March 8: * * * we have had to make a somewhat arbitrary assumption regarding the duration of the conflict in southeast Asia. Since we have no way of knowing how long it will actually last, or how it will evolve, we have budgeted for combat operations through the end of June 1967. This means that if it later appears that the conflict will continue beyond that date, or if it should expand beyond the level assumed in our present plans, we will come back to the Congress with an additional fiscal year 1967 request * * * Because of this arbitrary assumption, the budget itself, and to an even greater extent the appropriation request, imply a tailing off of orders and expenditures for items that would not be delivered or consumed until after the June 30, 1967, cutoff date. Total obli- gational availability proposed in the budget is actually lower for fiscal 1967 ($60.4 biffion) than for fiscal 1966 ($64.9 billion). The 1965 figure was $50.1 billion. At some point in the next few months, the Defense Department must revise its program to reflect a new assumption regarding the duration of the war in Vietnam. My own expectation, as of now, is that the revised assumption will involve continuance of hostilities within the present broad framework into fiscal 1968, that a 1967 supplemental appropriation of at least $5 billion wifi be requested, and that fiscal 1967 budget expenditures will also be increased by slightly more than $5 billion. This adjustment reflects primarily the effect of a revised assumption on the duration of the war. It also includes some allowance for the results of the faster-than-scheduled expansion of uniformed personnel, the earlier-than-expected military pay increase, the im- pact of general price inflation on costs of defense orders, and the unan- ticipated costs of fighting a war whose dimensions are not entirely within U.S. control. As indicated in the chart showing quarterly data, defense expendi- tures on the budget basis tend to fluctuate more widely than on the GNP basis and to move somewhat in advance. This is because the budget figures, as charted here, are not seasonally adjusted and because they include progress payments to contractors. In a time of rising defense expenditures, orders and production are reflected in budget expenditures because of t.hese progress payments before they PAGENO="0177" ECONOMIC EFFECT OF VIETNAM SPENDING 535 show up as purchases of goods and services by the Government. In the GNP accounts, the rise in defense production shows up first as an increase in inventory of goods in process. This process is ex- plained in some detail, with comments on its important economic implications, in articles by Prof. Murray Weidenbaum, of Washington University (St. Louis). The chart shows defense spending on the two bases-budget and GNP-drawing together during 1967 as the rate of deliveries catches up with the placement of procurement orders and current production rates. THE OUTLOOK FOR PEACE The analysis presented here assumes continuance of hostilities in Vietnam through the entire calendar year 1967, in much the same general framework as at present, but with U.S. forces applying in- creasing efforts and spending increasing sums of money. The U.S. objective sounds modest enough. As stated by Secretary MeNamara, it is "a stable and independent government free of Communist control." But perhaps the limited nature of the objective makes it all the more difficult to attain. Because of repeated pressures on both sides in the conflict from most other nations in the world, I would expect some progress to be made during the next 16 months toward bringing the war to an end. But, in view of the pathology of the conffict over many years, it seems unduly optimistic to expect peace negotiations to reach a stage that would permit significant relaxation of the U.S. commitment in Vietnam within the horizon comprehended here. In the other direction-that is, expansion of the area of conflict- developments of the past few weeks offer strong reason to expect that Communist China and the Soviet Union will not change the essential nature of their support of North Vietnam. There has been, in re- sponse to U.S. bombing of targets in North Vietnam, an escalation of rhetoric arid the boycotting of a track meet which the Russians evidently were going to lose anyway. But there is no evident dispo- sition to convert the conflict in Vietnam into. World War III. CONCLUSION Thus we are left in this fairly narrow band of uncertainty regarding the prospective course of the war in Vietnam and of defense spending in 1967. It is an outlook that promises continuing strains on. the U.S. economy, but only because other pressures on productive re- sources are present. As the final chart shows, the proportion of GNP going to defense goods and services will remain modest by any recent standard. The prospective magnitude of defense spending should therefore be within the capacity of the economy. To conclude this analysis in the most practical economic terms, the increase in defense spending now in prospect for next year should not in itself require a tax increase. 78-516-67-vol. 2-12 PAGENO="0178" Defense Expenditures C) 0 0 C) o -.4 rxl (I) z z C) 1939 to 1967 100 *0 $0 70 $0 1940 1945 195(1 1933 1960 1965 PAGENO="0179" Defense ExpendItures Def*nse Expenditures Quarterly BaSIs 1960 to 1967 A. Percent of GNP C) iWi~M .0 48.u~ *0 40.0- flodist Basis - Fiscal Ysar 35. - : (fliP Basis - Calendar Year _________ `:~ : 1440 1341 1~iS 1443 1944 1945 1945 1957 `43 `47 `iSO PAGENO="0180" NATIONAL DEFENSE AND PROSPERITY * On July 28, 1965, the President asked the Congress for supplemental funds for defense spending in order to meet the increased requirements of our commitments in southeast Asia. That request opened up a new chapter in the annals of our economy and economic policy; and our history is stifi being written in that chapter. The economy moved ahead very rapidly in late 1965 and early 1966, attaining the lowest rates of unemployment and the highest rates of industrial utilization achieved on any sustained basis since the Korean war. The Nation recorded outstanding heights of achieve- ment in output, employment, and real incomes. But we also registered some less welcome new heights in interest rates; and we interrupted a gratifying record of remarkable price stability that had persisted through the first half of the 1960's. The latest chapter of our economic history is marked by new episodes in the use of economic policy. Our stabilization tools were employed to achieve restraint rather than stimulus of demand. F or years, promoting balance in the economy had called for strengthening demand to make jt match supply. Suddenly, demand threatened to be too large. Talk and action focused on tax increases rather than tax cuts. Monetary policy occupied the center of the stage more often than ever before. These developments occurred simultaneously with an important buildup in our defense expenditures and military manpower. None of them was independent of the developments in defense. But the interrelationships are not simple. The connections between the developments in defense and the record of our economy in this Vietnam chapter deserve careful inspection to throw light on our recent progress and problems. Such an understanding is also vital in appraising the challenges that lie ahead-in the short run, sustaining steady growth and stability during the period of active hostilities; and, over the longer term, maintaining high employment in a peacetime environment. PRIOR TO THE DEFENSE BUILDUP In considering the economic impact of the recent defense buildup, we might remind ourselves how well we were doing when it first began. As of mid-1965, we had enjoyed an uninterrupted economic advance for 52 months, the longest peacetime expansion in our history. Our real GNP had expanded by about one-fourth in that period, considerably faster than the growth of the economy's supply capabili- ties. We were able to catch up as well as keep up with our growing capacity. The unwanted reserves of idle men and machines gradually were brought into productive use. Unemployment, which had amounted to more than 7 percent of the civilian labor force in May 1961, was down to 43/i percent. The average operating rate of our industrial Remarks by Arthur P. Okun, Member, Council of Economic Advisers, before the American Ordnance Association. Fort Lesley I. McNair, Washington, D.C., Oct. 12, 1966. 538 PAGENO="0181" ECONOMIC EFFECT OF VIETNAM SPENDING 539 capacity was up to 90 percent after a substantial rise from the recession low of 78 percent in early 1961. The record of price stability was equally impressive: average consumer prices in July 1965 were only 6 percent higher than they had been in early 1961, and prices of non- food commodities had risen only 3 percent. Manufactured finished products at wholesale were seffing, on average, less than 1 percent above the level at the start of the expansion. The progress of the economy from early 1961 to mid-1965 owed much to the active use of expansionary fiscal policy. Through reform of depreciation rules in 1962, the initiation of the investment tax credit also in 1962, and the tax reductions following from the Revenue Act of 1964, earners of both corporate and individual incomes enjoyed a one-fifth reduction in their tax liabilities. Meanwhile, Federal spending on goods and services stayed on a plateau. After mid 1962, there was little change-actually a modest decline-in the dollar total of defense expenditures. Therefore, as a share of our growing GNP, these outlays fell steadily from 9.5 to 7.3 percent. Defense spending was clearly not the fuel propelling the economy toward full employment. Rather the decline in the defense share was a lubricant that greased the wheels. It made possible reductions in taxes at the same time that important new civilian obj ectives of the Federal Government were being pursued through the President's Great Society programs. The private investment share of GNP rose to make up for the decline in defense; meanwhile, State and local outlays continued to absorb a growing fraction of our real output; and, contrary to their usual behavior in a period of rapid economic expansion, consumer purchases held their own as a share of GNP. Given the healthy economic environment in the spring of 1965, policy was aiming to provide further stimulus to complete the advance ~to full employment. Congress enacted a major reduction of excise 1~axes, and the first stage took effect in June 1965. A liberalization of social insurance benefits was enacted to take effect retroactively and was scheduled to give the economy a significant stimulus in the fall of 1965. Monetary policy continued to pursue a quiet life, meeting the credit needs of a brisk expansion and contributing to the stability of long-term interest rates that was so unusual for a period of rapid economic advance. THE PERIOD OF SPEEDUP The pace of economic advance quickened markedily in late 1965 and early 1966 with defense and business fixed investment leading the way and consumption close behind. GNP, which had been advancing at an average rate of $11 billion per quarter, rose an average of $16 billion per quarter between the second quarter of 1965 and the first quarter of 1966. The annual rate of real growth was a phenomenal 7.2 percent. Unemployment started dropping rapidly and, in February, reached what is stifi the low point of this expansion-3.7 percent of the labor force. But along with the important progress came some disturbing problems-accelerating prices, soaring interest rates, and a shrinking surplus in international trade. On top of the deliberate fiscal stimuli that were coming into play and the forward momentum of a strong economy close to full employ- ment, the $2 billion a quarter rise in defense outlays undoubtedly PAGENO="0182" 540 E~CONOMIC EFFEC~P OF VIETNAM SPENDING played a key role in the acceleration. It contributed to the already great and growing strength of business investment demand by gener~ ating needs for new capacity and by lifting economic expectations. Defense was the extra margin, unanticipated and economically un- wanted. Yet, over this interval of three quarters, the increase in defense outlays was only $53~ bfflion (annual rate) out of the $48~ billion rise in GNP. It was much smaller than the increase of $9' billion in private business fixed investment. A little extra stimulus went a long way-but it was only a little extra stimulus. THE WELCOME SLOWDOWN Since the first quarter of 1966, the pace of advance has clearly mod- erated. The growth of industrial production and nonfarm payroll employment since March has been about half as large as the spec- tacular growth of the preceding 6 months. The recent expansion in the economy has proceeded essentially in parallel with the growth: of capacity, Thus, the unemployment rate has been on a. plateau. between 3.7 and 4 percent for 9 months, and average operating' rates of manufacturers have also been stable. Thus, in a relative sense, we have witnessed a "slowdownP More descriptively, we have adjusted to a safe speed from an excessive speed that threatened to generate intolerable price and wage pressures.~ An economic slowdown can be worrisome or it can be welcome-our recent experience clearly belongs to the second variety. Fiscal and monetary policy since the turn of the year have aimed at bringing about such a slowdown. The recent moderation is a tribute' to their effectiveness and a piece of reassuring evidence on our ability to op- erate fie~dhle policies in a changing economy. * Fiscal policy, after years of expansionist aims, was shifted. into reverse with the President's budget in January. Six billion dollars of private purchasing power were siphoned off through higher' payroll tax rates legislated last year for medicare and social security liberaliza- tion. The President requested and Congress promptly enacted legis- lation to reverse some of the earlier excise tax reductions: and to accelerate payments of both individual and corporate income' taxes. At the same time, apart from `Vietnam costs, the adminIstrative budget for fiscal year 1967 was held to an increase of 1 percent or $600 million, as requests for new appropriations for less essential nondefense programs were stringently pared down. In the first half of 1966, the Federal budget on the national income accounts basis-our best measure of the economic impact of fiscal policy-was operating at a surplus of $3 billion. In years gone by,. we have always carefully made another calculation of where that budget would have been if the Nation had been operating at full employment. This year I need not offer that hypothetical calcula- tion because the economy has come up to its statistical full employ- ment benchmark; thus, the actual and hypothetical surpluses are essentially identical. Within the initiation of medicare benefit pay- ments, the significant surplus will not be repeated in the second half of this year; hut present prospects for revenue and expenditures do not suggest that we will be consuming red ink. Monetary policy has played a particularly important role this year. By pursuing a strategy of active restraint, it deliberately restrictedi PAGENO="0183" E~CONOMIC EFFECT OF VIETNAM SPENDING 541 the growth of credit supplies below the large increases that were being demanded. Declines in residential construction and in commercial building offer eloquent testimony to the potency of tight money in curbing demand. PoLICIEs To IMPROVE THE BALANCE Thus, although defense spending kept forging ahead, the tools of general economic stabilization were able to achieve a quite satisfactory overall rate of economic advance this spring and summer. But the pattern of this deceleration was not equally satisfactory. It turned out that general monetary tools had, in fact, operated very selectively on the homebuilding industry and had barely touched business invest- ment expenditures, apart from commercial construction. Capital spending demands moved ahead with undiminished vigor and put intensifying pressures on our machinery and equipment industries. With administration support, Congress enacted financial legislation designed to improve the balance in our capital markets: FNMA's ability to support the home mortgage market was strengthened, and regulatory agencies were given new authority, to set ceilings on the interest rates paid on savings by financial institutions. The Federal Reserve used this new authority along with its existing powers in several ways to smooth out the pressures in financial markets. But fiscal policy was also needed to deal with the remaining im- balances. On September 8, the President announced a cutback and holddown on civilian expenditures. He also proposed to Congress two additional fiscal steps-the temporary suspension of the 7-percent tax credit for equipment and of accelerated tax depreciation on new structures. Once enacted, these measures should help to take some froth off the investment boom and thus to ease the strong pressures on financial markets and skilled labor supplies that the capital boom has generated. As we look back over the past year, the most notable blemish on our economic record is the 3~-percent r ate of price increase that we have experienced at both wholesale and retail. That rate of increase IS considerably larger than we can reasonably tolerate over any extended period; in fact, a major goal of public policy for the year ahead must be to work back toward price stability. It is important, however, to see these price increases in perspective. The fact that much of the rise has taken place in food prices offers no particular comfort to the housewife. But it is significant because, unlike ` some industrial prices, these prices are flexible in both direc- tions. It is also significant because the spurt in food prices reflects several special and probably temporary circum stances within agri- culture as well as the rising demands of a rapidly growing economy. Apart from farm products and foods, wholesale prices are up 2.3 percent in the past year; and the consumer price index, excluding food, shows a rise of 2.9 percent. For nonfood commodities, the increase of consumer prices was 1.8 percent. Any objective appraisal of consumer welfare must look at both sides of the equation-the incomes people have to spend as well as the prices of the goods they buy. Such an appraisal makes clear that all major groups have recorded substantial gains over the past year. The key to consumer welfare lies in wages and salaries, which represent more than two-thirds of total. family income. Total payrolls have risen 10 PAGENO="0184" 542 ECONOMIC EFFECT OF VIETNAM SPENDING percent in the past year. The spurt should not be read as a major jump in wage rates. Much of this large gain comes from reduced unemployment, steadier work, job upgrading, and the big jump of employment in high-wage manufacturing industries. But the extra 10 percent is there to be spent by American workers. Much the same performance has occurred in other forms of income- dividends, interest income, farm income per farm, and corporate profits all show increases ranging from 8 to 11 percent over the past year. The benefits of social security liberalization and medicare to older citizens are partly reflected in the 17-percent increase in Federal transfer payments over the last 12 months. Even after all the proper adjustments to these figures for the 2-percent increase in our popula- tion and labor force and the 33~-percent increase in consumer prices, it is terribly hard to turn this record into a sad story. The price performance of recent months, moreover, has begun to reflect our more moderate pace of economic advance. The index of indu3trial wholesale prices (1957-59=100) stood at 105.2 in both July and August; it was 105.1 in September. It is rightly said that a large change in 1 month does not make a trend, and it follows that no change for two monthly intervals does not make a plateau. But it is welcome news. Indeed, in September, selected types of machinery and building materials were outstanding as the only manufactured items showing strong upward price movement3. International trade data may also be showing some encouraging signs; the balance has not been on a deteriorating trend since April and it may actually be turning around. DEFENSE AND EcoNoMIc POLICY The brief review of the past year reveals a number of ways in which the defense buildup has complicated the problems of managing eco- nomic policy. In particular, the sharp spurt of demand which the defense buildup triggered off late last year and early this year had serious impacts on prices. In the absence of added defmse outlays, we would not have sprinted up to and beyond the 4-percent unemploy- ment line. Many of the strains on supplies would not have arisen if we had reached the same levels of utilization on a more gradual upward movement. Supply does not adjust instantaneously; a spurt in demand therefore pushes up prices and order backlogs. Overtime, however, supplies do respond and can catch up with demand even while the demands are stifi growing. We have seen the responsiveness of supplies in certain basic raw materials and metals. In many types of skilled labor, too, supplies have been expanded through time- consuming recruitment and training programs. A second complication of the defense buildup arises because my profession's skills and knowledge are imperfect. It is particularly difficult to diagnose the psychological impact of a changing defense outlook on business expectations and decision-making. An imperfect diagnosis of this issue was a key reason why economists-inside and outside of Government-underestimated the strength of demand at the start of this year. As of January, the administration recognized that demand was very strong; but we did not realize just how potent and dynamic it was, especially in the business investment areas. The defense buildup required important shifts of resources among industries. But this task was handled primarily by our flexible PAGENO="0185" E~CONOMIC EFFECT OF VIETNAM SPENDING 543 market economy rather than by Government policy. Priority sys- tems for defense materials were, of course, important. But basically, it was the American enterprise system that met the needs of defense so magnificently. In our economic system, manpower, machines, and materials move where they are needed in response to market incentives. The economy takes major shifts in stride. It absorbed a one-third decline in housing starts in a 5-month period without creating pockets of unemployment. It generated a one-third increase-amounting to $20 billion-in the capital goods sector in the last 2 years before the strains really began to tell. It should not be surprising that the economy adapted to the defense buildup so well. The recent experience reflects a number of factors: the strong military position we had when the Vietn am emergency began, our use of economic policy tools, and the great size and productive capacity of our national economy. Unlike World War II or Korea, the Viet- nam emergency did not require a major reshaping of America's global military strategy. Ever since the Korean war, we have main- tained high levels of defense expenditures, continuously roffing over our stock of defense weapons to take advantage of the latest tech- nology and to maintain an up-to-date arsenal. Instead of spending 5 percent of our GNP on defense as we did in 1949 and 1950, v~e main- tained expenditures of 9 or 10 percent of our GNP on defense from 1954 through 1962. These were investments made in readiness for the contingencies that have since turned so regrettably into reality. As a result, the Vietnam conflict found us well prepared and required a relatively small buildup in total military procurement. At 8 per- cent of GNP, defense purchases in 1966 constitute a smaller fraction of our national output than in any year between 1954 and 1963. In World War II, because defense expenditures ran 30 to 40 percent of GNP and absorbed such an overwhelming fraction of certain key industrial outputs, it was judged unfeasible to regulate demand entirely through fiscal and monetary policies. Huge budget deficits were tolerated, and they were financed in ways that added mightily to national liquidity. In light of this policy strategy, it was necessary to contain inflation by direct wage and price controls. In the case of Korea, the onset of the conflict was met by the American public with a wave of war hysteria and an outburst of speculation and hoarding. That initial destabilizing buying spree was the key justi- fication for adopting direct wage and price controls. The huge defects in both the World War II and Korean systems of direct controls were not basically the result of poor planning or inept administration. They were intrinsic to any set of mandatory regula- tions that enmesh the market in a web of redtape. Inevitably, such a system will often keep price tags stable only through bare shelves and low quality products. On any reasonable assessment, or even a reasonably pessimistic assessment, of the outlook for the Vietnam conflict, there is no earthly reason why we should want to or need to travel that route again. NORMAL PROBLEMS OF PROSPERITY Let me emphasize that I am not claiming that the task of managing economic policy in this Vietnam chapter of our history is, in any sense, easy. What I am saying is that the hard challenges that we face are PAGENO="0186" 544 ECONOMIC EFFECT OF VIETNAM SPENDLNG essentially those of managing a prosperous economy close to full em- ployment-problems that will be little different when we have the opportunity to make policy for full prosperity in a peacetime environ- ment. In an underemployed economy, fiscal and monetary policies to ex- pand demand can be recommended with conviction and confidence. On the other side, if there were huge excesses of demand, the case for restrictive policies would be crystal clear. Bu b when the economy is close to a smooth path of balanced growth and when the job is to stay on the path, policy-making becomes a much more complicated and delicate task. Stifi it is a path. It is not a tight rope where the tiniest misstep in either direction would result in precipitous recession or disastrous runaway inflation. The economy has shown that it can maintain its balance despite substantial swings in demand above and below the ideal rate of growth. That margin for error is the salvation of a free economy and an imperfect economic policy. If it were a tight rope, we would have broken our necks long ago. Despite past variations, right now we are close to the growth path that we would consider sustainable. The utilization rates of our labor force and our industrial capacity cannot be described as excessive or inadequate. Policy should aim to maintain a steady growth of output, essentially parallel to the growth of our productive capacity. That would require a growth of real GNP of about 4 percent over the year ahead. To strive for this objective effectively, we shall have to make care- ful use of our fiscal and monetary tools-always ready to adapt them to changing circumstances and to restrain or ease in full light, of de- velopments in private demand and defense. One clear consequence is that we cannot chart our policies far in advance; we cannot maintain an unyielding position regardless of surprises we may encounter on the way. The uncertainties in defense are one important reason why it is impossible to blueprint the policies for the year ahead. But they are not the only reason. In any period of high employment, prosperity, we should want the best information we can get before making de- cisions on taxes, expenditure programs, and credit policies. A number of private observers have complained about the uncer- tainties of Government policy. They want answers about taxes and the budget and interest rates. So do we. But we want the right answers and so should they. It would be reckless and irresponsible for the Government to decide whether we are going to have our foot on the brakes or the gas when we come to the next traffic light until we can see whether that light is red or green. At the moment, there are a number of bends in the road before that traffic light will become visible. PAGENO="0187" E~CONOMIC EFFECT OF VIETNAM SPENDING 545 The need for voluntary cooperation from labor and management in their price and wage decisions is also best viewed as part of the inormal problems of prosperity. The basic dilemma of reconciling high employment with price stability will persist in peacetime. The ,most effective and wisest use of monetary and fiscal policies cannot make it vanish. Indeed, the self-discipline of business and labor will determine just how restrictive monetary and fiscal policies have to be to sustain steady noninflationary growth. Enlightened private decisions can help make the path of full employment safe and stable, and can permit a larger total of real incomes to be divided between workers and business owners. The key current problem for the guideposts stems from the recent increases in food and service prices, which have accounted for the major part of our rise in consumer prices. The Nation is now asking the industrial sector whether owners and workers, in combination, `will show the restraint to absorb these costs, as they can do without serious sacrifice. To be sure of success in moving back toward price :stability, the Nation cannot afford to have the increases in the prices of food and services built into the structure of industrial costs and prices. CONCLUSION It should be clear that the increase in the defense budget of the past year did not make our prosperity. Nor did it break our prosperity. If we must, we can live with and adjust to growing defense require- ments. We can even adjust to them without tightening our belts :absolutely over time. The growth of our, productive capacity makes possible an extra $30 billion of real GNP (apart from any price changes) in the year ahead. We can clearly pay for defense out of that growth and still have more resources left to meet the urgent needs of the civilian economy. We can certainly live even more happily without a growing defense `budget. Naturally, we would all welcome an honorable peace in southeast Asia for reasons that extend far beyond the economic `realm. In addition, there would be important economic benefits to be reaped from the enlarged growth of both private and public civilian spending that would become possible if defense outlays should decline. Both the Congress and the administration would welcome the opportunity to terminate our temporary taxes, to remove some of the restraint from high priority nondefense programs, and to declare new "fiscal dividends" in the form of tax rate reductions. Wherever the defense budget has to go, it is safe to predict that we will have problems in managing prosperity. But anyone ~ho would Ilabel these problems insuperable has simply not read the economic :record of recent years. PAGENO="0188" THE FEDERAL BUDGET AND THE OUTLOOK FOR DEFENSE SPENDING..' B~ MURRAY L. WEIDENBAUM, Department of Economics,. Washington University, St. Louis, Mo. That perennial whipping boy of economic analysis-the proverbial man in the street-seems to be right once again. Sophisticated economists have been contending that Federal fiscal policy has been one of restraint in recent periods and that the inflationary pressures have arisen in good measure in the private sector, especially from. rapid expansion in business capital investment. In contrast, just try asking our wandering pedestrian what is causing the present inflation. The odds are he will reply to the effect that "Don't you know that there's a war on, buddy?" This paper says that he is right, and has properly, although intuitively, analyzed the current economic impact of the Federal Budget. Some perspective may be helpful. In a sense the United States is engaged in a war; but, we do not have a war economy. Ours is truly a mixed economy; we are literally concerned with social security as well as national security. We do not have the controls or runaway inflation often associated with war-time experiences. Yet, we do find an economy pressing very closely to the limits of available capacity and we are making choices somewhat analogous to guns- versus butter but not quite so. In a sense, we are choosing both more: guns and more butter. However, we are also choosing less private housing and fewer automobiles while we are voting for more urban redevelopment and additional public transportation-thus simul.~ taneously increasing both the military and civilian portions of the public sector in both relative and absolute senses. Let us first examine the impact of the Vietnam military buildup on the economy as a whole and on the Federal budget; subsequently~ I will indicate the effects on various types of companies and regions and then hazard a few projections. THE TIMING OF THE IMPACT: A MACRO VIEWPOINT The escalation in the U.S. commitment in Vietnam can, to some extent, be translated into economic impact by looking at the changing pace of military demand. As a benchmark, let us recall that in the fiscal year ending June 30, 1965, total contracts placed, orders let. and other "obligations" incurred by the Department of Defense were a shade over $50 billion. I use the concept of obligations because it is a generic term, including both government payrolls and contracts with private firms. In the January 1966 budget, it was estimated that this rate of making new commitments would rise to well over $63 bfflion in fiscal year 1966. Actually, the January budget under- estimated the rise in military demand during the fiscal year which was then in progress. ~Working Paper 6610, November 1906. I wish to express my appreciation to Mr. Kenneth Gaichus, my research assistant, ror both the usual helpful work and for manfully reporting negative findings. I have also benefited from discussions with Harold Barnett, Keith Carison, William Chartener, and Hy Minsky. 546 PAGENO="0189" ECONOMIC EFFECT OF VIETNAM SPENDING 547 The actual amount of new obligations incurred during the past fiscal year was somewhat in excess of $67 billion, or fully one~third greater than in 1965. Actual expenditures increased at oniy half that rate during the same period-l6~ percent. In other words, obligations is the sensitive or leading indicator. Unfortunately from the viewpoint of analyzing business conditions, the supposedly most sophisticated measure of government finance, the so-called national income accounts budget, uses a concept that even~ lags behind ex- penditures-the delivery of completed military equipment.2 To com- pound the problem, the national income accounts budget picks up government revenues on an accrual basis, which precedes the actual receipt of cash by the Government. (See fig. 1.). On previous occasions, I have tried to point out that theimpact on employment, production, and income of a military buildup may occur primarily at the point in time that budget recommendations are made, increased appropriations are enacted, and orders placed with military contractors. Although this may appear quite obvious to those acquainted with defense industries, the statement of Federal receipts and expenditures on national income account confines the measurement to the actual delivery of completed weapons and other military "hard goods." A considerable period of time often elapses between budget recommendations for military procurement and delivery of the completed items to the government and payment therefore. The primary effect on productive activity, to the extent there is any, normally occurs in advance of the actual government expenditures. Under most circumstances, the placing of orders induces private production on government account and such produc- tion remains in the private sector and does not show up as government FIGURE 1 DIFFERENCES IN RECORDING GOVERNMENT INCOME AND OUTGO TAX LIABILITY PAYMENT PLACED RECEIVED ONBOOKS - --~- BY OF TREASURY CORPORATI ON `~`1~' " National Income Cash Budget * Budget Records *Records Transaction Transaction CONTRACTS :~ PRIVATE PRODUCTION WEAPON -_.-_--~- GOVERNMENT PAWIEIITS SUPPLIERS `~ Deliveries to Government Sugg~ted Suggsted Ca~h Nati~onaI - Adjustment `A" AdJustmeni "B" Budget Income Records Budget - Transaction Records Transaction `~ See my `The Inflationary Impact of the Federal Budget," Financial Analysts Journal, July-August 1966, and the sources cited there for detailed analysis of this point. The extent to which, deliveries lag ex- penditures is shown graphically in William H. Chartener, The Outlook for Defense Spending-How Great an Uncertainty?, a paper presented before the Annual Meeting of the American Statistical Association, Los Angeles, Calif., Aug. 18, 1966. Government Income (Corporate Tax ilevenue) Government Outgo (Military Purchases) PAGENO="0190" 548 E~CONO~IIC EFFECT OF VIETNAM SPENDING expenditures until it is completed and the goods involved delivered to the public sector. Conceptually, production on government order is not reflected in government purchases of goods and services at the time the work is performed. This activity, as measured by the cost incurred, is currently included, in the gross national product, in the change in business inventories. When the government contractor delivers the finished items, the transaction shows up in the national income accounts as a decline in business inventories. It is also then recorded as a government purchase of goods and services. These two entries tend to cancel each other out, with no net effect on GNP. At the time it is recorded in the national income accounts, the government purchase does not represent payments to the factors of production; it is more in the nature of an intersectoral transfer-a reimbursement to the government contractor for his outlays during earlier periods. It is at the order stage that the government action normally will have its initial and often major impact on the markets for labor, raw materials, and financial resources. The contribution to economic activity is made during the production period prior to the actual government "purchase." Indeed, the recording of the government purchase may coincide in time with a reduction in governmental im- pact on total demand and in repayment of working capital loans by the government contractors. This may seem like a statistical tempest in a teapot (or a crackpot). However, the upshot is that the official budget and economic reports are very slow to pick up the expansionary impact of the Vietnam buildup, but very quick to take account of the deflationary impact of the revenue speedup. The net result is that the Federal Government appears to have been following a noninflationary economic policy in 1966 when actually it has been a major source of inflationary pressure in the American economy during the past year. I shall try to present some statistical support for that statement. In table 1, I have assembled a few variations on a theme, the theme being the net Federal surplus or deficit in recent periods. On the far left, I have placed the officially reported surplus or deficit in the so- called national income accounts budget. This, we are repeatedly told from on high, is "our best measure of the economic impact of fiscal policy." On that basis, the Federal budget shifted from a position of ease in the second half of calendar 1965 (a deficit of $1.4 billion) to some restraint in the first half of 1966 (a surplus of $3.1 bfflion). TABLE 1.-Federal surplvs or. deficit: Some variations on the National Income Accounts Bvdget IBflliöns of dollars at annual rates] _______________________ Calendar year Federal sur- plus (+) or deficit (-), official basis Adjustments for defense obligations ~ Federal surplus (+)or deficit (-), adjusted basis A B A B 1964: 1st half -4.3 2nd half -1.8 1965: 1st half +4.4 2nd half -1.4 1966 estimated: lsthalf ±3.1 2nd half - 0 -0.1 -4.4 -2.0 -5.2 -8.4 -0.1 -2.2 -1.0 -2.6 -4.2 -4.4 -6.2 +2.4 -6.6 -5.3 -4.4 -4.0 +3.4 -4.0 -1.1 PAGENO="0191" E~JONOMIC EFFECT OF VIETNAM SPENDING 549 Now I shall try to muddy the waters. The next two columns on that table contain two alternative sets of rough adjustments for the fact that new contracts awarded may be a better proxy for the im- pact of a military buildup on the economy than delivery of completed weapons. The A series is essentially the excess of military obliga- tions over expenditures during the period, seasonally adjusted and converted to an annual basis. One further change has been made. Over the years, about $2 to $3 billion worth of obligations each year do not seem to result in actual expenditures. A number of technical factors are at work here, including some double counting of contracts awarded by one military agency in behalf of another military agency. Such a case might be Air Force procurement of aircraft for the Army, which may show up as an Army obligation to the Air Force, as well as an Air Force obligation to the airplane manufacturer. In com- puting both the A and B adjustment series, the annual obligation figures were reduced by $3 billion in each case to take account of the double counting. My intent, of course, is to err on the conservative side. It can be seen, referring to the A column on the right hand side of table 1, that adjusting for defense obligations results in some signifi- cant changes in the "best" measure of Federal fiscal impact. The second half of 1965 is now seen to be a period of much more substan- tial ease in the Federal budget than shown on the official basis. Of greater interest, of course, is the indication that the first half of 1966 was not a period of fiscal restraint but also one with a substantial excess of outgo over income. The B adjustment is an attempt to satisfy the more timid. It is a statistical compromise between the two approaches, the result of an arithmetic averaging of military obligations and expenditures for each period. The theoretical rationale that could be offered is that perhaps a more proper counterpart to the liability basis of the cor- porate revenue computations would be somewhere between the ex- tremes of contract placement and governmental disbursement. As would be expected, the B results are somwhat more moderate than the A series. The adjusted Federal deficit for the latter part of 1965 is rather large, but, on this basis, the first half of 1966 witnessed a deficit of somewhat reduced proportions. I would suggest that even the B series provides a very weak case for the widely made claim that fiscal restraint occurred during January-June 1966. ANOTHER KOREA? It has been fashionable to compare the Vietnam buildup with the Korean experiences in the hope that some parallels would provide a firmer basis for forecasting purposes. However, important differences need to be acknowledged, although they tend to balance each other out. The first set of differences relates to the smaller relative scale of the present buildup. The current expansion of the armed forces from 2,700,000 to 3,200,000 seems modest indeed when compared to the spurt from 1~ million in 1950 to over 3~ million in 1952. Also, the defense budget doubled during the first year of the KOrean war, while, as noted, the inciease during the past year was about 16 percent All this reflects the fact that this is the first time that the United States has entered a major war with a very large existing Defense Establishment. PAGENO="0192" ~55O ECONOMIC EFFEcT OF VIETNAM SPENDING The second set of differences relates to the fact that, unlike Korea or World War II, the present military buildup was superimposed on an economy which was rapidly approaching full employment. Using June 1950 and July 1965 as the respective beginning points, we find that unemployment was higher in the earlier period (5.4 percent versus 4.5 percent) and the operating rate of industry was lower (80 percent versus 90 percent). Summing these two conflicting tendencies, we may conclude that even though the current defense program utilizes a smaller fraction of the Nation's resources, it is more in the nature of-but certainly not entirely-displacement of civilian demand rather than resulting in a total addition to actual production of goods and services. Hence, in the absence of direct controls over materials, wages, and prices, it would be expected that inflationary pressures would ac- company the rapid shift of resources from civilian to military use. The Korean experience showed that the strongest inflationary pressures occurred during that first year of the buildup, while the economy was initially adjusting to the new level of military demand. The actual peak in defense spending a few years later occurred shortly before the onset of recession.3 If there is any lesson to be gained from the Korean experience, it is that we particularly need to under- stand the timing of the impact of the different stages of a defense buildup (and subsequent cutback). Otherwise we can find ourselves fighting yesterday's inflation with a tax increase that will compound tomorrow's recessionary problems. THE CHANGING MIX: A MICRO VIEWPOINT~ Important changes also are taking place within the military budget. Such shifts in its composition are affecting the extent to which dif- ferent industries and regions are participating in the defense program. The key to understanding these developments is analyzing the chan~- ing "product mix" of military spending. The fundamental change is the shift of emphasis away from developing and maintaining in being the potential capability to deal with hypothetical worldwide or general-war situations and toward operating a military establishment actually waging a difficult but limited war whose dimensions keep on evolving. Table 2 shows the extent to which funds for U.S. combat forces have been shifting from general war to limited war programs as the cold war has heated up. It is striking to note that general -war forces now receive half of the share of the military budget that they received a few years ago. However, a more detailed breakdown of the military budget is :needed in order to get at the questions of regional and company impacts of this fundamental budget change. Table 3 shows the shifting product mix of military procurement (on an obligations basis). Three maj or shifts are taking place: (1) a more than doubling in the share of the budget going to tanks, weapons, ammunition and similar conventional battlefield ordnance; (2) a massive reduction in the relative as well as absolute importance of missiles; and (3) the reorientation of the military aircraft budget away~ from long-range strategic bombers and to tactical aircraft, particularly supersonic fighters~ and helicopters. The latter point, of course, emerges from ~M. L. Weidenbaum, "The Economic Impact of the Government Spending Process," Unfver,~it~i of Houston Busineu Review, Spring 1961, pp. 3-47. PAGENO="0193" ECONOMIC EFFECT OF VIETNAM SPENDING 551 analyzing the details of the budgetary reports. In general, the mili- tary budget is looking much more like it did during the Korean war and less than during the more recent period of cold war confrontation with the Russians. TABLE 2.-U.S. military budget: General versus limited war [Total obligational authority; dollar amounts in billions] . Category of combat forces Cold war (fiscal year 1962) Vietnam (fiscal year 1966) Amount Percent Amount Percent General war capability: Strategic offensive forces Continental air and missile defense forces $8. 9 2.3 29.8 7.7 $5.1 1.7 13.1 4.4 Subtotal Limited war capability: General purpose forces Airlift and sealift 11.2 37.5 6.8 17.5 17. 5 1.2 i8. 5 4.0 30. 0 2.2 76.9 5.6 Subtotal Total 1 18.7 62.5 32.2 82.5 29. 9 100. 0 39. 0 100.0 I The remainder of the military budget is devoted to support of the combat forces, research and develop. ment, military assistance, and retired pay. TABLE 3.-The changing product mix of military purchasing [Dollar amounts in billions] Procurement category Korean war (fiscal year 1952) Cold war (fiscal year 1962) Vietnam (fiscal year 1966) Amount Percent Amount Percent Amount Percent Sophisticated equipment: Aircraft Missiles Electronics Research and development $13. 1 . 4 1.3 1.5 43.5 1.3 4.2 5.0 $6.4 4. 7 1.5 5. 7 27. 1 19.9 6.4 24.2 $8. 6 2. 1 1.5 7.2 29.9 7.3 5.2 25.0 Subtotal Conventional equipment: Ships 16.3 54. 0 18.3 77.6 19.4 67.4 1.8 9.2 2.9 5.8 30.4 9.8 2.2 2.3 .8 9.5 9.6 3.3 1. 1 6.4 1.9 3.8 22.2 6.6 Ordnance Other Subtotal Total 13.9 30.2 46. 0 5.3 22.4 9.4 32. 6 100. 0 23.6 100.0 28.8 100.0 Hence,we are witnessing a reversal of the shift that occurred in de- fense purchasing in the mid-1950's. Once again, the automotive, mechanical, textile, clothing, and rubber companies are becoming important suppliers of war material. The most dramatic increases have occurred in ammunition (up 270 percent during the past fiscal year), clothing and textiles (up 240 percent), tanks and vehicles (up 80 percent), and food (up 60 percent). The large aerospace and elec- tronics firms, although still significant defense contractors, are finding their shares of the military market to be declining. Unlike the period of large weapon systems-such as ICBM's which could oniy be supplied by a few of the industrial giants-the demands of Vietnam result in numerous smaller contract s involving a great many and variety of medium-size firms as defense suppliers. 78-516---07-vol. 2-13 PAGENO="0194" 552 ECONOMIC EFFECI' OF VIETNAM SPENDING There is also a geographic dimension to this change in the military product mix. Large proportions of the companies working on Vietnam orders are located in the upper Midwest and in other relatively older industrial States in the East. The Far West, which had been receiving so large a share of defense orders during the past decade, is experiencing some absolute as well as relative declines. Table 4 shows the high- lights of these changes. Several States have been receiving defense contracts at rates of 40 to 50 percent above last year's levels. These include Connecticut, Illinois, Indiana, Maryland, Michigan, Minnesota, Ohio, Pennsyl- vania, and Texas. In contrast, Washington State, Utah, and Colorado have seen their defense contracts virtually cut in half during the past 2 years. California is now at the 1963 level, despite the sub- stantial growth in the overall military market which has occurred since then. TABLE 4.-The changing geographic distribution of defense contracts [Percentage distribution of dollar volume] Census region Korean war (fiscal year 1952) Cold war (fiscal year 1962~ vietnam (fiscal year 1966) Northeast: 8. 1 25.1 10.9 18.7 11.9 17.6 New England - MiddleAtlantic - Subtotal . Midwest: East North Central 33. 2 29. 6 29.5 I 27.4 12. 6 6.8 6.7 15.3 7.6 West North Central Subtotal . South: South Atlantic . South Central - 34.2 19.3 22.9 7. 6 6. 4 10.4 7.8 12. 5 12.2 Subtotal Par West: Mountain . Pacific 14. 0 18.2 24.7 .7 17. 9 18.6 - 4.7 28. 2 2.5 20. 4 Subtotal - Total . 32.9 - 22.9 100.0 100.0 100.0 The economic impacts of this shift in the location of defense industry may not be as simple as would appear. The Midwestern States have large, well-diversified industrial bases and these recent increases in their defense orders, although dramatic, may be taken in stride as they will require relatively small proportions of existing manufacturing capacity. On the other hand, defense work in recent years has accounted for a proportionately large share of the total n~anufacturing employment of many Western States and in several cases for virtually all the growth of such employment in the major metropolitan areas. The adjustment to the changing military market may be especially difficult for those Western States that are not participating in the simultaneous expansion in the commercial aircraft market. On balance, I would expect that the reorientation of defense spend- ing toward greater emphasis on limited war equipment, which seems likely to outlast the current Vietnam buildup, wifi have important differential effects on the relative rates of growth in population, income, PAGENO="0195" ECONOMIC EFFEC~1' OF VIETNAM SPENDING 553 and tax bases in the various regions of the country-effects which should primarily be favorable to the Middle Atlantic, Great Lakes, and New England areas. THE OuTLooK FOR 1967: WILL FISCAL RESTRAINT BE BIGGER ON THE INSIDE THAN ON THE OUTSIDE? And now to my cloudy crystal ball. Ordinarily, the Federal Government would have issued by now a Midyear Review of the Budget, updating the estimates published last January. Very im- pressive reasons are given for the lack of a Midyear Review. As I recall, a different set of excuses were made last year. As a sometime forecaster, I will readily agree that it is always more cOmfortable not to have to stick your neck out. Hence, the task at hand for us is to infer future developments from the most recent data. It is almost a situation of constructing a case based solely on circumstantial evidence. Let us begin by analyzing the pattern of military buying during the past year, the fiscal year ending June 30, 1966-which is the latest period for which. data are publicly available. Because of the unique seasonal patterr~of military ordering and the absence of a seasonal adjustment for earlier periods, it is useful to compare the data for a given quarter with the corre- sponding period in previous years. Beginning with the July-~Sep. tember quarter of 1965, we find that military obligations during each of the past four quarters were the highest for that respective period since the peak demands of the Korean war in 1952. . In addition, each recent quarter has .b,een higher than the preceding quarter, with the greatest spurt occurring during April-June 1966. Because of the age-old tendency to concentrate Federal commitments in the final quarter of the fiscal year (so-called. June buying), not too much can be read into the last quarter of data. However, it does seem quite clear that the upsurge of defense orders is not running out of steam. . The leadtime between ordering tanks, ammunition, and similar conventional limited war equipment is likely to be less than is the case for ICBM's, space systems, and other highly sophisticated aero- space products. Hence, the acceleration in defense buying in fiscal 1966 already has been translated into a $4 biffion annual rate of increase in defense purchases of goods and services in the July-Sep- tember quarter and likely into another $3-$4 billion increase in the current October-December quarter. These estimates account -for the first half of fiscal 1967. .Here, this swami's crystal ball begins to cloud up and you need to put some coin in his palm in order to obtain a forceast for the calendar year 1967. Hopefully, the fine print on that coin should contain the military obligation rate for the past quarter and estimates for the next quarter or. so. There is little advantage to going back to the January budget; as we later learned, only some time after the docu- ment was released, it was based on the optimistic assumption that the war soon would be over. We are really on our own. Two alterña- tive projections of defense spending in 1967 seem to be fashionable these days. The first, a Newtonian or Dow theory approach, says that the current increase in defense outlays will continue through 1967-the rationale being that if the war continues then the military buildup will need to continue. PAGENO="0196" 554 ECONOMIC EFFECT OF VIETNAM SPENDING The second or acceleration principle approach indicates that defense spending should taper off in the last hail of 1967, even if the Vietnam fighting continues at its present pace, but, of course, barring another large-scale escalation. The idea here is that you can let up on the gas pedal after the vehicle attains the desired speed-in the present case, the new production lines should already have been put in place and quantity production rates achieved early in 1967. Also, to the extent that some of the recent ordering has been designed to restock military investories, new ordering can taper off as appropriate stock levels, particularly soft goods, are reached. Because this second approach is somewhat more sophisticated, I tend to lean toward it, but with limited confidence. The assumption of no further military escalation may be too optimistic. One view that I do hold with greater firmness may be consistent with both of these alternatives and that is that the major shock to the American economy from the ~Vietnam buildup already has oc- curred. This statement is made despite the likelihood of Federal defense purchases reaching a total of $70 billion in 1967, a rise of 40 percent from 1965. Barring a fundamental escalation, it is unlikely that the coming year will witness the 33~ percent increase in defense orders that occurred last year. Hence, the inflationary pressures of a demand-pull nature which we have been experiencing during the past year are likely to subside somewhat, but the cost-push inflationary pressures are likely to continue. TABLE 5.-Federal receipts and expenditures in the National income Accounts [In billions of dollars] Calendar year Receipts Expenditures Surplus (+) or deficit (-) 1958 . 1959 . 1950 1961 78.7 89.7 96.5 98.3 106.4 114.5 115.1 124.9 143.0 158.0 88.9 9L 0 93.0 102. 1 110.3 113.9 118. 1 123.4 140.0 158.0 -10.2 -1.2 +3.5 -3.8 -3.8 ±.7 -3.0 +1.6 +3.0 1962 1963 1964 1965 i966 estimate 1967 estimate Norx.-See table 1 for possible adjustments to the expenditure and surplus/deficit figures. To mollify those who anticipate a projection of the Federal budget' table 5 is offered, probably as a sacrifice on the altar of conventionS No doubt it should be kept out of the reach of children and appro- priately labeled as to its possibly being injurious to the health, finan- cial in this case. It can be seen that I am projecting a relatively small surplus in the statement of Federal receipts and expenditures in the income accounts in calendar year 1966 and approximate balance in 1967-on the official basis. I have used poetic license in labeling these guesses as "estimates." PAGENO="0197" ECONOMIC EFFECT OF VIETNAM SPENDING 555 A few comments on the details of the projections may be in order. On the revenue side, I have attempted to take account of the scheduled continuation of the speedup in the payment of the corporate income tax. For example, in the current year, large corporations are paying about 116 percent of their normal annual liability (42 percent of their 1965 liability and 74 percent of their 1966 liability). In 1967, the speedup continues, with these companies paying approximately 126 percent of normal annual liability (the remaining 26 percent of their 1966 liability plus 100 percent of their 1967 liability). Thus, they will be on a pay-as-you-go basis for the calendar year 1968 as a whole.4 On the expenditure side, the bulk of the recently enacted increases in the various Great Society programs is reflected primarily in rising transfer payments and grants-in-aid to state and local governments. Relatively small proportions of these education, housing, and anti- poverty programs result in Federal purchases of goods and services, The greater part of these purchases and virtually all of the recent in- creases are in connection with military and related national security programs. On the face of it, it would appear that the trend is for a slight reduc- tion in Federal fiscal restraint in 1967. As you must know by now, I do not believe that it will work quite that way. If we had the data to project the adjustment for defense obligations, I believe that the results would be a Federal deficit on income and product account in 1966 and a smaller deficit in 1967, thus indicating an abatement in the inflationary pressures directly resulting from the Vietnam buildup. DEALING WITH INFLATION Some important policy implications flow from all this. A general tax increase taking effect some time in 1967 may be too late to deal effectively with the inflationary pressures of the Vietnam buildup and of limited usefulness in dampening a wage-price or cost-push inflation. It might also coincide with some of the belated impacts of this year's tight monetary policy, especially in its effect on business investment.5 Thus, a tax increase now might relieve guilt feelings for not having enacted one in January, but mere confession of error might be more helpful. Given the continued speedup of Federal revenue collections, assum- ing that our diagnosis of the economic impact of defense spending is approximately correct, and given the softness or slowing down in many private areas of demand, 1967 may be the year that-one way or another-they lower the boom. Hence, ceteris Darabus, a reduction in Federal corporate income tax receipts may occur in 1958. 5 Cf. Iohn Kareken and Robert M. Solow, "Lags in Monetary Policy: A Summary," in Warren L. Smith and Ronald L. Teigen, editors, Readings in Money, National Income and Stabilization Policy, 1965, pp. 76-80 PAGENO="0198" 1966-YEAR OF EXCESSIVE DEMANDS AND THEIR CONTROL* Nineteen sixty-six was the sixth consecutive year of expansion in spending and production. In each year since 1960 total demand for goods and services has risen rapidly enough to reduce the proportion of workers unemployed and the proportion of plant capacity unused. The year 1966 differed from the previous five, however, in several significant respects. Aggregate demand for goods and services was excessive during most of the year. In the 1961-64 period demand rose sufficiently to bring the economy steadily closer to its potential output and, on the whole, in a moderate and orderly fashion, avoiding the creation of undue problems of resource allocation and inflationary pressures. During 1965 there was a much more rapid growth of total demand, accom- panying the acceleration of activity in Vietnam, but most of the rise was matched by an increase in output. During most of 1966 the rise in demand continued to be rapid and significantly outpaced the ability of the economy to produce. The year 1966 was one of inflation. During the first 4 years of the business expansion, sales and production rose in parallel fashion, and overall prices changed little on balance. Beginning about mid-i 965 total demand rose more vigorously than real output, and rises in price indexes became notable. In 1966 demand continued to rise rapidly, and, with the economy at virtual capacity, about half of the rise was translated into higher prices. Federal budget policy was more stimulative to total demand in the last half of 1965 and in 1966 than it had been in over a decade. From a relatively restrictive stance in 1960 budget policy became progres- sively more expansionary through tax cuts, additional welfare pro- grams, and acceleration of the war in Vietnam. Such developments are believed to have been major forces in the growth of total demand from an inadequate level in the early 1960's to the excessive level of 1966. Monetary trends changed markedly during the year. In mid-1960, several months before the cyclical upturn, the money stock began rising moderately, at about a 3-percent annual rate compared with an average 2-percent rate in the previous decade, and continued to rise at this pace until mid-1964. From the summer of 1964 to the spring of 1965 money rose at an expansionary 4-percent rate, and from the spring of 1965 to the spring of 1966 it went up at a very stimulative 6-percent rate. This marked expansion was probably a significant factor in the strong rise in total demand during 1965 and 1966. From April through November money declined on balance, acting as a restraining force on total demand in the last half of 1966. Interest rates rose rapidly from mid-1965 to the spring of 1966 and then spurted yet more rapidly until September, reaching the highest levels in over thirty years. Higher yields were reflected in a decline of bond prices and exerted a depressing influence on the value of common stocks, real estate, and other capital assets. The rise in *Reprinted from Federal Reserve Bank of St. Louis Review, December 11)66. 556 PAGENO="0199" N~\ IjiJ.I.LLIIILLIIILLIjjLI1f1J1Ili thu 11111 ~919 24 30 36 42 48 54 60 W66 Source: Moodys Investors Servke Latest data plotted: ~96o estimated The nation's balance of payments with other countries deteriorated in some major respects but improved in others. On the one hand, the strong domestic demands for goods and services, the higher prices in this country, and the shortage of some items domestically caused a jump in our imports and a marked reduction in our trade surplus. On the other hand, the higher interest rates in this country were helpful in reducing the net outflow of capital and money market funds from the United States. For a fuller analysis and some background on the ba1ance~of-payments problems, see "1966 Balance of Payments in Perspective," on page 17 of this Review. In late 1966 there were indications that the increase in total demand was moderating. Spending was less bouyant, credit demands were less vigorous, and interest rates receded from the peaks reached in the early fall. The abrupt shift in the thrust of monetary variables, which turned from expansion to restraint in the spring of 1966, may have been a major restraining force on total demand later in the year. Total demand serves as a convenient theme for analyzing economic conditions. All of the above developments, together with many ECONOMIC EFFECT OF VIETNAM SPENDING 557 rates resulted primarily from a huge demand for funds accompanying Federal budget policy and the strong demand for goods and services. Since yields on market securities rose much more than interest rates offered by banks and savings and loan associations, a greater share of the public's funds than in many years flowed directly from savers to investors without passing through an intermediary. Interest Rates Highest Grade Corporate Bonds Per Cent ______ Der Cent I. 4 2 6 2 PAGENO="0200" 558 ECONOMIC EFFECT OF VIETNAM SPENDING others, were related to the excessive total demands for goods and services during 1966. This article examines: (1) public policy factors affecting the demands; (2) the resulting demands for goods and services and the accompanying rises in production, employment, and prices; (3) credit and interest rate developments; and (4) some economic trends, prospects, and choices developing in late 1966. PUBLIC POLICY FACTORS AFFECTING TOTAL DEMAND The two chief factors influencing the course of spending are fiscal and monetary developments. Some analysts see fiscal policy as domi- nant, while other view monetary policy as more effective. Direct Government spending and taxing are commonly thought to play more important roles in determining total demand than their size might indicate for two reasons: (1) Government spending and taxing are based largely on political, military, and welfare considerations and are not directly a function of current or expected income; and (2) a one dollar change in Government spending or taxing will generally lead to more than a one dollar change in total spending because of the effects on disposable incomes of consumers and businesses, which, in turn, influence their spending. Monetary actions may have as great or greater impact on economic activity. Changes in the stock of money held by individuals and businesses relative to their desire to hold it as an asset influence spending. Linkages between money and spending may be through such variables as interest rates, credit availability, and liquidity. FISCAL DEVELOPMENTS Since mid-1965 the U.S. Government, through its current taxing and spending programs, has exercised a strongly stimulative influence on total demand for goods and services. The overall relation between tax rates and the provision for expenditures has been the most stimu- lative in over a decade. At the same~ time, total tax receipts of the Government have been rising rapidly, largely because of the growth in private incomes. As a result, the total impact of the Federal budget, including the effect of the so-called automatic stabilizers, has been less stimulative than current programs alone would indicate. Recent Federal Government fiscal developments may be examined in the light of alternative ways of measuring receipts and expenditures of the Federal Government.' There are four budgets of the Govern- ment in common usage. The administrative budget is the basic planning document of the Government. The cash budget measures the cash flow between the Government and the rest of the economy. The national income accounts budget summarizes the receipts and expenditures of the Federal Government sector as an integrated part of the recorded activities (i.e., the national income accounts) of all sectors of the economy. The high-employment budget is an estimate of the national income accounts budget which would prevail at a specified rate of resource use. IFor a fuller discussion of various budget measures, see Keith M. Carlson, "Budget Policy in a High. Employment Economy," in the April 1966 issue of this Review. PAGENO="0201" ECONOMIC EFFECT OF VIETNAM SPENDING Federal Budgets 559 0 On an administrative budget basis, the deficit rose from $4.6 billion in calendar 1965 to an estimated $8.9 billion in 1966. (See table on p. 548.) This budget is the basic planning document of the Government but has serious shortcomings as a measure of impact on the econ- omy (as noted below in the discussion of other budgets). Expendi- tures are estimated at $119 billion in 1966, up 17 percent from $101 bfflion in 1965. Spending for national defense, reflecting the acceleration of war in Vietnam, rose from about $53 billion in 1965 to an estimated $65 biffion in 1966. Other outlays increased from $49 biffion to roughly $54 billion, reflecting pay increases to Government employees and other price increases and new welfare programs. Net budget receipts increased from $97 biffion in 1965 to an estimated $110 biffion in 1966, or 14 percent, as incomes and profits rose, excise tax rates were increased, and tax collections were accelerated in a move toward a pay-as-you-go system. The consolidated cash budget also indicated a greater net Government deficit in 1966 than in 1965, rising from $4.5 biffion to an estimated $7.5 billion. The cash budget, which includes the activities of Gov- ernment trust funds, provides a broader measure than the adminis~ trative budget of the cash flow between the Government and other sectors of the economy. Cash receipts of the Government rose from $123 billion in 1965 to an estimated $145 billion in 1966, 17 percent. Higher social security tax rates were a factor causing the greater rise m receipts on a cash basis than on an admimstrative basis Cash payments to the public went up 19 percent, from $128 billion in 1965 to an estimated $152 bfflion in 1966. Medicare payments and more Annual Data Bilflons of Dollars 15 BilUons of Dollars 1. -i0 5 -5 1960 1961 19.62 1963 1964 1965 1966 Sources: U.S. Department of Commerce, U.S. Treasury Department, Council of Economic Advisers1 and 1.derol Reserve Bank of St. Louis Latest data plottedt 1966 estimated by ths bank .10 PAGENO="0202" 560 ECONOMIC EFFECT OF VIETNAM SPENDING liberal social security benefits as well as the greater outlays included in the administrative budget were chief causes of the increase. The national income accounts budget is a broad measure relating the Federal Government sector to the consumer, business, state and local government, and international sectors of the national income and prod- uct accounts. It reflects the impact of current changes in tax rates and provisions for expenditure by the Government as well as the built-in stabilizing effects of existing laws as applied to changing economic development~.2 On the national income accounts basis, the budget has shown a surplus at an average annual rate of about $0.4 bfflion during the past 18 months. This was less stimulative than in the period 1961-64, when the deficit averaged a rate of $2.5 bfflion. This measure of Government action, which indicates about the same stance in 1966 as in 1965, is generally thought to be a better indicationof the relation- ship of the Government to total spending than either the administra- tive orcash budget. The national income accounts budget is designed to include only factors which have a direct impact on the flow of current income. This is accomplished by such devices as excluding transactions in existing assets and accruing tax receipts. The some- what greater restriction indicated by this budget for 1965 and 1966 than for the preceding 4-year period resulted in large part from the impact on Government tax receipts of the rise in economic activity and incomes-the chief automatic stabilizer. In view of the high level of economic activity and the excessive rate of increase in total spending, the budget appropriately should have registered a large surplus in the last 18 months if it were the act as a restraining force on total spending. The high-employment budget indicates the influence of changes in tax rates and in provisions for Government expenditures upon the national income accounts budget and abstracts from the major built-in stabilizer effects. It is thus a better measure of changes in fiscal policy. On a high-employment budget basis the Government operated at a surplus of about $0.5 billion annual rate in the 18 months from mid- 1965 to the end of 1966. This was the smallest surplus, and therefore the most stimulative, in over a decade. Figures presented in this budget are hypothetical, but relative levels are believed to provide the best single measure of the relative impact on the economy of current Government fiscal actions. The high-employment budget differs from the national income accounts budget primarily by elimi- nating the effect of changes in economic activity on Government receipts. It measures the impact of changes in tax laws and legal provision for expenditure, at an assumed rate of use of resources, rather than actual tax receipts and expenditures. Government tax and expenditure policies as measured by the high- employment budget were a substantial drag on total spending in 1960, were moderately and on the whole increasingly stimulative 2 Differences of opinion exist as to whether it is better to include or exclude the effect of automatic stab!. lizers in analyzing fiscal policy. There Is an extensive literature on the value of the automatic stabilizers. However, since the Impact of these stabilizers is chiefly determined by developments in the private sectors, others believe that these movements may be misleading. The differences of opinion are similar to those of deciding whether to useinterest rates and free reserves (which are influenced by both the monetary authorities and demands for credit in the rest of the economy) or touse aggregate reserves and money (which are controlled by the monetary authorities) in measuring monetary actions. PAGENO="0203" E'CONOMIC EFFECT OF VIETNAM SPENDING 561 from early 1961 to early 1965, and became very stimulative in late 1965. The marked shift in the posture of the Government since 1906 resulted from the investment tax credit and liberalized depreciation guidelines in 1962, tax cuts in. 1964 and 1965, increasing expenditures for the Vietnam conflict, and greater outlays on welfare programs. Fiscal Measures Federal Budgets Billions of Dollars Quarterly Data Billions of Dollars lu o High-Employme t Vatlo~come Accounts 5 0 1964 1965 1966 Sources: U.S. Deportment of Commerce, U.S. Treasury Department, Council of Economic Advisers, and Federal Reserve Bank of St. Louis Latest data platted: 4th quarter estimated by this bank Government actions were probably even more stimulative in late 1965 and early 1966 than indicated by the high-employment budget. Government outlays are recorded in this budget when goods are de- livered; yet the economic impact begins soon after orders are placed. The defense buildup was accelerating rapidly because of the war in Vietnam. Contracts were let iii great volume, production increased markedly, and employment rose, but deliveries of goods were relatively small in the early months of the buildup.3 Government debt-management operations were also expansionary during 1966. Because of the legal maximum interest rate of 43~ percent on new issues with maturities of over five years, the Treasury. was forced to finance with relatively short-term issues, adding to the liquid assets of the public. Average maturity of the publicly `held Federal debt declined from 63 months in 1965 to less than 59' months in the January-October 1966 period. A detailed analysis of this effectwas presented by Murray Wiedenbaum in a paper entitled "The Federal Budget and the Outlook for Defense Spending" at the University of Michigan Economic Outlook Confer. ence on Nov. 18, 1966: PAGENO="0204" 562 ECONOMIC EFFECT OF VIETNAM SPENDING Economic analysis during the past two or three decades has generally indicated that fiscal policy is the major public, policy influence on total demand. Judged by this view, public policy has been extremely stimulative during the past 18 months. Recent economic analysis has put increasing emphasis on monetary policy as a major determinant of total demand. MONETARY DEVELOPMENTS Monetary expansion was rapid from mid-1964 to the spring of 1966 and then came to an end. Both member bank reserves and the money stock, which had been rising sharply, showed net declines from April to November. Typically, changes in these monetary variables have had their greatest impact on economic activity after a brief timelag. Monetary developments are measured variously by changes in the stock of money, interest rates, bank credit, and other measures. For the sake of simplicity and because it is a widely used policy indicator, particular attention is given here to changes in the stock of money. The money stock (demand deposits and currency) has decreased at an annual rate of 1.5 percent since last spring after increasing 6 percent in the preceding year and at a 4-percent rate from mid-1964 to April 1965. From mid-1960 to mid-1964 money rose at a 3-percent rate, and in the 1950's, at a 2-percent rate. Money Stock Billions of Dollars BflUons of Dollars :1 U U 1~~ /1] 160 3 ~ .Afl +277 ~ ~r__I__ ~_`F~"~~ Monthly Averages of Daly Figures Seasonally Adjusted ~1A~'~ +6.2%~ /1 JL~j, .17Z 140 ~2:oo un~ A £1 iuly59Z ~~Jur~e64Z/~pr 65 4 -- -~ 4 IA 1959 1960 1961 1962 1963 1964 1965 1966 Percentages ore annual rates of change between months indicated. Latest data plotted: November preliminary "A NOTE ON INTERPRETING MONETARY VARIABLES" As the Nation's central bank, the Federal Reserve System has responsibility for managing the monetary system in a way that helps achieve the broad goals of economic policy. While the general nature of the role of the Federal Reserve in monetary management is not difficult to explain, it is difficult to explain the specifics of how that role should be performed: for example, how monetary policy should be designed, how the variables to be influenced should be selected, and how the results should be measured. One fundamental and practical problem involved is the presentation, use, and measurement of basic statistical information. The sharp expansion in the money stock from mid-1964 to early 1966 was probably a significant factor in the rapid rise of spending 170 150 PAGENO="0205" ECONOMIC EFFEcT OF VIE~AM SPENDL~G 563 during 1965 and early 1966. To the extent that actual cash balances exceed desired cash balances, upward pressures are placed on spend- ing. Evidence indicates that changes in the rate of spending have usually followed marked and sustained changes in the rate of growth of the money stock after a few months' lag.4 The decline in money since April has probably exerted a restraining influence on aggregate *demand in late 1966. The demand deposit component of money has declined at a 3- percent annual rate since spring following a 5-percent rate rise from mid-1964 to spring 1966. By contrast, the currency component has increased at a 4-percent rate since spring compared with a 6-percent rate in the preceding period. The amount of currency held is prob- ably related to the volume of transactions which typically utilize currency. Changes in the rate of growth of currency have tended to coincide with movements in total spending or to lag slightly behind them. Rates of growth of demand deposits have been related to changes in member bank reserves available for private demand deposits. Marked and sustained changes in the growth rates of demand deposits have usually preceded changes in economic activity.5 Changes in the money stock have reflected in large measure changes in member bank reserves. Member bank reserves (adjusted for Reserves of Member Banks Bil lions of Dollars Monthly Averaqes of Daily Fktures Blllksnc ~f ~ 24 22 20 Seasonally Adjusted Tot - I Reserves*** +48V ~ ~ 227 ~ ~-s~-~i~ -~ ~ - -~ -___ Reserves Requ ired ~or Other D posits4 5.6 :____1____: ~ 3 `14 ~ Reseri . ~ ) L_~~j .2.8% es Available fer Pnvale I~ernand Depos tsp" 14 Nov)6~r~ LLit~T0 Apr.65 Apr.66 ~11l i~i~ JEJILLLLJIJLJLJ±UJ±TJLdILLJ 1963 1964 1965 1966 *U.S. Government demand deposits, deposits duo to domestk commercial bonki, and time and savings deposits. *aDeposits of member banks included in the usual definition of the money supply. *°°Adjusted for estimated effect of reserve roquirement changes. Percentages ore annual rates of change between months indicated. Latest data plotted: November preliminary ~ See "Money Supply and Time Deposits, 1914-1964," in the September 1964 issue of this Review. See "Currency and Demand Deposits," in this Review, March 1965. 24 3.2 22 20 PAGENO="0206" 564 ECONOMIC EFFECT OF VIETNAM SPENDING changes in reserve requirements) declined at about a 2-percent ann ual rate from April to November this year. Reserves, which are com- posed of deposits with Reserve banks and cash in bank vaults, are the major determinant of the level of demand deposits. From April 1965 to April 1966 bank reserves rose about 5 percent. By com- parison, reserves increased at a 4-percent rate from 1960 to 1965 and at an average rate of about 2 percent per year in the 1950's. The rapid expansion of reserves from mid-1964 to the spring of 1966 resulted from Federal Reserve System net purchases of Government securities totaling $6 biffion and an increase of $400 million in member bank borrowing from Reserve banks. Partially offsetting factors were a movement of currency into drculation and net sales of gold by the U.S. Treasury. The decline in effective reserves since last spring has reflected both a rise in reserve requirements on time deposits and a slower rate of net purchase of Government securities by the System. Reserves available to support private demand deposits (total reserves less reserves required for deposits not counted as part of the money supply) have decreased at a 3-percent rate since spring after increasing 5 percent in the preceding year. These reserves rose at a 1.5-percent rate from 1960 to 1965, about the same as in the 1950's. Movements in private demand deposits and the money stock are usually more closely associated with these reserves than with total reserves. Time deposits in commercial banks rose at a 10-percent annual rate from November 1965 to August this year and since have shown little net change. By comparison, these deposits increased at a 15-prcent rate from 1960 to 1965 and a 7-percent rate from 1951 to 1960. Growth of each of the three major components of commercial bank time deposits has followed a different course in 1966. Recent trends are most exactly known for the large banks which report weekly. These banks hold about $88 bfflion of total time deposits of $157 billion. Divergence of trends of different kinds of time deposits has probably been greater at these large banks than at other banks. At these large banks passbook savings deposits, which now amount to about $47 billion, have declined at an 8 percent annual rate since last December after rising 11 percent during 1965. The chief cause of the changed trend was that with higher interest rates on competing instruments banks found more difficulty in attracting and holding passbook accounts at the Federal Reserve's Regulation Q rate ceiling of 4 percent. Large CD's (certificates of deposit), which rose 12 percent in the year ended in August and had increased about a third each year for several earlier years, have since declined at a sharp 50-percent rate to about $15 bfflion in early December. The Regulation Q maximum of 5% percent on these funds has made it increasingly difficult for banks to hold them. Smaller, consumer-type CD's at the large banks have risen 51 per- cent since a year ago compared with a 20-percent rate earlier in 1965. Recently these deposits have amounted to about $26 billion. The recent rapid growth rate of these deposits reflected increased bank agressiveness in seeking these funds for which regulations permitted payment of effectively competitive interest rates. Since September ~of this year, when the maximum rate on these CD's was lowered from :5% to 5 percent, the amount outstanding has changed little on thalance. PAGENO="0207" ECONOMIC EFFECT OF VIETNAM SPENDING 565 Money stock plus time deposits at all commercial banks declined somewhat from September to November after growing at a 4-percent rate from June to September, at a 9-percent rate from March 1965 to June 1966, and at an 8-percent rate from 1961 to 1965. In the 1950's this broader measure of money went up at an average 3.4-percent rate. A particular net stimulative or restrictive effect on the economy may be obtained with various mixes of monetary and fiscal policies. During most of 1966 the particular combination of policies prevailing was one of relatively expansive fiscal developments and relatively restrictive monetary actions. This mix required larger borrowing by the Federal Government and a lesser growth in money than a mix with more restrictive fiscal action and less restrictive monetary action and tended to place upward pressure. on interest rates. The higher rates were of some benefit in keeping the country's balance of payments from deteriorating since they reduced the incentive to seek higher rates abroad. On the other hand, higher interest rates adversely affect some sectors of the economy, such as housing. FEDERAL RESERVE SYSTEM ACTIONS DURING 1966 Federal Reserve credit 1 Annual rates of change December 1965- April 1966 April 1966- November 1966 Federal Reserve credit 2 .. . Federal Reserve holdings of U.S. Government securities Total reserves of member banks Reserves available for private demand deposits Percent ±9.3 +8.0 ±6.9 +4. 1 Percent +3.2 +3.4 -2.3 -3.1 1 Adjusted for reserve requirement changes. 2 Federal reserve credit excluding float and a few minor items. Discount rate Percent In effect Jan. 1, 1966.. 4~ In effect Dec. 20, 1966 43~~ Reserve requirements Percent of deposits Demand deposits Time deposits, all member banks Reserve city baaks All other member banks Savings deposits Other time deposits Up to In excess of $5, 000, 000 $5, 000, 000 In effect Jan. 1, 1965 163~ 12 4 4 4 July 14,' 21,2 1966 Sept. 8,' 15,2 1966 6 In effect Dee. 20, 1966 163~ 12 4 4 6 1 Effective date for reserve city banks. 2 Effective date for all other member banks. PAGENO="0208" 566 ECONOMIC EFFECT OF VIETNAM SPENDING Margin requirements on stocks Percent In effect Jan. 1, 196&.. 70 In effect Dec. 20, 1966 70 Maximum interest rates payable on time and savings deposits I Other time deposits, 30 Savings days or more maturity deposits -____________ Under $100, 000 $100, 000 or more In effect Jan. 1, 1966 Sept. 26, 1966 In effect Dee. 20, 1966 Percent 4 `I 4 Percent Percent 53'l 5 ~ LOAN POLICY On September 1, 1966, the presidents of the Federal Reserve banks sent a letter to all member banks regarding growth in overall bank credit, the increase in business loans, and administration of Federal Reserve credit assistance to member banks through the System's discount facilities. Excerpts from the letter are as follows: "* * * credit financed business spending has tended towards unsustainable levels and has added appreciably to current inflationary pressures * * * [This] expansion is being financed in part by liquidation of other banking assets and by curtailment of other lending in ways that could contribute to disorderly conditions in other credit markets * * * Member banks will be expected to cooperate in the System's efforts to hold down the rate of business loan expan- sion * * * and to use the discount facilities of the Reserve Banks in a manner consistent with these efforts. * * *~ DEMAND, PRODUCTION, AND PRICES DEMAND The demand for goods and services was very strong in 1966, al- though it declined moderately from the exceptionally high 1965 rate. Total dollar spending, which had risen at a very rapid 9-percent annual rate from late 1964 to early 1966, grew at a somewhat more moderate 7-percent rate from the first to the third quarter of 1966. These rates of increase in spending were substantially above the estimated 4-percent rate of growth of productive potential. The stimulative fiscal actions during 1965 and 1966 and the rapid monetary expansion from the summer of 1964 to the spring of 1966 contributed to the large demand for goods and services of the past 2 years. The growth pattern of spending changed markedly during 1966. Private investment, which had risen at a 15 percent annual rate from the third quarter of 1964 to the second quarter of 1966, declined in the third quarter of 1966. Outlays on housing declined from $27.8 billion in 1965 to an annual rate of $24.8 billion in the third quarter of 1966. Since housing is consumed over a relatively long period, current spending on new construction can be curtailed without greatly reducing the amount of housing services available. Since interest cost is usually a major portion of the total expense of owning a home, higher interest rates increase the effective price of house services more than the price of consumer goods in general. Consequently,. the amount of housing demanded declines greatly. PAGENO="0209" ECONOMIC EFFECT OF VIETNAM SPENDING 567 Demand and Production Ratio Scole _______ Quarterly Totals at Annual Rates BilUons of Dollars 800 Seasonally Adjusted +6.6% ~44.6 ::: J~T~;~eaIProducf:2% 500 4th ~r. 4th tr. 1st qtr.3d qtr. oc ft ___ ___ ___ ___ __ 1959 1960 1961 1962 1963 1964 1965 1966 Percentages are annual rates of change between quarters indkated. a GNP in current dollars. Source: U.S. Department of Commerce t~ GNP in 1958 dollars. Latest data plotted; 3rcl~quarter Inventory buying continued large in the first half of 1966 but added little to increased total demand. Net purchases of business inven- tories during the first half of 1966 ($10.6 billion rate) remained close to the fourth quarter 1965 rate ($10.4 bfflion). Inventory purchases rose rapidly in 1965 from $4.7 billion in 1964, reflecting both the greater flow of goods in the private economy and the buildup of war goods for Vietnam. In the third quarter of 1966 inventory buying declined slightly, to a $9.9 billion rate. Factors in the slowdown may have been the higher costs of credit, unavailability of some items, and the greater delivery of war goods to the Defense Department relative to production of these items. Business sp';nding on plant and equipment, in contrast to inventory investment, continued to rise during 1966. These outlays increased at an estimated 15-percent rate in the first three quarters of 1966 compared with an average 9-percent rate in the previous 5 years. Profit anticipations were optimistic, and demands for defense goods were great. Interest costs, although up nominally, did not impose much restraint on demand since growing inflationary pressures led to expectations that repayments would be made in cheaper dollars. Government expenditures jumped at an average 14 percent annual rate during the first three quarters of 1966 compared with growth at about a 9-percent rate from late 1964 to late 1965 and a 5-percent rate from 1962 to 1964. Defense outlays accounted for most of the Ratio Scale Billions of Dollars 800 700 I 700 _______ _______ _______________ ~ F', 649.3 Total Spending a +2.8% 600 78-516-67-vol. 2-14 PAGENO="0210" 568 ECONOMIC EFFECT OF VIETNAM SPENDING gain, but welfare programs of the Federal Government and spending by State and local governments continued to rise. Consumer outlays, which rose at about a 9-percent rate from late 1964 to early 1966, increased at .a 6.4-percent rate in the second and third quarters of 1966. The slower rate was caused primarily by a decline in durable goods purchased during the second quarter as auto- mobile sales decreased, reflecting higher excise taxes, greater with- holdings for personal income taxes, and discussions of automobile safety. Nevertheless, personal income, a measure of purchasing power, has continued to rise at about an 8-percent rate in 1966. PRODUCTION AND EMPLOYMENT Growth in real output of the economy slowed in 1966, trending downward from a 7-percent growth during 1965 to a 6-percent rate in the first quarter of 1966 and a 3-percent rate in the second and third quarters. By comparison, output rose at an average rate of 5 percent from late 1960 to late 1964. Productive potential is estimated to increase about 4 percent a year. The reduced rate of growth in production during 1966 resulted in large part from resource limitations and from problems of readjustment as the economy ran into bottlenecks and shifted to greater military effort. Total demands for goods and services were strong, and spending rose about twice as fast as production, causing prices to rise. Many plants were at virtual capacity, and shortages of skilled workers were widespread. When a high rate of resource use is achieved in the economy, the rate of increase of total real product necessarily falls back to about the rate of growth of productive potential. Employment Ratio Scale Ratio Scale Millions of Persons Seasonally Adjusted Millions of Persons xi' 50 - +22% 7C ~. ~ .- +40% ~i-~t 75.1 70 64.7 -~ ,~u cô 60 6 50 ~- June61 ~ May65 Jo -i .~66 Nov. ~% v~ ~c Payroll ~ Total -~ +1.8% ~ ~- +2.9% ~ ~ ;;~ ;~; +5.3% ~ +4.3% ~ 1959 1960 1961 1962 1963 1964 1965 1966 Percentages ore annual rates of change between months indkoted. Latest data plotted: November preliminary Source: U.S. Deportment of Labor PAGENO="0211" ECONOMIC EFFECT OF VIETNAM SPENDING 569 Total employment, after growing at about a 4-percent annual rate in the last half of 1965, rose at about a 2-percent rate in the first 11 months of 1966. This shift is accounted for by the exhaustion of the supply of employable labor and the flow of manpower into the armed forces. From 1961 to 1965 the 2-percent rate of increase of employ- ment was much greater than the 1.3-percent rate of growth of popu- lation of working-force age (18 to 64 years). In 1966 the gain in employment approximated the 1.6-percent growth of this population group. Since the number of men in the labor force has recently increased little, growth of employment has been dependent in large measure on entrance of women into the labor force~ Unemployment was at a relatively low level during the year. Over 98 percent of the married men looking for work had jobs in the first 11 months of 1966 compared with 97.6 percent in 1965 and 95.4 percent in 1961. A large portion of married men out of work in 1966 could be accounted for by seasonal unemployment, those changing jobs, and those without skills or aptitudes marketable at prevailing wage rates. Total unemployment was about 4 percent of the labor force in the first 11 months of 1966 compared with 4.6 percent in 1965 and 6.7 percent in 1961. The paradox of about one in 25 of those wanting a job being idle at a time of strong labor demand may be partially explained by minimum wage laws. Unemployment was greatest among those without skills or experience and with little education, particularly those in the 14 to 18 age group. The value of the product of many of these workers is less than the legal minimum wage, and incentives are great for firms to avoid engaging in activities for which these workers are fitted or to replace such workers through automation. PRICES Inflationary pressures erupted during 1966. More than half of the rise in total spending was translated into higher prices and less than half was matched by increases in goods and services. By comparison, in the previous year about 20 percent of the rise in spending resulted in higher prices, and 80 percent was matched by additional output. Higher prices reflected primarily demands for goods and services exceeding the economy's ability to produce with the given supply of land, labor, capital, and technology. Price rises tended to be sharpest in areas where goods and services were in shortest supply relative to demand. The transfer of resources from private production to build war supplies in late 1965 and in 1966 was accomplished primarily by bidding up wages and other prices. Prices of consumer goods moved up sharply. From late 1965 to October 1966 average consumer prices rose at a 3.7-percent annual rate after going up at a 1.3-percent rate from 1958 to the fall of 1965. The acceleration of price increases may have been even greater than implied by these figures. In the.earlier period, quality improvements may not have been taken adequately into account, and the fixed market-basket approach did not allow for gains to consumers from substitute commodities. More recently, with strong demands for goods and with shortages developing, discounts have been eliminated, and there have been deteriorations in quality which may not have been recognized in computing the index. PAGENO="0212" 570 ECONOMIC EFFECT OF VIETNAM SPENDING Prices of most consumer items rose. Food prices went up at a sharp 5.4-percent rate in the first 10 months of 1966. Fees and charges for consumer services (excluding rent) also increased at a 5.4-percent rate. Rent and prices of nondurable goods other than food increased less rapidly. Prices of durable goods crept up slightly. Wholesale quotations rose 3 percent from the fall of 1965 to the fall of 1966. By comparison, these prices increased at a 2.3-percent an- nual rate from mid-1964 to the fall of 1965 after being stable from 1958 to mid-1964. Wholesale prices of farm products and processed foods rose about 5 percent from the fall of 1965 to the fall of 1966, reflecting limitations of production, exhaustion of stocks, large de- mands for shipment abroad, and high personal incomes. Industrial prices rose 2.3 percent. Prices Ratio Scale Rato Scale 1957-59100 1957~59:1O0 120 : ~ 1958 Aug. ~ . - June64 J ~ Oct.'ó -4- Oct6 -1 1959 1960 ~961 ~962 1963 1964 1965 1966 Percentages ore annual rates of change between months indicated. Latest data plotted: Consumer-October Source: U.S. Deportment of Labor Wholesole.November preliminary CREDIT AND INTEREST RATES Accompanying the strong demand for goods and services, a sub- stantial volume of credit was extended in 1966. With incomes high and rising during 1965 and 1966, the amount of private savings was large, and monetary expansion was very rapid during much of this period. The demand for funds was even stronger in response t& optimistic business expectations and requirements of governments. The demand for credit apparently decreased somewhat after early September, and the flow of funds contracted. Commercial bank credit rose at a 10-percent annual rate from November 1964 to August 1966 compared with an 8-percent rate in. PAGENO="0213" ECONOMIC EFFECT OF VIETNAM SPENDING 571 the economic upswing from late 1960 to late 1964 and a 4-percent average rate in the late 1950's. From August to November this year such credit declined at a 2-percent rate. Strength centered particularly in business loans, which increased 18 percent from August 1965 to August 1966. From August to November these loans increased at only a 7-percent annual rate. Banks purchased municipal securities at a 12-percent rate from September 1965 to June 1966; from June to November these holdings were reduced at a 1-percent rate. Bank real estate loans increased at a 13-percent rate from January 1965 to ]Vfarch 1966 and then at a reduced 8-percent rate from March to November. The rate of increase of bank loans to consumers declined from 14 percent in the year ending in April 1966 to 8 percent in the April-September period and then to 4 percent from September to November. The rate of increase of consumer instalment credit outstanding both at commercial banks and elsewhere has declined significantly since a year ago. After increasing at a rate of 12 or 13 percent a year in 1964 and 1965, this credit grew at an 11-percent rate from December 1965 to March 1966, at a 10-percent rate from March to August, and at a 7-percent rate from August to October. The decline in the rate of increase of total installment credit reflected primarily a considerably more marked decline in the rate of increase of automobile credit. After growing about 12 percent in 1964 and 15 percent in 1965, this credit expanded at a 10-percent annual rate from December 1965 to March 1966, at a 7-percent rate from March to September, and at a 5-percent rate from September to October. Bank Credit Ratio Scale All Commercial Banks Ratio Scale Bi!1~ons of Dollars Seasonaii# Adjusted _______ Billions of Dollars 4UU I I_____ - - 4 ~ 307.3 300 ~54.8 Tot 48% .2.2% 200 200 Total less Go Bank Credit y'l Securities ~i I~~8 ioans Investments w I~- Nov. 41 Nov. 4 4 Aug.66 N 44 100 90 80 70 60 100 90 80 .70 60 ~959 1960 1961 1962 1963 1964 1965 -1966 Percentages are annual rates of change between monthi indicated. V Latest data plotted: November PAGENO="0214" 572 ECONOMIC EFFECI' OP VIETNAM SPENDING Interest rates rose markedly during the last half of 1965 and the first 4 months of 1966. After April the rate of increase accelerated, and by early fall most rates reached their highest levels since the 1920's. The rise reflected a sharper increase in the demand for credit than in the available supplies from saving and bank credit creation. The sharp upward movement in interest rates from April to September accompanied the initial period of monetary contraction. From September 1966 to early December interest rates declined moderately. The decline in rates after September may reflect a decline in the fundamental demand schedule for loan funds. Alterna-. tively, some of the rapid increase of the summer may have been pri- marily speculative because of inordinate expectations of still higher rates, and the October declines may have been of a technical nature. Responding to the high level of rates in the fall compared with the first half of the year, the declines of credit extentions may have reflected a decline in the amount of funds demanded rather than in the demand. schedule. Yields on highest grade corporate bonds, which had averaged 4.35 percent in the 1961-64 period and had risen to 4.50 percent by mid- 1965, rose to 4.96 percent in April this year and then to 5.49 percent in September. Rates on Government bonds and on high-grade municipal bonds moved in a roughly parallel fashion. Per Cent 5. Capital Market Rates Per Cent 5.5 1959 1960 1961 1962 1963 1964 a Monthly overoges of doily figures. ta Monthly averages of Thursday figures. Sources: Board of Governors of the Federal Reserve System and MoOdy~s InvasIon Service Latest data plotted: November PAGENO="0215" ECONOMIC EFFECT OF VIE~AM SPENDING 573 In the short-term market, yields on 3-month Treasury bills worked up from 2.35 percent in 1961 to 3.80 percent in June 1965, to 4.61 in April 1966, and to 5.36 percent in September. Quotations on prime 4- to 6-month commercial paper followed a similar course. The higher interest rates were reflected in price declines for many capital assets. A rise in rates means lower prices on existing bonds and preferred stocks. A rise in rates also tends to push down the present value of a given expected return from real estate and common stocks. Interest rates on market instruments rose more rapidly in 1965 and 1966 than did rates paid by financial intermediaries. Market yields quickly reflect changed demand and supply conditions, while rates paid by commercial banks on time deposits and dividends paid on savings and loan shares are much more rigid. Frequent moves in the latter rates are' practically impossible. Since reduction of institu- tional rates offends customers, there is a reluctance to raise rates until it becomes clear that thehigherlevel might beinaintained for a period. Financial intermediaries have a further reluctance* to increase their interest costs because new rates apply to previously obtained funds as well as to new funds and resources of an intermediary are invested in previously purchased lower yielding assets. Money Market Rates PAGENO="0216" 574 E~CONO~41C EFFECT OF VIETNAM SPENDING Supervisory authorities have used their influence to resist higher rates on funds supplied to intermediaries, fearing deterioration of lending and investing standards or responding to a public opinion that increases in such rates encourage higher general market interest rates. Maximum rates which commercial banks have been permitted to pay under Regulation Q have exercised a restraint on aggressive banks. In early September Regulation Q controls were tightened, limitations on rates paid by savings and loan associations were formal- ized while liberalized, and more formal restraints were placed on mutual savings banks. An exceptionally small share of the total flow of funds went through financial intermediaries in 1966. In 1964 and 1965, 44 percent of the net sources of credit in the economy flowed through time and savings accounts of deposit-type financial institutions. In the first quarter of 1966 these institutions received 30 percent of available funds, and in the second and third quarters they received 26 percent. With market rates higher than interest rates paid by banks, savings and loan associations, and other intermediaries, there was an incentive for suppliers of funds to place them in stocks, bonds, commercial paper, and direct loans. This diversion tended to favor the larger suppliers of funds and the large borrowers, notably the U.S. Government, large State and municipal borrowers, and major businesses, which obtain funds in a national market. Smaller savers generally received lower rates than large suppliers, while less well-known borrowers, who must usually rely on local financial institutions, had fewer funds for which to compete. PAGENO="0217" ECONOMIC EFFECT OF~ VIE~AM SPENDING 0)000)00 t~00kC ~00C000 ~)000 000000 ~ 575 00 00 0 + C 00 C CI) I)~I)0~ *~~00 ~);~C~C ~.C `.000 00~'00C~) 00000 00000 `.000C~ ~ ~ c~0L~- 00;?-~?.~ ~* I I I I ++I I ++ I I++ 1+ ,~ ~ ~ o.~ 0000 ~ 00 000000 0C 0000 ~` 000000 000-00 ~ ~ ~ ~ III 1+11 `i;'rr Ill III ~t'~00~ 000000 CUO'OC i~f~ c5 CCI C) C. C) 00 .00 03 Cl 0 00 00 C) 0.. C) 00 0 00 C) cc 0 ~ ~ ~ 0 r~ -~ ~ 00 ~ CC 000000 0000 C Coo'. 00 00 CO 00 0-0-0 0000000'- 0)0000 0'. 000-000 0-00 - 00Co~'. 00,-". CO CO CO 00000000 000000 00 ~E~oc 0 0 `~~cIC z.-~-0 0~-C ~ 0- 00000000 0-,) o-C 0000 0)000 0-00 0)0000- 000-000 000000 C00C~4 co~-~~-c,-o,-c . 030) ~ o0~ oooo 0-co ~c `cc cooccooo coo) `cc co `c co ~C ~C `CCX) ~t"C~ ~ ~ -.0 o c'~ 00 E 0000 ~ <1 00000000 0000000 00000000 0)0000 0-00 C) ~ ~ ~ ~, ~ 0000000) 0)0000 0000000 C) 00'00 C) C) 0 ),00o0o-)c-,c-)c-~-) c-c , .03~903g~ .~C)000 ~ CCOO00C-4 00000000 0107)0000 00'-'.) 000001 ~ 000000 0)~+) `~` Qj~ 00000000 000000) CCX)'.) 00070- 0000000 :;:; ;;; ;;:~ .0 o ~ CI) E000 o cc-C 00000000 0000000 00000000 0-00.-'. 000000 ~ ~ -`.0 --~c'i cc5c~d oIo~'ccO 0)00000'- C).-'.0000 00000000 000000 000CC c 00 00 0 03 C 0 0 C E CO 0 ~ *CI) 00'.'. *0 ~.04 `03 oc) Eo 000 000 U 00 00 C 00 oO I;! C C? `C 0 :00: c~'.0) C ``00 -C; ~ CO CC CC 00 ~ ~ 0 *r~ PAGENO="0218" 576 ECONOMIC EFFECT OF VIETNAM SPENDING EcoNoMIc TRENDS LATE IN THE YEAR DEMAND Available evidence indicates that the demand for goods and serv- ices may have moderated during the summer and fall. Total spending rose from the first to the third quarter at a 6.6-percent annual rate, down from the 9.5-percent rate of the preceding five quarters. (See chart, p. 8.) Whether, in view of resource bottlenecks and problems of shifting to more military production, there has been adequate reduction in the excessive demand of late 1965 and early 1966 remains to be seen. Growth of several elements of total demand for goods and services has slackened considerably. The rate of growth of retail sales has declined from 13 percent in the last half of 1965 to 5 percent during the first half of 1966 and has since shown little net change. The increase in net business outlays for inventories, which was at a $12 billion annual rate from the first to the second quarter, slowed to a $10 bfflion rate from the second to the third quarter. Expenditures on new homes, which were about unchanged from the first to the second quarter, fell at an annual rate of $5 billion from the second quarter to October. Large offsets to these declines have been pro- vided by increasing Government outlays and by more business spend- ing on equipment. Personal income, a measure of purchasing power, has been rising at about an 8-percent rate in recent months. REAL OUTPUT The rate of growth in real output has also declined. Total output, measured in constant dollars, increased 7 percent in 1965, at a 6- percent annual rate in the first quarter of 1966, and at a 3-percent rate from the first to the third quarter. Industrial production, which New Construction of Dollars . Billions of Dollars Seasonally Ad~usted Annual Rates Billions 90 ~,` ~_-~-_-__-~ ¶90 Co ~%%J i70 ``I Nov.~ I I I I 1t1'-~~-i**--; I i 1Mar.'66 i-~1...i tti* t 1 0v 7(~ +15.5% ~ 71.8 160% 1964 1965 1966 Latest data plotted: October preliminary Source: U.S. Department of Commerce Percentages are annual rates of change betweenmonths indicated. Oct~66 it, ~ PAGENO="0219" E~JONOMIC EFFECT OF VIETNAM SPENDING 577 had risen at an 1 1-percent rate from September 1965 to June 1966 and at a 7-percent rate from June to August, increased very slowly in the autumn. Achievement of essentially full employment, de- velopment of bottlenecks, and problems of substantial shifts from civilian to military production have necessitated some reduction in the rate of real growth. A softening of demand also may have de- veloped. Steel was produced at a slightly slower pace in the July- October period than in the previous 4 months. Construction put in place, after reaching a peak during the first 4 months of the year, has since fallen significantly. PRICES The slowing in the pace of spending also may have been reflected in price developments, though inflationary pressures remain. Since August wholesale prices have declined, after rising at about a 4-percent rate earlier in the year. The industrial price component has risen only slightly since July, after rising at a 3.4-percent rate during the previous seven months. Prices of farm products and processed foods fell from August to November but remained about 3 percent higher than a year earlier. Consumer prices have continued to rise at the disturbing 4-percent pace which has prevailed since the fall of 1965. OTHER DEVELOPMENTS The amounts of credit demanded and possibly the fundamental demands have lessened since early fall. Extensions of loans and net purchases of securities by financial intermediaries have slowed. In part this has reflected the lack of success of deposit-type institutions in attracting savings and the inability of banks to expand credit, caused by the decline in reserves. Since early fall there are indica- tions that direct financing also has been less. Some interest rates, after rising to peak levels in early September, declined moderately during the fall despite a lack of monetary expan- sion in the period. Yields on highest grade corporate bonds declined from 5.49 percent in September to 5.37 percent in early December. Three-month Treasury bill rates decreased from 5.36 to 5.10 percent during the same period. CAUSAL FACTORS The pronounced shift in monetary trends beginning last spring may have exercised some restraint on the excessive demands for goods and services. Both bank reserves and money, which had been rising be- fore April at the fastest rate hi over a decade, have since been con~ tracting. Usually such a marked and sustained change in the course of bank reserves and money has been followed after a brief lag by a significant slowing in spending. Federal fiscal influence, on the other hand, has evidently continued to be expansive in late 1966. Total Government outlays have been expanding significantly, and both the national income accounts measure of total fiscal impact and the high-employment measure of current Government actions have contiuued to indicate stimulation. PAGENO="0220" 578 ECONOMIC EFFECT OF VIETNAM SPENDING There were some evidences, however, supplementing the formal budget measures, that the Government may have been a little less stimu- lative in late 1966 than in the previous year. New orders for war materials were probably not rising so rapidly relative to deliveries as in the earlier period. Late in the year the 7-percent investment tax credit and accelerated depreciation benefits were withdrawn, making private investment somewhat less attractive. In November the Treasury replaced maturing securities with 5-year obligations, re- ducing somewhat the liquidity of the public. At the beginning of 1967 another increase in social security tax rates is scheduled. The nature of our productive process may have contributed to a slowing of aggregate demands for goods late in the year. During 1965 and early 1966, as demands for goods of the producers of final products expanded, derived demands on the suppliers of these con- cerns rose even more sharply. The suppliers not only had to produce materials for the products which were ultimately sold but also to provide the ftnal producers with inventories and other investment goods to expand. When many final producers reached capacity oper- ations in 1966, they had to slow their rate of expansion even though final demand continued in excess of capacity. The slower growth in real output of final producers meant an actual reduction in both dollar and effective demands for materials from some suppliers. Changes in Money Stock for Selected Periods Per Cent Per Cent or 6 L Sx Months Pdor to - Cycikal Peaks LL ______ ______ - 4 Jan. to Nov. 1959 May to - 1951 to 1966 July1957 toMayl96O Nov.1966 ~ -2 +2.2% +0.2% 1 o~ I -1.2% 2~ I [ .3.3% .4 U. As delined by National Bureau of Economk Research. Pert ntages are annual, rates, PAGENO="0221" ECONOMIC EFFECT OF VIE~AM SPENDU~G 579 OUTLOOK At the beginning of 1966 economic stabilization required containing excessive demands for goods and services, thereby moderating infla- tionary pressures. In the early months of the year, the problem was aggravated by rising contracts and expenditures for the Vietnam con- flict and a reluctance either to reduce social programs or to increase tax rates. Monetary actions also were stimulative, partly because the huge demands for funds caused rapid expansion of commercial bank demand deposits even at rising levels of interest rates. In the fourth quarter of the year the major task may have shifted from one directed primarily to restraining exuberance to one of main- taining an optimum growth in total demand. By late 1966 total demand had lost some of its strength, and concern was being expressed over whether adequate expansion of total demand and of real product would be continued in 1967. The problem of achieving appropriate total demand in 1967 is complicated by cost-push inflationary pressures which are strong at the end of 1966 and which could be easily reinforced by excessively expansive fiscal add monetary actions. Even if total demand is one which in the long run might be considered optimal, many prices are likely to increase seriously in 1967 because of the excessive total de- mand and price increases for the past year. Prices do not always rise immediately in response to demand-pull forces; some have been held back because or guideposts, and others have been `restrained because of contracts (including wage contracts). Many wage rates and other prices are expected to be marked up in 1967 because of the excesses or 1966 (these increases will place cost-push pressures on other prices, and it is unlikely that there will be enough offsetting price declines to prevent undesirable general price increases. At year-end it appears that the combination of monetary and fiscal developments may not have to be so restrictive in the coming year as it has been since the spring of 1966. Total demands for goods and serv- ices have probably slowed, and a further reduction might cause an unwarranted contraction of employment and real product. The mix of policy actions must also be selected. If lower interest rates are judged desirable in order to stimulate areas such as housing and other private investment and to foster real growth in the private economy, emphasis might be placed on a combination of restrictive fiscal policies with expansive monetary actions. If large declines in interest rates are believed undesirable because of a likelihood of in- creased outflows of funds from the country, reliance might be placed on a policy mix with relatively stimulative fiscal actions and quite limited monetary expansion. PAGENO="0222" STRAINS AND RESTRAINT IN A SURGING ECONOMY* The major theme of recent economic developments is the continua- tion of progress. But there is also a secondary theme of problems and inbalances, many of which can be traced back to mid-1965, when the sudden increase in defense requirements for Vietnam led~ to a marketed acceleration in economic activity. By the time measures of fiscal and monetary restraint took hold and slowed down the economy, significant problems had developed-an interruption of price stability, a deterioration in international trade performance, acute pressures in financial markets, and sharply divergent movements among the various sectors of the economy. THE ECONOMY IN MID-1965 As of mid-1965, the economy was advancing steadily and healthily toward full employment. GNP had risen by $11 billion a quarter, on the average, for the preceding 2 years; the annual rate of real growth over that period had been 53~ percent. Unemployment was down to 4~ percent of the civilian laborforce, and the average operating fate of manufacturing capacity was up to 89 percent. The price record showed few blemishes: average consumer prices in July 1965 were only 6 percent higher than they had been in early 1961, and prices of nonfood commodities had risen by only 3 percent. Prices of manufactured finished products at wholesale had advanced by 1 percent in 5 years. Expansionary fiscal policy had contributed actively to the record of 52 months of advance. The reform of depreciation rules and the investment tax credit, both initiated in 1962, encouraged business tc~ expand and modernize plant and equipment. Furthermore, as a result of these measures and the much larger tax reductions granted by the Revenue Act of 1964, both corporate and individual income recipients were enjoying an average reduction of one-fifth in their tax liabilities. Monetary policy continued to meet the credit needs of a brisk expansion and thereby contributed to the relative stability of long-term interest rates that was unusual for a period of rapid economie advance. Meanwhile, Federal spending on goods and services was essentially level after mid-1962. As a share of the growing GNP,, defense purchases fell steadily from 9.2 percent in 1962 to a post- Korean low of 7.3 percent by mid-1965. Defense spending was clearly not the fuel that was propelling the economy toward full employ- ment. But neither was the decline in the defense share permitted t& retard the growth of total demand; some economic stimulus was provided by spending on new Federal civilian programs, and major reductions in taxes encouraged private spending. New stimulative policies were being prepared in the spring of 1965 to complete the advance to full employment. Congress enacted a major phased reduction of excise taxes, in line with the President's proposals, ~Excerpted from Annual Report of the Council of Economic Advisers, lanuary 1967, pp. 45-52. 580 PAGENO="0223" ECONOMIC EFFECT OF VIETNAM SPENDING 581 and its first stage took effect in June 1965, cutting taxes by $1 % billion (annual rate). A liberalization of social insurance benefits, designed to help the aged, was enacted to take effect retroactively. The larger benefits were to be financed by a payroll tax increase at the beginning of 1966. Meanwhile the liberalization of benefits was expected to give the economy a significant stimulus in the fall of 1965 when an anticipated liquidation of steel inventories might otherwise have threatened a slowdown. The retroactive portion, which was disbursed in September, amounted to $900 million. There- after annual benefits were raised by about $2 billion. SPURT IN ECONOMIC ACTIVITY The economic environment was significantly changed by the ex- pansion of defense requirements. On July 28, 1965, the President requested additional funds for defense and indicated that further increases would be required in January. Military outlays, at an annual rate, rose by nearly $2 billion a quarter in late 1965 and early 1966 (table 3). Defense orders expanded very rapidily, spurring demands for labor and inventories by contractors. Yet the defense buildup itself was not enough to account directly for the acceleration in the overall economic advance. Rather, it reinforced the previously planned fiscal stimuli and the forward momentum of a strong economy close to full employment. Further- more, the expansion of defense spending contributed to a significant change in the climate of opinion. The `Vietnam buildup virtually assured American businessmen that no economic reverse would occur in the near future. The impact on business attitudes was intensified by unwarranted fears that the Vietnam conflict might have conse- quences like those of the Korean conflict: direct controls, excess. profits taxes, and a huge jump in prices of raw materials. TABLE 3.-Changes in gross national product during ~ periods since mid-1965 [Billions of dollars, seasonally adjusted annual rates] Expenditure category Change 196511 to 19661 1966 Ito 1966. IV' Gross national product 48.3 28.8 5.9 12. 5 10.4 10.8 9.6 9. 1 . s 1. 3 -2. 2 10.7 6.3 s. s . 9 4.4 37.9' 18.8 -.2 6. 8 12.2' 3. 5 -2.0 4. 7 -6. 7 5. 5 -1. 2 16.9 10.6 10. o -. 4 6.3. Personal consumption expenditures Durable goods Nondurable goods Services Gross private domestic investment Fixed investment Business fixed investment 2 Residential structurcs Change in business inventories Net exports of goods and services Government purchases of goods and services Federal National defense Other State and local Preliminary. `Nonresidential structures and producers' durable equipment. NOTE-Detail wifi not necessarily add to total because of rounding. Sources: Department of Commerce and Council of Economic Advisers. PAGENO="0224" 582 ECONOMIC EFFECT OF VIETNAM SPENDING The increase in defense spending swelled an already strongly rising tide of business investment expenditures. From the second quarter of 1965 to the first quarter of 1966, business spending for new structures and equipment rose by $9 billion. Defense, investment, and social security liberalization, in combination, speeded the growth of dis- posable income. Consumer spending responded strongly, growing by $29 billion over this three-quarter interval. All in all, GNP advanced at an average of $16 billion a quarter. Real output grew at a phe- nomenal annual rate of 7.2 percent, and industrial production rose at an annual rate of 9.7 percent. Unemployment fell from 4.7 to 3.8 percent of the civilian labor force during this period. New orders for durable manufactured goods rose marked by (12 percent), with orders for electrical machinery (20 percent) and defense products (19 percent) increasing especially rapidily. The surge in demand for goods and labor created pressures on prices in many areas. From October 1965 to July 1966, the annual rate of advance for industrial wholesale prices stepped-up to 3 percent. Prices of industrial crude materials moved sharply upward-at an annual rate of 8 percent from October to April. At the consumer level, demand pressures raised prices of services and nonfood com- modities and combined with special supply factors in agriculture to push up food prices. These price movements and their consequences are discussed in detail in chapter 2. All in all, the economy exceeded reasonable speed limits in the period from mid-1965 through the first quarter of 1966. MODERATION IN THE PACE OF ADVANCE After years of providing stimulus to the economy, policy changed directon at the turn of the year. Monetary policy accounted for a major share of the restraint during most of 1966. As described in detail below, the Federal Reserve restrained the growth of credit supply in the face of extremely strong demands for borrowing by business. With intense competition for funds, interest rates rose sharply. Institutions which supply mortgage funds to the home- building industry lost deposits both to the commercial banks and to the market for new corporate securities. As a result, residential construction was starved for funds, and the sharp decline in this sector was one of the principal moderating influences during the second half of 1966. Fiscal policy also responded effectively. Although the special defense costs necessarily swelled Federal outlays and were highly stimulative, restrictive actions were taken th other areas. Increases in nondefense purchases were held to $300 million from 1965 to 1966. Several restrictive tax measures were proposed in January 1966, and were enacted in mid-March. These included a reinstatement of some of the earlier excise tax reduction, restoring about $1 biffion to the annual rate of Federal revenues; and a system of graduated with- holdii~g for individual income taxes that drew off $1~ billion (annual rate) from disposable income beginning in May. These new measures followed the $6 billion increase in payroll taxes that took effect at the start of 1966. In addition, revenues were increased in the spring by unusually large payments on 1965 income tax liabilities. PAGENO="0225" ECONOMIC E~i~E~r OF VIETNAM SPENDING ~ ~ 583 The national income accounts budget for the Federal sector shifted ~ from a deficit at an annual rate of $1 ~ billion in the second half of 1965 to a surplus at an annual rate of $3 billion in the first half of 1966 (As explained in the appendix to this chapter, Federal fiscal policy is discussed throughout this Report m terms of the national mcome accounts budget) These mon etary and fiscal actions helped to bring the rate of overall economic expansion in hne with the growth of capacity After the first quarter of 1 966, gams m GNP slowed to an average of $123~ billion a quarter, no longer outstrippmg the growth of potential GNP The unemployment rate leveled off, as employment gams essentially matched the growth of the labor force Manufacturmg output actually rose less than the growth of manufacturing capacity, and average operating rates at year-end were below the 91 percent that had been reached in the first quarter The change of pace was first clearly noticeable in the spring Fiscal restraint appreci'ibly slowed the growth of disposable income in the second quarter and contributed to a marked slowdown in consumer spending During the summer, consumer demand perked up again But homebuilding, which had declined moderately in the second quarter, was hit hard by the shortage of mortgage financing and took a sharp plunge, holding down the increase in economic activity Business demand for capital goods, on the other hand, continued to expand rapidly durmg the spring and summer Although tight money, rismg costs of machinery and construction, declining prices of common stock, and appeals for voluntary restraint had moderating effects in particular firms and mdustries, total business investment forged ahead In August, both the Commerce-SEC anticipations survey and the National Industrial Conference Board appropriations survey confirmed the vigor of the capital boom Commercial con- struction was the only type of business mvestment that showed weakness, it was restrained by the shortage of mortgage funds The capital boom, in fact, was proving too vigorous In view of the growing backlogs of orders, shortages of certain types of skilled labor, rising prices in capital goods industries, and acute pressures of business credit demands on financial markets, there was a clear need to moder- ate investment demand On September 8, the President asked Congress to suspend, until January 1, 1968, the 7-percent tax credit on mvestment in machinery and equipment and `iccelerated deprecia- tion provisions on new buildings. At the same time, he inithited a program to reduce nondefense spending. The Commerce-SEC survey in November showed that only mod- *erate further increases in plant and equipment spending were planned through the second quarter of 1967 It also revealed that the actual increase in capital outlays in the third quarter was somewhat smaller than the planned advance reported in August, this was the first down- ward revision of plans in 3 years The results of the survey no doubt reflected several factors, including the moderation of economic expan- sion, the financial pressures on business, and the suspension of the investment tax incentives Even though orders for machinery and equipment continued to outiun shipments through December, there were favorable prospects that the prés~ures Of excess demand' On capital goods industries would be lessened in the months ahead. 78-516-67-vol. 2-15 PAGENO="0226" 584~ ECONOMIC EFFECT OF VIETNAM SPENDING RETROSPECT Despite the moderation after the first quarter, expansion for 1966 was more rapid than virtually anyone expected at the outset. At the time it was presented last January, the Council's forecast that GNP in 19~6 would rise strongly by $46~ billion was somewhat above the typical forcast of private economists. Yet it turned out to be $12 billion too low. In part, the underestimate reflected the difference between the predicted real growth of nearly 5 percent and the actual rate of 53~ percent. In addition, the overall price deflator rose by 3 percent-about 1 percentage point more than projected. : The primary sources of the underestimate were in Federal defense purchases and business fixed investment. While both had been expected to be key sources of strength they were even stronger than anticipated. As the prospective duration of Vietnam hostilities and the intensity of our military commitment exceeded those assumed in the budget, Federal spending for defense in the calendar year ran above last January's estimate by $4 bfflion. Spurred in part by defense outlays, expenditures on plant and equipment topped the Council's expectations by $2 bfflion to $3 billion. State and local purchases and inventory investment also were above the projections, while homebuilding and net exports fell below the estimates. As it became clear that public and private demand was exceeding expectations, the desirability of further increases in taxes came under public discussion. Continuing and careful consideration of this issUe within the administration, sharpened by the increasing strain on financial markets, led to the fiscal program of September 8. In retrospect it is clear that, after March, monetary and fiscal policy in combination provided adequate total restraint. It may be debated whether a better balance of demands and policies would have been achieved if a program of additional fiscal restraint had been undertaken earlier in order to relieve the pressure on monetary policy. it may also be argued that the capital boom could have been cooled off sooner if the investment tax credit had been suspended earlier in the year. The question of whether a different timing or different magnitude of fiscal actions might have produced a more favorable balance in 1966 will long interest and challenge analysts of economic policy. But the main lesson is clear from the record: economic policy was used effec- tively to restrain the economy during 1966, much as it bad been used during the preceding 5 years to stimulate demand. THE PATTERN OF OUTPUT In contrast to the reassuring balance of the expansion from 1961 to 1965, the advance in 1966 was uncomfortably uneven among sectors. The nature of these imbalances is illustrated by chart 2, which shows the shares of GNP absorbed by various types of expenditures since 1954. It is striking that the portion of GNP devoted to Federal purchases in 1966 was much the same as in earlier years. Indeed, despite the sharp growth of defense outlays, Federal expenditures represented a smaller share of national product than in any other post-Korean year PAGENO="0227" ECONOMIC TEFFEQTS~ OF VIE1~)M SPENDING :585 except 1964 and 1965. The share of .defense';purchases was 8.1 per- cent, also lower than in any year from 1954 to 1963. State and local government purchases continued their secular rise as a share of :GNP. The share of private domestic and foreign investmeiit in 1966, 16 percent of GNP, was quite typical for a full-employment year. Private investment exceeded private saving at full employment, leaving room for moderate surpluses in government budgets (national mcome accounts basis) Chart 2 Selected Shares of Gross National Product PERCENT OF GNP S DOMESTIC INVESTMENT GOVERNMENT PURCHASES AND NET EXPORTS S - FEDERAL PURCHASES ,~INVNT STATE AND LOCAL PURCHASES RESIDENTIAL STRUCTURES CHANGE III BUSINESS S - iNVENTORIES - NET EXPORTS ~ ~ `4ulll'~"~ ~ I lift' j / -~ I I I 1 I I I I I I 1 1 1 1 I I I I I i I I I ..J.._ 1954 56 58 60 62. 64 66 1954 56 58 60 62 64 66 SOURCE: DEPARTMENT OF COMMERCE. PAGENO="0228" 586 ECONOMIC EFFECT OF VIETNAM SPENDING UNEVEN SHARES IN INVESTMENT Although the share of investment in GNP was normal, the pattern of the major investment components was unusual when compared with other. post-Korean years. Business fixed investment was at a record high.of 10.7 percent of GNP, surpassing its previous peak . of 10.5 percent in 1957 and considerably above its post-Korean average of 9.8 percent. Because of the scarcity of mortgage funds, housing starts fell steadily from an average of 1.5 million units in the first quarter of the year to 1 miffion in the fourth; at 3.5 percent, the share of residential construction was at a post-Korean low. Inventory investment, at 1.5 percent, matched its previous post-Korean high of 1955. Excess demand at home generated: a spurt. in demand for goods from abroad, pulling down the share of net exports to the lowest level since 1959. The recOrd share of business fixed investment in 1966 occurred despite the need for a much greater volume of external financing at unusually high borrowing costs. Incentives to invest were provided by a continuation of the forces that had spurred business to expand and modernize facilities in 1964 and 1965: growing sales, orders, and profits, and high operating rates. . These were further strengthened by the rise in defense spending. INVENTORY INVESTMENT A high rate of inventory investment in relation to GNP during 1966 reflected many of the same factors that stimulated business fixed investment Inventory-sales ratios generally ci ept up after years of stability or decline. . . Nonf arm .stocks expandedby 8 percent over:the year, considerably above the rate of growth of real output or sales. Inventories .rose especially rapidly in durable goods manufacturing; these stocks grew by nearly $7 billion during the first 11 months of .1966. Within durables, goods-in-process inventories rose by about $4 billion over the period, reflecting, in part, ~the buildup of defense and business equipment in the pipeline. The long production times that are essential for many durable goods were largely responsible for the growth of stocks of goods-in-process. From the time a company begins to build an airplane or a machine, it may take 6 months or a year to produce a finished good and com- plete a shipment. While the piece of equipment is being fabricated, the value of the completed portion shows up in: inventories of goods in process Thus, if orders rise sharply for items with long produc- tion times, inventories grow, the ration of inventories to shipments also tends to increase until shipments can catch up In late 1965 and in 1966, orders for business equipment and defense hard-goods rose sharply, and. shipments did not keep pace The economic impact of this stepup in orders was not fully reflected in Government purchases or in business fixed investment; some of it showed tip. as inventory investment. . .The inipaet:..of defen~e..~orders on inventories cannot be quantified precisely. :Butit can be estimated by two approaches: one uses data on progress payments made by the Department of Defense, and the other rests mainly on the sta- tistics of defense-oriented industries. Both approaches suggest that, from the beginning of the fourth quarter of 1965 through the third quarter of 1966, defense contractors and their suppliers added about $2 billion to their stocks as a result of defense orders. PAGENO="0229" THE FEDERAL BUDGET AND ECONOMIC STABILIZATION The President's Council of Economic Advisers forecasts 1967 gross national product at $787 billion in current prices, an increase of about 6.5 percent over 1966. This increase consists of an advance of nearly 4 percent in real output and an increase of slightly more than 2.5 percent in prices.' The Council's forecast, or plan, is constructed in large measure on a Federal budget program that produces in calendar 1967 about a $4 billion deficit on a national mcome accounts basis 2 A 14 3-percent increase in Federal spending and an 11 3-percent rise in revenues underlie this projected deficit. The expected increase in revenues will result from several factors, including continued advance in total income and a proposed 6-percent surcharge on personal and corporate income taxes effective July I. The Fedeial budget program and the Annual Report of the Council of Economic Advisers (CEA) together can be viewed as a national economic plan in the spirit of the Employment Act of 1946. The presentation of the CEA is based, in considerable measure, on the popular theory that Federal budget policy to a major degree can control total demand and thereby exert a primary influence on changes in real output and prices Budget policy is presumbaly designed to achieve an optimum level of demand compatible with the goals of high employment, real growth, relative price stabthty, and equilibrium in the nation's balance of payments In contrast with the fiscal policy theory of economic stabilization there is an alternative school of thought which places primary em- phasis on control of monetary variables as a vehicle for influencmg total spending. It is the belief of this school that monetary factOrs play a dominant role in the determination of total demand.3 The theory implicit in the following presentation is that the com- bination of stabilization policies, rather than fiscal or monetary policy alone, in large part determines total demand. Consequently, this discussion of the Federal budget alludes frequently to the role of monetary policy in national economic developments The purpose of this article is to summarize the pro.posed Federal budget program for calendar 1967 and to examine its implications as a part of total stabilization policy. Although the Federal budget receives considerable attention at this pai ticular time of ye4r, it seems that in the interest of a dynamic and effective stabilization policy, or even of a neutral policy, the budget program should be reviewed continuously throughout~ the year. Evaluations are made privately on a continuous basis, but an official 1 Annual Report of the Council of Economic Advisers (January 1967), pp. 62-63. 2 The national income accounts budget summarizes the receipts and expenditures of the Federal Govern- ment sector as an integrated part of the recorded activities of all scctors of the economy. For expanded discussion of this and other fiscal measures, see the appendix, "Budget Concepts and Definitions," p. 597; 2 The 1967 report pays considerable homage to the role that monetary policy played in restraining total demand in 1966. The appearance of such an acknowledgment distinguishes the l967report from previous ones, in which monetary policy was seemingly considered supportive (for fiscal policy) rather than active in affecting total demand. 587 PAGENO="0230" 588 ECONOMIC EFFECT OF VIETNAM SPENDING midyear budget review (with revised projections) was not released to the public in 1966. To assure a free and fully informed discussion and mterchange of ideas both inside and outside of Government, it would be desirable to have official revised projections frequently, possibly on a quarterly basis.4 A midyear review in July or August after Congress has made most of its decisions would seem more re- liable for the ensuing year than the 12-month forecast made in Janu- ary. The CEA report focuses primarily on the immediate 12 months, while the budget concentrates on the* 12-month period beginning next July i.~ To form a basis for a discussion of budget policy in future months, this article summarizes and evaluates economic developments, budget conditions, and monetary developments in calendar 1966. The budget program through June 1968 is then summarized and analyzed within a framework emphasizing total stabilization policy. An appendix is pi ovided that discusses alternative budget measures BUDGET PoLIc~t AND ECONOMIC AND MONETARY CONDITIONS IN 1966 Real economic activity advanced rapidly in 1966, but advances were constrained by the size of the labor force and limitations on plant capacity. Employment, production, and income all increased, though less rapidly than in 1965 when sOme economic slack remained.6 As a result of total demand pressing on available resources, prices rose significantly, particularly early in the year. . In an attempt to limit excessive total demand and price increases, monetary expansion was restricted beginning in the spring. Intense demands for credit pro- duced rising interest rates early in the year, while limitations on credit expansion accelerated the rise during the summer. The Federal budget, on balance, was a strong force underlying the. buoyant economic situation in 1966. Government expenditures grew rapidly as spending for defense and health, education, and welfare programs rose sharply. Federal revenues a]so increased rapidly, partly in response to rising money incomes but also in some measure because of increases in tax rates. RESOURCE TRANSFERS IN 1966 Total income and output showed advances substantial enough to keep the economy at high employment during 1966. Real output (GNP in constant dollars) rose 4.1 percent in the year ended in the fOurth quarter of 1966, with the advance most rapid in the first quarter. The year 1966 was marked by the necessity to allocate resources to military use more rapidly than total available resources were growing. Such a transfer of resources is facilitated if there is a considerable quantity of unused resources in the economy, as was the case at the outbreak of the Korean conflict. The Vietnam war was escalated at a time when there was very little slack in the economy. 4Asimilar recommendation has recently been made by the Joint Economic Committee of `T~ongress. Although revised budget projections are not made available, data on realized expenditures and revenue, are readily available. See. e.g., the Surrey ef current Business. For a brief quarterly analysis of these datas see "Federal Budget Trends," a release of the Federal Reserve Bank of St. Louis. `Since there is some evidence to support the view that the budget affects economic activity with some lag, see, e.g., Albert Ando and E. Cary Brown, "Lags in Fiscal Policy," Stabilization Policies, research studies prepared for the Commission on Money and Credit (Englewood Cliffs, NJ.: Prentice-Hall, Inc., 1963), it would seem that the. budget for fiscal 1968 (year ending June 30, 1968) must afford a basis for an economic plan for a year beginning in, say, October 1967 or January 1968. If the primary concern of the Economic Report is the state of the economy in calendar 1967, it would seem that the budget for the year ending June 30, 1967, is more relevant than the budget for the year ending June 30, 1968. 6 For an extended discussion of economic developments in 1966, see the December 1966 issue of this Renew. PAGENO="0231" ECONOMIC E~FECT OF VIETNAM SPENDING 589 At times of high employment and near-capacity levels of output, a resource transfer from civilian use to military use is normally effected by.either tax increases or a system of Government controls. Neither route was followed with respect to the Vietnam build-up in late. 1965 and~ 1966. .: Instead, the price mechanism was utilized to. effect the resource transfer, i.e., the Federal Government bid away goods and services from civilian use for the war effort. Selected expenditures as a percent of GNP Quarter National - defense Consumer durable goods Residential structures 1964: ~ 8.1 8.2 7.8 7.5 . 9.3 9.5 9.6 9.1 4.6 4.4 4.3 4.1 . 2 3 4 1965: 1 7.3 7.3 7.~ 7.5 7.6 7.8 8.3 8.6 9.9 9.6 ~ 9.7 9.7 9.2 9.4 9.2 . 4.2 4.2 4.0 . 39 4.0 3.8 3.3 2.9 2 3 ~ 1966: 1 2 . 4 Source: U.S. Department of Commerce. Overall price increases thus operated as a silent tax in the absence of more restrictive fiscal or monetary actions. The growth of real after-tax personal income slowed as prices rose faster relative to money incomes than previously. Associated with the slowdown in the growth of real spendable income was a decline in real demand for civilian goods, in particular for automobiles and housing. In response to excessive dollar demand for goods and services, and thereby for loan funds, and to some extent to restriction on monetary expansion beginning in the spring of 1966, interest rates rose. This increase in the price of credit helped to effect the transfer of resources by discouraging demand for those' goods where capital and, interest nre important elements of total cost, e.g., housing and commercial and industrial buildings. The resultant rise in interest rates affected housing more than if the resource transfer had been effected by taxes. Housing probably would have been affected if incomes had been reduced by tax increases, but the extent would probably have been less. Interest rates would not have risen so rapidly, and the cost of new housing services would not have increased as much if a more restrictive course of fiscal action had been followed. Any transfer of resources in a high-employment economy involves a cost, and some groups gain at the expense of others. However, transfer by tax increases permits the effects to be planned and regu- lated while maintaining the advantages of free markets. The price inflation mechanism causes inequities that are often unpredictable PAGENO="0232" 590 ECONOMIC E.FFECF OF VIETNAM SPENDING Personal Income Quarterly Totals at Annual Rates Ratio Scale Seasonally Ad1usted Billions of Dollars 800- 195619571958 W59 1960 1961 19621963196419651966 1967 Note: Real afIer~taxincoin~e.is personal income adjusted for tax changes and by the implicit price deflator for personal consumption expenditures Source: U.S. Departmental Commerce .. - Shaded areas represent periods of business recession as defined by the National Bureau of Economic Research Latest data plotted 4thquarterpreliminory and creates distortions that may be in conthct with national goals of efficient resource allocation and equilibrium in the~ balance of payments STABILIZATION POLICY IN 1966 The fiscal actions that were su:pposedto restrain demand in 1966- social security tax increases, speedup in the collection of individual and corporate income taxes, and rescission of. scheduled . excise tax :cuts-came too late to thwart the inflationary pressures of the first quarter.7 In fact, there is some question whether the. 1966 first quarter experience could have been avoided (or offset) by budget actions as late as January and February of that year. Because of -lags in. the effect of stabilization policies, the. stage may have been set for an inflationary period by a very stimulative fiscal situation in late 1965 supplemented by rapid.monetary expansion in late 1965 and early 1966. The Vietnam buildup in the last hail of 1965 was accom- panied by excise tax reductions and a large retroactive increase in 7 Normally a change In collection procedures is not viewed a restrictive action because Individuals and ffrms supposedly react to changes in liabilities rather than collections. The speedup is mentioned here, however, because the 1966 CEA Report listed this action as restrictive in its effect on total demand. See pp. 53-54. .1! Ratk Scale BilUons 61 Dollars apo 7Ô0 PAGENO="0233" ECONOMIC. EFFECT OF VIETNAM SPENDfl~G 591 social security benefits. The money stOck expanded at a 6-percent annual. rate from April 1965. to April 1966. Other key monetary variables, such as commercial bank credit and member bank reserves, also increased very rapidly during the. year ending. in April 1966. This combination of monetary and fiscal forces may have been sufficient to cause the first quarter 1966 excesses and the carryover with respect to prices in the second quarter (even though the advance of GNP slowed substantially in that quarter). The restrictive budget measures that were effected-increased social security taxes, accelerated tax collections, and rescinded excise taxes-may have helped to slow the economy after the unsustainable advance in the last half of 1965 and the first quarter of 1966. These fiscal actions represented restraining factors in addition to the April turnaround in monetary growth and the implicit tax increase through inflation. Although Government expenditures rose substantially in the first half of1966, these increases were~more than offset by the. increase in tax revenues, and the national income accounts (NIA) budget showed a surplus of $3.1 bfflion compared with a $1.4 bfflion deficit in the last half of 1965. During the second half of 1966 Federal expenditure increases out- paced the growth in receipts, resulting in a $2 7 billion deficit in the NIA budget Expenditures for the Vietnam war contmued to rise, and some domestic nondefense expenditures also rose, particularly those related to the medicare program. No direct tax increases became effective in the second half, although in October the invest- ment tax credit was rescinded and depreciation allowances for tax purposes were tightened. These measures probably had little effect on tax revenues in 1966, although they may have affected total demand via investment decisions Money Stock Ratio Scale Monthly Averages of Daily hgures Ratio Scale Billians of Dollars Seasonally Adiusted Billions of Dollars 185 180 I, IJ 165 . +4.2% ~_-~( -0.9% ~69.7 . 2 June'64 ~ fL1i Apr.'65 (fLI~ Apr.'66 Jo ttit111h1 `67 f11ittit1i1 1964 1965 1966 1967 Percentages are annual rates of change between months indkated. Latest data plotted; January preliminary I, .,~ 170 165 160 155 150 145 June'60 It4 ~ PAGENO="0234" 592 ECONOMIC EFFECT OF VIETNAM SPENDING For the year 1966 the NIA. budget ran a small $0.2 billion surp1us~ and since the. econOmy was at full employment the high-employment budget showed the same result.8 On this high-employment basis~ this small budget surplus in 1966 indicated the most stimulative budget in more than a decade. The high-employment budget ran about an $8 billion average surplus from 1961 to 1965. The stimulative budget situation in 1966 was accompanied by very restrictive monetary actions after . April. The~ money stock showed little change from then to late fall. With loan~~ demand fueled by rapid growth . in total demand for goods and services,. interest rates rose rapidly until. September. . . . . . . High-Employment Budget (+)Surplus ( )Defictt QuarterlyTotats otAnnuol Rates . .. . . SeosonaltyAdjusted . . Billions of Dollars. 20 I 0~ t~/~ -jt- - - -~ ~- Jo - - . . 0 -10 -20 ~` 1956 1958 1960 1962 1964 1966 Sources: U.S. Deportmentof Commerce, Council of ~conomicAdyisers, and the Federal Reserve Bank oISt.Louis LatestdatSplottéd:1967eitimoted forhollyears byFederSt Reserve Bank of St. Louis from Fiscoll968 Budget $ For further discussion of the high-employment budget, see the appendix. Billions of Dollars 20 PAGENO="0235" ECONOMIC EFFECT OF VIETNA SPENDING 593 BUDGET PROGRAM FOR FISCAL 1967-68 The economic outlook for 1967 depends in large measure on the course of recent, present, and future monetary and fiscal develop- ments. Such developments in turn are influenced by the unfolding of economic events. A forecast of economic conditions and policy must take into account this simultaneity. Presumably the Council's forecast is based on this simultaneous interaction. This section dis- cusses in some detail the budget program for the 18-month period ending June 20, 1968, and examines budget policy in light of expected economic and monetary conditions. THE BUDGET PROGRAM A FACTUAL SUMMARY Budget plans for the next 18 months indicate a larger average deficit than in calendar 1966 This conclusion obtains for the national income accounts budget, considered to be the most complete and reliable measure of the Federal Government's activities and their economic impact. The following summary of the fiscal program for the remainder of fiscal 1967 and fiscal 1968 is presented as general background and centers on the NIA budget. Fiscal year figures are given because the budget document is presented on that basis. New obligational authority. Obligational authority on a cash budget basis, i.e., authority provided by Congress to obligate the Federal Government to pay out money, increases to an estimated $194.2 bfflion in fiscal 1968 from $190.4 bfflion in fiscal 1967. This fiscal measure is considered by some to be a key variable in any analysis of the Federal budget.9 The reason for this is that expendi- tures must be preceded by granting of obligational authority by Congress. The $3.8 billion increase in obligational authority planned for fiscal 1968 compares with an increase of $27.3 billion in the previous fiscal year. Last year's January budget plan (i.e., for fiscal 1967) called for a $3~5 billion increase in new obligational authority. These plans went awry, partly because of supplemental appropriations requested in January 1967 for Vietnam, but also because of larger-than-expected appropriations for housing, community development, health, educa- tion, and welfare. Expenditures. Federal NIA expenditures in fiscal 1968 are esti- mated to increase 10.2 percent over fiscal 1967, which in turn is expected to be 16.1 percent above fiscal 1966. Fiscal 1967 expendi- tures are estimated at $153.6 billion, 7.6 percent above the figure projected a year ago for the fiscal 1967 period. See the writings of Murray L. Weldenbaum, e.g., "The Timing of the Economic Impact of Government Spending," National Tax Journal (March 1959), pp. 79-85. PAGENO="0236" .594 ECONOMIC EFFE(~ OF VIETNAM SPENDING Changes in obligational: authority, cash budget I Fiscal 1966 toll cal 196i Billions Percent of dollars Fiscal 1967 to fiscal 1968 Bfflions of dollars Percent Defense Internationaland space - Domestic Health labor and welfare Education, housing and community development, national resources, commerce, and transportation Interest on public debt - Other 1 Total 8.6 -L 1 12.5 -10. 1 2.2 0.3 2.8 3,1 19.8 23.7 1.3 1.3 10 8 6. 6 1. 4 1. 1 27 9 ~* 36. 1 11. 6 7.7 - 3 7 : -3. 0 0.7 0. 2 5 ~ -12.1 5.2 1. 3 27.3 16.7 3.8 2.0 * lAgriculture, veterans' benefits and services, general government, civilian and military pay increases. Source The Budget of the tT~ited States Govermuent or the Fi cal Year Endmg Tune 30 19~S p 44 Changes in Federal spending5 national income accounts budget `. F~ca1 1966 to fiscal 1967 Fiscal 1967 to fiscal 1968 Billions of dollars Percent . Billions of dollars Percent . Defense International and space 11 8 "0 9 .~ 5 8 -0.2 8 5 -2.3 131 Domestic: ` 95 142 100 6.2 2.0 0.9 0.4 .. 18.8 16.7 , 9.2 3.3 .` 7.2 0.9 0.2 1.8 18.4 , 6.4 1.9 14.3 Health. labor, and welfare Education, housing and community development, -, natural resources, commerce, and transportation Interest on public debt Other' Total 21.3 16.1 15.6 10.2 lAgriculturé, veterans' benefits and services, general government, civilian and military pay increases. Source: The Budget of the United States. Government for the Fiscal Vesr Ending June 30,1968, p. 43. Changes in Federal receipts, National Income Accounts Budc'et . Fiscal 19 6 to fiscal 196 Fiscal 196 to flsc~.i 1968 Billions of dollars Percent of .1966 . recespts Billionsof dollars Percent of 1967 receipts Changes dise to changes in tax law.... Personal income . ` . 7.0 ` 5.3 , 5.8 . 3.9 1 2 0 9 4 ` " 1.9 3, , 1.3 -.IJ ..3 , 1. 0 , 0. 7 Corporate income ,: Exciseandother Social security Changes due to growth in economy Total . 5.8 10.2 , 4.4 7. 7 11. 5 7.7 17.2 13.0 17.3 11.6 Source: Estimated by Federal Reserve Bank of St. Louis from The Budget of the United States Govern- ment for the Fiscal Year Ending June 30, 1968. Fiscal 1968 expenditures include increases over presently estimated 1967 expenditures of $5.8 billion or 8.5 percent for defense and $9.8 billion or 11.5 percent for nondefense spending tn~l~di~~ ~pandod social security benefits. The increases in fiscal 1967 over fiscal 1966 are 20.9 percent.for defense and 12.5 percent for nondefense programs. PAGENO="0237" 4 £VU ~ Expe ditures `~ 1 bU 40 C AI Surplus (deficil ) ~ .1 2nd 1 4 all 1st half i4 1st half ~ i ~j i 1 lsthalf I 4 1st half 1 4 -40 64 66 1968 - `. 1948 50 52 54 56 58 60 62 Source: U.S. Department of Commerce Percentages are annual rates of change between periods indicated. Latest data platted: 1967 and firsthalf 1968 estimated by Federal Reserve Bonk of St. Louis from Fiscall968 Budget. Receipts. Federal NIA receipts are expected to rise less rapidly than expenditures from fiscal 1967 to fiscal 1968, thereby increasing the. deficit. Increases in receipts were large in fiscal 1966 and even larger in fiscal 1967. Such increases have resulted primarily because this was a period of rapidly expanding money incomes and inflation. Receipts were also accelerated however, by faster collections and increases in social security tax rates during this period. NIA receipts are anticipated to increase by $17.3 biffion or 11.6 percent in fiscal 1968 over the previous fiscal year. Growth in receipts will result mainly from continued economic expansion but will also reflect the proposed (3-percent surcharge on personal and corporate income effective July 1, 1967, and a scheduled increase in social security tax rates on January 1, 1968 BUDGET POLICY IN ITS ECONOMIC SETTING Budget plans for calendar 1967 are predicated on a forecast of sluggish growth in private demand in the first half of the year with a resumption of more rapid growth in the second half The purpose of this section is to examine Federal budget plans within the economie setting expected in calendar 1967 An evaluation of the Federal budget plan at this particular time is replete with problems The Council of Economic Advisers probably has access to more information than anyone else at the time of the budget's preparation Consequently, this examination of the budget centers more on assumptions than on the internal consistency of the proposed total economic plan The economic plan, as presented m the fiscal 1968 budget and the CEA report, is to keep the economy on a full-employment growth path with relative price stability. The budget is presumably designed to provide just the right amount of fiscal stimulus or restraint at the appropriate time. The success of the proposed budget program de-~ gCoNoMIC EFFECT OF `VIETNAM SPENDING 595 Nat onal Income Accounts Budget BilLions of Dollars Half YearTotalsatAnnualRates Billions of Dollars 2~C 122% A ~ LJ 80 40 PAGENO="0238" 596 ECONOMIC :EFFECT1OF VIETNAM SPENDING pends on the vagaries of, private demand and the response of private demand to monetary and fiscal actions. Fundamental to success is whether budget policy is `sufficiently flexible to move in accordance with changing economic and monetary conditions:'"~''~ The budget program for the first half of calendar 1967 is essentially determined. Forces governing the, course of expenditures and,receipts are already in motion. The, CEA indicates that the sizable stimulus of a $5 billion NIA deficit will be appropriate in its timing and mag- nitude of impact on an~-economy characterized by weakening private demand. Included in the budget program for the second half of 1967 is a pro- posed surtax which' is süpposed~ to provide restraint on strengthening private demand at that time. Such plans provide flexibility in that the surtax proposaL could be dropped if economic conditions do not warrant fiscal restraint. Furthermore, if inflationary pressures in- tensify, the surtax rate' could be increased above that which is pro- posed. The 1966 experience suggests that budget policy was not sufficiently flexible to counter movements in private demand. During the first quarter of 1966, when it was quite obvious that further monetary or fiscal restraint was required, budget policy fell short as an instrument of stabilization. Fiscal restraint was not forthcoming because of the siow and' cumbersome nature of the budget machinery. It was not possible to implement a tax increase because of the slowness of the Congressional process. Furthermore, most' Government spending programs are of the type than cannot be slowed or speeded in accord- ance with the desire of the policymaker. Because of the relative inflexibility of fiscal policy, it was necessary for monetary policy to carry the burden of stabilization in 1966. Taking these considerations into account, it appears that monetary policy may again be assigned' a critical role in the total of stabilization policy in 1967.. Monetary policy is flexible in its implementation, though there is a question about flexibility in its impact. Incomplete knowledge of the. magnitude. and timing of monetary actions on eco- nonne activity indicates that it should be used' carefully as a tool of stabilization policy 10 Uncertainty about the, length and. ,variability of time lags in the implementation and effect of monetary and fiscal policy suggests that stimulus or restraint be applied in moderate doses when the economy is at high employment. Large adjustments in policy variables may cause instability, which is precisely what poheymakers are trying to avoid The economic situation in early 1967 is believed to dictate a need for more stimulative economic policy An indication that the fourth quarter 1966 increase in GNP contained some mvoluntary accumula- tion of inventory portends further slowing of production and attempts to reduce inventory Since fiscal and monetary policies tend to affect total demand with lags, excessive stimulation in the next months might be too late to avert a slowdown in the first half of 1967 but might create serious mflationary problems m the second half On the other hand, insufficient stimulation might cause the slowdown to continue ~s ell into the second half KEITH M C 4LRLSOI'. 10 Some evidence has recently been presented to support the view that monetary actions may affect total demand quite quickly via portfolio behavior of holden of liquid assets. See Donald P. Tucker, "Dynamic IncOme `Adjustment to Money Supply Changes," American Economic Review (Inne 1966), `pp: 433-449. PAGENO="0239" APPENDIX BUDGET CONCEPTS AND DEFINITIONS The fiscal activities of the Federal Government can be summarized in several ways. Some alternative budget concepts and the relation- ships between them are discussed in this appendix. A table recon-. ~iing these budget concepts is given, with data for fiscal 1966-68 used for illustration. ADMINISTRATIVE BUDGET The administrative budget is the basic planning document of the Federal Government, covering receipts and expenditures of funds that it owns. Its main purpose is to serve as a guide to executive and legislative program planning, review, and enactment. The admin- istrative budget is in fact the only Federal "budget" in the sense of a financial plan. All other "budgets" discussed here are summary statements of receipts and expenditures classified in various ways for purposes other than administrative planning. Those agencies for which Congress makes regular appropriations are included in the administrative budget. Public enterprises 1 are included while trust funds 2 and Government-sponsored agencies ~ are not. Expenditures and receipts are generally recorded on a cash basis, * i.e., on the date of actual receipt or payment. Interest expense is on an accrual basis. CASH BUDGET The consolidated cash budget is a summary statement of cash flow between the Federal Government and other sectors of the economy. Included are activities of the regular Government agencies found in the administrative budget plus the activities of trust funds and `Government-sponsored agencies. Because activities of some agencies (e.g., the post office) are recorded on a net basis, the full magnitude of cash flows between the Federal Government and other sectors of the economy is not measured by the cash budget. The cash surplus or deficit serves as a measure of the direct impact of Federal Government spending and taxation on the financial assets of the private sector of the economy (including state and local govern- ments). Surpluses or deficits in this budget indicate changes in the Tpublic debt and/or changes in the Treasury's cash balance. NATIONAL INCOME ACCOUNTS BUDGET The national income accounts budget summarizes the receipts and expenditures of the Federal Government sector as an integrated part of the recorded activities (i.e., the national income accounts) of all 1 Commodity Credit Corporation, Federal National Mortgage Association, Export-Import Bank, etci 2 Federal old-age and survivors insurance, unemployment trust fund, highway trust fund, etc. 3 Federal home loan banks, Federal land banks, Federal intermediate credit banks, and banks for cooperatives. 597 PAGENO="0240" ~598 ECONOMIC EFFECT OF VIETNAM SPENDING sectors of the economy. Primary differences between the cash budget and the national income accounts budget are (1) on the expenditure side, spending is recorded when delivery is made to the Government, and purchases and sales of existing real and financial assets are exèluded, and (2) on the receipts side, taxes are in large measure recorded when the tax liability is incurred. HIGH-EMPLOYMENT BUDGET The high-employment budget is an estimate of expenditures and revenues in the Federal sector of the national income accounts for a level of high employment.4 It is an attempt to correct the distortion introduced by the impact of the economy itself (through the effect of changing levels of economic activity on Government expenditures and tax receipts) on the realized surplus or deficit. The smaller the surplus or greater the deficit in this budget, the more stimulative is the impact of Federai fiscal activities and the, less is the dependence on private demand to maintain high employment. NEW OBLIGATIONAL AUTHORITY Another measure of particular importance in evaluating the impact of the Federal Government on the economy is "new obligational authority." This is legislation by Congress permitting a Govern- `ment agency or department to com.mit or obligate the Government to certain expenditures. Congress does not vote on expenditures; it determines new obligational authority. Before funds can be spent, an agency must submit and have approved by the Bureau of the Budget an apportionment request. This determines the rate at which obligational authority can be used. An agency usually incurs obligations, i.e., commits itself to pay out money, after apportion- ment by the Bureau of the Budget. The President's Council of Economic, Advisers defines a high-employment level of economic activity as that level associated with a 4-percent unemployment rate. The high-employment budget could be computed for other budget concepts, but, for an analysis of the economic impact of the budget, the national income accounts basis seems most appropriate. For a description of techniques and procedures for calcu- lating high-employment budget estimates, see Nancy H. Teeters, "Estimates of the Full-Employment Surplus, 1955-1964", The Review of Economics and Statistics, XLVII (August 1965), pp. 309-321. PAGENO="0241" ECONOMIC EFFECT OF VIETNAM SPENDING 599 Incurring obligations does not necessarily mean immediate cash expenditures. When the Government buys goods and services pro.. duced by the private sector, the lag of expenditures behind obligations may be substantial. In the case of items not usually kept in inventory, like military hardware, it usually takes time for private producers to draw plans, negotiate subcontracts, produce, and deliver the product. Reconciliation of various measures of Federal receipts and expenditures [Billions of dollars] . Fiscal year 1966 actual 1967 estimate 1968 estimate RECEIPTS Administrative budget receipts Plus trust fund receipts . 104.7 34.9 4. 5 . 6 117. 0 44.9 6. 2 1. 1 126.9 48. 1 6. 5 .5 Less intragovernmental transactions Receipts from exercise of monetary authority Equals Federal receipts from the public Less Cash transactions excluded from Federal receipts account (District of Columbia, financial transactions, etc.) Plus Items added to Federal sector account but not Li cash receipts (nettiag differences, timing differences, etc.) Equals Federal receipts, national income accounts Plus adjustment for tax receipts because of deviation of econ- omy from high employment Equals high-employment receipts EXPENDITURES Administrative budget expenditures Plus trust fund expenditures Less intragovernmental transactions Debt issuance in lieu of checks and other adjustments - - - Equals Federal payments to the public Less cash transactions excluded from Federal expenditures account (District of Columbia, financial transactions, etc.).. Plus items added to Federal sector account but not in cash payments (netting differences, timing differences, etc.) Equals Federal expenditures, national income accounts Plus adjustment for expenditures because of deviation of ecoa- 134. 5 1. 3 -. 6 154.7 1.8 -3. 1 168. 1 2. 0 1. 0 132. 6 .3 149.8 .2 167. 1 0 132. 9 150. 0 167. 1 107.0 34.9 4. 5 -.4 126.7 40.9 6.2 . 6 135.0 44.5 6. 5 .7 137.8 7.3 1.8 160. 9 8. 7 1. 5 172.4 5.0 1. 8 132.3 0 153. 6 0 169.2 0 omy from high employment - Equals high-employment expenditures SURPLUS OR DEFICiT 132.3 -2.3 -3.3 +. 3 +. 6 153.6 ~ -9.7 -62 -3.8 -3.6 169.2 -8. 1 -4.3 -2. 1 -2.1 Administrative budget - Cash budget National income accounts budget - High-employment budget Sources: The Budget of the United States Government for the Fiscal Year ending June 30, 1968 and Federal Reserve Bank of St. Louis. 78-516-67-vol. 2-16 PAGENO="0242" PAGENO="0243" Part III MILITARY IMPACT ON THE GENERAL ECONOMY This section consists of studies analyzing in detail the timing of the economic impact of government, and especially military spending. The leads and lags in government procurement impacts are particularly significant for the current period. The paper, "Employment Impacts of Defense Expenditures and Obligations," is scheduled for publication in a forthcoming issue of the Review of Economics and Statistics and is made available through the courtesy of that journal. 601 PAGENO="0244" PAGENO="0245" THE ECONOMIC IMPACT OF THE GOVERNMENT SPENDING PROCESS* BY MURRAY L. WEIDENBAUM CONTENTS Page. Summary Introduction ,-~ The Federal Government Spending Process Effects on the Economy of an Increase in Government Spending Effects on the Economy of ~t Change in Government Spending: Relaxing the Simplifying Assumptions ~The Generally Used Measures of Government Spending ~ - Measures of the Various Phases of the Government Spending Process_ -- - An Analysis of Historical Experience, 1950-1954 Evaluation and Conclusions SUMMARY An examination of the major phases of the Federal Government spending process reveals that the economic impact Of government spending may occur during any of the phases of the process, but often ~prior to the actual governmental disbursements. These phases are (1) granting of financial authorizations by the Congress; (2) placing of contracts with business firms; (3) production of goods and services; and (4) delivery of the items to the Government ~tnd payment therefore. Under certain circumstances, the effects of the announcement of newly granted obligational authority may cause an increase in private spending in advance of the placement of contracts or of the expendi- ture of funds. More usually, economic activity will be affected soon ~ifter contracts or orders are let with private producers. The private contractor undertaking to fill the order will, at the time the order is placed (or perhaps even befOre, if intent to place the orderS has been expressed to him), begin to acquire the resources needed for its com- pletion. It is, therefore, at the order stage that the governmental procurement action will have its initial and often major impact on the markets for labor, raw materials, and financial resources; a stage often several years before the procurement transaction is recorded as a government purchase or payment. *Reprinted from The Business Review, The University of Houston, vol. 8, spring, 1960. This study is based on a doctoral dissertation prepared at Princeton University. Portions have appeared In the following lournals and the editors have kindly consented to the use of some of the material:Accounring Review, American Jouranl of Economics and Sociology, FederalAccoientant, National Tax Journal, and Public Finance. The writer wishes to express his deep appreciation to Profs. Paul J. Strayer and Lester V. Chandler of the Department of Economics of Princeton University for their advice and guidance in the course of the study. The writer is also indebted to his former colleagues at the U.S. Bureau of the Budget for encourage. xnent and much necessary information. 603 PAGENO="0246" 604 ECONOMIC EFFECT OF VIETNAM SPENDING This production on Government order will be recorded in the national income accounts as increases in gross private domestic invest- ment (change in business inventories). This private production on Government account does not appear in any of the generally used. measures of Government spending. Only as production'is completed and as finished items'are delivered. to the Government will the transaction appear as a Government purchase. The delivery will be treated simultaneously as a decrease in gross private domestic investment; no net effect will occur in the level of gross national product at this point. The contribution will have been made earlier, during the production period prior to the actual. government expenditures. Indeed, the governmental expenditure may coincide in time with a reduction in governmental impact on total demand. . . . . However, the mere granting of appropriations and the placement. of contracts may. .have little effect on the level of production when resources are fully employed. Also, to the extent that government orders can be filled out of existing inventories, the effect on production may not occur until the depleted inventories are restocked Despite these and. other complications, the primary impact of government procurement on the level of economic activity usually occurs in ad- vance of the actual government expenditure. . Government spending for~ ~othe~ than the acquisition of goods and services may approximate more closely, or even lead, the economic impact. This ordinarily wopid be tru~ for transfer and interest payments and grants to State and local governments where the contribution to economic .output would .be made as the funds are respent This would also hold for lending programs, except w here production is begun on the basis of the Govermnent's comnntment to lend at a later date. Purchases of existing assets merely add to the liquidity of the recipients, unless the proceeds are used to purchase or finance current output. The generally used measures of Federal spending cover onh the completion phase of the spending process, represented by disburse- ments or by deliveries. Measures of some of the other stages of the process can be obtained or prepared. Data on budget authorizations granted by the. Congress can be secured annually, from the .budget document. Information, on contracts led and other "obligations" incurred by Federal agencies is gathered for internal budgetary pur- poses There are no current data of production on government account smce reports on in'~ entories do not reveal the amounts relatmg to government orders Measures of the early stages of the government spending process can be used for many purposes of economic analysis They are lead series which quickly register changes in demand and indicate future: trends in governmental disbursements. They can also be used to evaluate developments in the economy during periods when changes in government purchasing exercise an important role.. The possibthty of economic effects occurring durrnz the various phases of the government spending pi ocess neces~atate~ taking meas- urements of the spending stream at earlier points than merely at the completion stage What is needed is not a single measure of Federal spending but a tool kit of series, each of which is useful for certain purposes. PAGENO="0247" ECONOMIC EFFECT OF VIETNAM SPENDING 605 INTRODUCTION The impact of government spending on the economy is generally measured at the point at which disbursements are made. However, depending on the nature of the program and the state of the economy, the economic impact may occur significantly earlier than the actual expenditures. This study analyzes the many important circumstances. under which the economic impact occurs during the earlier stages of the government spending process. Because of the length of time involved in carrying out many government procurement programs, it is important to know if economic effects occur at the point where expenditures are made or if they occur also, or instead, at some other' place in the process. Except for some limited treatment made with reference to other matters, this is a question which has not been dealt with in the literature.' The outlays of the Federal Government in recent years have con- stituted by far the greater part of total government spending in the United States. The Federal Government has also become a major consumer of the Nation's economic output. Moreover during this. time, fluctuations in the level of government spending have often exercised a dominant influence `on the course of aggregate economic activity. The concern with the government spending process and its measure- ment specifically arises in connection with these fluctuations and their' ramifications. For many purposes of public policy and of fiscal, administration, it is essential to have accurate instruments to record present movements and to understand their relationship to future trends. An inappropriate indicator of government spending may' show an upturn when, in reality, the basic force of government spend- ing is operating in quite the reverse fashion. An insensitive indicator may show little movement when in fact a great fluctuation is taking' place. A lagging indicator may only show movement with consid- erable delay. As will be indicated, adequate information on the government. spending process together with an understanding of its operation can be important in the formulation and administration of governmental economic policy and in the analysis of economic developments. The increased extent to which Federal expenditures are being made to acquire privately produced goods and services has complicated the analysis even of the direct effects on the economy of governmental outlays. The pub]ic and the private sectors have ` become inter- twined. No longer does the greater part of Federal expenditures go directly to consumers in the form of wages and of salaries of govern- ment employees, of interest payments to holders of Treasury securities, or of transfer payments to the recipients of social welfare benefits. The Federal Government is buying an increasing proportion of goods produced in the private sector, mainly in the form of armaments and of other security-related objects such as atomic energy installations and as strategic and critical materials. The payments to the factors of production for these goods are being made by the government con- tractors and not, as in the case of other government spending programs, by the Government itself. Such purchases of goods and services from 1 Cf. Morris A. Copeland, "The Defense Effort and the National Income Response Pattern," Journal of Political Economy, June 1942, pp. 415-426; C. Lowell Harriss, "Government Expenditure: Significant Issues of Definition," Journal of Finance, December 1954, pp. 351-364. PAGENO="0248" 606 ECONOMIC EFFECT OF VIETNAM SPENDING the private sector have risen from 31 percent of total Federal pur-. chases in 1929 to 61 percent in 1959. Economic literature abounds with references to government spend- mg and its effects. Yet a full understanding of the governmental spending process often appears to be lacking. For example, Samuel-. son, in a knowledgeable article on fiscal policy, explains that the Congress does not legislate revenues, but tax rates.~ He then goes on to state that the Congress "legislates government expenditures." 2 As will be pointed out, Federal agencies and private business firms, rather than the Congress, exercise the controffing influence over the rate of government expenditures in a given period. The congressional action merely makes available funds whiOh can be spent over an extended period. Villard, in his important work on the contribution of government activity to income, decried as too lagging a definition of government expenditures which "would not count funds as `spent' by the Govern- ment until the funds had been received as income by the factors of production involved in making the output bought by the Govern- ment." ~ As will be demonstrated, these payments to factors usually precede rather than follow the actual government expenditures. Such a series would be a leading, rather than a lagging, indicator. This study is rooted in an examination, theoretical as well as historical, of the entire Federal spending process and of the effects on the economy of the different phases of this process under varying circumstances. Such examination reveals the possibility of important economic impact during each of the phases of the process. It is also demonstrated that the timing and magnitude of the economic impact may vary according to the type of government outlay and the state of the private sectors of the economy. A subsequent examination of the generally used measures~ of govern- ment spending reveals that they. do not cover the economic impact of all of the major phases: of the process, but only one-the completion stage represented by disbursements or deliveries. The study goes on to examine the potential availability of measures of other major phases Of the government spending process and finds the most import- ant and remediable shorteoming to be in the commitment stage. An attempt is made to construct a series on Federal commitments. The concluding section of the study is devoted to a discussion of the importance to economic analysis of theunderstanding of the operations of the government spending process generally and of the uses and limitations of this new series on spending specifically. Because this study gives primary attention to developments and practices during the last two decades, military spending often domi- nates the discussion.4 1 Defense preparation and war periods have usually been the time when the Government exercises a strategic if not the dominant role ininfluencing the course of economic activity. Itis at such times that there are large and abrupt changes in the rates of government spend- ing. Moreover, armament programs particularly generate Govern- ~2Pau1 A. Samuelson, "The Simple Mathematics of Income Determination" (In Income, Employment and:Pubtic Policy, essays in honor of Alvin H. Hansen, New York, W. W. Norton, 1948), P. 143. "According to this definition, the Government would not have `spent' all the money used to buy a battleship until part of the sum involved bad been received bythe iron miners who dug the ore from which was made the steel from which the battleship was built." Henry H. Vifiard, Deficit Spending and the Na- tional Income, New York, Farrar & Rinehart, 1941, p. 201. 4 "* * * spending fornational security * * * except for brief interludes; has been the dominant type of Federal spending throughout our history." lames A. Maxwell, Fiscal Policy, its Techniques and huh- tutional Setting, New York, Henry Holt, 1955, P. 106. Cf. U.S. Department of Commerce, Historical Statistics of the United Slates ,Washington, GPO, 1949, pp. 299-301. PAGENO="0249" ECONOMIC EFFECT OF VIETNAM SPENDING 607 ment orders for goods produced in the private sector and involve substantial buildup of productionin the privatesector prior to delivery of completed items to the Government~ This latter feature will attract much of our attention m analyzing the economic impact of the various phases of the Federal spendmg process However, neither the analysis nor its apphcatons are limited to military spendmg and various sections deal with questions relating to nonmilitary'~programs. In its attention to the need for new measurements of government spending this study is not intended to disparage the usefulness of the currently used measures but to add to the existing stock of valuable indicators which has been developed through the years. In some way, this study is written in the spirit of the follo'vc ing "caTh' issued by C Lowell Harriss The call for greater clarity which this paper tries to make is by no means a call for either a single or a simple concept. Needs are so varied that no single concept of government spending can be best for all purposes THE FEDERAL GOVERNMENT SPENDING PROCESS Much of this study is devoted to analyzing the economic impact of the government spending process This chapter describes the lengthy and intricate process through which Federal Government expenditures are made BASIC AUTHORIZING LEGISLATION The first step in the process is the enactment of basic legislation authorizing a given agency, program, or activity. Some statute, such as the permanent authorization for the Council of Economic Advisers or the annual authorization for the mutual security program; must be on the books before an appropriation, can ~be enacted to provide funds for the agency or program involved. This is the result of Congressional procedure rather than statutory `requirement.6 Basic authorizing legislation of this nature does not ordinarily contain financial authorization enabling an agency to obligate, government funds or to make expenditures The request for funds is usually the next step in the spending process There are a number of exceptions Some basic authorizing statutes do simultaneously grant Federal' agencies `financial authority of various types The Federal-Aid Highway Act, for example, both authorizes the program of aid' to the States and enables `the Bureau of' Public Roads to commit the Federal Government. to make specific grants for highway construction ~ The annual appropriation request is merely to "liquidate" `the obligations previously incurred. Many government corp'orations and other business-type enterprises, `particularly those `operating lending programs, are `authorized by basic legislation to spend the receipts from their operations without securing annual appropriations from the Congi ess 8 Harriss op cit p 353 The House rule provides that "no appropriation shall be reported in any general appropriation bill, or be in order as an amendment thereto, for any expenditure not previously authorized by law * ~ ;The Senate rule is generally similar. Constitution, Jefferson's Manual, and Rules ef the House of Represent atives, H. Doe. No. 766, 80th Cong., 2d sess., Washington, Government Printing Office, 1849, rule 21, clause 2; Senate Manual Containing the Standing Rules Orders Laws and Resolutions Affecting the Business of the United States Senate, S. Doe. No. 11, 81st Cong., 1st sess., Washington, Government Printing Office, 1849, rule XVI, clause 2. 7 Public Law 627 84th Cong 8 Budget and Accounting Act of 1921 (31 U.S.C. 11-16); Budget and Accounting Procedures Act of 1950 (Public Law 784 81st Cong) PAGENO="0250" 608 ECONOMIC EFFECT. 0F VIETNAM SPENDING On. the other hand, the conduct of the military establishment has been. sanctioned by the Constitution,. and no general authorizing legis- lation is necessary; oul~ appropriations enacted by the Congress are needed to enable it to spend government money for its operations. It is . important to consider the increment of legislation which is proposed each fiscal year-the extension of expiring legislation, the enactment of. new legislation, and the modification or repeal of exist- ing.statutes-for this is the birth stage of new governmental spending programs. . . .` REQUESTS FOR NEW FUNDS In January of each year the President transmits to the Congress the budget for the coming fiscal year, the 12-month period beginning the following July 1. The budget contains the President's estimates of the Federal Government's needs for new appropriations in the coming fiscal year. ~. From time to time exigencies arise which were not foreseen in the preparation of. the budget, .and which require the President to make further requests to the Congress. . The enactment of legislation not included in the budget or the necessity of unanticipated commitments of the Tjnited &ates in international conflicts have resulted in, such supplemental requests CONGRESSIONAL ENACTMENT Within the next 6 months, and sometimes over a longer period, the Congress reviews and modifies the President's recommendations and enacts the appropriation bills for the coming year.9. The total of financial authorizations made available to the Federal agencies for a given year is composed of a number of types of enactments. The most prevalent type is the ordinary appropriation, which em- powers Federal agencies (1) to place orders, enter into, contracts, or otherwise commit or "obligate" the Government to make expenditures in the future, and (2) to make the expenditures required by such obli- gations. . In the fiscal year 1960, 97 percent of the total amount. of financial authorizations were of this type.'° Another type of financial grant is the contract authorization. This empowers the agencies only to incur obligations. In these cases, the agency has to make a later request for an appropriation to pay for or "liquidate" . the obligation. Such appropriations are pro Jorma and are usually only given perfunctory review by the Congress.' Authorizations to expend from debt receipts are often used to fi- nance lending and other government enterprises where proceeds from operations may repay the initial advances from the Treasury. These authorizations to make expenditures from, borrowed money may take the following forms: (a) authorization . for the Treasury to make public debt receipts available to a given enterprise, often in exchange for notes of the enterprise; (b) authorizations for a government enter- prise to borrow directly from the public; and (c) cancellation of notes issued by a government enterprise to the Treasury, where the ~The Constitution provides that "No money shall be drawn from the Treasury, but in consequence of ap- propriations made by law" (art. I, sec. 9(7)). 10 Budget of the United States Government forthe Fiscal Year Ending June30, 1962, Washington, Government PrintingOffice, 1961 (hereafter referred to as 1962 Budget), pp. 14-15. A number of appropriations are "per- manent"; that is, they do not require annual enactment by the Congress. Most trust funds operate under this form of obligational authority. PAGENO="0251" ECON$MIC E1~FEGT OF VIETNAM SPENDING 609 cancellation has the effect of permitting further expenditures to be made (throughrestoring previously used authority tO borrow from the Treasury.) The availability of obligational and expenditure authority is the same as that of ordinary appropriations. However, authorizations to expend from debt receipts need not go through the appropriations committees and are not included in the congressional tally of appro.. ~priations enacted. Most financial authorizations are enacted for a 1- or 2-year period and expire if not obligated during that time. Because of the lags in Federal procurement, there are often requests to extent such au- thorizations beyond the original period of enactment. The effect of reauthorizations is generally the same as if new authorizations were voted in their place. The total of appropriations and other financial authorizations made available to the agencies for a given year is called "new obliga- tional authority." Table 1 shows the various types of new obliga- tional authority which were enacted for the fiscal year 1960. Their common characteristic is that they empower the agencies to obligate the Government to make expenditures in the future. TABLE 1.-Types of new obligational authority, fiscal year 1960 [In millions] Appropriations 1 $76, 829 Authorizations to expend from debt receipts 1, 801 Contract authorizations 760 Reappropriations 184 Total 79, 574 1 Excludes appropriations to liquidate contract authorizations totaling $505 million. Source: 1962 Budget, op. cii., pp. 14-15. These authorizations are termed new obligational authority because they exclude the unobligated balances of prior-year obligational authority which are still available for current obligation. The total of funds available for obligation, which is of importance for budgetary control, includes both new obligational authority and the unobligated balances. The granting of new obligational authority is a major control point over Federal spending. Given the grant of new obligational authority, the usual functioning of governmental operations will result in a sub- sequent flow of expenditures. APPORTIONMENT OF FUNDS After the Congress has voted funds, the control of expenditures shifts back to the executive branch. The rates at which appropria- tions are obligated and expenditures are made are determined by the departments and agencies, subject to the control of the Bureau of the Budget. The Bureau of the Budget apportions to the agencies each quarter the funds appropriated to them. The apportionment power arises from the desire to prevent agencies from spending their appropriations early in the year and returning for deficiency appropriations.1' 11 Executive order 6166, dated June 10, 1933, gave the Bureau of the Budget the authority for making, waiv- ing, and modifying apportionments of the appropriations of the various agencies. Previously this author- ity had been vested in the heads of the agencies. PAGENO="0252" 610 ECONOMIC EFFECT OF VIETNAM SPENDING The apportionment process dOes' not cover the operations of trust funds or privately owned government-sponsored enterprises.'2 The apportionment power has been used to keep the amount Of government spending for a particular item below the full limit of funds granted for it by the Congress. This use has been defended on a number of grounds, mcludin~ the need to make Federal spending patterns cor~form to changes m circumstances and needs arising after the congressional enactment of `funds.1' The General Appropriation Act of 1951. affirmed the legal authority of the President and the Bureau, of the Budget to take such, actions. The Act provided that: In apportiomng any appropriation, reserves may be established to provide for contingencies, or tO effect savings whenever savings are made possible by or through changes in requirements, greater efficiency of operations, or other ,devel- opments subsequent to the date on which such appropriation was made available.'4 Following the making of apportionments, which is a centrally administered control, allotments are made `by agency heads, to ad- ministrative units within the agencies. `Allotments may be made on a monthly or. quarterly basis and may limit the use `of obligational authority in terms, of. objects to be' purchased, aOtivities, or organiza- tional units Gerhard Cohn believes that the system of allotments and reserves could be developed into "an important instrument of fiscal policy." `~ It has ,been used for that purpose only in `rare instances. Examples of such action would be "nnpoundmg" funds durmg inflationary periods and freemg them for expenditure during recessionary periods INCURRING OBLIGATIONS Within the limits of the apportionment of funds made available to them, the Federal agencies place orders, award. contracts, buy goods and~ services, and take other similar actions which obligate their apportioned funds.'6 This is the' `stage of the Federal spending process which is measured by "obligations incurred." To `the extent that the goods and services needed by the Government are ordered from and produced in the private sector, this is the fist stage of the process' where government procurement activity' directly involves private industry It is also the last clearly discretionary step in the process which will ultimately involve government payment `of funds. Some instruments of contract are not considered as part of the total of obligations incurred. Letters of intent, interim devices by which the contractor is authorized to proceed with production before detailed contract terms are agreed upon, are no, longer treated as budget obligations. ` ` . ` ` "Obligations" may be incurred . for a wide variety of objects,. in addition to the purchase of bonds and services from the private sectoi Purchases of goods and services from the public sector itself transfer, interest, and subsidy payments, grants to State and local go\ einments, and purely financial transactions are also included 12 U.S. Bureau of the Budget, Circular No. A-34, Washington, 1952... 131. D. Williams, The Impounding of Fund., by the Bureau of the Budget, Inter.Universlty Case Program, No. 28, University, Ala., University of Alabama Press, 1955. . " ` 14 General Appropriation Act, 151 (64 Stat. 595). 15 Gerhard Coim, Essays in Public Finance one! Fiscal Policy, New York, Oxford University Press, 1955, p. 190. 16 The law provides that "no contract forpurchase is to be mndë except under an adequate appropriation" (41 U.S.C. 11). There are a number of specific instances where a Federal agency may place an order in advance of an appropnation (25 U S C 99) PAGENO="0253" ECONOMIC EFFECT OF VIETNAM SPENDING 611 PRODUCING GOVERNMENT-ORDERED GOODS Pursuant to the contracts and orders placed, the suppliers of government goods and services, in both the public and private sectors, produce or otherwise obtain and then deliver the items previously obligated for. Government contracts usually contain delivery schedules. In the case of heavy equipment, however, production de- lays and delivery date extensions are commonplace and the amount of control by the Government over the speed of work on the contract depends on the ability of the procurement officer as well as the coop- eration of the contractor 17 To the cxtent that production is carried on in the privat& sector, this stage of the Federal spending process is not usually reflected in the Federal fiiiancial accounts ~f he fact that disbursements to factors by government contractors do not appear in the government accounts at this stage but in the private accounts will be of considerable sig-. nificance m the subsequent analysis of the economic effects of the governmental spending process. In the case of production carried on :by a government agency, the actual disbursements to factors in. the course of production are re- flected as expenditures in the Federal accounts. In the case of ex- penditures which, are not for currently produced goods ;and services, such as ti ansfer payments, interest payments, and the acquisition of land, the lag between obligations and expenditures is usually non- existent or `at a minimum, depending upon the nature of the individual program involved.. Moreover, such expenditures do not involve the long production lead times that are characteustic of hard goods procurement MAKING PAYMENTS THE CONCLUDING STEP In accordance with private business practice, the Federal Govern- ment genei ally pays for the items it orders after they have been delivered, inspected, and approved A number of agencies are authorized to make advance and progress payments 18 These are usually confined to large orders for neavy equipment in the production of which the supplier requires considerable additions to his normal working capital. ` ` . ` Progress payments can usually be made up to 70 percent of the costs incurred; or 85 percent of direct labor and material alone.'9 No interest `is charged the contractor on such payments. Advance payments are made, prior to the performance, under~ a contract and are expected to be liquidated from payments due the contractoi as a result 01 performance Unlike progress payments, adv'ince payments are made under restrictive and selective conditions Only $47 million worth of advance payments by the Department `of Defense.were outstanding as. of December 1959. In' contrast,' $2.6 billion of progress payments w ere outstanding on that date 20 Such 17 U S Commtssion on Or'anization of Executive Branch of the Government Task Force Report on Miii tary Procurement, Washington, Government Printing Office, 1955, p. 34. 18 Armed Services Procurement Act of 1947, as amended,'F'irst WarPowers Act, 1941, as amended. 19 Department of Defense, Armed Services Procurement Regulation, l960edition, Washington, Government Printing Office 1960 p E49 20 U.S.. Congress, Joint Economic Committee, January 1959 Economic Report of the President, Washington, Government Printing Office, 1959, p.' 703. , . ` . . : PAGENO="0254" .612 ECONOMIC EFFEOTTOF.VIETNAM $PENDING payments have been concentrated in heavy: procurement where pro- duction time and hence the lag between obligations and deliveries is the longest THE LAGS I~ THE PROCESS As aresitit of the number of steps involved in the Federal spending process and because of the length of time .often required by suppliers to produce the goods. ordered by the Government, there is, in aggre- gate, a substantial lag between the time expenditures are authorized and the time they are made. The lags in the early stages of the process are primarily adminis- trative. It takes tine for the agencies to prepare and obtain approval of their apportionment requests, for specifications to be drawn up for individual orders, and for contracts to he awarded. The length of this period has been attributed to "the time-consuming nature of planning."2' The lag may depend in part on the newness of the program and the necessity for establishing new procedures. The average lag of about a year between granting of new obligational authority and the place- ment of contracts in the 1933 Public Works Administration program was reduced to 100 days for the 1938 program.22 A later and. more important lag is technological, the lag between the letting of contracts and the beginning of quantity production. This is a period of "make ready," which may range from a few weeks to more than a year. In the typical case of a complex new military item, hundreds of additional engineers are hired and trained; hundreds and sometimes thousands of detail drawings are made; production lines are laid out; material requirements are computed; schedules are prepared for deliveries of material and components to be procured; and subcontracts are negotiated.23 Table 2 shows an estimate of the numbers of years which may elapse between contract negotiation and quantity production for typical military items. This stage varies from approximately one-half year in the case of military uniforms to over two years for bombers and jet fighters. Following quantity production, there is the delay be- tween delivery to the Government and payment for the goods de- livered. This includes the time needed for inspection, processing vouchers, and making disbursements. TABLE 2.-The lag between ordering and producing typical military items Number Illustrative items: of I Military uniform Mediumtank 13~ Recoilless 57 mm. rifle 2 Destroyer DD 692 2 Transport plane 2 Bomber 23~( Jetfighter 234 1 The time shown for each item represents the span from the end of contract negotiation until the first unit comes off the production line set to deliver at the scheduled rate. Source: Based on materials contained In Defense Production Record, May 15, 1952, p. 1. 21 Federal Reserve Bank of New York. Selected Economic Indicators, 1954, p. 73. "John Kenneth Galbraith, assisted by G. G. Johnson, Jr., The Economic Effects of the Federal Public Works Expenditures, 1933-1958, National Resources Planning Board, Washington, Government Printing Office, 1940, p. 28. 21 Drawn from materials in U.S. Director of Defense Mobilization, Second Quarterly Report to the President, Washington, Government Printing Office, July 1, 1951, pp. 7-8. PAGENO="0255" ECONOMIC EFFECT OF VIETNAM SPENDING 613 A study of experience of the Air Force casts some light on the total lag in the Federal spending process. The Air Force is érucial in this connection because it a~counts for so much of the "hard goods" purchased by the Government, the heavy equipment with long produc- tion: time. Of the total new obligational authority granted to the Air Force for the fiscal year 1951, only 25 percent was spent in that year. Forty percent was spent during the following year and 28 percent was spent during the third year. The remaining seven percent was al- located between the fourth and fifth years. (See table 3.) TABLE 3.-Relationship of expenditures to new, obligational authority, United State& Air Force, fiscal years 1951-53 [Percent expended] * New obligational authority 1st year 2d year 3d year 4th year 5th year 1951 25 23 29 40 36 35 28 30 25 6 9 8 1 2 3 1952 1953 Average 26 37 27 8 2 Source: U.S. Senate, Committee on Appropriations, Hearings on Department of Defense Appropriations for 1953, Washington, GPO, 1952, p. 607. (Chartinserted by Secretaryof the Air Force Thomas K. Fanletter.) As would be expected, purchases Of "soft goods" and services do not evidence such a time-consuming lag. The Bureau of Labor Statistics examined reports on almost all Federal contracts for com- modities for the calendar year 1947 distributed by both delivery date and date of award. In addition, several agencies made available to the Bureau their listings of expenses in terms of both obligations and expenditures. As a result of analyzing this data, it was concluded that the lag between obligations and expenditures was negligible for soft goods, although often substantial for hard goods.24 The Bureau of the Budget has reported a similar general finding: In the case of salaries and wages, travel, and like items, the lag between obli- gations and expenditures is usually no more than a few weeks or a few months.25 There are certain legal limits to the lags in the Federal spending process. Most forms of new obligational authority are available for obligation for either 1 or 2 years and are available for expenditures for no more than 2 years beyond that. Within these legal limits, the lag between the Government's embarking on a program and its exe- cution is largely determined, by private decision making. Military procurement, however, is financed largely from "no-year" appro- priations, which are available until spent; most lending programs are likewise financed primarily from authorizations without specified expiration dates. It was estimated that 68 percent of the new obligational authority requested for fiscal year 1962 would be spent in that year with the remainder (except for minor amounts of lapsing appropriations) being spent in future years. Also coincidently, only 68 percent of the ex- penditures in that year would be made out of the authority granted 24 Irving H. Licht, "Government," Conference on Research in Income and Wealth, Input-Output Analy- mis, Technical Supplement, New York, National Bureau of Economic Research. 1954, pp. 2-13. 25 1965 Budget, op. cit., p. 10. In 1957, the Bureau estimated the lag for personal services, printing, travel, and transportation expenses at from 15 to 140 days. Michael S. March, "A Comment on Budgetary Im- provement in the National Government," National Tax Journal, June 1952, p. 173. PAGENO="0256" 614 ECONOMIC EFFECT OF VIETNAM SPENDING in the year. The remaining expenditures would come from' authority granted in prior years.26 The nature of the lag between new obligational authority and expenditures makes for a changing relationship during the different stages of a buildup; new obligational authority (and obligations incurred) run sharply. ahead of expenditures as orders are being placed and initial production gets underway. As the bulk of the spending program is put on order, the gap between new obligational authority and expenditures narrows. Finally, as quantity production is corn- pleted and deliveries are made, expenditures continue rising and exceed new obligational authority. From time to time, attempts have been made to reduce the lag in the Federal spending process. Improved procurement procedures and organization are helpful More important are steps which have been, taken to reduce the technological lag. A number of states, have. adopted procedures which lessen the lags between authorization and expenditure. The system of "preadvertisement" of bids permits potential. government contractbrs..to. get their orders to the miUs"~rell in advance of actual construction. In the case of the New York Thruway, `the State called for superstructure "bids for, a new Hudson River. crOssing near Albany several months' in advance of~ the actual~ letting of contracts for substructure.27 REDUCP~G GOVEiF~ME~TAL SPENDING The actions w hich can be taken to curtail expenditures w ould operate m somew hat the same fashion as the actions m~ olved in making expenditures A reduction in government spending can be initiated at' various stages in the spending process. The effects of the actions taken at each stage can be cumulative m their effects on the tOtal of expenditures during any given period. ` For example, the Congress may decide tO eliminate or toreduce `the scope of a particular prpgram, by changing its basic statutory author- ization, or by eliminating or reducing the amount of,funds authorized for it durmg a given period These actions can be implemented either through eliminations or through reductions in the amount of new obhgational authority being considei ed or in the recision of existing obligational authority Independently of congressional action, the Pi esident may decide that a given agency should not spend all of its available obligational authority This decision can be implemented by reducing its quar- terly apportionment of funds and placing a portion of the appropiiation "in reserve" The individual agency can reduce the amount spent for a program by slowing' `down the rate at' which it obligates its funds, by obtaining a slowdown in the rate at which the partiuclar goods or, `service con- tracted for are pioduced and made available to the agency, or by rescinding contracts and other comimtments it had previously entered mto Most government contracts provide for their cancellation in the intérésts of the' `Government.28 There are important obstacles to the reductions m expenditures w Inch can be made through recisions of 26 `Federal Budget in Brief, 1962,. Washington, Government Printing Office, 1961, p. 58. "Engineering News Record July 5 1956 p 96 `~ Department of Defense, Armed Serv'ices Procurement Regulation, op.' cit., p. 851. PAGENO="0257" ECONOMIC EFFECT OF VIETNAM SPENDING 615 outstanding contracts, such as the payment of damages to the con- tractor for the unrecoverable costs which he has incurred, or the loss of interest on the part of business firms in bidding on future govern- ment contracts. This factor is a limitation both at the legislative and agency levels. In the case of such activities as public works projects, the desire to protect the government investment already made may be decisive in continuing expenditures on a going project in the face of a general effort towards curtailment of government spending. Most supply and construction contracts permit the con- tracting officer to order certain changes in the performance of the contract. The order of the contracting officer, so long as it is within the scope of the changes clause involved, does not require the consent of the contractor.29 SUMMARY The Federal Government spending process can be viewed as a continuousstream of activity. Four major stages may be highlighted because of their importance in terms of the impact of government spending on the economy: (1) the granting of congressional author- izations to let contracts and make expenditures; (2) the placing of contracts by government agencies; (3) production of the goods and services ordered by the Government; and (4) delivery of the finished product and the government payment. The granting of financial authorizations by the Congress* and the letting of contracts by the agencies are basic control points over the amount and rate of spending; time actual production generates the direct effect on the level of output in the economy (in those cases involving government purchases of goods and sei~vices). The flow of expenditures has important financial effects, including the use of Fed- eral tax or debt receipts and the increase in the liquidity of the private sectors of the economy; it also measures the completion of the govern- ment spending program. Subsequent chapters will explore the impact on the economy of each of these stages under varying circumstances and for different types of governmental spending programs. EFFECTS ON THE ECONOMY OF AN INCREASE IN GOVERNMENT SPENDING In this chapter four phases of the Federal Government spending process are highlighted: (1) enactment of appropriations, (2) place- ment of government contracts with the private sector, (3) production in the private sector to meet these contracts, and (4) delivery to and payment by the public sector. A number of simplifying assumptions are made so that the effects on the economy arising directly from an increase in governmental spending can be more readily examined. More complicated situations are dealt with in the following chapter. An increase in government spending is assumed which consists entirely of expenditures for goods and services currently produced in the private sector of the ecOnomy. It is assumed that these expendi- tures are financed by borrowing idle funds. It is also assumed that there are sufficient idle resources and mobil- ity in the economy to produce the goods and services ordered by the 29 Ibid., . 70p1. 78-516-67--vol. 2-17 PAGENO="0258" 616 ECONOMIC EFFECT OF VIETNAM SPENDING Government without new fixed business investment or price or wage increases and without displacing any private demand. Also postu- lated is the availability of adequate financing for the government con- tractors by the private credit market. It is further assumed that this increase in government spending will generate no indirect psychological effects on consumer or business expectations nor any changes in other government programs. PHASE I. APPROPRIATION OF FUNDS It is assumed that the President transmits to the CongTess a supple- mental appropriation request which it enacts after due delibera- tion. Under the assumed conditions, there is no immediate effect on the economy as measured by any indicators of economic activity, such as GNP or the index of industrial production or any of the lead series, such as the volume of new orders. Neither is there yet any change registered in any of the measures of government spending.3° This stage may take one to two quarters of a year, on the average. PHASE II. PLACEMENT OF CONTACTS The government agency to which the appropriation is made negotiates and places contracts with business firms in the private sector of the economy. The following are some of the events that would flow from the receipt of a government order by a manufacturer. He finds that he cannot ff1 the order out of inventory or from existing prodt~ction lines. He determines that this additional volume of production can be obtained through more intensive utilization of existing capacity, but that it will require substantial increases in inventories of materials and increased working capital which will have to be obtained outside of the firm. On the basis of the company's past performance and the government order, the contractor obtains a working capital loan from his bank. He begins to place orders for materials, to hire additional workers, and to subcontract parts of the order to other firms. These suppliers or subcontractors wifi be going through a similar process at this time, in some cases involving another tier of suppliers or subcontractors. The first effect on the volume of economic activity wifi now be taking place. As deliveries begin to be made on raw materials, and as wages are earned by the first of the newlyhired workers who are tooling-up, the contractor wifi be drawing upon his loan authorization and making small amounts of payments to the various factors of production. An increase will be registered in the outstanding loans of the commercial banks and, cet. par., in the total money supply of the economy. Also, an increase wifi occur in gross private domestic investment. This 1a~ter item is the component of GNP which contains the inventory accumulation resulting from the increased amounts of goods in process. The economic activity represented by contract placements is not reflected in any of the generally used measures of government spend- ing. These contracts are included, but not identified separately, in the monthly reports by the Department of Commerce on new orders received by business firms. `°As is pointed out in ch. V, the series on budget expenditures, cash payments, and government par. chases all measure essentially the payment stage of the spending process (phase IV). PAGENO="0259" ECONOMIC EFFECT OF VIETNAM SPENDING 617 That the placement of government orders ("obligations incurred" by the Federal agencies) is the phase of the government spending process which energizes private production on government account has been noted by a number of observers: The initial stimulus to production is provided by government contracts for procurements.31 * * * it is the placing of a contract, or its anticipation, which leads industry to plan its acquisition of materials and labor and to schedule its production.32 The initial impact of Government purchases results when new orders are placed * * * New orders initiate a demand for raw materials, working capital, and labor required in manufacturing the products. The flow of new orders has had an important influence on inventory policy and rate of production in certain durable goods and industries such as transportation equipment and primary metals, where defense orders represent an important part of their total business.33 It is in the stimulus to productive activity rather than in the minor amounts of initial "make ready" production that the contract place- ment stage exercises an important effect on economic activity. PHASE III. PRODUCTION OF GOODS As quantity production gets under way on the government order, payments are made by the government contractor for wages to the employees engaged in the work, materials delivered, and the interest due on the working capital loan. He will also be accruing profits on the order.34 The costs incurred by the contractor during the entire production period, i.e., the "value added," should total the amount of the order. The outlays of government contractors are not reflected in govern- *ment purchases of goods and services nor in any other gov ernment expenditures series at the time they are made. These outlays will currently show up in GNP-~in the change in inventory segment of gross private domestic investment. Inventories, as measured in the national income accounts, include the following kinds of goods: (1) all types of raw materials and sup- plies that must be kept in stock if production is to flow smoothly; (2) a certain quantity of goods in semifinished state, so-called work in process; and (3) stocks of finished goods. Accordingly, government- ordered production in the private sector will show up in GNP (on a value-added basis) as it goes through the above three stages prior to its receipt by the Government and its recording as a government expenditure. The Survey of aurrent Business has explained the phenomenon quite clearly: Al ter work starts on government contracts, there is a considerable period, depending upon the type of goods in question, during which such production is recorded as private investment-specifically, as a component of the change in business inventories. It is only upon delivery of finished goods that government expenditures are affected.35 The amount of production on government orders remaining in business inventories during a given period cannot be identified in the 31 Melvin Anshen and Francis D. Wormuth, Private Enterprise and Public Policy, New York, Macmillan, 1954, n. 530. ~2 John Perry Miller, Pricing of Military Procurements, New Haven, Yale University Press, 1949, po. 24-25. 33 Federal Reserve Bank of Philadelphia, "The Budget for 1956," Business Renew, February 1955, p. 11 "It is * * ~ a generally accepted accounting procedure to accrue revenues under certain types of cantracts and thereby recognize profits, on the basis of partial performance * ** * Particularly where the performance of a contract requires a substantial period of time from inception to completion * * ~" American Institute of Accountants, Restatement and Revision of Accounting Resea,cb Bulletins, New York, 1953, n. 95. 11 Survey of Current Business, November 1950, p. 8. PAGENO="0260" 618 ECONOMIC EFFECT OF VIETNAM SPENDING available statistics and, hence, the amount of production carried on in the private sector on government account cannot be measured. Only a general idea can be obtained from series on contracts placed and deliveries made. On the income side, increases will be registered in compensation of employees, corporate profits, rental income and, perhaps, earnings of unmeorporated enterprises. increases in consumer expenditures also occur as a result of these income payments. This stage may last from one quarter up to two years or more depending on the production time involved. PHASE Iv. PAYMENT FOR GOODS During phase IV the contractor delivers the Government the goods which have been produced during phase III. Following inspection and other processing activities, payment is made by the Government. Several economic effects of this activity can be discerned. The delivery of the equipment shows up in the national income accounts as a decline in business inventories and, hence, in gross private domestic investment. It also is recorded as a government purchase of goods and services. These two movements tend to cancel each other out with no net effect on GNP. The government purchases do not represent payments to the factors of production but are more in the nature of intersectoral transfers-reimbursements to the government contractor for his outlays during the previous period.36 Following the payment by the Government, the contractor would repay the working capital loan. These actions tend to reduce the amount of private credit, reduce the Government's cash balances, and increase the cash position of the firm doing business with the Government. The contractor can now disburse dividends, or set aside funds for tax payments, future expansions or merely an im.. proved cash position. The necessary public debt securities will be marketed during this time. This is the period during which the government purchase shows up as a budget expenditure and a cash payment to the public. RECAPITUALTION Table ~ is an ifiustrative version of the relationship through time between the four major stages of the Federal spending process and aggregate economic activity. it is assumed that in stage 1, the Congress authorizes a Federal spending program of 50, with no immediate effect on GNP. During stage 2, contracts are let with private firms which begin necessary tooling up operations. The relatively minor production activity involved is reflected in GNP. During state 3, quantity production is carried on in the private sector on government account and this is the period during which the significant effect on GNP occurs. As yet, no government expendi- tures have been made. 36Cy Samuelson and Hagen on theWorid War I experience: "The producer borrowed money or used his own funds to finance production; later, when the goods were delivered, the Government payment replaced the funds. The contribution to purchasing power had occurred earlier." Paul A. Samuelson and Everett E. Hagen, After the War-1918-192O, Military and Economic Demobilization of the United States, National Resources Planning Board Pamphlet, Washington, Government Printing Office, 1943, p. 23. PAGENO="0261" ECONOMIC EFFECT OF VIETNAM SPENDING 619 TABLE 4.-illustrative impact of the major stages of the Government spending process State of spending process Business in- ventory ac- cumulation Government purchases All other GNP 1. Authorization 2. Contract placement 1 3. Production 4. Payment +5 +45 -so +50 +5 +45 1 Includes tooling-up expenses incurred prior to quantity production getting underway. NOTES: 1. Assumes a hypothetical 1-shot Government spending program of 50. 2. Amounts shown are changes from the levels obtaining in period "0." 3. Only direct and primary effects are shown in the table. 4. Fluctuations in economic activity likely to arise from other causes are not shown hero or in sub- sequent amplifications. During stage 4, the government-ordered goods are completed and delivered. This is the period when government payments are made. However, while the total of government purchases of goods and serv- ices rises to reflect the payment, there is an equivalent reduction in business inventory accumul~ation. Hence, there is no net effect on GNP during this period. In practice, the sequence is not always as simple as outlined above. While the Congress is considering a new appropriation for military procurement, the affected industry may be conducting preliminary discussions with the government agencies involved and may also be tooling up. Stage II may be quickened and an expansion in inven- tories begun as soon as the contracts are negotiated.37 Also, after the initial lag between production and deliveries, there may be a steady stream of production in the private sector and deliveries to the public sector. This would result in no further need for inventory ac-~ cumulation and the increases in GNP resulting from this government program would then show up in government purchases of goods and~ services, rather than in gross private domestic investment, as postu-~ lated above, However, given the simplifying assumptions which have been made, the following is the sequence in which th~ various stages of the gov- ernmental spending process ordinarily enter into the movements of total economic activity. 1. The enactment of an appropriation indicates the size of a government spending program (for the period for which the funds are appropriated), but is not reflected in any measure of current economic activity. - 2. The placing of government contracts with the private sector gives rise to the begirnng of production and, hence, furnishes a measure of the early and potential impact of government spending (i.e., procurement) on the economy. 3. The actual production in the private sector on government account shows up in GNP as additions to business inventories. This is the stage when government contractors actually make disbursements for wages and materials. However, because of the lack of available statistics, we cannot measure the magnitude of these disbursements, which represent the amount of private productaon on government account. Increases in consumer spending also occur during this period as a result of the payments to factors. 17 Gardner Ackley, "The Multiplier Time Period: Money, Inventories and Flexibility", American Eco- nomic Review, June 1951, p. .357. PAGENO="0262" 620 ECONOMIC EFFECT OF VIETNAM SPENDING 4. The completion of production of the goods and services ordered results in deliveries from the private sector to the Govern- ment. This is the stage where the government spending program shows up as government purchases of goods and services. With the simultaneous decline in private inventories of a corresponding amount, there results no net effect on GNP during this period. However, this is the point at which the Government generally makes its expenditures for the goods and services delivered to it- when this activity is recorded as a budget expenditure and a cash payment. OTHER TYPES OF GOvERNMENT SPENDING PROGRAMS AND PROCEDURES Without relaxing many of the simplifying assumptions made earlier, other payment and production procedures and other types of govern- ment expenditures can be examined. Other payment arrangements. Many government contracts provide for partial payments as the work is progressing. This is frequently done on heavy equipment orders such as aircraft, where the production time may take several years and where privately obtained working capital is not normally sufficient during this period to cover the pay- ments to factors. Advance and progress payments reduce the contractors' need for outside financing. To the extent that some of the benefit of these payments is passed on to the subcontractors or suppliers, their need for additional financing is diminished. Government cash balances would be drawn upon during the production period rather than after delivery of the equipment, as would occur under more usual payment arrangements. Hence, a stream of borrowing from the public might be necessary instead of a single funding effort at the final payment stage (or similar adjustments in scheduled repayment of government borrowing). Progress and advance payments show up as budget expenditures and cash payments to the public at the time they are made. In the case of the income and product accounts, such payments in theory are included in private inventory accumulation rather than in gov- ernment purchases. The customary practice, however, of the business firms which receive progress payments against partially completed work is to list the goods in process as receivables from the Govern- ment rather than as inventory.38 The Department of Commerce attempts to adjust for this diver- gence, but does not have the necessary data in all cases. To the extent that the adjustment is made when necessary, production will be currently reported as increases in business investment; advance and progress payments, as well as completion payments, will show up as government purchases of goods and services at the time the delivery of the completed item is made. Other production arrangements. A substantial segment of govern- ment purchases of goods and services is made directly from the public sector. Conventionally, this gross product of the public sector is taken as the compensation of general government employees.39 38"Unbilled costs and fees under such (Government) contracts are ordinarily receivables rather than advances or inventory * * American Institute of Accountants. op. cit., p. 93. `~ "1954 National Income Supplement," Survey of Gurrent Business, p. 53. PAGENO="0263" ECONOMIC EFFECT OF VIETNAM SPENDING 621 Where a Federal agency, to enable it to increase its staff, is granted a supplemental appropriation, or a regular appropriation larger than it received for the previous year, it can begin to hire new personnel as soon as it receives an apportionment of funds. Funds are obligated as the personal services are rendered. Limited by an initial adminis- trative lag, usually of one to two weeks, the funds are expended as biweekly payments for services as they are rendered. Hence, the lag between obligations and expenditures is at a minimum. From the viewpoint of economic activity, the payments to factors (government employees) are recorded as government purchases of goods and serv- ices when the services are rendered and when payments are made. There is no time lag involved for intersector transfers as is the case for goods and services which the Government buys from private business firms. However, even Government programs which are basically admin- istrative in nature involve the purchase of supplies and other goods and transportation and other services froni the private sector. The actual purchasing patterns of Federal Government agencies are characteristic of this "mixed" case. It is essentially a question of degree. In the case of the General Accounting Office, about 97 per- cent of the outlays for a given year were wage payments to govern- ment employees. The General Services Administration, in contrast, spent about 80 percent of its funds on supplies and materials produced in the private sector and only seven percent on wage payments to its own employees. Most government agencies fall somewhere between these two extremes.4° In the important case of government programs involving the pro~ curement of heavy equipment, the bulk of the production is usually carried on in the private sector. Moreover, it is precisely these programs which involve long production load times and the con- sequent buildup of private inventories on government account. Military and foreign aid programs are the most important representa- tives of this group and it is in these areas where abrupt and large shifts in magnitude and timing are most common. Other types of government spending programs. Many government spending programs are not for current output and do not directly enter into gross national product, although they may be part of other national income accounts. In addition to purchases of goods and services, government spending may go for the following: transfer, interest, and subsidy payments which do not constitute a government demand for output but are income to the receivers; grants-in-aid to State and local governments which primarily affect economic activity as they are utilized by the non-Federal governmental units and then would be included as purchases of goods and services, transfer payments, etc.; intragovernmental transactions which are purely internal transfers of funds and do not directly affect the public or the economy generally; and purchases of "used" assets such as land and second-hand equipment and loans to private recipients, which are on capital account for both the spender and the receiver. The timing of the economic effects of these types of government spending programs, may differ from that of purchases of goods and services. 40 U.S. Bureau of the Budget, Summary of Obligations by Object, 1954. PAGENO="0264" 622 ECONOMIC EFFECT OF VIETNAM SPENDING Normally, transfer and interest payments only affect the level of output after a lag and indirectly, as they are respent by the recip- ients. This is the reverse of the situation obtaining in the case of government purchases where the effect on output levels normally precedes the government expenditure. Anticipatory effects could take place under certain circumstances, such as newly unemployed workers maintaining a certain level of spending in anticipation of the future receipt of unemployment compensation. The accruals of interest can have some economic effect in advance of the actual payment. Some bondholders report interest on an accrual basis for tax purposes. Also, the knowledge that their net worth position is growing stronger may also influence the spending decisions of some investors. Subsidy payments, to the extent that they have favorable reper- cussions on the expectations of producers, may evoke a positive effect in advance of the government expenditure. The prospect of a sub- sidy could encourage farmers to increase production. In some cases, such as where the Government is a major purchaser of the commodity, the subsidy may be an alternative to a price rise and the total level of government spending may be reduced. There might not be any change in real output, but a rise might be averted in its monetary value. This has been experienced in wartime in conjunction with the operation of a system of price controls.4' Grants-in-aid to State and local governments normally affect economic activity as they are utilized by the non-Federal govern- mental units. State and local purchases of goods and services with the Federal funds would have similar results as direct Federal pur- chases. Likewise, State and local transfer payments financed by Federal funds would have similar results as Federal transfers. How- ever, circumstances can arise under which the very act of the Federal Government in embarking on a new or expanded grant-in-aid pro- gram, or even its anticipation, can evoke an important stimulus in private or State and local activities in advance of any specific pay- ment or even ~pledge of funds to a State. The expansion m 1956 of the program of Federal grants for highway construction furnishes such an example. In advance of the congres- sional authorization of a $38 billion program over a 16-year period, potential suppliers such as cement producers and manufacturers of road building equipment began to plan for expansions of capacity and markets. The States undertook advanced planning of highway projects with the result that every State had some qualifying projects either "well into the design stage or ready to go." ~ As soon as the program was enacted into law, the Federal Govern- ment acted to achieve the expansive effects. The Secretary of Com- merce immediately announced, "We are starting the greatest public works program in the history of the world. * * * Its favorable impact on the economy is already felt." ~ The Commerce Department followed with a release claiming that 118,000 additional workers would be engaged in highway construction 4~Ofl1ce of Price Administration, Problems in Price Control: Stabilization Subsidies, Washington, Gov- ernment PrintingOffice, 1947, pp. 18-22. 42 "Can the States Meet the Challenge?" Engineering News-Record, luly 5, 1956, p. 23. Cf. also issue of 3une 7, 1956 prior to passage of the hill, "Many States and cities have had their sights set on the expanded Federal highway program for the last 18 months. Speedup of existing programs wifi follow quickly upon enactment of the legislation" (p. 26). "Federal Highway Spending Termed a Quick Shot in Arm to Economy," Wall Street Journal, luly 2, 1956, p. 4. PAGENO="0265" ECONOMIC EFFECT OF VIETNAM SPENDING 623 within 5 years and that the demand for steel for highway construction during that period would expand by 86 percent, that for cement by 79 percent, and that for explosives by 60 percent.44 The reactiOn in the supplying firms was similarly optimistic. The Associated General Contractors of America stated that the program would generate $200 million of additional highway construction during the first 2 months following its passage and an additional $200 million during the following 4 months.45 Federal loan programs provide a number of variations in the timing of the economic impact of government spending. The main effect of the government loan would normally rise from the subsequent purchases made by the recipient of the loan. For example, housing loans can be used to finance new private residential construction; production loans can be made to business firms and to farmers for inventory accumulation and, ultimately, for sales to consumers, to governments or to other private businesses; and loans can be made abroad for net foreign investment. In some cases the Government may merely take over existing loans and increase the liquidity of private firms or individuals. The sec- ondary mortgage operations of the Federal National Mortgage Asso- ciation are of this nature. However, in assuring commercial lenders that there wifi be a standby secondary market, FNMA undoubtedly has encouraged commercial lending for housing mortgage purposes. Also, through the device of advance commitments, FNMA has at times functioned virtually as a primary lender.4° In some circumstances, the expansive effect of governmental lending would precede the government disbursement. This would be true if private firms order goods and services, hire additional employees, and begin production on the basis of the Government's commitment to make the loan at a later date. In many instances, private produc- tion may take place soon after the making of the loan by the Govern- ment. In the case of agricultural production, the loans would be used to acquire implements, feed, and other items needed before production could get under way. Here the expansive effect on economic activity would normally follow the making of the loan by the Government. Government purchases of land and other existing assets merely add to the liquidity of the recipients. Only to the extent that the proceeds are used to purchase current output rather than other existing assets wifi there be any resultant increase in the level of economic activity. EFFECTS ON THE ECONOMY OF A CHANGE IN GOVERNMENT SPENDING: RELAXING THE SIMPLIFYING ASSUMPTIONS Some of the possible effects on the economy of the operation of the various phases of the governmental spending process are examined under more complicated circumstances than in the previous chapter. ANTICIPATORY EFFECTS In the simplified situation it was assumed that the new government spending program would be neutral in its effects on consumer and "Department of Commerce, Bureau of Public Roads, release dated July 25, 1956. " Wall Street Journal, July 2, 1956, p. 4. "Leo Grebler, The Role of Federal Credit Aids in Residential Construction, National Bureau of Economic Research, 1953, Occasional Paper 39, pp. 36-49. PAGENO="0266" 624 ECONOMIC EFFECT OF VIETNAM SPENDING business expectations. Consumers may not foresee any adverse reper- èussions on the availability or price of commodities, or they may believe that their stocks of hoardable commodities are adequate to meet any temporary shortages that may occur. Also, their purchas- ing~power, including the availability of credit, may be severely limited. All of these circumstances would dampen any advance wave of consumer buying. Businessmen may also believe that there is no need to alter their plans. The magnitude of the government program may not be very great, the duration may be limited, or the government program may be a part of a large stabilization policy. Tinder these circumstances, there may be no significant change in expectations, although in the absence of the governmental stabilizing action business expectations might have become less optimistic. The Government's act of embarking on a large new program can have a positive "announcement" effect on consumer and business expectations. Such was the case in the early stages of the Korean mobilization program when memories of World War II price rises and shortages set off a wave of private ordering and buying in advance of government purchasing. TABLE 5.-A new Government spending program, giving rise to favorable private expectations Stage of spending process Consumer Business expenditures inventory ac- cumulation Government purchases All other GNP 1. Authorization 2. Contract placement 3. Production 4.Payment +10 +35 +5 +10 +5 +45 -50 +50 +20 +5 +80 ±5 Norx.-Amounts shown are changes from the levels obtaining in period 0 and are based generally on table 4. Table 5 shows, in an idealized fashion, how favorable expectations on the part of business and consumers resulting from the Govern- ment embarking upon a spending program can be superimposed o~ the direct effects of such a program. The present case includes an "announcement" effect of the government authorizations on con- sumer spending and business inventory accumulation. The subse- quent developments are similar to those in table 4, except that the "second round" effect on consumer spending is specifically indicated here. Private business investment may sharply accelerate in advance of any large increases in government ordering. If the Government em- barks on a program to alleviate recessionary conditions, businessmen's hopes for an upturn may be raised. As Hamberg points out, under these circumstances: * * the marginal efficiency of capital may rise sufficiently to provide an increase in private investment independent of the immediate effects of rising current spending (public and private). The extent of this upward shift in the investment schedule would depend on the confidence that businessmen had in the success of the government's efforts.47 The reaction of businessmen to this new government spending pro- gram may be negative. They may fear that such activities are a ~7 D. Hamberg, Business cycles, New York, Macmillan, 1951, p. 357. PAGENO="0267" ECONOMIC EFFECT OF VIETNAM SPENDING 625 prelude to government interference and competiton with private enter- prise.48 The announcement effect of government spending is too dif- fuse and elusive to be measurable. We simply do not know what the actions of businessmen and consumers in a given period would have been in the absence of the anticipatory effect of government activity. Measures of the magnitude of the new government spending pro- grams may prove helpful in gauging the anticipatory reactions of the private sector. Although there is no precise relationship between the granting of new obligational authority and anticipatory reactions7 sharp and sizeable changes in the magnitude of this measure can throw light on some of the early reactions to changes in government programs.49 AVAILABILITY OF RESOURCES In the examination of the simplified situation in the preceding chapter, it was assumed that the placing of contracts by the Govern- ment would, in effect, start the wheels of industry turning. Re- sources, however, may not always be present. Substantial amounts of new investment may be necessary before production commences. In this case, the production by private business would include additions to private plant and . to equipment needed to produce the government-ordered goods as well as including actual production on the goods destined for government use. There are several important distinctions between these two ac- tivities. Although both groups of expenditures would show up initially in gross private domestic investment, the capital expenditures. would be included as additions to plant and equipment and would remain in the stock of private business assets. The production on government account, on the other hand, would initially show up as business inventory accumulation but, as the production is completed, would be transl-erred from t.his segment of business investment to government purchases of goods . and services and the items produced would become part of the stock of government assets. Table 6 shows the operation of these two different types of production ac- tivities arising from government orders. TABLE 6.-A new Government spending program requiring additional private investment Stage of spending process Consumer expenditures Private fixed investment Business Government inventory purchases accumulation~ GNP 1. Authorization 2. Contract Placement 3a. Investment 3b. Production 4. Payment - +35 +10 ~ +10 ±5 +45 -50 +50 . +15 +80 +10 Note: Amounts shown are changes from the levels obtaining in period 0 and are generally based on Table 4. Under a situation of relatively full utilization of resources, the letting of additional government contracts may simply result in accumulations of backlogs and unifiled orders. Given the limitation of resources, this problem cannot be remedied by additional investment ~ Cf. Hayes' statement on the 1937 recession, "~ * * who could tell where the experimenters would turn next?" Douglas A. Hayes, Business Confidence and Business Activity: 4 Case Study of the Recession of 1937, Ann Arbor, University of Michigan Press, 1951, p. 120. ~ See ch. VII for details of recent experience along these lines. PAGENO="0268" 626 ECONOMIC EFFECT OF VIETNAM SPENDING in productive facilities. Placement of contracts by the Government would not immediately affect private production. Attempts by the Government to bid away resources from private uses could result in rises in prices. However, there would not be any real increase in the total production of the economy, except that resulting from changes in the product mix. Where the Government resorts to material controls and allocation systems to obtain the output it needs, the backlogs may accumulate in the private sector rather than in the work on government contracts. Table 7 ifiustrates the full employment situation in which the Government utilizes direct economic controls to draw resources away from private uses. As full utilization of resources is postulated, there would be no effect on the aggregate level of economic activity during any part of the government spending program. The authorization of the new spending program could not give rise to any changes in consumer and business outlays (resulting from changes in expectations) nor could the contract letting lead to any expansion in the volume of production. As a result, when production of the government-ordered goods is completed, there would be an increase in government pur- chases and an equivalent decline in consumer expenditure and/or business fixed investment depending on which private demands were displaced. TABLE 7.-A new Government spending program requiring compulsory transfer of resources Stage of spending process Consumer expenditures Private fixed investment Business inventory accumula- tion Government purchases GNP 1. Authorization 2. Contractplacerneflt 3. Production 4. Payment -40 -10 (i) (1) +50 I Although the total level of inventories would be unaffected by the new Government spending pro- gram, the portion devoted to Government-ordered production would be increased during ~ege Per~QtII (and decreased in the subsequent period). N0TE.-AmountS shown are changes from the levels ohtain~ng hi perio4 0, There is also the special case where the government contractor can fill the order out of existing inventory. Here production would not commence until the firm hires labor and other factors to replace the depleted inventory. The government payments in this case would initially add to the supplier's working capital and would constitute income only with a lag-when they are paid out to the factors of pro- duction for replacement of the depleted inventory. As could be seen in the above cases, the usefulness of the measures of the early phases of the government spending process in analyzing current economic developments varies with the surrounding circum- stances. The volume of government orders affords an insight into the Government's demand for current private production and future production. However, the relation between new orders and the ensuing production depends on the availability of resources. Here, unliquidated obligations (unfilled government contracts) are an indi- cator of future production on government account. PAGENO="0269" ECONOMIC EFFECT OF VIETNAM SPENDING 627 FINANCING PRIVATE PRODUCTION It was assumed earlier that the government contractor can obtain financing and thus, once facilities and materials are available, can effectively carry on government-ordered production. In a report to the Hoover Commission it was observed that the need for short- or long-term borrowing to finance current operations be- comes much greater when a firm takes on government contracts: Capital borrowings in the performance of Government contracts are frequently made necessary because of common delays in obtaining payment such as the slow processing of invoices, delays encountered in obtaining definitive contractual instruments authorizing payment, Government revisions of delivery schedules which delay or stretch out deliveries over a longer period, thereby prolonging investments in inventories, and other Government action * * * 50 Retained earnings are often a firm's prime internal source of working capital while bank credit is a major external source. Here can be seen the possible ramifications and interrelations of fiscal and monetary policies. A liberal money market would tend to quicken and ease the expansion of business credit while a tight one might tend to have an adverse effect. In this connection, taxation which im- pinges on savings and thus reduces the supply of loanable fundswould tend to have a tightening effect on the availability of external business financing. Also, such fiscal measures as changes in *the level of corporate taxation and in the treatment of undistributed profits could strongly affect the extent of internal financing. - The liberalization of advance and progress payments tends tO ease the financing problems of government cOntractors. Other govern- mental devices to ease the demand of government contractors for working capital are the delivery of government-owned raw materials and of semifabricated items for processing or for assembly and the utilization of government-owned inventories. All of these methods result in increasing the current assets controlled by business firms working under government contracts. To the extent, consequently, that these financial arrangements are cairied on, business concerns do not have to rely solely on their own resources to find the capital and the credit necessary to support current production. In the absence of governmental assistance, there may be financial as well as technological limits to expansion of production on govern- ment orders. As can be seen by the large array of governmental devices designed to ease the financing problems of government contractors and by the performance of the American economy during wartime, these financial limitations have generally not been controlling. FINANCING THE GOVERNMENT EXPENDITURES In the simple situation examined in the previous chapter, it was assumed that the government payments to contractors would be financed by borrowing idle funds. It would be more usual for the Government to finance a large increase in the level of expenditures through raismg the level of taxation or tin ough borrowing aCtive investment funds or by means of a combination of the two. In the short run, some mcreases m expenditures could be financed by drawing down the government's cash balances. 50 National Security Industrial Association, Report to Commission on Organization of the Executive Branch of the Government Regarding Military Procurement, Washington, 1954, p. 57. PAGENO="0270" 628 ECONOMIC EFFECT OF VIETNAM SPENDING The economic effects of expenditures are not generally independent of the means of financing them. For example, increasing individual income taxes tends to offset the increased consumer incomes (and subsequent expenditures) resulting from the payments to the factors of production made by the government contractors. Similarly, raismg the corporate income tax reduces the funds available for the payment of dividends and for internal financing. Government borrowing operations may compete with private uses of funds. There would also be a reciprocal effect on the public sector due to the ~ov~rnment-induced expansion in the private sector. TJnernploy- ment compensation payments tend to decrease in periods when in- creased production, including government-ordered production, results in a lower level of unemployment. Also, increases in consumer and business incomes tend automatically to result in greater Federal revenues, especially with the existence of a progressive tax structure. REDIJCING GOVERNMENT SPENDING In general, the effects on the economy of a reduction in spending are the reverse of the ones traced for the expansion of government expendi- tures. A curtailment of new obligational authority leads to a reduc- tion in the volume of orders placed which in turn leads to a reduction in private production on government account. The end result is a reduction in government expenditures. In practice, complicating factors will arise analogous to the ones examined in the preceding discussion of expansion in government spending. The very act of embarking upon a contraction of govern- ment activity can have an "announcement" effect on business and consumer anticipations. The exact nature of this response will vary with the surrounding circumstances. Under circumstances of a large pent-up private demand for goods and services the curtailment of government demand may evoke waves of private buying of both consumption and investment goods. In other circumstances, the heralded decline in government purchasing may lead to a reduction in the total demand for the goods and services produced in the economy. Under such circumstances, announced reductions in government spending (as indicated by lower annual amounts of new obligational authority) will have a dampening effect on the private sectors of the economy in the absence of any large amounts of unsatisfied nongovermental demand. Declines in new government orders and cutbacks and recisions of existing contracts have an immediate repercussion on business firms heavily dependent on government demand. Ackley has shown that in the case of a contraction in demand for production the crucial factor may be the length of irrevocable commitments to suppliers and to the factOrs of production.5' However, if a seller has inventories which exceed what he feels to be the necessary minimum under the new circumstances, he can contract his production prior to the completion of his contracts (subcontracts from the Government's point of view) and can fill the balance out of inventory. Prompt settlement of con- tracts terminated by the Government helps to free working capital, to clear plants of special inventories and equipment, and to permit business to attain normal production patterns. "Ackley, op. cit., p. 361. PAGENO="0271" 629 ECONOMIC EFFECT OF VIETNAM SPENDING A complicating factor in the analysis is the rOle of unexpended balances of authorizations available to Federal agencies.52 Unless these balances are rescinded or put in reserve, the agencies can con- tinue to use the unobligated portions of these balances to place new orders and let contracts in the absence of any current grant of new obligational authority. Approximately 52 percent of the balances carried into the fiscal year 1962 were unobligated, primarily represent- ing available authorizations to expend from debt receipts.53 CHANGES IN RATES AND LEVELS There are a number of situations in which the placement of new orders per se may not have any significant effect on economic activity or an effect different from that postulated above. "Followon" orders, extending and maintaining existing production levels, tend to result in continued stability rather than in any net increment in total demand. In these instances, we may be approaching some variant of the accel- eration principle. The placing of additional government orders with business firms and the subsequent production and delivery t.o the Government may not have a particularly stimulating effect on business investment or on the economy generally when the net result is to main- tain a fairly constant level of government procurement. TABLE 8.-Illustration .01 achieving a higher level of Government spending Stage of spending process Consumer expendi- tures Business inventory accumula- tion Govern- ment purchases GNP PerIod 1 Period 2 Period 3 Period 4 Period 5, etc fAuthorization of program A.._ ~Contracts for program A Authorization of program B~_. (Production A IContracts B (Authorization C Payment A u~t~01~::::::::::::::::: Authorization D Payment B ~~~`::::::_:::::-_::: Authorization E +10 +10 +35 +10 +10 +35 +5 +5 +5 +45 +5 +5 -50 ~45 +5 -50 t~ +5 +50 :::::::::: +50 :::::::::::_ 15 +20 1 +100 J +110 +110 +10 +10 +35 +10 Norx.-In this illustration, once the new level of Government spending has been achieved, payments (expenditures) are an adequate indicator of the impact of Government spending. Table 8 shows a typical four-stage reaction to a new government spending program, with favorable advance repercussions, necessary private investment, and indirect effects on consumer expenditure. To this extent, it is consistent with the earlier discussions, such as that relating to table 5. However, it is assumed that "followon" orders are placed which maintain the level of private production achieved with the original orders. The levels achieved during period 4 (when payment is made on the first series of contracts) are merely maintained in period 5 and beyond. Finally, the permanency of the change in the amount of government procurement is important. When businessmen and consumers believe ~2 Cf. Gilbert and Paradiso, on the private sector: "~ * * The significance of an increase or decline in new orders depends largely upon the condition of unfilled order backlogs * * ~ Milton Gilbert and Louis Para- diso, "National Income and other Business Indicators" (in Philip M. Heuser and William R. Leonard, Government Statistics for Business Use, New York, John Wiley & Sons, 1946) p. 45. 63 1962 Budget, op. cit., p. 17. PAGENO="0272" 630 ECONOMIC EFFECT OF VIETNAM SPENDING than an increase in government spending will be lasting, they may react, particularly in investment decisions, far more fully than if they regard such increases as merely transitory. In this relationship, Waffich concludes that: * * * one probably cannot assume that an increase in government orders will induce the same amount of private investment that might be called forth by higher private demand. This will be true, at any rate as long as government demand is regarded as less permanent than private demand.54 SUMMARY The magnitude of changes in the various phases of the Federal spending process can have important economic effects under many circumstances; an awareness of these surrounding circumstances is essential to an adequate analysis of the changes in government spending patterns. The very act of announcing and authorizing a new or increased spending program-the granting of new obligational authority-can sometimes give rise, by affecting expectations, to positive or even to negative changes in business and in consumer spending in advance of the actual letting of contracts or of the disbursement of government funds. The act of placing contracts and incurring other: oblig~tions may not always signal the onset of production. The needed production facthties may not be readily available or backlogs of orders ~may first have to be worked off. Also additional working capital may be required. On the other hand, the government order may be filled out of inventory and no effect on economic activity would take place until some time later. In addition to the direct effects of the government expenditure there will be the accompanying effects of the financing of this outiny. Auto~ matic increases in personal and corporate tax collections may offset in part the effects of the rise in government expenditures,~ including the spendings out of the earnings from government orders. Govern- ment borrowing, likewise, may compete with private demands. Re- ductions in the level of government spending also work their effects through the economy in an analogous four-step process. Although all of these complications may modify the effect on the economy of a program of government procurement from private in- dustry, the basic relationships generally hold: The primary effect on productive activity (to the extent there is any) occurs in advance of the actual government expenditures. Under mOst of the circum- stances that have been examined, the placing of orders induces (either immediately or after a delay) private production on government account, and such production remains in the private sector and does not show up as government expenditures until after it is completed and the goods involved delivered to the public sector. THE GENERALLY TJ5ED MEASURES OF GOVERNMENT SPENDING This chapter examines the measures of government spending which are generally available and currently used. The three~ most widely- known measures are (1) budget expenditures, based on the Federal administrative budget, (2) Federal Government payments to the `~ Henry C. Wallich "Income-Generating Effects of a Balanced Budget," Quarterly Journal of Ec&nomies, November 1944, p. 89. PAGENO="0273" ECONOMIC EFFECT OF VIETNAM SPENDING 631 public, prepared on a consolidated-cash basis, and (3) Federal pur- chases of goods and services, computed as a part of the national income and product accounts. BUDGET EXPENDITURES The conventional measure of Federal spending, budget expendi- tures, is the central series in the annual budget document. Coverage. This total of spending generally includes all expenditures of the Federal departments and agencies plus the net outlays of the enterprises which are wholly owned by the Federal Government. It excludes the transactions of government-sponsored enterprises and trust funds and payments for retiring, purchasing, or redeeming the Government's debt. This treatment is similar to that of many busi- ness firms, whose budgets usually exclude the company pension funds and the operations of firms in which they have only a partial interest. For the government enterprises which are included, usually only the net expenditures-the difference between gross disbursements and gross receipts-are reported in the total of budget expenditures. A number of exceptions exist to this "net" treatment of government enterprises. Some government agencies which are not financially organized as business-type enterprises, notably Interior Department deposit the proceeds from their operations directly into the Treasury. In such cases, these receipts do not offset. budget expenditures but increase the totals of budget receipts. Either treatment has the same effect on the budget surplus or deficit.55 Basis of measurement. Budget expenditures are generally recorded at the time checks are issued by governmental disbursing officers A major exception is interest payments on the public debt, which are reflected on an accrual basis. Other exceptions include cases where direct or guaranteed obligations are issued to discharge certain liabil- ities. These include the issuance of armed forces leave bonds to vet- erans and of guaranteed debentures to lenders holding defaulted FHA. mortgages. Budget expenditures include, in addition to disbursements directly from the Treasury of the United States, checks issued by government enterprises, such as the Panama Canal Company, from their checking accounts with commercial banks.56 The logic of including both types of payments is apparent with the growth of Treasury tax and loans accounts with commercial banks, for in either case government funds. are carried by a private bank. In the former case, the account is in the name of a government agency and, in the other, in the name of the Treasurer of the United States. The effect on the recipient of the government disbursement from these accounts is the same. Changes in concepts. Through the years, the items included in the budget totals have.varied considerably. Although this paper is based on the classification current during the time of writing, the more im- portant changes in recent y ears ai e mentioned as an indication of the possibilities for future changes and improvements in the concepts and measurement of Federal finance. A number of items previously included on both the income and outgo sides have been gradually excluded, such as payments to the Treasury "Some departments receive revenues from services rendered to the public, such as performing special re.~ search studies. Their expenditure totals are reported net of such reimbursements. " Treasury Bulletin, April 1954, p. A-2. 78-516-67-vol. 2-18 PAGENO="0274" 632 ECONOMIC EFFECT OF VIETNAM SPENDING by wholly owned government corporations for retirement of capital stock and amounts refunded by the Government, principally for overpayment of taxes. The exclusion of these items from both the receipt and expenditure totals has no effect on the budget surplus or deficit. Types of payments incinded. Because budget expenditures cover such a wide variety of government agencies, many different types of payments are contained. These include purchases* of currently produced goods and services, transfer payments, interest payments, grants-in-aid to State and local government, subsidies, purchases of land and other existing assets, loans and other financial exchanges, and transfers of funds between government agencies. The budget document does not contain a tabulation showing which expenditures fall in each of these categories; however, the supple- mentary material in the document has been expanded to present details on some of the categories, such as interest payments, grants- in-aid, and loans.57 Role of the conventional measure. The series on budget expenditures is generally used for purposes of political and administrative budgetary control. This series also forms the basis of other series on government spending which are more useful for economic analysis; it is the only one that is "built from the ground up," appropriation account by appropriation account. The other measures consist solely of additions to and subtractions from the total of budget expenditures. Note in this connection the description of the derivation of government expenditures for the national income accounts: The method, in general, is to start with the budgetary totals drawn from broad fiscal reports, then to make various additions to and deductions from these totals so as to achieve as residuals the desired purchase series.58 The reporting of budget expenditures is a method of keeping track of outlays of government-owned funds over time. Many students of public finance believe that this series, compared to the other available measures, gives a better device for aiding in the management of government use of resources, especially for the long view.59 In studying the costs of government programs, it is not often material whether wages are paid in full or retirement deductions are made or whether interest on the public debt is paid to the public or to govern- ment trust funds. Gerhard Coim, on the other hand, states that "Adding up these administrative accounts does not necessarily give any meaningful totals." 60 Coim may be correct from the viewpoint of economic analysis. However, the series on budget expenditures contains the transactions of the governmental programs which are amenable to control through the appropriations process and hence, it is of value for budgetary review purposes. From a purely fiscal standpoint, it is the budget surplus or deficit, based on budget expenditures and its counterpart series, budget re- 57 19~2 Budget, op. cit., Special Analysis D, pp. 997-1007. 5S "1954 National Income Supplement," op. cit., p. 146. ~` C. Lowell Harriss, "Government Expenditure: Significant Issues of Definition," Journal of Finance, December 1954, p. 354. ~° Gerhard Cohn, "Fiscal Policy and the Federal Budget," (in Max F. Milllkan,ed. Income ~Siabilization for a Developing Democracy, New Haven, Yale University Press, 1953) p. 209. PAGENO="0275" ECONOMIC EFFECT OF VIETNAM SPENDING 633 ceipts, which causes changes in the total of the public debt and in the Government's cash balances. Trust account surpluses or deficits, on the other hand, merely alter the proportion of the public debt held by these accounts.6' All expenditure series, including the coiiventional budget measure, exclude the effects of such important fiscal actions as guarantees of private loans, and commitments or contracts to make either future payments of benefits or to purchase goods and services. FEDERAL GOVERNMENT PAYMENTS TO THE PUBLIC The series on Federal payments to the public is often termed the "consolidated-cash" budget because it combines budget expenditures with the expenditures of other funds and eliminates transactions not involving the flow of cash from the Government. However, this series and its counterpart, Federal receipts from the public, do not comprise a budget but are a financial statement in the budget document and are generally based on the materials available in the detail of the budget.62 Coverage. The government transactions in this series include, in addition to those of government-owned agencies and enterprises (which are included in budget expenditures), the funds which the Government holds in trust 63 and the operations of government- sponsored enterprises (except the Federal Reserve and Postal Savings Systems). The major funds for which the Federal Government acts as trustee are the old-age and survivors' insurance fund; the railroad retirement fund; the veterans life insurance funds; and the civilian government employees retirement funds. The disbursements of these funds are primarily transfer payments to individuals covered under the various social insurance systems.°4 The government-sponsored enterprises include those in which the Federal Government has had a share of ownership from time to time: the banks for cooperatives, the Federal home loan banks, the Federal land banks, and the Federal Deposit Insurance Corporation. Basic of measurement. Unlike the budget expenditure series which is on a "checks issued" basis, the cash payments series is on a "checks paid" basis. This transition is accomplished through adding in the total for the clearing account for outstanding checks, which adjusts for the checks which have been issued but not yet cashed. In determining the cash totals, the total of budget expenditures is added to trust expenditures, and a number of adjustments are made. Table 9 shows the major adjustments, including deduction of intra- governmental transfers and non-cash transactions, which must be made in arriving at the cash total. 61 Certain other factors affect changes in the public debt and cash balances, such as direct borrowing from the public by Government enterprises and changes in the trust funds uninvested working balances. 62 1958 Budget, op. cit., "Special Analysis A," pp. 979-982. 63 Note the comment of the Committee for Economic Development: "~ * * if we want to weigh the effects of the budget upon private purchasing power, total demand, employment and prices, the budget must in. elude these important collections and payments." Taxes and the Budget, New York, CED, 1947, p. 18. 64 The Federal-aid Highway Act of 1956 established a highway trust fund to which receipts from designated highway-related excises are deposited and from which grants to the States are made. The extent to which these funds are not government-owned but are held in trust is rather questinoable. The operation of this trust fund is closer to that of programs financed by earmarking budaet receipts. PAGENO="0276" 634 ECONOMIC EFFECT OF VIETNAM SPENDING TABLE 9.-Derivation of Federal Government payments to the Public, fiscal year 1960 [In bifflons] Descriptio'n Amount Budget expenditures 376. 5 Trust fund expenditures 21. 8 Expenditures of government-sponsored enterprises . 5 Less: Intragovernmental transactions 4. 1 Non-cash debt transactions (net) 4 Federal Government payments to the public 94. 3 Source: 1662 Budget, op. cit., p. 081. Major intragovernmental transfers which are eliminated are budget and trust payments to Treasury, such as interest paid by govern- ment corporations; budget payments to trust funds, such as the interest paid on United States securities held by trust funds; and trust payments to other trust funds, such as the payment made by the District of Columbia to the. civil service retirement fund. Accrued budget expenditures in the form of increases in public debt are also eliminated. The most important such adjustment results from the savings bond program where semiannual increases in redemption value occur during the life of the bonds and are cur- rently reflected in budget expenditures. A single dash payment of interest is made when the bond is redeemed, involving no additional budget dxpendittires; A: cash payment~ however, is then recorded for all of the intetëst earned. Changes ~n concepts No major corcept~ al re~ isions ha~ e been made in this serie~ since 1947. A few changes have been made to reflect similar change~ which have been made in the concept of budget expenditures such as in the method of handling refunds of receipts. A companion series prepared by* the Treasury Department, cash income and outgo, has undergone extensive revision. Prior to the 1954 change in Federal reporting, cash outgo was identical with cash payments, and Cash income differed from Federal receipts from the public only by seighiorage on silver, which is cash income from the viewpoint of the U.S. Treasury but is not a receipt from the public. Since the change, the Treasury cash series has been titled "Cash Deposits and Withdrawals" and is computed from the viewpoint of the Treasurer of the United States. Under this concept a transfer of funds from the Treasurer's account to the account of a government corporation with a commercial bank is recorded as a cash withdrawal. A payment by a government corporation to a private individual or to a business firm from such "outside" checking account is not in- cluded in cash withdrawals. In contrast the Budget Bureau series refers to payments to the public regardless of whether these trans- actions are carried on through accounts of the U.S. Treasury or through government agency accounts with commercial banks. The net difference between these two series is slight. Payments to the public in 1960 were $94.3 billion compared to cash withdrawals of $93.5 billion. 65 Types of payments included. Despite the various adjustments made in converting from the conventional to the cash basis, the meas- ure of payments to the public is stifi essentially just as heterogeneous in coverage. From the viewpoint of gauging economic effects, the 631962 Budget, op. cit., p. 082. PAGENO="0277" ECONOMIC EFFECT OF VIETNAM SPENDING 635 two main improvements over the conventional series are the elimina- tion of intragovernmental and non-cash transactions and a more complete coverage of transfer payments through inclusion of the trust funds. Role of the cash series. It is generally agreed that the series of Federal payments to the public is the most useful available measure of the total flow of money, excluding borrowing, from the Government to the public. Blarriss concludes that "For studying the effects of fiscal action on the economy in the short run, the cash figures are most significant." 66 The difference between the Government's cash position and its budgetary position varies from year to year, the cash position usually appearing more favorable. The gap between the two methods arises largely from the operations of the trust funds. The largest trust funds are social insurance accounts which are currently accumulating reserves to meet future benefit payments and are expected to do so for many years. The value of the cash payments series in analyzing economic impact is subject to similar limitations as budget expenditures, as pointed out in the official explanation of the cash statement: * * * many Government activities besides receipts and expenditures have a bearing on the economy. For example, a rapid expansion in new appropriations and in Government orders could stimulate a rise in business activity long before the authorized funds were paid to the public. Federal guaranties and insurance of private loans may also affect activity in the economy, even though they nor- mally entail relatively small Government expenditures.67 FEDERAL PURCHASES OF GOODS AND SERVICES The Federal Government component of the gross national product is Federal purchases of goods and services. Coverage. The various agencies of the Federal Government are included in this measure, to the extent that their expenditures are for the acquisition of current output. The current accounts of government enterprises, however, are included in the business sector, and are shown as a deduction from GNP in computing national income. Only the capital formation of government enterprises is included in :~overnment purchases of goods and services. The main reason for ~this treatment is to avoid classifying current business-type expenses of the Government as final purchases. It is admitted that this is "not more than a convenient means" of disposing of this conceptually indefinite but quantitatively small item in the income accounts. An indication of basic dissatisfaction with this ad hoc solution is the Commerce Department's conclusion that if government enterprise operations were to assume greater importance in the United States economy, "it is entirely possible that some modification of their treatment in the national income accounts would be called for." 68 The definition of government enterprises in the income accounts differs from that used in the other series that have been discussed. Included here as government enterprises are business-type activities whose expenditures are reported gross in the budget document and whose receipts from operations are included on the receipts side. On 86 Harriss, op. cit., p. 354. 67 1962 Budget, op. cit., p. 082. 68 "1954 National Income Supplement," op. cit., p. 49. PAGENO="0278" 636 ECONOMIC EFFECT OF VIETNAM SPENDING the other hand, the Federal land banks are excluded because the Federal Government no longer has any financial interest in the banks. Basis of measurement. Except for the treatment of government enterprises considered above, all purchases of currently produced goods and services by government agencies are considered to be final products and hence enter into the final output of the economy. The reasoning rests mainly on the fact that the general government is an ultimate buyer in the sense that it does not buy for resale in the market and, accordingly, its purchases are not elements of cost in the value of other output produced for the market.69 This rationale omits any reference to the extent to which govern- ment goods and services actually do enter into the final product which business firms produce. According to Hicks, some part of the government output is not final product but "plays its part in produc- tion by facilitating the production of other goods (maintenance of law and order, roads used for business purposes, and so on). To reckon this as well as the goods whose output is facilitated would~ involve double counting." 70 To report government transactions consistent with the correspond- ing payments and receipts recorded for the business sector an ad- justment is made to an accrual basis to reflect generally the time of delivery rather than the time of payment. This adjustment repre- sents the net increase in accounts payable to business, less the net increase in outstanding advances and prepayments by the Federal Government, a~s computed from a number of sources including the~ surveys of corporate working capital by the Securities and Exchange Commission. Charges in concepts. Until 1946, both government and private interest payments on debt were considered to be income according to the concepts underlying the official national income statistics of the United States. In that year, Federal interest payments on the public debt were excluded from government purchases of goods and services and treated as transfers. The reasoning behind this change was that the Federal debt has come into existenc.e prnnarily in connection with the financing of wars and the interest payments therefore do not reflect the acquisition of current output. The earlier treatment considered these payments as return to government bondholders for the use of their money, parallel- ing the treatment of interest on private indebtedness.7' A number of students of public finance have questioned the change. Earl Roiph states that it is "not obvious" that the differences be- tween government debt and private debt are such that they justify such a radically different treatment of interest payments.72 Roiph shows that there is an inconsistency between treating government interest expenditures as transfers and the usual definition of what constitutes a transfer payment: The crucial negative feature of the definition--that transfer income is not in return for services or products-appears to be generally held, whether the defi- nition is stated as "no contribution to social product", "no specific quid for the specific quo rendered", or a failure to "enhance the production of econonic vnlues".' ~5 MiitOU GltI)ert anil others. "Obkctives of Yational inconse Mearurement: A Reply to Proiesso~ Knznets,' Poviezr of Economic Stoti~iic.s. .-\ucust 1943. t~. 133. 70 1. H. Hicks, "The \~aluation of the Social Income," Econoinica, May 1940, p. 118. 71 Gilbert and others, op. cii., pp. 192-493. - 72 Earl R. Rotoh, The Theero of Bisect Economico, Berkeley and Los Angeles, University of Catifornia Press. 1954, P. 59. `3 Rid, p. 58. PAGENO="0279" ECONOMIC EFFECT OF VIETNAM SPENDING 637 Proponents of the change claim the practical value of not increasing the Federal component of GNP simply because the government borrows ftmds to finance its operations and, in the opposite instance, of not decreasing Federal purchases of goods and services whenever the Government retires debt (and hence reduces the volume of its interest payments) ~ Types of payments included. Federal purchases of goods and services consist of the output of the Federal Government sector and that part of the output of the private sectors that is purchased by the Government. The output of the government sector is measured by the wages and salaries of general government employees plus certain supplements paid by the Government as employer. The category of general government employees includes both military and civilian personnel but excludes the employees of government enterprises, whose current transactions are covered in the business sector. Supplements to wages and salaries cover such items as the Government's contributions to the retirement funds for its employees. A number of significant types of government spending are not included in Federal purchases of goods and services. Some of them, however, are included in other parts of the national income accounts. For example, grants-in-aid to State and local governments are included with the outlays of those lesser jurisdictions; transfer and interest payments are included in personal income; and subsidies (including the current deficit of government enterprises) is an adjustment item used in computing national income from GNP. A total of Federal expenditures "onincome and product account" can be built up using all of these components of government spending. (See table 10.) Although such a tabulation may be helpful for certain limited pur- poses, it is not as generally used a measure of government spending as are Federal purchases of goods and services. TABLE 10.-Federal expenditures on~ income and product account, fiscal year 1960 [In billions] Description Amount Purchases of goods and services $54. 0 Transfer payments 21. 9 Interest 6. 1 Subsidies pius the current deficit of government enterprises 3. 5 Grants-in-aid to state and local governments 6. 5 Federal expenditures 92. 0 Source: U.S. Congress, Joint Economic Committee, Hearings on January 1959 Econonsic Report of the President, Washington, Government Printing Office, 1959, p. 148. There are other types of Federal spending which do not appear in any of the income accounts, such as transfers of funds between different government agencies, financial exchanges, and purchases of existing assets. An exception to this treatment is the price support loans made by the Commodity Credit Corporation. These are counted as purchases for inventory under the assumption that the loans are a preliminary step to the subsequent purchase. Role of the series on Federal purchases of goods and services. The value of this series is derived primarily from its being a component of GNP. As used in analyses showing what constitutes the composi- tion of demand for the final output of the economy, Federal purchases 7' Gilbert and others, op. cit., pp. 192-193. PAGENO="0280" ~638 ECONOMIC EFFECT OF VIETNAM SPENDfl~G of goods and services indicate the portion taken up by the Federal government. This is similar to personal consumption expenditures which represent the proportion of final product (other than housing) going to consumers and gross private domestic investment which represents the amount going to the business sector. THE RELATIONSHIPS AMONG THE THREE SERIES Table 11 shows the interrelationships among the series on budget ~expenditures, Federal payments to the public, and Federal purchases of goods and services. As can be seen, purchases by general govern- ment agencies of currently produced goods and services are included in all three series. The bases of measurement differ somewhat. The budget series is essentially on a checks-issued basis, the cash series on a checks-paid basis, and the purchases on a delivery basis. TABLE 11.-Types of Federal Government spending included in 3 currently used series Type of spending Series in which included Budget expenditures Cash payments Purchases of goods and services ~Purchases of goods and services by general Government agen- cies `Wholly-owned Government enterprises: Capital outlays Current outlays - Transfer payments (including Interest): Prom budget accounts Prom trust accounts Grants-in-aid LSubssdies purchasesofexistingassets Pinancial exchanges - Intragovernmental transfers and noncash transcations -Expenditures of government-sponsored enterprises: - Federal land banks FHLB's, FOlD, banks for cooperatives X X X X X X X X X X X X X X X X X X X X X. X. X. - The following categories are included in both the budget and cash ~measures but excluded from the Federal component of GNP; transfer payments from budget accounts, grants-in-aid to State and local governments, subsidies, current outlays of wholly owned government enterprises, purchases of existing assets, and financial exchanges, such as loans. Transfer payments from trust accounts and the expenses of the Federal land banks are only included in the cash series. Intragovern- mental and noncash transactions are only included in budget expendi- tures. Common shortcomings of the three series. Despite the differences in the scope of transactions covered, all of the three series are closely connected. They are all variations of budget expenditures and generally measure the flow of the government spending process at its tompletion, when production is finished and delivery or payment is made. Contrasted to this general uniformity of measurement, Federal spending is, as has been demonstrated in earlier chapters, a process, a flow of financial activity; "expenditures" or "payments" or "pur- chases" represent just one point among many in an often lengthy PAGENO="0281" ECONOMIC EFFECT OF VIETNAM SPENDING 639 series of actions. Tinder some circumstances, attention should be focused on the earlier phases of the spending process in order to ade- quately gauge or understand the economic impact of a government spending program, particularly one involving goods and services produced in the private sector. Aside from the availability, one of the main reasons why the three "expenditure" measures can be so generally employed is that during a period of stability or little change in government operations, they are quite satisfactory. When the composition and level of government programs are stable, the length and complexity of the Federal spending process can usually be safely ignored. The current levels of authoriza- tions granted, contracts let, production performed on government account and Federal expenditures incurred are all approximately the same for a given procurement program and any expenditure series is generally adequate to measure the impact on the economy. As noted earlier, none of the measures of the early stages of the Federal spending process-such as the granting of spending authority or the making of commitments to spend-are among the economic series or indicators in current usage. It is the thesis of this study that such measures are of distinct importance to economic analysis and that their current absence is a gap in our knowledge. The following chapter is devoted to methods of preparing such series. MEASURES OF THE VARIOUS PHASES OF THE GOVERNMENT SPENDING PRocEss It is the purpose of this chapter to examine the availability of series on the government spending process and on the problems involved in filling existing gaps. NEW OBLIGATIONAL AUTHORITY The annual budget document shows new obligational authority for 3 years: the fiscal year most recently completed, the current fiscal year, and the following fiscal year. The latter two figures are, by their very i~ature, ex ante estimates. No estimates are prepared on a. monthly or quarterly basis. The absence of monthly or quarterly totals of new obligational authority may not be very important ordinarily due to the annuality of the appropriation cycle. The bulk of the funds for a given year are appropriated within a period of a few months around the beginning of the fiscal year and, hence, it is the differences in the annual totals for consecutive years or between the amount requested and the amount approved which are significant. In case of sudden and large changes in government spending programs, howevei~, the timing of specific grants of authority may be important, particularly in gaging the impact on business and consumer anticipations. The reported figures on new obligational authority exclude the oper- ations of the trust funds and the government-sponsored corporations,. whose transactions are not included in budget expenditures. How- ever, they include all major changes in government spending programs affecting current output. The trust funds primarily disburse transfer payments and the sponsored enterprises primarily engage in banking and in insurance activities. These activities do not require annual congressional grants of new obligational authority, and they give rise to little anticipatory effects on the economy. PAGENO="0282" 640 ECONOMIC EFFECT OF VIETNAM SPENDING OBLIGATIONS INCURRED There is no currently available, regularly issued series on the total obligations being incurred by Federal agencies. Since January 1958, this information has been made available annually in the budget document. The reporting lag is quite serious. Actual figures for a given year are not available until more than 6 months after the close of the year. Also, no monthly or quarterly breakdowns are prepared. Annual series. Table 12 contains the figures for this series, as well as the series on new obligationa.l authority and expenditures. Not all the obligations incurred will result at a later date in budget expendi- tures. The obligations of business-type enterprises such as the Post Office, which are reported "gross," are offset in good measure by the receipts from the sale of postage stamps, etc.; only a portion of the obligations actually result in net expenditures. TABLE .12.-Measures of the Government spendc~ng process [In billions of dollars] Fiscal year ~ New obligational authority OblIgations incurred Expenditures 1950 49.3 82.9 91.4 80.3 62.8 57.1 63.2 70.2 76.3 81.4 79.6 44.1 83.1 104.6 85.6 65.7 74.7 80.3 69.0 73.9 80.6 75.3 39.5 44.0 65.3 74.1 67.5 64.4 66.2 69.0 71.4 80.3 76.5 1951 1952 1953 1954 1055 195) 1957 1958 1959 196') Source: 1962 Budget and earlier budget documents, and U.S. Bureau of the Budget, tabulations of obliga- tions by object. Although the relationship is not precise, it can be seen that often increases in the amount of new obligational authority granted by the Congress from one year to the next may lead to significant increases in the level of obligations incurred in that year or the next year and in actual expenditures in the following year. The experience during the period 1950-53 is a case in point which will be elaborated in the following chapter. Quarterly series. Federal agencies furnish reports, generally at monthly intervals, showing the cumulative amount of obligations incurred under each appropriation account since the beginning of the fiscal year. These reports are received by the Bureau of the Budget on an individual appropriation account basis, No attempt currently is made to review this measure of the progress of govern- ment programs on an aggregate rather than a piecemeal basis, In earlier years, the Treasury Department issued monthly report, popularly known as the "White Book,"75 showing the total amount of obligations incurred by Federal agencies. This publication was discontinued after the June 30, 1949, issue. On the basis of a number of available sources, the writer has pre- pared a rudimentary series showing Federal Government obligations incurred, by quarters. This series is presented essentially for illusta- tive purposes, More exact series could be prepared by the Govern- ~5 U.S. Treasury Department, Financial State'mcnts Relating to the United States Gorernment, Obligations, Expenditures, and Balances under Appropriations and Contract Authorizations, Washington. PAGENO="0283" ECONOMIC EFFECT OF VIETNAM SPENDING 641 ment, provided that the agencies involved are directed to do so. The derivation of the quarterly obligations series is as follows: 1. Department of Defense (military functions) and foreign military assistance. The obligaton figures for this category were obtained from the Department of Defense release, Monthly Report on Status of Funds. Although the concept of "obligations" used in the Status of Funds report is not precisely the same as that in the budget document, the annual totals are fairly close and the conceptual differences are relatively minor.76 This report covers almost half of the total annual obligations to the Federal Govern- ment in recent years. 2. Interest. The figures for this category were obtained by using the data on budget expenditures for interest reported in the monthly Treasury Bulletin. This could be done because interest payments on the public debt are recorded both as budget expenditures and as obligations when the payable interest accrues rather than when cash actually is paid. This category covers approximately 10 percent of the total annual obligations at the present time. 3. All other programs. For historical periods, the annual obli- gations figures (other than interest and defense) can be converted to quarterly estimates by reference to the seasonal patterns which Federal procurement activities have generally followed through the years. rfhere is usually a high rate of obligating during the first few months of the fiscal year as the agency commits its new funds for the programs which it has already planned. A downturn in ordering usually takes place in the fall and carries through until the spring. A sharp increase in obligations occurs in the closing months of the fiscal year, due in part to the desire of agency officials to fully obligate* their funds by the close of the fiscal year to avoid "losing" unobligated funds. Ordinary prudence would dictate to an administrative official that he maintain, in effect, an emergency fund for unforeseen contingencies by holding up until the end of the fiscal year outlays for certain desir- able but postponable items. This assumed seasonal pattern of Federal purchasing has been affirmed by the limited studies which have been made on the subject. An analysis of government purchasing for the Temporary National Economic Committee noted the concentration of government purchase orders in the latter part of the fiscal year l938.~~ In his study of military procurement during World War II, John Perry Miller noted the tendency for the award of contracts to be "heavy" in the second quarter of each calendar year (the last 3 months of the fiscal year). He states that this was clearly a reflection of the desire of the agencies to commit funds before the end of the fiscal year to avoid the lapse of unobligated amounts.78 The monthly obligation series for the last several fiscal years reported by the Treasury White Book also generally support the hypothesis. An analysis of the White Book renders the following 7' For example, the Status of Funds report list obligationsincurred by the Department of Defense (military functions) in the fiscal year 1954 as $30 billion, while Budget Bureau worksheets incidate $32 billion for the same period. ~` ci~ c. Linnenberg and Dana M. Barbour, Government Purchasiny-An Economic commentary Temporary National Economic committee, Monograph No. 19, Washington, Government Printing Office, pp. 144-145. "Miller, op. cit., p. 2.5. PAGENO="0284" 642 ECONOMIC EFFECT OF VIETNAM SPENDING quarterly distribution of the non-defense, non-interest obligations of the Federal Government.79 Percent 1st quarter 28 2d quarter 18 3d quarter 25 4th quarter 29 Total ioo The above percentages have been applied in order to obtain a quarterly distribution of non-defense, non-interest obligations for the fiscal years 1951-1956. The results are contained in Table 13. TABLE 13.-Obligations incurred by the Federal Government, by quarters [Fiscal years; in billions of dollars} 1951: 1st 2d Year and quarter Defense Interest Other Total 4th 1952: 8.6 8.7 16. 1 16.3 1.1 L 3 1.2 2.0 49.6 7.8 5.0 7.0 8.1 5.6 17.5 15.0 24. ~ 26. a 27.9 3d - 4th Total 1953: 1st 91 13.0 13.0 15.3 20.6 83.1 1.1 1.7 1.1 2.0 61.9 10.3 6.6 9.2 10.7 5.9 24. 4~ 21.3 25.6 33.3 104.6 36.8 16.8 10.4 10.8 8.5 1. 1 1.9 1. 1 2.4 4th - Total 1954: 1st 2d 3d 4th - TotaL 1955: 9.1 5.9 8.2 9.4 46.5 6. 5 27.0 18.2 20.1 20.3 85.6 32.6 6.5 6.0 6.9 10.5 1.0 1.8 1.2 2.4 8.2 5.3 7.4 8.5 29.9 Tnthl 6.4 15.7 13.1 15.5 21.4 65.7 29.4 8.0 8.7 8.5 10.1 1956: 1st. 2th. 3th. 1.1 1.9 1. 1 2.3 35.3 9.2 5.9 8.3 9.6 6.4 18.3 16.5 17. 9~ 22.0 74.7- 33. 0 6.4 9.4 10.7 14.0 1.7 1.7 1.8 1.7 40.5 9.2 5.9 8.2 9. 6 6.9 17.3: 17.0 20.7 25. a 80. a 32.9 Source: Table 12; Office of the Comptroller of the Department of Defense, table dated August 26, 1953; Monthly Report on Status of Funds by Budget Category, June 30, 1956, P. 33; Treasury Bulletin, August issues, 1951-1956, p. 3. Although different assumptions as to the precise quarterly distribu- tions would have yielded different figures, the orders of magnitude and the direction of movement would be essentially similar. However, the important movements-both expansions and contractions- 7~ U.S. Treasury Department, op. cU, issues for June 30, 1946-Jpne 30, 1949. PAGENO="0285" ECONOMIC EFFECT OF VIETNAM SPENDING' 643 during this* period were taking place in the defense programs. In future periods, movements in non-defense programs may be the dominant feature in Federal spending patterns, and the rough ap- proximations used here might not suffice so readily. PRODUCTION ON GOVERNMENT ACCOUNT In order to measure the production in the private sector on govern- ment account, a breakdown is needed in the current reports on busi- ness inventories showing how much relates to private orders and how much to government orders. Such information is not now available. It would be difficult to obtain a breakdown of inventories between "government account" and others. Large amounts of equipment ordered by the Government are made in the same plants as producers' equipment and often from similar parts or materials. Many goods purchased by the Government are similar to or identical with civilian goods and are often made alongside them, with orders sometimes filled with common stocks. Problems would also be encountered in con- nection with subcontractors who are not always aware of the nature or destination of the final products into which their output is incor- porated. A limited attempt at measuring the amount of government-ordered production can be made through the use of the quarterly reports on the financial position of American corporations, which are jointly prepared by the Federal Trade Commission and the Securities and Exchange Commission. These reports, in presenting a consolidated balance sheet of corporations, show the amounts receivable by business from government and the amounts advanced by government, usually in `the form of progress payments. These figures can be taken as a rough indication of the amount of production which has been com- pleted and not yet paid for. A number of companies do not list receivables from the Federal Government separately in their report. 80 Second, the receivable items measure a later stage of the process than is desired. They represent the completion of a certain amount of productive effort from the accountant's viewpoint of liability ivhile the ideal measure would be the actual amount of production being carried on and the actual amounts being paid to the factors of production. Finally, in the case of continuing or "followon' orders, the levels of inventories add receivables remain fairly constant over an extended period, although considerable amounts of production are carried on and completed. Nevertheless, this series provided a helpful indication of the amount of production currently being performed on government account in World War II. For example, at the outset of the defense program in December 1939, receivables from the Federal Government of 1,228 registered corporations were only $21 million. On December 1941, the time of the attack on Pearl Harbor, these receivables were only $525 million. However, by December 1943, the peak period of war production, `they had risen to $4.1 bfflion. As of December 1944, these receivables totalled $3.8 bfflion and by June 1945 they had declined to $3.3 bffiion.8' 80Many companies have complained that they have difficulty in obtaining reports from the Government as to what their receivables are (accounts payable on the Government's books). Carman G. Blough, "Confirmation of Government Receivables," Journal of Accountancy. October 1955, p. 69. 81 Securities and Exchange Commission, Working Capital of 1228 Registered Corporations, released dated Dec. 5, 1945, Washington. PAGENO="0286" 644 ECONOMIC EFFECT OF VIETNAM SPENDING The fluctuations in this series in recent years have been on a smaller scale. For example, this series shows, to a limited extent, the buildup of private work on government orders during the Korean mobiliza- tion. Net receivables from the Federal Government increased by $800 mfflion during the fiscal year 1952 and by an additional $300 mfflion during the following year. In the fiscal year 1954, the trend was reversed and those receivables declined $300 mfflion. An addi- tional decime of $300 mfflion was registered during the following year. 82 These movements correspond to the general sequence of the Korean military procurement cycle, but the amplitude of the fluctuations registered are so small as to make the series of very restricted useful- ness. PAYMENTS FOR GOVERNMENT GOODS AND SERVICES The measures of the final stage gf the government spending process are the most highly developed and most frequently employed. The series on budget expenditures is reported in the Monthly Statement of Receipts and Expenditures~ issued by the Treasury Department. Estimates, on a fiscal year basis, are contained in budget documents and midyear budget reviews. Historical data are contained in the budget document and in the monthly Treasury Bulletin. The Treasury version of the cash-consolidated statement appears each working day in the Daily Statement of the united States Govern- ment. The Budget Bureau series, Federal payments to the public, appears monthly in the Treasury Bulletin. Estimates on a fiscal year basis are contained in the budget document and in the midyear review of the budget. Historical data are contained in the Statistical Abstract of the limited States for the Budget Bureau series and in the Treasury Bulletin for the Treasury series. Federal purchases of goods and services are reported quarterly by the Department of Commerce. The more inclusive measure, Federal expenditures on income and product account, appears in the annual national income number of the Survey of Ourrent Business. Historical data for these series are contained in the "1954 National Income Supplement" and the national income numbers of the Survey. Compared to the indicators of the earlier stages of the government spending process, the various measures of government payments are readily available and, hence, widely used and analyzed. Although there undoubtedly are a number of refinements which would be helpful to the analyst, these measures have been used over a comparatively long period of time and many of the "bugs" have been worked out and the uses and limitations identified as reasonably as could be expected. Accordingly, the present study has focused on filling the major gaps in the measures of the government spending process, rather than on developing minor improvements in the "expenditure" series. AN ANALYSIS OF HISTORICAL EXPERIENCE, 1950-1954 The defense mobilization program upon which the United States embarked at the outbreak of fighting in Korea in 1950 furnishes an excellent example of how the responses to the various phases of a new government spending program work themselves out through the economy. The Korean incident began in June 1950, as the American econ- omy was recovering from the recession of 1949. An indication of the 82 U.S. Securities and Exchange Ccmmission, releases on working capital of U.S. corporations. PAGENO="0287" ECONOMIC EFFECT OF VIETNAM SPENDING 645 outlook immediately prior to the Korean outbreak is furnished by a contemporary analysis: Expansion in economic activity continues to be reflected in the major economic series, with rising production requirements tending to advance prices of many important industrial raw materials in recent weeks. Employment has contin- ued to move ahead in response to the basic trend of business * * ~. The fun- damental characteristic of the current uptrend in the business cycle continues to be the sharp expansion in investment.83 RAPIDLY EXPANDING ECONOMIC ACTIVITY: FISCAL YEAR 1951 The first year of the Korean effort-the fiscal year 195 1-proved to be a period dominated by anticipatory actions of consumers and businessmen, engendered by a military campaign whose ultimate scope they could only dimly guess. On the military production front itself, this was a period of formulating strategy and plans, making ready, and tooling up. In the first phase of transition to the defense program, a sharp and abrupt shift upward in business and consumer expectations began concurrently with the international developments which gave rise to the change of military policy. "h * * the public reacted very much as if in expectation of a World War JJ~[" 84 Consumers bought most heavily commodities which had suffered quality deterioration in World War II. The larger volume of consumer buying contributed to increased demand all along the line. Distributors' orders mounted as they attempted to maintain or build up stocks. Manufacturers' orders for raw and semifinished materials also rose substantially. Because there was little slack in the economy at the time, the effect upon prices and retail trade was prompt and vigorous. The Bureau of Labor Statistics wholesale price index jumped from 100.2 in June 1950 to 103.2 in July, and to 107.1 in September. Similarly, the consumers' price index rose from 101.8 to 104.4 during this period.85 With the exception of the decontrol period following the close of World War II, this was described as "the most rapid and the most widely pervasive inflationary movement" in recent American history. 86 The general inflationary movement which gripped the economy dur- ing the quarters immediately following the Korean outbreak was un- accompanied by any significant increase in the volume of actual pro- duction on defense orders. Although near capacity operations were maintained in industries producing raw and semifinished materials, "on the whole defense output continues to represent a small fraction of the volume of total production." 87 In July 1950, the President requested supplemental defense appro- priations of $10.5 billion.88 The figure was increased by early August to more than $15 billion to provide for heavier expenditures under the Mutual Defense Assistance Program and for additional naval air- craft. There was much speculation at the time as to the ultimate levels of defense spending. The following is an example of the more restrained reaction: 83 Survey of Current Business, June 1950, p. 1. ~` I. Frederick Dewhurst and Associates, America's Needs and Resources: A New Survey, New York, Twentieth Century Fund, 1955, P. 15. 85 "1955 Statistical Supplement," Survey of Current Business, pp. 26-27 (base of 1947-49=100). ~ U.S. Congress, Joint Committee on the Economic Report, Inflation Still a Danger, Washington, Gov- ernment Printing Office, 1951, pp. 12-13. 87 Survey of Current Business, November 1950, p. 3. 88 Message to the Congress of July 19, 1950. PAGENO="0288" 646 ECONOMIC EFFECT OF VIETNAM SPENDING (The rate at which we rearm) will obviously be greater than the $31 billion that, as of mid-August, the administration has asked for fiscal 1951. Would it come to $50 billion? Probably `~` * * In any case, a rearmament program of much *greater proportions than the President had announced by the middle of August was clearly needed and is probably coming.8° The Harvard Bwsiness Review contained a guess of "$50 billion or $60 billion" as the ultimate rate for military expenditures.9° In September, supplemental military appropriations of $17.8 bfflion were enacted and, on the same day, the Revenue Act of 1950 ivas passed, forecasted to yield an additional $5.8 bfflion in Federal receipts at calendar year 1951 income levels.91 Also in September the Congress approved the Defense Production Act which authorized .a broad program of production and stabilization controls. A contemporary report illuminated the impact on the economy of government action during this period: Since the Korean attack, the stepped-up defense program has been the basic influence in the expansion of business activity. For the most part the principal effects have been anticipatory, growing out of the projected expansion in Govern- ~ment spending in the year ahead.92 Federal expenditures remained fairly stable during the fiscal year 1951. The automatic stabilizers tended to have the immediate effect of reducing nonmilitary Federal spending. Also, receipts increased substantially as a result of higher incomes and tax rates. The administrative budget yielded a $3.5 billion surplus in 1951 while on a cash basis the surplus was $7.6 billion. In contrast, the total amount of new obligational authority granted for the fiscal year 1951 increased 68 percent, rising from $49.3 billion in 1950 to $82.9 billion.93 The amount of military orders and contracts let was virtually unchanged until the third quarter when it almost doubled, rising to $16.1 billion. Contract letting was maintained at that rate for the final quarter of the year. The total amount of contracts let and other ~obligations entered into by the Federal agencies almost doubled in ~the first year of the Korean mobilization program, rising from $44.1 ~bihion in 1950 to $83.1 billion. The interplay during fiscal 1951 of the opposing tendencies of the various phases of the Federal spending process was clearly brought out in the following comment on this period by the Joint Committee on the Economic Report: The ineffectiveness of the governmental cash surplus, normally a deflationary ~force, was, in large part, atrributable to anticipatory forces on the inflationary -side arising from the current or expected placement of orders for future deliveries.94 GNP rose each quarter of fiscal 1951, for a total increase of 19 percent over 1950. Consumer expenditures declined in the second quarter, subsequent to American victories against the North Koreans. ~Consumer spending rose again in the third quarter during the buying spree following the adverse turn of events in Korea in December 1950 when the Chinese Communists entered the conffict. Inventory accumulation continued through the year while total private fixed U Fortune, September 1950, PP. 69-70. 90 Ernest A. Tupper. "Guideposts to Industrial Mobilization," Harvard Business Review, November 1950, p. 41. 9' U.S. Secretary of the Treasury, Annual Report on the Slate of the Finances for the Fiscal `ear Ended June 50, 1951, Washington, Government Printing Office, 1952, pp. 44-45. 92 Surreg of Current Business. November 1950, p. 1. 93 Budget of the United Slates Government for the Fiscal Pear Ending June 50, 1954, Washington, Government Printing Office, 1953, p. M6. (Hereafter referred to as 1954 Budget..) ft U.S. Congress, Joint Committee on the Economic RepDrt, National Defense and the Economic Outlook .s~r the Fiscal year:1953. Washington, Government Printing Office, 1952, p. 49. PAGENO="0289" ECONOMIC EFFECT OF VIETNAM SPENDING 647 investment remained steady. After a slow start, Government pur- chases also began moving upward. The fiscal year 1951 furnishes an example of the possible economic importance of the early steps in the Federal'spending process. In the face of a budgetary surplus, the announcement of and authorizations and contracting for the Korean mobilization program set off the tremendous expansions in the economy that occurred during the year. As will be shown, the following year-the period of the actual major increase in Federal defense expenditures-was one of comparative stability in the American economy. By the time the peak in expendi- tures actually occurred, the necessary production facilities had already largely been put in place and had produced much of the output con- tracted for. The long awaited boom in Federal spending was in good measure discounted m advance-mainly in the fiscal year 1951 RiSiNG MILITARY PRODUCTION: FISCAL YEAR 1952 The second year of the Korean war-the fiscal year 1952-was a time of rapid increase in defense outlays. This was the period when the newly built production lines began to turn out completed military items in significant quantities. However, as the military situation in Korea greatly improved, consumers soon realized that the supply and price situation was not worsening either as much or as rapidly as they had originally feared. `It was apparent that world war III was not in the offing. Personal saving rose, to 9 percent of disposable income in the first half of the year from a low of 2.7 percent in the first quarter of fiscal 1951. Retail sales slackened off appreciably. ,Continued expansion in defense outlays tended to be offset in part by `d~eclines, in' private investment. ` Gross national product continued its quarterly rise, although at a slower pace than the previous ~rear. The net' expansion was' primarily in. .the defense sector,, as civilian output (GNP excluding defense pur- chases of `goods and services) fluctuated between $290 billion and $293 billion a quaitei `it seasonally adjusted annual rates Defense pur- chases increased almost 20 percent from the first to the fourth quarter of the year. ` New obligational authority granted by the Congress for major national security programs totaled $72 7 billion in 1952, an increase of 14 percent over the previous year ~ Also the peak in contract letting and other forms of obligating defense funds was reached in 1952. Although the `military obligation rate `was lower in the first three quar- ters of the year than in the record second half of fiscal 1951, the yearly total of $61.9 billion was the high for the entire Korean effort. The beginning of fiscal. year 1952 saw the industrial economy emerging from the "tooling up" stage on many military items and crossing the threshold of the period of volume production ot hard goods. At the end of the first quarter, the Director of Defense Mobilization declared: Military production is entering a new stage-a period when, on many of the new weapons, asseniblyline production is beginning and the major problems will be in finding and breaking the bottlenecks that may be holding up the flow of arms off the lines." 9' 1954 Budget, op. cit., p. 1090. `~ U.S. Director of Defense Mobilization, Third Quarterly Report to the President, Washington, Government Printing Office, Oct. 1, 1951, p. 1. 78-516-67-vol. 2-19 PAGENO="0290" 648 ECONOMIC EFFECT OF VIETNAM SPENDING In general, the period following the Federal-Reserve-Treasury accord of March 1951 was one of credit restraint and price stability. On the fiscal side, the budget surplus in 1951 was converted into a budget deficit of $4 billion in 1952. The provisions of the Revenue Act of 1951 were in effect during the last 8 months of fiscal 1952. Although the rise in personal income leveled off after the first quarter of the year, tax receipts in each of the first three quarters were about $3 biffion higher than the corresponding period in 1951. The increase in military deliveries was even greater. As a result, Federal expendi- tures rose each quarter, reaching the height of $18.4 billion in the fourth quarter of the year.97 The total of new obligational authority enacted for the year increased 10 percent over the 1951 figure, compared to a 68 percent rise the previous year. The total for 1952, $91 bfflion, was the high point for the Korean mobilization. A similar dampening occurred in the obligations rate. Contrasted to an increase of 92 percent in the previous year, total obligations incurred by Federal agencies in the fiscal year 1952 rose 25 percent over the 1951 total to a record height of $105 billion. The governmental trust funds continued to accumulate reserves and, on a cash basis, Federal receipts from the public in 1952 were in approximate balance with Federal payments to the public. According to this measure, the financial operations of the Federal Government for the year tended to have a neutral effect on the economy. Gerhard Coim points out that most of the rise in national security spending during this period occurred after prices had roughly sta- bilized.98 That is, the actual higher level of Federal spending followed the strong expansion in the economy rather than accompanying it. However, the rapid rise in defense expenditure may at least have supported the increased level of prices. According to an analysis prepared in the spring of 1952: "It could be argued * * * that the direct effects of defense production now being felt are not nearly so upsetting to the economy as were the anticipatory effects a year or so ago * * * The shortages failed to appear, prices declined, and inventory congestion plagued industry throughout most of the past year. In part, this reversal * * * stemmed from widespread misapprehensions about the impact and timing of the defense program." ~ This misapprehension may be a serious indictment of the data available to the Government and private analysts for gauging the economic impact of government spending and also of the lack of ability to interpret properly the data that were available. PEAK LEVELS OF OUTPUT: FISCAL YEAR 1953 The fiscal year 1953, the third year after the outbreak of hostilities in Korea, was the peak period of the Korean cycle. All sectors of the economy reached record highs. GNP for the year was $358 biffion, an increase of $21 biffion over fiscal year 1952. The level of consumer prices held extremely steady during the year, rising to 114.5 in June, only four-tenths of a point higher than at the start of the year. After declining 2.2 points in the ~ Treasury Bulletin, August 1952. pp. 1, 7. 98 Gerhard Coim with Marilyn Young, Gun We Afford Additional Programs for National Securdy? Wash- ington, National Planning Association, 1953. P. 9. ~` "Production in a Defense Economy," Monthly Review of the Feueral Reserve Bank of New York, March 1952, p. 39. PAGENO="0291" ECONOMIC EFFECT OF VIETNAM SPENDING 649 first half of the year, the wholesale price index was fairly constant in the last 6 months of 1953, fluctuating within a range of six-tenths of a point.'09 In transmitting the budget for the fiscal year 1953, President Truman pointed out that "the smaller amount of new obligational authority which I am recommending indicates the substantial portion of the financial requirements of our military buildup that has been met in the appropriations already made by the Congress." 101 The 1953 total of $80 billion in new obligational authority was $11 billion or 12 percent less than the peak year of 1952. Similarly, the total amount of obligations incurred by Federal agencies was $86 billion, a 6 percent decline from the previous year. Budget expendi- tures for the year, on the other hand, reached their Korean peak at $74 billion-the largest total annual outlay by the U.S. Government since 1945. The rise in military production and deliveries and, hence, expen- ditures leveled off during the year. Budget expenditures increased $7 billion over the previous year compared with the rise from $20 billion to $40 billion from the 1951 to 1952 fiscal years. In his October 1952 report, the Director of the Defense Mobilization pointed out the causes for this trend: The rise in total production will be gradual because it will be selective. Each item in the military program has its own productive curve-a period of accel- eration, a period of level sustained production, and a period of decline prior to ~terminating production. * * * or a large proportion of the items in the program, the sustaining rate has been reached.'°' Revenues reached a high of $64.8 billion in the fiscal year 1953, reflecting the full impact of the higher Korean rates. Nevertheless, the Federal Government had a cash deficit for the first time since the beginning of the Korean fighting. This resulted from the fact that the primary impact of the Korean program on government expendi- tures was being experienced at the time. DECLINE IN ECONOMIC AcTIvITY: FISCAL YEAR 1954 Reductions in inventory accumulation and in defense outlays in the fiscal year 1954 resulted in the first significant quarterly declines in GNP since 1949. The reductions in new obligational authority and obligations that occurred in 1953 were translated into reduced Federal expenditures in 1954. The slackening rate of military production was apparent in the decline of deliveries for security programs and, hence, expenditures, in every quarter of the fiscal year 1954.. Total deliveries declined by approximately $7 billion at annual rates from the last quarter of fiscal 1953 to the last quarter of the 1954 fiscal year.'°' The decline in obligations incurred by the Defense Department, which began in the previous fiscal year, continued through the firsf half of fiscal 1954. The obligation rate stayed at a low level for the rest of the year. Some . military contracts were canceled after the Korean truce, which was signed in July, 1953, the beginning of the 100 "1953 Statisatici Supplement," op. cit., pp. 25-27. 101 Bo'dget cf the United States Government for the Fiscal Year Ending June 30, 1953, Washington, Govern- ment Printing Office, 1952, p. MS. 102 U.S. Director of Defense Mobilization, Eighth Quarterly Report to the President, `Washington, Govern- ment Printing Office, January 1, 1953, p. 10. 103 "Treasury Financing in Fiscal 1954," Monthly Review of the Federal Reserve Bank of New York, August 1954, p. 105. PAGENO="0292" 650 ECONOMIC EFFECT OF VIETNAM SPENDING fiscal period. Obligations for hard goods procurement averaged $500 million a quarter for the first 9 months of the year, compared to expenditures on these programs at the rate of $4.2 bfflion a quarter. Reductions in Federal tax rates, continued operation of the"auto- matic stabilizers," increases in State and local outlays, and high levels of business investment all served to cushion the decline. At the year's end, there w4ere indications that the downturn would be a limited one. Continued low levels of new obligational authority and obligations, however, presaged no significant rise in Federal spending in the near-term future, barring an abrupt shift in the international situation. By June 1954, the economy had generally adjusted to the impact of the military and economic mobilization program that the Nation had embarked upon 4 years previously. The Korean cycle had to a large extent worked itself out. From a comparatively "normal" position in the 1950 fiscal year, the economy had been in an expansive stage in 1951 and 1952.. After reaching peak levels in 1953, economic activity declined in fiscal year 1954. Toward the end of 1954, there were indications that the bottom of the recession had been reached and an optimistic mood prevailed in business and government circles generally. SUMMARY Table 14 shows the relationships of the major phases of the Federal spending process to the overall trend in the American economy during the Korean mobilization period. It should be noted that the primary volatile component of all of the measures of Government activity W~S the national defense program. TABLE 14.-Relationship of measures of Federal spending to changes in economic activity [Percent changes from previous period] Fiscalyear GNP New obligational authority Obligations incurced Budget `expenditures 195L 1952 - 1953 1954 +19 +18 +4 +1 +68 +10 -12 -24 +92 +25' -6 -23 +11 +15 +14 , ` Source: Table 12; Survey of Current Business, "1954 National Income Supplement," pp. 222-223; July 1956,pp. 25-27. As can be seen, the large, initial~ increases in new. obligational authority and in obligations were accompanied by a sharp rise in GNP, but there was a much smaller change in the government expendi- ture level at that time. In the absence of any other important de- velopments, the rapid expansion in economic activity was based largely on anticipations arising from the early stages of the new government spending program. As the expansions in new obligational authority and in obligations incurred slowed down, a similar reaction occurred in GNP. On the other hand, the expenditure rate accelerated somewhat akin to the increases in the other series during the earlier period. Economic activity, as measured by GNP and other indicators, reached a peak in the third year of the Korean mobilization program, PAGENO="0293" ~ECONOMIC EFFECT OF VIETNAM SPENDING 651 although the rate of increase was slower than during the earlier periods. Actual decreases were recorded in the annual totals of new obligational authority and obligations. Expenditures reached their peak during this period, although they were rising at a reduced rate. *GNP and other indicators of economic activity were declining through mOst of the fourth year of the Korean mobilization program. However, the annual total of GNP was approximately the same as that of the previous year, indicating that GNP fell in the fiscal year 1954 at about the same rate as it was rising during 1953 Heavy declines in new obligational authority and in obligations were recorded at this time, together with a slight reduction in Federal. expenditures. Several interesting' points emerged from this examination . of~ the Korean mobihzation program 1 The major expansion in economic activity occurred at approximately the same time as the announcement and authoriza- *tion of the program, and while many of the defense orders wer~ being placed. . 2. The expansion in economic activity slowed down at about the same time that the rise in new obligational authority slowed down 3 The declines in new obhgational authority and in obligations occurred prior to the declines in economic activity and in gov- ernment spending 4 The maj or rise in government expenditures occurred after the major expansion in new obligational authority and after substantial defense ordering had taken place 5. The major expansion in economic activity occurred prior to the major rise in government expenditures. The reader should be cautioned against generalizing simply on the basis of the Korean experience. The events during the Korean mobilization period did show that the main expansive effect of this new program of purchases of privately produced goods and services occurred at the early stages of the spending process rather than at the terminal stages when the government disbursements are made. A number of situations have occurred where the responses to a new governmental spending program are quite different than was the case during the Korean mobilization program. The Government's em- barking on a new spending program could have, as during the 1930's, a negative effect on business confidence. Also, the level of economic activity might have risen instead of declining when the tempo of military spending was slowed. This was the response during the reconversion following World War II. The unavailability of resources would have prevented the rapid translation of government contracts into business investment in ex- panded capacity and production on government account. Finally, different types of government spending programs-such as transfer or interest payments-may `have had a more subdued effect on the economy generally. The following special factors contributed to the exact timing and extent of the economic effects of the Korean mobilization program: 1. The American participation in the conflict and the initial defeats, which engendered the fears of a World War III. 2. The recent experience of a global war, with the attendant infla- tion and shortages of materials. PAGENO="0294" 652 ECONOMIC EFFECT OF VIETNAM SPENDri~G 3. The partial rather than total mobilization of the economy, so that there was generally an ample supply of civilian goods and services. 4. The strong financial position of American consumers and busi- nessmen so that they could make effective the resultant demands. 5. The excess capacity in the economy, so that much of the military demands could be added to rather than supplant civilian demands. 6. The slowing of the tempo of hostilities and, subsequently, the signing of an armistice, so that declines in. military production were made possible. 7. The fact that nondefense government programs were not sharply increased when the declines occurred in military spending. 8. The lack of understanding of the timing of the economic effects of the mobilization, so that while, experiencing the peak effects of the program the public (if not the Government, too) believed that the worst was yet to come EVALUATION AND CONCLUSION - Tn general, the application of this study for purposes of economic analysis and governmental administration are twofold: (1) a proper understanding of the operation of the Federal spending process is important in analyzing economic developments and government activity during periods of fluctuations in government purchasing, and (2) the measures of the early stages of the spending process are lead series which often quickly register changes in governmental demand and indicate future trends in actual governmental disbursements ANALYSIS OF' ECONOMiC CONDITIONS Because the early stages of the government spending process often show up in the private sector rather than in the public sector, it is a temptation, during periods characterized by sharp increases in government purchasing, to conclude that private rather than govern- ment demand is contributing the inflationary pressures. The follow- ing is an example of this shortcoming which often mars otherwise cogent analyses. The author is discussing the first year' of the Korean mobilization program. This great increase in private demand took place at a, time when the federal budget was running at a surplus, and when the direct increase in expenditure for security programs was quite small. Thus most of thq inflation in the year after Korea can be said to have been caused by the large volume of private spend- ing * * * The important point is that Federal fiscal policy cannot be held directly responsible for the inflation * * * A major part of the remedy must be found in more effective monetary policy to curb private credit spending through curtailing money and credit creation.'°4 It is not meant to single out the author of the above statement, because similar analyses were made by A. J. Brown and others.'°5 `Maintaining that Federal fiscal policy was not inflationary during a year when the rate of military orders was doubled and only a com- paratively minor tax increase was enacted ignores the operations of the Federal spending process. To go on and state that the remedy `°4 W~ Glenn Campbell and others, Economics of Mobilization and War, Homewood, fl, Richard D. Irwin, 1952, p. 75. `°~ A. I. Brown, The Great inflation: 1939-1951, `London, Oxford University Press, 1955; U.S. Congress, Joint Committee on the Economic Report, National Defense and the Economic Outloot for the Fiscal year 1953, Washington, Government Printing Office, 1952. PAGENO="0295" ECONOMIC EFFECT OF VIETNAM SPENDING 653 simply exists in curbing private spending and credit creation ignores the very reason for a good share (the nonspeculative share) of the expansions in economic activity. It was government policy of the time to encourage private spending for and financing of the production on government account and the necessary supporting investment.'06 General credit curtailment might have seriously interfered with the needed expansion in private production and investment. To be sure, the inflationary effects of consumer and business spending not directly related to the defense production program should not be ignored, nor need the pegging of the government bond market be defended. An understanding of the operation of the Federal spending process can be useful in business cycle analysis, interpretation of current economic conditions, and evaluation of future economic developments, especially where changes in governmental activities play a dominant role in the period being covered In a more specific way, lead series on the govermnent spending process can be used in a way similar to the lead series which have been de~ eloped for private economic activity The lead series in the Federal spending process are ne~ obligational authority and obhga- tions incurred `~hi1e series on expenditures are lagging, or at best, coincident measures There is an intimate functional relationship between these series: Expenditures are merely the Inevitable result of incurring obligations in the form of contracts and other commitments which are based on the appropriations and other authorizations granted by the Congress.~OV This relationship seems quite clearly to meet the test of lags in economic developments-when certain developments are related to other developments as cause and effect, but the effect follows the cause with some time delay. Thus, the lead series are a form of "excepta- tional" statistics Their similarity in use to statistics on business plant and equipment expectations can be seen in a study of the latter field by a group headed by George Terborgh: The importance of measuring plans and expectations, as distinguished from expenditures themselves, arises from the lead time involved. Capital goods have a long production cycle, especially buildings and structures * * * Here the lag of actual expenditures behind the commitments to undertake the project * * * must average several months * * * It follows that figures on expenditures run far behind the flow of commitments.108 This similarity between "expectational" statistics on private and government spending can also be seen in an analysis of the uses of the seiies on private new ordeis * * * changes in new orders reflect directly or indirectly fluctuations in de- mand from producers and consumers. Long before a change in business activity, new orders will reflect the changed demands and will point to coming develop- ments.'09 The lead series on government spending may be of special value in foi ecasting the general levels of economic activity at times w hen 100 Cf. Director of Defense Mobilization, First Quarterly Report to the President, Washington, Government Printing Office, 1951, P. 5. 107 A statement by "a representative" of the Bureau of the Budget U.S. House of Representatives, Com- mittee on Government Operations, Limitation of Federal Expeditures, Report to Accompany HR. 2, Wash- ington, Government Printing Office, 1953, p. 3. 103 Committee on Business Plant and Equipment Expenditure Expectations, ~Statistics on Business Plant and Equipment Expenditure Expectations, Washington, Board of Governors of the Federal Reserve System, 1955, p. 2. 109 Gibert and Paradiso, op. cit., p. 43. "In any given business organization, the current arid future busi- ness prospects are judged on a much broader base than production statistics. Order backlogs, incoming orders, and market opportunities which will produce a continuing flow of such orders receive much atten- tion; the company's own production figures are given scant attention." Herbert V. Prochnow, editor, Determining the Business Outlook, New York, Harper & Bros. 1954, pp. 152-153. PAGENO="0296" 654 ECONOMIC EFFECT OF VIETNAM SPENDING changes in governmental spending patterns are the decisive factors in the economy Gerhard Coim, w ho has piepared many studies and forecasts of economic conditions, has pointed out that economic fore- casting is s'ifest to the extent that it can be based on decisions w Inch have already been made and that studies of "what is in store" in the government sector can be among the most impOrtant building blocks for constructing an economic forecast."° Series on new obligational authority and obligations incurred might well be added to the "leading" series of statistical indicators used by the National~ Bureau of Economic Research. It has been pointed out that the existing National Bureau series, limited to measures of the private sector, can be misleading when the important developments in the economy are m the government sector Lem- pert has demonstrated that the National Bureau's lead series indicated a slowing in the rate of economic activity throughout the calendar year 1950, despite the tremendous expansive influence of the Korean mobilization during the second half of the year ~" The obligation series may also be helpful in preparing mtermdustry models where obligations for long leadtime programs are taken into account in the calculation of the "bills of goods" for consumer ex- penditures, private producers' durables, and business inventories.112 FORMULATING AND EVALUATING GOVERNMENTAL ECONOMIC POLICIES Attention to the early phases of the government spending process can be useful iii formulating public policy by indicating the initial effects on the economy of governmental action and where that action would lead over time. Kenneth Roose, in his analysis of the 1937-38 cycle, claimed that because such knowledge was not available most policy makers and economists were not aware that the - net effect of governmental action throughout 1937 was deflationary. Roose points out that "Thus there must be a continual awareness of the extent to which the government is acting in its role of tax collector and public disburser to depress or to stimulate the level of income and production." h13 Expenditure policy. The knowledge of the lags in and the nature of the government spending process is of particular importance in gauging a proposed spending program for countercycical purposes. For example, if a $5 billion decline in GNP (annual rate) has been experienced in period 1 and a $10 biffion decline is being assumed in period 2, it may be of little avail (aside from effects on expectations) in countering the immediate recessionary tendencies to embark upon a large construction program for which contracts could not be let until period 3 and production gotten underway until period 4. In such case, recourse to actions which involve shorter "leadtime" may be more appropriate. A step up could be ordered in the rate of produc- tion of equipment previously contracted for. With programs of military defense, foreign aid, stockpiling, and atomic development 110 Gerhard Coim, The Economic Outlook for 1955, abstract of an address before the Conference on the Eco- nomic Outlook, University of Michigan, Ann Arbor, Nov. 12, 1954, p. 2. 111 Leonard H. Lempert, "Current Implications of the 21 Statistical Indicators," Illinois Business Re- view, December 1956, p. 6. 112 Irving H. Licht, `Government" (in conference on Research in Income and Wealth, Input-Oulpni Analysis, Technical Supplement, New York, National Bureau of Economic Research, 1954), p. 2-13. 113 Kenneth D. Rouse, The Economics of Recession and Revival, an Interpretation of 1957-1938, New Haven, Yale University Press, 1954, p. 257. PAGENO="0297" ECONOMIC EFFECT OF VIETNAM SPENDING 655 totaling. many tens of billions of dollars a year, an actual acceleration of $2~ billion in a quarter ($10 billion at an annual rate) in deliveries might be more effective. The literature seems to have emphasized almost exclusively possi- bilities of embarking on new programs to the neglect of the ready possibilities of altering the obligation, production, and delivery rates on existing programs. In these latter instances, there are not the problems of getting advance Congressional authorizations and appropriations such as. occur in the traditional anticyclical program-new public works. Moreover, the danger of overcompensating is not as great. Par- ticularly if the economy were heading up again as the combined result of monetary and other government action, a slowdown could then be instituted in the obligation, production, and delivery rates to keep the activity within the overall level programed for the year or longer period involved. The apportionment, reserve, and allotment tech- niques described in chapter II could be utilized in this connection. An example of the administrative stepup in government spending to counter deflationary tendencies occurred in the third quarter of 1954. Secretary of Commerce Weeks announced a policy of speeding up government purchasing within the limits of the budget to give "the economy a little nudge." He cited the distribution of highway grants to the States 6 months earlier than normal, a fast start on procurement of new army uniforms, and a policy of pushing aid to airport construction within the limits of the funds appropriated by the Congress.114 No study has yet been made of the effectiveness of the 1954 speedup, nor could one be adequately made without access to the procurement plans and records of the major spending agencies. Some insight may be obtained from a similar experience in the 1937-38 recession. In November 1937, the President requested the various government agencies to accelerate procurement orders wherever possible so that government demand might serve as a partial offset to the then current sharp decline in private demand. A study of this period concluded: Existing records are not definitive, but it does not appear that the President's request resulted irs any considerable volume of advance procurement."5 A number of explanations were offered: (1) inadequate information as to current purchases and future requirements, especially among departments with decentralized procure ment systems; (2) insufficient funds to make large advance purchases, particularly in the case of agencies which were uncertain as to whether they would obtain deficiency appropriations; (3) insufficient storage space; (4) admin- istrative difficulties on the part of purchasing officers in concentrating the year's work; and (5) contractual obligations already entered into, particularly on construction projects calling for delivery throughout. the remainder of the fiscal year."6 A more recent study of the attempted administrative speed up in government procurement in 1958 yielded similarly disappointing results and somewhat similar explanations. Long-term commitments, lack of storage space, and insufficient time were listed as reasons for `""Weeks Outlines U.S. Policy to Boost Economy, Speed in Spending Planned to Bring Upswing,' Philadelphia Inquirer, July 30, 1954, p. 2. 115 Linnenberg and Barbour, op. cit., p. 118. 118 Ibid., p. 119. PAGENO="0298" 656 ECONOMIC EFFECT OF VIETNAM SPENDING the inability to achieve a significant speed up in procurement to combat the recessionary conditions in 1958.117 The Bureau of the Budget concluded that the governmental actions that have the largest and promptest economic impact are transfer payments such as unemployment compensation that constitute out- right additions to private purchasing power, rather than programs tied to construction or the production of goods.~8 Tax Policy. Understanding the time sequences in the Federal spending process is also important in formulating tax policy. The administration leaders were in a difficult position in the fiscal year 1951. The inflationary pressures that had been rampant in the econ- omy since the Korean outbreak were unaccompanied by any im- madiate Federal deficit. Under the principles of "sound finance" and balancing of receipts and expenditures, there was no need for added taxation during the year. However, the administration was partially successful in coupling the need for increased revenue with recently enacted appropriations and the high levels of procurement- rather than with the low contemporaneous level of expenditures. This resulted in sufficient additional revenues to yield a surplus in 1951, although not in the later years when the high projected expen- ditures materialized. The following statement made by the then Secretary of the Treasury John Snyder to the House Ways and Means Committee clearly il- lustrates the importance for fiscal policy of taking account of the economic impact of the early stages of the Federal spending process. In considering the additional revenue required, we should not be misled by the fact that, temporarily, the budget deficit is moderate. Since an important part of defense preparation entails production operations extending over two, three, or even more years it is inevitable that obligations incurred now will be fully re- flected in expenditures only at some time in the future. * * * Under present conditions, expenditures for defense exert an inflationary pres- sure on the economy substantially in advance of the actual disbursement of funds. Demands for materials, labor, and capital outlays occur very soon after the Government contracts are let, well in advance of the time when the Government pays for that production. This explains in part why scarcities and inflationary pressures have developed even though a large portion of the increased defense funds appropriated by the Congress after Korea have not yet been reflected in Government expenditures.119 A comparable policy might be adopted toward tax reduction when a decline in government purchasing occurs. In fact, such action took place after the hump in the Korean mobilization program had been passed. The sizable decline in obligations which occurred in the fiscal year 1954 was accompanied by reductions in individual income taxes, by the elimination of the excess profits tax on corporation income, a.nd by other modifications in the tax structure which resulted in immedi- ate losses in revenue. These tax reductions may not have been directly motivated by the concurrent declines in government orders. However, the administration policy at the time was to reduce govern- ment demands, both on output and income, so as to allow increased private demand and personal disposable income. Direct controls. The inflationary (or deflationary) effects of changes in the early phases of the Federal spending process are of importance in the administration of price, wage, and materials controls. Anshen 117 U.S. Bureau of the Budget, Federal Fiscal Behavior During the Recession of 1957-58, Washington, 1961, p. 18. In Ibid., p. 21. 111 U.S. Secretary of the Treasury, Annual Report on the State of the Finances for the Fiscal Year Ended June 50, 195%, Washington, 1952, p. 406. PAGENO="0299" ECONOMIC EFFECT OF VIETNAM SPENDING 657 and Wormuth, in their discussion of World War IT controls, conclude that, because of the failure to properly take into account the leadtime factors in Federal procurement, controls are likely to be applied later than an "objective and imaginative analysis" of the facts would dic- tate. Also, these controls are likely to be more limited in scope than is required to deal promptly and effectively with the necessary adj ust- ment of the economy's resources. They point out that the economic. setting increased the natural disposition to ignore the lag between the making of defense production plans and the actual output of munitions and related items at mass production levels.120 Although beyond the general scope of this study, it would appear that the general phenomena of inflation and deflation need to be ex- plored, not only in terms of the two poles of psychological expectations and actual cash flows, but also the intermediary stages during which plans are formulated and decisions are made.12' What may appear to be actions based merely on anticipations (such as buying sprees in advance of heavy war expenditures) can be really the early stages of the war expenditures themselves-such as necessary tooling up and business inventory accumulation. ADMINISTRATIVE GOVERNMENTAL. USE The measurements of the early stages of the Federal spending process lend themselves to' administrative use in forecasting future levels of expenditures, in gauging the progress made in the execution of Federal programs, and in controlling expenditures. Forecasting expenditures. Forecasts of government expenditures can be prepared by making assumptions as to the availability .of funds (new obligational authority and unused obligational authority granted in prior years), the extent to which they will be committed during the period under study, and expected delivery or expenditure rates resulting therefrom. Algebraically, the relationship can be described in terms of a dif- ference equation as' follows: X(t) =aA(t) + bA(t)-1) cA(t-~2 . . . nA(t-n), where X(t) ==expenditures for a given year (from current as well as prior year appropriations). A(t) = appropriations and other new obligational authority granted for a given year. A(t-1) = appropriations for the previous year, etc. a= the proportion of appropriations for year (t) to be spent in year (t). b=proportion of appropriations for year (t-1) to be spent in year (t), etc. As the Government prepares estimates of appropriations for future. periods, the major question involved' is the extent to which the lead time coefficients-a, b, c, . . . n-remain constant over a period of time. Unfortunately, lead times vary for different types of programs and under. different economic. conditions. Hence, in the absence of a general degree of stability in government snendmg patterns, ex- penditures in a future period cannot be predicted simply by examining the total of ne~ obligational authority 10 Anshen and Wormuth op cot p 526 121 Cf. Brown, op. cit., * * the expenditure approach to the phenomena of inflation, so enlightening in most circumstances, turns out to be sadly inadequate during the period under review" (p. 71). PAGENO="0300" 658 ECONOMIC EFFECT OF VIETNAM SPENDING Leadtimes will vary as the product mix of governmental purchasing fluctuates with changing needs and conditions. Studies of inter- industry economics have revealed that even technological leadtimes in specific industries are not invarient over time or with respect to changes in the level of activity. More distant sources of materials, the employment of less efficient labor, and variations in the precise nature or quality of the product may tend to increase the leadtimes.122 Egle states that the so-called output lag is relevant in this connection (the lag of output behind a change in the volume of orders). He concludes that, for purposes of fiscal policy, this output lag will probably always defy reliable measurement because of the problem of determining the length of the lag with variable governmental out- lays in goods.'23 The Navy Department has found that, in recent years, expenditure rates for the major categories of long-range procurement have many characteristics of the normal growth pattern-the logistics or S curve. By knowing or estimating the availability of fuilds for a given pro- gram and the expenditure rates experienced on similar programs in recent years, expenditure forecasts can be made for the next several years.'24 The rationale for the S curve is that production on long lead-time items is slow in getting started, then hits its stride with quantity pro- duction, and finally tapers off as the order nears completion. Such a method is more useful for procurement categories for which there is experience, rather than for such new items as missiles and space vehicles. In a more general way, changes in the level of new authorizations and/or new commitments can be used to gauge the future course of expenditures in a somewhat similar manner that fluctuations in new orders are used by business analysts to estimate future sales trends. This is brought out in the following discussion of private orders. When new orders have been received for several months at a rate exceeding sales, the indications are strong that sales will rise in the future. If, on the other hand, new business has been running below sales, a downward sales trend is indicated, except when backlogs are unusually high in relation to sales. Of course, in this case also sales must ultimately drop unless demand is stimulated, but with many months of unfilled orders on hand, a cut in output can be deferred for a considerable period. Finally, when incoming orders are about in line with sales and backlogs are normal, it is likely that sales will not be altered much for several months.'25 Similarly, when the current level of new obligational authority and/or obligations incurred exceeds the level of expenditures the, indications are strong that expenditures will rise in the future and that if the lead series are lower than the level of payments, future expenditures will be lower. Unexpended balances play a role analo- gous to that of unfilled orders, because even during a cutback in new 222 Leadtime in input-output analysis covers only the time necessary to transform the input of an industry to an output. Leadtime in government spending refers to the entire period from ordering an object to delivery and payment. Jean Bronfenhrenner, Lead Times in Interindustry Models: Concepts and Computa- tions, Washington, Department of Commerce, 1952, p. 3. 123 Walter P. Egle, Economic Stabilization: Objectives, Rules and Mechanisms, Princeton, Princeton Univer- sity Press, 1952, p. 193. 121 For example, about 85 percent of the funds available for naval aircraft procurement in any one year will be spent over the next five years. U.S. Department of the Navy, Stati,tical Approach to Forecasting Ezpendllures, NAVEXOS P-1571, undated, pp. 2-3. 125 Jacobs and Wimsatt, op. cit., p. 20. "When a change in the trend of defense expenditures takes place, it nearly always results from a prior change in the same direction in appropriations and contracts. As was to be expected after the outbreak of the Korean conflict, appropriations and contract-letting initially expanded more rapidly than expenditures." Federal Reserve Bank of New York, Selected Economic Indicators, 1954, pp. 72-73. PAGENO="0301" ECONOMIC EFFJ~CT OF VIETNAM SPENDING 659 authorizations and new commitments, it is possible for expenditures to hold steady or even rise if they are made out of preexisting balances. Evaluating progress. It is the belief of the writer that the failure to aggregate the current information on obligations is an important shortcoming of the budgetary process. It is an indication of the con- centration on the minutia of detailed accounting rather than on the major trends and developments. Current reports on total govern- ment obligations incurred during a given period and amounts of outstanding obligations at the end of a period would provide a valuable indicator of the total progress being made on government programs. The aggregation and publication of the detailed obligation data could also have an important "feedback" effect on the reliability of the data supplied for internal budgetary control purposes. Com- parisons and analyses of the data supplied by the various agencies should reveal, to a greater extent than is possible under current pro- cedures, any inconsistencies in interpreting what is an obligation or in reporting the status of the various kinds of accounts. Moreover, the requirement of publication ought to have a favorable effect on the quality of data presented as, hitherto, agency officials have known that the information they reported would not be made public. Controlling expenditures. Many groups, private as well as govern- mental, have wrestled with the problem of, how to control Federal spending effectively, with th~ particular view of reducing it. Unfor- tunately, most of the discussion has centered on expenditures per se. For example, the second Hoover Commission has urged emphasizing costs rather than obligations in order to better control government spending. 126 Expenditures are merely the completion of the spending process. If adequate controls are to be exercised over government spending, attention must be given to the early stages where expendi- tures are authorized and committed, rather than merely to the pay- ments for goods and services already ordered and produced. In a more general and philosophical discussion of what he terms "the:structure of commitments," John Norton describes the perennial dilemma of the "budget cutter": Some past commitments project into, and limit, the present and future; of these some are irrevocable but others may be modified at a cost. Today's events are almost completely predetermined by choices made yesterday and before; nevertheless, a small area of free choice remains. As of any day, the opportunity for the exercise of free choice increases as we include more and more of the future within the compass of our decision making.127 An improved understanding of the operatioi~s of the Federal spend- ing process on the part of those interested in curtailing government spending is necessary for the preparation of effective proposals to change the course of government spending. Mere exhortation, how- ever well-intended, to reduce expenditures in a given year, may prove fruitless. Naive exponents of economy tend~ to be quickly dismissed by members of the Congress if they show themselves ignorant of governmental budget matters. CONCLUDING REMARKS It is a fundamental finding of this study that the variations in timing and impact of the various stages of the governmental spending 12~ U.S. Commission on Organization of the Executive Branch of the Government, Budget and Accounting, Waahington, Government Printing Office, 1955, pp. 17-25. 127 John D. Norton, "Research Required for the Application of Interindustry Economics" (in Conference on Research in Income of Wealth, vol. 18, Princeton, Princeton University Press, 1955), p. 210. PAGENO="0302" 660 ECONOMIC EFFECT OF VIETNAM SPENDING process necessitate taking measurements of the governmental spend- ing stream at earlier phases than merely at the completion stage represented by deliveries or payments. It may well be that different kinds of measures are needed at different periods in the development of government programs and for various types of governmental programs. When the Government is about to embark upon a new program, often the most useful indicator of the scope of this new activity will be the amount appropriated for it by the Congress. A series on new obligational authority would furnish the needed information in this case and would furnish also some insight to any "announcement" effects. A more direct indication of the current effect on the economy can be the aggregate of the orders placed~ and contracts let. A series on Federal obligations incurred would provide the necessary information in this instance and, in general, the most convenient measure of the progress being made on a government program. Changes in the size of government programs often show up in the new obligational authority and obligations incurred series significantly earlier than in the expenditure series. This is especially the case where a long production period is involved between the time com- modities are ordered by the Government and the time they are produced. Moreover, such production typically takes place in the private sector of the economy and only appears in the public sector when the delivery and- payments are made. Hence, the two "lead" series on governmental spending would, in these instances, help to indicate the extent to which developments in the private sector arose in response to changes in the public sector and were mainly part of the governmental procurement process. Where the increase in government activity consists mainly of pay- ments made directly to the public, such as veterans' pensions or relief, a series on expenditures would be of particular value. Except for a comparatively minor amount of advance and progress payments usually made to contractors on large production or construction orders, the expenditure of public money represents the completion of the program concerned rather than the dynamic period of its development. The use of any of these measures need not be mutually exclusive and their contribution may be additive. What is needed is not a single standard measure of Federal spending but a tool kit of series, eacl~ of which is adapted to special analytical purposes. The addi- tion of economic series measuring the early - stages of the Federal spending process to the con'~ entional series w Inch emphasize the ter- - minal stages may help better to meet the needs of the various situations that can occur.. - - This specific recommendations that arise from this study are that - series on new obligational authority granted by the Congress and obligatiOns incurred by government agencies be computed regularly by the Federal Government and that they should be published in the standard compendia of economic statistics. They should be sup- plemented from time to time by reports on unobligated balances and on unpaid commitments outstanding. PAGENO="0303" ECONOMIC EFFECT OF VIETNAM SPENDING 661 Such series would be useful and complementary additions to the sections on government finance in such publications as the Treasury Bulletin, the Economic Indicators, the Federal R.~serve Bull,et'~n, and the Survey of Gurreni Busines~. Subsequent efforts might be made to explore the value of such series for state and local governments and the possibilities of their preparation. Likewise, a better understanding of the workings of the Federal spending process will assist in the use of these tools for purposes of economic analysis and policy formulation. It is hoped that the work done for this study will prove suggestive to others concerned with related questions of fiscal policy to the end that economic analysis will make a more intelligent and knowledgeable contribution in the formulation of governmental economic policy. PAGENO="0304" EMPLOYMENT IMPACTS OF DEFENSE EXPENDITURES AND OBLIGATIONS (Reprint from Review of Economics and Statistics) By EDWARD GREENBERG* I. INTRODUCTION The importance of specifying accurately the impacts of military procurement in models of the economy is apparent. One of the potentially most important applications of such models is to generate the responses of the economy to changes in procurement activity and to evaluate the effects of alternative courses of government action designed to reduce the economic hardships associated with large and rapid changes in military procurement. An inaccurate specification of equations describing the impacts of government actions may seriously mislead planners who are devising appropriate offsetting policies. For example, if the major changes in defense employment occur at the order-letting stage, rather than the expenditure or final delivery stage, as several models suggest, necessary modifications in fiscal and monetary policy may be delayed by about a year. From another point of view the empirical work contained in this paper is an attempt to include instrumental variables, variables which can be directly controlled by policy makers, in models designed to describe the behavior of the economy, as stressed by Orcutt, [151. It will be pointed out that several of the existing models of the economy do not include the appropriate instrumental variables, making it difficult to consider alternative courses of action. In fact, the whole area of effects of government spending has not been studied exten- sively.' For the purpose of analyzing the employment impacts of military expenditures and obligations, the paper proceeds as follows: (1) A brief review of the process by which a procurement action moves from the budget stage to the delivery and final payments stage is presented. Based on this process, implications are drawn about the appropriate variables to be entered into equations describing the impacts on employment of procurement actions. (2) Several existing models of the economy-those with fairly well-developed government sectors-are examined in the light of (1) to see if they reflect the process accurately. (3) Empirical work is presented which attempts * The author is associate professor of economics at Washington University, St. Louis, Mo. A great debt is owed to Prof. M. L. Weidenbaum for sharing his knowledge of the military procurement process and data sources, and for helpful comments on earlier drafts of this paper. Prof. 11.3. Barnett also contributed valua- ble comments on an earlier version. Thanks for computational and clerical assistance are due to M. Smith, F. Hummel, R. Keller, and R. Gilon. The project was supported by NASA through its grant NsG 342 to Washington University. `The following comments makes the point well: "When we began our work we expected that our main job would be to study very closely the detailed timing relations implicit in already established quantitative measures of the effectiveness of monetary and fiscal policy. We soon realized that no such foundation of established quantitative knowledge existed about (1) the working of the money and credit mechanism or (2) a large portion of the mechanism through which fiscal policy works. We found ourselves in the trying position of searching for a needle in a haystack, when no evidence had ever been produced that the haystack contained a needle in the first place" [1, p. 1]. 662 PAGENO="0305" ECONOMIC EFFECT OF VIETNAM SPENDING 663 to estimate the employment impacts of the process in two important defense industries. A concluding section summarizes the paper and points out some important data and research needs. II. THE MILITARY PROCUREMENT PROCESS AND SOME IMPLICATIONS The discussion which follows briefly reviews the military procure- ment process and indicates the implications of this process for empirical research designed to estimate the economic effects of procurement actions.2 The process normally begins with the submission of the President's budget in January, on which congressional hearings are held. Later in the year, appropriations bills are passed, providing the Department of Defense with authority to spend. During the year the Defense Department incurs obligations. In the case of procurement, these are generally in the form of contracts with private industry. To complete the process, expenditures are made as the finished products are delivered. Which stages in the procurement process are crucial for measuring impacts on output or employment? Subject to several qualifications discussed below it appears that the contract-letting, or obligations, stage is most significant. At this stage, the contractor adjusts employment and output as he takes steps to fill the order. As pro- duction is undertaken, inventories are increased. This is reflected iu GNP.3 Eventually, the product is completed and payment is re- ceived by the firm. An important implication of this description, for the case in which production and delivery requires rather a long time, is that the employment and income effects are felt prior to the ex- penditure-m some cases many months piior As indications that these leadtimes are significant, it might be noted that 27.8 percent of the 1960 total of procurement and research, development, test, and evaluation was negotiated in the category: "Technical or specialized supplier requiring substantial initial invest- ment or extended period of preparation for manufacture" [20, p. 23]. Other evidence is reported by Weidenbaum [23, p. 1 1], who points. out that the lag between ordering and production for rifles, destroyers~ transport planes, bombers, and jet planes is two or more years. Empirical work of Ando and Brown [2] supports the view that obliga- tions affect output. rfhefr contribution will be discussed more fully below. Several additional features of the defense industry and the procure- ment process complicate the above description. First, defense firms often submit proposals to the Defense Department describing projects which might be of interest to the Department. While a certain amount of this type of work is likely to be going on all the time, greater activity may take place in response to information from the Depart- ment of Defense regarding its view on national security needs. Infor- mation is made available to the defense industries in various ways, 2 More detailed analysis of this process may be found in [5], [10], [16], [22], and [231. `Conceptually, for national income accounting purposes, work in progress, on which progress payments have or have not been paid, should be included in inventories. Unfortunately, company accounting prac- tices make it difficult for the national income accountants to do this since funds expended on such inventories are often reflected in accounts receivable, rather than in inventories. On the government side of the account- ing, however, the amount called "government purchases of goods and services" is on a delivery basis. Prog- ress payments paid during production do not appear as purchases untilfinal delivery is made, at which time the total expended on the contract is recorded as purchases. The foregoing refers to equipment contracts; construction contracts are treated somewhat differently. 78-516-67-vol. 2-20 PAGENO="0306" 664 ECONOMIC EFFECT OF VIETNAM SPENDING including speeches by1 officials of the Department and amounts re- quested in the Budget message. Though the former source~ of information is fairly difficult to quantify, the budget is readily avail- able. Also, to the extent that the Department has unobligated appropriations in various accounts, information on the possibility of future obligations is passed on to the industry. Second, if off-the- shelf items are supplied, the effect of the government orders depends on firms' inventory policies and positions. If they were overstocked, for example, there may be few effects on employment and output until inventories are further reduced~ In specialized defense firms this is probably not very important. Third, in many contracts the typical procedure is for the firm to bifi the government as production takes place. These progress payments are made although no delivery takes place. In the past several years changes in progress payments have occurred which are of some importance. The percentage of costs paid monthly has been changed from 100 to 80 percent and then back to 100 percent. Peck and Scherer suggest that the ability of defense firms to operate is affected by their access to working capital, so that amounts received from the government might have an inde- pendent effect [16, p. 162-163J. Fourth, it is likely that firms do not respond completely to new contracts on a month to month basis, due perhaps to the high costs of rapid employment change. These considerations suggest that a model designed to predict the impacts of changes in government procurement actions on employ- ment should include among the independent variables: (1) "Announcement" effects-specifically, budget plans and unobligated appropriations. The budget variable is equal to the budget amount from January until the month in which the appropriations bill is passed, after which, it is equal to zero until the following January. This formulation is intended to reflect the hypothesis that budget plans are the main source of information from January until the appropriation bill is passed. TJnobligated appropriations constitute a backlog item, consisting of the balance in the appropriation account after currently in- curred obligations are deducted and new appropriations are added. At any point in time, these unobligated balances of appropriations represent the amount avail- able to make additional contract awards. (2) Expenditures-to allow for the importance of working capital. (3) Obligations-to measure the direct impact of contract letting. Several lags will be incorporated to capture the possibility that firms do not respond fully on a month-to-month basis. Additional variables are needed to capture the effects of two other factors: price changes and changes in the amount of subcontracting. Since the empirical work will relate money amounts of expenditures and obligations to employment, changes in the price level will weaken the relationship. In a period of rising prices, for example, the same amount of obligations would lead to a smaller amount of employment. Changes in the amount of subcontracting are important because the Department of Defense budget categories and the SIC employment categories do not cover the same industries. This problem is described more fully in the appendix. Briefly, Department of Defense budget categories are concerned with end items, such as aircraft or ships, while the SIC data are keyed to the major product class of individual establishments. The tendency for more electronics equiphèht to be included in ships is reflected in the Department of Defense data in the "ships" account, while in the employment data, it is reflected in the electronics category. This factor should operate negatively on employment, that is, a given amount of dollars obligated forships will PAGENO="0307" ECONOMIC EFFECT OF VIETNAM SPENDING 665 lead to less employment in shipbuilding establishments, the more electronic equipment is included in the ship.4 An attempt is made to allow for these effects by including another variable (4) Polynomial in time-to alloxs for trends in subcontracting and price changes The use of a trend variable will, of course, pick up other smoothly changing omitted vaiiables In the present study, changes in the amount of procurement purchased from foreign sources may. be one such variable. . . Finally, although I suspect that much of the seasonal variation in the monthly employment series is due to the seasonality in the obliga- ti()ns series, conventional holiday periods and climatic conditions may be significant. These are allowed for by a set of variables.: (5) Set of seasonal dummy variables, with January omitted. Employment will be measured by (1) total number of workers, (2) number production workers, and (3) number of production workers times average weekly hours w orked These all reflect different types of adjustmentb It is anticip ted that the man-hours variable will be most sensitive to changes in obligations, since adjusting the length of the work week is generally the fastest way to increase output The number of production workers should be more sensitive to obligations than total workers, since the latter includes a large component of managemial and reseaich people, who may be more insulated from changes in production To the extent, how ever, that research per- sonnel are involved, the "announcement" variables may exert a greater impact on total w orkers than on production workers .111. REvIEw OF PREVIOUS EMPIRICAL WORK The discussion of the previous section leads to the conclusion that the structure of the government procurement process is such that the primary effects on employment and output will be felt some time after the order or obligations stage, with secondary effects operating through expenditures and announcements. With that in mind, some empirical work in. which government purchases of goods plays an important role will be examined. This work includes four large scale models of the economy and two papers which emphasize the impor- tance of obligations.5 Two other models were examined, but will not be reported upon in detail since their government sectors are not greatly elaborated. These include the Wharton School Quarterly Economic Model [Klein, 8], and T C Liu's Quarterly Model [11] In the Klein model, government purchases appear only in the identity for GNP Other possible routes through w hich defense procurement could flow are through new orders and unfilled orders New orders, however, are a function of recent sales and price changes, which do not explicitly allow for a change in government procurement action New orders, along with the rate of capacity operations, determine unfilled orders Again, there is little scope for changes in defense spendmg 4 The effects of price changes and changes in subcontracting are discussed by Hitch in [7, p. 694]. 5 Several other large-scale models of the economy are currently being constructed. The Brookings-Social Science Recearch Council model, [91, is ckse to completion. although important revisions are still being undertaken at this time. Two others, Wisconsin's Social Systems Research Institute [14] and the National Planning Association's Program Analysis for Resource Management, [131 have not, to my knowledge, elaborated agovernment expenditures sector. ~. . . PAGENO="0308" 666 ECONOMIC EFFECT OF VIETNAM SPENDING In Liu's model, the relevant variable, government purchases of goods and services, appears (after eliminating an identity) in the equation determining the change in nonf arm business inventories. Its coefficient is positive, but not significant. The description of the government spending process suggests that the coefficients should be negative, since purchases would tend to decrease inventories. How- ever, since service items, which may have fairly short lags between order and delivery, are included, and since there are problems in estimating inventories, the relationship may have been obscured. I next consider four large-scale models and two other studies which are directly concerned with the impacts of the procurement process. A. UNIVERSITY OF MICHIGAN RESEARCH SEMINAR IN QUANTITATIVE ECONOMICS ECONOMETRIC MODEL One of the few econometric models to take into account institutional factors of the government procurement process is the model, based on annual data, developed at the University of Michigan [17]. The equation explaining the change in durable goods inventory is a function of the difference between Federal military purchases in the following and the current year, (~M+ 1) as well as other variables. 4M+ 1 enters positively and significantly into the equation. The rationale for including this variable is that production of this component of inven- tory ~ * * appears in the national accounts as goods in process, and exerts a strong impact on the economy long before delivery of the finished product materializes as government expenditure" [17, p. 1 15~. This model is thus seen to have recognized the importance of accurately specifying lead and lag structure. It is, however, inade- quate from other viewpoints: (1) The level of aggregation is quite high, making it impossible to obtain impacts on specific industries; (2) the use of annual data. makes it impossible to study intra-yearly movements which may be of some interest; and (3) the use of Federal military purchases from private industry includes purchases of items which are not classified in the durable goods industry. Nevertheless, the importance of this variable in the inventory equation is an indica- tion of the gains to be realized from an appropriate specification of the lead and lag structure of the process. B. DUEsENBERRY-ECKsTEIN-FR0MM: MODEL OF THE U.S. ECONOMY DURING RECESSION In their very interesting paper [4], Professors Duesenberry, Eckstein, and Fromm recognize the importance of the order effect, particularly in the explanation of inventory changes. In constructing the order series, however, they assume that the lag between orders and pur- chases is one quarter. They nevertheless are able to state that the ~ * . * stimulus of government actions worked through orders. as much as through actual expenditures." It would be interesting to explore the consequences of a more realistic specification of the lag between obligations and purchases. C. FR0MM: "INVENTORIES, BUSINESS CYCLES, AND STABILIZATION" In a paper prepared for the Joint Economic Committee, Gary Fromm states, "~ * * fluctuations in government orders and expend- PAGENO="0309" ECONOMIC EFFECT OF VIETNAM SPENDING 667 itures coupled with their resulting impact on, and the independent variation of, private business investment appear to be the principal Tesponsibility for recent stability difficulties in the U.S. economy" {6, p. 37]. Although he presents some data to support this view, government orders do not explicitly appear in the econometric model of the econ- *omy presented in a later section of the paper. They are included, however, in the change in unfilled orders variable, which enters the inventory change equation. There would appear to be some difficulty, though, since the unfilled orders variable is essentially determined by lagged values of itself and current and lagged final sales of goods. Thus, government orders are present only to the extent that they appear as initial conditions in the unfilled orders equation, and to the extent that they appear in the final sales of goods, which enters with *a lag of two periods. The following is the inventory equation: E~I~= -29.4345 + .4601 8G - .7314 I~_~ + .1658 [111.3945 - .3878 S~_1G + .5229 /.\ S~_2G - .5545 Ot_~ + .8099 Ot_21 where I is inventories, S is final sales of goods, and 0 is unfilled orders~ The term in brackets is the equation for O~ [6, pp. 71 and 73]. Change in inventories is thus determined by current sales and sales lagged one, two, and three periods. In the case of government pur- chases, we would expect inventories to be related to sales with a lead, as in the Michigan model. D. LOVELL: FACTORS DETERMINING MANUFACTURING INVENTORY INVESTMENT A paper which explicitly considers government obligations is that of Michael Lovell. Using quarterly data from 1954 through 1960, he obtains the following inventory change equation: z~H~= -4.01 - .0683 H~ - +.184 X~ +.0298 z~X~ - .0158 ~ U~ + .0112 U~ - .295 E~ - .l24Obt where H is inventories of durable goods, X is sales of durable goods, U is unfilled orders, E is defense expenditures, and °b is defense obligations [12, p. 132]. Defense obligations are seen to enter posi- tively; they are also statistically significant. Unfortunately, Lovell did not report on longer lags. E. ANDO-BROWN: COMMISSION ON MONEY AND CREDIT STUDY The study most closely related to the present is the paper by Ando and Brown for the Commission on Money and Credit. They report that "the relationship between expenditures on aircrafts and current output is small. The current and two preceding months of expendi- ture did have coefficients that were statistically significant, and there may be some evidence that advance payments to contractors are of some significance to aircraft output" [2, p. 144]. The relationship between lagged obligations and output, on a quarterly basis, resulted in the following equation: P~= .0063 0~+ .0002 0~=i+ .0107 0~_2 (.0077) (.0076) (.0068) * + .0130 ~ (.0067) PAGENO="0310" 668 ECONOMIC EFFECT OF VIETNAM SPENDING where P~= quarterly average of Federal Reserve Board Index of Production in period t, and O~= quarterly obligations in period t (2, p. 144). The second and third quarters preceding that for which output is to be explained were considered significant, so that a lag of nearly a year between obligations and output existed. Further ex- periments on longer lags were not very satisfactory. The Ando-Brown paper thus presents important evidence on two of the effects which might be considered important for the discussion of the government spending process and the nature of the defense industries. It is concluded that lagged obligations explain output better than do expenditures, but that recent expenditures have some effect on output, pointing to the possible importance of the industry's dependence on the government for working capital. Their conclu- sions are summarized in the following statement: Even variations in rates of procurement of defense items take a considerable period before they register themselves in output. Output appears to be more sensitive to contract awards than to actual expenditure in the aircraft component of defense expenditure, the only one we examined. Aircraft contracts, for ex- ample, change output by only 20 percent of the contract by the end of 6 months, 55 percent by the end of three quarters, and are nearly fully reflected in output change by the end of a year. This particular case, however, can be attributed to excess capacity in the industry. New products could be initiated only after lengthy periods of research and would be expected to have lags of considerably greater length ~2, p. 11]. The main differences between Ando-Brown and the statistical results to be reported upon in the following section are the following: (1) The absence of variables representing "announcement" effects in the Ando-Brown paper. These may significantly affect the timing o changes in output and employment. (2) The use of output rather than employment as the dependent variable. Since the Federal Reserve Board reports [3, p. S-9} that the monthly output series for the aircraft industry is based on man-hours, with an adjustment for output per man-hour in the case of aircraft parts, this particular difference is probably not crucial. I prefer to work with the employment data directly, leaving the polynomial trend to capture changes in output per man-hour, because neither the source nor the quality of the Federal Reserve Board's adjustment is known to me. (3) The correspondence between Department of Defense budget categories and SIC categories. Ando and Brown relate budget aircraft to SIC aircraft, while the present study, because of the fact that much of the country's missile production takes place in establishments classified as aircraft, attempts to adjust for this. (4) Ando and Brown work with the period 1954-1959, while the present study incorporates 1955-1963. G. SUMMARY The preceding discussion of several large-scale models of the U.S. economy indicated that, by and large, these models do not appear to have portrayed the government sector accurately with respect to purchases of military goods. In general, the equations developed to explain inventories, orders, and unfilled orders are better suited for industries in which sales are made from inventories, and the adjust- ment mechanism operates through attempts to. control inventories. PAGENO="0311" ECONOMIC EFFECT OF VIETNAM SPENDING 669 This is not the case for large amounts of military procurement, how- ever. Many of these items are made to order, and a long lag occurs between orders and purchases. If military procurement were a small or unchanging portion of government purchases, inaccurate equations would perhaps not be crucial. But some of the important uses of these models have to do with the time path of the economy as changes in these procurement actions occur. An accurate description of the process is thus especially necessary if econometric models are to be helpful in evaluating alternative courses of action which would tend to offset major changes in procurement. The discussion also showed that when obligations were explicitly included they emerged as an .important explanatory variable. The empirical work discussed in the following sections bears this out for the aerospace industry expenditures and presents some new evidence on the importance of. the "announcement" effect. IV. STATISTICAL RESULTS The previous sections have argued that models designed to analyze the effects on employment of military procurement should incorporate announcement variables and new orders to obtain more accurate pre- dictions of the time path of employment. It has also been pointed out that many of the existing large-scale econometric models of the economy have not done so, and that the small amount of empirical work which has recognized the role of new orders has discovered it to be an important variable. In this section empirical work for two groups of budget categories will be discussed. Specifically, expendi- tures and obligations f or the aircraft-missiles-astronautics budget categories (hereafter aerospace group), will be related to employment in SIC categories 372 and 19, aircraft and parts, and ordnance and accessories, respectively, and budget category "ships" will be asso- ciated with SIC category 3731, shipbuilding and repairing. A more detailed description of the data may be found in the appendix. Tables 1, 2, and 3 contain the results for the aerospace industry of multiple regression analyses for three dependent variables: total em- ployment, production worker employment, and number of production workers times average weekly hours worked. Employment figures are in thousands of employees, man-hours are in thousands, and all dollar amounts are in millions. The results are broadly similar and are discussed in the following paragraphs. (1) Seasonal and time variables: Generally, the seasonal variables are not significant individually, which lends support to the hypothe- sis that observed seasonality in the employment series is better ex- plained by the seasonality in the obligations series than a constant seasonal pattern. An F test perfoimed on the group of seasonal dummy variables for the total worker regression proved to be insignifi- cant at the 5 percent level. Both time and time squared are highly significant. The coefficient of time is negative and that of time squared, positive. Over the range of t in this study, however, the negative effect predominates and the net effect of time is negative, although at a decreasing rate. In view of the earlier discussion of the likely effects of price changes and subcontracting patterns, this nega- tive effect was expected. PAGENO="0312" -i 0 rD~ ~ 0 0 ~: ~ a 0 0 0 -1 0 0 ~t0c~t0t0t0t~ ~ 2~R~~%~°° ~ w ~0 ~ ~ 0. I ~ 0) .1~ C) C) C) )~. C) (1)0)0)0) w ~ 0)0) PAGENO="0313" 0 0 0 *I ~ 0 LTi c~ ~ (~ ~ ~ 11 I. 0 w t~ t~ - - 0~ c~ c~ o - o o - o PAGENO="0314" 672 ECONOMIC EFFECT OF VIETNAM SPENDING TABLE 3.-Aerospace industries-Regression analysis [Dependent variable: Production worker monthly man-hours]' Independent variable Coefficient Standard error Beta Partial correlation Seasona1 dummies: February -117.4075 780.3 -0.0097 March 167.2887 823.7 .0138 April -256.6500 641.7 -.0212 May -347.5373 827.5 -.0287 June 147.2898 951.2 .0122 July -797.1213 788.5 -.0695 August -127.6783 1024.0 -.0111 September 687.8603 1023.0 .0600 October 807.6806 1017.0 .0704 November 894.8415 1193.0 .0780 December 153.0373 1254.0 .1334 3-356.9214 29.2 -3.2292 t2 31.6258 .1852 1.7354 Current expenditures -.0001 .3378 -.0389 Obligations,current .0002 .3100 .0601 1-month lag 31.0772 .3140 .1884 2-month lag 3.9303 .3134 .1637 3-monthlag 3.6327 .3220 .1103 4-monthiag 3.7840 .3245 .1369 5-monthiag 3.8744 .3248 .1541 6-monthiag 3.9448 .3193 .1688 7-mohthlag .5929 .3190 .1037 8-mohthlag 3.6790 .3197 .1193 9-month lag 3 . 7571 .3122 . 1331 10-month lag 3.8686 .3148 A527 11-monthlag 3.9021 .3161 ~1586 12-month lag .4546 .2760 .0824 Ur88bligated appropriations . 0845 . 0872 . 1043 BiIdget .1353 .0889 .2615 Intercept 25,279.4280 .9272 Standarderrorofestimate 1,045.1086 . i)egrees of freedom 72 Durbin-Watson statistic .3708 -0.0177 .0239 -.0471 -.0494 .0182 -.1183 -.0147 .0790 .0932 .0881 .1423 -.8215 .7190 -.0382 .0583 .3748 .3302 .. .2256 .2739 .3024 .3293 .2140 .2429 . 2748 .3092 .3188 .1905 . 1135 .1766 I In thousands. 2 All money amounts are in millions of dollars. 3 Significant at the 5-percent level. (2) Expenditures and obligations: The three sets of regression co- efficients reveal that current expenditures and obligations are not significant explanatory variables of employment, but that lagged obligations are all positive, all greater than their standard errors, and nine out of 12 coefficients in each regression are statistically significant. The fact that expenditures were not significant casts some doubt on the hypothesis that the industry is dependent upon the government for its working capital needs, but the importance of obligations is strongly reinforced. Contrary to the findings of Ando and Brown, the effects of obligations are felt almost immediately (the first lagged value is significant) and effects are fairly well spread out over the year, with a rather sharp drop between the 11th and 12th coefficient. (3) Announcement effects: The coefficients of the unobligated ap- propriations and the budget variables are statistically significant in two of the three regressions, and positive, though not significant, in the third. These variables appear to exert more effect on total work- ers than on production workers, both in terms of the magnitude of regression coefficients and standardized regression coefficients (B's). Since total workers include managerial and research people whose employment may depend less on actual production contracts than on the preparation of proposals to the defense department based on expectations about the amount of subsequent production contracts, this result is consistent with a~ priori expectations. PAGENO="0315" ECONOMIC EFFECT OF VIETNAM SPENDING 673 The R2s are quite high, ranging from .73 to .93, and are highest for the production workers and the production man-hours equations. The Durbin-Watson statistic appears to indicate some degree of positive serial correlation of the residuals, although the published tables do not contain entries for the number of independent variables used in these regressions. Several other sets of regressions were tried with lack of success. The first used outstanding obligation, lagged up to 6 months, as inde- pendent variables. They were not statistically significant and yielded low R2s. Another set of regressions used the data for the shipbuilding industry to estimate models similar to those reported above. The results were quite disappointing, with statistically insigmficant co- efficients and low R2s. Much of the trouble is no doubt due to the large and changing civilian component in employment.6 The importance of considering the effects of announcement and obligations variables on employment is illustrated in table 4. Three different models are used to generate the employment effects of the following postulated series of events: $1 billion are added to the budget and included in an. appropriations bill passed in August, a contract for that amount is let in September, and delivery takes place the follon ing September Model I utthzes the coefficients recorded in table 1 It includes both announcement effects and obligations Model II is based: on a similar regression with the announcement variables omitted. Model. III. assumes that the entire employment effect takes place at the time of delivery as assumed in several of the econometric models discussed abOve. ` . Model I accounts for a. greater total of employment than model II and displays a rather different time pattern.7 By September, when the obligation is assumed to occur, the announcement variables have already generated 17 percent of the total employment. The per- centage `of employment accounted for by model I remains above that `accounted for by model II for the whole period. Both models I and II, `of course; predict a time rather different from that suggested by model III. V CoNcLusIoNs It will be convenient to consider the main conclusions of this study in four parts: an empirical description of the military procurement process, the implications for econometric models, data needs and availability, and directions for further research. A. EMPIRICAL DESCRIPTION OF THE MILITARY PROCUREMENT PROCESS Based on the description of the government spending process and the regressions for the aerospace industry, it is clear that an important role is played by the obligations variables. Beginning with a 1-month lag they exert an important influence for a year. In addition, evidence has been presented to indicate that two proxies for announcement 6 According to (18, p. 23), the 1058 portion of military output (according to value of output) for the ship- building and repairing industry was 61 percent. Further, Survey of Manufactures data reveal that the proportion of military shipbuilding has fluctuated from about 30 percent to over 50 percent. 7 A referee notes that employment drops following the new appropriation and the new obligation in model I. The former occurs because the coefficient for unobligated appropriations (.0071) is smaller than the coefficient for the budget variable (.0081). Perhaps this is because much of the preliminary planning and development is done in response to the announcement of the budget in January and is virtually com- pleted by the time of the enactment of the appropriations in August. The drop in employment at the time of the hypothetical obligation in September is due to the negative, but insignificant, coefficient of current obligations (-.0037). I did not think it necessary to recompute the equatioiiwithout this variable. PAGENO="0316" 674 ECONOMIC EFFECT OF VIETNAM SPENDING effects-budget and unobligated appropriations-have substantial impacts on employment TABLE 4.-Employment resulting from 6( $1,000,000,000 increase in budget, included in August appropriation bill, obligation incurred in September, and delivery made in following September . ~ Month ~ Model I Model II Model III. cumu- lative per- centage of total employ- merit * Employ- merit' Cumula- tive employ- merit' Cumula- tive per- centage of total employ- ment Employ- merit Cumula- tive employ- merit 1 Cumula- tive per- centage of total employ- merit January February March . April May June July August September October November December January February March April May June July August September Total 8,100 8,100 8,100 8,100 8,100 8 100 8,100 7,100 3,400 32,300 27,500 21,000 27,100 30,300 30,500 15,900 18,500 22,300 30,600 34,800 16,800 8,100 16,200 24,300 32,400 40,500 48 600 56,700 63,800 67,200 99,500 127,000 148,000 175,100 205,400 235,900 251,800 270,300 292,600 323,200 358,000 374,800 2.16 4.32 6.48 8.64 10.81 12 97 15.13 17.02 17.93 26.55 33.88 39.49 46.72 . 54.80 62.94 *67. 18 72. 12 78.07 86.23 95.52 100.00 0 0 0 0 0 4, 900 30,900 21,6(X) 14,900 20,400 27,600 31,200 25,000 22,100 22,400 29,100 33, 100 15,000 0 0 0 0 0 0 0 0 4,900 35,800 57,400 72,300 92,700 120,300 .151, 500 172,500 194,600 217,000 246, 100 279,200 294,200 0.00 0.00 0.00 0.00 0.00 0 00 0.00 0.00 1.67 12. 17 19.51 24.58 31.51 40.89 51.50 58. 63 66. 15 73.76 83.65 94.90 100.00 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ~ 100. - 374,800 294,200 `Number of employees. Time~trend variables, acting as proxies for factors such as changes in the amount of employment in the SIC employment category asso- ciated with the corresponding budget category, proved to be highly significant. Seasonal dummies, however, were not significant. Ex- penditures were not a significant explanatory variable, in contrast to the findings of Ando and Brown. Whether this was due to differences in industry correspondence, time period covered, or estimation of expenditures was not investigated. Unfortunately, similar regressions for the ship industry resulted in unsatisfactory coefficients and low R2s. This result was attributed to the significant and varying nonmilitary demand in the industry. However, the fact that different results were obtained with the two industries also suggests that some degree of industry disaggregation should be employed to obtain more accurate estimates of employment impacts. B. IMPLICATIONS FOR ECONOMETRIC MODELS The implications for existing and planned econometric models are clear. There are apparently important employment (and income) effects associated with announcements and obligations. Variables representing these effects should be included among the exogenous variables. Further, models which incorporate series On new or unfilled orders should recognize that part of these series-especially orders for military procurement-are exogenous to the system. They are under the control of the government, and should enter the model in such a way as to facilitate study of their impact on variables of interest. PAGENO="0317" ECONOMIC EFFECT OF VIETNAM SPENDING 675 C. DATA NEEDS A few changes would seem fairly inexpensive and quite useful. These include breaking up the "ordnance, vehicles and related equip- ment" category into individual categories and publishing expenditures data on a gross basis. The former modification would permit a closer correspondence between employment and budget categories and the latter would provide a better estimate of amounts paid to business. It would also be desirable for other agencies of the government, particularly GSA, NASA, and AEC to release similar information on monthly obligations, with care being taken that these obligations are not also counted in the Department of Defense series when contracts are placed through the latter. While on the subject of data, it might be noted that a study for the Joint Economic Committee entitled "A Federal Statistics Program for the 1960's" [19] does not include an improved series covering govern- ment obligations on its list of directions for improvement. D. FURTHER RESEARCH Given the present data availability, I do not think that the pro- cedure followed in this paper can be applied to other industries. If appropriate data should become available, such studies would be quite valuable. Another direction for research would be to complete the description of the spending process by constructing models which relate expenditures and government purchases to lagged obligations and other variables. An important area for research, not touched upon in this paper, is the question of economic impacts on particular regions. It is hoped that the present study has contributed to this research by pointing out the stage at which impacts arelikely to occur. Again in the direction of disaggregation, more detail on the occupational mix of employment might be investigated. As noted above, there appear to be differences in the behavior of total employment and production worker employ- ment. As longer' series on research and development obligations become available, these differences might be useful for studying the' dynamics of the demand for engineers and scientists. REFERENCES 1. Ando, Albert, E. Cary Brown, John Kareken, and Robert M. Solow, "Lags in Fiscal and Monetary Policy," Research Study 1 in Stabilization Policies (Engle- wood Cliffs, N.J.: Commission on Money and Credit, Prentice-Hall, 1963), pp. 1- 163. 2. Ando, Albert, and E. Cary Brown, "Lags in Fiscal Policy," part II of No. 1, pp. 97-163. 3. Board of Governors of the Federal Reserve System, Industrial Production, 1959 Revision (Washington, July 1960). 4. Duesenberry, J. S., Otto Eckstein, and Gary Fromm, "A Simulation of the United States Economy in Recession," Econometrica, 28, No. 4 (October 1960), pp. 749-809. 5. Federal Reserve Bank of Boston, "New England and the Impact of Defense Orders," New England Business Review (March 1965), pp. 8-15. 6. Fromm, Gary, "Inventories Business Cycles, and Economic Stabilization," in Inventory Fluctions and Economic Stabilization, part IV, Supplementary Study Papers, Joint Economic Committee, U.S. Congress (Washington, D.C.: U.S. Government Printing Office, 1962), pp. 35-133. 7. Hitch, C. J., "Statement," in hearings on the January 1961 Economic Report of the President and the Economic Situation and Outlook (Joint Economic Com- mittee, February 9, 10, March 6, 7, 27, April 10, 1961), Washington, D.C.: U.S. Government Printing Office, 1961), pp. 614-701. PAGENO="0318" 676 ECONOMIC EFFECT OF VIETNAM SPENDING 8. Klein, L. R., "A Postwar Quarterly Model; Description and Applications," in Models of Income Determination, Studies in Income and Wealth, 28 (Princeton, N.J.: National Bureau of Economic Research, Princeton University Press, 1964) pp. 11-57. 9. Klein, L. J., and Gary Fromm, "The Complete Model: A First Approxi- mation," The Brookings Institution, Econometric Model Project, mimeo. (June 1964). 10. Levy, M. E., "Statement," in The Federal Budget as an Economic Document, hearings before the Subcommittee on Economic Statistics of the Joint Coin- mittee, April 23, 24, 25, and 30, 1963 (Washington, D.C.: U.S. Government Printing Office, 1963), P1~* 222-232. 11. Liu, T. C., "An Exploratory Quarterly Econometric Model of Effective Demand in the Postwar U.S., Economy," Econoinetrica, 31, No. 3 (July 1963) pp. 301-348. 12. Lovell, M. C., "Factors Determining Manufacturing Inventory Invest- ment," in Inventory Fluctuations and Economic Stabilization, part II, Causative Factor in Movement of Business Inventories, Joint Economic Committee, U.S. Congress (Washington, D.C.: U.S. Government Printing Office, 1961), pp. 119-194. 13. Norton, J. DeW., "An Introduction to the Post-Attach Recovery Planning System," PARM System Manual Volume I-A, B (National Planning Association, Economic Programing Center, August 1964), mimeo. 14. Orcutt, Guy H., "Microanalytic Models of the United States Economy: Need and Development," American Economic Review, LII, No. 2 (May 1962), pp. 229-240. 15. -~--, "Toward a Partial Redirection of Econometrics," this Review XXXIV, 34 (August 1952), pp. 195-200. 16. Peck, M. J., and *F. M. Scherer, The Weapons Acquisition Process: An Economic Analysis (Boston: Division of Research, Harvard Business School, 1962). 17. Suits, D. B., "Forecasting and Analysis with an Econometric Model," American Economic Review, LII (March 1962), pp. 104-132. 18. U.S. Arms Control and Disarmament Agency, Economic Impacts of Dis- armament, U.S. Arms Control and Disarmament Agency Publication 2, Economic Series 1 (Washington, D.C.: U.S. Government Printing Office, 1962). 19. U.S. Bureau of the Budget, A Federal Statistics Program for the 1960's, a study prepared for the Joint Economic Committee, October 15, 1962 (Wash- ington, D.C.: U.S. Government Printing Office, 1962). 20. U.S. Congress, Joint Economic Committee, Background Material in Economic Aspects of Military Procurement and Supply-1964, April, 1964 (Wash- ington, D.C.: U.S. Government Printing Office, 1964). 21. U.S. Department of Labor, Bureau of Labor Statistics. Employment and Earning Statistics (Washington, D.C.: U.S. Government Printing Office, 1962). 22. Weidenbaum, Murray, "Statement," in The Federal Budget as an Economic Document, hearings before the Subcommittee on Economic Statistics of the Joint Economic Committee, April 23, 24, 25, and 30, 1963 (Washington, D.C.: U.S. Government Printing Office, 1963), pp. 62-103. 23. -, "The Economic Impact of the Government Spending Process," Business Review (University of Houston, spring, 1961). APPENDIX The purpose of this appendix is to provide the sources of the data and the various adjustments made. (1) INDUSTRY CORRESPONDENCE 8 The following correspondence was established between the budget categories used by the Department of Defense and the Standard Industrial Classification used for the employment data: ~This correspondence was established with the aid of Prof. M. L. Weldenbaum, and is based on Census work sheets for industry classification. PAGENO="0319" ECONOMIC EFFECT OF VIETNAM SPENDING 677 TABLE A 1.-Category correspondence Industry name Budget categories I Standard industrial classification Ai craft mi ic IAircraft Aircraft and parts (372). r 551 S (Missiles Ordnance and accessories (19). Ships Ships Shipbuilding and repairing (3731). I These budget categories are the titles used in the most recent issues of the "Monthly Report on Status of Funds by Functional Title." Earlier years titles were somewhat different. Work on missiles is divided between the aircraft and parts industry and the ordnance and accessories industry. It was not possible to include the entire ordnance budget classification, since in most recent years ordnance has been part of "ordnance, vehicles, and related equipment." Using this category would make it necessary to include the motor vehicles and parts industry employment category to pick up the vehicles component of the budget category, but this would involve including the civilian component of the industry as well. In this case, of course, the civilian component would dominate the data. (2) EMPLOYMENT, HOURS, AND EARNINGS These data were obtained from "Employment and Earnings, 1909-1961" [21] and current issues of the same publication. The variables are not seasonally adjusted. (3) BUDGET The budget amounts are taken from the U.S. budget for various years. Gen- erally, the correspondence between the Department of Defense categories used in this study and the budget categories is easily established. An exception is the case of the Army budget, which for several years used the category "Ammunition and Guided Missiles." The portion included in missiles was taken to be the percentage of obligations for missiles and ammunition going to missiles for the year in question applied to the total budgeted amount for missiles and ammunition. (4) EXPENDITURES, OBLIGATIONS, UNOBLIGATED BALANCES AND UNPAID OBLIGATIONS The main source for these variables is the Department of Defense monthly release, "Monthly Report on Status of Funds by Functional Title." Amounts taken are those for "Military Functions." (A) The amounts shown for expenditures are net of receipts from other govern- ment agencies (Mutual Defense, NASA, etc.) for whose account the Defense Department placed contracts.' In an effort to arrive at a gross expenditures amount, which more accurately reflects payments to industry, a correction was added to expenditures. This correction was obtained by taking, for each year, outstanding obligations at the beginning of the year plus current obligations minus net expenditures. The resulting figure is compared with outstanding obligations at the beginning of the next year, and the difference is assumed to be the amount by which gross expenditures have been misstated. One-twelfth of the difference is added to each month. This correction was not possible for procurement in 1954 and research and development in 1960. (B) Obligations data are taken directly as published from the Status of Funds Report. (C) Status of Funds reports unobligated balances at the beginning of the year. This is diminished monthly by current obligations and then replenished by the annual appropriations. This latter amount is added in the month that the ap- propriations bill is reported out of the Joint Conference.10 Appropriations are derived by deducting end-of-fiscal-year uncommitted obligations from uncom- mitted obligations for the beginning of the next fiscal year. These estimates will include some minor accounting adjustments in addition to appropriations. `Thanks to Mr. Sheldon Taylor of the Department of Defense for explaining the intricacies of their account procedures. 10 Although the appropriations bills do not become law until signed by the President, I assume that the "announcement" effect operates at the time the bill is reported out of the Joint Conference for two reasons: first, the signing of the bill follows by a few days, so that it does not make very much difference; second, it is extremely unlikely that the bill will be vetoed, so that the bill's being reported outof the Joint Conference is tantamount to approval of the appropriations. PAGENO="0320" THE RELATIONSHIP OF NEW ORDERS TO SHIPMENTS OF * DEFENSE PRODUCTS B~ ~`1Aw Lix LEE* INTRODUCTION in recent discussions about how an econometric model can be effec- tively used to evaluate the impacts of government operations, it has been pointed out that the development of a realistic model of the gov- ernment sector is a prerequisite [61. There are two aspects to this problem: (i) An econometric model should include appropriate in- strumental variables-variables that can be controlled by policy makers [11], and (ii) the model should properly capture the impacts of the government actions [1, 2, 4, 13]. The research presented here is in one sense an exploratory work to fill out knowledge about these two aspects of the problem. Since defense procurement accounts for approximately 10 percent of GNP, a question which naturally arises is: Can defense procure- ment be manipulated by the government to help stabilize economic activity or to offset cyclical fluctuations? It is to be expected that the timing of defense procurement is determined primarily by non- economic considerations. In peace time, however, a certain degree of flexibility is presumed to exist in the scheduling of defense procure- ment. For this reason, defense procurement can be considered a candidate for instrumental variables to be included in econometric models. In entering defense procurement as a candidate for instrumental variable, the next question being raised is: What stage in the defense procurement process is most important from the viewpoint of measur- ing its impact on economic activity? In a limited way in which defense procurement was considered in major econometric models, econometricians tend to measure its impacts at the expenditure, stage [3, 5, 7, 8, 9, 10, 12]. Except for progress payments, expenditure however, is made after final product is completed and delivered. Because of the nature of defense products, little or no inventories are accumulated by the defense industries in anticipation of order or contracts. In fact, most defense procurement involves direct negoti- ations between the Department of Defense and defense industries. It can therefore be assumed that the production process begins after the defense industries accept an order and sign a contract with the Defense Department. As the industries take steps to fill the order, employment, output, and income payments are affected. What this implies is that the impacts of defense procurement on GNP (through employment, income, output, and inventories) are felt prior to the *The author, who is assistant professor of economics at Washington University, St. LouIs, Mo., wishes to express his gratitude to Prof. M. L. Weidenbaum for sharing his knowledge of the military procurement process and data sources and for helpful comments on an earlier draft of this paper. Prof. Edward Green- berg also contributed valuable ideas on econometric models of the government sector. Thanks are due to Norbert Budde and Robert Keller for assistance. The project was supportedby NASA through its grant NsG-342 to Washington University. 678 PAGENO="0321" ECONOMIC EFFECT OF VIETNAM SPENDING 679 expenditure stage. In fact, expenditure and delivery of shipment usually signals the end of the impacts of a given defense procurement. Because of this, it is not the sales or the expenditure, but the letting of new orders that should be investigated to measure the impacts of defense procurement on economic activity. A study of the nature of structural lags between new orders and shipments will not directly reveal the impacts of defense procure- ments on economic activity. But on the assumption that the place- ment of new orders signal the beginning and shipments signal the end of the impacts of defense procurements, a study of the nature of structural lags does indicate the duration of such impacts. On the one hand, this knowledge is useful for model building in econometrics. On the other, it will be useful for the timing of fiscal and monetary policies to coincide with or offset any changes in defense procurement. THE NATURE OF ORDERS-SHIPMENTS RELATIONSHIP Defense products, as defined by the Bureau of Census,' include communication equipment, complete aircraft, aircraft parts, and ordnance. These products vary in characteristics. The length of time required for the production of some of these products may be quite short. However, for products such as complete aircraft and missiles, 2 years or so may be elapsed before an order results in ship- ments. From a technical viewpoint, it can be assumed that new orders placed during a given period, 01, will not result in shipments during the same period. It is also assumed that a proportion, a,~1, of 0, results in shipments in (t+1); and a proportion, a,+,, of 0, results in shipments in (t+2), etc. As a first approximation, we assume that all or nearly all of the new orders placed during t, 0,, are filled within a period of 2 years (eight quarters). This order-shipment relation- ship can be restated as that the current shipments, 5,, are derived from new orders placed during the preceding eight quarters, 0,_,, 01-2, 0,8. The length of time required for an order to be ifiled can be said to depend on (1) state of technology, (2) the nature of product, and (3) the extent of capacity utilization. Technological condition and the nature of product can be regarded as long run factors which affect the nature of structural lags or the order-shipment relationship through a's. The rate of capacity utilization, on the other hand, may be regarded as a shortrun factor the effect of which on the order-shipment relationship may be assumed to be additive. That is, the fuller the capacity is utilized, the smaller the size of 5, will be, and vice versa. On the assumption that technology and the nature of products remain constant over the sample period, we postulate that: a0 -J- a~O 1+1 + a2O 1-2 ~ . . + a80 1-8 -f- a,R ,+ (I, Where a's represent the proportions of new orders placed during each of the periods t- 1, t-2, . . . , t-8, that result in current shipment, 5,. a0 is introduced to take care of systematic deviations from the hypothesis and a9 shows the effect of the rate of capacity utilization on 3,. U, is introduced to account for any random disturbances. 1 See Bureau of Census publication: "Manufacturers' Shipments, Inventories, and Orders: 1947-63 Re- vised." 7S-516-67----vol. 2-21 PAGENO="0322" 680 ECONOMIC EFFECT OF VIETNAM SPENDfl~G The assumption that technology and the nature of products remain unchanged is not entirely realistic however. In fact, the advance- ment in military tecnhology and changes in the nature of products during the past 15 years were unprecedented in history. From the viewpoint of individual products, technological progress wifi improve the quality of product and/or the methods of production. An im- provement in production methods may shorten the length of time required for the production of a given product. In other words it may shorten the structural lags between new orders and shipments of the product in question. However, a more apparent result of technological progress is the introduction of new products. As new products are introduced, the product mix changes.2 This is evident in that the proportion of defense procurement devoted to missiles and electronic equipment, which have high technology content, has been increasing since the early 1950's. A change in product mix undoubtedly will alter the nature of structural lags between new orders and shipments of defense products. Because of this, the assumption that the nature of structural lags remains unchanged throughout the sample period will have to be relaxed. In other words, instead of assuming the fixed values of a's as in equation (1), we assume that a's are a function of product mix. That is to say, the nature of structural lags as indicated by a's changes with a change in product mix. There is no precise measurement of how product mix changes. However, as noted above, the growing importance of missiles and electronic equipment may be a good indicator and is used as proxy for changes in product mix. This variable is quantified by taking the ratio of the obligations on missiles and electronic equipment to the obligations on the total defense procurement. This ratio ranges from a low of .07 to a high of .43 over the sample period. On the assumption that the nature of structural lags is a function of product mix P~, we write: a11=aio+aiiPt~i (2) a2ta2o+aslPt~2 (3) a3~ago+aaiPt_g (4) as~~ago+asiPt_s (8) Substituting equation (2) through (8) in equation (1), we obtained: S~ ao+ (ai o + anP ~-~) O~-~ + (a20 + a21P t-2) 0 t-2 + (a3o+asiPt_s)Ot_s+ . . .+ (aso+a8jPt_s)Ot_s+agRt+ U~ (9) Rewriting (9), we have: S~= ao+aioOt_l +aioOt-_2+ . . . -4-a5001_s+aii(PO) g...j~+ _________a21(P0) t-2+ +asi(P0) t_s+agRt+ U~ (10) `This study is concerned with the relationship of new orders to shipments of defense products in aggre- gate term. The order-shipment relationships of individual products are not within the scope of this in- vestigation. PAGENO="0323" ECONOMIC EFFECT OF VIETNAM SPENDING 681 In order to preserve as many degrees of freedom as possible, it is assumed that: aii= a2i= /310 a31 a41 I3~~ a5i a61 1312 a71 a81 1313 and denote: a~0 a80 Equation (10) is then rewritten as: * .+i3801_8+i39R~+1310{(P0)1_1+ (P0) t-2} -f-thi{ (P0) t-34- (P0) ~ +/312{ (P0)5-5+ (P0) t-6} +f3ia{ (P0)5-7+ (P0) s_s } + Ut (11) Equation (11) shows that S~ is dependent on previous new orders, the interaction of new orders with product mix, and the rate of capacity utilization. 3. DATA AND STATISTICAL RESULTS Data on the new orders, shipments, unfilled orders, and inventories of defense products are published by the Bureau of Census as monthly series in "Manufacturers' Sales, Inventories, and Orders." To avoid the necessity of including an excessive number of lagged variables in the equation, the data are aggregated to obtain a quarterly series. This aggregation reduced the size of observations to a smaller number. But it also resulted in some loss of precision. Seasonally adjusted data are used in this investigation. The rates of capacity utilization are those of the Federal Reserve Board series. The ratios of the obligations on missiles and electronic equipment to the obligations on total procurement are calculated from various issues of Monthly Report on Status of Funds published by the Department of Defense. The statistical estimates of equation (1) are summarized in table 1. TABLE 1 Variables Coefficients Standard errors Variables Coefficients Standard errors Constant 0,-i o t-2 01-3 01-4 438. 21 .1366 . 1464 . 1707 .1640 .1189 0.0631 * 0665 .0680 .0707 .0745 01-6 0t-7 0 t-8 .R, R2=.8189 Se=33.24 0. 1142 .0190 . 0024 .0413 d.f.=30 d=.6697 0. 0693 .0636 . 0548 .0140 PAGENO="0324" 682 ECONOMIC EFFECT OF VIETNAM SPENDING An interesting aspect of the above estimates is that the effects of new orders, 0, on shipments, S, first increases then decreases with the in- crease in lags. The coefficients for 05...3 and 05~4 indicate that the largest proportions of new orders plaaed during a given period result in shipments three and four quarters later. The coefficients for 0~_7 and are respectively .0190 and .0024 suggesting that current ship- ments are derived from a very small proportion of new orders placed more than seven or eight quarters ago. In other words, most of the new orders placed in a given period were filled within a period of six quarters. From another viewpoint, the results indicate that the dura- tion of the impacts of a given order for defense products is approxi- mately a year and 6 months. As expected, the extent of capacity utilization is inversely related to shipments: The fuller the capacity is utilized, the smaller the size of shipments will be and vice versa. The estimates for equation (11) are summarized in table 2. TABLE 2 Variables Coefficients and standard errors Variables Coefficients and standard errors Constant O-~ 0-2 o~-~ 0t-~ 0-5 26.2834 .0490+0001 Pt_i (.0566)(.0422) .0642±0001 P~_, (.0626)(.0422) .0903-.0452 Pt-3 (.0569)(.0931) .0708-0452 P,-4 (.0642)(.0931) .0573±.1277 Pt-5 (.0608) (.1114) Ot-t .0889±1277 Pt-s (.0564)(.1114) 0,-v .0278+2335 Pt-7 (.0514)(.0906) 0,-s -.0088+2335 Pt-s (.0451)(.0906) Rt -1.4559 (1.2900) P2=9019 df=26 S~=26.28 d=1.025 ~ The addition of product mix P~ as an explanatory variable raises the R2 from .8 189 (table 1) to .9019 (table 2). This change in the B2 of .0830 is highly significant statistically. The estimated value of a's are ifiustrated for P,=.05, .10, .15, .20, .25, .30, .35, .40, and .45 in table 3. TABLE 3 P 0,-, Ot-2 Ot-3 0,-i 0,-, Ot-e 0t-~ Ot-s 0. 05 0.0490 0. 0642 0. 0880 0. 0685 0. 0637 0.0953 0.0395 0.0029 .10 .0400 .0642 .0858 .0663 .0701 .1017 .0512 .0146 .15 .0490 .0642 .0835 .0640 .0765 .1081 .0628 .0262 .20 .0490 .0642 .0813 .0618 .0828 .1144 .0745 .0379 .25 .0490 . 0642 . 0790 . 0595 . 0892 . 1208 . 0862 . 0496 .30 .0490 . 0642 . 0767 . 0572 . 0956 . 1272 . 0979 . 0613 .35 .0490 .0642 .0745 .0550 .1020 .1336 .1095 .0729 40 . 0490 . 0642 . 0722 . 0527 . 1084 . 1400 . 1212 . 0846 45 . 0490 . 0642 . 0700 . 0505 . 1148 . 1464 . 1329 . 0963 Tables 2 and 3 show that the changes in product mix as indicated by P~ does not have any effect on the relationship of 0,~ and °t-2 to B,. Most of the new orders that result in shipments within a short period, say 6 months, are those for component parts of defense products. It is reasonable to assume that change in product mix will have little effects on the relationship between new orders and shipment of these products. Changes in product mix, however, have effects on the relationships of 0,_3, 0,_4, . . . 0,.9, to 8,. The magnitude of coefficients for PAGENO="0325" `ECONOMIC EFFECT OF VIETNAM SPENDING 683 °t-3 and ~ is rnversely related to P~, while that for ~ O~, ~ °t8 varies with the value of P~. A change in product mix over the sample period indicates a shift from conventional defense products which have relatively `lower technology content to missiles and electronic equipment which have relatively higher technology content. The time required for the production of conventional defense products is shorter than that required for the production of missiles and elec- tronic equipment. As the proportion of defense procurement going to missiles and electronic equipment increases, the proportion of new orders that is filled within three or four quarters decreases while the proportion that is filled between five and eight quarters increases. The nature of structural lags between new orders and shipments varies with the change in product mix. This also implies that the duration of defense procurement impact on economic activity increases as the proportion of expenditure going to products with high tech- nology content, such as missiles and electronic equipment, increases. 4. CONCLUDING REMARKS The statistical estimates of the structural lags between new orders and shipments implied that the impacts of defense procurement on economic activity are spread over a period of approximately a year and a half. The duration of these impacts, however, is dependent on product mix. The larger the proportion of defense procurement going to products with high technological content, the longer the duration will be. In considering the implications for fiscal and mone- tary policies to meet any change in defense procurement, the duration of such impacts needs to be taken into account. It is beyond doubt that the appropriate stage of defense procurement should be introduced as an instrumental variable in the government sector of econometric models. The study presented here does not directly investigate the impacts of defense procurement on such activities as production, employment, and income. Nor does this study investigate orders that are generated by subcontracting. These need to be investigated directly. REFERENCES 1. Ando, Albert; Brown, E. Cary; Kareken, John; Solow, Robert M., "Lags in Fiscal and Monetary Policy," Research Study 1 in Stabilization Policies, Com- mission on Money and Credit, Prentice-Hall, Englewood Cliffs, N.J., 1963, pp. 1-163. 2. Ando, Albert; and Brown, E. Cary, "Lags in Fiscal Policy," part II of No. 1, pp. 97-163. 3. Duesenberry, J. S.; Eckstein, Otto; and Fromm, Gary, "A Simulation of the United States Economy in Recession," Econometrica, volume 28, No. 4 (October 1960), pp. 749-809. 4. Federal Reserve Bank of Boston, "New England and the Impact of Defense Orders," New England Business Review, March 1965, pp. 8-15. 5. Fromm, Gary, "Inventories Business Cycles, and Economic Stabliization," in Inventory Fluctuations and Economic Stabilization, part IV, Supplementary Study Papers, Joint Economic Committee, U.S. Congress, U.S. Government Printing Office, Washington, 1962, pp. 35-133. 6. Greenberg, Edward, "Employment Impacts of Defense Expenditures and Obligations," Working Paper 6505, Washington University, St. Louis, Mo. 7. Klein, L. R., "A Postwar Quarterly Model; Description and Applications," in Models of Income Determination, Studies in Income and Wealth, volume 28, National Bureau of Economic Research, Princeton University Press, Princeton, 1964, pp. 11-57. PAGENO="0326" 684 EcoNoMic EFFECT OF VIETNAM SPENDING 8. Klein, L. R.; and Fromm, Gary, "The Complete Model: A First Approx- imation," the Brookings Institution, Econometric Model Project (mimeo), June 1964. 9. Liu, T. C., "An Exploratory Quarterly Econometric Model of Effective Demand in the Postwar U.S. Economy," Econometrica, volume 31, No. 3 (July 1963), pp. 301-348. 10. Lovell, M. C., "Factors Determining Manufacturing Inventory Invest- ment," in Inventory Fluctuations and Economic Stabilization, part II, Causative Factors in Movement of Business Inventories, Joint Economic Committee, TJ.S. Congress, U.S. Government Printing Office, Washington, 1961, pp. 119-194. 11. Orcutt, Guy H., "Toward a Partial Redirection of Econometrics," Review of Economics and Statistics, volume 34, No. 3 (August 1952), pp. 195-200. 12. Suits, D. B., "Forecasting and Analysis With an Econometric Model," American Economic Review, volume LII, No. 1 (March 1962) pp. 104-132. 13. Weidenbaum, 1\'iurray L., "The Economic Impact of the Government Spending Process," The Business Review, the University of Houston, October 8, spring, 1961. PAGENO="0327" Part IV REGIONAL AND INDUSTRIAL IMPACTS Frequently asked questions are those inquiring about Defense ex- penditure impacts on a firm, an industry, a community, or on an economic region. This part's papers attempt to illuminate these areas of inquiry. 685 PAGENO="0328" PAGENO="0329" THE ECONOMIC IMPACT-INDUSTRIAL AND REGIONAL- OF AN ARMS CUT* B~ WAssILY LEONTIEF, ALISON MORGAN, KAREN POLENSKE, DAVID SIMPSON, EDWARD TOWER I. THE PROBLEM AND ITS ANALYTICAL FORMULATION 1. The object of the computations described in this paper was to determine what effect a hypothetical reduction in military accom- panied by a compensating increase in nonmilitary demand would have on the industrial composition and regional distribution of employment in the continental United States. By compensation is meant the maintenance of the total level of employment in the economy. In a paper published 4 years ago,' input-output analysis was used to estimate the effect of such a change in the structure of final demand on the industrial distribution of the labor force for the country as a whole. The present study carries that inquiry one step further. The impact of the hypothetical shift from military to civilian demand is projected here not only in interindustrial, but also in interregional terms. Specifically, the territory of the continental United States has been subdivided into 19 distinct regions, and the shift in the industrial composition of output and employment was assessed for each one of them. Had we attempted to study each region separately and then simply to add the results to arrive at corresponding aggregates for the country as a whole, the total national output figures and the corresponding total input figures for each distinct category of goods and services could not have been expected to match. In other words, the results of such isolated regional studies would not comprise a consistent picture of the national economy as a whole. The simple scheme of multiregional analysis on which the present computations are based provides for simultaneous balancing of all input-output flows from the point of view of each individual region, as well as for the U.S. economy as a whole. For some goods-let them be called local-a balance between pro- duction and consumption tends to be established separately within each region; for other goods-let them be identified as national-such a balance typically is achieved only for the country as a whole. Withip each region the output of a national good might exceed or fall short of its total input, the deficit or surplus being evened out by exports to or imports from other regiOns. Retail trade and auto repair services are characteristically local industries while coal mining and aircraft manufacturing are typically national. The difference *Reprinted from The Review of Economics and Statistics, vol. XLVII, No. 3, August 1065; also chapter 10 of Imput-Output Economics, Oxford University Press (New York), 1966. All authors were members of the Harvard Economic Research Project. This study was financed by the National Science Foundation and the Rockefeller Foundation. The computations were performed on the IBM 7094 at the Harvard Computing Center. 1 Wassily Leontief and Marvin Hoffenberg, "The Economic Effect of Disarmament," Scientific Americas,. April 1961. 687 PAGENO="0330" 688 ECONOMIC EFFECT OF VIETNAM SPENDING between the two obviously should be explained in terms of the relative mobility or transportability of their output. To separate national industries from the local, all sectors were arranged in order of the increasing magnitude of interregional, as compared with the intraregional, trade of their respective products. Then, an admittedly somewhat arbitrary cut was made across that array, setting apart the local industries, serving mainly users located within the region in which production occura, from the national industries, supplying the entire national or even international market, whose products typically are being shipped for this reason in com- paratively large amounts across regional lines.2 2. The multiregional input-output computation itself can be visualized best as being performed in three distinct, successive rounds. The first consists of a conventional input-output calculation designed to determine the direct and indirect effects of the given shift from mili- tary to nonmilitary final demands on the total output of all-that of local as well as of national-goods for the country as a whole. The regional distribution of these total figures is determined in the second and the third rounds. All basic information on the input structure of each local or national industry used again and again throughout these computations stems from the same large input-output table of the American economy. This common source of structural data ensures the internal consistency of all the ftnal results. For national industries the regional apportionment of the increase or the reduction in the total U.S. output is based in each instance on a simple, but in the first approximation, well-justified assumption of a uniform percentage change. For example, if the first stage compu- tation indicates that as a result of curtailed military purchases and a simultaneous expansion of deliveries serving various types of final civilian demand, the total U.S. output of electronic equipment will fall by 5 percent, then in the second stage that aggregate cut is allo- cated among the different regions on the assumption of an equal 5 percent cut applied across the board. That presupposes, of course, knowledge of the actual output and employment levels maintained by the national industries in each region before the shift occurs. The third and last step determines the geographic distribution of changes in the level of activities of local industries producing goods for which the balance between supply and demand tends to be main- tained within each region with relatively limited recourse to inter- regional trade. The input requirements that must be covered in each region by the output of its local industries comprise: (a) deliveries to final military and civilian users located in the same region; (b) input requirements of the national industries operating in it; and (c) the input requirements of the local industries themselves. Thus, the calculation of regional outputs of local industries requires not only a knowledge of final demand for the United States as a whole, but also a breakdown of military and nonmilitary final demand by regions. While changes in the level of final deliveries of steel, chem- icals, and other national goods need be specified only for the country as a whole, the given shifts in military procurement and civilian purchases of electric power, gas and water, office supplies, and other local goods have to be specified separately for each region before the analysis of their regional impact can begin. The amounts of local 2 The concluding observations at the end of this article describe a possible refinement of this approach which introduces a graduated distinction between national, regional, and subregional industries and goods. PAGENO="0331" ECONOMIC EFFECT OF VIETNAM SPENDING 689 goods absorbed in each particular region by national industries oper- ating in it can be ascertained easily by applying appropriate sets of technical input coefficients to the regional output figures derived for all national industries in the previous, second round of computations. The regional output levels of local industries, finally, can be derived through separate input-output computations in which the deliveries of local goods to final users located in each region and to national industries operating within it play the role of a given bill of goods. 3. In this last stage of the multiregional analysis, households is treated as one of the local industries-the largest one in fact. The out put of that industry consists of labor services of various types. In contrast to previous computations of this kind, for reasons of prac- tical convenience the quantities of labor services are measured in this study not in man years but rather in terms of the total wage and salary payments received for them. The inputs of the household sector are consumer goods purchased by it. Its input structure, like the input structure of any other industry, can be described accordingly by an array of consumption coefficients, each of which represents the amount of one particular type of good absorbed by the household sector per unit of its own output, i.e., per dollar of salaries and wages received by it. That means, of course, that in the third stage of the multiregional input-output computations, the given regional bill of goods is rede- fined so as to include all military and non-military governmental purchases and private investment expenditure, but not the private consumption expenditures. Since households is treated at this stage of the computations as one of the local industries, all goods ab- sofbed by it appear not as final deliveries, but rather as components of that part of all output of each sector that serves indirect demand. The internal consistency of the entire procedure is demonstrated by the fact that, if separated from deliveries to other local and all the national industries and summed for the country as a whole, these regional inputs into households will match exactly the private consumption column of the final bill of goods introduced into the computation in its very first stage. 4. That bill of goods itself, of course, must reflect the anticipated effect of a hypothetical reduction of military and a corresponding increase in civilian expenditures. For purposes of the present analysis, such a shift has been assumed to. have occurred in the year 1958, which at the present time is the latest year for which a detailed input-output table of the U.S. economy has been compiled. The final bill of goods is represented by three components: Military pur- chases, private household consumption, and nonhousehold civilian final demand.3 The latter demand "contains" non-military deliveries. to the Federal, State, and local governments, private and public gross investment, and net exports. The hypothetical cut in military expenditure is visualized to take the form of a 20-percent, across-the-board reduction in each kind ~of military purchase. With the total 1958 defense expenditure included m the_military vector amounting to $31.3 billion, that means reducing Morris R. Goldman, Martin L. Marimont, and Beatrice N. vaccara, "The Interindustry Structure of the United States, a report on the i958 Input-Output Study," Survey of Current Business, U.S. Depart- ment of Commerce, November 1964, Washington, D.C. A detailed description of the definitions and composition of the final demand vectors used in this study is given in see. IV. The vectors only include estimates of final purchases from endogenous industries, e.g., the military vector does not include purchases from new construction since this is exogenous in this study. Thus, the sum of the elements included in the vectors does not represent all final demand. See footnotes to table A-3. PAGENO="0332" 690 ECONOMIC EFFECT OF VIETNAM SPENDING it by $6.3 to $25 bfflion.3 The compensating rise in nonmilitary demand was assumed, on the other hand, to be represented by a proportional across-the-board increase in all kinds of nonmilitary final deliveries. Its total magnitude is chosen deliberately with the view of maintaining the total level of employment, or rather the combined wage and salary bill of all industries, at its original-that is, the actually observed-1958 level. Had the military shopping list contained the same goods and in the same proportions as the civilian, each mfflion dollars' worth of addi- tional nonmilitary demand could reemploy the same number of hands and heads-commanding the same amount of wages and salaries- as would have been released by each mfflion dollars' worth of military budget cut. However, the military product mix is very different from the civilian. A comparison of the results of two auxiliary input- output computations has shown that in 1958 the total wages and salaries paid for all the labor engaged directly and indirectly in produc- tion of one mfflion dollars' worth of goods and services combined in the proportion demanded by the military are some 21 percent larger than wages and salaries paid for labor inputs required for production of $1 million worth of outputs delivered in amounts reflecting the average product mix of all nonmilitary final users. Thus, it would take $7.6 bfflion of additional civilian demand to compensate the cancellation of $6.3 bfflion worth of military spending. Nonmilitary final demand, as defined for this study, amounted in 1958 to $418 bfflion.3 Stated in percentage terms, the shift in the economic impact as described below combines a 20-percent cut in military purchases with a 1.8 percent increase in the amount of goods and services absorbed by each of the two categories of final civilian users. With the total labor input and wage bifi remaining constant, a 1.8 percent increase in the amount of all goods and services allocated to private consumption can be described as a proportional increase in all consumption coefficients. Accordingly, the column of technical coefficients used in the last stage of the multiregional input-output computations to describe the input requirements of households was obtained by raising by 1.8 percent the consumption coefficients de- rived from the 1958 U.S. input-output table. A translation of the theoretical scheme described above mto concise mathematical language is presented below. A reader not interested in details of computational procedure can skip part II and proceed directly to part III containing a summary of the principal conclusions of this study. II. MATHEMATICAL FORMULATION OF A LINEAR MULTIREGIONAL INPUT-OUTPUT SYSTEM ~ 1. NOTATION The multiregional economy described below consists of (m) national and (i-i) local industries. When households is treated as an en- dogenous sector the total number of local sectors is (1). rphe loca- tional distribution of all inputs and outputs is specified in terms of (`r) distinct regions. 4Thefirst-materhlly different, but form~11y similar to the present-version of that system was presented in Wassily Leontief (Ed.). Studies in the Structure of the American Economy, (Oxford University Press: New York, 1953), cli. 4. PAGENO="0333" ECONOMIC EFFECT OF VIETNAM SPENDING 691 The quantities of all goods, including the labor services, are meas- ured in physical units defined in each instance as "the amount pur- chasable for $1, at 1958 prices." Captial letters are used to designate rectangular and square matrices, lower case Latin letters to describe column and row vectors, and Greek letters to define scaler magnitudes, except matrix dimensions, which are in parentheses: A-square, (n+l- 1) by (n+l- 1), matrix of input coefficients of all national and local industries, excluding households. rA~NlA~L1 A*_~ * * augmented square, (n-Fl) by (n+l), matrix of input coefficients of L~ILN -~LL1 all sectors including households, partitioned into: A~N-square (n X n) submatrix of input coefficients describing flows from national to national industries. ALL-rectangular (n Xl) submatrix of input coefficients describing flows from national to local sectors, including households. A~N-rectangu1ar (1X n) subinatrix of input coefficients describing flows from local industries, including households, to national industries. ALL-square (11) submatrix of input coefficients describing flows from local to local industries, including households. w'-row vector of (n+l- 1) labor input coefficients of all national and local in- dustries, excluding households. c~'-column vector of the original (n+l) consumption coefficients, i.e., the input coefficients of households, including the coefficients describing inputs from from households to households. c~'-column vector of (n+l) consumption coefficients, including the input from households to households, adjusted to the change in the level of living which has resulted from the shift in final demand. x-column vector of (n+l- 1) total outputs of national and local industries, ex- cluding households. column vector of (n + 1) total outputs of all sectors partitioned into: ZN column vector of (n) total outputs of national industries, and x~ column vector of (1) total outputs of local industries, including households. XN-diagonal matrix with the total outputs of national industries entered on its principal diagonal in the same order in which they are shown in ZN. rn, h, q-three column vectors of (n+l- 1) quantities, measured in 1958 dollars, of national and local goods, excluding labor, representing respectively the military, the household and the nonhousehold civilian component of the origi- nal, total final bill of goods. ~j*, q*two column vectors of (n+l) quantities of military and nonhousehold civilian final demand, including labor. ~M, ~H, PQ-three amounts of labor directly entering respectively into the mili- tary, the household and the nonhousehold civilian demand components of the original, total final bill of goods. M~ Q~ -two diagonal (lXl) matrices of quantities of local goods, including labor, representing respectively the military and the nonhousehold civilian component of the original, total final bill of goods. X~-rectangular (n X r) matrix each column of which shows the output levels of all national industries in one particular region. PN-rectangular (n X r) matrix each column of which shows what fractions of the total output of each of the national industries are produced in one particular region. D~P, D~-rectangular (1 X r) matrices the columns of which represent respectively proportions of the total military and of nonhousehold civilian final demand for the products of different local industries, including households, absorbed in one particular region. a-the ratio of the magnitude of each element of total final military demand after the shift from military to nonmilitary expenditure to its magnitude before the shift. i3-the ratio of the magnitude of each element of the household and of the non- household civilian componens of total final demand after the shift from military to nonmilitary expenditures to its magnitude before the shift. PAGENO="0334" 692 ECONOMIC EFFECT OF VIETNAM SPENDING 2. DERIVATION OF COMPUTATIONAL FORMULAE Basic relationship between the total final bifi of goods-comprising deliveries to household, nonhousehold civilian, and military final demand-and the total outputs of the national and local industries, excluding households: x=(I-A~ `[h+q+mll. Corresponding relationship between the original, total level of employment and the combined labor inputs indirectly absorbed by all national and local industries plus those directly entering final demand: V=WX+ VH+ VQ+ ~M* Relationship between the new final bifi of goods and the new total level of employment that-by assumption-equals the original level of employment: p=w'(I- 4) -`{13(h+q) +am~ +av~u+13(PH+vQ). Solution of the equation (3) above for 13, with all other magnitudes appearing on the right-hand side considered as given: - v-a[w'(I-4)~m+vMI (4 ~(I~A~'(h+q)+vH+PQ Derivation of the new vector of the input coefficients of the house- hold sector through adjustment of the original vector to the shift in the level of living: c~=c~-j3. (5) Derivation of the new ~ total output levels of national and local industries, including households: xe~= (I_A*) _l[13~*+~*] (6) Derivation of the new regional outputs of national industries from their new total outputs: yR_V V --N-"12V'- N- Derivation of the new regional outputs of local industries, including households: V*R_(T * \-lr * VRL(Q* *_L ~f* *\ -`i- L'~ LU L LN-"~-Nm\J-' L QT~ ~ Mi The sum of the last two terms is a rectangular (lXr) matrix each column of which represents the new combined military and nonhouse- hold civilian final demand for the products of local industries- including households-in one particular region. The multiplication of 13Q~ by D~ and a~l~[~ by D~ are analogous to that performed 011 the_right-hand side of (7); it involves application of given sets of Strictly speaking, a subscript should be used to distinguish old and new outputs. PAGENO="0335" ECONOMIC EFFECT OF VIETNAM SPENDING 693 regional distribution coefficients to previously obtained total figures of final military and nonhousehold civilian deliveries of each kind of local good. Any other method of determining the amounts of local goods absorbed by military and nonhousehold civilian final demand in each region would be equally acceptable, provided the regional figures add up to the corresponding elements of the diagonal matrix (i3Q~+ aMa); i.e., provided the sum of all regional deliveries of each local good equals the corresponding total amount of military and nonhouse- hold civilian deliveries for the country as a whole. One of the 1 rows of the rectangular matrix X~ on the left-hand side of (8) describes the new regional outputs of the household sector, that is the level of employment attained in each region after the hypothetical shift in the relative magnitude of the military and of the nonmilitary components of final demand. The formulae presented above describe the computations of regional output and employment figures after the shift from military to non- military ~expenditures. If the proportionality factors a and $ are set equal to 1, the formulae describe the state of the economy and, in particular, the level and regional distribution of output and employ- ment before the shift. III. SUMMARY OF THE PRINCIPAL FINDINGS 1. When the numerical conclusions presented are based on a straightforward application of a systematically developed theoretical theme, the results need little additional explanation. In the present instance most of the explaining was done when the procedure was described by which the primary factual information fed into an analytical machine is transformed into final figures describing the results of the entire computation. They appear in the form of tables which describe in great detail changes in the interindustrial and the interregional distribution of output and employment that would be brought about by a hypothetical 20 percent reduction in the military bill of goods, combined with a compensating proportional increase in the nonmilitary components of the final bill of goods. This non- military demand comprises consumption by private households, total investment, which includes new construction, and nonmilitary gov- ernmental expenditures. A detailed explanation of sources and methods used to obtain the basic matrix of input-output coefficients of all national and local industries, to ascertain the actual composition of the military and nomiitary vectors of the final bill of goods for the year 1958 and last, but not least, to determine the regional distribution of the outputs of national industries and of the final military and nonmilitary demand for locally produced goods will be found in section IV below. The number of industries in terms of which the productive apparatus of the American economy is described is 58, and the number of regions into which the territory of the continental United States was sub- divided for purposes of this description is 19; thus, the total number of output and employment figures resulting from this multiregional input-output computation could exceed 1,000; in fact, since not all industries are present in all regions, the detailed tables reproduced in the appendix contain a certain number of empty cells. PAGENO="0336" 694 ECONOMIC EFFECT OF VIETNAM SPENDING Since the hypothetical shift in the composition of final demand was balanced so as to leave the overall level of employment for the country as a whole the same as it was before, its economic impact takes the form of shifts in the labor force among different industries and among different regions. The magnitudes of changes in output and employment that we are about to examine are-when expressed in relative terms-at most of the order of a few percentage points up or a few percentage points down; in most instances, they are even smaller. Considering, how- ever, that an unemployment rate of 5.5 percent commonly is inter- preted as a sign of serious malfunctioning of our economic system and that an eventual reduction of that figure to 4 percent has been recog- nized as one of the major goals of national economic policies, even a one-half of 1 percent change in employment level in one region or another must be taken to represent a noteworthy shift. The percent- ages to be examined may not meet that degree of accuracy, but they should indicate the direction of change in regional employment levels. TABLE 1.-Percentage changes' in output and employment 2 by industries, after a compensated 20 percent cut in armament expenditures Sector num- her' Industry Percent- age change Sector `mm- her' Industry Percent- age change 36N Aircraft -16.05 13N Wood containers 1.05 40N Ordnance -15.42 27N Stone and clay.~ 1.10 41N 34N 29N 38N Research and development - - Electronics equipment Nonferrous metals - Instruments -13.26 -5.40 -2.21 -1.59 1L 1OL SN 15N Printing, publishing Business services Fabrics, yarn - Otficefurniture - 1.12 1.14 1.19 1.19 32N 37N 28N 31N 1SN Electricalapparatus - Other transportation equip- ment Iron and steel Nonelectrical machinery Chemicals - -0.92 -0.23 -0.04 -0.03 0.15 20N 35N 39N 2L 12N 5L Drugs Motor vehicles Miscellaneousmanufacturing Electricity, gas, water Lumber, wood products Communications 1.21 1.21 1.23 1.24 1.26 1.26 13L Maintenance construction 0.20 14N Household furniture 1.27 24N 33N 22N Rubber, plastics Appliances, lighting Oilfields 0.30 0.34 0.38 12L 3N 4L Medical, educational services_ Forestry, fisheries Trade 1.31 1.33 1.40 23N 3L 21N Petroleum products Transportation Paint 0.45 0.48 0.48 6L 9L 8L Finance, insurance Auto repair services Personalservices 1.48 1.48 1.56 30N Fabricatedmetals 0.54 25N Leather -- 1.57 uN 19N Miscellaneous fabricated tex- tiles Plastics synthetics 0.54 0. 59 7L 2N ilL Real estate, rentals Otheragriculture Amusements 1.57 1.65 1.66 26N 16N 17N Glass Paper Paperboard containers 0.81 0.83 0.93 iON 6N iN Apparel 1.66 Food and kindred products~ 1.66 Livestock 1.67 9N i4L 5N Miscellaneous textiles, rugs~ Government enterprises Coal mining 0.97 0.98 0.98 7N i7L 4N Tobacco 1.76 Households' 1.81 Agricultural services 2.14 Each figure represents the change in output and employment in each industry as a percentage of totnl output and employment in that industry before the arms cut. 2 Employment and its regional distribution is measured in each industry by labor earnings. 2 Compensation is assumed to consist of a uniform proportional increase in all components of nonmilitary final demand sufficiently large to maintain the aggregate employment in all sectors (consequently in all regions) taken together unchanged. Source of data: Appendix tables A-6 and A-7. 5 Note that the local sectors which are dummy industries have been omitted from this ranking. N refers to National industry number, L to Local industry number. Note that this percentage reflects the 1.81 percent increase in all consumption coefficients. It represents the change in employment of employees in households such as domestic help or babysitters. 2. Table 1 describes the impact of a postulated demilitarization of the final demand in terms of individual industries. The percentage figures show that of the 56 sectors listed,6 only 10 will experience a Twolocal dummy sectors, 15L office supplies and 16L business travel and entertainment, are not included in this tabulation. PAGENO="0337" ECONOMIC EFFECT OF VIETNAM SPENDING 695 reduction in total output and employment; aircraft, ordnance, and, significantly, research and development will take large cuts of over 13 percent, while electronic equipment, nonferrous metals, and instru- ments will drop between 1.59 and 5.40 percent. Among the four other industries registering losses rather than gains is iron and steel, which with its token 0.04 percent cut barely maintains the traditional stand- ing as an armament industry. Positive changes are on the other hand distributed more evenly and among a much larger number of in- dustries. Food products, other soft consumer goods, and services gain most, basic industries such as chemicals, petroleum products, and paper, least, printing and publishing, motor vehicles, and other branches of processing show intermediate gains a few points above and below 1 percent. The skewness of the entire distribution, specifically the bunched negative and widespread positive shifts reflect, of course, the contrast between the specialized nature of military demand and the broad product mix of the civilian. 3. The regional projection of the economic impact of disarmament is summarized in table 2. As can be seen from the percentage entries in 10 of the 19 regions employment can be expected to contract while in the other nine it will expand. The largest loss, -1.85 percent, will be experienced in California, the biggest gain, + 1.54 percent, in the midwestern region comprising Minnesota and the two Dakotas. TABLE 2.-Percentage change in output and employment by region after a compensated 20-percent cut in armament expenditures Region number Region Total net change (percent) (1) Total gross increase (percent) (2) Total gross decrease (percent) (3) 19 16 17 9 14 18 12 8 10 1 13 7 11 2 3 15 4 5 6 California Colorado New Mexico Arizona, ~.1evada, Utah Maryland, Virginia, Delaware, West Virginia, District of Columbia Texas Oregon,Washington Mississippi, Alabama Georgia, North and South Carolina Florida New England Arkansas, Louisiana, Oklahoma Kansas, Iowa, Nebraska, Missouri Kentucky, Tennessee New York New Jersey, Pennsylvania Idaho, Montana, Wyoming Michigan, Ohio Indiana, Illinois, Wisconsin Minnesota, North and South Dakota Total United States -1.85 -1.40 -1.35 -1.36 -1.00 -0.81 -0.73 -0.57 -0.43 -0.06 0.21 0.44 0.37 0.66 0.53 1.28 0.89 0.93 1.54 0.54 0.67 0.69 0.66 0.73 0.91 0.89 1.02 1.12 1.05 1.26 1.46 1.31 1.44 1.26 1.83 1.43 1.46 1.96 1. 16 2.39 2.07 2.04 2.02 1.73 1.72 1.62 1. 59 1.55 1.11 1. 05 1.02 0.94 0.78 0.73 0. 55 0.54 0.53 0.42 1. 16 Neither the shift from one industry to another, nor the move from one region to another, considered separately, measures the total magiiitude of readjustments that will be required of the members of each regional labor force. Such a measure must take both into account, simultaneously. What is needed is a figure which shows what proportion of all men and women initially employed in all the different industries operating in a given region will lose their jobs and will have to look for new jobs in a different industry in the same region or 78-516-67-vol. 2-22 PAGENO="0338" 696 ECONOMIC EFFECT OF VIETNAM SPENDING in another region; in the latter case, the jobs they find in another region might or might not be in the same industry in which they worked before. The figures entered in column 3 of table 2, accordingly, show what proportion of all the wage and salary earners will receive discharge notices and will have to look for new jobs. To emphasize the impor- tance of these figures, the sequence in which the 19 regions are listed on the table reflects the order of decreasing magnitude of these "gross displacement" rates. California, again, is at the head of the procession with the highest rate of 2.39 percent, and Minnesota with North and South Dakota ranks lowest with only 0.42 percent. A comparison of entries in column 1 with those of column 3 reveal that one region can experience a larger expansion in the total level of employment than another, but at the same time be subject to a greater stress as measured by the gross displacement figure. According to the computations the New York State region, for example, would expand its total employed labor force by 0.66 percent while the corresponding figure for the Kentucky-Tennessee region is 0.37 percent. At the same time 0.78 percent of the original jobholders in New York would have to change their jobs as against 0.94 percent in Kentucky-Tennessee. Employment agencies might be interested in the total number of new jobs created in a particular region, i.e., in the sum total of the increases in employment figures of those industries expected to expand in each region. Expressed as percentages of total labor force initially employed in the region, these "gross job gains" figures are entered in column 2. Strictly speaking, they do not present us with any new information since by definition they can be obtained simply by adding pairwise the corresponding entries in column 1 and column 3. The regional impacts of disarmament as summarized in table 2 are described graphically on chart 1. Each set of bars depicts the impact of the same hypothetical shift from military to non-military demand on the employment situation in one of the 19 regions. The total length of the bar extended downward from the horizontal baseline measures the gross job loss (described in col. 3 in table 2). The ~ota1 length of a bar extended upward represents the corresponding gross gain in jobs (described in col. 2 of table 2). The solidly shaded sec- tion of the longer of the two bars shows the difference between their length; in other words, it measures the change in the total level of employment in a particular region. That change is negative when the solid bar extends below the horizontal line, and it is positive when it is above. The geographic picture confirms the well-known fact that most of the resources serving directly or indirectly final military demand come from the western, southwestern and southeastern regions, while the Midwest, the Great Lakes region and the North Atlantic and New England States depend to a large extent on civilian demand. A cut in military expenditures, accompanied by an expansion of the nonmilitary bifi of goods, thus will create more serious readjustment problems in the first than in the second group of regions. IV. DATA AND METHODS OF COMPUTATION 1. The basic concern of this study was to determine the regional, combined with the industrial, effects of a reduction in armaments. PAGENO="0339" ECONOMIC EFFECT OF VIETNAM SPENDING 697 Table A-i gives the industrial classification used. The aggregation of states into i9 regions was chosen to make the data collection and the computations of a manageable size, while maintaining sufficient detail to detect regional differences. The "A" matrix consisted of a domestic-base 1958 80-order inter- industry coefficient matrix made available by the Office of Business Economics in November 1964 and aggregated to 60 sectors at the Harvard economic research proj ect.7 New construction coefficients were removed from the endogenous sectors to form a final demand column. Row distributions of final demand were used to derive the final demand columns other than new construction and military.8 The next step was to estimate vector (m) of military final demands shown in table A-3. Since more specific data for the military final demand vector was unobtainable at the time this study was begun, the estimates for military final demand were developed working with adjusted control totals given for various sectors in military prime contracts 10 and with the i958 Federal Government vector itself. The military final demand vector was made so that military purchases from any industry did not exceed Federal Government spending for products of that industry. Whenever a degree of arbitrariness entered into the determination of components of~ military final demand the estimate was biased toward the metal industries. All sectors with zero Federal Government final demand were assigned zero military final demand." In the case of aircraft (36N) and ordnance (40N), the entire Federal Government final demand was put in the mtht'iry final demand vector For the remaining sectors, each item in military prime contracts which served as a control total for military purchases from a particular group of industries was distributed in the proportion the sectors were to one another in the total Federal Government bill of goods, or in the proportion that the Department of Defense payrolls were to other Federal Government payrolls.'2 The three vectors of final demand are shown in tables A-2 and A-3.'3 The next step (represented earlier as equation 3) was to estab- lish the control total, ic, the aggregate level of direct and indirect labor earnings in i958, which was to remain constant throughout the computations. This total included direct earnings in household, military, and nonhousehold civilian final demand categories, as well as the direct and indirect earnings received from the endogenous sectors. Earnings were defined to include wages and salaries and `The 60-sector classification is given in table A-i distinguishing between national and local industries. A column of import coefficients also was obtained from the Department of Commerce for use in the calculations. The row distributions are given in "The Interindustry Structure of the United States," Survey of Current Business, November 1964, table I, p. 21. The calculation of Household final demand is designated as vector (h), while the final demands of the Federal Government (other than military), State and local government, net inventory change gross private capital formation competitive imports exports, and new construction are referred to as a group called nonhousehold civilian vector (q). Refer to footnotes on table A-3. 9 The fiscal year was adjusted to a calendar year base; also, "Actions of less than $10,000" were distributed proportionately over prime military contract figures. These adjusted figures were used as control totals in determining how much military spending there was within groups of industries. 10 Military Prime Contract Awards and Subcontract Payments, July 1962-June 1963, Office of the Secretary of Defense, tables 6 and 7. 11 These include: Livestock (iN), coal mining (5N), tobacco (7N), oilflelds (22N), finance (OL). Forestry and fisheries (3N) and lumber (1IN) had negative Federal Government final demands, but were assigned zero military final demand since it appeared that the military would not provide inputs to these industries. Crops (2N) also was assigned zero military final demand since the large entry for this sector in the total tederal Government vector represented operations of the Commodity Credit Corporation. Since sectors (iN), (2N), and (3N) now had zero elements in the military vector, agricultural services (4N) also was assumed to have zero military final demand. 12 When it could he assumed that military and nonmilitary expenditures would parallel closely the num- ber of workers in each sector. 15 Households was separated from the other final demands, because in the later calculations this sector would become endogenous. PAGENO="0340" Co C a 0 SI C Lii Lii C 0 -ci SI Lii Si Lii SI z a CHART 1. PERCENTAGE CHANGE IN OUTPUT AND EMPLOYMENT RESULTING FROM A HYPOThETICAL 20 PER CENT CUT IN MILITARY SPENDING AND A COMPENSATING RISE IN CIVILIAN FINAL DEMAND PAGENO="0341" ECONOMIC EFFECT OF VIETNAM SPENDING 699 income of unincorporated enterprises, with a fixed markup of 20 percent in all but a few sectors to account for consumer expenditures by those with incomes from sources other than employment. Such an even markup does not affect the role of earnings as a measure of labor input. Since v was to remain constant, the drop in total labor earnings caused by the decrease in military spending had to be offset by an increase in the other components of final demand which would produce a compensating increase in labor earnings. The postulated value for a was 0.8; then using equation (4), j3 was determined to be approxi- mately 1.02.14 Earlier, the output and labor earnings generated by the three components of final demand were calculated to determine what the requirements actually- were in 1958 (referred to as before the shift); now, the new requirements associated with the new final demands (referred to as after the shift) were estimated. The next step was to calculate the regional distribution of labor earnings both before and after the shift. By including households as an endogenous sector in the subsequent computations, the repercussion effect of household incomes and expenditures. on the rest of the industries could be taken into account. Matrix A* had to be constructed separately for the base year 1958 and for the situation after the level of living was increased by 1.81 percent as part of the compensation for the arms cut. In both cases, it was formed by adding a row of labor coefficients and a column of consumption coefficients. The labor coefficients were obtained by dividing wages and salaries plus income of unincorporated enterprises, inflated by 20 percent, for each industry by output in that industry.15 The column of consump- tion coeffioien~s for 1958 was obtained by dividing the deliveries from each industry to households (h) by the total amount of labor earnings for the country as a whole (~) .`~ The elements of this column of consumption coefficients were multiplied by 1.81 to obtain the adjusted column. The new diagonal element of the labor coefficient row and the consumption coefficient column was obtained by dividing direct earnings in households, (v11), by the figure Then, the two new A* matrices-one matrix containing the original consumption coefficients, the other the adjusted consumption coeffi- cients-were partitioned into four submatrices by dividing all in- dustries into two categories: National and local.'7 In the classification used, there were 41 national industries and 17 local industries, includ- ing households.18 14 Therefore, a reduction of 20 percent in military expenditures was compensated by an approximate 2 percent increase in the household and nonhousehold civilian components of final demand. 15 See table A-2, col. 2. Sources for labor earnings are given in table A-b. `5 See table A-2, col. 1. Consumption coefficients after the shift can be obtained by multiplying each element of this column by 101.8 percent. 17 The division was based upon the data given in charts 17 and 19, pp. 144 and 146, of Wassily Leontief (Ed.), ibid., showing the proportion of the output of different industries which is consumed within a region and that which is exported for two types of regions: States and census divisions. A diagram of the partition is shown in sec. II. IS See table A-i. Since business travel and entertainment and the office supply sectors are "dummy" sectors, their assignment to local industries is arbitrary. PAGENO="0342" 700 ECONOMIC EFFECT OF VIETNAM SPENDING 2. The regional distribution of the output of national industries, was obtained by directly allocating the share of national output to a region in proportion to that region's share in the productive capacity of a particular industry.'9 The change in labor earnings by region for national industries was determined by subtracting the regional distribution of outputs before the shift from the distribution of outputs after the shift and multiplying by the labor coefficients.2° The first step in establishing the level of output of each ocal in- dustry in each region was to distribute the final demand for local industries by regions. Military demand was distributed according to Department of Defense payrolls in each region. Nonhousehold civilian final demand was subdivided into its seven component bills of goods, each one was distributed according to a factor representing the importance of that final demand in a particular region, and the seven resulting matrices were added.21 Then, the output in each local industry in each region was obtained by inserting the appropriate matrices and vectors on the righthand side of equation (8). Outputs of local industries before the shift were subtracted from the outputs after the shift and the result was multiplied by the labor coefficients to give the change in labor earnings in local industries.22 The total change in labor earnings by regions, finally, was obtained by adding the change occurring in local industries in a region to that occurring in national industries and to that origi- nating within the military and nonhousehold civilian sectors of the economy.23 `~ The sources for the PN matrix, the distribution factors for national industries, are given in table A-il. The actual distribution factors used are shown in table A-5. 20 See table A-6 which includes the change in dollar and in percentage terms. Only one column is needed to represent the percentage changes for national industries since total U.S. demand forthe industry's product determines the output within a particular region. 21 The sources for the DQ and DM matrices, the distribution factors for local industries, are given in table A-12. Table A-4 contains the regionally distributed final demands. 22 See table A-7 for dollar and for percentage changes in local industries. 2~ See table A-9. PAGENO="0343" ECONOMIC EFFECT OF VIETNAM SPENDING 701 V. CONCLUDING OBSERVATIONS ON FURTHER RESEARCH The same analytical scheme that permitted us to assess the economic implications of a hypothetical step toward disarmament, implemented by the same body of factual data, also can be used for evaluating the probable effect of specific measures of economic policies intended to mitigate the stresses of the transitional period. Such measures are usually designed to modify directly or indirectly the level, the composi- tion and the regional distribution of the new civilian bill of goods. To assess their effect on the interindustrial and interregional distribution of outputs and employment, it wifi be necessary only to repeat the sequence of computations described above with these readjusted versions or the final bifi of goods. Whenever information on specific military budget cuts becomes available, this information can replace the hypothetical assumption of the proportional 20-percent cut in military spending and the compensating 2-percent increase in civilian purchases. The following two refinements can be introduced into the procedure described above without changing the analytical basis of the general approach. The admittedly rigid assumption that whenever the total output of a national good goes up or down, it increases or decreases in the same proportion in all regions can be relaxed. After completion of the three-stage computation described above, the new regional distribution of consumption of each national good can be determined and then compared with the old. Some regions will turn out to be increasing their relative shares at the expense of the others. Accord- ingly, the geographic distribution of the output can be expected to be affected by this, at least to some extent. If the demand for steel were to contract in a western but to expand in the eastern regions, the share of the latter in the total output of steel might be expected to increase somewhat and the share or the western mills to fall. To take account of this, a second round of multiregional input-output computations can be undertaken in which the set of the regional distribution co- efficients applied to each of the national industries would be revised in the light of the numerical results, of the first round. PAGENO="0344" 702 ECONOMIC EFFECT OF VIETNAM SPENDING The second refinement of the original procedure consists in breaking the regions into subregions.24 The region, for example, which in the present computation includes Iffinois, Indiana, and Wisconsin can be subdivided into two parts, one comprising Iffinois and Indiana and the other-Wisconsin. The percentage figures describing the partici- pation of these three States in the total production of each national good would have to be split into two separate figures. The output of the industries originally classified as local can be treated in two different ways. The regional outputs of some local goods might bal- ance the demand not only for the three States together, but also separately, in each of the two subregions. That might be true of automobile repair services and retail trade. Other local goods, while not moving in sufficiently large amounts across the borders of the three-State region, still might be traded freely between its two parts. For such goods the distribution of the total regional output between the two subregions might be described better by a set of constant subregional coefficients. On the lower subregional level, these em- pirically determined coefficients would play a role analogous to that assigned to regional coefficients in determining the interregional distri- bution of the total output of each national good. Without elaborating the technical details of such a complicated analytical scheme, involving not one but several layers of regional breakdowns, it suffices to observe that while the successive rounds of such computations can be intro- duced one by one without modifying the results of the higher rounds, the overall results always will be internally consistent at every stage. Finally, an entirely different nonlinear, multiregional input-output scheme was proposed several years ago.25 It is being tested now in the United States, in Latin America, and also in Europe. All of these interregional input-output schemes require detailed regional information which is not always available. Thus, highest priority should be assigned to improvement of the basic data. For statistics which are collected on a national level, a systematic, regional breakdown becomes more and more important. On the other hand, most data collected by local and State organiza- tions-often in connection with various programs of regional eco- nomic development-are limited in their usefulness because of lack of comparability with other regional and national statistics. This needs to be remedied by agreement on and compliance with certain common classifications and standards. 24 See Wassily Leontief (Ed.), ibid., ch. 4. a Wassily Leontief and Alan Strout, "Multiregional and Input-Output Analysis," Tibor Barna (Ed.) Structural interdependence and Economic Derelopment, (Macmillan: London, 1963), cli. 7. PAGENO="0345" -~ -~ ~ CD ~ ~Hr~ ~ ~&CD$~~~ -~ -~ ~ CD !Qh ~ CD CD CDQ 9J;~ cID' -o ~CD II .~ 0 0~ CD 0 0 CI) CI 0 CI 0 CD CI CI. t~1 C w C 0 ~ ~ 0 C i z CI CI CI CI CI. CI PAGENO="0346" CD CD CD CD CD CD CD CD CD CD )CD b~ I~ CD -~ CD) CD D. CD ~CD - CD * ~ ~CCD_ ~ ~CDCD ~ Dl p~ ~ ~ ci~ *0 ~ ~CD~rC CD0~~ a - ~ ~ ~ 0 CD (DCDC) ~ C) ~ft ~ os ju IDl~1 ~ ~ C C) ci CI) *3 CI) tn :1' CD -i CC CD * p LCD CD CD CD DCI CD) CD C) CD DO LCD CD C) CD LCD - C) C) 0 0 C) t~j 0 * * CD CD CD ~ CD CD CD CD CD CD CD ~ CD CD LCD LCD LCD LCD D- CD CD CD CD LCD CD CD 0 CD PAGENO="0347" LTJ I 0 0 H 0 C) C) C) C) C) C) C) C) C) ) C) ~C)C)C)C)~C)C)4OOCCC)C)OOC)C)~OOCC! ~ -`~1 ~ ~~C)C)C)C)C)CCC~C)CCC) C)C)C)C)C7'C)C) C)C)~I C) C)C)C) C) C)C)C) C) C) C) C) C) ~ C) C) C) C) C) C) C) ~ C) C) C) C) C) C) C) C) C) C) C) ~ C) C) C) C) PAGENO="0348" 1:1 706 ECONOMIC EFFECT OF VIETNAM SPENDING C . *~1d ~ c~o~ ,-~ ii:- - o~-~ ~ L ~;9~ L~ ~a ~ - - -~ c-i c-i -i t- t- c-c C Ci C ~i ~c-~ c-i z~ C 0 0 C `cc C 0 C 0 C PAGENO="0349" ECONOMIC EFFECT OF VIETNAM SPENDING 707 Cl `-0 0000 0'- 0000000000 Cl Cl .O~00,-.000 0000 00 00000000 00000 cC 000'-CO 00000000000 C'l 0000' 0000000000 `~ 00 CC C) 00t~00©00000000©000000000000 CCC ~ ~ 0-~ 00 ~ - C0000000000 Cl 0000 00000 0000 CO ~ 0000 00 00000 00 ~ 00000 00 0'- OQ ~ ,cC~C E Cl 00 d' ~` ~ 0000000000~-~-~-00©cCCCOcC00 0 ,0 ~ CCCI CC ~ 0000 00 00 CO CO 0' `CC 00 ,~ 0000 ~~CO00CO0000 000000Ct'-~ 0000 ~ ~ :~ 000000000000000000000000000000000000 ii `-~ ~CC'~ ~ - CCC C)Z~'-~ ,~C)00- C) :_~~ ~ PAGENO="0350" C) +0 0 0 CO 0) `0-~ ~ - 00 .E ~h ~ ~_~o0 .o~ ~ ~ ~ ~cC fl~~difl!~I CO C) 0) C- 000CC) C~ CO ~C CC CC F- 708 ECONOMIC EFFECT OF VIETNAM SPENDING ©C)C)C')C'I Cl CO C)CC00©t'C' 0'100C0~' CC 0000 CO ~ 0 00 0C>o~~ ~ - C ~ .,~ ~ ~Zc~Wc~ ooo - CC ~ CC 00CC c~ ~ ~o ~ 0000 C) F-CO ~` C) CO ~ C) 000)00 C) CO CC 00CC - CO CO - 00- 00CC C÷~o0 ~ r~z~ ~ooo 00000000 -o ~` eo CO 00000000 ~ 0C) -~ 00 ? ~ C C) 0001 ~` F- C) CC CO C) ,-)CC C) C) C) `-C F-F- COCO'CO,C~00CO C) CO ~ ~- ~ ~ ~ COCO-00 CC ~C 00)0 --~ >~ ~ z~!4~ C0 F- Cl ~-l CO CC 0' C- CO 01 ~o Z~oo ~00COC)COCO1~CCCC~CC~ `~CO ~` CC CC 00 CC C) C) 00CC COO) C- 0000 CC COO) CO C),~)C -- CO CC C) CC >0 0 cC 0 CC 0 0 PAGENO="0351" 709 ECONOMIC EFFECT OF VIETNAM SPENDING 0000 ~ 000000 CO 000-000-CO 00 COO) CO CO CO CO ~ CO 00 CO CO ~ CO CO 0000 CO CO 0- CO~ 00 , ~b0 ~ o~ 000000) CO 00 CO ~ CO 0000 ~ 000- ~ 00 COO- O00000CO0000,O CO CO ~ C~ ~`o.o t- O0)C~ z~ .~z 00cr CO CO CO CO CO 00000000000000000000 0000 00 CO 0- 00 CO CO 00 - ,0 00) C) 0 - 0 0 ~ ~C#4 ~ [-0000 CO ~ CO ~ 00000- ~ CO CO 0000 CO CO 00000o,0),-OCO -40- -4CO00 ,-400 00 00 -4 CO 00 CO - CO ~0 c0~0 00 ~ ~ CO00~000000COO0000~4COCO~ 00 00) Co 0) ~4 E~ 0000~0000COCOCO0000000-0))C0O- 040) CO ~ 0~ CO 40) o E~ ~ 00 .~0 o~ 00000000000000000-CO ~ CO 0000 CO COO- 00CO~C0COCO00)o-4~lCO 00000000 5 0~ CO 0- CO~ co00 00 00000000O-,000 00 00000000 [-0000CO00 ~0 000000 t'-CO 005000000000000 000000 00 0) 0) ~ 4_~0) ~O 0)0~O *~:~ ~ ~00) - ~ :~~0) 0 ~ ~ *~ oc~o~ 000000 0040)0-000000000000 ~ 00000- 00 0 0) 400)) ~ 0040 o44 00 ) 00 CO 0-000-00000000 .~ ~OCO00C)~4000O-t-C)00COo-CO O 0)0 00 0 0 to OZO 0) 0 PAGENO="0352" 710 ECONOMIC EFFECT OF VIETNAM SPENDING CC CC CC CCCCCCCCCCCCCC© C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C CC-C©.-CCCCCCCCCCCCCCCCcCCC ~ ~ - ~ ~ CCCC ~CCCCCC CCC CCCCCC 2 C C C I~ C ~ C C C C C C C' ~ .-~ C C N. ~ N.'~ C C C C ~ 2 C C C C C C C C C C C C C C C C C C C C C C C C C C C © C C C C C CCC C .-~CN.C~CCCCCCCCC -C ~CC~r-,-~1 ~ ©~©b b ©©©© ©©©©~ - 2 ~ ~ C C C C C C C N. C N. C C C ~ ~ N. ~`1 C C `~ ~`1 C C C C 2 - C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C ~ ~ ~ CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC ©.©.C.~ *©~~ C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C z C C N. C C C C N. C N. N. C C C C C C C N. C C C C C~ C C C C C ~ C ~ - C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C PAGENO="0353" ECONOMIC EFFECT OF VIETNAM SPENDING 711 S ~dc~dd~ *~ 0 ~~S8 0 _______________ 0 c~ t- c~ c ~ - - ,-4 ~ ~ ~ E 0 0 ~{~:~:E ~ ~ H !5!~ ~J 78-516-67-vol. 2-23 PAGENO="0354" 712 ECONOMIC EFFECT OF VIETNAM SPENDING ~ C~ C~ tO ~t~-4 eqeq to eq r~. toooeot~ao eq ~eOeq ~ e- tOO 0 ~eq ~ ~o - to oct to~ eq - eq eq~-t ~to e-eq to eq eq~ t-c~ eq~ eq eq eq to eq ~ eq eq~ eq eq eq cq tOOt CO CO - Otto *0 tO *0 r-*0 t~ CO to CO 0~-t toc~e~ o* eq e~ e to eq ~ ot o eq ~- too e-.~ to ~ eq 0 ~ CO ~ 0~-Ct-t 000 eqeq~eq~eqeqeqeq~eq-CeqCO0 to r-) CO *0t~ ,~9 eq eqeqtoeqeqeq S eqeqeqeqeqeqeqeqeq oeqSo eqeqeqeqeqeqeqeqeqoSeqo bt~ g ~ 0 __________ - - eq eq - ~ eqeq eq eqeq ~t ,-t e- to eq to ~* O'~*~ 0 t-0 ~ 555 55 88 888O ~88S 8588 e- oc~ ~ o o eqeq-q~eqeq ~eq~qe~qt ~ `0 ~ oooooo eqoeqoeqooSS ooeqSeqc eqeqeqeq8eqScC000 ~` OQ~ ~ ~ _____ ________________________ to eq ~ eq cot- to to ~ 0 eq o eq eq oo o eq eq eq eq eq eq eq eq eq eq eq eq ~ -~E'~ ~ ~ cc o t-eq eq ~ eq eq to eq eq eqc-c eq eq eq eq eq eq to eq t- c~ ~-. eq eq eq to eqco ~C eq -~ ~ ~ .5 eq ~o~~eqeq *oeq'cc.~tto eqto~-~c~coto ~ to~eq eq eqeq ~oqtc~ toCOt- ~ eqobeqo eqeqeqeqeqeqeqeq~eqeq~eq 00000 eqeqeqeqeqeqeqeqeqeqeqo eq eq .~ .~ - ___ eq to c c eq eq eq eq eq eq eq 0*0*0 eqeq eq eq - - ~ eq eq .q* ~i eq ~ eq ~-~c to to eq eq .-i eq eq eq eq eq eq eq eq eq eq 000000 eq~5eq ~ eq 0 eq eq eq 0 eq eq eq eqeq eq eq eq eq eq eq 000000 eq eq eq eq eq eq eq eq eq eq eq eq eqeq eq eqeqeq eq eqeqeq eq 000 eq 00 -oot--coeqeq- ~ eq eq c cc cc cceqeq cc to coco to to to to CO PAGENO="0355" 38 Instruments 0.008 0. 000 0. 004 0. 013 0. 0. 002 0.002 0. oo2 0.065 4, 988. 7 39 Miscellaneous manufacturing 0.014 0. 010 0.010 0. 004 0.001 0. 013 a 005 0. 008 0.053 5, 29L 9 40 Ordnance 0. 013 0. 001 0. 0. 014 0. 0. 051 0. 023 0. 0.405 4~ 641. 8 41 Research and development 0.062 a 012 0. 010 a 020 a 002 0.026 a 002 0.007 a 277 5,301.8 2 These gross domestic output figures were estimated before the 1958 transactions matrix was released by the Office of Business Economics and are expected to vary somewhat from the OBE output figures. LTJ C) 0 0 C) IT] ~TJ IT] C) S 0 I 1' c9. PAGENO="0356" 0 0 o 0 - - 0 714 ECONOMIC EFFECP OF VIETNAM SPENDING 0 t- ~ 0 ~ ~00 0 0000 ~ 0 o 0000 C~ 0 0 c~ 000000000000000000000 0 ~2 ~ ~ E~ 0 t- 0 C~1 0 00'-~ ~ 00 -40-r ~0 o 000 0 0000 OOOOOO~~~0000000~r0000 ti ~4 COO ~ 00 0 ~ 0 0 ~4C000'4' 000000 ~4 `-COO C~ ~ 0 ~ Ill ~C' ~` 0000 C~ ~ 000 ~-C 0000 C- 00000 -~ C~ 000 000 ~ I ~- ~ ~ O0CO~' 00O0'~ 000C~00 00CO~00~0 oOoo00~00O0O~0r-0©~00000OO~OOOO I -0~ ~0~'~0 ~ ~ 0 ~ ~ -~--0 .~o ~ z~0~ ~-C~ ~o ~ 00 C~ or- 0 ~ CO ~ 0 0COCO CC 00C0000 ~ 0000000 C~ 00000000000000 C~ 0 cq 0000 C~ 000 0 000 0000,-40~~00 C 0000 C- C- 0000000000000000000 ~ 000000000 0 C- 0 C- OO C~ ~ C~ C~ C~ C~ ~ O0CO-~0 ~ C~ C~ 0 C- Cr00 000 ~ 0 C~ 0 C~ -C C~C 00000000 Cq - ~ 0 C-C- 0 OC0~00 C- ~ 0000 o000 O~ C- OOoO C-0000~00 0,©,C©_?~0O0CCO0000~0C-C-0 ~o~' cq 00O~~0 0~ ~ 0C0O'-~0 C- 00 COO 000CC- 0C0 COO-CO C- 00 ~ 000' ~ CO COCOO Cl 0 Cl ~ 00 ~O 000 0,-r0C' 00 Cl 000000 Cl 0 ~ 00 C0'OOO C- 0__00'~C000CO000000O0 C- O0000 0 C 0 z PAGENO="0357" ECONOMIC EFFECT OF VIETNAM SPENDING 715 ~ ~0O~ ©©~~ 00C0~ II - ~ 0000 0~ ~ 00 00 0000 Ill II © 000 0000 00 00~0c~© III II 00000 00~C~ ~ I 1 0000000 0C0~~~ ,-4o~ o ci o o 00 0000 Co ~ CC 0CC CC~CCci0Ot~. COt~.~ 00-00000 -0CC Co 00 00 00 Ci 0000 ~ Ci CC ~ t~- 0-00 I T TI ii ~-~CC t-~ ~O~000CCI-Ci 0000CC I 7 T' 7 00000 Ci Ci 0~-o CO CC I I CC CC CO Ci COO- PAGENO="0358" 716 ~CONO~~C EFFECT OF VIETNAM SPENDING - ~ ~ ~ ~ e~ e~ `~ ~ ~ eo e~ ~ o ~ _ ~ cq ~ ~ eq ~o e~ `~ CqO II Ii ~ _______________________________________ ~ ~ c~ ~eq eqco~~ eq~c~ o~ ~~r.ce eq~~t' o~ ~. t1~ ~ -i_ ~ ~ - I I `IT ~ Cl Cl ~4C~ Cl t~ `~` ~ ~ - Ii 0 o ~ ~~Cl ~ o o~o ~ ~ - II II I ~ 0 Cl Cl~' Cl 0C~ ~-4 0 00 ~00 0 Cl 00 Cl ~ ~ II II I o ~ 0C~00~400'~ 00~'.-4.4CI ~0'~0~ .2 ~ II II I 0 ~ 0 0~ ~ 0 0 C~ Cl 0 0000 ~ II ~ Ce ~` CeO C-- C- -4C~ Cl - C4'-4 Cl -4 Cl - Ce O~4O - O'~ ~ 0 liii 0Ce'~~ ~ 0'Cl' ~! ~ I I ooc3~ 0 - o - eq Ce 0 C-Ce C) O.-4 Cl Ce-'~~ ~C PAGENO="0359" L'i C) 0 C) I 37. Other transportation equipment 38. Instruments 39. Miscellaneous manufacturing 40. Ordnance 41. Research and development Net increase Gross Increase Gross decrease - -0.1 -0.1 -0.0 -0.0 -0.1 -0.4 0. -0.0 0.2 0.1 0.0 0.3 0. -3.0 0. -10.9 -0.4 -0.8 -0. 1 -1.0 -0.0 -0.1 0. 1 -5. 0 -0.1 -0.1 -0.1 0.2 0. -0.3 I These figures are valid for the national industries on the regional, as well as on the national, level. This is because demand for the output of a national industry, no matter where it is located, is a function only of the total U.S. demand for its output; thus, the percentage change In output (equal to the percentage change in employment)of that ndustry in each region will be IdenticaL 15.8 -24. 6 8. 5 -4.9 -10.2 27.8 38. 5 10. 6 10.4 8.0 12.0 63.0 2. 1 15.3 18.3 -0.2 -2.0 1.2 -86. 1 -11. 1 -3.3 -31. 1 22. 4 -212. 7 -39. 9 -47.4 25. 5 72. 9 0. 0. 22.4 0. 0. 879.0 879. 0 0. -0.23 -1.59 1.23 -15.42 -13.26 -316.2 -498.3 66.6 879.0 382.8 1377.3 3.3 31. 1 0. 212.7 39.9 1377.3 0. 1377.3 N0TE.-In all tables an entry of zero followed only by a decimal indicates the cell is empty. An entry consisting entirely of zeros, with no blank space, indicates the cell contains a figure of negligible size. PAGENO="0360" 0.. 00 0.. 0.. 00 0.. 00 0) I-. 000000.000000 0000000000000 0- ,0 00~ 00000000'~ 0000 000000 ~ P~ ~,c~__ C o) CO 00 © 00 C) 000000 0000 C/) 00)0 00 ~ C -o ~ © 00 000000 - 00)0 o~ . .9 ~ C.) 0~ ~ ~ 9~ ~ 0000000000 C0000000~00 t- ~ 0000 c~c~ 0000 00 0000 ©t..©oco ~ 00000-0-0000 ,.00 00~co~00~0000©©9 00 ~.) 00 ~ 0)00 ~) ~ o ~` ~ ~`C ~000CO00CC00©©CO00 000000 00 .00,0000000000)00000000000000000000 - P-C- 000000 0000 ~d 0000)00 ~` 0000000000000-000000 00 ~ .04 o ~ ~ ~ ~0 ~`C 000000000-00000000 00000000 00 ..)0000,)00000000 000000000000000000 0000 `-00000 00)0) ~r 000000000 000)0 000000000 00 ~ 00 01) 0) ~ :~. ~ *~00 00~0 ~ ~ `0~~ s-'.) lC)Q0000'~ 00 Qoo~-00~ ~÷01.~t?. IQ00 C E_~h~ .~U ~ ~ 718 ECONOMIC EFFEC'2 OF VIETNAM SPENDING .~ ~.04 00 ~ ~.C ~ 0000000-00)0CO000-©00COCO~' C C) ~ ~ 0000000-0-0000000 ~C ~ 000000 00 000000 0000000 00 COO ~ S 00 `C C C CC C z 0- 0000000)00 000 00000000 00 0000 0000 000-000000 o-C 0000000 0000 000000 `C C PAGENO="0361" :~ ~ ~ ~ *~c~-~ ~`~` ~ ~ CO CO L'- 0000 CO CO 00 ~ CO ~4 CO 00 CO CO,-OCO,-000COCO ~ :;::::00:00~::CO:CO~:: I III 0000 ,-o,-CO I p~ CO ~ ~ ~ 0000000000000000000 00 I 000000 ~ ~ `~ c0~ ~ ~0 co~ ~Zo ~ ~ ~ 0000000000 01 CO CO CO CO CO `0~ CO ~ I I 0) ~ 0000 ~d *~co CO I~ C * CO 00010,-~CCCO'0,-oO0C0COCOCOCO - t-c0,-~ `00000 C 0~ !~ 0'- ~ ~ 0~ ~ ~4z CO ,-o~-o CO CO CO CO CO CO CO CO ~ ~ t0 ,-oCO ~ CO *~ E~ ~ 0'- CO 0'- `0 CO 0'- CO 0'- CC CO 000-0 `0 C~~~~1000 COO 0000 00 ~0CO `0~~0 L0~ ,~, ~ ~ ~ ~ `~`-~`~ z.~ 00COCC-~00 CCCI COC~00O0~ ~ ECONOMIC EFFECT. OF VIETNAM SPENDING 719 CC Ct) -0 00 00 CO CO CI 00 CI CO 0'- -o CC CO CO CO CO CO CO CO COCO CO CO CO 000000'0o000CC~'0CI00CO C'- COO ~-o CICO CO COo CO CO -0 ,-O COCO~CO COCCI'. 00 CO CO CO 0 PAGENO="0362" 0 C 0 0 0 0) 720 ECONOMIC EFFEC'I' OP VIETNAM SPENDING I 0 0 000 © 000000000000 ©o~©©c~©c~ 0 ~ 0 t- © 0 0 ~0 0'O,O t~- O0~ ~ 3 000000 000000 o-'Co00Co0000Co ~0. -4000000000000000000000100000000000000000-.400 0>°0, 000000 I,- `-` ` 00000000 0000000.0 03 0000000000 00000000 000-0303 .0000000000 0- C'3-4 © -4 00CoCo0,0000~ 0000000000001000000000000000000000-4010000000 00-400000001000030300 00 0000 000-° CoO 000000 0000000000 000000000.0 C-°0>3 0>3 0000 CoOCoOooCoOco-3 0 CoO oo CoO©CoO©t>3303 0-00000000000000000000-400000000-40.0000000 00©00©00004 0000000000 C, C, coo 0. a C. C, 0 C, 000000-4 Co 4©C0300010000 0000000000000000000000000000000° 00003.00000000-000000000000000000000000000 w Co ~0 0 p0 Co <0 (0 00 CC, (0 p p0 p 00 00 -C CO (0 00 CC, p (0 C, (0 LTJ Lol 0.°-' `~ 00 000000000000000000000000000000000000000- 0000000000-1-400000000000000000 00 000-°0-°0030300 00000000-40000000000000 Co00000°0000000000000000000000000000000000000000CoO0 Co 000000 Co 00000-4000000000 0.0000000000000000000000-400000000000000000000-3000 01000000000000C0000000-40000©oo© ~0 0 C-° C, ~ CD C, ~ C~ CD 2. 00 -~ 00 ~ 00 -00 03 ~~100-4 00000000000000000001000001 0000Co34000000CoCo00C~-300-400Co0000000000000.400000000-4 0000000-400000. -~ 0 ~ 00Co00~'~~ ~ g 000C-ICOCO-1004000 0°- 0°- 0.00000000000000000000000000000000000000000 -1000000000-40-°000001000030 (`CC ~C, ~ 0 0 o+C~ ,~ 00 0000 CoO 0-° 0-° 0-' 0-3 0-000000 0-3 0-OC03 00-CO 00-1 00003 003000000300 0- 0~0 00000000003 0° COC0.o0.000, 10000 000000000000000000000000000 0000000000o0.00-40000-30Co0000o0.0000-~1000030.00 0O 0000000000000000~000,0000~0,~~ 0000-400-400-40000000-3000000000000000000 00000000000000000000000001 z C,- C, C, 0. PAGENO="0518" 876 ECONOMIC EFFECT OF VIETNAM SPENDING Closely allied to the index of relative concentration is the concept of defense dependency, which may be defined as defense-generated employment as a percent of the civilian labor force. The average defense dependency of the United States, as shown in table 5, is 3 percent; 22 States and the District of Columbia equal or exceed this figure. A common attribute of the top six entries on this list is the significance of civilians hired by military installations ranging from 53.5 percent of total defense-generated employment in Maryland to over 90 percent in Hawaii. PAGENO="0519" CD CD CD CD 0 CD CD CD CD CD w CJ~ t~i. E U CD CD CD LTI C) a t~j C I 0000 000(0000 DID 0000 DID DID DID 000000000000 00000000 CD DO~4~DID0000ODO 4C)D~~ DODO00~~00 ~ ZZ~ZZ~~Z ZO~t~1~- ~ r ~ ~ ~gO~~CD ~ ~ D0~q ~ CD ~: CD E ~` : ~ ~fl ~: a CD CD 00 CD (0 ~--~±-~ ~ ~ g~ ~ ~ (CD DOD 40000 00 C00-4CID~ ~~0000 0)0(00000 0 DoDODO 000(~000(4~ ~ 0 ~ ~ ~ CD : ~ ~00 DID : ~ 00 CD) DO 0- 0- DID 000000 0- DID 0000 ~ 00 to) 00 0000 4000000030 0-' ~ 0(3 0-' Do -~0) -400 to) 00000(0 ~3 P ~e~D3~p, ~ DID 0-00'4000000D 000 DIDD,300-40010D 00Q~ 00000ID000300000000000000-oDo00000(0)00(000 ~3 ~ ~ CD CD CD CD~, ~ 0 PAGENO="0520" 878 ECONOMIC EFFECT OF VIETNAM SPENDING Defense dependency was examined for 292 labor market areas in which there were more than 500 defense-generated workers, or in which the defense dependency rate exceeded five percent. Tables 5(a) and 5(b) summarize the characteristics of those areas with respect to the dominant cause of defense dependency and the size of the area labor force. Table 5(a) presents the distribution of these 292 labor market areas by defense dependency class intervals and identifies the dominant cause of dependency. If an area's defense employment is 50 percent or more attributable to a military installation or any one product as listed in columns (b) through (g), it is distributed under that column. Of the 292 areas, 129 derived their dependency from military installa- tions and 106 were undistributed under this "dominance" criterion. Of the latter, 64 fall below the 3 percent U.S. average defense depend- ency ratio. These 64 may be relatively immune to defense impact since they have a low dependency rate and a diversified defense activity base. Sixteen of the 25 areas in the defense dependency class interval of "15 percent or more" are attributed to the location of military installa- tions and four to commercial shipyards. TABLE 5(a).-Area distribution by dependency class and type of employment, June 1966 Defense dependency classes (a) Areas by dominant type of employment Labor areas Military installa- tions (b) Aircraft (c) Missile and space (d) Ammu- nition (e) Ships (f) IJndis- tributed (g) Total (h) Cumu- lative percent (i) 15 percent and over... 12 to 14.9 percent_.. 9 to 11.9 percent 6to8.9 percent 3 to 5.9 percent Under3 percent Total 18 13 14 23 33 30 4 5 9 2 2 1 4 3 1 2 3 3 2 9 4 1 1 1 2 2 7 8 23 64 25 17 31 35 68 116 8 14 25 37 60 110 129 18 12 20 7 106 292 PAGENO="0521" ECONOMIC EFFECT OF VIETNAM SPENDING 879 Table 5(b) presents the distribution of the 292 areas by labor force size groups using the same dependency class intervals. Of the 292 areas, 183, or 60 percent, have a labor force of less than 100,000 workers; 69 have less than 25,000 workers. The areas with the highest defense dependency rates tend to be associated with the smallest communities (and have a high de- pendency on military installations). Nineteen of the 25 areas in the "15 percent or more" class have a labor force of less than 50,000. By contrast the areas with the lowest dependency rates tend to be associated with the largest areas. Of the 116 locations having less than 3 percent dependency, 92 are in areas having a labor force of 50,000 or more. ~OW~T~ if a mov1~ comniete measure of impact could be obtained by tracing lower tier subcontracting and purchases of goods and services, it may be found that the larger areas with a broader industrial base retain more of this secondary impact than the smaller areas. Column (c) in table 5(b) also shows that 41.6 percent of defense- generated employment in this study is located in 108 areas having a dependency of "6 percent or more" which is twice the 3 percent U.S. average. TABLE 5(b).-Area distribution by dependency class and labor force size, June 1966 Defense depend- ency classes (a) Defense em- ploysnent Labor force size groups (thousand) No. (thou- sands) (b) cumu- lative per- cent (c), Under 25 (d) 25 to 50 (e) 50 to 100 ~ (f) 100 to 250 (g) 250 to 500 (h) 500 to 1,000 (i) Over 1,000 (J) No. of Areas (k) 15 percent and over 12 to 14.9 percenL.. 9to 11.9 percent..... 6 to 8.9 percent 3 to 5.9 percent Under 3 percent~ Total 207 124 427 236 690 703 8.7 13.9 31.8 41.6 70.5 100.0 15 7 14 10 20 3 4 5 4 12 12 21 4 3 6 13 30 2 1 5 3 10 37 1 7 3 4 13 1 5 9 1 4 3 25 17 31 35 68 116 2,387 69 58' 56 58 28 15 8 292 Table 6, using the smaller sample of 851,200 EIS-surveyed workers at 387 plants, presents the percentage distribution for this employ- ment both by state and defense product group. The percentage distribution of the total labor force i~ presented for comparative purposes. PAGENO="0522" rF~BLE 6.-Percentage distribution of EIS-surveyed defense employment by State and product group, June 1966 . Defense product groups Total labor Region and States Aircraft Missiles and space Ships Vehicles and weapons Ammu- nitlon Electronics and corn- munica- tions R.D.T. & E. Other Total force (a) (b) (c) (d) Ce) (f) (g) (h) (i) (j) (k) .~... 3.8 5.8 0.4 .4 1.4 .3 10.3 15.3 5.1 2.4 5.7 9.9 .9 8.4 6.0 0.6 .4 7.8 14.2 23.1 7.6 2.9 2.0 New England: Maine New llampshire Vermont Massachusetts Rhode Island Connecticut Subtotal Middle Atlantic: New York New Jersey Pennsylvania Subtotal East north central: Ohio Indiana Illinois Michigan Wisconsin Subtotal West north central: Minnesota Iowa Missouri Nebraska Kansas 16. 6 5.7 36.8 24.6 3.5 12. 1 6.0 15.3 8.2 1.7 3.8 3.2 1.0 .9 .9 6.7 2.5 .6 4.6 14.0 7.0 8.3 8.7 .9 4.2 1.7 .8 7.2 3.9 3.6 13.8 4.1 .9 7.6 7.7 29.3 9.6 6.7 14.7 14.1 LTj C) C) 0.5 .3 .2 ~j 3.1 C) .5 I-~ 1.6 0 6.2 ~i 10.1 t:zi 3.5 ~.3 6.0 19.6 5.3 2.6 t.Tj 6.0 20.3 8.4 3.2 .5 .5 .6 1.3 .8 1.7 1.2 7.6 4.5 22.9 2.5 9.6 3.9 3.5 .4 1.6 2.0 2.0 1.0 3.5 2.5 10.2 3.6 2.5 1.2 1.6 .6 12.6 1.9 3.7 35.0 19. 5 7.0 3. 5 12.6 9. 5 10.4 4.9 .7 9.4 8.6 4.1 12.8 1.8 4.5 3.3 2.2 .6 1.9 .9 5.1 .2 2.2 2.0 1.5 2.5 .8 1.1 15.3 .7 0 9.4 31.8 6.1 0 0 10.3 `8.5 Subtotal.~ PAGENO="0523" 1 Does iiot add due to exclusion of States not represented in EIS survey. May not add due to rounding. .2 .1 .1 6.8 2.3 .3 6.5 2.8 0 7.1 3.7 .7 .2 25.8 11.2 1.5 1.1 2.7 10.4 4.2 3.0 *4 .8 2.6 3.0 7.1 1.6 1.7 9.3 2.7 10.4 18.5 28.1 11.2 1.8 11.9 12.1 13.5 12.4 South Atlantic: Delaware Maryland District of Columbia Virginia West Virginia North Carolina Georgia Florida Subtotal East south central: Tennessee Alabama Mississippi Subtotal West south central: Arkansas Louisiana Oklahoma Texas Subtotal Mountain: Colorado Arizona Utah Subtotal Pacific: Washington Oregon California Subtotal U.S. total EIS-surveyed defense employment (thousands).... .3 1.7 .5 2. 1 .8 2.5 2. 1 2.9 1.0 1.7 .2 .7 .7 1.8 8.7 11.8 .8 4.2 1.5 .9 .8 2.9 1.4 10.5 0 12.7 0 0 4.2 3.3 .4 1.1 10.6 .4 .8 1.5 .8 3.4 9.8 .1 3.7 1.7 4.2 .1 .5 *~ 5.8 12. 1 1.2 1. 6 0 14.0 3. 8 0 5.9 6.8 114.2 t~j C) 0 2.0 1.6 0 1.0 `6.0 CD .9 1.6 1.2 CD 5.1 ~ 8.8 0 1.0 *.~ `3.8 L 5 1.1 9.5 12.1 100.0 !~ 17) .3 .7 4.3 2.3 5.1 .4 1.0 .8 .9 .8 1.0 11.6 0 0 .4 1.0 0 0 2.6 .5 15. 1 12.4 42. 6 7.3 2.3 8.9 .9 11. 2 8. 5 28. 6 68. 7 41. 5 2.7 .2 23.0 15. 6 55.0 18.4 12. 1 8. 5 28. 6 68.7 41. 5 26. 0 100. 0 100.0 100.0 100.0 100. 0 100. 0 100.0 100. 0 100. 0 304. 5 136.4 65.5 22.3 71. 1 228. 1 11. 5 11.8 851.2 PAGENO="0524" 882 ECONOMIC EFFECT OF VIETNAM SPENDING The Pacific region with 26 percent of the EIS-surveyed workers, but only 12.1 percent of the work force, far outrauks the next highest regions, i.e., mid-Atlantic and New England with 14.7 and 14.1 percent, respectively. One unique characteristic of the Pacific region is its significant participation in each product group. California, with 23 percent of the EIS-surveyed workers and 9.5 percent of the labor force, is the dominant State both in total EIS- surveyed workers and for several of the defense product groups. It far outranks Connecticut and New York which have 7.8 and 7.2 percent, respectively, of the total EIS-surveyed employment. The largest product group, in terms of EIS-surveyed employment, is aircraft with 304,000 workers, or 36 percent, of the total of 851,000 workers. Employment in the aircraft program is rather evenly dispersed; it ranges between 10 and 16 percent in all regions except for mountain and east south central regions, which combined represent only 3.9 percent of the total. Employment in the electronics and communications product group, which accounts for 27 percent of total EIS-surveyed employment, is concentrated in the middle Atlantic and Pacific regions; each of these two regions account for approximately 29 percent of the total employ- ment in this product group. Regional concentrations for the remaining six product groups, accounting for the residual 37 percent of EIS-surveyed employment, varies greatly. Ammunition is produced in all nine regions. How- ever, two of these regions, east north central and west north central, account for over half of the EIS-surveyed employment on this product. Table 7 delineates the State distribution of the 146,000 workers employed on defense subcontracts in plants surveyed by the EIS. It should be explicitly noted that, since the EIS survey was designed to include large defense prime contractors, the subcontracting disper- sion shown in table 7 may be somewhat biased. For example, Kansas, a State in which the EIS sample encompassed a relatively high percent of total defense-oriented industries' employment, may rank relatively high while Illinois, where ETS coverage is relatively small, may rank relatively low because of an understatement of subcontracting. TABLE 7.-EIS-surveyed employment generated by defense subcontracts by State of performance, June 1966 State ranking Number (thou- sands) Percent- age State ranking Number (thou- sands) Percent- age 1. California 2. New York 3. Massachusetts 4. New Jersey 5. Connecticut 37.8 20.9 9.4 9.0 7.6 25.9 14.3 6.4 6.2 5.2 20. Missouri 21. Iowa 22. West Virginia 23. Georgia 24. Colorado 25.Maine 1.5 1. 1 .8 . 7 .6 .6 1.0 .8 .6 .5 .4 .4 6.Texas 6.7 7. Ohio 6.4 8. Florida 5.4 9. Kansas 4.8 10. Indiana 4.7 11. Pennsylvania ! 4.1 12. Tennessee 3.9 13. Michigan 3.4 14. Maryland 2.9 15. Minnesota 2.7 16. Arizona 2.3 17. Utah 2.2 18. Illinois 1.8 19. Virginia 1.6 4.6 4.4 3.7 3.3 3.2 2.8 2.7 2.3 2.0 1.9 1.6 1.5 1.2 1.1 26. North Carolina 27. Louisiana 28. Oklahoma 29. Alabama 30. Mississippi 31. Vermont 32. Washington 33. Wyoming 34. Wisconsin 35. Delaware Other 15 States Total .5 .5 .4 .4 .4 .2 .2 .2 .2 .0 .1 ~ 146.0 .3 .3 .3 .3 .3 .1 .1 .1 .1 .0 .1 ~- 100.0 PAGENO="0525" ECONOMIC EFFECT OF VIETNAM SPENDING 883 To better evaluate this inherent bias, table 8 presents data showing the distribution of subcontracts awarded to the top 10 States as deter- mined by a special study conducted by the Office of the Assistant Secretary of Defense (Systems Analysis). The subcontracting data collected for that study was less biased than the EIS-surveyed data. it can be seen that, although there are si~nfficant differences between the two studies, eight of the top 10 appear on both lists. TABLE 8.-lO top States ranked by defense prime and subcontracts State ~ (a) Special defense subcontract study 1 Subcontracts in EIS plants 2 Defense prime contracts Awards3 Employment 4 Rank (b) Percent of United States (c) Rank (d) Percent of United States (e) Rank (f) Percent of United States (g) Rank (h) Percent of United States (i) California New York New Jersey Ohio Connecticut Pennsylvania Massachusetts Florida Texas Illinois Subtotal Others Total 1 2 3 4 5 6 7 8 9 10 30.2 11.5 7.0 6.0 5.6 5.1 4.2 2.9 2.9 2.8 1 2 4 7 5 11 3 8 6 18 25.9 14.3 6.2 4.4 5. 2 2.8 6.4 3.7 4.6 1.2 1 2 9 8 4 7 5 11 3 17 22. 1 9.6 3. 5 3.7 5. 1 4. 2 5.1 2.7 6.2 1.8 1 2 9 6 3 5 7 10 4 13 18.6 7.3 3.8 4.8 6.0 4.8 4.7 3.6 5.6 2.6 78.2 21.8 74.6 25.3 64.0 36. 0 61.8 38.2 100.0 100.0 100.0 100.0 I Based on dollars of subcontract awards received. 2 Based on June 1966 employment generated by defense subcontracts received by EIS plants. `Based on prime contract awards in fiscal year 1965. 4 Employment on prime contracts as reported by EIS plants. This table also presents for comparative purposes an employment and awards series for prime contracts in these same 10 States. The first series, prime contract awards, is published by the Office of the Assistant Secretary of Defense (Comptroller), while the second is derived from the ETS survey of prime contract employment. Com- paring all four rankings (two for prime contracts, two for subcontracts), it is noted that eight of the top 10 States~ as ranked by the DOD special subcontracting study, appear in all series. This suggests that subcontracting work is more concentrated geographically than prime contracts. Each of the prime contract series indicates that approxi- mately 65 percent of all work is done in the top 10 States while, for subcontracting, the 10 top States account for 77 or 78 percent of all work. As a summary of State distribution of defense impact, table 9 presents the top 10 States ranked by nine separate impact measures. The concentrated nature of defense impact is demonstrated by the fact that only 19 States appear in this table, and four of the 19 (Cali- fornia, New York, Texas, and Ohio) appear in all nine columns. PAGENO="0526" TABLE 9.-Top 10 States ranked by defense impact measures Rank Prime contracts Subcontracts Total RIS employment, primes and subcontracts (3+0) Civilian employment at installations 6 Total defense generated employment (8+9) Awards fiscal year 1905 1 EIS employment 2 Census shipments (MA 175) 3 Awards per DOD study 4 . EIS employment Census shipments (MA 175) (1) (2) (3) (4) (5) (0) (7) (8) (9) (10) 1 California California California California' California 2 3 New York Texas New York Connecticut New York Connecticut New York New Jersey ----~ New York MaSsachusetts... California New York California New York California Virginia 4 Connecticut Texas Ohio Ohio -- New Jersey Connecticut Pennsylvania - -- 5 6 7 8 9 Massachusetts~ - - Missouri PennsylvanIa. - -- Ohio New Jersey Pennsylvania. - - - Ohio Massachusotts~ Missouri New Jersey New Jersey Massachusetts.~ Missouri Texas PennsylvanIa. Connecticut Pennsylvania. - - Massachusetts.~..~ Florida Texas Jersey Connecticut Texas Ohio Florida Kansas Ohio Connecticut Massachusotts PennsylvanIa. - -- Indiana Texas Massachusetts..... Ohio PennsylvanIa. - -- New Jersey Texas Maryland Georgia Ohio New York 10 - - -- Illinois Missouri Alabama Georgia Florida Washington Illinois Indiana Texas Florida Oklahoma 1 OSD Comptroller, fiscal year 1965: Data for fiscal year 1965 is considered more compara- Census MA-175, calendar year 1963. able to EIS employment data than the fiscal year 1906 awards data. Special defense subcontract study, 1906. 2 Prime contract portion of EIS surveyed and nonsurveyed prime contract generated Subcontract portion of EIS survey, June 1966 employment June 1960. OSD Comptroller, June 1960. tTj 0 z 0 ~rj California. Texas. New York. ~TJ Pennsylvania. Virginia. Ohio. Maryland. Massachusetts, ~ Connecticut. ~ New Jersey. LTj PAGENO="0527" ECONOMIC EFFECT OF VIEiTNAM SPENDING 885 CHANGES IN DEFENSE-GENERATED EMPLOYMENT Between June 1965 and June 1966 defense-generated employment increased by 17 percent as shown in table 10. Of the three com- ponents, employment imputed to prime contracts accounted for the largest relative (39 percent) and absolute increase in defense-generated employment. Plants comprising this component generally devote most of their output to commercial-type items such as construction equipment, medical and dental equipment, pnotographic equipment and supplies, material handling equipment, food, clothing, etc. TABLE 10.-Defense-generated employment, June 1965-June 1966 Components Employment (thousands) Percent increase, June 1965 to June 1966 Percent of total employ- ment increase, June 1965 to June 1966 June 1965 December 1965 June 1966 EIS-surveyed plants Imputed to prime contracts DOD civilians Total 733 1 361 941 774 408 983 851 501 1,035 16 39 10 33.8 3'. 6 26. 6 2,035 `2,170 2,387 17 100.0 1 Based on contract awards for the 6 months, July-December 1964, converted to an annual basis. Employment in the EIS plants (working primarily on specialized. defense products) increased by 16 percent. The largest aggregate* increases were in aircraft and ammunition programs as shown in table 11. Defense employment in the aircraft plants increased by 41,000, or 16 percent. The 39,000 increase mo employment in the ammunition group represented more than 100-percent increase over 1965. TABLE 1 1.-EIS-surveyed employment, changes by product group, June 1965 to June 1966 [In thousands] Defense product group , June 1965 December 1965 June 1966 Aircraft Missiles and space Ships Vehicles and weapons Ammunition Electronics and communications All others surveyed Total 263 126 63 19 32 209 21 280 128 63 18 46 219 21 304 136 66 22 71 228 24 733 774 851 The geographic distribution of changes in defense-generated em- ployment between June 1965 and June 1966 are delineated by table 12. The total change in defense-generated employment is presented in column 5, while columns 3 and 4 identify the portions of change associated with plants and DOD installations, respectively. Also included in column 6 is the geographic distribution of changes in military personnel. The nine States indicated by an asterisk accounted for 52 percent of the 353,900 increase in defense-generated employment. Except for Missouri, Connecticut, and Illinois, these nine States also rank PAGENO="0528" CD ~P~o o CD L ~ E CD 0 ~CD CD ~1 CD ~ ~ I. P C~ CDO~CDCDt~ ~CD CD OCDCDCCD~-~CDCD3 t~ ~pI ~I L ~-~o~I ~ p~c~ ~. ~) CDCDCDCDCDCD CD~CDCDCD I ~ 0~DQ ~ CDCD* ~ ~. P'. . CD CD CDCD CDCDCD ~CDCDCDCD~ CDCDCD)~.C~CDCDCDCDCDCDCDCDCDCDCDCDCD E~o~ w CO CD CD CD CD CO CD CD CD CD 0 CD CD CD CD CD CD ~. ~. ~ ~. ~. ~. P~~)!\DP?~. CDCDCDI CDCDCDCDCDCD~~ CD a 0 0 a a 0 w ~rj 0 0 1 CD I IICDIIICD II CDICDCD CD C~I ICC~~CDOIC~CCDICDt I-CD~-CIcj ICDCCICDCOOCCDCDCD C~CDCDCD CD CDCDI ICD(Z CC CC CD CD CD CD CD ~ CD CD ~i ~ CD CD CD CD CD CD CD CD 030CDCD-ICD CC CD CD ~ CD CD CD CD CD CD ~ CD ~ CD CD CD CD CD CD CD CD CD CD CC 0~ c~ CD ~ CD CD 0 CD CD 0 CD I I C\3 ~$~* ~3C~DI ~ç$~I ~ ~ CD P. CD P CD 0CC-CD CDCDCC CD CD CD 0303 CD P. CD CD CD CD CD 0CC-C-CD P. CD -.3 CD CD CD CD CD P-CD P P. CD CD 0303 CD CD CD CD 030 CD CD 0 PAGENO="0529" ECONOMIC EFFECT OF VIETNAM SPENDING 887 Finally, focusing on a longer time span, table 13 presents defense- generated industrial employment trends from 1963 to June 1966 for 150 ETS plants that have been surveyed continuously since 1963. The defense-generated employment for these 150 plants represented 72 percent of the total defense-generated employment in the 387 plants as of June 1966. Employment totaled 719,000 in June 1963 which was below the peak ieached in 1962. The downward trend continued to June 1965 but was reversed during the following year. The most significant employment changes among the defense product groups during 1963-65 were the decreases in missiles (40 percent) and electronics and communications (28 percent). FUTURE REPORTING The next cycle of contractor reporting under the ETS covers the period ending December 31, 1966. improvements in the data are expected particularly with respect to expanded coverage and the reporting of time-phasing profiles for assessing the employment impact of large defense projects. Using these updated reports, statistical summarie~ similar to those presented in this article are planned for release during mid-1967 and periodically thereafter. CONCLUSIONS These statistics, although somewhat incomplete as to coverage, present for the first time an indication of the geographic concentra- tion and dependency of the employment generated by defense pro- grams as well as the change in these dimensions over time. As such they provide a measure not only of "potential impact" as measured by current dependency on defense programs), but, in a historical sense, "actual" impacts (expressed as changes in defense-generated employment) over time. Employment in military installations appears to be the dominant cause of significantly above-average defense dependency, particularly for labor areas with a small labor force. Large labor areas are generally less dependent on defense-generated employment and typically have a wider defense-oriented base. Approximately 65 percent of defense-generated industrial workers on defense prime contracts are located in 10 States having approxi- inately half of the total U.S. civilian work force. The data indicate, however, that the distribution of defense subcontract work may be somewhat more concentrated than work performed on prime contracts. The total magnitude, as well as the geographic and program impact of the defense budget increase during fiscal year 1966, is documented by the data. It is important to note that, although this increase in defense-generated employment accounted for 25 percent of the total increase in the civilian work force, the geographic impact was quite widely dispersed and a significant share of the total increment was focused on firms producing commercial items. PAGENO="0530" 888 ECONOMIC EFFECT OF VIETNAM SPENDING Using data of this nature and supplementary economic statistics now being generated both within and outside DOD, it should b~ possible to develop improved methods for assessing more accurately the results of major shifts in defense programs. These analyses should be useful both to appropriate Government agencies in their programs for mitigating the adverse effects of such shifts and to industry as the supplier of defense requirements. TABLE 13.-Defense-generated employment trends in 150 EIS plants, 1963-66 [In thousands] Product group June 1963 June 1964 June 1965 December 1965 June 1966 Aircraft Missiles and space Ships Vehicles and weapons I Ammunition 255 193 41 16 26 188 245 162 46 11 23 152 221 116 51 14 18 135 233 117 51 13 23 139 248 123 51 15 33 143 Electronics and communications Total 719 639 555 576 2613 1 Includes only plants where defense work is dominant. Military trucks and vehicles produced or assembled in large automotive complexes are not included in the EIS survey. 2 Defense employment for June 1966 for these 150 plants represents 72 percent of the total defense employ- ment generated by the 387 EIS plants. This percent coverage varies by product group as follows: aircraft 81 percent; missiles, 90 percent; ships, 78 percent; vehicles, 69 percent; ammunition, 46 percent; and dee- tronics, 62 percent. PAGENO="0531" MILITARY PRIME CONTRACT AWARDS BY REGION and STATE FISCAL YEARS *1962 *1963 *1964 * 1965 *1966 PAGENO="0532" TABLE OF CONTENTS MILITARY PRIME CONTRACT AWARDS BY REGION AND STATE, FISCAL YEAR 1962 THROUGH FISCAL YEAR 1966 Page Foreword 891 Part A. Total U.S. military prime contract awards: Table I. Awards by geographic region and State 893 Table II. Awards for major military hard goods by geographic region 895 Table III. Awards by commodity categories, by State 897 Part B. U.S. military prime contract awards for research, development. test, and evaluation work: Table IV. Awards by geographic region, State, and type of contractor, fiscal year 1962 1002 Table V. Awards by geographic region, State, and type of contractor, fiscal year 1963 1005 Table VI. Awards by geographic region, State, and type of contractor, fiscal year 1964 1008 Table VII. Awards by geographic region, State, and type of contrac- tor, fiscalyear 1965 1011 Table VIII. Awards by geographic region, State, and type of contrac- tor, fiscal year 1966 1014 Map: Geographic regions 1017 890 PAGENO="0533" FOREWORD This pamphlet contains a record of military prime contract awards of $10,000 or more in fiscal years 1962 through 1966 which are assign- able by state and geographic region. Two types of information are presented in this pamphlet. In part A, data are shown for all military prime contracts by State and geographic region, and individual tables are shown for each State breaking out total procurement according to 25 major categories of supplies, equipment, and services. Part B covers procurement for research, development, test, and evaluation (R.D.T. & E.) work by State and region. These amounts are included in part A. The R.D.T. & E. total for each State is subdivided to show awards to educational institutions, other non- profit institutions, and business firms. Beginning with fiscal year 1965, awards to research foundations and nonprofit corporations associated with universities are included in the dollar amounts re- ported for "other nonprofit institutions." Formerly, such awards were recorded under "schools and their affiliates." It is emphasized that prime contract data are not a measure of the total volume of defense work that is performed within a State, because they do not reflect the very substantial amount of siib~ontract funds that may flow into and out of the State. About half of the prime contract dollars for major hard goods, and unknown proportions of other types of procurement, are suicontractect ~y Lue prune contractor. In general, the State data are based on the location of the plant where the product will be finally processed or assembled. For contracts where companies assign the work to more than one plant, the location is the address of the plant where the greater part of the work is done or where the management responsibility is centered. When this cannot be determined, the contracts are assigned to a "not distributed by State" category arid are excluded from this report. The amounts not distributed by State consist principally of all con- tracts and purchases below $10,000 each but also include other con- tracts which for security reasons could not be assigned to a state. The amounts not distributed by State were as follows: Fiscal year- Billions 1962 $2.8 1963 2.9 1964 3. 1 1965 1966 4. 0 Some special characteristics of the data on prime contract awards by procurement program category should be noted: The electronics category includes all electronics and communica~ tions equipment which is separately procured under prime contract. In the case of missiles and aircraft, electronics work is often an inte- gral part of the assembly prime contract, and therefore is not sepa- rately identified as electronics in the prime contract statistics. 891 78-516 0-67-vol. 2-35 PAGENO="0534" 892 ECONOMIC EFFECT OF VIETNAM SPENDING Weapons, whether for use in ships, tanks or aircraft, are separately procured and separately reported. Contracts for all other types of equipment and parts, and for repair, maintenance, overhaul, modification and other services, which can be identified with one of the specified program categories, are assigned to that category. For example, the installation or checkout of equip- ment at baffistic missile sites is recorded as missile work in the State where the site is located. (The contract for manufacture of such equipment is reported according to the location of the manufacturer's plant.) Aircraft, missile, or other program contracts, therefore, may be reported in States where there are no weapon assembly plants, but where bases, laboratories, or suppliers of instruments, parts, or support equipment may be located. The dollar volume shown for each category includes research, de- velopment, test, or evaluation (R.D.T. & E.) work associated with it. The scope of R.D.T. & E. includes the following activities: Reserch.-All effort directed toword increased knowledge of natural phenomena and solution of problems in the various sciences, but ex- clusive of efforts directed to prove the feasibility of solutions of prob- lems of immediate miJitary importance or time-oriented investigations and developments. This work is done primarily by universities with some by in-house laboratories and industry. Exploratory deveiopment.-Effort directed toward the solution of specific military problems short of major development projects. This may vary from time-oriented applied research to advanced breadboard hardware, study, programing, and planning efforts. It is pointed toward specific military problem areas with a view toward developing possible solutions and determining their characteristics. This work is widely distributed to in-house laboratories and industry, with some to universities. Advanced development .-All projects which have moved into the development of hardware for experimental or engineering test. Engineering development.-Development programs being engineered for service use but not yet approved for procurement or operation. This work is done principally by industry. Operational systems development.-Effort directed toward develop- ment, engineering, and test of systems which have been approved for production and service employment, but otherwise having the same characteristics as engineering development programs. Management and support.-Effort in support of installations or op- erations required for general research and development use, such as test ranges and maintenance support of laboratories. PAGENO="0535" ECONOMIC EFFECT' OF VIETNAM SPENDING 893 g 0 i1\O CO Ci" p 0 C- `-4 ~8 a' -4 ~ 8 N ~ (C) N..* LA `.0 ~0OO4-O'..0 ~ C\4 (C) (C' 0.4 a'0\ -4 Ia ~ 10.01-4 fib I -4 (-0 fl 0.4 `.0 40.4- (flIA It C~1C'.J,-4 ~ -Iomooo,-4 ~0N0,-400Jc\J C-' ~ ~) ~,3..4 ~ N CC) N -I -4~$- -4 C ~000ht'.011 0 0.0.4 ~O'Co'1.4- C-¼0 O) fl 0'. 1 ~(nN-4C40 4- -4'.0'.O (1.4 -4 N 0 C N (0.0 0~4 0.4.4- ~ C-- `-I0.4-o00~-4 ~0N,-IN0.-4ONN 0 Ii -4 5 I ~ ~ ~ I 00o~o~ N NO) C- 18t-1(fl ~ (14-1(440 0 a'~ LAO) N COOu-'.000,-4 (na'O) ~ ~ N ~ N C 0N0N0~-40Nr~ I - -1 0 C) Cl) N ~4 N N N 4000.40.4 .4- 0.'. 0 1'. `.0 fl 0'. 0'. It'. 0'. SU".Cfl ~L0.,-4-4N0 -4 LC~(- 4-C) CC)-) IC) `0,-WN000,-4 .4 N4 0'. CC 4-0 N C-fl ~0N0C0,-40,-4N `~ I 8 C (C) N -4 N NO) ~00OU~04 4 4-- CflCO `.0 Afl-) 1-0 ~.4fl C44NN~-1 C N t-N.4- It'. N `.0 \0~10N000~-1 .4 -4 0'. t-O)'.0 -4 Ifl.4 `.0 g0H0~-404dN -4 ~ `~ ~ \ ~ ~g? -~ ~ 1:4 ~l)0~9 - . ~ 0 `~ ~ ~~19 . ~ C~ ~ `~ t `iii h~~u hiilhi PAGENO="0536" 894 ECONOMIC EFFECT OF VIETNAM SPENDING I ~ ii -~ ~~tc-cc-c0u-cccj `c~ ~0c400O~-40c- c-j OLrc~-4cnO 00000 Otcncn 0-4O~- ~c-C\JC\1 000 4ccc- *c4 c-4 ~ ~cc cv 0 c- c- ccc -1 cfc Cci 000000c-40\O c-c -4 * c-4 co -Lv- 0 00 c-40000 c-c CCI -4 `0 ci-CUOCIJ c-c co ccc co c-C C- cc~c c-c c cdoooooocr~ co c-C * cci co ~ * c-c C- `0 ccc c-C 0 0-4-4 00 ~0-C ~D~C Cc*UCC c-HCCIc-4 \C cv c-c v c-co Lc- 0 c-c -4 -4 cn ccl * ccc co -c o0000-40-cc- ~ci-000CJ--4 00 ~ c-ccc Oc c-c-cOcc-c ~- c-c - 000 4 ~ cv co ccc Co~ c- c-C ccc ~t-~ 0~\0 cv c~c~ 4 ~ ccc ( - v crcv co ccc co c-cco ccc ccc O\0 c-~ c~ -~go~~ ccicci~ co~ ci ~ ~DC\O 0cCc-\ ~CCICJ c ,-4co c-c ~-c-g~ c ccc cv cc-~ Cc cc Cv cv cv ~flfli ~ ~h !c~ 1~i ~ ~ cv<~cc~oE-c ~jzcv~ccoccvz-cc ~*0O ~-ci~ 0 ~ PAGENO="0537" E'CONOMIC EFFECT OF VIETNAM SPENDING 895 § I ~ ~ -~ O~O in O~ ~ t. -4 ~-. 4Ci~ 0 At- ~ -t Cii Ait C4'.O Cii ~it -4 in -4~O 0 0' t- Ciii Cii * g~dg~~od~jd t-~ciit-cnoCii I N-tilt' O\-ii- A O\a) `-4 5~O~ H i-I N intO Ci) HO Cii * gO\~itCuginN~ H - N-it in N H H 0 H ~) in -4 in H O\ 0 (`-NO * ~ ino~o~o goa~ciit-inOcu H H I ~tlitinitiiti-I ~O~0~O H H'OinHC'lCtjChJ,-I* 5 ~`-`1~~t i-I ~OinCilHtOini-4'0* 8~'~ H H `~-1NinCiJOcOCtlti* 5O~itinHNinO0\ I ~ ~ ~* ~~j~C~Ng0in Ci Ci Ci in N * 3 )ininCii~ I tO 0 in N in * in 0 ~o~'0Og~g ~O ) ~ intO NO in in * 8OCiiCi~O~inOa) I N inCO H 0 1A'O 0 * 3~~410NO~ 010 Ci) CO 0\ in Cii N * 5 )i-1OH~in ~) -C in Cii N N in * ii)) * ~) g~NoO~N ~ inO CO in Cii in intO * 8Oin~OininO~ " intO~in~3i~H ~HHH H -4 ~C'i~H Ci (~ini4I~'0OinininH ~-4 -I r~r ~ C C~ ~4 `~ ii i-it g~o~ Ci it H it in~H~ 4 it inin~ H ~O Ci Ci ii I CO0103 ~ ~ Ci~-~ ~ - -- in ) ~ s~fn'r-~ ~ inin~3 ~ ~4 `I PAGENO="0538" 896 ECONOMIC EFFECT OF VIETNAM SPENDING 0 H ~fl (A C~i (~ ~- 0 C\ 0 0 ~ C\~O ~ (A t- C\O 0 0 ~ d ~ (A (fl(A H (A (fl (fl ~o~o H ~ H 0 (A ~(A 0 1 (A0~0 5 0 (A 0 (A 0 )~~~H~jO ~ (A (A H 0 (A~ 0 ~i~jO H H 5 H 1 ~U~0~\0 5 H ou~co (AO~H~O 3 H ~o ~ H 3 ~(( 0 0 (A 0 0 0 ~N\0(flH~0 3 ) (A H 0 ~0~0 3 D NO (A H ~H~O H 3 H (fl H C\J H (A H 0 H 0 1 ~flC4~O~O 3 H A(A H..4 n H .~ .4- 0 `~) )(A0HC\~O~O ~ H r'.o C'J (A (A -fl.4- 0 (4 ~8~° ~:( 4 ~u~0 ~ 4 ~4 4- =`r~~4~c4 H 4 0 O~~H~00 ~ ~ ~0~(A(AO ~ 4 g~\D~g~4D(-4 4 (U -~ ~O~4-NO ~ 4- (~~O~ç~O ~4 4-E~t'-CUO ~ 4 0 (U 4 CU (U (U >4 4 000 N-O (A-C0 .4 Oo~A .404 ~4 -0 0 H'O(A'.Q (AOH 0 )C\(A C -0 D H H (003 ~~%8-4-~ C~ ~(00v -4 0 H0~0) H (U ~~0-0 ~~dil ~ (U S 0 CU h 0 0 PAGENO="0539" (Value in Thousands) TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE TOTAL: ALL STATES AND THE DISTRICT OF COLUMBIA Procurement -~ - Program Fiscal Year 1962 -~ Fiscal Year 1963 Fiscal Year l961~ Value %u. 5~ - Value % of U. S. Value %ofU.S. $25,233,214o 0.0 $214,14rj,io~ Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipoent & Supplies Missile and Space Systems Ships Combat Vehicles ~ Non-Combat Vehicles Weapons Ammunition -Electronics-& Communication Equipoent Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipnent Textiles, Clothing & Equipage Military Building Supplies Subsistence Transportation Equipuent Production Equipnent Construction Construction Equipment Medical & Dental Supplies & Equipment Photographic Eouipment & Supplies Materials Handling Equipment AU Other SupplieL & Equipment Services $25,038,690 3,178,091 1,200,986 775,115 6,82'T,276 1,558,514.8 553,916 1492,5149 222,077 923,899 3,3143,011 8144,187 36,3514 i,io6 1419,369 23,175 637,292 3,1470 102,501 1,205,1142 92,758 105,1469 72,562 140,867 8214,096 1,5514,8714 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 3,657,508 1,118,1450 703,8146 6,8514,957 1,7145,755 573,8814 1458,692 216,522 8914,076 3,1141,995 838,301 314,1445 779 266,006 140,973 585,715 2,805 105,228 1,117,1439 111,1114 66,557 62,313 66,319 735,373 1,8314,188 0 0 0 0 0 C 0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 14,1492,918 1,121,156 553,295 5,806,7614 1,528,797 353,135 1425,676 213,238 672,257 3,012,120 761,5814 22,272 1,632 271,860 20,0814 582,612 677 59,9614 1,296,351 91,795 77,1473 65,6146 53,927 715,1451 2,216,1423 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 PAGENO="0540" TABLE III procurement Program Total Fiscal Year 1965 -~ Fiscal Year 1966 Fiscal Year 1967 Value P:/ $23,268,080 % of US 100.0 Value 0. $3l,7l3,3O3~ of U S 100.0 Value % of U S Airframes & Related Assemblies & Spares Aircraft Engines &.Related Spares Other Aircraft Equipment & Supplies Missile and Space ~stems Ships 3, 993, 501~ 1,105,576 670,925 14.,1~35,592 1,785,270 100.0 100.0 100.0 100.0 100.0 1+,60i,870 2,159,308 1,030,083 1~,358,839 l,~07,69l 100.0 100.0 100.0 100.0 100.0 Combat Vehicles Non-Combat Vehicles Weapons Armnunition Electronics & Communication Equipnent 265,652 588,606 301,276 77i~,7O3 2,983,306 100.0 100.0 100.0 100.0 100.0 577,)~52 981,738 506,790 2,85)4,635 3,791,5)4)4 100.0 100.0 100.0 100.0 100.0 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipnent Textiles, Clothing & Equipage Military Building Supplies 775,865 29,)490 7,732 367,723 28,3)48 100.0 100.0 100.0 100.0 100.0 859,520 27,369 6,952 1,260,930 361,31)4 100.0 100.0 100.0 100.0 100.0 Subsistence Transportation Equipoient Production Equi~inent Construction Construction Equipnent 652,725 569 63,301 1,272,789 59,5)49 100.0 100.0 100.0 100.0 100.0 l,0~47,350 7,573 178,237 1,002,866 21)4,318 100.0 100.0 100.0 100.0 100.0 Medical & Dental Supplies & Equipuent Photographic Equipnent & Supplies Materials Handling Equipnent AU Other Supplies & Equipnent Services 112,776 99,8)46 35,872 760,519 2,096,566 100.0 100.0 100.0 100.0 100.0 21)4,307 163,787 lO)4,)4)49 1,387,20)4 2,606,L~77 100.0 100.0 100.0 100.0 100.0 (Value in Thousands) N~T2 VALUE OF MILITARY PRIME CONTRACT !~WARDS OF $10 ,000 OR MORE TOTAL: AlL STATES AR]) TUE DISTRICT OF COLUMBIA 0 0 0 ~rJ O 0 LTI 0 PAGENO="0541" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE AI~BANA IValue in Thousands) ____________________ __________________ Procur~nent Fiscal Year 1962 Fiscal Year 1963 Fiscal Year 1961k Program - Value of U.S. Value % oft. Value - %of U.S. ___________ 0.6 $ 19)~,99O o.8 $ 190,681 0 8 0 Total ___________ ________ ___________ _______ ___________ ________ Airframes & Related Assemblies & Spares 15)~9~ 0.5 28,780 0.8 21,61~1 0.5 0 Aircraft Engines & Related Spares 0.0 61~ 5,890 0.5 Other Aircraft Equipoent & Supplies 8,206 1.1 i8,66i 2.7 21,81~9 i~.0 Missile and. Space Syste~ 17,918 0.3 11~,83O 0.2 20,371 O.1e Ships 7,632 0.5 13,789 0.8 1~,252 0.3. Combat Vehicles 83 * 3I~ 0 1 779 0 2 Non-Combat Vehicles 10,11~1 2.1 8,~75 1:9 8,~19 2:0 (5 Weapons 292 0.1 1,020 0.5 1,281 0.6 Pnmiunition i6,1~8l~ 1.8 12,2119 1.l~ 6,951~ 1.0 o Electronics&~Coamunication~Equipaent~ ~ o.i 1,5790.1 1, 51i9 0.1 Petroleimi 2,709 0.3 2,396 0.3 3,191 0.14 Other Fuels & Lubricants 1431 1.2 951 2.8 163 0.8 Separately Procured Containers & Handling Equipoent 0.0 32 14.1 0.0 Textiles, Clothing & Equipage 21,006 5.0 114,O1i8 5.3 i14,588 5.14 Military Building Supplies 860 3.7 8,357 20.14 295 1.5 Subsistence 1,622 0.3 3,703 o.6 14,1467 0.8 Transportation Equipment 0.0 0.0 0.0 Production Equipment 96 0.1 139 0.1 1140 0.2 Construction 19,122 i.6 30,620 2.7 33,879 2.6 Construction Equipment 102 0.1 59 0.1 110 0.1 Medical & Dental Supplies & Equipment 58 0.1 21~ * 13 Photographic Equipment & Supplies 278 0.14 876 1.14 158 0.2 Materials Handling Equipment 1147 o.k 1,151 1.7 350 o.6 All Other Supplies & Equipment 14,7914 o.6 8,821# 1.2 22,899 3.2 Services 23,1490 1.5 21+,0l9 1.3 17,1423 0.6 PAGENO="0542" TABLE III NE7~ VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR i~i~ AlABAMA C~:i 0 0 t~j a O -4 (Value in - - procurement Program Ficcal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value r~iis. - Value ~of U.S. Value %ofU.S Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space ~rstems Ships $165,176 o~ $281,51~9 0.9 16,721 170 16,073 16,539 19,286 o.t~ ~ 2.l~ o.I~ 1.1 17,306 10 i7,881~ 23,2Ot~ 3,~438 0.~ * 1.7 0.5 0.2 . Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 683 7,192 696 3,333 2,968 0.3 1.2 0.2 O.~ 0.1 7t~8 17,798 l~,395 26,752 2,51~0 0.1 1.8 0.9 0.9 0.1 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 3,616 623 ~ 1,351 2o,L~49 3,360 0.5 2.1 l7.l~ 5.6 11.8 3,220 859 63t~ 89,296 l1~,O72 Q*!f 3.1 9.1 7.1 3.9 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment l~,5Ol 158 21,327 0.7 0.0 0.2 1.7 0.0 5,919 997 l3,?70 106 0.6 0.0 0.6 1.3 * Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services ~2 1~7 69 ~,793 21,179 * * 0.2 0.6 1.0 ~8 9~9 1,1~l7 10,180 26,507 * 0.6 l.t~ 0.7 1.0 PAGENO="0543" TABLE III NET VALUE OF MILITARY PRIME CONTRAC~I AWARDS OF $10, 000 OR MONE ALASKA (Va11]E~ ~fl ~ £UU~.L~Lbj - J Fiscal Year 1962 Program Value % of U.S. - Fiscal Year Value 1963 %of U.S. Fiscal Year Value l961# %ofU.S. Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships Combat Vehicles ~ Non-Combat Vehicles Weapons Ammunition $ 103,1476 $ 63,320 375 41~ 0.14 $ 101,5145 559 18 0.3 * 0.0 0.0 0.0 0.0 0.0 * 0.0 0.0. 0.1 12.5 0.0 0.1 0.2 0.14 0.0 0.0 2.1 0.0 0.0 0.0 * 0.3 1.3 i~LecT~ronics & Communication Equipment Petroleum Other Fuels & Lubricamts Separately Procured Ccxitainers & Handling Equipment Textiles, Clothing & Iquipage Military Building Supplies Subsistence Transportation Equipment Production Equipment Construction Construction Equipment Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 0.0 0.0 0.0 0.0 0.0 0.0 2 .1~--- * 13.0 0.0 0.0 * 0.14 0.0 0.0 2.0 0.0 0.0 0.0 0.3 0.2 672 14,5140 516 142 2,789 214,706 13 2,236 20,301 3140 35 114 82 ~29,337~ 1,672 14,ol#9 12 51 2,1455 51,572 158 ii,~68 c:'i 0 0.14 C * * 0.0 0.0 0.0 * a * 0.0 0.0 0.2 18.2 0.0 514 14,1467 19 2,295 22,766 25 2,1447 14,1314 PAGENO="0544" TABLE III N~P VALUE OF MILITARY PRIME CONTRACT AWAFO)S OF $10 ,000 OR MORE ALASKA Total $7~,l75 03 - $71,666 0,2 Airframes & Related Assemblies & Spares i1~4 * tt83 Aircraft Engines & Related Spares 0.0 0.0 Other Aircraft Equipment & Supplies 0.0 11 Missile mmcl Space ~stems 0.0 ~i8 Ships 0.0 0.0 Combat Vehicles 0,0 0,0 Non-Combat Vehicles 68 * 29 Weapons 0.0 0.0 Ammunition 0.0 0.0 Electronics & Communication Equipment 15,797 0.5 366 Petroleum 6,666 0.9 1,098 0.1 Other Fuels & Lubricants 3,773 12.8 5,~67 20.0 Separately Procured Containers & Handling Equipment 0.0 0.0 Textiles, Clothing & Equipage 0.0 0.0 Military Building Supplies 10 * 1~8 Subsistence 3,162 0.5 2,21~0 0,2 Transportation Equipment 0.0 0.0 Production Equipment 18 * 0.0 Construction 32,038 2.5 27,125 2.7 Construction Equipment 16 * 67 -* Medical & Dental Supplies & Equipment 0.0 0.0 Photographic Equipment & Supplies l~ * 0.0 Materials Handling Equipment 0.0 0.0 All Other Supplies & Equipment 6t~2 0.1 565 Services 11,827 o.6 33,7t~9 1.3 (Value in Thousands) Procurement Program - Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value U.S. Value -~ of U.S. Value %ofU.S.' C) 0 0 C') ~rj C) 0 tTl 02 C) PAGENO="0545" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MO~ ARIZONA (Value in Thousands) procurement - Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l961~ Value__- % of U.S. Value %of U.S. Value - %ofU.S. Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships ~. Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment $ 152,951 0.6 $ 285,751 1.1 $ 173,825 0.7 5,~08 1,l71~ 18,921 50,3014 122 113 fl 1,128 314,290 0.2 ~0.l 2)~ 0.7 * 0.0 * * 0.1 1.0 7,683 2,1~93 314,992 151,915 266 30 1#9 20 353 29,31#9 0.2 0.2 5.0 2.2 * * * * ~ 0.9 9,280 1,530 19,14714 16,3914 273 95 1,1214 75,116 0.2 0.1 3.5 0.3 * 0.0 0.0 * 0.2 2.5 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 283 173 2l~0 2,0148 * 0.5 0.0 * 8.8 223 329 163 5,263 * 1.0 0.0 0.1 3.2.8 579 231 2,2614 O~1 0.0 0.0 0.1 11.3 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 1,109 679 22,711 1,500 0.2 0.0 0.7 1.9 1.6 9~T 32,398 112 0.2 0.0 0.0 2.9 * 1,298 () 25~/~ 18,603 * 0.2 0.0 ~ 1.14 0.0 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment AU Other Supplie~. & Equipment Services 14,619 8,055 0.0 0.0 0.0 o.6 0.5 95 12 102 3,710 15,267 0.1 * 0.2 0.5 o.8 287 5,6714 21,628 0.0 1.14 0~) o.8 1.0 PAGENO="0546" TABLE III NL'2 VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE ARIZONA txi 0 0 tn tn 0 tn 0 (Value in ~ Procurement - Program Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipuent & Supplies Missile and Space ~rstemo Ships Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value Value ~of U.S. Value %ofU.S - $176,857 0.8 $2t~8,228 0.8 13,760 6,769 32,337 28,t~77 6I~t~ 0,L~ 0.6 i~.8 0,6 * 21,959 16,357 37,633 I~3,)~25 672 0.5 0.7 3.7 1.0 * . Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipnent 28 27 211 2,157 L~6,3I~l * * 0.1 0.3 1.6 L~3 25 377 12,513 61,283 * * 0,1 O.t~ 1.6 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipuent Textiles, Clothing & Equipage Military Building Supplies 285 275 6 * 0.0 0.0 0.1 * l)~7 786 3,329 * 0.0 11.3 0.3 0.0 Subsistence Transportation Equipsent Production Equipment Construction Construction Equipment 1,503 (-) 17 ~/ 15,t~8l 0.2 0.0 --- 1.2 0.0 2,031 50 11,081 86 0.2 0.0 ~ 1.1 * Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 86 77 () ~3 2/ 9,201 19,252 0.1 0.1 --- 1.2 0.9 81 383 11,738 21+,229 * 0.2 0.0 0.8 0.9 PAGENO="0547" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE ARKAIISAS Procurement Program -. Fiscal Year 1962 - Fiscal Year 1963 Fiscal Year 19614 Value % of U. S. Value - %ofU. S. Value %of U. S Total $ 814,798 0.3 $ 39,1114 0.2 $ 29,731 0.1 Airframes & Related Assemblies & Spares 0.0 576 238 Aircraft Engines & Related Spares 0.0 11 18 Other Aircraft Equipment & Supplies 626 0.1 1143 * (_) 796~ Missile and Space Systems 1,529 * 113 * 503 Ships 55 * 1l47 * 1~4O Combat Vehicles 72 * 0.0 176 0.1 Non-Combat Vehicles 1,14.83 0.3 553 0.1 395 0.1 Weapons 0.0 0.0 0.0 Ammunition 223 * 1,614.0 0.2 1,291 0.2 Electronics & Communication Equipment 992 * 1,628 0.1 3,507 0.1 Petroleum 2,756 0.3 1,687 0.2 1,1914 0.2 Other Fuels & Lubricants 153 0.14 1148 O.~4 0.0 Separately Procured Containers & Handling Equipment 0.0 0 0 14.914 30.3 Textiles, Clothing & Equipage 2,529 o.6 14,995 1.9 14,667 1.7 Military Building Supplies 12 0.1 0.0 0.0 Subsistence 3,076 0.5 2,218 0.14 2,776 0.5 Transportation Equipment 0.0 0.0 0.0 Production Equipment 0.0 0.0 0.0 Construction 67,611 5.6 22,096 2.0 10,883 o.8 Construction Equipment 33 * 12 * 0.0 Medical & Dental Supplies & Equipment 0.0 0.0 0.0 Photographic Equipment & Supplies 0.0 0.0 0.0 Materials Handling Equipment 68 0.2 319 0.5 21#7 0.5 All Other Supp1ie~ & Equipment 1,8214 0.2 880 0.1 1,314.9 0.2 Services 1,756 0.1 1,914.8 0.1 2,6149 0.1 (Value in ~ NI CD 0 0 CD NI NI CD 0 NI NI CD PAGENO="0548" TABLE III N~71' VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE ARKANSAS Total $39, 28~~ 0.2 $95,701 0.3 Airframes & Related Assemblies & bpares 862 * 522 * Aircraft Engines & Related Spares 0.0 0.0 Other Aircraft Equipnent & Supplies 1,~52 0.2 69 Missile and Space ~rstems 618 * t~88 Ships 139 * ilti Combat Vehicles 0.0 81 Non-Combat Vehicles 803 0.1 2,)4i40 0.3 Weapons 0.0 0.0 Ammunition z~,363 0.6 23,969 0.8 Electronics & Communication Equipment 66t~ * 8,i6i~ 0.2 Petroleum 2,180 0.3 1,288 0.1 Other Fuels & Lubricants 0.0 0.0 Separately Procured Containers & Handling Equipment 0.0 (-) 26 ~J Textiles, Clothing & Equipage 7,501 2.0 22,6ttl 1.8 Military Building Supplies 0.0 11,310 3.1 Subsistence 3,5~O 0.5 3,75)~ o.~ Transportation Equipment 0.0 0.0 Production Equipment 0.0 221 .o.i Construction 12,258 1.0 3,565 0.~ Construction Equipment 61 0.1 139 0.1 Medical & Dental Supplies & Equipment t~73 0.t~ 199 0.1 Photographic Equipment & Supplies 0.0 0.0 Materials Handling Equipment 11~9 01~ 1,715 1.6 AU Other Supplies & Equipment 1,680 0.2 11,967 0.9 Services 2,5~l 0.1 3,05t~ 0.1 (Vci1n~ in Procurement Program FiBeal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value %of iJ5 Value ~ofUS Value %of U S CD C C CD t,1 CD C -4 NI Ni CD PAGENO="0549" C C C z C 0 (valw~ ~T, TABLE III NET VALUE OF MILITARY PRIME COETRACT AWARDS OF $10, 000 OR MORE CALIFOBBIA - procurement - Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l961~ - Value ~~üs Value . Value u~ - - Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $5,993,2L~6 23.9 $5,835,670 23.1 $5,100,650 21.0 673,210 16,195 1~8,976 3,215,14214 173,807 21.2 1.3 19.2 147.1 11.2 676,596 21,893 111,307 3,078,650 121,812 18.5 2.0 15.8 1414.9 7.0 6l8,1~8O 87,t~l6 91,9142 2,1412,0714 1147,11.148 13.8 7.8 16.6 141.5 9.6 Combat Vehicles Non-Combat Vehicles Weapons Armnunition Electronics & Communication Equipment 118,685 8,501 27,711.3 158,711.1 1466,662 21.11. 1.7 12.5 17.2 114.0 80,696 14,795 26,511 150,887 555,089 114.1 1.1 12.2 16.9 17.6 58,129 8,875 31,593 103,388 5714,1480 16.5 2.1 114.9 15.14 19.1 Petroleum Other Fuels & Lubricants Separately Procured Containers & Eandling Equipment Textiles, Clothing & Equipage Military Building Supplies 162,5141 5,778 55 8,311 6611. ~_ 19.3 15.9 5.0 2.0 2.9 191,565 2,11.79 88 5,676 2,511 22.9 7.2 11.3 2.1 6.1 180,882 879 ~.. 2~ 14,883 5,358 23.8 14.0 1.6 1.8 26.7 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 121,893 16 28,1481 132,060 5,807 19.1 0.5 27.8 11.0 6.3 111,1146 79 13,637 1614,957 2,592 19.0 2.8 13.0 114.7 2.3 111,767 85 10,161 136,7142 1478 19.2 12.6 17.0 10.5 0.5 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplie~ & Equipment Services 3,1450 11,893 1,625 120,962 381,766 3.3 16.14 14.o 114,7 - 214.6 3,307 8,1185 3,571 1140,14141 356,900 5.0 13.6 5,14 19.1 19.5 11,1196 9,316 3,655 107,62L 390,1476 5.8 114.2 6.8 15.1 17.6 PAGENO="0550" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF *10,000 OR MORE CALIFORNIA Total $5,153,639 22.1 $5,813,078 18,3 Airframes & Related Assemblies & Spares 8o6,3ot~ 20.2 751,793 i6.1~ Aircraft Engines & Related Spares 17,066 1.6 23,855 1.1 )ther Aircraft Equipment & Supplies 121, 961~ 18.2 188,283 18.3 Missile and Space ~rstems 2,029,336 145.8 1,912,787 143,9 Ships 230,659 12.9 177,126 12.6 Combat Vehicles 5,14614 2.1 15,783 2,8 Non-Combat Vehicles 114,300 2.14 15,1#81 1.6 Weapons 145,9714 15.2 66,L#29 13.1 Anununition 172,588 22.3 5014,14142 17.7 Electronics & Communication Equipment 618,253 20.7 683,795 18.0 Petroleum 173,1014 22.3 190,675 22.2 Other Fuels & Lubricants 575 2.0 119 0.14 Separately Procured Containers & Handling Equipment 14,14314 57.3 1,238 17.8 Textiles, Clothing & Equipage 6,895 1.9 22,626 1.8 Military Building Supplies 1#,553 16.1 90,569 25.1 Subsistence 122,01414 18.7 2146,852 23.6 Transportation Equipment 99 17.14 0,0 Production Equipnent 9,325 114.7 27,71414 15.6 Construction 203,252 16.0 166,876 16.6 Construction Equipment 1,288 2.2 2,001 0.9 Medical & Dental Supplies & Equipment 6,952 6.2 12,7814 6.0 Photographic Equipment & Supplies 22,260 22.3 35,587 21.7 Materials Handling Equipment 2,3714 6.6 7,816 7,5 All Other Supplies & Equipment 1141,978 18.7 1814,027 13.3 Services 392,578 18.7 14814,390 18.6 (Value in Thousands~ Procurement - Program Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 - Value ~rUS Value -~ ~of US Value %of US a C C C) C) C -1 t.1 z C) PAGENO="0551" NET VALUE OF MILITANT PRIME CONTRACT AWARDS OF $10, 000 OR MORE RI C C C) RI C) H C RI H z 02 RI C) (Value in Thousands) COLORADO ~rocurement Program - Fiscal Year Value 1962 % of rj.s~ Fiscal Year 1963 Value % of U.S. Fiscal Year 196th Value %of U. S Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $ - 565,279 2.3 $ ~~411,l96 1.8 $ 389,511 1.6 712 56o 14S6,O711 51 * 0.0 0.1 7.1 * 578 77 291 356,789 11~ * * * 5.2 * 211 58 1125 299,110 5k * * 0.1 5.2 * Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 105 1,361 287 1,671 3,271 * 0.3 0.1 0.2 0.1 2,883 2,06k 2,725 3,671 0.0 0.6 1.0 0.3 0.1 l~7 7112 279 951 9,6149 * 0.2 0.1 0.1 0.3 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 8,713 1,020 129 1.0 2.8 . 0.0 0.0 0.6 9,823 727 285 141 1.2 2.1 0.0 0.1 0.1 3,0614 1473 ~ ~ 10 0.14 2.1 0.0 * 0.0 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 114,561 13 19,086 828 2.3 - 0.0 * 1.6 0.9 10,005 17 18,397 393 1.7 0.0 * 1.6 0.14 10,1423 39l~ 30,651 120 1.8 0.0 0.7 2.14 0.1 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment AU Other Supplie~ & Equipment Ser~rices 323 66 7,577 19,071 0.1 0.1 0.0 0.9 1.2 614 105 6i 9,872 25,3114 0.1 0.2 0.1 1.14 1.14 1~3 1140 2,510 10,176 19,981 0.1 0.2 14.7 1.14 0.9 PAGENO="0552" TABLE III NPI? VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE COLORADO Total $21+9,15l 11 $255,893 0.8 Airframes & Related Assemblies & Spares (_) 120 C __ t,l60 0.1 Aircraft Engines & Related Spares 300 * 209 Other Aircraft Equipment & Supplies 601+ 01 609 0.1 Missile and. Space E~jstems 157,873 3.6 .138,5th 3.2 Ships 162 * 882 0.1 Combat Vehicles 68 * 92 Non-Combat Vehicles 1+19 0.1 623 0.1 Weapons 288 0.1 1,011+ 0,2 Ammunition 1,31+0 0.2 8,212 0.3 Electronics & Communication Equipment l2,851+ 0.1+ 9,521 0.3 Petroleum 1,703 0.2 2,620 0,3 Other Fuels & Lubricants 1+83 1.6 355 1.3 Separately Procured Containers & Handling Equipment 0.0 11+ 0,2 Textiles, Clothing & Equipage 265 0.1 1,700 0,1 Military Building Supplies 17 0.1 2,686 0.7 Subsistence 16,395 2.5 18,91+6 1,8 Transportation Equipment 0.0 0.0 Production Equipment 1+15 o.6 850 0.5 Construction 26,987 2.1 36,955 3.7 Construction Equipment 183 0.3 266 0.1 Medical & Dental Supplies & Equipment 11+6 0.1 229 0.1 Photographic Equipment & Supplies 78 0.1 103 0.1 Materials Handling Equipment 1,260 3.5 81+2 0.8 All Other Supplies & Equipment 9,063 1.2 9,198 0.7 Services 18,368 0.9 17,21+3 0.7 (Value in ~ Procurement Program - - Fiacal Year 1965 Fiscal Year 1966 Fiscal Year 1967 - Value % of U S Value ~ofUS Value %ofUS t,1 C C C) C) H C 131 H 1> CI) 131 C~) PAGENO="0553" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE CONTLECTICUT C) C C) C) C z C) I. (Value in m...~ -, Procurement -~ - Program Fiscal Year 1962 - Fiscal Year 1963 Fiscal Year l96L~ Value %oftj.S. Value %ofU.S. Value I % of U. S. - Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships - $ 1,213,067 1~.8 $ 1,Oli.8,1449 I~.2 $l,l26,O5t~ l~.6 - 22O,771~ 5]A,865 90,528 27,268 221,61~9 6.9 112.9 11.7 O.~f 1L~.2 130,577 ~4OO,OiO 77,789 5O,I~72 219,637 3.6 35.8 11.1 0.7 12.6 152,751 l419,57~~ 61,557 67,061 232,l21~ 3.1k 37.1~ 11.1 1.2 15.2 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 795 1,831~ 17,365 31,969 111,690 0.2 O.I~ 7.8 3.5 1.2 116 2,750 2I~,955 36,786 113,901 * o.6 11.5 1~.1 i.~1 1i41 l~U 18,188 )~5,1~l9 117,751 0.1 0.1 8.6 6.8 i.6 Petroleum Other Fuels & Lubricants 3,296 O.1~ 0.0 1,207 377 0.1 1.1 5811 0.1 0.0 Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 7,033 U 0.0 1.7 * 1~,l53 89 0.0 1.6 0.2 .~ 5,1~O 73 0.0 1.9 0~1 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 569 236 3,729 2,935 1,183 0.1 6.8 3.6 0.2 1.3 6111 136 3,253 7,000 2117 0.1 1~.8 3.1 o.6 0.2 507 115 7,196 1~,522 79 0.1 6.7 12.0 0.3 0.1 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment AU Other Supplie~ & Equipment Services 1,313 791 581 12,795 9,858 1.2 1.1 1.11 1.5 o.6 6114 1,317 8,681~ 15,503 18,205 1.0 2.1 13.1 2.1 1.0 1,102 666 1,5111 11,872 117,1177 1.~1 1.0 2.8 1.7 2.1 PAGENO="0554" TABLE III NE'F VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE CONNECTICUT Total $1,180,111 5.1 $2,051, 560 - 6.5 Airframes & Related Assemblies & Spares 11)4,382 2.9 217,0814 14.7 Aircraft Engines & Related Spares 5)45,013 149.3 1,1011,907 51.2 Other Aircraft Equipment & Supplies 119,956 7.5 7~4,330 7.2 Missile and Space ~~stems 35,020 0.8 511,015 1,2 Ships 252,025 111.1 153,315 10.9 Combat Vehicles 500 0.2 8,986 1.6 Non-Combat Vehicles 1,791 0.3 3,929 O.~1 Weapons 6,691 2.2 76,277 15.1 Ammunition 117,193 6.1 i~18 081 5.2 Electronics & Communication Equipment 65,1115 2.2 86,1711 2,3 Petroleum 676 0.1 3)41 Other Fuels & Lubricants 0.0 0.0 Separately Procured Containers & Handling Equipment 0.0 0,0 Textiles, Clothing & Equipage 9~3119 2.5 13,676 1.1 Military Building Supplies 19 0.2 80 Subsistence 980 0.2 1,938 0,2 Transportation Equipment 13 2.3 0.0 Production Equipment 2,571 ~`- 12 7)42 7.2 Construction 10,1180 0.8 3,078 0.3 Construction Equipment 562 0.9 14ii 0.2 Medical & Dental Supplies & Equipment 1,1158 1.3 3,385 1.6 Photographic Equipment & Supplies ~ 11.5 5,13)4 3.1 Materials Handling Equipment 1,21)4 ~ 6,888 6.6 All Other Supplies & Equipment 13,988 1.8 51,0)47 3.7 Services 16,330 0.8 25,7)42 1.0 (Value in Thousands) - Procurement - Program FIscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value - 5 Value ~of US Value %of US 1'l C) C C C) t,1 C) H C ~T1 rJI) z C) PAGENO="0555" TABLE III NET VALUE OF MILITARY PRIME CONTRAC'T AWARDS OF $10,000 OR MORE DELAWARE - Procurement - Program Fiscal Yea rl962 Fiscal Year 1963 Fiscal Year l96l~ Value % of Tj,S, Value %of U.S. Value %of u.s Total $ 36,666 0.1 $ 1~7,I~83 0.2 $ 3O,1i21~ 0.1 Airframes & Related Assemblies & Spares 693 * 2,311 0.1 926 Aircraft Engines & Related Spares 101 * 0.0 0.0 Other Aircraft Equipment & Supplies 1~23 0.1 1,590 0.2 3,212 o.6 Missile and Space Systems 0.C 1,276 * * Ships l~,571~ 0.3 1,865 0.1 362 Combat Vehicles 2,192 oJ~ 0.0 0.0 Non-Combat Vehicles 658 0.2 13,779 3.0 7,968 1.9 Weapons 10 * 93 * 0.0 Ammunition 1,699 0.2 1,521 0.2 ~38 0.1 Electronics & Communication Equipment 79 * 196 66 Petroleum 12,875 1.5 12,558 1.5 5,1114 0.7 Other Fuels & Lubricants io8 0.3 0.0 Separately Procured Containers & Handling Equipment 0.0 0.0 ].~ 0.8 Textiles, Clothing & Equipage * 81~8 0.3 131 Military Building Supplies 0.0 0.0 0.0 Subsistence l,961~ 0.3 2,757 0.5 3,635 o.6 Trensportation Equipment 0.0 0.0 0.0 Production Equipment 2,602 2.5 99 0.1 0.0 Construction 1,692 0.1 6~o . 0.1 1,I~96 0.1 Construction Equipment 31~ * 71~ 0.1 0.0 Medical & Dental Supplies & Equipment 78 0.1 310 0.5 139 0.2 Photographic Equipment & Supplies 262 0.l~ 1,095 1.8 l,161~ 1.8 Materials Handling Equipment 209 0.5 1~5 0.1 0.0 Al]. Other Supplies & Equipment 3,261 0.1k 3,778 0.5 1,711 0.2 Services 3,068 0.2 2,638 0.1 3,531 0.2 (Value in Thousands) C H C H C PAGENO="0556" TABLE III RET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE a C C C) t,1 t,1 C) H C H z z C) (Value in ~ DElAWARE rement Program Fiscal Year 1965 - Fiscal Year 1966 Fiscal Year 1967 Value %of U.S. Value of U.S. Value %ofU.S Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $38,239 0.2 $37,t~t~5 0.1 1,550 7,651 55 7~5l * 0.0 1.1 * * 913 365 272 2,583 0.0 * 5 0.2 Combat Vehicles Non-Combat Vehicles Weapons Aemunition Electronics & Consnunication Equipment 58~ 6L~5 229 0.0 0.1 o.o 0.1 * 70 5,302 i~ t~35 167 * 0,5 ~ * * Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 6,036 17 1s96 68 0.8 o.o 0.2 0.1 0.2 9,170 (-) 13 ~J 1,959 516 1.1 --- 0.0 0.2 o~i Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 3,616 21 2,169 0.6 o.o * 0.2 0.0 6,672 . 210 2,216 29 0.6 0.0 0.1 0.2 * Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 380 538 ~ 9,317 ~,l25 0.3 0.5 0.0 1.2 0.2 303 621 1,012 s,629 0,1 ~ 0.0 0.1 0.2 PAGENO="0557" Procurement - Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year 19614 Value %oftJ.5. Value %ofU.S. Value %ofU.S. - - Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships - 181,9514 0.7 4 238,120 0.9 222,9147 0.9 106 673 958 37,013 * 0.0 0.1 * 2.14 193 268 7145 8,558 59,0314 * * 0.1 0.1 3.14 10 50 38 1403 27,81~5 * * * * 1.8 Combat Vehicles Non-Combat Vehicles Weapons Assnunition Electronics & Communication Equipment 314 65 14214 117 39,399 * * 0.2 * 1.2 1147 513 141,901 0.0 * 0.2 0.0 1.3 39 31 296 39,087 * * 0.1 0.0 1.3 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 678 2814 120 0.1 0.8 0.0 * o.o 636 1429 U 149 0.1 1.2 0.0 * 0.1 i,776 14914 ~ 211 - 0.2 2.2 0.0 * 0.0 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 2,769 61 8,255 110 0.14 o.o 0.1 0.7 0.1 3,876 114 9,196 12 0.7 0.0 * 0.8 * 2,6914 25 13,722 0.5 0.0 * 1.1 0.0 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment AU Other Supplie & Equipment Services 195 1421 21,990 68,282 0.2 o.6 0.0 2.7 14.14 185 906 29 16,399 95,019 0.3 1.5 * 2.2 5.2 25 331 16 35,1465 100,389 * 0.5 * 5.0 14.5 (Value in m~s~ TABLE III NET VALUE OF MILITARY PRfl~ CONTRACT AWARDS OF $10, 000 OR MORE DISTRICT OF COLUMBIA C) C C C) C) C C) PAGENO="0558" TABLE III Total $2L~7, 576 1.0 $328,111 1.0 Airframes & Related Assemblies & Spares * 109 Aircraft Engines & Related Spares 36 * 29 * Other Aircraft Equipment & Supplies 25 * 103 * Missile and Space ~jstems 1,159 * 2,65k 0.1 Ships 50,007 2.8 89,269 6.8 Combat Vehicles o.o 0.0 Non-Combat Vehicles 358 0.1 98 Weapons 663 0.2 852 0.2 Ammunition 175 * 286 Electronics & Communication Equipment 35,91 V~ 1.2 85,512 1.2 Petroleum 1,103 0.1 1,188 0.1 Other Fuels & Lubricants 800 ~ 322 1,2 Separately Procured Containers & Handling Equipment 0.0 12 0.2 180 * Textiles, Clothing & Equipage 862 * Military Building Supplies 0.0 0.0 Subsistence 1,109 0.2 797 0,1 Transportation Equipment 0.0 0.0 Production Equipment 168 0.2 28 Construction 17,327 ~ 16,688 1.6 18 * Construction Equipment 20 * Medical & Dental Supplies & Equipment 71 0.1 2,255 1.1 Photographic Equipment & Supplies 379 o.8 387 0.2 Materials Handling Equipment 60 0.2 0.0 All Other Supplies & Equipment 18,356 2.8 15,693 1.1 Services 119,983 5.7 151,871 (Value in Thousands) NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE DISTRICT OF COLUMBIA Procurement Program Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value %of US Value ofUS Value - %of US C C C) C w t~.1 tEl PAGENO="0559" TABLE III NET VALUE OF MILITARY PRIME CONVRACT AWARDS OF $10, 000 OR MORE FLORIDA CD 0 0 CD CD 0 U) t~j z z SD I. (Value in ~ Procurement - Program Fiscal Year 1962 -~ Fiscal Year 1963 Fiscal Year l96~ Value % of U. 5* Value % of U. S. Value % of U.S. - Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $~ 64~,4~8 2.6 583,237 2.3 782,591 15,11q8 22,299 10,45o 277,683 6,062 0.5 1.9 1.3 11.1 0.4 21,142 14,503 4,407 180,658 10,040 0.6 1.3 0.6 2.7 0.6 14,208 l7,0U 5,359 201,854 9,121 3.2 0.3 1.5 1.0 3.5 0.6 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 147 368 4~6 6,596 56,639 * 0.1 0.2 0.7 1.7 613 1,599 242 8,063 56,292 0.1 0.4 0.1 0.9 1.8 153 1,955 642 5,677 77,872 * 0.5 0.3 0.8 2.6 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 4,494 505 556 30 0.5 1.4 0.0 0.1 0.1 5,343 628 1,080 15 o.6 1.8 0.0 0.4 * 5,128 289 ~- 1,079 63 0.7 1.3 0.0 0.4 0.3 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 18,129 541 52,107 ~ 2.8 0.0 0.5 4.3 0.0 19,179 1,698 92,855 720 3~3 0.0 1.7 8.3 0.6 2].~S57ci (-) 170-' 385 241,131 29 3.8 --- 0.6 18.6 * Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies. & Equipment Services 582 73.1. 424 12,985 158,216 0.6 1.0 1.0 1.6 10.2 343 516 105 8,190 155,C06 0.5 0.8 0.2 1.1 8.5 756 705 381 5,553 171,553 1.0 1.1 0.7 0.8 7.7 PAGENO="0560" TABLE III NI'T VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE FLORIDA CD C C CD CD H C -4 NI z U) NI z. CD (Vehi~ In Program FIseal Year 1965 - Fiscal Year 1966 Fiscal Year 1967 Value - % or u.s. Value ~of U.S. Value - %ofU.s Total Airframes & Related Assemblies & Spares Aircraft Engines &`Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $633,332 2.7 $766,955 2)~ 10,719 2L~,567 6,32k 150,873 7,6~f~ 0.3 2.2 0.9 3J~ O.1~ 28 3o~ 32,~6l 15,107 l8~,97l l6,79t~ 0.6 1.5 1.5 1~*3 1,2 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 257 3,O3!~ 393 6,112 55,207 0.1 0.5 0.3 0.8 1.9 167 3,768 2,662 16,600 92,~6o * o.~ 0.5 0.6 2.L~ Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment 4Textiles, Clothing & Equipage Military Building Supplies ~89 288 36~ 5,361 (-) 13 21 0.6 1.0 ~7 1.5 --- 4,319 27 217 3,~6 ~4,7~#9 0.5 0.1 3.1 0.3 1.3 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 30,353 (_) 90 21 155,573 142 ~7 0.0 --- 12.2 0.1 ~f1,362 8~6 115,2141 4,0 ~ 0.5 11.5 ~ Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment AU Other Supplies & Equipment Services 650 3314 2142 6,630 163,3 9 0.6 0.3 0.7 0.9 7.8 2,115 i~ 199 5,935 1914,981 1.0 * 0.2 0.14 7.5 , PAGENO="0561" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MONE GEORGIA (Value in Thousands) - Procurement - Program Fiscal Year 1962 - - Fiscal Year 1963 Fiscal Year l96t~ Value s Value *~ Value C Total $ 337,1~73 ________ 1123,290 1.7 $ 520,169 2.1 C Airframes & Related Assemblies & Spares 221~, 520 7.1 3l~5,550 9.5 11~30,7l48 9.6 Aircraft Engines & Related Spares 2,138 0.2 110 221 Other Aircraft Equipment & Supplies 7,507 1.0 5,897 0.8 3,61~7 0.7 Missile and Space Systems 566 * 1,1129 * 16,365 0.3 Ships 1,957 0.1 2,1~78 0.1 1,367 0.1 t~j Combat Vehicles 21 * 187 * 0.0 e Non-Combat Vehicles 1~,923 1.0 363 0.1 1,360 0.3 Weapons 155 0.1 29 * 11~ * C Assnunition 3,8112 ~ 3,785 O.1~ 2,81~0 ~ Electronics & Communication Equipment 2,668 0.1 2,038 0.1 1,910 0.1 Petroleum 1,562 0.2 i,661f 0.2 1,615 0.2 Other Fuels & Lubricants 12 * 191k 0.6 0.0 Separately Procured Containers & Handling Equipment 0.0 0.0 0.0 Textiles, Clothing & Equipage 12,826 3.1 3,2l1~ 1.2 13,285 1h9 Hilitary Building Supplies 2,227 9.6 888 2.1 25 0.1 t~:j S~ibsistence 16,157 2.5 13,108 2.2 10,518 1.8 Transportation Equipment 0.0 0.0 0.0 Production Equipment 12,395 12.1 9,687 9.2 138 0.2 rmstruction 21,911 1.8 l1~,514() 1.3 17,788 1.1k ~nstruction Equipment 223 0.2 1,698 1.5 65 0.1 Meciical & Dental Supplies & Equipment 331k 0.3 110 0.2 3O1~ 0.1k Protographic Equipment & Supplies 51 0.1 80 0.1 207. 0.1k 1&terials Handling Equipment (..) 3B~/ --- 15 * 26 * ~1l Other SupplieL & Equipment 9,035 1.1 5,512 0.8 1~,779 0.7 ~rvices ].2,1~66 0.8 l0,711~ 0.6 12,9l~7 0.6 PAGENO="0562" TABLE III (Value in Thousands) NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE GEORGIA Total $662,1U7 2.8 $799,362 2.5 Airframes & Related Assemblies & Spares 516,671k 12.9 551,286 12.0 Aircraft Engines & Related Spares 375 * 320 Other Aircraft Equipment & Supplies 5,332 0.8 791f 0.1 Missile and Space Systems 7,985 0.2 1,566 Ships 2,~39 0.1 2,858 0.2 Combat Vehicles 3L~ * 35 Non-Combat Vehicles 385 * !~69 Weapons 815 0.3 1,816 o.)~ Ammunition L~,8o3 0.6 ~2,655 1.5 Electronics & Communication Equipment 1~,98t~ 0.2 5,005 0.1 Petroleum 1,661 0.2 i,51t1 0,2 Other Fuels & Lubricants 0.0 0.0 Separately Procured Containers & Handling Equipment 195 2.5 2,052 29.5 Textiles, Clothing & Equipage 19,995 s.'~ 89,866 7,1 Military Building Supplies 1,197 ~.2 1,950 0,5 Subsistence l2,5l~f 1.9 16,269 1.6 Transportation Equipment 86 15.1 0.0 Production Equipment 53 0.1 ~4~8 0.2 Construction 58,827 ~.6 27,263 2.7 Construction Equipment 1~' 01 5,391 2.5 Medical & Dental Supplies & Equipment 79 0.1 9~3 Q,t~ Photographic Equipment & Supplies 292 0.3 t~35 0,3 Materials Handling Equipment 17 2,th6 2.5 All Other Supplies & Equipment ~ 1.0 29,999 2.2 Services 15,893 0.8 13,755 0.5 Procurement - Program Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value % of uS - Value ofUS Value %of US CD C C CD CD 1'l z Cl) 1'l z S.) PAGENO="0563" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE HAWAII procurement - Program Fiscal Year 1962 - - Fiscal Year 1963 Fiscal Year l96l~ Value %oru. I~Value Ia ~ value %or u.s Total $ 31,875 0.1 $ 145,206 0.2 $ 52,112 0.2 Airframes & Related Assemblies & Spares 0.0 187 279 * Aircraft Engines & Related Spares 0.0 0.0 0.0 Other Aircraft Equipment & Supplies 73 * 0.0 2,715 0.5 Missile and Space Systems 2146 * 0.0 211 * Ships 65 * 0.0 140 * Combat Vehicles 0.0 0.0 0.0 Non-Combat Vehicles 0.0 12 * 0.0 Weapons 0.0 0.0 0.0 Azmnunition 0.0 0.0 0.0 Electronics & Communication Equipment 926 * 6914 * 805 Petroleum 3,53.14 0.14 3,0143 0.14 98 Other Fuels & Lubricants 13 * 0.0 16 0.1 Separately Procured Containers & Handling Equipment 0.0 0.0 0.0 Textiles, Clothing & Equipage 0.0 0.0 0.0 Military Building Supplies 25 0.1 1142 1.1 1468 2.3 Subsistence 9,5149 1.5 10,397 1.8 10,979 1.9 Transportation Equipment 0.0 0.0 0.0 Production Equipment 0.0 0.0 0.0 Construction 8,896 0.7 18,762 1.7 20,296 1.6 Construction Equipment 0.0 27 * 0.0 Medical & Dental Supplies & Equipment 10 * 53 0.1 146 0.1 Photographic Equipment & Supplies 0.0 714 0.1 0.0 Materials Handling Equipment 33 0.1 0.0 0.0 All Other Supplie~ & Equipment 915 0.1 2,1480 0.3 14,582 0.6 Services 7,610 0.5 9,035 0.5 11,577 0.5 (Value in Th~a~d~ CD z CD L~i CD CD z CD I. PAGENO="0564" TABLE III NET VALUE OF MILITARY PRIME CONTRACf AWARDS OF $10,000 OR MORE HAWAII 0 0 C) ~T1 C~) H 0 -1 H CD t~1 C) (Vn1n~ in ~ Procurement Program Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipsent & Supplies Missile and Space ~jutenis Ships Fincal Year 1965 Fiscal Year 1966 Fi8cal year 1967 Value of U.S. Value U.S. Va~Lue %ofU.S - $72,213 0.3 $6~,i70 0.2 ~~92 i~,oo3 l~ 1,090 ~ * 0.0 0.6 * 0.1 516 198 95~ 1,016 * 0.0 * * 0.1 Combat Vehicles 0.0 0.0 Hon-Combat Vehicles 29 * 23 Weapons 0.0 0.0 Ammunition 0.0 0.0 Electronics & Communication Equipuent 1,027 1,356 Petroleum Other Fuels & Lubricants 1,255 0.2 o.o 1,257 0.1 0.0 Separately Procured Containers & Handling Equipnent 0.0 0.0 Textiles, Clothing & Equipage * 0.0 0,0 Military Building Supplies 201 0.7 97~ 0.3 Subsittence 8,~22 1.3 12,398 1.2 Transportation Equipsent 0.0 0.0 Production Equipsent Construction Construction Equipment 39,861 ~8 0.0 3.1 0.1 21687 101 0.0 2.2 * Medical & Dental Supplies & Equipuent 0.0 13 * Photographic Equipuent & Supplies Materials Handling Equipsent All Other Supplies & Equipment Services ~l 2,669 13,061 0.0 0.1 0.3 0.6 28 25 2,3~6 21,278 * 0.2 0.8 PAGENO="0565" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE EDAHO 0 ~a1ue in Thousands) procurement - Program Fiscal Year 1962 - Fiscal Year 1963 Fiscal Year l961~ Value % of U.S. - Value %of U.S. Value - %ofU.S. - -~ - 26.121 0.1 $ 8,631~ $ 7,8O1~ Total .~rframes & Related Assemblies & Spares ~rcraft Engines & Related Spares :her Aircraft Equipment & Supplies Lssile and Space Systems :~bat Vehicles .:~-cambat Vehicles eapons .-~unition :Lectronics & Communication Equipment Patroleum 1~her Fuels & Lubricants sparately Procured Containers & Sandling Equipment :~tiles, Clothing & Equipage .llitary Building Supplies ~ibsistence :ransportation Equipment Productiom Equipment onstruction onstruction Equipment edical & Dental Supplies & Equipment Photographic Equipment & Supplies taterials Handling Equipment - ~.11_i~than Su~p1iet. & Equipment ~ervices 0.0 0.0 0.0 * * 0.0 0.0 * * 0.0 0.1 0.0 0.0 0.0 0.5 0.0 0.0 1.7 0.0 0.0 0.0 0.0 0.1 * 63 51 53 28 760 3,2811 20,973 - 656 253 0.0 0.0 0.0 * * 0.0 0.0 0.0 0.0 * 0.0 0.0 0.0 0.6 0.0 0.2 0.0 0.0 0.0 0.0 0.2 * 691 119 (-) l3~J 138 3,707 20 2,329 l~333 380 a C * - C 0.0 0.0 a 0.0 * * a 0.0 0.0 0.0 0.0 * 0.0 H 0.0 0.0 0.0 z 0.8 0.0 0.0 0.1 0.0 0.0 0.0 0.0 * 52 33 100 11,8113 1,8111 350 585 PAGENO="0566" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF ~O,OOO OR MORE IDAHO Total $11, 72~ 0.1 Airframes & Related Assemblies & Spares 0.0 o.o Aircraft Engines &~:Related Spares 0.0 0.0 Other.Aircraft Equipment & Supplies u6 * o.o Missile and Space ~rstexns 0.0 0.0 Ships 0.0 33 Combat Vehicles 0.0 0.0 Non-Combat Vehicles 6l~ * 0.0 Weapons 13 * 0.0 Assnunition 0.0 0.0 Electronics & Conmiunication E~uipnent 202 * 10 * Petroleum 0.0 0.0 Other Fuels & Lubricants 0.0 0.0 Separately Procured Containers & Handling Equipment 0.0 0.0 Textiles, Clothing & Equipage 0.0 0.0 Military Building Supplies ~- 0.0 1,079 0.3 Subsistence 8,398 1.3 l1~ 7~~l l.~f Transportation Equipment 0.0 0.0 Production Equipment 0.0 0.0 Construction 1,898 0.1 1,009 0.1 Construction Equipment 0.0 0.0 Medical & Dental Supplies & Equipment 0.0 0.0 Photograjthic Equipment & Supplies 0.0 10 Materials Handling Equipment 0.0 0.1 All Other Supplies & Equipment 39~ 0.1 2,529 0.2 Bervices 639 534 (V~i.. ~n ~ ~. -~-~ Procurement Program - Fiscal Year 1965 - Fiscal Year 1966 -~--~----~-- Fiscal Year 1967 Value s Va1UL ~of U S Value %of US 0 0 t~1 H 0 -i ~I) z PAGENO="0567" TABLE III NET VALUE O1~ MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE ILLINOIS fValue in Thousands) Procurement Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l961# Value %ofu.S. Value %of U.S. Value ~Foi u.s. Total $ 531,008 2.1 $ 1486,067 1.9 $ 429,201 1.8 Airframes & Related Assemblies & Spares 15,9814 0.5 18,325 0.5 7,9140 0.2 Aircraft Engines & Related Spares 3,395 0.3 2,766 0.2 3,596 0.3 Other Aircraft Equipment & Supplies 21,719 2.8 22,881 3.3 22,332 1#.o Missile and Space Systems 19,208 0.3 13,148 0.2 7,667 0.1 Ships 10,9814 0.7 11,175 0.6 12,117 0.8 Combat Vehicles 1,853 0.14 2,635 0.5 936 0.3 Non-Combat Vehicles 18,918 3.8 26,1141 5.7 22,951 5.14 Weapons 4,826 2.2 13,O1#5 6.0 7,14145 3.5 Ammunition 146,350 5.0 36,662 14.1 39,203 5.8 Electronics & Communication Equipment 156,502 4.7 134,937 4.3 118,127 3.9 Petroleum 19,733 2.3 15,818 1.9 12,298 1.6 Other Fuels & Lubricants 745 2.0 1,651 4.8 1,528 6.7 Separately Procured Containers & Handling Equipment 0.0 0.0 18 1.1 Textiles, Clothing & Equipage 7,0149 1.7 6,392 2.14 ~ 1.7 Military Building Supplies 1,788 7.7 4,747 11.5 2,883 11#.14 Subsistence 54,6147 8.6 39,898 6.8 29,5514 5.1 Transportation Equipment 1,243 35.8 83 3.0 3314 49.4 Production Equipment 1,990 1.9 4,428 14.2 2,697 4.5 Construction 19,030 1.6 15,027 1.3 14,672 1.1 Construction Equipment 28,558 30.8 31,1437 28.3 42,814 46.6 Medical & Dental Supplies & Equipment 14,052 13.3 4,296 6.~ 4,422 5.7 Photographic Equipment & Supplies 8,389 11.5 3,470 5.6 5,073 7.7 Materials Handling Equipment 8,1463 20.7 18,962 28.6 8,780 16.3 All Other Supplies; & Equipment 41,389 5.0 29,728 4.1 26,923 3.8 Services 214,193 1.6 28,1415 1.6 30,337 1.4 C z C C) Fl Fl C) C RI z RI C) PAGENO="0568" TAI3LE III NET VALUE O1~ MILITARY PRIME CONTRACT AWARDS OF $10, COO OR MODE ftTT NO IS C) C C C) Ml C) C Ml H Ml C) (Value in Thousands~ - Procurement - F1?cal Year 1965 Fiscal Year 1966 - Fiscal - Year 1967 - Program Value - Value 1~of U.S. Value of U. Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space ~jstems Ships $1121, 899 1.8 $919,779 2.9 6,818 2,221 17,639 5,103 6,026 0.2 0.2 2.6 0.1 0.3 13,213 6,695 36,506 9,1214 25,335 0.1 0.3 3.6 0.2 1.8 Conlbat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 1,959 7,1318 13,995 132,181 121,658 0.7 1.3 1.7 5.11 13.1 6,8136 22,1341 113,851 209,915 167,112 1.2 2.3 2.9 7.14 14.14 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 13,193 1,163 90 7,218 7,385 1.7 13.0 1.1 2.0 26.0 13,227 1,795 11 22,632 135,526 1.5 6.6 0.2 1.8 12.6 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 35,~~99 713 6,095 26,710 211,696 5.14 13.0 9.6 2.1 141.5 149,185 314 15,580 23 6'T3 56,050 4.7 0.14 8.8 2.13 26.2 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 7,362 14,13131 7,1131 31,628 32,o9o 6.5 14.5 20. ( ~.2 l.o 11,467 8,111 29,125 107,935 32,390 5.11 5.0 27.9 7.8 1.2 PAGENO="0569" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE INDIANA a a C a NI a a z NI a (Value in Thousands) - Procurement Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l961~ Value % of U.S. Value %of U Value - %of u.s: Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $ 571,1814 2.3 $ 486,759 1.9 $ 5~7,91iO 2.2 10,778 142,167 13,339 52,552 2,650 0.3 11.8 1.7 0.8 0.2 6,1449 119,657 13,564 60,913 2,250 0.2 10.7 1.9 0.9 0.1 7,1423 83,280 2,716 55,636 1,687 0.2 7*5 0.5 1.0 0.1 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 69,323 75,114 6,438 57,286 68,930 12.5 15.3 2.9 6.2 2.1 63,476 81,992 1,153 45,881 34,742 11.1 17.9 0.5 5.1 1.1 67,290 141,144 2,031 35,830 79,091 19.1 33.2 0.9 5.3 2.6 Petroleum Other Fuels & Lubricants 14,7144 660 1.7 1.8 12,452 697 1.5 2.0 17,447 792 2.3 3.6 Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 8,399 33 0.0 2.0 0.1 30 1,435 168 3.9 0.5 o.4 24 3,241 15 1.5 1.2 * Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 13,7146 1,371 5,785 1,2514 2.1 0.0 1.3 0.5 1.4 10,5142 89 2,813 1,697 784 1.8 3.2 2.7 0.2 0.7 10,478 94 1,791 3,1447 466 1.8 13.9 3.0 0.3 0.5 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplim & Equipment Services 66 732 15,586 5,376 4.6 0.1 1.8 1.9 0.3 3,184 30 497 12,473 9,791 4.8 0.1 0.7 1.7 0.5 3,193 227 1489 7,221 12,887 4.1 0.4 0.9 1.0 0.6 PAGENO="0570" TABLE III N~Y2 VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE INDIANA C) C C C) tTl C) C H C) (Value in T~-~--~--' - Program Fiscal Year 1965 Value ~of U.S. Fiscal Year 1966 Value ~oftJ.S. Fiscal Year 1967 Value %of U.S - Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space ~rstems Ships - $6o!~,925 2.6 $1,068,259 3.~ l1~,71~0 91,787 7,317 Z~7,i~o9 1,659 O.1~ 8.3 1.1 1.0 0.1 - l7,7I~2 l69,l81~ 13,110 23,275 3,095 O.!~ 7,9 1.3 0.5 0.2 , Combat Vehicles Non-Combat Vehicles Weapons Assnunition Electronics & Communication Equipment 1~9,299 200,057 2,895 36,269 7I~,876 18.6 3I~.0 1.0 ~.7 2.5 82,025 322,82!~ 9,555 l1~0,32L~ 92,590 32.9 1.9 1~'9 ~ Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 211, 098 1162 22 2,036 il~ 3.1 1.6 0.3 0.6 0.~1 l9,l1~7 636 1,589 10,258 28,551~ 2.2 2.3 22.9 0.8 7.9 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 13,059 1,7911 7,129 2,5011 2.0 0.0 2.8 0.6 l1.2 26,1108 5,593 8,805 32,222 2.5 0.0 3.1 0.9 15.1 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 5,960 l6o 2811 9,059 11,936 5.3 0.2 0.8 1.2 0.6 111,821 321 1,621 30,715 13,8115 6.9 0.2 1.6 2.2 0.5 PAGENO="0571" (Value in TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF ~lO,OOO OR MORE IOWA - Procurement - Program Fiscal Year 1962 - Fiscal Year 1963 Fiscal Year l96l~ Value % o~ ij~ Value - % of U.S. Value %ofU.S Total 179,153 0.7 $ 130,1106 0.5 $ 103,392 0.11 Airframes & Related Assemblies & Spares 2,328 0.1 2,1188 0.1 1,1110 If Aircraft Engines & Related Spares 1~75 * 1,196 0.1 1~8 * Other Aircraft Equipment & Supplies 6,856 0.9 6,662 0.9 3,1~79 0.6 Missile and Space Systems 5118 11~9 * 71~ Ships 1,218 0.1 1,123 0.1 320 * Combat Vehicles 107 * 19 * 63 Non-Combat Vehicles 1,891 0.11 2,022 0.li. 9111 0.2 Weapons l~98 0.2 1~35 0.2 201 Ammunition 112,390 11.6 12,838 1.11 12,106 1.8 Electronics & Communication Equipment 90,299 2.7 78,565 2.5 56,9611 1.9 Petroleum 5,715 0.7 33 5,329 0.7 Other Fuels & Lubricants 22 0.1 0.0 0.0 Separately Procured Containers & Handling Equipment 15 1.11 0.0 0.0 Textiles, Clothing & Equipage 502 0.1 611 0.2 790 0.3 Military Building Supplies 211 0.1 88 0.2 0.0 Subsistence 16,271 2.6 18,195 3.1 lIf,163 2.11 Transportation Equipment o.o 0.0 0.0 Production Equipment 30 38 * 0.0 Construction 3,1122 0.3 1,138 0.1 1,775 0.1 Construction Equipment 1,1129 1.6 620 0.6 1,837 2.0 Medical & Dental Supplies & Equipment 51 22 29 * Photographic Equipment & Supplies 38 0.1 39 0.1 131~ 0.2 Materials Handling Equipment 0.0 17 * 0.0 All Other SupplieL & Equipment 3,3911 0.11 1,862 0.3 1,1168 0.2 Services 1,630 0.1 2,2116 0.1 2,531 0.1 PAGENO="0572" TAB~2 III NIT VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE IOWA Total $133,951 0.6 $2I~,6l9 0.8 Airframes & Related Assemblies & Spares 655 * 7l~6 * Aircraft Engines & Related Spares 352 * 318 * Other Aircraft Equipment & Supplies 5,85~ 0.9 9,301 0.9 Missile and Space Ebjstems 150 * 279 Ships 1j43 * t~38 * Combat Vehicles 0.0 176 ~ Non-Combat Vehicles 378 0.1 2,809 0.3 Weapons 61 * 328 0.1 Ammunition 16,518 2.1 tt9,830 1.8 Electronics & Communication Equipment 77,1~96 2.6 129;8o6 3*1~ Petroleum 5,976 0.8 0.0 Other Fuels & Lubricants 0.0 0.0 Separately Procured Containers & Handling Equipment 0.0 0.0 Textiles, Clothing & Equipage ~6 * 8i~7 0.1 Military Building Supplies o.o 0.0 Subsistence l9,I~59 3.0 35,520 3.1~ Transportation Equipment 0.0 0.0 Production Equipment 169 0.3 68 ~ Construction 7143 0.1 586 o1 Construction Equipment 159 0.3 6,301 3.0 Medical & Denta]~ Supplies & Equipment 0.0 2148 0.1 Photographic Equipment & Supplies 0.0 0.0 Materials Handling Equipment 28 0.1 1145 0.1 All Other Supplies & Equipment 2,506 0..3 6,962 0.5 Services 2,9145 0.1 2,911 0.1 (Value in procurement Program Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value %Ofu.S. Value ~of U.S. Value %of U.S a C) C) C) ~z1 ~11 t,1 C) H C) -1 H U) t~1 C) PAGENO="0573" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE KANSAS Procurement Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year 19611 Value ~L2f_U. S Value % Value %of U. S. Total ~ 393,507 1.6 $ 331,687 ________ ~ 289,0115 1.2 Airframes & Related Assemblies & Spares 200,588 6.3 235,121 6.11 190,356 11.2 Aircraft Engines & Related Spares 8911 0.1 11,266 0.l1 5,166 0.5 Other Aircraft Equipment & Supplies 105,6911 13.6 3,253 0.5 7,696 1.11 Missile and Space Systems 3,1111 * 21,796 0.3 111,111 0.2 Ships 826 0.1 28 * 220 * Combat Vehicles 31 * 169 * 0.0 Non-Combat Vehicles 2,000 0.1k 180 * 653 0.2 Weapons 21 * 107 * 1111 * Ammunition 3,7116 0.11 9,798 1.1 10,376 1.6 Electronics & Communication Equipment 1,272 * 1,205 852 * Petroleum 10,01~9 1.2 13,587 1.6 17,921~ 2.1~ Other Fuels & Lubricants 1,371~ 3.8 679 2.0 116 0.5 Separately Procured Containers & Handling Equipment 0.0 38 11.9 29 1.8 Textiles, Clothing & Ecjuipage l1,1~12 1.1 5,536 2.1 3,637 1.3 Military Building Supplies 0.0 329 0.8 666 3.3 Subsistence 8,636 1.11 8,1162 i~k 8,085 1.11 Transportation Equipment 0.0 0.0 0.0 Production Equipment 1,255 1.2 915 0.9 1,059 1.8 Construction 38,1196 3.2 16,1188 1.5 19,1117 1.5 Construction Equipment 0.0 23 * 206 0.2 Medical & Dental Supplies & Equipment 15 * U * 178 0.2 Photographic Equipment & Supplies 112 0.1 0.0 11 Materials Handling Equipment 68 0.2 192 0.~ 0.0 All Other Supplie~. & Equipment 11,858 0.6 11,365 0.6 2,566 0.11 Services 5,819 0.11 5,139 0.3 5,850 0.3 (Value in Thousands) CD C C CD 1'l a C NI z w NI CD I. PAGENO="0574" TABLE III N~1' VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR )I)RE KANSAS Total $229,051 1.0 $312,629 1.0 Airframes & Related Assemblies & Spares 162,636 l~l 17O,80~ 3.7 Aircraft Engines & Related Spares 3,167 0.3 6,105 0.3 Other Aircraft Equipment & Supplies 3,907 0.6 6,82t~ 0.7 Missile and' Space ~stems 1,171 * 3,352 0.1 Ships ]A6 * `55 Combat Vehicles o.o 107 Non-Combat Vehicles 153 * 2,763 0.3 Weapons 26 * 231 Ammunition L~51~ 0.1 ~6,955 1.6 Electronics & Communication Equipment 2,110 0.1 3,053 0.1 Petroleum 10,890 l.~ i3,58t~ 1.6 Other Fuels & Lubricants 39 0.1 376 l.t~ Separately Procured Containers & Handling Equipment 0.0 0.0 Textiles, Clothing & Equipage 3,132 0.9 8,605 0.7 Military Building Supplies l,L~69 5.2 ~,259 1.2 Subsistence 9,295 l.l~ 13,015 1.2 Transportation Equipment 0.0 293 3.9 Production Equipment 760 1.2 3,003 1.7 Construction ll,61I~ 0.9 6,893 0.7 Construction Equipment 63 0.1 * Medical & Denial Supplies & Equipment 319 0.3 791 0.~ Photographic Equipment & Supplies 0.0 3~ Materials Handling Equipment ~ ~ 399 Q~1~ All Other Supplies & Equipment 5,690 0.7 11,160 0.8 Services u,5i6 0.5 9,9O1~ (Value in m..,....~A..\ Procurement Program Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value ~~ijs Value ofUS Value %of U S CD 0 0 CD tTl ~.t1 C) 0 0) PAGENO="0575" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MONE KENTUCKY (Value in Thousands) Procurement - Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l96l~ Value %of U.S. Value % of U.S. Value U. ~ Total $~ 43,510 0.2 $ 55,725 0.2 $ 40,476 0.2 Airframes & Related Assemblies & Spares 0.0 142 * 0.0 Aircraft Engines & Related Spares 58 * 21 * 0.0 Other Aircraft Equipment & Supplies 22 * 231 * 289 0.1 Missile and Space Systems' 158 * 101 * 0.0 Ships 1,794 0.1 467 * 1,673 0.1 Combat Vehicles 232 * 138 * 162 * Non-Combat Vehicles 5,085 1.0 1,388 0.3 3,575 0.8 Weapons 170 0.1 188 0.1 204 * Ammunition 505 0.1 251 * 518 0.1 Electronics & Communication Equipment 5,897 0.2 5,566 0.2 5,504 0.2 Petroleum 7,669 0.9 12,455 1.5 5,117 0.7 Other Fuels & Lubricants 1,228 3.4 1,135 3.3 977 4.4 Separately Procured Containers & Handling Equipment 0.0 0.0 ~. 0.0 Textiles, Clothing & Equipage 3,993 1.0 6,237 2.3 1,747~ 0.6 Military Building Supplies 0.0 0.0 0.0 Subsistence 5,896 0.9 7,037 1.2 6,542 1.1 Transportation Equipment 0.0 0.0 0.0 Production Equipment 214 0.2 242 0.2 67 0.1 Construction 3,369 0.3 10,290 0.9 3,924 0.3 Construction Equipment 216 0.2 1,650 1.5 69 0.1 Medical & Dental Supplies & Equipment 70 0.1 266 0.4 329 0.4 Photographic Equipment & Supplies 11 * 42 0.1 24 Materials Handling Equipment 80 0.2 249 0.4 Of All Other Supplies & Equipment 3,130 o.4 3,183 0.4 4,862 0.7 Services 3,713 0.2 4,446 0.2 4,893 0.2 CD 0 C CD CD H C H CD PAGENO="0576" TABLE III NPF VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE KENTUCKY C-) 0 0 C) t,1 C) 0 01 z 0) 01 C) (vel tie Procurement -~ Program Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 - Value ~ofiJ,5. Value of U.S. Value %ofU.S Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space aystems Ships $1~2,7~9 0.2 - $70,057 0.2 l~ 716 13 226 * 0.0 0.1 * * 21 15 31 518 0.0 * * * * Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 659 5,6t~9 2~5 300 2,929 0.2 1.0 0.1 ** 0.1 961 8,161 9~ 1,370 7,290 0.2 0.8 ~ * 0.2 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipneni~ Textiles, Clothing & Equipage Military Building Supplies 2,263 l,271~ 3,659 ~3l 0.3 I~.3 0.0 1.0 1.5 3,567 657 10,591 O.1~ ~ 0.0 0.8 0.0 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 5,833 257 8,263 u~ 0.9 0.0 ~ 0.6 0.2 5,925 77 11,632 172 0.6 0.0 * 1.2 0.1 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 21~3 ~gj 100 1+,665 1+,856 0.2 * 0.3 0.6 0.2 +96 +26 12,221+ 5,829 0.2 0.0 0.1+ 0.9 0.2 PAGENO="0577" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF ~lO, 000 OR MORE LOUISIANA C C 0 0 C w C (Value in ~ Procurement - Program Total Airframes & Related Assemblies & Spares Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l96L~ Value % of U.S. - Value % of U.S. Value % of U.S: 2144,036 1.0 - $~ 195,341 0.8. $ 181,1427 0.7 0.0 209 * 2,166 0.1 Aircraft Engines & Related Spares 0.0 0.0 0.0 Other Aircraft Equipment & Supplies Missile and Space Systems Ships 1,014 43,63]. 0.0 * 2.8 3.0 826 9,975 * * 0.6 57 550 13,027 * * 0.9 Combat Vehicles Non-Combat Vehicles 258 45 * * 25 294 * 0.1 23 * 0.0 Weapons A~nunition Electronics & Conmiunication Equipment 199 32,1470 8,309 0.1 3.5 0.3 799 21,870 216 0.4 2.5 * 72 9,957 251 * 1.5 * Petroleum 113,259 13.14 119,8144 114.3 112,6314 i14.8 Other Fuels & Lubricants 99 0.3 92 0.~ 0.0 Separately Procured Containers & . Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 2,510 o.o 0.6 o.o 595 590 0.0 0.2 3.14 .~ 1,593 68 0.0 0.6 0.3 Subsistence 9,610 1.5 10,698 1.8 ].2,756 2.2 Transportation Equipment o.o 0.0 Production Equipment Construction Construction Equipment 59 5,293 - 0.1 0.14 o.o 55 5,795 114 0.1 0.5 * 514 14,1481 10 0.1 0.3 * Medical & Dental Supplies & Equipment l1#5 0,1 16 * 82 0.1 Photographic Equipment & Supplies 55 0.1 0.0 18 * Materials Handling Equipment 0.0 0.0 0.0 All Other Suppliec & Equipment Services 5,8114 21,266 0.7 1.14 1,1470 21,9148 0.2 1.2 3,018 20,610 0.14 0.9 PAGENO="0578" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR !4)RE LOUISIANA CD C C CD CD C -I Dl ci) t:'l (Value in ~ Procurement Program Fiscal Year 1965 Fiscal Year 1966 Fii~ca1 Year 1967 Value %ortj.s. Value of U. S. Value %of U. s: Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipnent & Supplies Missile and Space ~rsteins Ships Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipaent Petroleum Other Fuels & Lubricants Separately Procured Containers & $255,83I~ 179 289 197 85,751 63 ~l 159 8,609 (-) 129W 116,271 35 1.1 * o.o * * 1~.8 * * 0.1 1.1 --- 15.0 0.1 43302,906 2,850 115 38 30,812 173 58 11 50,1+70 (-) 16 ~J 132,679 137 1.0 0.1 0.0 * * 2.2 * * * 1.8 --- 15.5 0.5 Handling E~uipaent Textiles, Clothing & Equipage Military Building Supplies Subsistence Transportation Equipnent Production Ec~uipaent Construction Construction Equipnent Medical & Dental Supplies & Equipuent Photographic Equipsent & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 2,11+0 11 9,71+9 ~1+ 8,538 18 L26 12 2,786 20,935 0.0 0.6 * 1.5 0.0 0.1 0.7 * 0.1 * 0.0 o.1+ 1.0 2,1+82 i6t+ 15,088 ~,~6'+ 253 333 22 11+,31o * 1+7,363 0.0 0.2 * i,~+ 0.0 0.0 0,6 0.1 0.2 * 0.0 1.0 1.8 PAGENO="0579" - TABLE NET VALUE OF MILPIARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE MAINE (Value in ~ Procurement - Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l961~ Value %of U. 5~ Value % of U. S. Value %of u~i Total $ 79,585 0.3 $ 58,1~O9 0.2 31,531 0.1 Airframes & Related Assemblies & Spares 0.0 0.0 50 Aircraft Engines & Related Spares 108 * 96 58 Other Aircraft Equipment & Supplies l~9 * 10 144 Missile and Space Systems 180 290 1~4 41 Ships 51,817 3.3 35,360 2.0 7,891~ 0.5 Combat Vehicles 0.0 21 l~9 Non-Combat Vehicles 66 i1~ 41 36 Weapons 7,514]. 3.14 7,080 3.3 6,518 3.1 Ammunition 1418 0.0 0.0 Electronics & Communication Equipment 557 1,014?t 1450 Petroleum 1,290 0.2 2,019 0.2 1,976 0.3 Other Fuels & Lubricants 0.0 148 0.1 13 0.1 Separately Procured Containers & Handling Equipntent 0.0 0.0 0.0 Textiles, Clothing & Equipage 1,539 o.~ 2,298 0.9 5,037 1.9 Military Building Supplies - 0.0 0.0 0.0 Subsistence 1,3143 0.2 1,1443 0.2 1,271 0.2 Transportation Equipment 0.0 0.0 0.0 Production Equipment 0.0 0.0 0.0 Construction 9,658 0.8 3,806 0.3 1~,92o o.14 Construction Equipment 0.0 35 * 0.0 Medical & Dental Supplies & Equipment 151~ 0.1 13 22 Photographic Equipment & Supplies 0.0 0.0 0.0 Materials Handling Equipment 0.0 20 37 All Other Supplie & Equipment 3,398 ~ 3,2o1# o.1~ 1,827 0.3 Services 1,1467 0.1 1,605 0.1 1,315 NI C) C C C) NI NI C) C NI z U) NI z C) PAGENO="0580" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE MAIHE iflOUeau(la, Total $68,771 0.3 $51,3I~O 0.2 Airframes & Related Assemblies & Spares 0.0 0.0 Aircraft Engines &Related Spares 391 * 29 * Other Aircraft Equipment & Supplies 303 * 23 Missile and Space Syctemi3 1~ * 200 * Shipa 1~8,~25 2.7 2,~81 0.2 Combat Vehicles 0.0 696 0.1 Non-Combat Vehicles 75 * 953 0.1 Weapons 1~,262 l.t~ 20,080 Anunition 5I~ * 2~ Electronics & Communication Equipment 759 * 965 Petroleum 1,020 0.1 1,382 0.2 Other Fuels & Lubricants 10 * b2 0.2 Separately Procured Containers & Handling Equipment 0.0 0.0 Textiles, Clothing & Equipage 1,927 0.5 10,977 0.9 Military Building Supplies 0.0 l,9~2 0.5 Subsistence 1,880 0.3 1,802 0.2 Transportation Equipment 0.0 0.0 Production Equipment 0.0 18 Construction 5,3I~3 O.1~ 2,235 0.2 Construction Equipment 0.0 0.0 Medical & Dental Supplies & Equipment 89 0.1 98 Photographic Equipment & Supplies 0.0 0.0 Materials Handling Equipment 13 * 0.0 All Other Supplies & Equipment 2,89k O.1~ 5,670 O.Lf Services 1,312 0.1 1,723 0.1 (Value in ~---~-~ Procurement Program Fiacal Year 1965 - Fiscal Year 1966 Fiscal Year 1967 Value % of U.S. Value ~of U.S. Value %ofU.S 0 C) t~1 O H 0 UI z ci) UI UI UI C) PAGENO="0581" Procurement -~ Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year 1961+ Value %ofu.S. Value % of U.S. Value Tof u.s: Total $ 1+69,1+91 1.9 $ 606,365 2.1+ $ 51+7,936 2.3 Airframes & Related Assemblies & Spares 5,506 0.2 7,811 0.2 5,960 0.1 Aircraft Engines & Related Spares 1,621 0.1 731 0.1 101 Other Aircraft Equipment & Supplies 9,950 1.3 6,582 0.9 19,560 3.5 Missile and Space Systems 125,318 1.8 205,71+8 3.0 169,526 2.9 Ships 11,787 o.8 22,165 1.3 17,910 1.2 Combat Vehicles 1+98 0.1 1,817 0.3 758 0.2 Non-Combat Vehicles 9,5118 1.9 981 0.2 2,011 0.5 Weapons 3,032 1.1+ 6,736 3.1 5,699 2.7 Ammunition 111,81+0 1.6 17,081 1.9 iI+,i88 2.1 Electronics & Communication Equipment 1811,892 5.5 189,551 6.o 173,1+18 5.8 Petroleum 1+,355 0.5 2,597 0.3 2,758 0.1+ Other Fuels & Lubricants 0.0 0.0 0.0 Separately Procured Containers & Handling Equipment 0.0 0.0 0.0 Textiles, Clothing & Equipage 1,057 0.3 1,1+66 o.6 909 0.3 Military Building Supplies 752 3.3 83 0.2 262 1.3 Subsistence 13,321+ 2.1 12,5611 2.1 12,029 2.1 Transportation Equipment 0.0 0.0 0.0 Production Equipment 773 0.8 1151 ~ 531 0.9 Construction 13,831+ 1.1 14+,252 3.9 29,302 2.3 Construction Equipment 259 0.3 278 0.2 56 0.1 Medical & Dental Supplies & Equipment 1,733 1.6 523 0.8 1+85 o.6 Photographic Equipment & Supplies 571+ 0.8 1+61+ 0.7 395 o.6 Materials Handling Equipment 78 0.2 222 0.3 0.0 All Other Supplie & Equipment 25,631+ 3.1 35,587 11.8 19,1+73 2.7 Services 1+0,121+ 2.6 1+8,675 2.7 72,605 3.3 ~1uein Thousands) TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE MARYLAND NI 0 0 c2 NI NI a e 0 NI z NI z a PAGENO="0582" TABLE III NET VALUE OF MILITARY PREI CONTRACT AWARDS OF $10 ,000 OR MORE MARYlAND CD C C CD t,1 ~r1 C) C z CI) z C) (Value in Thousands) Procurement Program Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value %ofu.s. - Value of U.S. Value %~f u.i~ Total Airframes & Related Assemblies & Spares Aircraft Engines &:Related Spares Other Aircraft Equipment & Supplies Missile and. Space ~rstemn Ships $58~,333 2.5 $8I~2,527 2.7 7,856 93 6,1~27 l7l,31~7 ~ 0.2 * 1.0 3.9 2.5 25,668 369 l8,8l1~ 193,295 67,286 0.6 * 1.8 l~*5 ~.8 , Conibat Vehibles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 395 l~,380 6,l71~ 21,172 l8l,l~69 0.1 0.8 2.0 2.7 6.1 1,277 23,300 14,1457 38,231~ 271,167 0.2 2.Z~ 0.9 1.3 7.2 * Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 2,971 2,298 273 0.I~ 0.0 0.0 0.6 1.0 3,3L~8 18,192 * 2O,t~O0 O.t~ 0.0 0.0 l.l~ 5.7 Subsistence Transportation Equipment Production Equipnent Construction Construction Equipment 13,839 1~89 29,712 2~ 2.1 0.0 0.8 2.3 * 17,196 1,639 144,202 3l~ 1.7 0.0 0.9 ~ * Medics.]. & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment Al]. Other Supplies & Equipment Services 1,339 779 78 19,031 69,013 1.2 0.8 0.2 2.5 3~3 3,3t~3 1,306 2,930 21,806 614,2th 1.6 0.8 2.8 1.6 2.5 PAGENO="0583" TABLE III NET VALUE OF MILITARY FRThIE CONTRACT AWARDS OF $10, 000 OR MORE MASSACHUSETTS Procurement -~ - Program Fiscal Yea r 1962 Fiscal Year 1963 Fiscal Year l96I~ Value %oftr.S. Value % of U. S. Value %of U.~ Total $ 1,310,055 5.2 $ 1,060,165 ~.2 $ 1,032,062 Airframes & Related Assemblies & Spares 9,326 0.3 15,288 - O.1~ 1~,266 0.1 Aircraft Engines & Related Spares 111,9l#1~ 9.3 lli4,l~78 10.3 117,319 10.5 Other Aircraft Equipment & Supplies 13,l~06 1.7 10,175 1.5 15,325 2.8 Missile and Space Systems 519,1~O6 7.6 380,039 5.6 399,571~ 6.9 Ships 11~#,203 7.3 82,396 l~.7 3O,14~O 2.0 Combat Vehicles 550 0.1 1,201 0.2 289 0.1 Non-Combat Vehicles 1,385 0.3 i,6t~8 O.l~ 2,067 0.5 Weapons 1~3,5l~9 19.6 11,778 5.t~ 9,k514. 1~.5 Ammunition 2I~,767 2.7 12,669 1.1~ 16,81~3 2.5 Electronics & Communication Equipment 220,586 6.6 219,239 7.0 182,337 6.i Petroleum 1~,61~8 o.6 1~,183 0.5 ~~,3O3 0.6 Other Fuels & Lubricants 1,363 3.7 1,132 3.3 375 1.7 Separately P~ocured Containers & Handling Equipment 0.0 0.0 ~0 2.1k Textiles, Clothing & Equipage 21,893 5.2 13,099 1~.9 12,806 i~.7 Military Building Supplies 51 0.2 29 0.1 77 0.~ Subsistence * l~0,538 6.1~ 31,253 5.3 1~0,9~1 7.0 Transportation Equipment - 0.0 0.0 0.0 Production Equipment 2,197 2.1 2,751 2.6 2,720 1~.5 Construction 19,973 1.7 12,58I~ 1.1 11,283 0.9 Construction Equipment 353 o.1~ 727 o.6 178 0.2 Medical & Dental Supplies & Equipment 3,1~78 3.3 3,1~53 5.2 I~,580 5.9 Photographic Equipment & Supplies 1,729 2.Z~ 721 1.2 2,373 3.6 Materials Handling Equipment 202 0.5 2,255 3.l~ 122 0.2 All Other Supplie & Equipment 29,960 3.6 23,863 3.2 18,k22 2.6 Services 121~,5148 8.0 115,201~ 6.3 155,928 7.0 ()~g~uein Thousands) 0 C C 0 0 C ci) t~1 0 I. PAGENO="0584" TABLE III NFl' VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR NONE MASSACHUSETTS cD 0 0 C-) ~T1 t,1 C-) H 0 H (I) ~d. z C) (Value in m~~) Procurement Program Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value % of U.S. Value - % of U.S. Value %of u.s: - Total Airframes & Related Assemblies & Spares Aircraft Engines &:Related Spares Other Aircraft Equipment & Supplies Missile and Space ~sterss ShAps $1,178,729 5.1 $1,335,952 ~.2 1~,l77 120,903 12,963 363,872 188,578 0.1 11.0 1.9 8.2 10.6 3,159 20~,777 18,997 36~~,963 181,717 0.1 9.5 i.8 8.Lf 12.9 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 200 1,360 ~,81~8 17,550 263,926 0.1 0.2 1.6 2.3 8.9 1,521 2,5t~9 l6,tfl5 39,5O~ 2146,828 0.3 0.3 3.2 ~ 6.5 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 3,066 1214 ~ 16,258 96 0.14 0.14 0.0 ~ 0.3 5,663 68 27 63,338 1,0114 0.7 0.2 O.~4 5.0 0.3 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 23,1412 17 2,359 17,5146 226 3.6 3.0 3.7 1.14 0.14 30,1433 7,1491 11,3814 2,582 2.9 o~o 14.2 1.1 1.2 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 3,760 1,809 372 16,5814 1114,723 3.3 1.8 1.0 2.2 5.5 6,059 2,305 1,278 37,656 86,2214 2.8 1.14 1.2 2.7 3.3 PAGENO="0585" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE MiCHIGAN (Value in Thousands) Procurement Program - Fiscal Year 1962 Fiscal Year 1963 Fiscal Year 19614 Value %of U.S. Value %ofU.S. Value % o~ u.s Total $ 677,786 2.7 $ 633,0117 2.5 $ 591,290 2.14 Airframes & Related Assemblies & Spares 9,1465 0.3 11,1483 0.3 7,516 0.2 Aircraft Engines & Related Spares 11,3714 0.9 18,597 1.7 i11,o16 1.3 Other Aircraft Equipment & Supplies 29,8014 3.8 29,1402 11.2 32,071 5.8 Missile and Space Systems 32,91#1 0.5 114,997 0.2 115,298 o.8 Ships 1414,961 2.9 38,1014 2.2 21,000 1.11 Combat Vehicles 172,218 31.1 131,8511 23.0 914,291 26.7 Non-Combat Vehicles 152,670 31.0 152,150 33.2 120,718 28.11 Weapons 6,227 2.8 7,950 3.7 6,326 3.0 Amsunition 7,671# o.8 9,098 1.0 16,859 2.5 Electronics & Communication Equipment 91,671 2.8 82,2147 2.6 77,2148 2.6 Petroleum 8,1111 1.0 6,162 0.7 6,065 0.8 Other Fuels & Lubricants 142 0.1 1141 0.14 33 0.1 Separately Procured Containers & Handling Equipment 62 5.6 ii6 114.9 36 2.2 Textiles, Clothing & Equipage 6,772 1.6 3,890 1.5 9,776 3.6 Military Building Supplies 2,526 - 10.9 622 2.0 136 0.7 Subsistence 8,221 1.3 6,14614 1.1 9~821c/ 1.7 Transportation Equipment 1,321 38.0 147 1.7 (-) 12-' Production Equipment 2,060 2.0 7,505 7.2 2,5146 14.2 Construction 18,518 1.5 11,870 1.1 17,062 1.3 Construction Equipment 12,0146 13.0 38,2118 314.14 19,722 21.5 Medical & Dental Supplies & Equipment 2,719 2.6 2,5145 3.8 3,3714 14.14 Photographic Equipment & Supplies 1,078 1.5 262 0.14 2 Materials Handling Equipment 5,1497 13.14 7,6141 11.5 12,1014 22.14 All Other SupplieL & Equipment 31,071 3.8 26,087 3.5 148,663 6.8 Services 18,1437 1.2 25,365 1.14 26,619 1.2 C C Ni cD C Ni z 0) Ni z C.) PAGENO="0586" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE MICHIGAN a 0 0 C-) H 0 -~ 51 ci) 51 z z C') (Value in ~ rement Program - Fiscal Year Value 1965 -~ %ofir.S, Fiscal Year Value 1966 ~of U.S. Fiscal Year Value - 1967 - %ofU.S Total Airframes & Related Assemblies & Sparee Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships 1~532, 897 2.3 $9l8,1426 2.9 10,583 12,832 23,827 147,365 5,635 0.3 1.2 3.6 1.1 0.3 10,503 15,290 70,833 62,061 12,756 0.2 0.7 6.9 1.14 0.9 Combat Vehicles Non-Combat Vehicles Weapons ,Ammunition Electronics & Communication Equipment 88,278 160,739 7,952 13,182 59,126 33.2 27.3 2.6 1.7 2.0 179,211 2314,800 19,231 31,203 147,032 31,0 23.9 3,8 1.1 1.2 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 14,535 10 214 14,318 772 0.6 * 0.3 1.2 2.7 5,669 10 56 16,811 3,1214 0,7 ~ 0,8 1.3 0.9 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 8,918 15 1,1467 10,7514 9,368 1.14 2.6 2.3 0.9 15.7 15,963 514 2,603 6,021 57,8141 1.5 0.7 1,5 0.6 27,0 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 3,679 17 5,687 25,036 28,778 3.3 * 15.9 3.3 1.14 5,6814 62 14,8714 614,751 51,983 2.7 `~ 14.7 14.7 2.0 . PAGENO="0587" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MONE MINBESOTA fl~iuein Thousands) Procurement -~ Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Yea rl96t~ Value % of U.S. Value % ~ ~Vaiue of u.s Total ~ 297,306 1.2 $ 273,757 1.1 $ 2l7,91a 0.9 Airframes & Related Assemblies & Spares 715 * 1~99 * 1,819 * Aircraft Engines & Related Spares 998 0.1 1~31~ - * 219 * Other Aircraft Equipment & Supplies 6,81~ 0.9 8,095 1.2 6,157 1.1 Missile and Space Systems 1~2,786 0.6 27,037 0.~ 55,017 0.9 Ships 1,359 0.1 2,613 0.1 695 * Combat Vehicles 558 0.1 1,179 0.2 152 Non-Combat Vehicles 862 0.2 1~33 0.1 3,272 0.8 Weapons 3,O31~ l.Z~ 7,726 3.6 7,513 3.5 Anmiunition 111,239 12.1 111,811 12.5 ~3,573 6.5 Electronics & Coimnunication Equipment 75,02)~ 2.3 1~9,26Z~ 1.6 ~3,190 l.1~ Petroleum 2,900 0.li 3,186 O.1~ 3,553 0.5 Other Fuels & Lubricants 0.0 0.0 0.0 Separately Procured Containers & Handling Equipment 0.0 0.0 0.0 Textiles, Clothing & Equipage 1,786 O.1~ 793 0.3 1,020 O.1~ Military Building Supplies 0.0 2,020 1~.9 0.0 Subsistence 18,1~o7 2.9 16,o2o 2.8 15,386 2.6 Transportation Equipment 0.0 0.0 38 5.6 Production Equipment 357 o.~ 956 0.9 ~~22 0.7 Construction 3,123 0.3 5,882 0.5 2,189 0.2 Construction Equipment 3,32l~ 3.6 525 0.5 119 0.1 Medical & Dental Supplies & Equipment 1,110 1.1 390 0.6 620 0.8 Photographic Equipment & Supplies 150 0.2 209 0.3 l~2l~ 0.7 Materials Handling Equipment 7,505 18.3 98l~ 1.5 1~7 0.1 AU Other Supplieu & Equipment 10,008 1.2 17,227 2.3 6,911k 1.0 Services 5,217 0.3 16,1~71~ 0.9 25,672 1.2 C C C UI z PAGENO="0588" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE MINNESOTA Total $259,500 - 1.1 1.6 Airframes & Related Assemblies & Spares l,ll~]. * 1,01+9 * Aircraft Engines & Related Spares 51+7 0.1 o.c Other Airoraft~ Equipment & Supplies 10,321+ 1.5 24,91+9 2.1+ Missile and Space ~rstexns 37,185 0.8 42,1+58 1.0 Ships 2,195 0.1 2,656 0.2 Combat, Vehicles ~o1+ 0.3 731 0.1 Non-Conibat Vehicles 2,905 0.5 1,870 0.2 Weapons 114,918 14.9 9,288 1.8 Ammunition 31,952 4.1 190,507 6.7 Electronics & Communication Equipment 50,7114 1.7 75,898 2.0 Petroleum 5,923 0.8 6,567 0.8 Other Fuels & Lubricants 32 0.]. 0.0 Separately Procured Containers & Handling Equipment 0.0 0.0 Textiles, Clothing & Equipage 46~ 0.1 3,967 0.3 Military Building Supplies 782 2.8 1,318 0.1+ Subsistence 21,348 3.3 37,927 3.6 Transportation Equipment 0.0 0.0 Production Equipment 1,061 1.7 3,287 1.9 Construction 2,132 0.2 2,927 0.3 Construction Equipment 702 1.2 3,1+23 1.6 Medical & Dental Supplies & Equipment 717 0.6 976 0.5 Photographic Equipment & Supplies 1+18 o,4 560 0.3 Mniterials Handling Equipment. 568 1.6 987 0.9 All Other Supplies & Equipment 8,870 1.2 27,777 2.0 Services 33,867 1.6 58,872 2.3 (Value in Thousands) Procurement - Program -~ Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value % of U.S. Value -~ ~?,of U.S. Value %of U.S CD 0 0 CD ~T1 C) H 0 H ~J) C~) PAGENO="0589" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE MISSISSIPPI Ml 0 z 0 Ml Ml Ml z U) Ml 0 (Value in Thousands) - Procurement - Program - Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l96~ Value % of U.S. Value % of U. S. Value %ofU.S - Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $ 100,220 $ 186,039 0.7 $ 155,911 - 0.6 50 63 81 31~ 59,229 * * * * 3.8 920 319 100 325 118,928 * * * * 8.5 311~5 123 222 31i8 57,576 * * * * 3.8 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 12 io,1~5i 329 1W) 999 * 2.1 0.1 * * l~,291 1,600 219 303 2,187 0.7 O.1~ 0.1 * 0.1 170 689 399 22 1,1~3l~ 0.1 0.2 0.2 * * Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 1,8]~5 31~5 10,517 0.2 0.9 0.0 2.5 0.0 2,2~~2 390 6,791~ 99 0.3 1.1 0.0 2.6 0.2 10,963 63 1~,222 172 i.l~ 0.3 0.0 1.6 0.9 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 6,216 3,713 131~ 1.0 0.0 0.0 0.3 0.1 3,921 39 7,868 83 0.7 0.0 * 0.7 0.1 5,072 68,769 237 0.9 0.0 0.0 5.3 0.3 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplie~ & Equipment Services 819 2,31~3 3,000 0.8 0.0 0.0 0.3 0.2 662c/ (-) 16-' 215 1,978 2,572 1.0 ~- 0.3 0.3 0.1 1~02 , (-) 1I.~' 1,333 3,351k 0.5 0.0 --- 0.2 0.2 PAGENO="0590" - Procurement Program Fiscal Yea Value r 1965 %ofTJ,5, - Fiscal Year Value 1966 ~ Fiscal Yea - r 1967 Total Airframes & Related Assembliea & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & $152,188 0.7 $162,305 of U.S. Value %of U.S - 851 211 * * 2,133 603 0.5 * * Supplies Missile and Spoce ~Jstexns Ships l,li38 382 57,092 0.2 * 3.2 5,459 519 47,507 0.5 * 3,4 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 26 1,215 421 1,737 1,255 * 0.2 0.1 0.2 * 378 6,450 49 3,240 3,666 0.1 0.7 * 0.1 0.1 Petroleum Other Fuels & Lubricants 6,117 0.8 11,911 1.4 Seporately Procured Containers & 12 * * 0.0 Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 7,006 242 0.0 1.9 0.9 25,226 2,194 0.0 2.0 0.6 Subsistence Transportation Equipment 9,390 21,744 2.1 Production Equipment 0.0 0.0 Construction 235. 0.4 31 * Construction Equipment 56,579 2,592 4.~ 4.4 18,393 3,700 1.8 1.7 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies 1,180 ~ 1,0 1,144 0.5 Materials Handling Equipment All Other Supplies & Equipment Services l,~0 2,O'~7 0.0 0.0 0.2 0.1 387 4,532 3,039 0.0 0.4 0.3 0.1 fValue in ~ TABLE III NLT VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE MISSISSIPRE t,1 C) C C C) C) C ~Ti -1 tTl z t~1 C PAGENO="0591" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF ~11O, 000 OR MORE MISSOURI Procurement Program - Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l96I~ Value % of U.S. Value % of U.S. Value U.S. Total $ 5115,553~ 2.2 * 686,111 2.7 _~~9~O7l 5.5 Airframes & Related Assemblies & Spares 290,888 9.2 1177,802 13.1 l,ll13,OlO 25.1~ Aircraft Engines & Related Spares (-) 1192~ _- 195 1,3111 0.1 Other Aircraft Equipment & Supplies 6,723 0.9 8,819 1.3 8,612 1.6 Missile and Space Systems 39,1158 0.6 39,832 0.6 65,1188 1.1 Ships 6,622 0.11 1,329 0.1 999 0.1 Combat Vehicles 11611 0.1 109 322 0.1 Non-Combat Vehicles 3,1811 0.6 3,386 0.7 3,819 0.9 Weapons 3,2211 1.5 8,033 3.7 2,979 1.11 Ammunition 37,1311 11.0 Ii1~,O75 14~9 119,315 7.3 Electronics & Communication Equipment 19,262 0.6 16,2116 0.5 9,6119 0.3 Petroleum 3,905 0.5 9,156 1.1 1,697 0.2 Other Fuels & Lubricants 253 0.7 172 0.5 27 0.1 Separately Procured Containers & Handling Equipment 0.0 25 3.2 57 3.5 Textiles, Clothing & Equipage 9,222 2.2 3,018 1.1 6,11~30 2.11 Military Building Supplies 55 0.2 l1,290 10.11 282 1.1~ Subsistence 13,260 2.1 12,288 2.1 U,hihi1 2.0 Transportation Equipment 172 5.0 181 6.5 i1~ 2.1 Production Equipment 1,356 1.3 6,102 5.8 1,019 1.7 Construction 76,1161 6.3 28,901 2.6 19,136 1.5 Construction Equipment 1,687 1.8 909 0.8 l~27 0.5 Medical & Dental Supplies & Equipment 3,056 2.9 622 0.9 538 0.7 Photographic Equipment & Supplies 1,7l~8 2.11 2,193 3.5 105 0.2 Materials Handling Equipment 3,5110 8.7 66 0.1 0.0 All Other Supplim. & Equipment 15,570 1.9 8,3911 1.1 7,271 1.0 Services 8,801 0.6 9,968 0.5 15,120 0.7 (Value In HI CD C z C CD HI HI CD C HI U) HI CD PAGENO="0592" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR 1~)RE MISSOURI Total $1,060,781 ________ $1,112,665 - 3.5 Airfpames & Related Assemblies & Spares 827,098 20.7 650,131 Aircr~tt Engines & Related Spares ~9l * 2,161~ 0,1 Other Aircraft Equipment & Supplies lI~,5I~6 2.2 13,03t~ 1.3 Missile and Space ~stems ~7,796 1.0 102,81~8 2.t~ Ships 1,585 0.1 2,883 0.2 Combat Vehicles 397 0.1 883 0.2 Non-Combat Vehicles 12,689 2.2 10,816 1.1 Weapons 18,578 6.2 31,161 6.1 Ammunition 50,325 6.5 153,788 Electronics & Communication Equipment 13,837 0.5 1t5,299 1.2 Petroleum l,82!~ 0.2 2,151 0.2 Other Fuels & Lubricants 30 0.1 30 0.1 Separately Procured Containers & Handling Equipment 80 1.0 0.0 Textiles, Clothing & Equipage 3,191 0.9 11,672 0.9 Military Building Supplies 139 0.5 9,2I~l 2.6 Subsistence 10,235 1.6 18,913 1.8 Trensportation Equipment 0.0 0.0 Production Equipment 859 1.3 189 Construction 22,867 1.8 7,810 0.8 Construction Equipment 266 o.L~ 250 0.1 Medical & Dental Supplies & Equipment 1,612 l.I~ 2,289 1.1 Photographic Equipment & Supplies 900 0.9 886 0.6 Materials Handling Equipment 0.0 7~ 0.1 All Other Supplies & Equipment 7,261 1.0 21,788 1.6 Services 2~,l75 1.2 2~,365 0.9 (vn1n~, in ii~uub_co/_ -_..---.. Procurement Program --------.~ Fiscal Year 1965 ~_- Fiscal Year 1967 Fiscal Year 1966 Value ~Üj Value of U.S. Value %ofU.S Oi C) 0 ~11 C) C -4 SI H) SI z 0 PAGENO="0593" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $io, 000 OR MORE MONTANA (Value in ~ - Procurement Program Fiscal Year 1962 - Fiscal Year 1963 Fiscal Year l96~ Value % of U~g* - Value %ofU.S. Value %of u.s Total 3l,261~ 0.1 $~ 79,3119 -, $ l6,1~22 0.1 Airframes & Related Assemblies & Spares 0.0 * 0.0 Aircraft Engines & Related Spares 0.0 0.0 0.0 Other Aircraft Equipment & Supplies o.o 0.0 .0.0 Missile and Space Systems 13,738 0.2 62,l6l~ 0.9 2,86l~ 0.1 Ships o.o 0.0 0.0 Combat Vehicles 0.0 0.0 0.0 Non-Combat Vehicles 15 * l~6 * 62 Weapons 59 * 0.0 0.0 Ammunition 0.0 0.0 0.0 Electronics & Communication Equipment 61~7 * 1,892 0.1 783 Petroleum 3,252 0.1~ 1,898 0.2 2,912 0.~ Other Fuels & Lubricants 312 0.9 362 1.1 99 0.1k Separately Procured Containers & Handling Equipment o.o 0.0 0.0 Textiles, Clothing & Equipage 0.0 Q.0 0.0 Military Building Supplies o.o 0.0 0.0 Subsistence 381 0.1 1190 0.1 539 0.1 Transportation Equipment o.o 0.0 0.0 Production Equipment 0.0 0.0 0.0 Construction 11,127 0.9 11,2119 1.0 7,656 0.6 Construction Equipment 686 0.7 0.0 0.0 Medical & Dental Supplies & Equipment 16 * 0.0 0.0 Photographic Equipment & Supplies o.o 25 * 0.0 Materials Handling Equipment 0.0 0.0 0.0 All Other Supplie~ & Equipment 1197 0.1 k02 0.1 171 Services 531k * 735 * 1,336 * C C a C 0) z C Ci PAGENO="0594" TABLE III (ypiuein Thousands) NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE MONTANA Total - $69,375 0.3 $13,779 Airframes & Related Assemblies & Spares 0.0 0.0 Aircraft Engines & Related Spares 0.0 0.0 Other Aircraft Equipment & Supplies 0.0 0.0 Missile and Space ~rstems 8,997 0.2 1,I~2 * Ships 10 * 0.0 Combat Vehicles 23 * 0.0 Non-Combat Vehicles 255 * 263 Weapons 0.0 0.0 Ammunition 0.0 0.0 Electronics & Communication Equipment 723 * 1,182 * Petroleum 2,~72 0.3 2,878 0.3 Other Fuels & Lubricants L4~3 1.5 119 0.~ Separately Procured Containers & Handling Equipment 0.0 0,0 Textiles, Clothing & Equipage 0.0 0.0 Military Building Supplies 0.0 0.0 Subsistence 550 0.1 5~~3 0.1 Transportation Equipment 0.0 0.0 Production Equipment 0.0 171+ Construction 52,660 1+1 1+,170 0,1+ Construction Equipment 0.0 20 * Medical & Dental Supplies & Equipment 0.0 0.0 Photographic Equipment & Supplies 0.0 0.0 0.0 Materials Handling Equipment 0.0 AU Other Supplies & Equipment 385 0.1 522 services 2,852 0.1 2,1+96 0.1 Procurement - Program Fi8cal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value %ofu.S. Value of U.S. Value %of U.S t,1 0 C (-) t~1 C w 24 94 C PAGENO="0595" r~ ThCU~s) TABLE III ~ VALUE OF MILITARY PRThIE CONTRACT AWARDS OF $10,000 OR M0~ NEBRASKA Fiscal Year 1962 Value % of U.S. $ 53,172 Fiscal Year 1963 Value 0.2 % of U.S. $ 33,559 Fiscal Year l96L~ Value Thi'~ocurement - rogram Total Airfraimes ~ ~~2sted Assemblies & Spares AL2~C~'t Th~ç-~ ~& Related Spares ~ ~ ~uiixnent & Supplies Mjs~iL~ a~ 3~c~e Systems Sbipas - Combatt VT~~L~&3 ~ ~~R~-1es Weapoaas ~ E1ectrro~~s ~ ~thmunication E~uipnent ~trcL~eu Other.-~s ~ Separa-c.~al- ~`~`red Containers & ~ncU~i~ ~.~~snent Te~e~, ~Fng & Equipage lits~r~- 3iiir~ Supplies Subsjz~e~re Trans r~ation ~uipnent Produci~c~ .~~iient Constr~on Constrr~rion 4lpnent ~t~1~Supp1ies & Equipnent Phatogra~ic E puent & Supplies ateriz~s lg Equipnent All Oth~ SUpp1~5~ & Equipnent Sevice.ce~ 0.0 0.0 0.0 * * 0.0 0.2 * 0.2 * 1.9 0.0 0.0 0.0 1.5 0.0 0.0 2.2 0.1 0.8 * 0.0 0.2 0.1 ~23 369 668 76 3,1~63 7,151k 358 701 9,9O1~ 25,9~2 68 811~ 10 1,516 1,706 0.1 0.0 * * * * 0.1 * 0.2 0.1 1.8 0.0 0.0 0.0 2.2 0.0 0.0 0.9 0.0 0.9 0.0 * 0.1 0.2 31~ 125 98 91~ 39 l~9l 86 1,280 2,193 262 6o1~ 13,081k 10,581 6i6 11 623 3,338 $ 33,921 11 1z~ 19 97 53 I (_)1,o7621 3,131~ 157 15 12,1~03 3,598 671 26 1I#,02 %ofU.S. ~ PAGENO="0596" fy~uein Thousands) Total $142,708 0.2 ___________ 0.3 Airframes & Related Assemblies & Spares 25 * 16 Aircraft Engines & Related Spares 0.0 11 * Other Aircraft Equipment & Supplies 0.0 0,0 Missile aaci Space ~rstems 0.0 101 * Ships 162 * 0.0 Combat Vehicles 18 552 0.1 Non-Combat Vehicles 201k * *l0,20)~ 1.0 Weapons 80 * 728 0.1 Ammunition 387 * 23,515 0.8 Electronics & Communication Equipment L~,l86 0.1 i#,802 0.1 Petroleum 195 * 153 * Other Fuels & Lubricants. 0.0 0.0 Separately Procured Containers & Handling Equipment 0.0 0.0 Textiles, Clothing & Equipage 0.0 0.1 Military Building Supplies 0.0 0.0 Subsistence 13,731 2.1 20,530 2.0 Transportation Equipment 0.0 0.0 Production Equipment L~3 0.1 10 * Construction 5,585 o.L~ 8,1490 0.8 Construction Equipment 0.0 144 Medical & Dental Supplies & Equipment 1,127 1.0 2,383 1.1 Photographic Equipment & Supplies 29 * 0.0 Materials Handling Equipment 0.0 0.0 All Other Supplies & Equipment l,ll4# 0.2 908 0.1 Services 15,787 0.8 6,583 0.3 TABLE III NL'T VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE NEBRASKA Procurement Program Fiecal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value %ofu.s. - Value of U. S. Value %of U.S 01 CD 0 0 C) ~T1 t~1 C) 0 `-4 01 H y z PAGENO="0597" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE NEVADA t~1 CD C C CD CD C z CD C~i 0 (Value in Thousands) - Procurement -~ Program Fiscal Year Value 1962 ~% o~ u.S. Fiscal Year Value 1963 %of U.S. Fiscal Year Value 1961+ %oEiJ~ - Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $ 8,21+6 * $ 13,114-3 0.1 $ 6,361 * 0.0 0.0 o.o 0.0 0.0 702 90 * 0.0 0.0 * 0.0 87 * 0.0 0.0 0.0 0.0 Combat Vehicles Eon-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 15 219 100 * 0.0 0.0 * * 91~ 89 * 1,216 * * 0.0 0.1 0.0 i6o 0.0 0.0 0.0 * 0.0 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment .Textiles, Clothing & Equipage Military Building Supplies 55 211+ 20 - * 0.6 0.0 0.0 0.1 6o 171 11 * 0.5 0.0 0.0 * 77 ~ 0.0 0.0 0.0 0.0 Subsistence Tramsportation Equipment Production Equipment Construction Construction Equipment 291+ 5,813 * 0.0 0.0 0.5 0.0 1+71+ 6,281 11+2 0.1 0.0 0.0 o.6 0.1 1+71 3,11+9 0.1 0.0 0.0 0.2 0.0 Medical & Dental Supplies & Equipment ~Photographic Equipment & Supplies Materials Handling Equipment AU Other Supplie~ & Equipment Services 290 1,226 0.0 0.0 0.0 * 0.1 * 2,11+1 1,670 0.0 0.0 0.0 0.3 0.1 15 159 2,21+3 0.0 * 0.0 * 0.1 PAGENO="0598" TABLE III NN~ VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE NEVADA 0 0 0 0 0 0 U) ~T1 (Value in Thousands) Procurement Program Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value %~of U.S. Value of U.S. Value %ofU.S Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $19, 1L~2 0.1 $32,028 0.1 (_) 17 31 32 --- 0.0 0.0 0.0 * 730 79 0.0 * 0.0 0.0 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Cosssuriication Equipment ko 7~ 885 * 0.0 0.0 * * L~5 53 If 55 * 0.0 0.0 * * Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 5If * 0.0 0.0 0.0 0.0 166 * 0,0 o.o 0.0 0.0 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment If61f f,8O9 0.1 0.0 0.0 o.If 0.0 573 3,293 53 0.1 0.0 0.0 0.3 * Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services -~_~ -- 2, 22 9979 0.0 0.0 0.0 0. 0.5 36 5,636 20,909 ~ 0.0 ~ 0.0 o.If 0.8 - PAGENO="0599" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE ~rocurement Program Fiscal Year 1962 Fiscal Year - 1963 Fiscal Year l961~ C) Total $ 58,926 0.2 $ 51,l71~ 0.2 $ 614,857 0.3 C Airframes & Related Assemblies & Spares 19 * 0.0 22 * Aircraft Engines & Related Spares 0.0 0.0 36 * Other Aircraft Equipment & Supplies 262 * 110 * 85 * Missile and Space Systems 1#67 * 68i * 909 Ships 1466 * 1,186 0.1 2,114]. 0.2 Combat Vehicles 0.0 0.0 0.0 Non-Combat Vehicles 0.0 0.0 0.0 Weapons 3,786 1.7 786 0.14 319 0.2 c Ammunition 1142 * 58 * 32 * Electronics. & Communication Equipment 314,193 1.0 25,568 0.8 144,221 1.5 Petroleum 66 * 85 * 96 * Other Fuels & Lubricants 2114 0.6 181 0.5 0.0 Separately- Procured Containers & Handling Equipment 0.0 0.0 0.0 Textiles, Clothing & Equipage 8,890 2.1 114,800 5.6 9,773 3.6 Military Building Supplies 0.0 0.0 . 0.0 L~T1 Subsistence 2,289 0.14 2,171 0.14 2,326 0.14 Transportation Equipment 0.0 0.0 0.0 Production Equipment 50 * 114 * 0.0 Z Construction 3,887 0.3 1,1#52 0.1 i,o8o * C) Construction Equipment 0.0 0.0 0.0 Medical & Dental Supplies & Equipment 312 0.3 178 0.3 113 0.1 Photographic Equipment & Supplies 0.0 0.0 0.0 Materials Handling Equipment 0.0 0.0 0.0 AU Other Supplie~ & Equipment 1400 * 557 0.1 1,9145 0.3 Services 3,1483 0.2 3,3147 0.2 1,1459 (Value in m..~., - NEW HAMPSHIRE PAGENO="0600" TABLE III C.1 NL'F VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE NEW HAMPSHIRE t~1. 0 _______ ______ 0 H 0 t~1 z 0 (Value in Thousands) Procurement Progra~ ~sca1 Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value % of ~ ~ 0.2 Value of U.S. Value %ofU.S Total Airframes & Related Assemblies & Spares $52,1+00 jflO9,591 0.3 281+ * 1+16 * Aircraft Engines & Related Spares Other Aircraft Equipnent & Supplies 1+20 0.0 0.1 32 5,269 * 0.5 Missile and Space ~jeteme Ships 3,682 1,196 0.1 0.1 1,617 1,101+ 0.1 Combat Vehicles non-Combat Vehicles 0.0 0.0 22 0.0 * Weapons 198 0.1 683 0.1 Ammunition 21+ * 35 * Electronics & Communication Equipuent 26,501+ 0.9 66,927 1.8 Petroleum 166 * 339 * Other Fuels & Lubricants 0.0 0.0 Separately Procured Containers & Handling Equipuent 0.0 0.0 Textiles, Clothing & Equipage 13,169 3.6 20,681 1.6 Military Building Supplies 0.0 0,0 Subsistence Transportation Equipsent 1,278 ~ 0.2 7.0 5,1+23 0.5 0.0 Production Equipnent Construction 85 1,101+ 0.1 0.1 89 1,571 * 0.2 Construction Equipment 0.0 15 * . Medical & Dental Supplies & Equipment 99 0.1 162 0.1 Photographic Equipment & Supplies 12 * 0.0 Materials Handling Equipment All Other Supplies & Equipment Services 1,781 2,358 0.0 0.2 0.1 2,31+7 2,859 0,0 0.2 0.1 PAGENO="0601" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE NEW JERSEY - ~ocurement Program Fiscal Year 1962 J Fiscal Year 1963 Value % of Value Fiscal Year l96~ Total $ 1,063,096 1~.3 $1,251,608 5.0 $ 917,561 3.8 Airframes & Related Assemblies & Spares 12,157 0.11 10,218 0.3 10,799 0.2 Aircraft Engines & Related Spares 1111,598 9.6 59,71~8 5.3 29,679 2.7 Other Aircraft Equipment & Supplies 86,038 11.1 ~89,5oO 12.7 50,317 9.1 Missile and Space Systems 116,3116 1.7 271,873 1i~0 219,251 3.8 Ships 56,681~ 3.6 201,1~88 11.5 l~5,1~27 3.0 Combat Vehicles 1,309 0.3 2,122 0.11 1,11~1 0.3 Nbm-Combat Vehicles 3,022 0.6 2,2111 0.5 1,1198 0.11 Weapons i~,063 1.8 14,087 1.9 10,3314 14.9 Ammunition 16,779 1.8 114,557 1.6 16,397 2.l# Electronics & Communication Equipment 1439,1440 13.2 1419,877 13.11 332,638 11.0 Petroleum 30,232 3.6 19,0114 2.3 19,397 2.5 Other Fuels & Lubricants 190 0.5 29 0.1 12 0.1 Separately Procured Containers & Handling Equipment 43 3.9 82 10.5 0.0 Textiles, Clothing & Equipage 27,977 6.7 15,1158 5.8 21,1433 7.9 Military Building Supplies 326 1.14 238 0.6 37 0.2 Subsistence 28,1432 11.5 20,276 3.5 16,1125 2.8 Transportation Equipment 0.0 0.0 16 2.11 Production Equipment 8811 0.9 1,659 1.6 2,1487 14.2 Construction 11,225 0.9 22,3314 2.0 211,587 1.9 Construction Equipment 590 0.6 i,8oi 1.6 728 0.8 Medical & Dental Supplies & Equipment 10,9811 10.14 7,163 10.7 9,1#86 12.2 Photographic Equipment & Supplies 1,682 2.3 2,115 3.11 5,392 8.2 Materials Handling Equipment 164 0.14 321 0.5 255 0.5 All Other Supplie~ & Equipment 59,190 7.2 47,129 6.4 53,9146 7.5 Services 40,71#1 2.6 38,278 2.1 115,879 2.1 (Va1u~ (ri ~Ph~i,ti~~ C) C) C) C) C) C) I.e CD C) PAGENO="0602" TABLE III RET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE NEW JERSEY 1~lue in Thousands) ___________________ Procurement Fiacal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Program Value - ~FofiJS Value ~of US Value %ofUS Total $820,309 35 $1,090,122 3*1~ C Airframes & Related Assemblies & Spares 5,07I~ 01 7,929 0.2 Aircraft Engines & Related Spares 28,~6l 26 77,2t~7 3.6 Other Aircraft Equipment & Supplies 63,653 9.5 96,651~ 9.L~ Missile and Space Systems 157,895 3.6 127,562 2.9 Ships 33,~82 1.9 30,829 2.2 Combat Vehicles 1,279 0.5 1,093 0.2 Non-Combat Vehicles 8,166 l.~ 3,170 0.3 Weapons 7,172 2.~ 10,773 2.1 Ammunition l1~f2O 1.9 73,905 2.6 ~11 Electronics & Communication Equipment 297,535 10.0 338,855 9.0 Petroleum 22,961~ 3.0 29,701 3.5 Other Fuels & Lubricants 26 0.1 203 0.7 Separately Procured Containers & Handling Equipment 0.0 0.0 Textiles, Clothing & Equipage 23,176 6.3 7~,826 5.9 Military Building Supplies 157 o.6 ~ 1.8 Subsistence 20,132 3.1 25,332 2.1k Transportation Equipment 0.0 0.0 Production Equipment l,2~l 2.0 2,7~~l 1.5 Construction 27,7~7 2.2 20,751 2.1 Construction Equipment L~56 0.8 3,l6I~ 1.5 Medical & Dental Supplies & Equipment l3,~O5 11.9 23,189 10.8 Photographic Equipment & Supplies 3,335 3.3 L~,o57 2.5 Materials Handling Equipment 50 0.1 563 0.5 All Other Supplies & Equipment 39,990 5.2 71,670 5.2 Services 5O,~93 2.~ 59,1+1k 2.3 PAGENO="0603" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWASDS OF $10, 000 OR MORE NEW MEXICO c:~2 0 z C ~rJ 0 C I. (v~1n~ ~n Thc~~nd~ Procurement - - Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l96t~ Value %oftj.5. Value % of U.S. Value Total Airframes & Related Assemblies & Spares . $ - 60,729 0.2 $ 61,6L~2 0.2 $ 71,1186 %of U.S 0.3 80 * 52 111i4 Aircraft Engines & Related Spares 0.0 Other Aircraft Equipment & Supplies Missile and Space Systems 28 1,657 * * 11,065 0.0 0.0 0.1 0.0 0.0 Ships 0.0 0.0 7,601 0.1 0.0 Combat Vehicles 0.0 Non-Combat Vehicles 557 0.1 33 0.0 0.0 Weapons 0.0 0.0 0.0 Ammunition 0.0 * 0.0 Electronics & Communication Equipment 5,2311 0.2 125 2,985 0.1 5,763 0.0 0.2 Petroleum Other Fuels & Lubricants 6,718 1~33 0.8 1.2 6,663 355 0.8 1.0 2,387 0.3 Separately Procured Containers & Handling Equipment 0.0 911 .~.- 0.11 Textiles, Clothing & Equipage 1,692 0.11 0.0 0.0 Military Building Supplies 0.0 0.0 96 0.0 Subsistence 1,085 0.2 1,163 0.2 Transportation Equipment 0.0 967 0.2 Production Equipment 0.0 0.0 Construction Construction Equipment 19,635 3~ 1.6 * 19,1146 0.0 1.7. 0.0 26,003 0.0 2.0 0.0 Medical & Dental Supplies & Equipment 0.0 Photographic Equipment & Supplies 28 * 33 0.0 0.1 11 0.0 Materials Handling Equipment All Other Supplie:: & Equipment Services 3,1187 20,0611 0.0 0.11 1.3 3,325 22,872 0.0 0.5 1.2 3,467 214,653 0.0 0.5 1.1 PAGENO="0604" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE NEW MEXICO Total ,137 O.~ - $86,230 0.3 Airframes & Related Assemblies & Spares i,o6o * 88 Aircraft Engines & Related Spares 0.0 0.0 Other Aircraft Equipment & Supplies 6I~ * 331~ Missile and Space ~rstems 3,596 o.:i 5,773 0.1 Ships 0.0 18 Combat Vehicles 88 * 0.0 Non-Combat Vehicles 291 0.1 567 0.1 Weapons 73 * 180 Ammunition * 117 Electronics & Communication Equipment 7,383 0.2 11,887 0.3 Petroleum 6Ot~ 0.1 729 0.1 Other Fuels & Lubricants 57 0.2 57 0.2 Separately Procured Containers & Handling Equipment 0.0 0.0 Textiles, Clothing & Equipage 0.3 t~,68l O.~ Military Building Supplies 0.0 53 Subsistence 869 0.1 1,513 0.1 Transportation Equipment 0.0 0.0 Production Equipment 0.0 0,0 Construction 28,3714 2.2 18,1471 1.8 Construction Equipment 0.0 122 0.1 Medical & Dental Supplies & Equipment 0.0 0.0 Photographic Equipment & Supplies * 0.0 Materials Handling Equipment 0.0 0.0 AU Other Supplies & Equipment 6,7914 0.9 8,995 0.6 Services 33,698 1.6 32,6145 1.3 (Value in Thousands) Procurement Program - - Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value - %ofu~ Value % of U. S. Value %ofU.S C) C C p-I C) 51 51 51 C) C 51 -1 51 z p--I CI) 51 C) PAGENO="0605" TABLE III NET VALUE OF MILITARY PRIME CONVRACT AWARDS OF $10, 000 OR MORE NEW YORK Procurement Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l96L~ Value %ofu.S. Value %oi U.S. Value %ofU.S. Total $ 2,668,71ii-~ 10.7 $2,500,]A6 9.9 $2,t~96,1~38 10.2 Airframes & Related Assemblies & Spares 61~5,289 20.3 589,1~58 16.1 5OO,1~99 11.2 Aircraft Engines & Related Spares 13,336 1.1 8,357 0.7 9,370 0.8 Other Aircraft Equipment & Supplies 92,838 12.0 117,788 16.8 72,679 13.1 Missile and Space Systems ~i1i8,1~58 6.o 2O1,81~5 3.0 221,065 3.8 Ships 191,l~O2 12.3 189,l~O6 10.9 19O,51~1 12.5 Combat Vehicles 2,278 ~ 1,835 0.3 1,711 0.5 Non-Combat Vehicles 13,865 2.8 5,351 1.2 1~,722 1.1 Weapons 23,006 ~ 20,380 9.1~ 18,339 8.6 Ammunition 36,996 l~.0 31,005 3.5 27,999 Electronics & Communication Equipment 667,613 20.0 627,505 19.9 603,002 20.0 Petroleum 35,219 1~.2 36,1~O2 1~.3 l~3,l~30 5.7 Other Fuels & Lubricants 1,a79 3.0 128 ~ 15 0.1 Separately Procured Containers & Handling Equipment 0.0 0.0 0.0 Textiles, Clothing & Equipage 26,796 6.t~ 1l+,71~6 5.5 13,556 5.0 Military Building Supplies 208 0.9 80 0.2 205 1.0 Subsistence 37,667 5.9 1~7,0O1~ 8.0 36,9T3 6.~ Transportation Equipment 72 2.1 0.0 0.0 Production Equipment 1~,165 1~.i 3,895 3.7 2,980 5.0 Construction L~2,025 3.5 I~7,191 1~.2 22,775 1.8 Construction Equipment 2,668 2.9 3,l~21~ 3.1 2,1~5Ii 2.7 Medical & Dental Supplies & Equipment 31~,981~ 33.2 18,712 28.1 22,1~30 29.0 Photographic Equipment & Supplies 35,315 1~8.6 35,88L~. 57.6 31~,166 52.1 Materials Handling Equipment 2,555 6.3 696 1.0 706 1.3 All Other Suppliem & Equipment 75,3~~1 9.1 59,289 8.1 70,736 9.9 Services 235,569 15.2 l~39,765 ~ 596,085 26.9 fValue in Thousands) C-.) C C C) C) C F.) z (12 F.) C) PAGENO="0606" TABLE III N~Y2 VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE HEM YORK CD 0 0 CD CD H 0 U) (Value in ~ Procurement Program - Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value ~of U.S. Value ~,of U.S. Value of u.s Total Airframes & Related Assemblies & Spares Aircraft Engines & `Related Spares Other Aircraft Eciuipnent & Supplies Missile aud Spoce ~otems Ships $2,229,1~73 9.6 ~2,819,153 8.9 t~O7,799 13,553 116,809 227,551 329,199 10.2 1.2 l7.~f 5.1 7.3 363,222 it~,37i l22,1O~4 214~,1l~4 195,725 7.9 0.7 11.9 5.6 13.9 Combat Vehicles Non-Combat Vehicles Weapons Pnmiunition Electronics & Communication Equipuent 1,621 , 22,311 31~,2~l 28,69k 511,697 0.6 3.8 ll.~ 3.7 17.2 9,382 22,750 29,702 80,812 596,855 1.6 2.3 5.9 2.8 15.8 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipuent Textiles, Clothing & Equipage Military Building Supplies ~l,8O2 10 17,939 529 * 0.0 t~.9 1.9 L~3,1+38 5 36 61,100 213 5.1 * 0,5 ~.9 0.1 ` Subsistence Transportation Equipnent Production Equipuent Construction Construction Equipuent , 1~6,21~7 jJ~ 2,312 21,858 816 7.1 2.5 3.6 1.7 l.I~ 53,677 t~,982 ~3,678 2,881 5.1 0.0 2.8 3 i.t~ Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment AU Other Supplies & Equipment Services 30,800 53,689 838 78,059 ~l,O85 27.3 53.8 2.3 10.3 21.0 66,2i~9 88,~63 3,787 106,978 6th,629 30.9 5I~.O 3.6 7.7 25.5 PAGENO="0607" (Value in ~ TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE NORTH CAROLINA Procurement - Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year 1961+ Value %oru. 5~ Value % of U. S. Value %of U. s $ 268,990 1.1 $ 258,987 1.0 $ 273,516 Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies Subsistence Transportation Equipment Production Equipment Construction Construction Equipment Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 77 566 117,630 2,081 17 1,350 771 5,796 39,716 609 6o 62,209 8,975 11+ 15,726 1+11 181+ 1+0 700 6,68i 5,377 * 0.0 0.1 1.7 0.1 * 0.3 0.3 o.6 1.2 0.1 0.2 0.0 11+.8 0.0 1.1+ 0.0 * 1.3 0.1+ 0.2 0.1 1.7 0.8 0.3 788 260 137,150 2,101+ 635 1,260 l+,1+28 31+,68t+ 1+92 31+, 366 ].2,199 102 17,51+1 51~ 196 1,383 5,057 6,288 * 0.0 * 2.0 0.1 0.0 0.1 o.6 0.5 1.1 0.1 0.0 0.0 12.9 0.0 .2.1 0.0 0.1 1.6 0.1 0.3 0.0 2.1 0.7 0.3 300 670 133,1+80 3,062 619 971+ 1+5,305 559 30,982 11,919 10 18,961 11+ 165 326 1,182 8,330 12,307 cD 0 1.1 * 0.0 0.1 2.3 0.2 0.0 0.1 0.5 o.6 1.5 0.1 0.0 0.0 11.1+ rj2 0.0 2.0 0.0 * 0 1.5 * 0.2 0.5 2.2 12 0.o C.Y1 PAGENO="0608" TABLE III N~72 VALUE OF MILITARY PRtME CONTRACT AWARDS OF $10,000 OR MORE NORTH CAROLINA C C C-) r,1 t,1 C-) H C tn H (p z C (Value in ~ Procurement - Program Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value %o~ ij~s* Value of U. S. Value %ofU.5 Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space ~bjstems Ships $288,1~O8 1.2 $1449,331 i.~4 115 30 1,153 128,1473 1,863 * * 0.2 2.9 0.1 148~ 81 2,2~~l 107,1141 3,696 * * 0.2 2.5 0.2 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipnent 2~4 3,113 7,860 5,288 20,14511 * 0.5 2.6 0.7 0.7 ~314 3,707 3,815 15 614o 1414,o88 * 0.14 0.8 0.5 1.2 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipnent Textiles, Clothing & Equipage Military Building Supplies 385 57,198 20 * 0.0 0.0 15.5 0.1 261 171,033 1,057 * 0.0 0.0 13.6 0.3 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 15,211 . 22,5140 19 2.3 0.0 0.0 1.8 * 26 162 (-) 8 ~ l~,7O5 2142 2.5 0.0 --- 2.0 0.1 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment AU Other Supplies & Equipment services 555 22 832 12,813 10,1440 0.5 * 2.3 1.7 0.5 701 2147 3,287 32,883 12,733 0.3 0.2 3.2 2.14 0.5 PAGENO="0609" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE Procurement - Program Fiscal Year 1962 - Fiscal Year 1963 Fiscal Year l961~ Value %Ofu.S. Value % of U.S. Value %of u.s Total 99,627 O.1~ $ 6I~,855 0.3 $ 192,025 o.8 Airframes & Related Assemblies & Spares 0.0 0.0 0.0 Aircraft Engines & Related Spares 0.0 0.0 0.0 Other Aircraft Equipment & Supplies o.o 0.0 Q.O Missile and Space Systems 10,802 0.2 18,666 0.3 37,083 0.6 Ships 0.0 0.0 0.0 Combat Vehicles 0.0 0.0 0.0 Non-Combat Vehicl.2s 0.0 0.0 0.0 Weapons 0.0 0.0 0.0 Ammunition 0.0 0.0 0.0 Electronics & Communication Equipment 0.0 61 * 89 * Petroleum 2,777 0.3 8,848 1.1 9,2I~9 1.2 Other Fuels & Lubricants 1419 1.2 380 1.1 182 0.8 Separately Procured Containers & Handling Equipment 0.0 0.0 0.0 Textiles, Clothing & Equipage 0.0 0.0 0.0 Military Building Supplies 0.0 114 * 0.0 Subsistence 31#6 0.1 59 * 5142 0.1 Transportation Equipment 0.0 0.0 0.0 Production Equipment 0.0 18 0.0 Construction 79,826 6.6 32,3149 2.9 11#2,650 11.0 Construction Equipment 0.0 0.0 0.0 Medical & Dental Supplies & Equipment 0.0 10 0.0 Photographic Equipment & Supplies 0.0 0.0 0.0 Materials Handling Equipment 0.0 0.0 0.0 All Other SupplieL & Equipment 1,486 0.2 1,259 0.2 220 Services 3,971 0.3 3,193 0.2 2,010 0.1 (Value in ~ NORTH DAKOTA RI CD C z C CD RI RI RI RI CD C RI RI z RI CD PAGENO="0610" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE NORTH DAKOTA Total $~8, 997 0.2 $83,113 0.3 Airframes & Related Assemblies & Spares 0.0 0.0 Aircraft Engines & Related Spares 0.0 0.0 Other Aircraft Equipment & Supplies 0.0 0.0 Missile and Space ~jstems 28,327 0.6 3~+,319 0.8 Ships 0.0 0,0 Combat Vehicles 0.0 0.0 Non-Combat Vehicles 211 * 393 5. Weapons 0.0 0.0 Ammunition 0.0 0.0 Electronics & Communication Equipment 289 5 81s Petroleum 2,326 0.3 1,977 0.2 Other Fuels & Lubricants l9t~ 0.7 206 0.7 Separately Procured Containers & Handling Equipment 0.0 0.0 Textiles, Clothing & Equipage 0.0 0.0 Military Building Supplies 0.0 0.0 Subsistence 639 0.1 7115 0.1 Transportation Equipment 0.0 0.0 Production Equipment 866 1.15 0.0 Construction 13,570 1.1 42,186 4.2 Construction Equipment 22 * 0.0 Medical & Dental Supplies & Equipment 11 * 10 Photographic Equipment & Supplies 0.0 0.0 Materials Handling Equipment 0.0 0.0 All Other Supplies & Equipment 233 * 209 5 Services 2,309 0.1 3,015 0.1 (Value in m.,...,,,,i..\ Procurement Program Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value ~f U.S. - Value - ?~ of U. S. Value %ofU.S NI C) 0 0 C-) NI ~rj NI C) 0 -4 NI z CS NI C) PAGENO="0611" 0 z 0 C) 0 w C) (Value in Thousands) TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MOPR OHIO procurement - Program Fiscal Year 1962 - Fiscal Year 1963 Fiscal Year 19614 Value % o~ u~s~ - Value %ofU.S. Value %of U.S Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $ 1,129,017 14.5 $ 1,3145,686 5.3 $ 1,028,9146 14.2 1147,9t1 216,110 33,1477 140,796 23,603 l~.7 18.0 14.3 o.6 1.5 29E,629 323,631 58,925 314,282 26,61#7 B.i 29.0 8.14 0.5 L5 2141,833 293,6115 142,1470 33,782 36,938 5.14 26.2 7.8 o.6 2.14 Combat Vehicles Non-Combat Vehicles Weapons Aimnunition Electronics & Communication Equipment 79,781 135,562 29,0714 149,1463 183,2714 114.14 27.5 13.1 5.14 5.5 170,506 111,508 31,376 58,761 35,302 29.7 214.3 111.5 6.6 1.1 614,163 58,162 15,551 30,305 311,6149 18.2 13.7 7.3 14.5 1.2 Petroleum Other Fuels & Lubricants Separately Procured Containers & - Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 20,1117 5146 i6o 3,087 5,299 2.14 1.5 114.14 0.7 22.9 20,390 662 3,976 2,7111 2.1~ 1.9 0.0 1.5 6.6 23,059 656 .~* 7142 1,569 1,620 3.0 3.0 145.5 o.6 8.1 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 12,187 13 19,958 19,9148 11,239 1.9 - 0.14 19.5 1.7 12.1 8,781 986 i6,i65 214,093 10,205 1.5 35.1 15.14 2.2 9.2 8,912 (-) 15~ 11,1413 21,1497 14,868 1.5 --- 19.0 1.7 5.3 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other SupplieL & Equipment Serviàes 2,1438 2,708 3,725 66,6614 21,517 2.3 3.7 9.1 8.1 1.11 3,7014 1,986 5,351 1#9,0141# 50,062 5.6 3.2 8.1 6.7 2.7 3,298 2,263 6,151 39,177 52,238 14.3 3.5 11.14 5.5 2.14 PAGENO="0612" TABLE III NE'!' VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE C-) C C C-) t.1 C-) H C ~r1 H CI) C (v.i~ in ~ OHIO Procurement Program Fiacal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value Value - ~of U. S. Value - %oflJ.S Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Miusile and Space E~rstexns Ships $863,113 3.7 $1,588,955 5.0 - 11111,027 202,820 59,900 53,599 20,1120 3.6 i8.11 8.9 1.2 1.2 137,376 11112,992 82,775 114,038 110,865 3.0 20.5 8.o 1.0 2.9 Combat Vehicles Non-Combat Vehicles Weapons 37,517 72,110 20,087 111.1 12.3 6.7 133,2711 175,081 25,878 23.1 17.9 5.1 Ammunition 26,230 3.11 81,200 2.9 Electronics & Conmunication Equipment 36,1187 1.2 70,753 1.9 Petroleum Other Fuels & Lubricants 22,551 719 2.9 2.5 17,2111 1,006 2.0 3.7 . Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies (-) 59 21 11,0111 11,101 --- 1.1 111.5 165 9,187 119,899 2.11 0.7 13.8 Subsistence 8,666 1.3 11,866 1.1 Transportation Equipment Production Equipment Construction Construction Equipmeot 32 10,055 23,3116 5,710 ~.6 15.9 1.8 9.6 19 211,170 15,612 22,983 0.2 13.6 1.6 10.7 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment AU Other Supplies & Equipment Services 7,075 2,3111 6,0211 39, 7110 55,601 6.3 2.11 16.8 5.2 2.7 10,128 8,589 19,232 103,129 61,5211 11.7 5.3 18.11 7.11 2.11 PAGENO="0613" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE OIaAEOMA H 0 H CD 0 0 ~lue in Thousands) Procurement Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year 19614 Value %ofu.S. Value % of U.S. Value %of u.s - Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $ 135,825 0.5 $ 111,2014 0.5 $ 122,1#89 0.5 5,271 3,607 2,531 758 122 0.2 0.3 0.3 * * 20,117 2,978 2,1471# 1#,88o 316 o.6 0.3 O.1# 0.1 * 15,702 3,852 817 20,727 101 0.14 0.3 0.1 0.14 * Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 763 1,000 i,61i.14 0.0 0.2 0.5 0.0 * 671 2,2143 1,181 78 1,710 0.1 0.5 o.6 * 0.1 1425 3,1490 895 178 10,261 0.1 0.8 0.14 * 0.3 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 38,997 1,112 17 14,559 573 14.6 3.1 1.5 1.1 2.5 29,021 1,525 97 1,9914 502 3.5 14.14 12.14 0.7 1.2 26,5214 514 29 2,015 3.5 0.2 1.8 0.7 0.0 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 6,722 3114 29,992 265 1.1 0.0 0.3 2.5 0.3 7,736 657 17,611 1~26 1.3 0.0 o.6 1.6 ~ 7,733 299 11,580 391 1.3 0.0 0.5 0.9 0.14 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other SupplieL & Equipment Services 27 14,758 32,793 0.0 * 0.0 o.6 2.1 1~3 92 166 2,516 12,170 0.1 0.1 0.3 0.3 0.7 61 * 102 8,557 8,690 0.1 0.0 0.2 1.2 0.14 I. PAGENO="0614" TABLE III N~T VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE OKLAHOMA 0 0 0 CD z 0 (Value in ~ Procurement Program Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value ~T~jj~5, Value of U.S. Value %ofU.S Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equi~iuent & Supplies Missile and Space ~jstems Ships $119,803 0.5 $l58,~92 0.5 18,396 5,088 2,33!~ 8,606 1,755 0.5 o.~ 0.3 0.2 0.1 29,690 51~75 6,390 2,992 o91 0.6 0.3 0.6 0.1 * Combat Vehicles Non-Combat Vehicles Weapons Iuimiunition Electronics & Communication Equipment (-) t~25 21 1,61+7 969 (-) 6 .21 10,735 --- 0.3 0.3 0.1+ 121 1,253 1,202 73 30,226 * 0.1 0.2 * 0.8 Petroleum Other Fuels & Lubricants Separately Procured Containers & HEmnclling Equipnent Textiles, Clothing & Equipage Military Building Supplies 28,610 96 2,070 69 3.7 0.3 0.0 0.6 0.2 26,651+ 81+ 9,1+83 653 3.1 0.0 1.2 0.7 0.2 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 8,970 328 11,998 187 1.1+ 0,0 0.5 0.9 0.3 9,667 273 11,755 629 0.9 0.0 0.1 1.2 0.3 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 21+ 81+ 10,672 7,596 * 0.1 0.0 1.1+ 0.1+ 91+ 13,795 7,292 * 0.0 0.0 1.0 0.3 PAGENO="0615" - Procurement - - Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l96!~ Value % of~jj Value %~PU.s. Value % of u.s - Total Airframes & Related Assemblies & Spares ~6,l29 0.2 - $ li:L,777 0.2 $ 29,l01~ 0.1 0.0 - 0.0 C-) 10591 Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies 67 0.0 * 0.0 0.0 12 0.0 * Missile and Space Systems Ships 71 16,878 * 1.1 3Ii~ 15,990 * 0.9 i6o 6,020 * 0.1~ Combat Vehicles o.o 0.0 0.0 Non-Combat Vehicles 80 * 17 * . 0.0 Weapons 2l~~ 0.1 89 * 813 Ammunition 717 0.1 958 0.1 296 * Electronics & Communication Equipment 3,191k 0.1 1~,81~6 0.2 ~,353 0.1 Petroleum 235 * 150 * 158 * Other Fuels & Lubricants o.o 0.0 0.0 Separately Procured Containers & . Handling Equipment Textiles, Clothing & Equipage 51~ 0.0 * 0.0 0.0 0.0 0.0 Military Building Supplies - o~o I~3 0.1 0.0 Subsistence Transportation Equipment 5,302 0.8 0.0 5,086 0.9 0.0 6,o68 1.0 0.0 Production Equipment 327 0.3 137 0.1 0.0 Construction Construction Equipment 3,71~O 685 0.3 0.7 3,125 73 0.3 0.1 2,398 )A2 0.2 0.2 Medical & Dental Supplies & Equipment o.o 0.1 * Photographic Equipment & Supplies 18 * 0.0 0.0 Materials Handling Equipment All Other SupplieL & Equipment Services 133 ~ 7,899 0.3 0.8 0.5 628 5,836 I~,I~il~ 0.9 0.8 0.2 1,069 6,033 3,61~6 2.0 0.8 0.2 (Value in Thousands) TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE OREGON C C C w C PAGENO="0616" TABLE III N1P~ VALUE OF MILITARY PRINE CONTRACT AWARDS OF $10 ,000 OR MORE OREGON O 0 0 C) t~1 C) C) -4 z C) (Value in Thousands~ Procurement Program Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value Value of U.S. Value - %ofU.S Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipnent & Supplies Missile and Space ~jstemn Ships Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication E~uipnent Petroleum Other Fuels & Lubricants Separately Procured Containers & $39,62~ (-) 22 2/ 2,2~l 1#82 ~ 3L~ l,O71~ L~3 1~,O38 191 0.2 --- 0.0 0.3 * 0.5 0.0 * 0.3 * 0.1 * 0.0 - $89,983 ~ ~ 1,563 158 28,861 515 37 7,070 I~25 b,l68 22l~ 0.3 * 0.0 0.1 * 2.1 0.1 * l.!~ ~ 0.1 * 0.0 * Handling E~uipnent Textiles, Clothing & Ec~uipage Military Building Supplies Subsistence Transportaticn Equipment Production Equipment Construction Construction Equipment Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment AU Other Supplies & Equipment * Services 178 199 8,289 60 1,130 * 169 77 30 61i4 9,517 2,602 0.0 * 0.7 1.3 0.0 0.1 0.1 0.3 0.1 * 1.8 1.2 0.1 131 1,520 16,186 38 853 867 536 29 1,828 22,585 2,377 0.0 * O.1~ 1.5 0.0 * 0.1 o.I~ 0.2 * 1.8 1.6 0.1 * PAGENO="0617" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE PENNSYLVANIA Procurement Program Fiscal Year 1962 - Fiscal Year 1963 Fiscal Year 19614 Value % of U.S. Value % of U.S. Value % of U.S Total $ 952,058 3.8 $ 887,1452 3.5 $ 883,065 3.6 Airframes & Related Assemblies & Spares 60,171 1.9 80,288 2.2 1146,565 3.3 Aircraft Engines & Related Spares 6,051 0.5 1#,659 0.14 5,2146 0.5 Other Aircraft Equipment & Supplies 13,9146 1.8 20,965 3.0 15,652 2.8 Missile and Space Systems 160,199 2.14 186,1169 2.7 116,053 2.0 Ships 1115,557 9.11 129,888 7.5 83,7311 5.5 Combat Vehicles 63,813 11.5 5,567 1.0 19,069 5.11 Non-Combat Vehicles 9,1179 1.9 8,197 1.8 8,167 1.9 Weapons 11,027 5.0 16,693 7.7 112,3811 20.0 Ammunition 37,095 14.~ 31,719 3.6 141,852 6.2 Electronics & Communication Equipment 1811,087 5.5 160,205 5.1 129,821 14.3 Petroleum 16,532 2.0 16,822 2.0 10,293 1.14 Other Fuels & Lubricants 3,118 8.6 3,137 9.1 2,671 12.0 Separately Procured Containers & Handling Equipnent 7514 68.2 17 2.2 11 0.7 Textiles, Clothing & Equipage 36,1462 8.7 20,025 7.5 20,300 7.5 Military Building Supplies 652 2.8 1,719 14.2 3,528 17.6 Subsistence 28,202 14.14 18,2714 3.1 19,163 3.3 Transportation Equipment 270 7.8 1,176 141.9 82c/ 12.1 Production Equipment 3,1127 3.3 858 0.8 (-) 142-' Construction 25,7114 2.1 15,997 1.14 22,301 1.7 Construction Equipment 3,14614 3.8 8,176 7.11 1,205 1.3 Medical & Dental Supplies & Equipment 10,281 9.8 9,689 114.5 10,169 13.1 Photographic Equipment & Supplies 1,637 2.3 589 0.9 732 1.1 Materials Handling Equipment 1,698 14.2 6,1472 9.8 9,806 18.2 AU Other Suppliec & Equipment 66,762 8.1 72,152 9.8 86,260 12.1 Services 61,660 14.0 67,699 3.7 88,0143 11.0 (Value in ~ t~:1 c2 0 0 a H NI H z U) NI z a PAGENO="0618" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE PENNSYLVANIA NI CD 0 0 CD NI CD H 0 NI H z U) NI z (Value in Thousands) Procurement - Program Fiscal Year Value 1965 ~ of U.s. Fiscal Year Value 1966 ~ of U.S. Fiscal Year Value 1967 %ofU.S Total Airframes & Related Assemblies & Spares Aircraft Engines &Related Spares Other Aircraft Equipment & Supplies Missile and Space ~rsteinu Ships $988,811 ~.2 $1,665,087 5,3 150,213 t~,5l9 27,888 131,798 81,915 3.8 o.~ )4.2 3.0 )4.6 382,230 9,98)4 58,802 157,132 11)4,311 8.3 o.s 5,7 3.6 8.1 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 17,917 18,097 3)4,585 360,316 159,272 6.8 3.1 11.5 7.8 5.3 )43,990 30,615 )42,178 233,965 196,3)46 7.6 3,1 8.3 8.2 5.2 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles', Clothing & Equipage Military Building Supplies 17,386 )4,jo8 53 18,883 686 2.2 13.9 0.7 5.1 2)4 18,9)4)4 3,579 56,798 2)+,)470 2.2 13.1 0.0 )4.5 6.8 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 21,389 )45 2,020 l7,)4l6 702 3.3 7.9 3.2 i.)4 1.2 20,905 7,162 19,758 17,832 )4,280 2.0 9)4.7 11.1 1.8 2.0 ` Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 15,)486 l,)492 1,015 109,1)41 92,)469 13.7 1.5 2.8 1)4.3 )4.)4 25,~3 l,)402 2,866 117,1)49 7)4,7)46 12.0 0.9 2.8 8,5 2.9 PAGENO="0619" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE RHODE ISLAND - Procurement Program - Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l961~ Value % of U.S. Value % of U. S. Value %of U.S Total $ 57,966 0.2 $ i~6,970 0.2 ~ 38,173 0.2 Airframes & Related Assemblies & Spares 150 * 513 * * Aircraft Engines & Related Spares 115 * 187 * 50 Other Aircraft Equipment & Supplies 3,0l~3 0.l~ l~27 0.1 951 0.2 Missile and Space Systems 590 * 1125 * 162 Ships 7,11118 0.5 2,873 0.2 1,781k 0.1 Combat Vehicles 0.0 37 * 0.0 Non-Combat Vehicles 61 * * 1~ Weapons 1,527 0.7 979 0.5 501~ 0.2 Airsnunition 1,129 0.1 1102 3,8110 0.6 Electronics & Communication Equipment 19,856 0.6 11,926 0.1~ 9,611 0.3 Petroleum 390 * 927 0.1 1,001 0.1 Other Fuels & Lubricants 0.0 0.0 0.0 Separately Procured Containers & Handling Ecjuipment 0.0 238 30.5 56 3.1~ Textiles, Clothing & Equipage 11,661f 2.8 10,812 li.1 6,589 2.1~ Military Building Supplies 29 0.1 13 12 Subsistence 1,590 0.2 1,2119 0.2 1,376 0.2 Transportation Equipment 0.0 0.0 0.0 Production Equipment 1~73 - 0.5 6112 0.6 225 Construction 2,731 0.2 7,150 0.6 1~,769 O.l~ Construction Equipment 152 0.2 12 * 0.0 Medical & Dental Supplies & Equipment 1,01i4 1.0 61&l 1.0 687 0.9 Photographic Equipment & Supplies l81~ 0.3 29 * 0.0 Materials Handling Equipment 11 * 31 * 0.0. All Other SupplierS & Equipment 3,380 ~ 3,2~ O.1~ 2,286 0.3 Services 2,399 0.2 1~,ll~5 0.2 If,i.83 0.2 (Va1nt~ ~ri 0 C C 0 0 C C PAGENO="0620" TABLE. III NT2 VALUE OF MILITARY PRIME CONTRACT AWARDS OF ~1O ,000 OR }EDRE RHODE ISLAND tTI a C C a tll ~11 a C ~T1 z L~'1 a (Value in mh~~.nn~ Procurement Program - Fiscal Year 1965 Fi~3cal Year 1966 - Fiscal Year 1967 Value ~Of U.S. O.1~ Value ~of U.S. Value %ofU.S Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipnent & Supplies Missile and Space ~-stems Ships $86,323 $131,722 l1~5 69 190 60 2,673 * * * * 01 93 167 526 868 4,21~3 * * 0~l * 0.3 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipsent 31 192 296 27,2~ * 0.0 0.1 * 0.9 67 1,078 8,Ot~3 32,98L~ * 0.0 0.2 0.3 0.9 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipuent Textiles, Clothing & Equipage Military Building Supplies 1~88 l,l~8 17,120 31 0.1 0.0 ll~.8 ~ 0.1 9 38 )~5,1~35 86 0.1 0.0 0.5 3.6 * Subsistence Transportation Equipuent Production Equipnent Construction Construction Equipsent 2,165 262 l~,856 109 0.3 0.0 0.l~ 1.2 0.2 2,331 ~36 ~,O85 72 0.2 0.0 0.2 O.l~ * . Medical & Dental Supplies & Equipsent Photographic Equipuent & Supplies Materials Handling Equipuent AU Other Supplies & Equipuent Services 737 U3 277 12,671 5,1~6 0.7 0.1 0.8 1.7 0.3 1,810 137 23,817 ~,957 0.8 0.0 0.1 1.7 0.2 PAGENO="0621" -- procurement Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year 196A Value %ofu.S. Value %ofU.S. Value % of u.s; - Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $ - 65,212 0.3 $ 57,71~7 0.2 - $ 51,621 0.2 2,1488 28 2,86~~ 0.1 0.0 * 0.0 0.2 1,1~32 72 22 2,963 * 0.0 * * 0.2 1,218 357 3,631~ * 0.0 0.0 * 0.2 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 103 101 563 0.0 0.0 * * * 15 37 525 * 0.0 0.0 * * I~3 559 232 0.0 * 0.0 0.1 * Petroleum Other Fuels & Lubricants Separately Procured Containers & flandling Equipment Textiles, Clothing & Equipage ~ilitary Building Supplies 589 71~ 19,935 0.1 0.2 0.0 l~.7 0.0 1,033 58 ~ 2O,l~27 0.1 0.2 . 0.0 7.7 0.0 6l~i *c:~~. 12,996 2l~ 0.1 0.0 0.0 Z~.9 0.1 Subsistence Transpoftation Equipment Production Equipment C~onstruction Uonstruction Equipment 3,012 51 36~ 29,571 0.5 1.5 0.1k 2.5 0.0 3,550 28 22,263 0.6 1.0 0.0 2.0 0.0 3,021 19 22,708 0.5 0.0 * 1.8 0.0 M~mdical & Dental Supplies & Equipment Photographic Equipment & Supplies H~terials Handling Equipment A~I1 Other SupplieL & Equipment Services 51~i' 11 1,l1~5 3,772 0.5 0.0 * 0.1 0.2 1,170 993 3,159 1.8 0.0 0.0 0.1 0.2 772 38 1,729 3,630 1.0 0.0 0.1 0.2 0.2 (Vaiu~ in TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE SOUTH CAROLINA C C 0 C z C PAGENO="0622" (Value in Thousands~ TABLE III ?~E7J~ VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MOPE SOTT.PH CAROLINA Procurement Program - Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value %o11J5 Value ~of US Value - %of U S Total $81,580 _______ $176,'t214 o.6 Airframes &Related Assemblies & Spares 362 * 6,l't9 0.1 Aircraft Engines & Related Spares 0.0 12 Other Aircraft Equipment & Supplies 5Ott 0.1 58't 0.1 Missile and Space ~rstems 190 * `too Ships 3,996 0.2 8,213 0.6 Combat Vehicles 0.0 5't Non-Combat Vehicles 21 * 11t5 Weapons 0.0 0.0 Ammunition 72 * 148 Electronics & Communication Equipment 3145 * 815 Petroleum 203 * 2014 * Other Fuels & Lubricants 0.0 0.0 Separately Procured Containers & Eandling Equipment 0.0 0.0 Textiles, Clothing & Equipage 20,601 ~.6 118,096 9.14 Military Building Supplies 0.0 2~+ Subsistence 5,089 0.8 11,263 1.1 Transportation Equipment 514 9.5 11 0.1 Production Equipment 0.0 0.0 Construction 140,0714 3.2 21,380 2,1 Construction Equipment 16 * 12 * Medical & Dental Supplies & Equipment 1,829 1.6 2,872 1.3 Photographic Equipment & Supplies 0.0 148 Materials Handling Equipment 0.0 72 0.1 All Other Supplies & Equipment 1,157 0.2 2,5114 0.2 Services 7,067 0.3 3,508 0.1 PAGENO="0623" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE SOUTH DAKOTA C) C) C) C) C) C) w C) 1~ (Value in Thousands) Procurement Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l96I~ Value %oru. s, Value %ofU.S. Value %ofU.S - Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $ 112,682 0.5 $ 80,630 0.3 $ 23,308 0.1 27,889 0.0 0.0 0.0 0.~ 0.0 63,132 * 0.0 0.0 0.0 0.9 0.0 lO,11~f6 0.0 0.0 0.0 0.2 0.0 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 21 0.0 0.0 0.0 0.0 *. 16 12 305 0.0 * * 0.0 * 60 230 0.0 0.0 0.0 * * Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 628 286 0.1 0.8 0.0 0.0 0.0 15 I~22 50 * 1.2 0.0 * 0.0 18 .~ 3T * 0.0 0.0 * 0.0 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 1,0119 ~ 8l,1~7l~ 0.2 0.0 0.0 6.8 0.0 1,17~~ U 11~,1~71~ 0.2 0.0 * 1.3 0.0 1,026 9,828 0.2 0.0 0.0 0.8 0.0 Madical & Dental Supplies & Equipment ~iotographic Equipment & Supplies Materials Handling Equipment AU Other Supplie~ & Equipment Services 11 ` 198 1,126 * 0.0 0.0 * 0.1 U 256 752 * 0.0 0.0 * * U 182 1,1~70 * 0.0 0.0 * 0.1 PAGENO="0624" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE SOUTH DAKOTA CD C C CD ~T1 CD H C H Cl) CD (Value in Thousands) Procurement Program Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value %O±P~i.S. Value of U. S. Value %OfU.S: Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space ~rstems Ships Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment Petroleum Other Fuels & Lubricants Separately Procured Containers & Hanfling Equipment Textiles, Clothing & Equipage Military Building Supplies Subsistence T~ransportation Equipment Production Equipment Construction Construction Equipment Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services $21,062 U,3O9 2112 65 183 0.1 0.0 0.0 0.0 0.3 0.0 0.0 * 0.0 0.0 * * o.o $23,315 22 13,601 11 227 28 1,953 14~6 ~ 0.1 0.0 0.0 * 0.3 0.0 * * * 0.1 * ~ 0.0 . . i,6 52 5,588 ~ ~ 1, 0.0 0.0 o.o 0.2 0.0 0.1 0.1+ 0.0 0.0 0.0 0.0 0.1 25 2,231+ 33 2,831+ 61+ 11 ~ 21+3 1,569 0.0 * 0.0 0.2 0.0 * 0.3 * * `0.0 0.0 * 0.1 PAGENO="0625" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE TENNESSEE - Procurement - Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year 19611 Value %oftj.S. Value %of U Value %of u. S Total $ l83,791~ 0.7 $ 183,1478 0.7 $ 193,5611 0.8 Airframes & Related Assemblies & Spares 0.0 283 * 7614 Aircraft Engines & Related Spares 0.0 0.0 0.0 Other Aircraft Equipment & Supplies 1138 0.1 992 0.1 (-) ]~ Missile and Space Systems 1,027 * 148,527 0.7 514,308 0.9 Ships 3,530 0.2 682 890 * Combat Vehicles 82 * 0.0 22 * Non-Combat Vehicles . 1,8311 0.11 2,695 o.6 2,696 o.6 Weapons 718 0.3 2113 0.1 716 0.3 Ammunition 116,960 5.1 35,6113 14.0 .39,110 5.8 Electronics & Cormnunication Equipment 3,8141 0.1 21,1195 0.7 17,896 0.6 Petroleum 6,183 0.7 7,272 0.9 9,516 1.2 Other Fuels & Lubricants 31#5 0.9 357 1.0 172 0.8 Separately Procured Containers & Handling Equipment 0.0 0.0 0.0 Textiles, Clothing & Equipage 33,1432 8.0 20,139 7.6 27,557 10.1 Military Building Supplies 0.0 23 0.1 0.0 Subsistence 7,007 1.1 6,792 1.2 8,267 , 1.1# Transportation Equipment 611 1.8 0.0 (-) 532] Production Equipment 261 0.3 11,113 3.9 155 0.3 Construction 17,1147 1.14 7,810 0.7 9,321 0.7 Construction Equipment 27 * 137 0.1 57 0.1 Medical & Dental Supplies & Equipment 196 0.2 1110 0.6 7hi4 1.0 Photographic Equipment & Supplies 27 * 111 * 0.0 Materials Handling Equipment 1422 1.0 3111 0.5 367 0.7 All Other Supplies & Equipment 35,162 l~.3 5,073 0.7 3,9118 o.6 Services 25,091 1.6 20,4611 1.1 17,112 0.8 CA~ (Value in Thousands) NI CD C z C CD NI NI CD C -4 NI z CI) NI CD PAGENO="0626" TABLE III MEN VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE TENNESSEE Total $197,283 0.8 $502,168 1.6 Airframes & Related Assemblies & Spares 581 * 596 Aircraft Engines & Related Spares OeO 0.0 Other Aircraft Equipment & Supplies (-) 1 3/ 99 Missile and Space ~rstems 51,80)4 1.2 514,909 1.3 Ships 3,)451 0.2 1,191 0.1 Combat Vehicles 314 * 141)2 0.1 Non-Combat Veh.Lcles 14,055 0.7 10,533 1.1 Weapons 226 0.1 1,277 0.2 Ammunition 145,986 5.9 201,660 7.1 Electronics & Communication Equipment 13,1499 0.5 28,079 0.7 Petroleum 6,95)4 0.9 7,1487 0.9 Other Fuels & Lubricants 3)48 1.2 350 1.3 Separately Procured Containers & Handling Equipment 13 0.1 19 0.3 Textiles, Clothing & Equipage 28,156 7.7 99,328 7.9 Military Building Supplies 0.0 10,635 3.0 Subsistence 8,~78)4 1.3 11,81)0 1.1 Transportation Equipment 0.0 0.0 Production Equipment 57 0.1 1,36)4 0.8 Construction 6,55)4 0.5 31,710 3.2 Construction Equipment 327 0.5 37 Medical & Dental Supplies & Equipment 963 0.9 1,232 0.6 Photographic Equipment & Supplies 0.0 10 Materials Handling Equipment 1498 1.14 868 0.8 All Other Supplies & Equipment 6,1)43 0.8 12,13)4 0.9 Services 18,851 0.9 26,368 1.0 (Va1i~ in ~ Procurement - Program - RIsca~1 Year 1965 Fiscal Year 1966 - Fiscal Year 1967 - Value %ofUg Value ~of US Value -~ %oftJS C C C) H C H (17 1:1 z C.) PAGENO="0627" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE TEXAS - Procurement - Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l96~ Value % of U.5. Value %ofU. S. Value I %or U.S. -~ - Total $1,006,253 11.0 $ 1,203,123 1~.8 $ l~2914.,1~3l 5.3 Airframes & Related Assemblies & Spares 309,5142 9.7 1~33,725 11.9 626,553 lLO Aircraft Engines & Related Spares 9,727 0.8 11,100 1.0 12,714?( 1.2 Other Aircraft Equipment & Supplies 29,5214 3.8 36,766 5.2 23,1407 Missile and Space Systems 6l~,283 1.0 82,1402 1.2 89,352 1.5 Ships 8,1199 0.5 5,376 0.3 15083 0.3 Combat Vehicles 1,131k 0.2 972 0.2 1195 0.1 Non-Combat Vehicles 5,071k 1.0 7,031 1.5 7,732 1.8 Weapons 6,319 2.9 3,197 1.5 5,753 2.7 Ammunition 112,672 li.6 56,220 6.3 1~5,96O 6.8 Electronics & Communication Equipment 815355 2.5 1.015391 3.3 99,280 3.3 Petroleum 2116,080 29.2 229,533 27.1k 180,866 23.7 Other Fuels & Lubricants 585 1.6 1,1143 3.3 655 2.9 Separately Procured Containers & Handling Equipment 0.0 0.0 10 0.6 Textiles, Clothing & Equipage 16,300 3.9 9,1165 3.6 8,281~ 3.0 Military Building Supplies 1110 0.6 185 0.5 65 0.3 Subsistence 30,557 11.8 29,0911 5.0 30,860 5.3 Transportation Equipment 0.0 0.0 i6 2.11 Production Equipnent 1,3117 - 1.3 2,599 2.5 14,669 7.8 Construction 117,732 11.0 79,381 7.0 75,159 5.8 Construction Equipment 15303 11.7 1132 0.11 125 0.1 Medical & Dental Supplies & Equipment 879 0.8 576 0.9 975 1.3 Photographic Equipment & Supplies i,1111 1.9 236 0.11 153 0.2 Materials Handling Equipment 116o 1.1 3,376 5.1 0.0 AU Other Suppliea & Equipment 1111,078 5.3 111,675 5.7 1~,903 2.6 Services 51,252 3.3 615248 3.5 58,329 2.6 (Va1iu~ In Thciiaands~ RI z C RI RI C RI U) RI C Ci PAGENO="0628" TABLE III N~I VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE TEXAS C) C C C) 51 ~r1 51 C) C -1 Dl z 51 C) tn Procurement - Program Fiscal Year 1965 Fiscal Year 1966 - Fiscal Year 1967 Value tJ.S, Value of U.S. Value %of U.S. Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipoent & Supplies Missile and Space ~jstems Ships $l,1+1+6,769 6.2 $2,291,1+51+ 7.2 733,988 l1+,392 21+,022 60,735 30,109 18.1+ 1.3 3.6 1.1+ 1.7 1,165,836 16,205 119,850 1+9,960 8,630 25.1+ 0.7 1+9 1.1 0.6 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 3,1+80 632 8,61+6 32,920 86,125 1.3 0.1 2.9 11.3 2.9 2,366 5,153 16,655 197,1+21 176,369 0.1+ 0.5 3.3 6.9 11.7 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 2011,701 6,561+ 11,1+91 310 26.11 22.3 0.0 3.1 1.1 21+1,875 1+,0l5 59,277. 12,01+2 28.2 111.7 0.0 11.7 3.3 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 36,758 36 7,831 88,303 1+01+ 5.6 6.3 12.1+ 6.9 0.7 57,372 12,070 66,201+ 267 5.5 0.0 6.8 6.6 0.1 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 361 131+ 911 31,839 62,891+ 0.3 0.1 0.3 11.2 3.0 2,166 1,367 1,882 53,132 91,31+0 1.0 o.8 1.8 3.8 3.5 PAGENO="0629" TABLE III NUT VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE CD z CD CD CD CD CD (Value in m~i. UTAH procurement Program Fiscal Year 1962 Fiscal Year ].963 Fiscal Year 1961k Value %ofu.S. 1.2 Value ~of U.S. Value - % of U.S. Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft E~uipnent & Supplies Missile and Space ~rstems Ships $ 298,596 $ 112T,679 1.7 $ 340,OkO l.k k,l79 518 260,259 159 0.0 o.k 0.1 3.8 * 173 219 377,309 19l * 0.0 * 5.5 * 203 53 292,189 70k * 0.0 * 5.0 * Combat Vehicles Non-Combat Vehicles Weapons Aunition Electronics & Cormaunication Equipnent 20 909 290 3,012 * 0.2 o.o * 0.1 33 i,66k 33 985 2,201 * o.k * 0.1 0.1 391 268 k,661 1,7k9 0.0 * 0.1 0.7 0.1 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipsent Textiles, Clothing & Equipage Military Building Supplies * k,7111f 503 ~, (..) 1k-' 0.6 i.k 0.0 --- 0.0 7,98k 160 * 33.9 2,923 1.0 1.3 0.0 * 7.1 7,328 266 23 892 1.0 1.2 ~ 0.0 * k.k Subsistence Transportation Equipnent Production Equipsent Construction Construction Equipnent * 2,801 392 11,986 25 o.k 0.0 - o.k 1.0 II 2,1169 k,116i 15,1151 5115 o.k 0.0 11.2 1.3 0.5 11,1109 81 6,935 8,852 0.8 0.0 0.1 0.5 9.6 Medical & Dental Supplies & Equipnent Photographic Equipnent & Supplies Materials Handling Equipnent All Other Supplies & Equipsent Services 12. 82 5,11611 3,256 * 0.1 0.0 0.7 0.2 13 ~,ko6 4,7110 * 0.0 0.0 0.8 0.3 111 611 3,376 7,2~2 * 0.1 0.0 0.5 0.3 PAGENO="0630" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR ~RE Total $191,173 0.8 $169,681 0.5 Airframes & Related Assemblies & Spares 0.0 288 Aircraft Engines & Related Spares 0.0 15 Other Aircraft Equipment & Supplies 61 * 17,577 1.7 Missile and Space ~rstems 150,569 3.1~ 93,961 2.2 Ships 1,728 0.1 1,557 0.1 Combat Vehicles 10 * 508 0.1 Non-Combat Vehicles 735 0.1 1,102 0.1 Weapons L~l0 0.1 3,I~58 0.7 Ammunition L~,033 0.5 4,533 0.2 Electronics & Communication Equipment I~,070 0.1 3,82L~ 0.1 Petroleum 6,128 0.8 5,768 0.7 Other Fuels & Lubricants 361 1.2 ~ 1.5 Separately Procured Containers & Handling Equipment 0.0 0.0 Textiles, Clothing & Equipage 907 0.2 968 0.1 Military Building Supplies 2~3 0.9 1,582 0.)4 Subsistence 3,815 0.6 tt,1t88 O.1~ Transportation Equipment 0.0 0.0 Production Equipment 33 0.1 170 0.1 Construction 5,609 0.~ 9,557 0.9 Construction Equipment 102 0.2 2,221 1.0 Medical & Dental Supplies & Equipment 71~ 0.1 26 Photographic Equipment & Supplies 70 0.1 98 0.1 Materials Handling Equipment 951 2.6 1,762 1.7 All Other Supplies & Equipment 2,'~67 0.3 7,311~ 0.5 Services 8,797 0.Lf 8,500 0.3 (Value in ~ UTAH Procurement - Program Fi6cal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value %oru ~ Value ~ofUS Value %of U S C) C C C) C) H C ~rj U) C) PAGENO="0631" TkBLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE VERMONT 0 z 0 Ml Ml Ml Ml 0 Ml Ml ci) Ml 0 0 (Value in - - Procurement Program Fiscal Year 1962 - Fiscal Year 1963 Fiscal Year l96t~ Value % of U.S. Value % of U.S. Value %of U.S Total Related Assemblies & Spares Engines & Related Spares $ 16,~~21 0.1 $ 12,253 0.1 $ 14,012 0.1 Airframes & Aircraft 358 * 0.0 656 11 * * 688 62 * Other Aircraft Missile and Equipment & Supplies Space Systems 570 1,257 0.]. * 1,291 718 0.2 * 787 123 0.1 * Ships 0.0 12 * 0.0 Combat Vehicles 183 * 369 0.1 174 0.1 Non-Combat Vehicles 0.0 0.0 17 Weapons Ammunition Electronics & Communication Equipment 9,080 1,563 706 4.1 0.2 * 6,901 107 520 3.2 * * 9,274 590 399 li.4 0.1 * Petroleum 36 * 244 * 182 * Other Fuels & Lubricants 0.0 0.0 0.0 Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage 355 0.0 0.1 1,758 0.0 0.7 425 0.0 0.2 Military Building Supplies 0.0 0.0 0.0 Subsistence 0.0 0.0 136 * Transportation Equipment Production Equipment Construction Construction Equipment 305 866 ~ 0.0 0.3 0.]. * 920 (-) l,698~ 0.0 0.9 --- 0.0 583 148 0.0 1.0 * 0.0 Medical & Photographic Dental Supplies & Equipment Equipment & Supplies 0.0 0.0 11 * 0.0 42 0.0 0.1 Materials AU Other Services Handling Equipment Supplies & Equipment 472 156 0.0 0.1 * 277 161 0.0 * * 169 213 0.0 * *. PAGENO="0632" (Value in Thousands) TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWPPRS OF $10,000 OR MORE VERMONT Total - $32,202 0.1 $81,066 0.3 Airframes & Related Assemblies & Spares 656 * 37 * Aircraft Engines & Related Spares 0.0 0.0 Other Aircraft Equipment & Supplies L~il 0.1 l,5I~3 0.1 Missile and Space ~rstems 238 * 88 * Ships 0.0 106 Combat Vehicles 171 0.1 997 0.2 Non-Combat Vehicles 29 * 51 * Weapons 27,090 9.0 73,365 ]A.5 Ammunition 172 * 300 Electronics & Communication Equipment 382 -~ 668 Petroleum 106 * ~ Other Fuels & Lubricants 0.0 0.0 Separately Procured Containers & Handling Equipment 0.0 0.0 Textiles, Clothing & Equipage 831f 0.2 1,023 0.1 Military Building Supplies 0.0 0.0 Subsistence ~26 0.1 186 * Transportation Equipment 0.0 0.0 Production Equipment 738 1.2 1,603 0.9 Construction 132 * 19 * Construction Equipment 0.0 0.0 Medical & Dental Supplies & Equipment JJ~l 0.1 117 0.1 Photographic Equipment A Supplies 0.0 0.0 Materials Handling Equipment 0.0 0.0 All Other Supplies & Equipment 377 * 569 Services 239 * 310 Procurement Program - Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value % of U. 5. Value - ~Of U.S. Value %of U. S C C 51 ~T1 C-) H C 51 H U) 51 C PAGENO="0633" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE VIRGINIA NI 0 z 0 0 NI NI C) H 0 NI H z CD NI C) (Value in Thousands) - Procurement Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year l96~ Value %oftj.S. - Value %oftJ.S. Value %of U.5 Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $ - 446,183 1.8 4 484.,989 $ 69O~852 2.8 196 61 4.,7l2 13,378 215,571 * * 0.6 0.2 13.8 334. 181 3,4.94. 115829 24.1,914. * * 0.5 0.2 13.9 1,077 19 10,4.39 4.9,554. 1421,784. * * 1.9 0.9 27.6 Combat Vehicles Non-Combat Vehicles Weapons Anenunition Electronics & Communication Equipment 1,070 5,670 250 52,131 36,510 0.2 1.2 0.1 5.7 1.1 529 ~i4i 57,627 4.3,169 0.0 0.1 0.2 6.5 1.4. 3,257 703 15,34.7 48,539 0.0 0.8 0.3 2.3 1.6 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 2,64.4. 880 22,482 59 0.3 2.4. 0.0 5.3 0.3 2,391 878 i6 5,4.4.8 4.39 0.3 2.5 2.1 2.0 1~1 1,826 1,593 ~ 4.6~ 8,563 116 0.2 7.2 2.8 3.1 0.6 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 16,527 15 32,168 128 2.6 - 0.0 * 2.7 0.1 17,097 ~ 35,270 95 2.9 0.0 0.0 3.1 0.1 115139 4.3 191 4.6,603 17 2.4. 6.4. 0.3 3.6 * Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplie~. & Equipment Services 1,255 514. 56 12,732 27,174. 1.2 0.7 0.1 1.5 1.7 1,107 377 ~37 11,o70 4.7,14.6 1.7 0.6 0.5 1.6 2.6 i,n4. 600 556 u,o88 53,638 1.4. 0.9 1.0 1.5 2. PAGENO="0634" TABLE III NFl VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE VIRGINIA a 0 C) 51 51 51 51 C) 0 51 -`1 51 ci) 51 (Ve1n~ -in Procurement Program Fiscal Year 1965 Fiscal Year 1966 - Fiscal Year 1967 Value % of U.S. Value of U.S. Value %of U.S'. Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space ~rstems Ships $)469,o97 2.0 $)425,)487 1.3 511 69 8,537 9,897 20)4,)437 * * 1.3 0,2 11.5 1,028 86 9,)493 11,586 77,392 * * 0.9 0.3 5.5 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 269 1,129 145,657 1)7,062 0.0 * o.)4 5.9 1.6 141)5 l,0~4) 828 119,292 711,622 0.1 0.1 0.2 1.7 2.0 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipnent Textiles, Clothing & Equipage Military Building Supplies 2,21)7 2,397 11,556 37 0.3 8.1 0.0 3.1 0.1 . 1,776 2,1)45 37,725 3,77)4 0.2 7.8 0.0 3.0 1.0 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 16,1)31 336 148,793 11) 2.5 0.0 0.5 3.8 * 21,230 11,265 1)0,570 18 2.0 0.0 2.14 )4.o * Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 1,723 1,2)43 207 6,938 59,607 1.5 1.3 0.6 0.9 2.8 3,536 2,016 875 i6,686 65,055 1.7 1.2 0.8 1.2 2.5 PAGENO="0635" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE WASHINGTON (Value in Thousanc1s~ Procurement - Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year 196k Value ~5, Value %ofU.S. Value %of U.S 921,115 3.7 $ i,Ola,58i 1,085,696 Total. Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment Petroleum Other Fuels & Lubricants Separately Procured Containers & Eanculing Equipment Textiles, Clothing & Equipage Military Building Supplies Subsistence Transportation Equipment Production Equipment Construction Construction Equipment Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment AU Other Supplie~ & Equipment Services 290,239 3,825 1,580 1146,911.3 55,397 6,050 2211. 1,055 1,600 3,693 17,775 1~37 385 301 lk,6o11. 12 2,935 142,292 111.3 111.6 85 21 12,1121. 19,259 9.1 0.3 0.2 6.6 3.6 1.1 0.5 0.2 0.1 2.1 1.2 0.0 0.1 1.3 2.3 0.3 2.9 3.5 0.2 0.1 0.1 0.1 1.5 1.2 230,2511. 5,229 998 601,11.511. 112,11.36 2,166 98 911 3,997 2,700 8,511J1. 38k 2114 12, 325 5,776 23,876 70 58 68 11,11.90 17,999 NI CD CD C CD NI CD C NI z NI z CD 6.3 0.5 0.1 8.8 6.5 0.11. 0.ll 0.5 0.1 1.0 1.1 0.0 0.1 1.2 2.1 0.0 5.5 2.1 0.1 0.1 0.0 0.1 1.6 1.0 32k, 379 9,378 703 553,975 115,778 k,826 157 203 3,094 4,259 7,725 19 328 122 1k, 265 53 85 ik,8i~ 129 162 1,348 10,168 19,725 7.2 0.8 0.1 9.5 7.6 1.4 * 0.1 0.5 0.1 1.0 0.1 0.0 0.1 0.6 2.4 7.9 0.1 1.1 0.1 0.2 0.0 2. 1. 0.9 PAGENO="0636" Procurement - Program -~ Flecal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value % of U.S. Value ~of U.S. Value %ofU.S. Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space ~rstems Ships $5I~5,6o7 2.3 $14~4,368 1.~ 11,061 9,226 1,270 l96,~l6 225,586 0.3 o.8 0.2 ~ 12.7 21,829 8,839 10,072 210,372 39,058 0.5 O.I~ 1.0 1~.8 2.8 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 2,251 226 387 5,036 5,526 0,8 * 0.1 0.7 0.2 l,8~6 ~20 1,919 10,0314 6,322 0.3 * 0.14 0.14 0.2 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 8,306 267 1.1 0.0 0.0 0.1 0.0 i~,141414 1,1437 1,997 1.8 0.0 0.0 0.1 o.6 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment l1~,997 205 17,085 2.3 0.0 0.3 l.~ o.o 31,561 696 13,803 1462 3.0 0.0 0.14 1.14 0.2 5 Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services l1~ 814 11,127 36,537 * 0.0 0.2 1.5 1.7 159 122 552 27,022 140,1402 0.1 0.1 0.5 1.9 1.5 5 (Value in ~ TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR NOPE WASHINGTON 0 0 C) 0 t~1 CI) z PAGENO="0637" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE WEST VIRGINIA `Procurement -. Fiscal Year 1962 Program Value %ofrj~~* Fiscal Year 1963 Fiscal Year 196l~ Value. %oftJ.S. Value Total 4~l~,3l3 0.6 ~ 162,201 0.7 $~ 87,327 0.i~ Airframes & Related Assemblies & Spares 0.0 551 28 Aircraft Engines & Related Spares O.0 0.0 0.0 Other Aircraft Equipment & Supplies 1,060 0.1 123 657 0.1 Missile and Space Systems 71,762 1.1 13,357 0.2 20,51~l Ships 9,531 0.6 670 * 810 Combat Vehicles 28,050 5.1 99,570 17.3 36,098 10.2 Non-Combat Vehicles 52 * 121k * 59 * Weapons 1,183 0.5 5,71U) 2.7 2,083 1.0 Ammunition 317 * 19,022 2.1 2,518 O.Z~ Electronics & Communication Equipment 1,617 * 2,901~ 0.1 (-.) 88o~J Petroleum 630 0.1 566 0.1 282 Other Fuels & Lubri~ants 5,628 l5.1~ 6,287 18.3 5,k1~0 21~.1~ Separately Procured Containers & Handling Equipment 0.0 0.0 0.0 Textiles, Clothing & Equipage 2,873 0.7 1,259 0.5 3,729 l.l~ Military Building Supplies 978 1~.2 (-) 21112/ -- - 0.0 Subsistence 633 0.1 222 * 1~37 0.1 Transportation Equipment 0.0 0.0 89 13.2 Production Equipment - 3,563 3.5 5,258 5.0 0.0 Construction 9,1~36 0.8 1,515 0.1 505 * Construction Equipment ` 72 0.1 0.0 0.0 Medical & Dental Supplies & Equipment 350 0.3 151 0.2 523 0.8 Photographic Equipment & Supplies o.o 0.0 16 Materials Handling Equipment 0.0 0.0 1,76l~ 3.3 AU Other Supplies & Equipment 5,617 0.7 5,183 0.7 12,331~ 1.7 Services 96]. 0.]. (-) 6021 --- 291k * (Value in ~ C z C C z C PAGENO="0638" TABLE III NEF VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10 ,000 OR MORE WEST VIRGINIA C C 0 0 H C -1 H U) tEl CD (Value in Thousands) Procurement Program - - Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Value ~j~ji5. Value ~of U.S. Value %ofU.S Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space ~jstems Ships $90,312 O.I~ $lI~9,300 0.5 93 600 10,170 ~L~3 * 0.0 0.1 0.2 * 51 15 325 9,900 1,605 * * 0.2 0.1 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 51,758 2,898 592 ~f8l~ 355 19.5 0.5 0.2 0.1 * 78,038 1+,675 2,267 3,56k 981 13.5 0.5 0.5 0.1 ~ Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 29~ ~~,755 8,69k 776 -~ 16.1 0.0 2.~ 2.7 2,~433 ~,393 l6,l1~3 300 0.3 16.1 0.0 1.3 0.1 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 907 I~4 226 I~O9 22 0.1 7.3 O.t~ -* * 960 133 87 0.1 0.0 0.0 * -~ Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 68 267 5,986 361 0.1 0.0 0.7 0.8 * 120 l~ 33 23,036 227 0.1 ~ * 1.7 * . PAGENO="0639" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10, 000 OR MORE WISCONSIN C) C C) C) C H z z z C) (Value in ~ Procurement - Program Fiscal Year 1962 Value %ofu.S. Fiscal Year Value 1963 % of U. S. Fiscal Year 196k Value % of U.S Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space Systems Ships $ 258,735 1.0 $ 219,1127 177,217 0.7 321 2,l~07 110,896 11~,268 - * o.o 0.3 1.6 0.9 70 150 3,600 91,796 26,175 * * 0.5 1.3 1.5 638 29 5,592 62,833 22,1~35 * * 1.0 1.1 1.5 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Cormnunication Equipment 1,876 2,651~ 2,819 25,109 ~ 0.5 1.3 2.7 1.2 968 7,961~ 1,1~1ik 35,503 i6,86k 0.2 1.7 0.7 ~ 0.5 709 2,3110 2,702 19,152 8,538 0.2 0.5 1.3 2.9 0.3 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 21~3 ~ 7,357 3,313 - * 0.0 0.0 1.8 11~.3 1112 3,758 867 * 0.0 0.0 l.l~ 2.1 137 ~ ~ 3,606 305 * 0.0 0.0 1.3 1.5 Subsistence Transportation Equipment Production Equipment Construction Construction Equipment 9,951~ 3,11118 1,025 8,707 1.5 0.0 3.Z~ 0.1 9.k 11,907 3,08k (-) 6,3o9~J k,3l3 2.]. 0.0 2.9 --- 3.9 l1~,180 18 5,k63 5,561 ~ 2.l~ 2.7 9.1 o.k 6.k Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 2,623 k09 1,66k ].k,239 k,389 2.5 o.6 1i.l 1.7 0.3 89k 53 1,763 11,56k 2,857 1.3 0.1 2.7 1.6 0.2 859 80 309 9,211 6,665 1.1 0.1 0.6 1.3 0.3 PAGENO="0640" 2IIOUSUJ1U5 procurement Program Fiocal Year 1965 Fiscal Year 1966 - Fiscal Year 1967 Valu~~[% of U.S. Value ~of U.S. Value - %ofU.S~. Total Airframes & Related Assemblies & Spares Aircraft Engines & Related Spares Other Aircraft Equipment & Supplies Missile and Space E~jstems Ships $203,003 0.9 $36I~,68t~ 1.1 8~6 58 9,378 ~7,l37 26,389 * * ~ 1.0 1.5 336 73 io,I~i5 22,1429 23,925 * * 1.0 0.5 1.7 Combat Vehicles Non-Combat Vehicles Weapons Ammunition Electronics & Communication Equipment 781 26,800 1~,l~82 21,338 8,1400 0.3 Lf.6 1.5 2.8 0.3 2,582 20,~f 51 14,119 128,778 12,730 0.5 2.1 0.8 14.5 0.3 Petroleum Other Fuels & Lubricants Separately Procured Containers & Handling Equipment Textiles, Clothing & Equipage Military Building Supplies 595 5,986 28 0.1 0.0 0.0 1.6 0.1 366 17,306 750 * 0.0 0.0 1.14 0.2 Subsistence Transportation Equi~xnent Production Equipment Construction Construction Equipnent 16,576 8,329 1,270 7,1477 2.5 0.0 13.1 0.1 12.6 147,1475 21,305 2,838 14,269 0.0 12.0 0.3 2.0 . Medical & Dental Supplies & Equipment Photographic Equipment & Supplies Materials Handling Equipment All Other Supplies & Equipment Services 1,14814 157 3,653 14,1472 7,357 1.3 0.2 10.2 0.6 0.~ 3,059 71 2,8145 31,031 7,531 j.l~ * 2.7 2.2 0.3 (Value in ~-`~ TABLE III NI7P VALUE OF MILITARY PRIME CONTRACT AWARDS OF ~1O ,000 OR MORE WISCONSIN C) C C C) 111 t~1 C) C z C) PAGENO="0641" TABLE II]~ NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF ~lO, 000 OR MORE WYOMING (Value in m~..) Procurement -~ Program Fiscal Year 1962 Fiscal Year 1963 Fiscal Year 1961~ Value %ofU.S. Value % of U. S. Value % of U.S Total * 22,;53. 0.1 ~ 125,081 0.5 ~ 49,408 0.2 Airframes & Related Assemblies & Spares 862 * 25 * 150 * Aircraft Engines & Related Spares 0.0 0.0 0.0 Other Aircraft Equipment & Supplies 52 * 111 * 12 * Missile and Space Systems 2,600 * 27,238 0.4 31,461 0.5 Ships 0.0 0.0 0.0 Combat Vehicles 0.0 0.0 0.0 0 Non-Combat Vehicles 0.0 0.0 II * Weapons 0.0 0.0 0.0 Ammunition 0.0 0.0 0.0 Electronics & Communication Equipment 3.73 * 569 * 504 * Petroleum 5,402 0.6 5,474 0.6 6,773 0.9 Other Fuels & Lubricants 70 0.2 56 0.2 22 0.1 Z Separately Procured Containers & Handling Equipment 0.0 0.0 0.0 Textiles, Clothing & Equipage 0.0 0.0 0.0 Military Building Supplies 0.0 0.0 0.0 Subsistence 186 * 225 * 297 0.1 Transportation Equipment 0.0 0.0 0.0 Production Equipment 0.0 0.0 26 * Z Construction 0.9 86,8k2 7.7 8,531 0.7 0 Construction Equipment o.o 0.0 0.0 Medical & Dental Supplies & Equipment 0.0 0.0 0.0 Photographic Equipment & Supplies 12 * 0.0 0.0 Materials Handling Equipment 0.0 0.0 0.0 AU Other Supplies & Equipment 104 * * --- * ~7 Services 1,716 0.1 4,319 0.2 1,564 0.1 PAGENO="0642" TABLE III NET VALUE OF MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MOHE WYOMING (Value in Thousands) ____________________ Procurement Fiscal Year 1965 Fiscal Year 1966 Fiscal Year 1967 Program Value ~ U~ - Value ~ ofUS Value 0 0 Total $7,867 * $11,112 * Airframes & Related Assemblies & Spares 0.0 0.0 Aircraft Engines & Related Spares 0.0 0.0 Other Aircraft Equipsent & Supplies ~l * 0.0 Missile and Space ~jstems (-) 5,897 21 --- (-) 1,355 21 Ships 0.0 0.0 Combat Vehicles 0.0 0.0 Non-Combat Vehicles 96 * 96 Weapons 0.0 0.0 0 Ammunition 0.0 0.0 Electronics & Communication Equipnent 101 33 * Petroleum 5,033 0.6 5,187 0.6 Other Fuels & Lubricants 7t~ 0.3 0.0 Separately Procured Containers & Handling Equipnent 0.0 0.0 Textiles, Clothing & Equipage 0.0 0.0 Military Building Supplies 0.0 0.0 t~i Subsistence 303 * 281 * Transportation Equipment 0.0 0.0 Production Equipment 0.0 31~3 0.2 Construction 6,571 0.5 5,231 0.5 Construction Equipment 0.0 0.0 Medical & Dental Supplies & Equipment 0.0 Photographic Equipment & Supplies 0.0 0.0 Materials Handling Equipment 0.0 0.0 All Other Supplies & Equipment l5~ * 82 Services 1,391 0.1 1,211k PAGENO="0643" Footnotes for Tab1esI~ II and III a C z C W Excludes the dollar value for work to be performed in classified locations. ?J Less than $500 thousand. ~/ The negative value results from contract cancellations in excess of new awards. a C * Less than o.os%. ____ (12 PART-B z U.. S. NLITARY PRIME CONTRACT AWARDS FOR RESEARCH, DEVELOP~V1ENT, TEST AND EVALUATION WORK BY REGION, STATE AND TYPE OF CONTRACTOR FISCAL YEARS 1962 - 1966 I. PAGENO="0644" TABLE IV MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVELOPMENT, TEST AND EVALUATION WORK, BY REGION AND STATE AND BY TYPE OF CONTRACTOR FISCAL YEAR 1962 C) 0 TyDe of Contractor Re~ioh Schools Other Bu~iness and Total and Their Non-Profit State ___________________ Affiliates Institutions~1 Firms C) $bOO Percent $000 Percent $000 Percent $000 Percent USTGTAL $~,ll3,il2 lOQQ%$31~5,8~73 1000% $139,583 ~ $5,627,656 1000% NEV RKGLAND Lfl~3, 889 ~ 120,837 ~ ~ 0.8 321, 901 ~ H Maine 1i~6 * 0 0.0 2L~8 0.2 21~8 * New Hampshire 8,2Ot~ 0.1 1~O7 0.1 0 0.0 7,79~ 0.1 Vermont 1,899 * 82 0 0.0 1,817 * Massachusetts 361,973 5.9 117,111 33.8 680 0.5 2141k, 182 L~.3 Rhode Island 6,312 0.1 2,612 0.8 0 0.0 3,700 0.1 Connecticut 65,005 1.1 625 0.2 223 0.2 61~,l57 1.1 MIDDLE ATLANTIC ~ ~ 39,762 ~ ~` 59~ ~2 ~ ~ New York 66k,8kL~ 10.9 2~,71~l 7.1 10,560 7.6 629, 5L~3 11.2 New Jersey 293,237 ~.7 ~ 1.2 -2~/ * 289,l9~ 5.1 Pennsylvania 235,998 3.9 10,976 3.2 6,037 1k3 218,985 3.9 EAST NORTH CENTRAL ~9 6~l ~ ~9, 6I~6 l1~ .1~ ~,53ç~ 3~ 296,~ ~ Ohio l32, 2.2 7,137 2.1 ~8 121,596 2.2 Indiana 39,~O5 0.6 3,317 1.0 0 0.0 36,088 0.6 Illinois 56,296 0.9 27,085 7.8 1~5 0.3 28,766 0.5 Michigan 58,850 1.0 10,877 3.1 1~9 * 1~7,92~ 0.9 Wisconsin 63,1~87 1.0 1,230 O.1~ 166 0.1 62,091 1.1 NaPE: See Table VIII for footnotes. PAGENO="0645" TABLE IV (Continued) MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVELOPMENT, TEST AND EVALUATION WORK, BY REGION AND STATE AND BY TYPE OF CONTRACTOR FISCAL YEAR 1962 0 Region and State Type of Contractor Schools Total and Their Affiliates Other Non-Profit Institutions W . Business Firms $000 Percent $000 Percent ~1~oo Percent $000 Percent WEST MONTH CENTRAL Minnesota 8L~, 391 52,082 0.9 $ 3,662 2,l0~ 0.6 $l,5lt~ 31~3 $ 0.2 79,215 ~ Iowa Missouri 5,563 17,237 0.1 0.3 532 683 0.2 0.2 0 1,090 0.0 0.8 5,031 l5,1~61~ 0.9 0.1 0.3 North Dakota 0 0.0 0 0.0 0 0.0 0 South Dakota 1401 * 6~ * 0 0.0 336 0.0 Nebraska 1~ansas 2,910 6,198 * 0.1 1~5 233 * 0.1 81 0 0.1 0.0 2,781k 5,965 * 0.1 SOUTH ATLANTIC Delaware Maryland District of Columbia 595, 381~. 11,756 190,581 23,783 0.2 3.1 0.1~ ~, 98'( 286 50,123 6,606 18.8 0.1 l1~.5 1.9 ~7, 281 0 7,l81~ 7,508 0.0 5.1 5.1k 5~_6 U,L~7O 133, 27~~ 9,669. 9.1 0.2 2.1~ 0.2 Virginia West Virginia 31~,572 61,660 0.6 1.0 1,255 55 0.1k * 2,225 0 1.6 0.0 3l,092~ 6i,6o~ 0.5 North Carolina 37,01~6 0.6 3,530 1.0 71 0.1 33,)4~5 1.1 0.6 South Carblina 338 * -5l * 0 0.0 287 * Georgia 1~,686 0.1 1,366 0.1f 81 0.1 3,239 0.1 Florida 230,962 3.8 1,715 0.5 212 0.1 229,035 SOUTH CENTRAL Kentucky 126,397 716 2.1 * ~Q3~ 120 2.3 * 11,592 8.3 106,789 1.9 * Tennessee 33,583 0.6 552 0.2 280 0.2 0.6 Alabama 12,691k 0.2 31~1 0.1 1f 81 0.3 11,872 0.2 Mississippi Arkansas 501 323 * * 1f38 0 0.1 0.0 25 0 * 0.0 38 * * Louisiana 91~7 371 Q.l 0 0.0 576 Oklahoma Texas 11~,1~O2 73,231 0.1 1.2 961 5,233, 0.3 1.5 21~ 10,737 * 7.7 3,1~l7 57,261 0.1 1.0 CD C C CD CD C NI z (I) NI CD :` PAGENO="0646" TABLE IV (Continued) MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVELOPMENT, TEST AND EVALUATION WORK, BY REGION AND STATE AND BY TYPE OF CONTRACTOR FISCAL YEAR 1962 C C Type of Contractor Region Schools Other and Total and Their Non-Profit Business State ____________________ Affiliates Institutions Finns II~P2O Percent ~OO Percent ~ Percent 6ö~~ Percent MOUNTAIN ~382,~~O 6.3% ~ ~ ~ ~ ~37p~, 038 6.6~ H Montana * 56 * 0 0.0 0 0.0 C Idaho -l8~/ ~ 0 0.0 - l8W * 0 0.0 Wyonin~ 1,160 * 0 0.0 0 0.0 1,160 Colorado 229,339 3.8 5,201 1.5 9I~O 0.7 223,198 ~+.O Utah 119,192 2.0 l,1~l9 O.~ 0 0.0 117,773 2.1 H Nevada 6~ 0 0.0 0 0.0 65 New Mexico 13,752 0.2 3,829 1.1 398 0.3 9,525 0.2 Arizona l8,89~+ 0.3 ~82 0.1 95 0.1 18,317 0.3 PACIFIC 2,933,681 I~8.o )+6,21~9 l3.~ 8~,5o~ 61.3 2 801,92 I~9.8 Washington ~92, 787 ~i 3,009 0.9 58 * 9,720 ~7 Oregon 2,031 * 531k 0.2 0 0.0 l,)+97 California 2,~38,863 39.9 ~~2,7O6 12.3 85,~4~7 61.2 2,310,710 ~ ALASKA & HAWAII 2,210 * 1,727 0.5 o 0.0 L~83 Ai~i~a * ~5T11 ~5 oT5 Hawaii 652 * 169 . 0.1 0 0.0 1+83 PAGENO="0647" TABLE V `MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVELOPMENT, TEST AND EVALUATION WORK, BY REGION AND STATE AND BY TYPE OF CONTRACTOR FISCAL YEAR 1963 T~~ntracto~ C Region Schools Other and Total and Their Non-Profit Business State ___________________ Affiliates Institutions ___________________ $000 Percent ~OOO Percent $000 Percent ~$boo Perceit t~i U. ~. TOTAL ~6, 198, 903 100.0% ~~86L~ ~ p72, 217 100.0% $5,6La~,822 100.0% NEW ENGLAND ~ J~ 123,217 3~ ~ C~9 ~ 6.~ Maine 207 * 0 Q*Q 105 0.1 102 * New Hampshire 7,916 0.1 685 0.2 0 0.0 7,231 0.1 Vermont ~,698 0.1 130 * 0 0.0 ~,568 0.1 Massachusetts 3EA,996 5.9 117,772 30.9 55~ 0.3 21~6,67O ~ Rhode Island 6,l21~ 0.1 3,602 0.9 16 * 2,506 * Connecticut lO3,1~68 1.7 1,028 0.3 876 0.5 101, 561~ 1.8 MIDDLE ATLANTIC 1,029 67L~ 16.6 li.8, 708 12.8 21,031 12.2 959,935 17.0 New York 386~ ~ 32, 9~i ~ 11, O6~ ~ ~ ~ New Jersey 387,530 6.3 3,9!~L~ 1.0 390 0.2 383,196 6.8 Pennsylvania 255,191 ~.l 11,823 3.1 9,572 5.6 233,796 ~.l EAST NORTH CENTRAL ~ 5~3!~3 l3.!~ 6,106 3.6 257,31+5 1+.6 Ohio 90,978 1.5 8,516 2.2 5,133 3.0 77,329 TT~ Indiana 28,732 0.5 2,91+7 0.8 0 0.0 25,785 0.5 Illinois 57,991 0.9 26,367 6.9 662 0.1+ 30,962 0.5 Michigan 72,758 1.2 11,689 3.1 66 * 61,003 1.1 Wisconsin 61+, 335 1.0 1,821+ 0.5 21+5 0.1 62,266 1.1 NOTE: See Table VIII for footnotes. PAGENO="0648" TABLE V (Continued) MILPYARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVELOPMENT, TEST AND EVALUATION WORK, BY REGION AND STATE AND BY TYPE OF CONTRACTOR FISCAL YEAR 1963 RI C) C) C) C) RI ~T1 RI C-) H C) -1 RI H z U) RI C) Region and State Type of Contractor Total Schools and Theis Affiliates ~boo Percent Other Non-Profit Institutions ~5OO ~Percent Business Firms $000 Percent $000 Percent WEST NORTH CENTRAL ~ 102, 7~6 L~7~ ~ ~Q5~ $ 3~, 333 ~ $_ 95~ 1~7~ ~ Minnesota 58,639 0.9 1,578 0.5 666 O.L+ 56,095 1.0 Iowa 1+,o58 0.1 739 0.2 0 0.0 3,319 0.1 Missouri 16,31+6 0.3 882 0.2 2,618 1.5 12,81+6 0.2 North Dakota 1,170 * 10 * 0 0.0 1,160 South Dakota 10,686 0.2 25 * 0 0.0 10,661 0.2 Nebraska 369 * 12 * L~9 * 308 * Kansas 11,1+98 0.2 1+08 0.1 0 0.0 11,090 0.2 SOUTH ATLANTIC Delaware Maryland District of Columbia Virginia West Virginia North Carolina South Carolina Georgia Florida SOUTH CENTRAL Kentucky Tennessee Alabama Mississippi Arkansas Louisiana Oklahoma Texas 581,360 9.1+ 82,890 ~1.3 29,l~ ~ 1+69,367 8.3 26,186 ö1~ 2ö1+ 0.1 0 0.0 25,982 0.5 231, 919 3.7 67,129 17.6 7,750 1+5 157,01+0 2.8 36,213 0.6 7,965 2.1 19,015 11.1 9,233 0.2 1+0,070 o.6 1,21+6 0.3 2,096 1.2 36,728 0.6 31,587 0.5 61+ * 0 0.0 31,523 o.6 1+0,81+7 0.7 2,1+81 o.6 20 * 38,31+6 0.7 31+1 * 192 0.1 0 0.0 l~+9 2,606 * 1,151+ 0.3 187 0.1 1,265 171,591 2.8 2,1+55 o.6 35 * 169,101 3.0 208, 588 i.!~: 9L?P~ 2.1+ ~ 1+1+ 99B * ~ 0.1 0 0.0 1+5,396 0.7 699 0.2 3,507 2.1 12,1+70 0.2 1+53 0.1 503 0.3 1+75 * 1+50 0.1 25 689 * 23 * 0 0.0 1, 31+0 * 651+ 0.2 0 0.0 5,958 0.1 1,271 0.3 72 11+1, 262 2.3 5,276 1.1+ 3,1+82 2.0 ~i~21L i~ 622 1+1,190 0.7 11,511+ 0.2 0 0.0 666 686 1+,6l5 0.1 132,501+ 2.3 PAGENO="0649" TABLE V (Continued) MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVELOPMENT, TEST AND EVALUATION WORK, BY REGION AND STATE AND BY TYPE OF CONTRACTOR FISCAL YEAR 1963 Region and State Type of Contractor Total Schools and Their Affiliates $000 Percent Other Non-Profit Institutions ~ö~o Percent ~$QQO Business Firms Percent $000 Percent MOUNTAIN Montana Idaho ~5~66,22'~ 3,l0l~ -L~9E/ 2~ 0.1 * ~p~985 78 51 * * $~,999 0 ~9j~ 0.0 -0.1 $_ 5~o, 2L~O 3,023 0 2.i~ 0.1 0.0 Wyoming Colorado 251~,31~6 * ~.l 0 3,~62 0.0 0.9 0 ~ 0.0 2.6 l,L~8~ 21~6,L~6 * ~ Utah 137,366 2.2 2,985 0.8 0 0.0 l3t~,38l Nevada l,~29 * 0 0.0 0 0.0 l,~~29 New Mexico * l7,I~21~ 0.3 3,692 1.0 6l~l Q*J~ 13,091 0.2 Arizona 151,123 2.~ 717 0.2 20 * 15Q~386 2.7 PACIFIC Washington 337, l7~ I~6.8 5.5 1~9,955 )~,786 13.1 1.3 98,260 - l~I~ 5~ 0.1 2,757,693 332, 28L~ 18.9 5,9 Oregon 1,718 * 7i~9 0.2 0 0.0 969 California 2,567,016 1~4,1~2O 11.6 98,156 57.0 2,1~2I~,L~i~O ~2.9 ALASKA & HAWAII Ai~ika 2,180 ],559 * * 1,610 1,255 O~3 2~5 ~ 0.1 0j 325 59 * * Hawaii 621 * 355 0.1 0 0.0 266 * t,1 0 0 z 0) z z PAGENO="0650" TABLE VI MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVELOPMENT, TEST AND EVALUATION WORK, BY REGION AND STATE AND BY TYPE OF CONTRACTOR FISCAL YEAR l961~ t~1 C-) ~eofContractor Region Schools Other Business C and Total and Their Non-Profit Fi~-~ State ____________________ Affiliales Institutions ~J ____________________ ~$OoO Percent ~$000 Percent $ö~O0 Percent $000 Percent U. S. TOTAL $5,761~,9O~ 100.0% $11i~2, 190 100.0% $208,077 100.0% $5,l]A,637 ioo.o% _____ ___ == --~ - NEW ENGLAND _____ ~ 152, 11~ ~ ~ 1.2 1~03, 538 ~ aine 139 * 0 0.0 0 0.0 139 * New Hampshire 11,309 0.2 l~50 0.1 0 0.0 10,859 0.2 Vermont 8,067 0.1 i66 0 0.0 `(,901 0.2 Massachusetts I~08, 961 7.1 l1~6, 752 33.2 1,570 o.8 260,639 5.1 Rhode Island 6,836 0.1 3,1~90 0.8 30 * 3,316 0.1 Connecticut 122,909 2.1 1,259 0.3 966 0.5 l20,68~ 2.1k MIDDLE ATLANTIC 895,388 15.6 58,71~l 13.3 23 19 U.2 8l3,L~5L~ 15.9 New York ~T851 ~ 39,187 -&~ 2,07 ~118~36~ ~ New Jersey 310,150 5.1k - ~,839 1.1 7,826 3.8 297,1~85 5.8 Pennsylvania 195,387 3.~ 1~,7l5 3.3 13,291 6.1k 167,381 3.3 EAST NORTH CENTRAL 309,223 ~ 56,183 ~ 10,160 1~.9 2112,880 ~ ~iio ~83,6~ 1.5 8,~85 2.0 1 6~,553 1.3 Indiana 57,378 1.0 3,651 0.8 0 0.0 53,727 1.0 illinois 1~3,750 0.8 23,938 5.1k t~33 0.2 19,379 0.~ Michigan 83,358 1.5 l7,9~6 1~.i 31 * 65,381 1.3 Wisconsin 111,109 0.7 2,060 0.5 209 0.1 38,8~0 o.8 NclrE: See Table VIII for footnotes. PAGENO="0651" TABLE VI (Continued) MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVELOPMENT, TEST AND EVALUATION WORK, BY REGION AND STATE AND BY TYPE OF CONTRACTOR FISCAL YEAR 1964 NI (-) C C C.) NI NI C-) H C NI H Cl) NI I. Type of Contractor Schools Other Total and. Their Non-Profit Business ___________________ Affiliates Institutions Firms $000 Percent $000 - Percent Iöbo Percent ~boo ~ Re an WEST NORTH !~llT~ Minnesota Iowa Missouri North Da~- South Dak~ Nebraska Kansas SOUTH Delawa~~ Maryland. District ~~usthia Virginia - West Vira~1 North Ca:'~~ South Ca:. Georgia - Florida SOUTH CIHI Kentucky Tennessee Alabama Miesissinn Arkansas Louisiana Oklahoma Texas ~l62,563 ~ $ 4,175 O.~ $ 6,043 ~ $_ 152,345 ~ 57,273 1.0 l,82~ ~ 199 0.1 55,250 1.1 2,320 * 1,202 0.3 0 0.0 1,118 54,874 1.0 910 0.2 5,743 2.8 48,221 0.9 30,558 0.5 0 0.0 0 0.0 30,558 0.6 8,170 0.1 80 * 0 0.0 8,090 0.2 124 * 23 * 101 0 0.0 9,244 0.2 136 * 0 0.0 9,108 0.2 665,548 11.5 82,164 18.6 22,840 11.0 560,544 11.0 6,249 0.1 434 0.1 0 0.0 5, 8i~ 51 217, 772 3.8 60,280 13.7 2,429 1.2 155,063 3.0 31,683 0.5 7,545 1.7 14,060 6.8 10,078 0.2 58,255 1.0 2,310 0.5 7,754 3.7 48,l9i-~ 0.9 17,083 0.3 34 * -l,722W -0.8 18,771 0.4 57, 378 1.0 6,736 1.5 0 0.0 50,642 1.0 274 * - 58 * 0 0.0 216 19,632 0.3 1,503 0.3 238 0.1 17,891 0.3 257,222 4.5 3,264 0.7 81 * 253,877 5.0 344,168 6.0 10,380 2.4 4,465 2.1 329,323 6.4 975 * 548 ~i -___--~ ~ 427 * 45,534 0.8 522 0.1 151 0.1 44,861 0.9 13,630 0.2 457 0.1 624 0.3 12,549 0.2 500 * 459 0.1 0 0.0 248 * 83 * 0 0.0 165 * 1,104 * 554 0.1 0 0.0 550 * 21,002 0.4 1,725 0.4 117 19,160 o.4 261,175 4.~ 6,032 1.4 3,532 1.7 251,611 4.9 PAGENO="0652" TABLE VI (Continued) MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVELOPMENT, TEST AND EVALUATION WORK, BY REGION AND STATE AND BY TYPE OF CONTRACTOR FISCAL YEAR 1961k I. Region and State Type of Contractor Schools Other and Their Non-Profit Affiliates Institutions $000 Percent $000 Percent Business Firms MOUNTAIN Montana Idaho Wyoming Colorado Utah Nevada New Mexico Arizona PACIFIC Washington Oregon California ALASKA & HAWAII Alaska Hawaii Total Percent ~~386, 282 ~ 37i~ 0.1 0 0.0 36,210 0.6 225,555 3.9 53,3L~5 0.9 ~~27 * 23,127 O.L~ 14J4~#38 0.8 2,14~l,2l5 ~+2.3 ~82~öi~ ~ 1,311 * 2,257,887 39.2 2296 * -~ 1440 * $ 12,05 1 0 0 6,352 1,515 30 3,356 786 6L~, 196 3,971 1,105 59,120 1,789 388 0:8 0.9 0.3 13. 0.1 0 0 tTI ~Ti H 0 t~1 H U) t~1 z 0 $ 6,989 0 0 0 1, l~ 0 153 5,162 530 131, 712 0 131, 6o6 109 -~7 0.0 0.0 0.0 0.5 0.0 0.1 2.5 0.3 63.3 0.0 63.2 * * * ~Q9Q 36, 210 218,059 51,830 2144 J)+,6o9 ~-~3,l22 ~327 177, 91+0 206 2,067,161 10 0 10 Percent 0.1 0.0 0.7 14.2 1.0 * 0.3 0.8 1~3 .9 3.5 * 1+0.1+ * 0.0 * PAGENO="0653" TABLE VII MILTPARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVKLOPMENT, TEST AND EVALUATION WORK, BY REGION AND STATE AND BY TYPE OF CONTRACTOR FISCAL YEAR 1965 Region and State ~eof Contractor - Total Educational Other Institutions Non-Profit Institutions Business Finns $000 Percent $000 Percent $000 Pe rcent $000 ~rcen~ U.S. TOTAL $14,707,612 100.0% $369,907 100.0% $315,198 100.0% ~14,O22,5O7 100.0% NEW ENGLAND 5114,2145 10.9 39~~ 3~.7 hO, 336 12.8 3314,291 8.3 Maine 3 - * -10 bJ - 0 0.0 13 - New Hampshire 15,189 0.3 571 0.2 0 0.0 i1#,6i8 0.14 Vermont 3,239 0.1 123 * 0 0.0 3,116 * Massachusetts 1401,978 8.5 131#,9140 36.5 39,091 l2.1# 227,9147 5.7 Rhode Island 1O,01#1# 0.2 3,080 0.8 19 * 6,9145 0.2 Connecticut 83,792 1.8 9114 0.2 1,226 O.I# 81,652 2.0 MIDDLE ATLANTIC 693,886 114.7 53,14146 114.14 28 681# 9.1 611 75~ 15.2 New York 285,2411 ~6i 29,3~6 7.9 - i~6b3 5.9 23~L#6~ 5.9 New Jersey 195,171 24.1 5,91#3 1.6 3243 0.1 188,885 24.7 Pennsylvania 213,3024 14.5 18,167 14.9 9,733 3.1 185,14014 14.6 EAST NORTH CENTRAL 358,069 ~7~6 hi 14324 11.2 29,~8~ 6.6 295,752 7.1# Ohio 13l,56~ 2.8 6~21# 1.8 9,5314 3.0 115,5014 2.9 Indiana 140,732 0.9 2,530 0.7 1,111 0.24 37,091 0.9 Illinois 57,1146 1.2 114,017 3.8 9,935 3.2 33,1914 0.8 Michigan 111,052 2.24 16,162 24.24 1024 * 914,786 2.24 Wisconsin 17,577 0.14 2,201 o.6 199 0.1 15,177 0.24 I. NOTE: See Table VIII for footnotes. PAGENO="0654" TABLE VII (Continued) MILLPARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVELOPMENT, TEST AND EVALUATION WORK, BY REGION ADD STATE AND BY TYPE OF CONTRACTOR FISCAL YEAR 1965 RI a C C C) RI RI C-) H C ~TI -I RI U) RI z Region and State Type of Contractor Other Educational Non-Profit Institutions Institutions Total aJ Business Firms $000 Percent $000 Percent $000 Percent $000 Percent WEST NORTH CENTRAL Minnesota Iowa Missouri North Dakota South Dakota Nebraska Kansas SOUTH ATLANTIC Delaware Maryland District of Columbia Virginia West Virginia North Carolina South Carolina Georgia Florida SOUTH CENTRAL Kentucky Tennessee Alabama Mississippi Arkansas Louisiana Oklahoma Texas lO9,~62~ 2.3_ 5,083 1.14 ~ 2.8 p5,2 2.14 50 378 1.1 1,827 0.5 l4'~ * ~i, 07 1.2 2 722 0.1 1,115 0.3 0 0.0 1,607 `~ 142,221 0.9 1,7614 0.5 8,686 2.8 31,771 0.8 23 * 11 * 0 0.0 12 ~ 550 * 63 * 0 0.0 1487 * -50 bJ - 53 * 0 0.0 -103 ~/ - 13,781 0.3 250 0.1 0 0.0 13,531 0.3 $ 6714,671 114.3% $ 69,~79 ~ $35,895 ~ $ 569 097 J~J~ 14,2714 0.1 259 0.1 0 0.0 I~ãl5 -* 198,3142 14.2 51,225 13.8 14,88i 1.5 1142,236 3.5 140,825 0.9 10,051 2.7 15,535 14.9 15,239 0.14 51,2143 1.1 982 0.3 10,722 3.14 39,539 1.0 9,7149 0.2 216 ~ 2,379 0.8 7,1514 0.2 102,725 2.2 3,261 0.9 7914 0.3 98,670 2.5 95 * 95 * 0 0.0 0 0.0 16,565 0.14 610 0.2 1,565 0.5 114,390 0.14 250,853 5.3 2,980 0.8 19 * 2147,8514 6.2 525~38O 11.2 10,583 2.9 6,172 2.0 508,625 12.6 1,008 * 306 0.1 0 0.0 702 ~ 149,0714 1.0 8140 0.2 0 0.0 148,2314 1.2 15,158 0.3 671 0.2 6o14 0.2 13,883 0.3 521 * 1472 0.1 149 * 0 0.0 * 33 ~ 0 0.0 23 * 1,1413 * 666 0.2 0 0.0 7147 * 12,237 0.3 1,267 0.3 236 0.1 10,7314 0.3 14145,913 9.5 6,328 1.7 5,283 1.7 14314,302 10.8 PAGENO="0655" TABLE VII (Continued) MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVELOPMENT, TEST AND EVALUATION WORK, BY REGION AND STATE AND BY TYPE OF CONTRACTOR FISCAL YEAR 1965 Region and State Type of Contractor Total Educational Institutions Other Non-Profit Institutions ~j Business Firms - $000 Percent - $000 Percent $000 Percent $000 Percent MOUNTAIN 225,383 L~.9 12,398 3.1~ ~ i.1~ 208,622 5.2 *Montana i,7L~0 * 221 * 0 0.0 1,519 * Idaho 155 * 79 * 76 * 0 0.0 Wyoming 95 * ~ 0.0 0 0.0 95 * Colorado l1~9,255 3.2 5,366 1.5 1,037 0.3 1L~2,852 3.6 Ut&a 16,965 0.1k 2,129 o.6 0 0.0 ]A,836 Q.1~ Nevada 2,I~36 * 10 * 1,059 0.3 1,367 * New Mexico 2L~, 161 0.5 3,556 1.0 1,6143 0.5 18,962 0.5 Arizona 30,576 0.7 1,037 0.3 5148 0.2 28,991 0.7 PACIFIC ~~602,808 314.0~ ~ 3~,028 j~L51i ~2L~3~2 J~3~Ej% ~ 314.~ Washington 99,391 2.1 14,1407 1.2 65 * ~,9l9 2.14 Oregon 1,376 * 1,325 0.14 0 0.0 51 * California 1,502,0141 31.9 29,296 7.9 169,567 53.8 1,303,178 32.14 ALASKA & HAWAII ~~5M 0.1 2,~38 0.7 1403 0.1 5Q~ * Alaska 2,2014 * 1,918 - 0.5 286 ~ö.l 0 0.0 Hawaii 1,3141 * 720 0.2 117 * 5014 C C C -4 z U) C 1~ PAGENO="0656" TABLE VIII MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVELOP~4ENT, TEST AND EVALUATION WORK, BY REGION AND STATE AND BY TYPE OF CONTRACTOR FISCAL YEAR 1966 I. Type of Contractor Region and Total Educational Other Business Institutions Non-Profit Firms State Institutions $000 Percent $000 Percent $000 Percent $000 Percent U. S. TOTAL $5,269,tt2l 100.0% $322,69o 100.0% $327,828 ioo.o% $14,618,903 100.0% NEW ENGLAND 513,357 9.8 66,91414 ~ 35,795 10.9 1410,618 9.0 Maine 99 * 11 * 0 0.0 * New Hampshire 23,599 0.5 63O 0.2 0 0.0 22,969 0.5 Vermont 5,673 0.1 147 * 0 0.0 5,626 0.1 Massachusetts 3148,057 6.6 61,399 19.0 314,5214 10.5 252,1314 5.5 Rhode Island 15,658 0.3 3,791 1.2 0 0.0 11,867 0.3 Connecticut 120,271 2.3 i,o66 0.3 1,271 0.14 117,9314 2.6 MIDDLE ATLANTIC New York New Jersey Pennsylvania EAST NORTH CENTRAL Ohio Indiana Illinois Michigan Wisconsin 0 0 -4 CI) 0 8141,1451 15.9 58,112 18.0 33,660 10.3 387,010 7.3 30,752 9.5 22,1463 7~ 201,593 3.8 5,273 1.6 213 * 252,8148 14.8 22,087 6.9 10,9814 3.14 1472,1470 9.0 147 5514 114.8 2314,691 i~-;-~ 6~6~9 ~i 32,720 0.6 1,937 0.6 614,9814 1.2 18,6114 5.8 120,609 2.3 18,3148 5,7 19,1466 0.14 2,016 0.6 22,9114 7.0 11,069 ~;:~i: 1,629 0.5 10,010 3.1 145 161 7149,679 ~ 333,795 7.2 196,107 14.2 219,777 14.8 1402 002 8.7 2l6~8~ I~T7 29,1514 0.6 36,360 0.8 102,216 2.2 17,289 0.14 PAGENO="0657" WEST NORTH CENTRAL Minnesota Iowa Missouri North Dakota South Dakota Nebraska Kansas SOUTH ATLANTIC Delaware Maryland District of Colunibig Virginia West Virginia North Carolina South Carolina Georgia Florida TABLE VIII (Continued) MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVELOPMENT, TEST AND EVALUATION WORK, BY REGION AND STATE AND BY TYPE OF CONTRACTOR FISCAL YEAR 1966 Region and State . Type of Contractor Total Educational ~ Institutions Other Non-Profit Institutions W Business Firms $000 Percent $000 Percent $000 Percent $000 Percent 1143,257 2.7 ~ 1.5 ~ ~ 132,131 2.9 76,022 IT1~ ~ 5~ 519 0.2 73,14142 iT~ 14,9714 0.1 1,052 0.3 0 0.0 3,922 0.1 56,631 1.1 1,623 0.5 5,I#93 1.7 149,515 1.1 71 * 37 * 00.0 314 * 172 * 21 * 0 0.0 151 * 96 * 78 * 18 * 0 0.0 5,291 0.1 2214 0.1 0 0.0 5,067 0.1 785,891 15.0 71,320 22.1 148,328 114.9 666,2143 114.14 2,921 0.1 193 0.1 0 0.0 2,728 ~ 2145,691 14.7 52,607 16.3 5,5114 1.7 187,570 14.1 35,173 0.7 9,339 2.9 11,051 3.14 ll~,783 0.3 614,260 1.2 1,169 0.14 22,5140 6.9 140,551 0.9 9,0140 0.2 145 * 6,126 1.9 2,869 514,552 1.0 3,833 1.2 1,519 0.5 149,200 1.1 1453 * 101 * 0 0.0 352 * 75,881 1.14 750 0.2 1,550 0.5 73,581 1,6 297,920 5.7 3,283 1.0 28 * 2914,609 6.14 SOUTH CENTRAL Kentucky Tennessee Alabama Mississippi Arkansas Louisiana Oklahoma Texas ttl 0 0 0 L*~1 0 H 0 NI H z w NI z 0 I. 1477,067 9.1 9 059 2.9 916 * 0.2 58,639 1.1 706 0.2 35,2714 0.7 603 0.2 1423 * 283 0.1 3314 * 62 * 1,14143 * 803 0.3 23,867 0.5 601 0.2 356,171 6.8 5,5143 1.7 L22~ ~! O 0,0 51 * 889 0.3 1~5 * O 0.0 O 0.0 257 * 5,856 1.8 1460,910 10.0 ~ 57,882 1.3 33,782 0.7 95 272 * 6140 23,009 0.5 3414,772 7.5 PAGENO="0658" TABLE VIII (Continued) MILITARY PRIME CONTRACT AWARDS OF $10,000 OR MORE FOR RESEARCH, DEVELOPMENT, TEST AND EVALUATION WORK, BY REGION AND STATE AND BY TEPE OF CONTRACTOR FISCAL YEAR 1966 MOUNTAIN _______ Montana Idaho Wyoming Colorado Utah Nevada New Mexico Arizona PACIFIC ________ Washington Oregon California ALASKA & HAWAII Alaska Hawaii a/ Includes contracts with Other Government b/ The negative value results from contract ~ Less than 0.05%. Agencies. cancellations in excess of new awards. Business Firms $000 Percent 199,596 4.2 1,259 * O 0.0 30 * 126,779 2.7 13,698 0,3 1,473 * 22,162 0.5 34,195 0.7 1,592,206 34.5 - 118,722 ~ 238 * 1,473,246 31.9 ~La~ 2~2 O 0.0 5,518 0.1 0 0 C-) H 0 H CI) 0 Region and State Type of Contractor Educational Institutions Other Non-Profit Institutions $000 Percent $000 Percent Total $000 Percent 216,607 4.0 1,331 * 20 * 30 * 133,990 2.5 15,471 0.3 1,991 * 27,899 0.5 35,875 0.7 l,8O9~~7 34.3 125,293 ~ 1,349 * 1,682,875 31.9 9804 0.2 *, 8,119 0.2 13,153 72 20 0 6,476 1,773 22 3,717 1,073 47,317 6,466 1,111 39,740 4 135 2,537 4.1 * * 0.0 2.0 0.6 * 1.2. 0.3 14.6 2.0 0.3 12.3 1.3 0.5 0.8 3,858 0 0 0 735 0 496 2,020 607 169,994 105 0 169,889 151 -~7 64 1.1 0.0 0.0 0.0 0.2 0.0 0.1 0.6 0.2 51.8 0.0 51.8 * PAGENO="0659" GEOGRAPHIC REGIONS NEW ENGLAQ" ~ ii C PAGENO="0660" PAGENO="0661" Part V POST-VIETNAM PLANNING This section consists of excerpts from two Government documents dealing with economic adjustments to cutbacks in U. S. military spending. 1019 78-516 0-67-vol. 2-43 PAGENO="0662" PAGENO="0663" EXCERPT FROM JANUARY 1967 ECONOMIC REPORT OF THE PRESIDENT * * * * * AFTER VIETNAM Despite all our efforts for an honorable peace in Vietnam, the war continues. I cannot predict when it will end. Thus our plans must assume its long duration. But peace will return-and it could return sooner than we dare expect. When hostilities do end, we will be faced with a great opportunity, and a challenge how best to use that opportunity. The resources now being claimed by the war can be diverted to peaceful uses both at home and abroad, and can hasten the attainment of the great goals upon which we have set our sights. If we keep our eyes firmly fixed on those goals-and if we plan wisely-we need have no fear that the bridge from war to peace will exact a wasteful toll of idle resources, human or material. But when that welcome day of peace arrives, we will need quick adjustments in our economic policies. We must be prepared for those adjustments, ready to act rapidly-both to avoid interruption to our prosperity and to take full and immediate advantage of our opportunities. Planning for peace has been an important activity in many execu- tive agencies. But the effort needs to be stepped up and integrated. Accordingly, I am instructing the heads of the relevant agencies in the executive branch, under the leadership of the Chairman of the Council of Economic Advisers, to begin at once a major and coordinated effort to review our readiness. I have asked them- to consider possibilities and priorities for tax reduction; to prepare, with the Federal Reserve Board, plans for quick adjustments of monetary and financial policies; to determine which high priority programs can be quickly expanded; to determine priorities for the longer range expansion of pro- grams to meet the needs of the American people, both through new and existing programs; to study and evaluate the future direction of Federal financial support to our States and local governments; to examine ways in which the transition to peace can be smoothed for the workers, compapies, and communities now engaged in supplying our defense needs, and the men released from our armed forces. I have directed that initial reports be prepared on all of these and related problems, and that thereafter they be kept continuously up to date. * * * * * * 1021 PAGENO="0664" EXCERPT FROM REPORT OF THE COMMITTEE ON THE ECONOMICS OF DEFENSE AND DISARMAMENT, JULY 1965 Chapter 5 INITIAL CoNcLusIoNs ON GOVERNMENT POLICIES During its review of existing Government programs-other thaii general fiscal and monetary policies-which assist in the conomic adjustment to changes in defense and related activities, the Commit- tee agreed on certain modest but useful improvements that it could recommend. Also, it agreed to reject, at least for the present, other changes suggested to it. And it agreed that certain suggested lines of approach deserve further study. This chapter summarizes the Committee's conclusions under several headings: Federal Government organizations and procedures, aids to workers, aids to communities, aids to defense firms, and support of research and development. In practice, many of the activities dis- cussed under each heading serve one or more of the other purposes. The Committee also makes some general recommendations to States and communities and presents some conclusions regarding the future of its own work. Recommendations relating to the collection of further data and to research that is needed are included in chapter 6. In conducting its study an~I formulating its conclusions, the Com- mittee has been guided by several basic criteria: 1. Consistency with national economic policies-promotion of full employment and rapid economic growth; 2. Consistency with standards of fairness and equity among various sectors of the economy and regions of the country- avoidance of singling out particular groups for special benefits not available to others in similar circumstances; 3. Consistency with efficient allocation of the Nation's re- sources-avoiding the creation of longrun inefficiencies in the economy when dealing with short-term problems? 4. Consistency with local and private initiative-encouraging and assisting rather than replacing the efforts of those State and local governments and private organizations which are attempting to offset adverse economic consequences of shifts in defense spending; 5. Consistency with the national security-maintaining the capability of the Nation to respond effectively to changes in the requirements of national security programs, whether total defense spending is increased or reduced as a result of arms control and disarmament agreements or other causes. 1022 PAGENO="0665" ECONOMIC EFFECT OF VIETNAM SPENDING 1023 FEDERAL GOVERNMENT ORGANIZATIONS AND PROCEDURES ORGANIZATIONS The Committee was impressed by the variety of services which now exist within the agencies of the Federal Government to assist workers and communities affected by the closing or cutback of defense installa- tions or by reduction or termination of defense procurement. The effectiveness of such assistance, however, depends on prompt and thorough diagnosis of the problems of the affected workers and communities, and a determination of which Federal programs would be useful. Thorough coordination of the efforts of the Federal agencies among themselves and with State and local authorities is essential to a sound program of adjustment. The principal need is to make known and available to the local community the wide range of s.ervices which Federal agencies can provide, and to bring about the development of an overall program for the use of these services. For every affected community, there needs to be some coordinating agency to serve as the single point of contact between the Federal Government and the appropriate State and local leaders. The purposes of this contact are to assist the community in diagnosing its needs and to make arrangements with the various Federal agencies to supply the appropriate services. Following the initiation of Federal services, the coordinating agency can continue to expedite and coordinate the application of these services. The Committee recommends that the Office of Economic Adjust- ment in the Department of Defense (DOD), the Office of Economic Impact and Conversion in the Atomic Energy Commission (AEC) and the National Aeronautics and Space Administration (NASA) continue to exercise the primary responsibility for coordinating Federal activities, in those communities affected by the closing or cut- back of Government installations. Currently, the same agencies and the same personnel staff both the President's Task Force on Community Assistance and the Advisory Committee to the Secretary of Defense. We recommend that functions relating to community assistance be carried out by a group with a single title-the Federal Task Force on Community Assistance. (As noted in ch. 4, the President's Task Force on Community Assistance, whose functions the Federal Task Force would inherit, was created during the period in which this report was in preparation, and it reflected, in part, considerations which grew out pf the work on this report, especially that of the working group on community adjustment problems. The Advisory Committee to the Secretary of Defense had been created earlier.) The following departments and agencies should be represented on the Federal Task Force: Department of Defense; Atomic Energy Com- mission; National Aeronautics and Space Administration; Depart- ment of Labor; Department of Commerce; Office of Economic Oppor- tunity; Department of Agriculture; Department of Health, Education, and Welfare; Department of Interior; General Services Administra- tion; Housing and Home Finance Agency; Small Business Administra- tion; Veterans' Administration; and the Arms Control and Disarma- ment Agency as an observer. Other agencies might be added from time to time as needed. PAGENO="0666" 1024 ECONOMIC EFFECT OF VIETNAM SPENDING The basic staff of the task force should be provided by the Depart- ments of Labor and Commerce, augmented as required from other. Departments and from agencies. In certain instances, the Federal Task Force may find it useful to create smaller working groups to assure effective on-the-spot coordination of the activities of the cooperating agencies. In cases where DOD, AEC, or NASA are directly involved, the advice of the task force and the services of its member agencies should be made available when requested by the department or closing or cutback of whose installation, or the cutback or cancellation of whose contract, is the source of the potential difficulty. The Federal Task Force ort Gommunity Assistance should be perma- nently constituted and given an executive director and deputy director. It is recommended that it proceed rapidly to develop procedures and to carry out vigorously its mandate. In addition to its coordinating func- tions, it should encourage the training of community assistance specialists. In all cases, however, coordinating agencies should operate by bringing to bear upon community problems the services of existing agencies of the Federal Government. The coordinating agencies should not themselves develop specialized staffs to provide technical services. This is now and should remain the respousibility of the various departments. ADVANCE NOTICE The Committee recommends that the defense procurement agencies review intensively their existing policies, procedures, and practices regard- ing the provision of advance notice to contractors and commun'tties of im- pending changes in their programs. It believes that the maximum feasible advance notice of cancellations and cutbacks of contracts should continue to be given to the contractors and the localities involved, so that local officials c~rn initiate or intensify adjustment; planning and enlist the assistance of Federal agencies at the earliest. practicable date. In addition, the Committee recommends that, when a major contract is terminated, procurement agencies require the prime contractor to supply an assessment of the impact of this termination on its own directly related employment. The contractor should also furnish a list of subcontractors, together with information, that would ma/ce it possible to estimate the timing and nature of the impact on them of the termination of the prime contract. The U.S. Employment Service, in cooperation with local employment services, should then develop an initial assessment of the impact on employment and on local labor markets, and make this assessment available to the State and Federal agencies primarily re- sponsible for adjustment assistance. AIDs TO WORKER JOB INFORMATiON AND PLACEMENT SERVICES The Committee believes that it is necessary to strengthen the Federal-State Employment Service, through larger budgets and more effective procedures. It therefore strongly supports the expanded funding requested in the President's budget for fiscal year 1966. The effectiveness of all means-including both public and private employ- PAGENO="0667" ECONOMIC EFFECT OF VIETNAM SPENDING 1025 ment services-that dislocated employees use to find employment should be enhanced. In particular, the Committee recommends that the effectiveness of the Federal-State Employment Service in aiding profes- sional and technical workers be strengthened. The Committee further recommends that the Department of Labor establish at the national level several advisory teams of specialists in interviewing, testing, counseling, guiding, and training. These teams could be quickly sent, at the request of the appropriate coordinating agencies, to areas seriously affected by shifts in defense spending. Also, the Department should encourage the State employment services to develop similar teams of specialists. The effective matching of men and jobs requires that good labor market information be obtained quickly. Expanded information on job vacancies is extremely important both for this and for other reasons. The Committee recommends, therefore, that the Department of Labor continue to explore effective means of developing and disseminating information on job vacancies, and of exchanging such information among areas and States throughout the Nation. To permit more rapid matching of job requirements with worker qualifications, it is recommended that, as soon as effective procedures are developed, the Labor Department's LINUS system be expanded rapidly to jacilitate interarea recruitment. This would have benefits for em- ployees affected by all layoffs, whether defense-related or arising from other causes. TRAINING AND RETRAINING The training and retraining programs conducted by the Federal Government to help unemployed workers have been described in chapter 4. The Committee welcomes the 1965 amendments that strengthen further the programs under the Manpower Development and Training Act (MDTA). The Committee believes that active and effective programs of training and retraining can make a vital contribution to assisting new workers to find jobs and to speed the reemployment of many workers who lose their jobs as the result of all kinds of economic change. However, the Committee does not believe that the special nature or extent of existing or prospective displacement of defense workers by itself justifies any enlargement of general training and retraining programs that is not justified on other grounds. Questions have been raised whether existing programs provide ade- quately for the special needs and circumstances of defense workers, and particularly for the needs of displaced engineers and other techni- cal and professional workers. Limited programs-at least for technicians-may now be possible under the MDTA amendments of 1965.1 The current experimental program for the retraining of displaced defense workers on Long Island will be carefully evaluated by the Committee. It is hoped that this experiment will lead the way to sim~1ar programs in other areas affected by defense shifts. The Com- mittee also expects to evaluate proposals for other special retraining programs for displaced defense workers-for example, the proposal for programs to train defense scientists and technicians as teachers of science in secondary schools and colleges. 1 See eh. 4, pp. 34-35. PAGENO="0668" 1026 ECONOMIC EFFECT OF VIETNAM SPENDING The Committee commends the present administrative procedures used to make surplus Government property promptly available for use in connection with the training of displaced workers. It hopes that these procedures can be further developed, including more effec- tive ways for making training authorities aware of the availability of suitable properties. RELOCATION As noted in chapter 4, the disposal of residences may be a serious barrier to labor mobility. Hence the Committee recommends that the Veterans' Administration (VA) and the Housing and Home Finance Agency (HHFA) utilize more actively their authority to initiate mortgage forbearance agreements in the case of emergencies created by changes in defense programs. It recommends further study of the problem oJ disposal of residences oJ workers displaced by major defense cutbacks. A working group, including representatives of VA, HHFA, GSA (General Services Administration), and the Departments of Commerce and Labor should be established to consider additional possible programs in this area. The Committee gave consideration to the possible use of relocation allowances to assist displaced defense workers to move to areas in which jobs are available. Specifically, it considered the suggestion that the precedent- in the Trade Expansion Act- of providing reloca- tion assistance to those affected by changes in Federal programs or policies be adapted to employees affected by defense shifts. The Committee noted the lack of any experience under the act. More importantly, it recognized the difficult administrative and equity considerations that could arise in attempting to restrict such assist- ance to defense workers or to communities affected by shifts in defense procurement. For example, when a firm that produces for both defense and nondefense purposes lays off an accountant, it is often almost impossible to determine whether he was laid off as the result of a cutback in defense work. Nor is there any basis for treating differently the production worker on the nondefense side of a con- tractor's business who is "bumped" by a worker from the defense side `~~~hen defense work is curtailed. It is difficult to conclude that the retail salesman who is laid off in a community where retail sales have been reduced because of decreases in defense production is less deserving of relocation assistance than the worker in the defense plant. Difficulties such as these make it most doubtful that relocation assistance would be justified except as part of a general program available to all-whether the need arises from defense shifts or from other causes. The Committee recommends that the Department of Labor continve to study the possibility of a general program of relocation assistance to ~inemployed workers, drawing upon the experience of its experimental program under the MDTA, especially as expanded in accordance with the 1965 MDTA amendments. It should also study the ex- perience of other countries with relocation allowances. However, the Committee concluded that existing or prospective problems of dislocation arising from defense shifts do not by themselves justify any general relocation program that is not justified by the needs of the economy generally. PAGENO="0669" ECONOMIC EFFECT OF VIETNAM SPENDING 1027 AIDS To COMMUNITIES The Area Redevelopment Act of 1961 provided many new tools for communities to use in overcoming economic adversity, including planning assistance, and grants and loans for public facilities, com- mercial and industrial enterprises, and training programs. The Com- mittee heartily endorses the proposals which the President has sent to the Congress for broadening the scope and improving the effective- ness of this program. The strengthened program will help com- munities to cope with economic difficulties of whatever origin; in addition, it will be of particular assistance to communities affected by shifts in defense procurement. INDUSTRIAL FACILITIES The timely disposal of Government-owned industrial facilities which are no longer in use and have become surplus is often essential to the economic health of a community. Delay in disposal may mean that a portion of the community's work force scatters, thus making it even more difficult to attract new firms to the area. The Committee recommends that the GSA continue to consider community needs of the highest priority in the disposal of surplus facilities, and that it especially consider ways to improve coordination of the disposition of personal and real property in existing installations. The sale of the naval ordnance plant in York, Pa., as a going concern without interruption in production and without adverse impact o n local employment is an example of what can be accomplished when facilities are disposed of quickly to an appropriate buyer. It is repre- sentative of constructive approaches that should be encouraged. SPECIAL ASSISTANCE TO DEFENSE-DEPENDENT COMMUNITIES The Committee has considered whether additional specialized Fed- eral assistance-beyond that provided in the general area and regional development program-could be given to communities suffering severe dislocation as a result of the closing of defense installations or the termination of contracts. For example, it has been suggested that, where measures to improve the mobility of labor and industry do not suffice, communities heavily affected by defense shifts should be eligible for low-interest loans, grants, and other assistance beyond that available to other areas where unemployment is high or average incomes are low. Also, it has been suggested that defense-affected areas (whether or not they qualify as labor-surplus areas) should be given special preference in Government contracts-perhaps through procurement setasides-or that prime contractors should be required to place a portion of their subcontracts in such areas, when feasible. The Committee has, so far, been unable to find resonable criteria by which to define an area whose economic problems can specifically be pinned to shifts in defense programs and to distinguish its needs from those of other areas suffering economic adversity. For example, there is no doubt. that the economy of Long Island has been adversely affected by the termination or reduction of defense production in a number of plants. Yet, on the basis of unemployment rates or income PAGENO="0670" 1028 ECONOMIC EFFECT OF VIETNAM SPENDING levels, the community is far better off than thousands of other com- munities where defense shifts have played a considerably smaller role- or no role at all- in creating economic hardship. Nevertheless, the Committee recognizes that there are and will be some communities-particularly small and isolated ones-whose economic fortunes are very heavily tied to continued defense acti~ ities and whose very existence can be threatened by its termination. If an action of the Federal Government withdraws their major economic support, the residents of such communities have a strong case for special Federal assistance- a stronger case perhaps than that of other communities which may suffer equally from the exhaustion of a mineral resource, the diversion of trade, or the business failure of their principal private employer. The Committee will continue to study possible criteria for distinguishing the case of such communities. However, the difficulties extend far beyond those of identifying a special dependence on defense work. The criteria of efficiency sug- gested at the beginning of this chapter preclude solutions which permanently and artificially sustain an existing economic pattern in a community. In particular, the Committee does not accept any solution based either on the continuance of unneeded defense activities or on providing, on more than a temporary basis, a special procurement advantage not justified by costs and efficiency. The Committee intends to study further the problem of providing special assistance to those few communities which may be so heavily dependent on defense activity that its termination in those areas threatens their continued existence. AIDS TO DEFENSE FIRMS The Committee welcomes the recent actions of the Department of Defense and NASA which clearly state that companies may charge to their defense or space contracts an allocable share of the costs of gen- eralized long-range management planning. We understand that AEC already views such costs as allowable. N.umerous additional suggestions have been made for the Govern- ment to assist and encourage defense contractors to diversify into nondefense markets. One suggestion is to allow defense contractors to charge as overhead costs on their Government contracts some portion of the initial efforts required to begin a commercial diversi- fication program, such as the development of generalized marketing capability and exploratory planning for commercial products. The Committee intends to review the application of the 1964 amendment to procurement regulations and, in the course of that review, the merits of the above suggestion should be considered. The Committee has rejected as completely inappropriate, as well as ineffective, the alternative suggestion that larger profit margins be allowed on defense contracts in order to provide increased corporate funds for investment in diversification efforts. There appear frequently to be cases in which, as a result of a decline in defense work, a company using a Government-owned defense manufacturing or development facility finds that it has a large amount of unutilized or underutilized capacity, even though the remaining volume of defense work requires the continued operation PAGENO="0671" ECONOMIC EFFECT OF VIETNAM SPENDING 1029 of the plant. Under such circumstances, it would appear to be desir- able public policy to encourage the company operating the Government- owned facility to develop alternative work for the unutilized portions. This could be done, for example, through the use of rental charges for commercial activity. The Committee recommends that Federal procure- ment agencies review their policies governing the use for commercial work of Government-owned contractor-leased facilities. Such policies should not, of course, permit the use of Government-owned facilities to the detriment of Government work being processed, nor should they confer an unfair competitive advantage upon the user. Within these limitations, however, the Committee believes that more effective procedures can be developed. It has been suggested frequently that the Government has a moral obligation to award large nondefense research and development (R. & D.) contracts to specialized defense contractors whose business has been seriously curt~iled, merely to keep their facilities and staffs together and at work. Many who advocate this course are confident that the benefits of such research would inevitably be substantial and well worth the cost. Although the Committee recognizes that national security requires the maintenance of an adequate private research and development capability to meet emergency needs, it rejects the idea that the Gov- ernment should support particular defense contractors, merely in order to maintain their scale of operations and to hold their staffs together. However, if there are large-scale nondefense research and development projects that can be justified on their own merits- and undoubtedly there are expanding opportunities of this kind-many defense contractors should be and will be able to compete effectively for such contracts. SUPPORT OF RESEARCH AND DEVELOPMENT Pending completion of its evaluation of more far-reaching proposals to facilitate the application of defense technology to civilian needs, the Committee supports certain other programs to strengthen R. & D. in nondefense fields. An effect of these programs will be to strengthen civilian demand for R. & D. personnel, thereby helping to assure an adequate demand for the services of scientific and technical personnel at a time when the demand for them by defense industry may have leveled off. One of these programs is proposed in the State rfechnical Service Act now before the Congress. This program would provide matching Federal-State grants for regional technological information centers designed to help firms apply advanced technology to the extension of markets and to stimulate the creation of new technically based businesses. State plans would be formulated and put into effect with local initiative and responsibility. In addition, the Institute for Applied Technology in the National Bureau of Standards is seeking to extend its programs aimed at creating an environment more conducive to technical innovation in industry. These programs include: Operation of the Clearinghouse for Federal Scientific and Technical Information, whose function is to convey unclassified PAGENO="0672" 1030 ECONOMIC EFFECT OF VIETNAM SPENDING Govermnent-generated physical science and engineering informa- tion to industry; Development of criteria of performance for industrial products so as to lead to the development of performance-based codes and standards, and thus aid technical innovation; Development of criteria of performance for Federal purchases of systems (such as hospitals, transportation, waste disposal), so as to encourage the use of these purchases to stimulate technical innovation. It should be noted that both NASA and AEC have active informa- tion dissemination programs through which the research and the development from these agencies' programs are made available to the public for industrial application. Unclassified scientific a.nd technical information from the Defense Department is made public through the clearinghouse, as stated above. To the extent that capabilities for basic research are released from defense-oriented activities, it should be possible for Federal agencies that perform or fund basië research to increase their activity on advantageous terms. Enlarged support through the National Science Foundation would appear to be one effective tool in this area. The President has recommended enlarged support for basic scientific research, and the Committee strongly supports this recommendation. FURTHER ASSISTANCE TO INDUSTRIAL RESEARCH AND DEVELOPMENT Many proposals have been made for the Federal Government to increase the incentive of private companies to conduct ZR. & D. projects. These proposals are aimed both at expanding the market for nondefense R. & D. work which might be performed by specialized defense contractors and at creating new ZR. & D. jobs elsewhere in the economy. The suggestions include (1) permitting firms to charge off as a current expense for tax purposes the purchase of new equipment for R. & D. work (a proposal included in the administration's 1963 tax bifi); (2) a partial tax credit for all R. & D. costs; (3) an aid pro- gram analogous to the mining exploration program of the Department of the Interior, under which the Government would pay part of the cost of civilian ZR. & D. work, but would be reimbursed out of the proceeds if the ZR. & D. should lead to profitable production; (4) loans or loan guarantees for R. & D. costs; (5) sale or lease of Government- owned plant and equipment on attractive terms for commercial R. & D. work; and (6) direct technical assistance to companies not familiar with the uses of ZR. & D. work. The Committee intends to study intensively these and similar proposals for special incentives for private research and development. PROPOSALS FOR EXPANDED GOVERNMENT R. & D. ON NATIONAL PROBLEMS The considerable efforts of the past decades to develop means of understanding a.nd dealing with complex technical problems have led to modern systems engineering. Many who a.re seeking solutions to nondefense problems have seen possible applications in their field of interest of systems engineering skifis now largely centered in the PAGENO="0673" ECONOMIC EFFECT OF VIETNAM SPENDING 1031 defense industry. It has frequently been urged that the Govern- ment undertake large new research programs in such fields as urban transportation, pollution control, oceanography, weather forecasting, methods for organizing medical and hospital care, and techniques of education. Defense contractors, as well as others, would be eligible to bid for the research contracts; and those ~vho have suggested the undertakings are confident that existing defense contractors would secure many of the contracts for the research work. There appears to have been some expectation that the Committee might recommend the appropriation of funds for competitions in certain specific fields of research. The Committee is in no position to make any such recommendation. It has received much exhorta- tion but no hard information which would indicate the probability of high payoffs from such new research. However, the Committee clearly is not the appropriate organization to review specific proposals of this sort, since it lacks facilities for receiving and evaluating large bodies of technical, budgetary, and similar specialized information. But the Committee does intend to study whether the Federal Gov- ernment-outside the areas of defense, space, and atomic energy-is adequately staffed and appropriately organized to evaluate complex proposals for large-scale research and development relating to civilian needs. It will be particularly interested in reviewing the plans for (and, later, the experience of) the new unit for program evaluation in the Bureau of the Budget. PROPOSALS FOR EXPANDED UTILIZATION OF ADVANCED TECHNOLOGY IN EXISTING GOVERNMENT OPERATIONS The Committee intends also to explore the suggestion that it recom- mend to the administrators of existing Government nondefense pro- grams that the procedures and specifications of existing programs of procurement should be revised, to permit more effective application of advanced technology and systems engineering. The reasoning is that, by specifying overall performance rather than details of con- struction or design, Government purchases of such items as housing for military dependents, hospitals, or educational facilities can be made at substantially lower costs in terms of program effectiveness. It is assumed that defense contractors would be interested in, and successful in, bidding on such a basis. Similar revised procedures might be applied to the procurement of services, including the possible substitution of purchased services for those performed "in house." The Committee has evidence which suggests that this approach is beginning to be used in some areas of Federal procurement, and hopes to review that experience. ADVANCE PROGRAM PREPARATION BY STATES ANT) Co~I~1uNITIEs The Committee believes that there has now been sufficient experi- ence with the termination of major contracts and the closing or cut- back of military installations so that States and communities which are potentially vulnerable to such events should, if they have not already done so, begin actively to study the extent and nature of their dependence on defense production, and begin to develop pro- grams which could be implemented if the need should arise. It is PAGENO="0674" 1032 ECONOMIC EFFECT OF VIETNAM SPENDING neither desirable nor necessary that the preparation of conversion or adjustment programs be postponed until there has been a decision to close a base or to cancel particular contracts. Many communities, and many private groups within such communities, have, of course, already begun to consider such programs. Diversification of the local economic base is one of the most effec- tive ways of offsetting the possibly adverse economic results which can follow the curtailment of a defense-related activity in a com- munity. Often, defense facilities can be adapted to new uses; other circumstances may favor the development of local business oppor- tunities unrelated to the defense facility. Roswell, N. Mex., is an example of a community where leaders, recognizing their heavy dependence~ on payrolls from a nearby Air Force base, took the initiative in reducing this dependence. Community leaders approached the Office of Economic Adjustment of the Department of Defense in early 1963 requesting assistance in planning to cope effectively with any possible major reduction in em- ployment at the base, even though this was not anticipated for many years. Other Federal agencies assisted in plans for community de- velopment. The city of Roswell employed consultants to analyze its business and industrial potential, and has now drawn up a land-use and development plan. These projects are expected to bring Ros- well a more diversified economy-one which will enable it to adjust more easily to any necessary future changes in defense programs. Diversification may not always be possible, because of the special nature of the defense activity or the unique characteristics of the com- munity. Also, in some situation, it may be unable fully to offset the effects of a defense curtailment. Nevertheless, the provision of reem- ployment opportunities in place offers such obvious advantages in minimizing personal disruptions-as well as holding down the adverse consequences for retail trade, for real estate and mortgage markets, and for public and private institutions-that its possibilities should be fully explored. Particular attention should be given to identifying the types of resources presently employed on defense work, including subcontracting, and to determining the economically sound alternative uses for these resources. The various departments and agencies of the Federal Government which administer the programs described in this and the preceding chapters stand ready to be of assistance in advance community plan- ning. The Committee is encouraging the appropriate Federal' agen- cies to prepare and make available detailed case studies of successful diversification efforts, and information manuals concerning the analytical and program resources that can be brought to bear by com- munities in their planning efforts. The Committee thws recommends that communities heavily dependent upon a defense establishment begin as soon as possible to explore fvily the feasibility of economic diversification programs to minimize vulner- ability to defense program changes, and to provide maximum reemploy- ment opportunities locally. To assist in such exploration by communities, the Gommittee recom- mends that procurement regulations should incinde as an allowable ex- pense not only diversification planning by defense contractors (as at present) bnt also the expenses of the contractor's participation in commu- nity diversification planning. PAGENO="0675" ECONOMIC EFFECT OF VIETNAM SPENDING 1033 THE FIJTURE OF THE COMMITTEE rfhe Committee believes that its work should be continued. There is need for a continuing review and coordination of the work of the Federal agencies relating to the economic impact of defense and to the problems of conversion or adjustment which arise from shifts or reductions in defense activity. It feels that a Committee of senior officials from the agencies actively responsible for defense-related activities, for studies of the economic effects of those activities, and for programs that can assist in conversion or adjustment is, for the present, an effective and necessary device. Such a Committee needs to have a full-time staff to expedite and give continuity to its work. But it needs no authority to make contracts or grants for studies relevant to its work. Those studies can be made by the agencies represented on the Committee, or these agencies can make and supervise contracts or grants for this purpose. The Committee's responsibility should extend only to the suggestion, coordination, and review of such studies.. The Committee, or the agencies represented on it, can supply a needed link with the staffs of congressional committees, State and local government bodies, and universities and other public and private organizations in the area of research on the economic impact of defense and disarmament. It can also stimulate additional agencies or groups, within and outside the Government, to devote more effort to research on the economic impact of defense programs- LINES OF EMPHASIS IN FUTURE WORK The Committee has considered the general nature of a program, and it believes that there are five areas that should be emphasized. First, there is vital need for more adequate, comprehensive, and accurate information and analysis of the impact of defense programs on the U.S. economy. The final chapter of this report outlines what we know, what we need to know, and the efforts now being made to learn more. The continuing development of such information should be a principal concern of the Committee. Second, the experience under existing and new programs to aid in defense adjustment will need continuing review and evaluation. This evaluation is, of course, a primary responsibility of the operating agencies. But the Committee can serve a useful function by en- couraging the agencies to make these evaluations, by reviewing them from time to time itself, and by calling to the attention of principal officials the need to correct any deficiencies that may be disclosed. Third, there is need for continued improvement in the coordination of Federal programs relating to the economic impact of defense, and of Federal programs with those of State and local governments. This should continue to be a principal concern of the Committee. Fourth, the Committee wishes to encourage a continuing study and analysis of the opportunities, as well as the problems, created by shifting defense programs. Although the Nation will continue to require large resources for defense, the accomplishments of the inten- sive defense production effort of recent years and the possibility of reduced international tensions in the years ahead may provide important opportunities to use a growing share of our output for other PAGENO="0676" 1034 ECONOMIC EFFECT OF VIETNAM SPENDING purposes. The Committee has been only one of a number of public and private groups which has the responsibility for assessing these opportunities. But it has had a particular interest in-and perhaps some special competence to consider-certain special aspects of this broad field. Fifth, the Committee should continue to receive and assess a wide range of additional proposals for new programs to alleviate the impact of defense changes. A number of these proposals, already received but not yet adequately evaluated, have been referred to in the earlier part of this chapter. Other proposals should be sought by the Committee. 0